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                    U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------

                                  FORM 10-KSB

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
           AND EXCHANGE ACT OF 1934
</TABLE>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES AND EXCHANGE ACT OF 1934
</TABLE>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 1-14697
                            ------------------------

                                audiohighway.com

                 (Name of small business issuer in its charter)

<TABLE>
<S>                                            <C>
              CALIFORNIA                                    77-0377306
    (State or other jurisdiction of              (I.R.S. Employer Identification
    incorporation or organization)                           Number)

    20300 STEVENS CREEK BOULEVARD,
              SUITE 100                                       95014
             CUPERTINO, CA                                  (Zip Code)
    (Address of principal executive
               offices)
</TABLE>

                   Issuer's Telephone Number: (408) 861-4000

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

<TABLE>
<CAPTION>
            TITLE OF CLASS               NAME OF EACH EXCHANGE ON WHICH LISTED:
<S>                                      <C>
      Common Stock, no par value                  Boston Stock Exchange
</TABLE>

Securities registered under Section 12(g) of the Act:  NONE
                            ------------------------

    Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/  No / /

    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 the registrant's knowledge, in definitive proxy information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /

    Revenues for the most recent fiscal year were: $

    The aggregate market value of the voting and non-voting common stock held by
non-affiliates computed by reference to the closing sale price on March 22,
2000, was $46,020,402*.

    The number of shares outstanding of the issuer's Common Stock as of
March 22, 2000 was 5,536,289.*

    Documents incorporated by reference: None

    Transitional Small Business Disclosure Format. Yes / /  No /X/

* Based on a closing price of $8.3125 per share on March 22, 2000. Excludes
  813,560 shares of the Registrant's Common Stock held by executive officers,
  directors and shareholders whose ownership exceeds 5% of the Common Stock
  outstanding. Exclusion of such shares should not be construed to indicate that
  any such person possesses the power, direct or indirect, to direct or cause
  the direction of the management or policies of the Registrant or that such
  person is controlled by or under common control with the Registrant.

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                                     PART I

ITEM 1.  BUSINESS

    audiohighway.com ("audiohighway" or the "Company") is an online information
and entertainment company which has developed a large and diverse library of
audio content available free to the public on the Internet. The Company is
implementing a second-generation business model that combines compelling content
and e-commerce into an integrated Web platform. Management believes this
multi-faceted approach will allow audiohighway to generate user traffic on a
cost-effective basis, and convert that traffic into a profitable revenue stream.
Furthermore, management believes that its branding efforts will make its Web
site a premier destination for accessing and consuming audio and video on the
Internet.

    The Company facilitates consumption of audio and video in one of three ways:
(1) a pre-programmed "channel" format, which offers convenient access to a broad
range of content; (2) individual selection, which allows users to browse through
the content library and listen to their personally-selected choices; and
(3) the Company's My JukeBox product, which allows users to "roll their own"
digital audio/video programming via an easy point-and-click management system.

    Using these methods of content distribution, the Company is executing a
strategy whereby it attracts user traffic through compelling content, maximizes
user retention and visit frequency by offering registered users value-added
member services including MP3 enabled email, Internet voice mail and free Web
sites. The Company plans to convert this user traffic to advertising and
e-commerce revenue.

    The Company plans to accelerate this momentum into calendar 2000 with a
number of major initiatives, including the development of new content
relationships, the introduction of additional member services and a complete
upgrade of its e-commerce capabilities, scheduled for launch during the second
quarter of 2000.

THE audiohighway.com OPPORTUNITY

    Although several alternative means of providing audio content have achieved
acceptance by the general public, the Company believes that Internet
distribution of audio content can have cost or convenience advantages for the
consumer over both radio and physical merchandise, such as compact disks or
audio tapes. For example, a consumer can listen to broadcast radio but only to
whatever happens to be on the air at the time. The radio listener has limited
control over the selection of broadcast content (I.E., he or she can change the
channel) and generally has no control over the time at which specific programs
can be heard. The purchaser of CDs or audio tapes can make selections and
determine when to listen to the content but must pay for the entire recording
even if only selected portions are desired. In addition, the Company believes
that distribution over the Internet can provide significant price and
convenience advantages to users of its Web site by eliminating the need to
physically visit a retail store and to purchase a hard copy out of the store's
inventory.

    The Company believes broadcasting audio content over the Internet also
offers advantages over traditional media. Internet technology allows the Company
to conveniently deliver a broad range of popular content directly to the user's
desk top. The Company intends to exploit the advantages of the Internet in
capitalizing on the worldwide popularity of various kinds of audio programming,
including audio books, musical and comedy programs and timely news. By offering
quality audio programming and by using the Web's graphical and interactive
capabilities to add value to its content, the Company hopes to increase brand
recognition for the audiohighway.com name. The Company believes that it can
build upon its brand recognition, its digital library of audio content and its
proprietary technology to pursue multiple revenue opportunities, including,
among others, advertising and e-commerce.

                                       2
<PAGE>
THE audiohighway.com WEB SITE: CONTENT

    Over 10,000 different media files are available for either download or
streaming at audiohighway. The Company typically obtains content through a fully
paid license or revenue sharing agreement with publishers or other audio content
providers. audiohighway has existing relationships with companies such as
Associated Press, CNET Radio News, Dow Jones, Maverick Records, Penguin Books
USA and Newsweek on Air. For the most part, the Company pays for the content on
a "per download" basis, so the Company is not charged simply for having the
content available on its Web site. Content is paid for either on the basis of
download hours or a flat fee for specialized content, including stock market
updates, sports scores and other information.

    MUSIC

    audiohighway currently features over 2,500 tracks of licensed music,
primarily provided by a selection of unsigned bands and archived radio shows.
Genres include Celtic, Classical, Country, Electronica, Holiday Music, Jazz,
Latin and Salsa, Music Shows, New Age, Popular, Reggae, Rhythm & Blues, Rock &
Roll, Unsigned Bands and World Rhythms. Current popular music in 10 different
genres is also available to audiohighway members on the "Highway Hits" portion
of its Web site.

    In addition, audiohighway has content relationships with a number of record
companies. These relationships typically provide the Company with rights to
content on demand, links between audiohighway and the artist's or label's Web
site and promotions for the sale of CD's on the Company's e-commerce Web site.
Periodically, the Company enters into marketing agreements with record companies
to sponsor and promote the works of specific artists to targeted audiences.
These programs are designed to expand the audience for the Company's Web sites
and to increase the number of members.

    Highway Hits, a channel on the audiohighway Web site, features playlists of
current hit music, produced by audiohighway in compliance with a statutory
license with the Record Industry Association of America. Highway Hits provides
users with access to continuously streaming music averaging five hours in
length. Current playlists include Pop, Rock, Country, Gothic/Industrial,
Electronica, Jazz, World Music, Movie Soundtracks, Alternative and Rhythm &
Blues/Hip-Hop.

    AUDIOBOOKS

    audiohighway currently features over 4,000 titles of licensed audiobooks.
They are primarily comprised of a selection of back listed titles from several
audiobook publishers which include Penguin Audio and The Publishing Mills.
Fiction categories and special collections offered on the site include Classics,
General, Kids Corner, Mystery & Suspense, Poetry, Romance, Science Fiction,
Short Stories and Westerns. Non-fiction categories and special collections
offered on the site include Autobiography, Business, Economics, History, Music,
Nature, Philosophy, Religion & Spirituality, Science & Technology, Self-Help and
Sports.

    NEWS AND INFORMATION

    audiohighway currently features over 350 licensed news programs covering
entertainment, financial and technology news, in addition to real time audio
news feeds from CNET Radio, IT Networks, and The Associated Press. News Programs
include AP News, Business News, Business Shows, Common Ground, Newsweek on Air,
Sports News and Scores, Technology News and U.S. National News.

    In November 1999, the Company entered into a content distribution agreement
with Dow Jones & Co. to provide selected articles and information from THE WALL
STREET JOURNAL INTERACTIVE EDITION to audiohighway users in an audio format on a
subscription basis.

                                       3
<PAGE>
    COMEDY AND ENTERTAINMENT

    audiohighway currently features over 1,500 tracks of licensed comedy albums,
radio dramas and other radio programs. Content licensors include UpRoar
Entertainment, Radio Spirits, Incorporated, NBG Radio Network and Pearlman and
Baine Publishing. Content categories in this channel include Comedy Shows,
Popular Comedians, Popular Comediennes, Audio Movies, Celebrity Talk, Cyber
Sleuths, Dr. Science, Imagination Theatre, Old Time Radio, The Golden Age of
Radio, Time Out for Trivia, Victoria Johnson and While Reason Sleeps.

    FILMS, MUSIC VIDEOS AND MOVIE TRAILERS

    In November 1999, audiohighway began featuring movie trailers, promotional
music videos and independent short films. While these works occasionally appear
on the audiohighway.com Home Page, the content library resides on The Buzz.
audiohighway recently launched streaming music videos as a component of its
service. The Company has promotional relationships with various record labels,
which entitle the Company to stream music video content, and include the
following:

<TABLE>
<S>                       <C>                       <C>
Bad Boy (Puff Daddy)      Hollywood Records         Jive Records
CMC International         Wind-Up Entertainment     Emagine Entertainment
Gotham Records            Zomba                     Atomic Pop
</TABLE>

    THE BUZZ

    This service, which was added to audiohighway's Web site in November 1999,
is directed towards the younger segment of audiohighway's user base (ages 14 to
24), which is looking for specialized entertainment beyond streaming audio. This
part of the audiohighway Web site includes streaming and downloadable music
videos, independent films, movie trailers and specialized jukeboxes. By signing
up for the service, users also gain access to Member Services (see "--Marketing
and Sales--Member Services"). All pages on the site provide links to Highway
Hits, Killer Boxes (which provides on-demand access to selected tracks and
videos from a number of music categories, including rock, electronic, reggae and
videos, and adds them to My Jukebox for personalized listening), and Live Polls
(which permits users to cast their votes for favorite entertainment offerings).
The site is further divided into the following four content channels:

    - Buzz Radio

    This channel provides users the opportunity to enjoy a number of types of
music entertainment. Users can access three different original deejay-designed
streaming audio tracks (alternative, dance and rave) containing multiple songs
and can send an e-mail to the deejay who created them. Each show is updated
weekly.

    - Music

    This channel permits users to view and listen to selected videos and listen
to the day's featured songs. Users are also given the opportunity to rate videos
and submit their comments to be posted on the Web site and to add videos and
songs to My Jukebox.

    - Films

    Users have the opportunity to view short films and to submit short films to
the site for review and possible posting on the Web site. Users also have access
to trailers for currently playing movies.

    - Buzz Board

    Users are able to view and post messages on the Web site in a number of
different forums.

                                       4
<PAGE>
MARKETING AND SALES

    TRAFFIC GENERATION

    In 1999, the Company spent approximately $5.9 million on marketing. The
Company generally uses several traffic generation tools, including:
(1) strategic partnerships with popular Web sites and affiliate relationships
with smaller sites, (2) direct marketing, (3) member services and (4) online
advertising on other Web sites.

    audiohighway partners with companies with a strong Web presence by providing
audio content and customized rich media programming in return for referrals via
graphical links on partners' sites, which join them to the audiohighway Web
site.

    In November 1999, audiohighway entered into a one-year agreement with Real
Networks to hard code three of audiohighway.com's channels into the latest
release of Real Player. As a result, audiohighway.com is the "Top Pop" music
site, the "Top Alternative" site and "Top Rock" site in the November 1999
release of the Real Player's Live Station listings. Real Networks projects that
34.5 million copies of the Real Player will be distributed during the term of
the agreement. audiohighway's distribution on the Real Player continues into
November 2000.

    Microsoft's Web site, www.windowsmedia.com, features links to audiohighway's
audiobooks channel on its Home Page, Radio and Lifestyle pages. Links to
audiohighway are consistently placed near the top of all links within
WindowsMedia.com. audiohighway's library of free audio content is also available
via headlines on WindowsMedia.com's Music and Entertainment channels. These
programs are designed to create greater awareness of audiohighway's audio
content and drive more traffic to the site.

    In March 2000, the Company announced the launch of the AmpliFire Network.
This program is a network of third party sites that link to selected portions of
the audiohighway.com Web site, thereby enabling text-based Web sites to deliver
audio content to their users. The Company is attempting to rapidly grow the
number of sites that link to audiohighway through its agreements with
iSyndicate, which has solicited the Company to offer content to its vast network
of client sites, its agreement with L90 and agreements with other Web sites.

    Notable sites that either currently link to audiohighway and/or link to
provide support for special events include the Go Network, Yahoo!, Excite.com,
Lycos.com, Snap.com, MSN.com and EntertainmentTonight.com.

    MEMBER SERVICES

    Management believes that high user retention and visit frequency are
important drivers of a sustainable, profitable business model for audiohighway.

    In October 1999, audiohighway began to offer free Member Services to its
"Registered Users." These additional features include e-mail, a daily horoscope
reading, Web site hosting, paging services and voicemail and fax services. When
a user accesses these services for the first time, a user can become a
Registered User by selecting a user name and password and providing the
following personal information: name, state, zip code, country, date of birth,
gender, industry and occupation. This information is maintained in a database of
current users, which the Company uses to send targeted e-mails advertising
products for sale at its e-commerce site and providing convenient on-demand
access to audiohighway content.

    - Streaming E-mail

    This service permits users to receive and send e-mail, maintain an address
book, attach a signature and change e-mail preferences, including font size,
screen width and the number of messages appearing in the user's mailbox. This
service also offers 10 megabytes of storage space and enables users to stream
MP3

                                       5
<PAGE>
audio directly from their messages, providing recipients with the opportunity to
listen to content as it is downloaded.

    - Rich Media Web Hosting

    audiohighway maintains an agreement with Homestead Technologies, Inc. to
operate the Company's Web hosting service. Through "what you see is what you
get" Web building technology, music and video enthusiasts are able to build
individual entertainment sites, which can occupy as much as 25 megabytes of
storage space. Members are able to post audiohighway's radio stations on their
Web sites, and during the second quarter of 2000, will be able to post
additional value-added content, such as movie trailers and music videos. The
Company is also using its free hosting service to promote the development of fan
sites, such as Nobody's Angel and She Daisy, two pop groups under the Hollywood
Records label. audiohighway is able to leverage its media Web hosting
capabilities to serve advertisements on registered users' personal Web pages.

    The Company also plans to grow the number of individual Web sites it hosts
by establishing a referral system between its artist submittals area and the
free Web site building page. The Company currently receives thousands of
inquiries by independent artists seeking to place their content on the
audiohighway site. Implementing a referral program will allow the Company to
address these inquiries while adding more participants to its Web hosting
program.

    - Paging

    This service provides Registered Users with a free Motorola alphanumeric
pager when they sign up for service. Numeric service is provided at $124 per
year and alphanumeric service is $178 per year, and audiohighway shares this
revenue stream with PageMaster Corporation. In addition to providing normal
paging service, audiohighway provides users with instant updates on sales,
products and services.

    - Voicemail

    Through an agreement with Z-Tel Technologies, Inc., a competing local
exchange carrier (CLEC), the Company offers Registered Users the opportunity to
check voicemail from the telephone or online at audiohighway. audiohighway
shares in the local and long distance revenues that Z-Tel derives from
audiohighway users. Z-Tel currently offers local dial service in New York City
and expects to roll out service to the rest of New York state, Massachusetts,
Texas and California by the end of the year 2000. The Company expects strong
demand for voicemail from the 14 to 24 year old audience. audiohighway plans to
leverage this service as a tool to retain members, distribute content and post
promotions and advertisements.

REVENUE SOURCES

    ADVERTISING

    The Company currently derives a significant portion of its revenue from
advertising on its Web sites. In addition to traditional banner ads, the Company
offers "SoundSpot" audio ads and channel sponsorships. The Company targets a
broad spectrum of advertisers ranging from consumer product and service
companies to popular new Web sites. Contracts are short-term, typically one to
six months, or for a fixed number of impressions. Prices are quoted on the basis
of cost per thousand impressions ("CPM") or for a fixed fee based on a minimum
number of impressions. The Company uses NetGravity ad serving software, which
provides advertisers with reports that track data on impressions and
click-throughs applicable to their advertisements. This information enables
advertisers to verify the number of ads served and to monitor advertisement
effectiveness. Ads are sold to customers primarily by the audiohighway sales
force and, to a lesser extent, by third party placement.

    Banner advertisements allow interested users to link directly to the
advertisers' own Web sites with a simple click-through. Banner prices range from
$10 per CPM to $20 per CPM based on the number of

                                       6
<PAGE>
impressions and targeting. The Company's banner advertisers include, among
others, Adauction, MTV and Boxerjam.

    The Company also sells audio ads called "SoundSpots," which are embedded in
audio content and are targeted at consumers based on their listening
preferences. Advertisers are able to combine an audio advertisement with a
synchronized banner linked back to the advertiser's Web site. This advertising
format has demonstrated a click-through rate three times that of traditional
banner advertisements. Another benefit of SoundSpot ads is that the ad, together
with the selected audio content in which it is embedded, continues to stream in
the background, even after the user has clicked through to the advertiser's Web
site. SoundSpots are currently priced from $15 per CPM to $30 per CPM based on
the number of impressions and targeting. The Company's SoundSpot clients
include, among others, Harborfreight and MTV.

    Sponsorships enable the Company to charge for focused advertising related to
specific content. For each of the content channels and special areas on the
Company's Web site, such as Highway Hits, The Buzz or Web casts, the Company
offers a premier content sponsorship. These sponsorships are offered to an
advertiser who prefers to be prominently displayed on the Web site. Channel
sponsorships currently last three months, and are priced from $1,000 for a
single button to $15,000 per month, depending on the advertising package, which
may include banner ads, targeted banner ads and SoundSpots. Certain of the
Company's 1999 sponsors included MTV, Auction-Sales.com, UMAX, Jazziz, Excite
and Entertainment Tonight.

    The Company participates in revenue sharing agreements with strategic
partners and other Web sites. The initial sources of these shared revenues range
from service fees to banner advertising.

    ELECTRONIC COMMERCE

    The Company integrated e-commerce functionality into the audiohighway
network with the launch of audioshop in the fourth quarter of 1998 and the
acquisition of Mass Music during the first quarter of 1999. The Company also
created a new search engine for each e-tailing business, which facilitates the
process of locating and purchasing merchandise.

    Subsequent to the purchase of Mass Music, the Company expanded the Mass
Music library to include nearly 300,000 titles. It has also added hard-to-find
imports to its inventory, from which it is able to earn higher profit margins.
The Mass Music site produced 3.25 million page views in November 1999 and
3.75 million page views in December 1999, resulting in purchases by 7.4% of
users.

    The Company launched audioshop in the fourth quarter of 1998 with an initial
focus on computer-related products. The audioshop inventory has expanded to
include video games, digital cameras, stereo accessories and audio versions of
THE WALL STREET JOURNAL.

    The Company is currently integrating Mass Music and audioshop into a single
Web site and is planning to launch this new site in the second quarter of 2000,
with a redesigned back-end and user interface and real-time distribution
capabilities.

RESEARCH AND DEVELOPMENT

    Since inception, the Company has devoted significant time and financial
resources to research and development activities to develop its current
technology, products and services. The Company anticipates that a portion of its
ongoing operations will continue to include research and development activities
due to the rapid technological evolution of Internet-based commerce. Operating
and development expenses, which include research and development expenditures,
totaled $1,073,000 and $3,089,000 in 1998 and 1999, respectively.

PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS

    The Company has filed several patent applications with respect to certain
aspects of its system for delivering audio content, and four patents have
issued. Although the Company does not believe that its existing patents provide
a competitive advantage, there is no assurance that in the future, patent
protection will not be of substantial importance to the Company's business and
future prospects.

                                       7
<PAGE>
    There is no assurance that patents will be issued pursuant to the pending
applications or that the patents that are issued or may be issued in the future
will not be held invalid or unenforceable by a court having jurisdiction over a
dispute challenging their validity. Even if patents are upheld and are not
challenged, third parties might be able to develop equivalent technologies or
products without infringing such patents or the Company could be required to
expend substantial funds in order to defend its patents.

    The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success and relies on a combination of
copyright and trademark laws, trade secret protection, confidentiality and
non-disclosure agreements and contractual provisions with its employees and with
third parties to establish and protect its proprietary rights. There is no
assurance that these steps will be adequate, that the Company will be able to
secure trademark registrations for all of its marks in the United States or
other countries or that third parties will not infringe upon or misappropriate
the Company's copyrights, trademarks, service marks and similar proprietary
rights. The Company does not own any registered copyrights protecting its
products but claims common law copyrights in its software. There is no assurance
that common law copyright will provide adequate protection for the Company's
related intellectual property. In addition, effective copyright and trademark
protection may be unenforceable or limited in certain countries, and the global
nature of the Internet makes it impossible to control the ultimate destination
of the content downloaded from the Company's Web site. In the future, litigation
may be necessary to enforce and protect the Company's trade secrets, copyrights
and other intellectual property rights.

    The Company has filed several trademarks. The Company intends to pursue the
registration of its trademarks based upon anticipated use internationally. There
is no assurance that the Company will be able to secure adequate protection for
these trademarks in foreign countries. In addition, there could be potential
trademark or trademark infringement claims brought by owners of other registered
trademarks or trademarks.

    There is no assurance that any particular aspect of the Company's technology
will not be found to infringe the rights of other companies. Other companies may
hold or obtain patents on inventions or may otherwise claim proprietary rights
to technology useful or necessary to the Company's business. The extent to which
the Company may be required to seek licenses under such proprietary rights of
third parties, and the cost or availability of such license, cannot be
predicted. While it may be necessary or desirable in the future to obtain
licenses relating to one or more of its proposed products or relating to current
or future technologies, there is no assurance that the Company will be able to
do so on commercially reasonable terms, if at all.

    There is no assurance that the measures taken by the Company will adequately
protect the confidentiality of the Company's proprietary information or that
others will not independently develop products or technology that are equivalent
or superior to those of the Company. Moreover, the Company may also be subject
to litigation to defend against claims of infringement of the rights of others
or to determine the scope and validity of the intellectual property rights of
others. If competitors of the Company prepare and file applications in the
United States that claim trademarks used or registered by the Company, the
Company may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
the Company. Similarly, actions could be brought by third parties claiming that
the Company's products infringe patents owned by others. An adverse outcome
could require the Company license disputed rights from third parties or to cease
using such trademark or infringing product. Any litigation regarding the
Company's proprietary rights could be costly and divert management's attention,
result in the loss of certain of the Company's proprietary rights, require the
Company to seek licenses from third parties and prevent the Company from selling
its products and services, any one of which could have a material adverse effect
on the Company's business, results of operations and financial condition. In
addition, inasmuch as the Company licenses a substantial portion of its content
from third parties, its exposure to copyright infringement actions may increase
because the Company must rely upon such third

                                       8
<PAGE>
parties for information as to the origin and ownership of such licensed content.
The Company generally obtains representations as to the origins and ownership of
such licensed content and generally obtains indemnification to cover any breach
of any such representations; however, there can be no assurance that such
representations will be accurate or that such indemnification will adequately
protect the Company.

COMPETITION

    The Company faces intense competition in every aspect of its business,
including competition for consumers of audio materials, advertisers, providers
of audio materials and vendors of products. The business of providing data and
other products using the Internet as a medium is currently experiencing
explosive growth and is characterized by extremely rapid technological
development, rapid changes in consumer habits and preferences, massive infusions
of capital and the emergence of a large number of new and established companies
with aspirations to control as much of the distribution process as possible. A
relatively small number of these companies, including America Online and Yahoo!,
currently control primary or secondary access of significant percentages of all
Internet users and therefore have a competitive advantage in marketing to those
users. Other large and established companies, such as local and long distance
telephone companies, cable companies, satellite programming providers and others
have established relationships with large customer bases and are rapidly
expanding into the provision of Internet services. Although the Company does not
believe that any of these companies currently are direct competitors and
believes that it provides services and has technology that could be attractive
to such companies as customers, substantially all of these companies have
financial, technological, promotional and other resources that are much greater
than those available to the Company. Most, if not substantially all, of such
providers could use or adapt their current technology, or could purchase
technology, to provide a service directly competitive with the Company's.

    The Company competes with (i) other Web sites and Internet broadcasters to
acquire and provide content to attract users, (ii) online services, other Web
site operators and advertising networks, as well as traditional media such as
television, radio and print, for a share of advertisers' total advertising
budgets, (iii) local radio and television stations and national radio and
television networks for sales of advertising spots and (iv) other Web site
operators engaged in e-commerce.

    Competition among Web sites that provide content such as news, financial
information, music and audio books is intense and is expected to increase
significantly in the future. The Company competes against a variety of
businesses that provide content through one or more media, such as print, radio,
television, cable television and the Internet. The Company competes generally
with other content providers for the time and attention of users and for
advertising revenues. To compete successfully, the Company must license and then
provide sufficiently compelling and popular content to generate users and
support advertising intended to reach such users. The Company believes that the
principal competitive factors in attracting Internet users include the quality
of service and the relevance, timeliness, depth and breadth of content and
services offered. The Company also competes for the time and attention of
Internet users with thousands of Web sites operated by businesses and other
organizations, individuals, governmental agencies and educational institutions.
The Company expects competition to continue to intensify and the number of
competitors to continue to increase significantly in the future. In addition, as
the Company continues to expand the scope of its content and services, it will
compete with a greater number of Web sites and other media companies. Because
the operations and strategic plans of existing and future competitors are
undergoing rapid change, it is extremely difficult for the Company to anticipate
which companies are likely to offer competitive services in the future.

    The online commerce market is new, rapidly evolving and intensely
competitive. In addition, the retail music, DVD/video, books, electronics and
software industries are intensely competitive. The Company's current or
potential competitors include (1) online vendors of music, DVDs, videos,
electronics and software, as well as other products, (2) a number of indirect
competitors, including Web portals and Web search engines, that are involved in
online commerce, either directly or in collaboration with other

                                       9
<PAGE>
retailers, (3) online auction services, (4) Web-based retailers using
alternative distribution capabilities and (5) publishers, distributors,
manufacturers and physical-world retailers of the products the Company sells,
many of which possess significant brand awareness, sales volume and customer
bases, and some of which currently sell, or may sell, products or services
through the Internet, mail order or direct marketing. The Company believes that
the principal competitive factors in its e-commerce market include brand
recognition, selection, personalized services, convenience, price,
accessibility, customer service, quality of search tools, quality of editorial
and other Web site content, reliability, speed of fulfillment, ease of use and
ability to adapt to changing conditions. As the online commerce market continues
to grow, other companies may enter into business combinations or alliances that
strengthen their competitive positions. audiohighway may not be able to compete
successfully against these and future competitors.

    The Company also competes with online services, other Web site operators and
advertising networks, as well as traditional media such as television, radio and
print for a share of advertisers' total advertising budgets. The Company
believes that the principal competitive factors for attracting advertisers
include the number of users accessing the Company's Web site, the demographics
of the Company's users, the Company's ability to deliver focused advertising and
interactivity through its Web site and the overall cost-effectiveness and value
of advertising offered by the Company. There is intense competition for the sale
of advertising on high-traffic Web sites, which has resulted in a wide range of
rates quoted by different vendors for a variety of advertising services, making
it difficult to project levels of Internet advertising that will be realized
generally or by any specific company. Any competition for advertisers among
present and future Web sites, as well as competition with other traditional
media for advertising placements, could result in significant price competition.
The Company believes that the number of companies selling Web-based advertising
and the available inventory of advertising space have recently increased
substantially. Accordingly, the Company may face increased pricing pressure for
the sale of advertisements. Reduction in the Company's Web advertising revenues
would have a material adverse effect on the Company's business, results of
operations and financial condition. There is no assurance that the Company will
be able to compete in its chosen market.

GOVERNMENT REGULATION

    Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as music licensing, broadcast
license fees, copyrights, privacy, pricing, sales taxes and characteristics and
quality of Internet services. It is possible that governments will enact
legislation that may be applicable to the Company in areas such as content,
network security, encryption and the use of key escrow, data and privacy
protection, electronic authentication or "digital" signatures, illegal and
harmful content, access charges and retransmission activities. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, content, taxation, defamation and personal privacy is uncertain. The
majority of such laws were adopted before the widespread use and
commercialization of the Internet and, as a result, do not contemplate or
address the unique issues of the Internet and related technologies. Any such
export or import restrictions, new legislation or regulation or governmental
enforcement of existing regulations may limit the growth of the Internet,
increase the Company's cost of doing business or increase the Company's legal
exposure, which could have a material adverse effect on the Company's business,
financial condition and results of operations.

    By distributing content over the Internet, the Company faces potential
liability for claims based on the nature and content of the materials that it
distributes, including claims for defamation, negligence or copyright, patent or
trademark infringement, which claims have been brought, and sometimes
successfully litigated, against Internet companies. The Company's general
liability insurance may not cover potential claims of this type or may not be
adequate to indemnify the Company for any liability that may be imposed. Any
liability not covered by insurance or in excess of insurance coverage could have
a material adverse effect on the Company's business, results of operations and
financial condition.

                                       10
<PAGE>
EMPLOYEES

    As of March 15, 2000, the Company has 41 full time employees, 19 in
marketing and sales, 17 in research and development and 5 in finance and
administration. The Company also makes use of 22 consultants and independent
contractors to perform various functions such as programming, engineering,
development, and accounting. The Company believes this approach not only allows
it to limit expenses, but also provides maximum flexibility to react to a
rapidly changing environment. None of the Company's employees is represented by
a labor union. The Company believes that its employee relations are good.

BUSINESS RISKS

    The future operating results of the Company are highly uncertain, and the
following factors should be carefully reviewed in addition to the other
information contained in this annual report on Form 10-KSB and in other public
disclosures of the Company. Any of the following risks could materially and
adversely affect our business, operating results and financial condition.

    HISTORY OF LOSSES AND ANTICIPATION OF FUTURE LOSSES.  The Company was
incorporated in June 1994 to deliver free, personalized audio via the Internet
and was in the development stage until the fourth quarter of 1997. The Company
first recognized revenues in November 1997 and has recorded increasing net
losses each year since its inception. At December 31, 1999 the Company had an
accumulated deficit of approximately $25,189,000. Accordingly, the Company has a
limited operating history on which to base an evaluation of its business and
prospects. The Company and its prospects must be considered in light of the
early stage of development, particularly companies in new and rapidly evolving
markets such as the market for Internet content, e-commerce and advertising.
Almost none of the companies in these markets have achieved profitability and it
is widely believed that many companies never will. To achieve and sustain
profitability, the Company must, among other things, (i) provide diverse content
of interest to Internet users, (ii) effectively develop new and maintain
existing relationships with advertisers, advertising agencies and content
providers, (iii) continue to develop and upgrade its technology and network
infrastructure; (iv) respond to competitive developments, (v) successfully
introduce enhancements to its existing products and services to address new
technology standards and developments on the Internet, and (vi) attract, retain
and motivate qualified personnel. The Company's operating results are also
dependent on factors outside the control of the Company, such as the
availability of desirable content. There can be no assurance that the Company
will be successful in addressing these risks and the failure to do so would have
a material adverse effect on the Company's business, results of operations and
financial condition. Additionally, the limited operating history of the Company
makes the prediction of future operating results difficult or impossible, and
there can be no assurance that the Company's revenues will increase or even
continue at their current level or generate sufficient cash from operations in
future periods. The Company expects to continue to incur significant losses on a
quarterly and annual basis for the foreseeable future. For these and other
reasons, there is no assurance that the Company will ever achieve profitability
or, if profitability is achieved, that it can be sustained.

    LIMITED OPERATING HISTORY; UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL
FLUCTUATIONS IN QUARTERLY RESULTS.  Because of the Company's limited operating
history and the emerging and evolving nature of the markets in which it
competes, the Company is unable to forecast accurately its revenues.
Additionally, the long-term acceptance of Web-based advertising and e-commerce
is as yet uncertain. The Company currently intends to continue to increase
substantially its operating expenses in order to, among other things,
(i) expand its distribution network capacity, (ii) fund increased sales and
marketing activities, (iii) acquire additional content, (iv) develop and upgrade
technology and (v) purchase additional equipment for its operations. The
Company's expense levels are based, in part, on its expectations with regard to
future revenues, and to a large extent such expenses are fixed, particularly in
the short term. To the extent the Company is unsuccessful in increasing its
revenues, the Company may be unable to appropriately adjust spending in a timely
manner to compensate for any unexpected revenue shortfall or will have to reduce
its operating expenses, causing it to forego potential revenue generating
activities, either of which

                                       11
<PAGE>
could cause a material adverse effect in the Company's business, results of
operations and financial condition.

    The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. Factors that may affect the Company's quarterly operating
results include (i) the cost of acquiring and the availability of content,
(ii) price competition in the e-commerce arena, (iii) demand for Internet
advertising, (iv) seasonal trends in advertising placements, (v) seasonal trends
in the markets for the products offered on the Company's e-commerce sites,
(vi) the advertising cycles for, or the addition or loss of, individual
advertisers, (vii) the level of traffic on the Company's Web site, (viii) the
amount and timing of capital expenditures and other costs relating to the
expansion of the Company's operations, (ix) price competition or pricing changes
in Internet advertising, (x) the level of and seasonal trends in the use of the
Internet, (xi) technical difficulties or system downtime, (xii) the introduction
of new products or services by the Company or its competitors and
(xiii) general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media. Any one of these factors
could cause the Company's revenues and operating results to vary significantly
in the future. In addition, as a strategic response to changes in the
competitive environment, the Company may from time to time make certain pricing,
service or marketing decisions or acquisitions that could cause significant
declines in the Company's quarterly operating results.

    DEPENDENCE ON CONTENT PROVIDERS; LICENSE FEES PAYABLE TO CONTENT
PROVIDERS.  The Company's future success depends in large part upon its ability
to obtain rights to and deliver content of sufficient interest to end users over
the Internet. The Company does not create its own content. Rather, the Company
relies on third party content providers, such as record companies, recording
artists, book publishers, news and financial information services and music
publishers for the content it makes available to its subscribers. The Company's
ability to maintain its existing relationships with such content providers and
to build new relationships with additional content providers is critical to the
success of its business. Although many of the Company's agreements with third
party content providers are for an initial term of one year, with automatic
renewal unless cancelled, the content providers may choose to terminate such
agreements prior to the expiration of their terms. The Company's inability to
secure licenses from content providers or the termination of a significant
number of content provider agreements would decrease the availability of content
that the Company can offer users. This may result in decreased traffic on the
Company's Web sites and, as a result, decreased advertising and or e-commerce
revenue, which could have a material adverse effect on the Company's business,
results of operations and financial condition.

    The Company's agreements with most of its content providers are
nonexclusive, and many of the Company's competitors offer, or could offer,
content that is similar to or the same as that obtained by the Company from such
nonexclusive content providers. Such direct competition could have a material
adverse effect on the Company's business, results of operations and financial
condition.

    License fees payable to content providers and other licensing agencies will
continue to increase as the Company continues to accumulate content, as Web site
traffic increases and as competition for such content increases. There is no
assurance that the Company's content providers and other licensing agencies will
enter into prospective agreements with the Company on the same or similar terms
as those currently in effect or on terms acceptable to the Company if no
agreement is in effect. If the Company is required to pay increased licensing
fees, such increased payments could have a material adverse effect on the
Company's business, results of operations and financial condition.

    UNCERTAIN ACCEPTANCE OF THE INTERNET AS AN ADVERTISING MEDIUM.  The market
for Internet advertising has only recently begun to develop, is rapidly evolving
and is characterized by an increasing number of market entrants. As is typical
in the case of a new and rapidly evolving industry, demand and market acceptance
for recently introduced products and services are subject to a high level of
uncertainty. The Company's ability to generate advertising revenue will depend
on, among other factors, (i) the Company's success in generating traffic from
user's with demographic characteristics that are attractive to potential

                                       12
<PAGE>
advertisers, (ii) the continued development of the Internet as an advertising
medium, (iii) pricing of advertising on other Web sites, (iv) the development
and expansion of the Company's advertising sales force and (v) the establishment
and maintenance of desirable advertising sales agency relationships. Many
potential advertisers and their advertising agencies have only limited
experience with the Internet as an advertising medium and have not historically
devoted a significant portion of their advertising expenditures to Web-based
advertising. There is no assurance that advertisers or advertising agencies will
be persuaded to allocate or continue to allocate portions of their budgets to
Web-based advertising or, if so persuaded, that they will find such advertising
to be effective for promoting their products and services relative to
traditional print and broadcast media. No standards have yet been widely
accepted for the measurement of the effectiveness of Web-based advertising, and
there can be no assurance that such standards will develop sufficiently to
enable Web-based advertising to become a significant advertising medium.
Acceptance of the Internet among advertisers and advertising agencies will also
depend, to a large extent, on the level of use of the Internet by consumers and
upon growth in the commercial use of the Internet. If widespread commercial use
of the Internet does not continue to develop, or if the Internet does not
develop as an effective and measurable medium for advertising, the Company's
business, results of operations and financial condition could be materially
adversely affected.

    MANAGEMENT OF GROWTH.  The Company anticipates that continued significant
expansion of its operations will be required in order to address potential
market opportunities. The Company expects that it will need to increase its
personnel significantly in the near future. The anticipated substantial growth
is expected to place a significant strain on its managerial, operational and
financial resources and systems. To manage its growth, the Company must
implement, improve and effectively use its operational, management, marketing
and financial systems and train and manage its employees. There can be no
assurance that the Company will be able to manage effectively the expansion of
its operations or that the Company's current personnel, systems, procedures and
controls will be adequate to support the Company's operations. Any failure of
management to manage effectively the Company's growth could have a material
adverse effect on the Company's business, results of operations and financial
condition.

    RISK OF SYSTEM FAILURE, DELAYS AND INADEQUACY.  The performance, reliability
and availability of the Company's Web site and network infrastructure are
critical to its reputation and ability to attract and retain users, advertisers
and content providers. The Company's network infrastructure is located at a
single facility in Santa Clara, California. The Company's systems and operations
are vulnerable to damage or interruption from fire, flood, earthquakes, power
loss, telecommunications failure, Internet breakdowns, break-ins, hackers and
similar events. The Company does not presently have redundant facilities or
systems or a formal disaster recovery plan and does not carry sufficient
business interruption insurance to compensate it for losses that may occur.
Services based on sophisticated software and computer systems often encounter
development delays and the underlying software may contain undetected errors
that could cause system failures when introduced. Any system error or failure
that causes interruption in availability of content, access to e-commerce order
processing or an increase in response time could result in a loss of potential
or existing business services to customers, users, advertisers or content
providers and, if sustained or repeated, could reduce the attractiveness of the
Company's Web site to such entities or individuals. In addition, because the
Company's Web advertising revenues are directly related to the number of
advertisements delivered by the Company to users, system interruptions that
result in the unavailability of the Company's Web site or slower response times
for users would reduce the number of advertisements delivered and reduce
revenues.

    A sudden and significant increase in traffic on the Company's Web site could
strain the capacity of the software, hardware and telecommunications systems
deployed or used by the Company, which could lead to slower response times or
system failures. The Company's operations also are, in part, dependent upon
receipt of timely feeds from certain of its content providers, and any failure
or delay in the transmission or receipt of such feeds, whether due to system
failure of the Company, its content providers, satellites or otherwise, could
disrupt the Company's operations. The Company is also dependent upon Web
browsers,

                                       13
<PAGE>
Internet Service Providers ("ISPs") and online service providers ("OSPs") to
provide Internet users access to the Company's Web site. Users may experience
difficulties accessing or using the Company's Web site due to system failures or
delays unrelated to the Company's systems. These difficulties may result in
intermittent interruption in programming. Any sustained failure or delay could
reduce the attractiveness of the Company's Web site to users, advertisers and
content providers. The occurrence of any of the foregoing events could have a
material adverse effect on the Company's business, results of operations and
financial condition.

    SECURITY RISKS.  Despite the implementation of security measures, the
Company's networks may be vulnerable to unauthorized access, hackers, computer
viruses and other disruptive problems. The Company's primary Web site did suffer
a brief denial of service interruption on one occasion in 1999. Although the
Company did not suffer any material adverse effects from this incident, a party
who is able to circumvent security measures could misappropriate proprietary
information or cause severe interruptions in the Company's Internet operations.
ISPs and OSPs have in the past experienced, and may in the future experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees or others. The Company may be
required to expend significant capital or other resources to protect against the
threat of security breaches or to alleviate problems caused by such breaches.
Although the Company intends to continue to implement security measures, there
can be no assurance that measures implemented by the Company will not be
circumvented in the future. Eliminating computer viruses and alleviating other
security problems may require interruptions, delays or cessation of service to
users accessing the Company's Web sites, which could have a material adverse
effect on the Company's business, results of operations and financial condition.

    DEPENDENCE ON SHORT-TERM ADVERTISING CONTRACTS.  A substantial portion of
the Company's Web advertising revenues are derived from short-term contracts.
Consequently, many of the Company's advertising customers can cease advertising
on the Company's Web site quickly and without penalty, thereby increasing the
Company's exposure to competitive pressures. There is no assurance that the
Company's current advertisers will continue to purchase advertisements or that
the Company will be able to secure new advertising contracts from existing or
future customers at attractive rates or at all. Any failure of the Company to
achieve sufficient advertising revenue could have a material adverse effect on
the Company's business, results of operations and financial condition.

    COMPETITION.  The market for information services and entertainment on the
Internet and otherwise is highly competitive, and the Company expects that
competition will continue to intensify. The Company competes with (i) other Web
sites and Internet broadcasters to acquire and provide content to attract users,
(ii) other e-commerce Web sites for the sale of CD's, videos, DVD's, computer
products, home electronics and associated products, (iii) online services, other
Web site operators and advertising networks, as well as traditional media such
as television, radio and print, for a share of advertisers' total advertising
budgets and (iv) local radio and television stations and national radio and
television networks for sales of advertising spots. There is no assurance that
the Company will be able to compete successfully or that the competitive
pressures faced by the Company, including those described below, will not have a
material adverse effect on the Company's business, results of operations and
financial condition.

    The Company also competes with online services, other Web site operators and
advertising networks, as well as traditional media such as television, radio and
print for a share of advertisers' total advertising budgets and with other
e-commerce Web sites. The Company believes that the principal competitive
factors for attracting advertisers include the number of users accessing the
Company's Web site, the demographics of the Company's users, the Company's
ability to deliver focused advertising and interactivity through its Web site
and the overall cost-effectiveness and value of advertising offered by the
Company. There is intense competition for the sale of advertising on
high-traffic Web sites, which has resulted in a wide range of rates quoted by
different vendors for a variety of advertising services, making it difficult to
project levels of Internet advertising that will be realized generally or by any
specific company. Any

                                       14
<PAGE>
competition for advertisers among present and future Web sites, as well as
competition with other traditional media for advertising placements, could
result in significant price competition. The number of companies selling
Web-based advertising and the available inventory of advertising space have
recently increased substantially. Accordingly, the Company has faced increased
pricing pressure for the sale of advertisements. Reduction in the Company's Web
advertising revenues would have a material adverse effect on the Company's
business, results of operations and financial condition.

    Many of the Company's competitors and potential competitors have greater
financial, sales and other resources than the Company. There is no assurance
that the Company's business strategy will be successful, or that the Company
will gain a market share or customer base that will be sufficient to justify
continued operations.

    PRODUCT DEVELOPMENT AND TECHNOLOGICAL OBSOLESCENCE.  The market for Internet
information delivery is characterized by extensive research and development and
rapid technological change, frequent new product introductions and technological
innovation, resulting in short product life cycles, and evolving industry
standards. Development by others of new or improved products, processes or
technology may render the Company's products and services less competitive or
obsolete. The emerging character of these products and services and their rapid
evolution will require the Company to effectively use leading technologies,
continue to develop its technological expertise, enhance its current services
and continue to improve the performance, features and reliability of its network
infrastructure. Changes in network infrastructure, transmission and content
delivery methods and underlying software platforms and the emergence of new
technologies could dramatically change the structure and competitive dynamic of
the market for the Company's products and services. There is no assurance that
the Company will be successful in responding quickly, cost effectively and
sufficiently to these or other such developments. In addition, the widespread
adoption of new Internet technologies or standards could require substantial
expenditures by the Company to modify or adapt its Web site and services. A
failure by the Company to rapidly respond to technological developments could
have a material adverse effect on the Company's business, results of operations
and financial condition.

    DEPENDENCE UPON KEY PERSONNEL.  The Company's success depends, to a
significant extent, upon a number of key employees and consultants. The loss of
the services of one or more of these employees or consultants could have a
material adverse effect on the business of the Company.

    GOVERNMENT REGULATION AND LEGAL UNCERTAINTY.  Although there are currently
few laws and regulations directly applicable to the Internet, it is likely that
new laws and regulations will be adopted in the United States and elsewhere
covering issues such as music licensing, broadcast license fees, copyrights,
privacy, pricing, sales taxes and characteristics and quality of Internet
services. The adoption of restrictive laws or regulations could slow Internet
growth or expose the Company to significant liabilities associated with content
available on its Web site. The application of existing laws and regulations
governing Internet issues such as property ownership, libel and personal privacy
is also subject to substantial uncertainty. There can be no assurance that
current or new laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, content, taxation, defamation and personal injury), will not expose
the Company to significant liabilities, significantly slow Internet growth or
otherwise cause a material adverse effect on the Company's business, results of
operations or financial condition.

    The Company currently does not collect sales or other taxes with respect to
the sale of services or products in states and countries where the Company
believes it is not required to do so. Some states and countries have sought to
impose sales or other tax obligations on companies that engage in online
commerce within their jurisdictions. A successful assertion by one or more
states or countries that the Company should collect sales or other taxes on
products and services, or remit payment of sales or other taxes for prior
periods, could have a material adverse effect on the Company's business, results
of operations and financial condition.

                                       15
<PAGE>
    The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over the
Internet were held to be unconstitutional by the U.S. Supreme Court, there can
be no assurance that similar laws will not be proposed and adopted. Although the
Company does not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject the Company to potential liability,
which in turn could have an adverse effect on the Company's business, financial
condition and results of operations. Such laws could also damage the growth of
the Internet generally and decrease the demand for the Company's products and
services, which could adversely affect the Company's business, results of
operations and financial condition.

    POTENTIAL LIABILITY FOR INTERNET CONTENT.  As a distributor of Internet
content, the Company faces potential liability for negligence, copyright,
patent, trademark, defamation, indecency and other claims based on the nature
and content of the materials that it makes available to Internet users. Such
claims have been brought, and sometimes successfully pressed, against Internet
content distributors. In addition, the Company could be exposed to liability
with respect to the content or unauthorized duplication or broadcast of content.
Although the Company maintains general liability insurance, the Company's
insurance may not cover potential claims of this type or may not be adequate to
indemnify the Company for all liability that may be imposed. In addition,
although the Company generally requires its content providers to indemnify the
Company for such liability, such indemnification may be inadequate. Any
imposition of liability that is not covered by insurance, is in excess of
insurance coverage or is not covered by an indemnification by a content provider
could have a material adverse effect on the Company's business, results of
operations and financial condition.

ITEM 2.  PROPERTY

    The Company's executive offices are located in an approximately 27,000
square foot facility located in Cupertino, California. This space, which houses
the Company's current operations is subject to a lease that expires in
October 2004. The monthly base rental under the combined lease (not including
insurance) is approximately $79,500 per month plus common area expenses of
$19,765 per month. The Company currently subleases approximately 5,000 square
feet of its facility to a subtenant for approximately $14,600 per month. The
term of the sublease ends in October 2001.

ITEM 3.  LEGAL PROCEEDINGS

    In August 1999, Spirit Partners, L.P. and Gaines Berland, Inc. filed suit
against the Company in the Supreme Court of the State of New York seeking
damages according to proof, punitive damages in the amount of $3,000,000,
attorneys' fees, costs and equitable relief, based on allegations of breach of
contract, negligent misrepresentation and deceptive trade practices relating to
the Company's redemption of its publicly traded warrants during February 1999.
The Company removed the case to United States District Court for the Southern
District of New York. Due to the nature of litigation generally and because the
lawsuit is at an early stage, the Company cannot estimate the total expense,
possible damages or settlement value, if any, that may ultimately be incurred in
connection with the suit, However, the Company believes the suit is wholly
without merit, intends to vigorously oppose the suit and believes that this
matter will not have a material adverse effect on the Company's results of
operations or financial condition.

                                       16
<PAGE>
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    On October 21, 1999, the Company held its annual meeting of shareholders. At
the meeting, the shareholders voted on the election of directors, an amendment
to the 1996 Stock Option Plan (the "Plan") to increase the size of the Plan to
1,800,000 shares, an amendment to the Plan to provide for automatic grants of
options to non-employee directors and the ratification of independent auditors.
The following six nominees were elected to the board of directors for a one-year
term: Lee M. Gammill, Grant Jasmin, Robert S. Leff, Muninderpal Rehki, Marvin M.
Reiss and Nathan M. Schulhof. Additionally, the two proposals to amend the Plan
were approved and the appointment of Grant Thornton LLP as the Company's
independent auditors for the year ended December 31, 1999 was ratified. The
number of votes cast for, against, or withheld, as well as the number of
abstentions and broker non-votes, for each proposal, are as follows:

        A. Election of Directors

<TABLE>
<CAPTION>
DIRECTOR NOMINEE                                              VOTES FOR   VOTES WITHHELD
----------------                                              ---------   --------------
<S>                                                           <C>         <C>
Lee M. Gammill..............................................  4,635,336       81,690
Grant Jasmin................................................  4,635,336       81,690
Robert S. Leff..............................................  4,635,336       81,690
Muninderpal Rehki...........................................  4,635,336       46,690
Marvin M. Reiss.............................................  4,635,336       46,690
Nathan M. Schulhof..........................................  4,635,336       46,690
</TABLE>

        B.  Amendment of the Plan to increase the number of options to
    1,800,000:

<TABLE>
<CAPTION>
                                      VOTES FOR   VOTES AGAINST   ABSTENTIONS   BROKER NON-VOTES
                                      ---------   -------------   -----------   ----------------
<S>                                   <C>         <C>             <C>           <C>
Amendment of Plan to Increase Size
  to 1,800,000......................  1,193,485      276,138         18,209        3,229,194
</TABLE>

        C.  Amendment of the Plan to provide for automatic grants of options to
    non-employee directors:

<TABLE>
<CAPTION>
                                      VOTES FOR   VOTES AGAINST   ABSTENTIONS   BROKER NON-VOTES
                                      ---------   -------------   -----------   ----------------
<S>                                   <C>         <C>             <C>           <C>
Amendment of Plan to Provide for
  Automatic Grants of Options to
  Non-employee Directors............  4,457,041      158,765         20,131          81,089
</TABLE>

        D. Ratification of the appointment of Grant Thornton LLP as independent
    auditors for the year ending December 31, 1999:

<TABLE>
<CAPTION>
                                                     VOTES FOR   VOTES AGAINST   ABSTENTIONS
                                                     ---------   -------------   -----------
<S>                                                  <C>         <C>             <C>
Ratification of the Appointment of Grant Thornton
  LLP..............................................  4,664,455      39,247          13,324
</TABLE>

                                       17
<PAGE>
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

    Since December 18, 1998, the Company's Common Stock has been traded in the
over-the-counter market and is quoted on the Nasdaq SmallCap Market under the
symbol "AHWY." The Common Stock also trades on the Boston Stock Exchange under
the symbol "AHY." The following table sets forth the high and low closing sale
prices for the Common Stock as reported on the Nasdaq SmallCap Market for the
period indicated. These prices represent prices among dealers, do not include
retail markups, markdowns or commissions, and may not represent actual
transactions:

<TABLE>
<CAPTION>
                                                                 HIGH             LOW
                                                            --------------   --------------
<S>                                                         <C>              <C>
YEAR ENDED DECEMBER 31, 1998

Fourth Quarter (commencing December 18, 1998).............  $14 13/16        $6 17/32

YEAR ENDED DECEMBER 31, 1999

First Quarter.............................................  $15 3/8          $7 1/2
Second Quarter............................................  $34 1/8          $11 11/16
Third Quarter.............................................  $21 3/4          $8 1/4
Fourth Quarter............................................  $13 1/2          $8 1/4
</TABLE>

    On March 22, 2000, the last reported sale price for the Common Stock was
$8 5/16 per share.

    As of March 22, 2000, there were approximately 205 record holders of the
Company Common Stock. This number does not reflect the number of beneficial
holders of the Common Stock, which the Company believes is approximately 10,000
holders.

    The Company has never paid cash dividends on its Common Stock. At present,
the Company intends to retain any earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

    Not Applicable

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

    The following discussion and analysis provides information that the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations financial condition for the two years ended
December 31, 1999 and 1998. The following discussion should be read in
conjunction with the Financial Statements and Notes thereto appearing elsewhere
in this Annual Report on Form 10-KSB. Some of the information in this Report
contains forward-looking statements which involve substantial risks and
uncertainties. These statements can be identified by forward-looking words such
as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue"
or similar words. Investors should read statements that contain these or similar
words carefully because they (1) discuss management's expectations about the
Company's future performance; (2) contain projections of the Company's future
operating results or of the Company's future financial condition; or (3) state
other "forward-looking" information. The Company believes it is important to
communicate its expectations to its investors. There may be events in the
future, however, that the Company is not accurately able to predict or over
which it has no control. The risk factors discussed in "Business Risks,"
appearing in "Business" in this Report, as well as any cautionary language in
this Report, provide examples of risks, uncertainties and events that may cause
the Company's actual results to differ materially from the

                                       18
<PAGE>
expectations described in the forward-looking statements. Additional risks will
be described from time to time in the Company's other filings with the SEC.
Investors should be aware that the occurrence of any of the events described in
the risk factors and elsewhere in this Report and in the Company's other
periodic SEC filings could have a material and adverse effect on its business,
results of operations and financial condition.

GENERAL

ACQUISITION

    Effective January 1, 1999, the Company completed the acquisition of
substantially all the assets of Mass Music, Inc., an online seller of music
products. The acquisition was accounted for as a purchase. Under the purchase
method of accounting, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Results of operations for Mass Music, Inc. have been included with
those of the Company for periods subsequent to the date of acquisition. The
total purchase price of the acquisition was $1,000,000, which consisted of
$200,000 in cash and a note payable in the amount of $800,000. In April 1999,
the Company converted the note payable into 36,478 shares of the Company's
Common Stock.

RESULTS OF OPERATIONS

    TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE TWELVE MONTHS ENDED
     DECEMBER 31, 1998

    Net revenues were $2,060,000 for the twelve months ended December 31, 1999,
as compared to $139,000 for the same period in 1998. The Company launched its
Web site in November 1997. Revenues generated in 1998 were primarily from
advertising sales. Revenues for 1999 were attributed to e-commerce sales
including revenues generated by the Company's Mass Music and Audioshop
e-commerce web sites, advertising sales and to a lesser extent, revenue sharing
opportunities. The Company had no substantial e-commerce or revenue sharing
arrangements in 1998. The substantial revenue increase in 1999 was primarily
attributable to e-commerce revenue, consisting primarily of the sale of compact
discs.

    Cost of products sold through e-commerce exceeded revenue by $324,000 for
the twelve months ended December 31, 1999. This was primarily attributable to
aggressive pricing to meet competition and to increase market share and high
fulfillment costs.

    Operating and development expenses were $3,830,000 for the twelve months
ended December 31, 1999, up 199% from $1,283,000 for the same period in 1998.
This increase was primarily the result of increased payroll expenses associated
with increased staffing, data communications expenses, costs to produce and
maintain the Company's Web sites, use of consulting engineers and amortization
of certain of the assets acquired from Mass Music, Inc. The Company employs
outside consulting engineers to facilitate a portion of its development effort.

    Selling and marketing expenses were $6,298,000 for the twelve months ended
December 31, 1999, up 244% from $1,832,000 for the same period in 1998. This
increase is primarily attributable to the increased advertising and marketing
expenses associated with promoting the Company's Web sites, increased payroll
expenses associated with additional sales and marketing staff, as well as
increased expenses for public relations. The Company expects selling and
marketing expenses to continue to increase substantially in future periods as
the Company develops and launches new Web sites and promotes its new and
existing Web sites.

    General and administrative expenses ("G&A") were $2,622,000 for the twelve
months ended December 31, 1999, up 316% compared to G&A expenses of $631,000 for
the same period in 1998. This increase was primarily the result of increased
staffing costs, accounting fees, legal fees and expenses incurred in connection
with transactions and public company compliance.

                                       19
<PAGE>
    The operating loss was $12,615,000 for the twelve months ended December 31,
1999 compared to an operating loss for the same period in 1998 of $3,611,000, an
increase of approximately 249%. As noted above, the increased loss was primarily
the result of increased expenditures in the sales and marketing, and operating
and development areas, offset by the $1,921,000 increase in revenue. The
increased operating loss was anticipated in light of the need to substantially
increase expenditures following receipt of the net proceeds from the Company's
initial public offering, in order to expand the business.

    Interest expense decreased approximately 49% to $950,000 during the twelve
months ended December 31, 1999 from $1,845,000 in the same period in 1998. This
decrease was primarily the result of 1998 including amortization of the fair
value of the warrants issued in connection with debt to a greater extent than in
1999 as the Company retired a substantial portion of the outstanding debt during
1999. The net carrying value of outstanding debt at December 31, 1998 was
$1,328,000 compared to $440,000 on December 31, 1999. Additionally, in 1998 the
Company recorded $609,000, related to amortization of beneficial conversion
features of convertible debt.

    Interest income increased approximately $884,000 during 1999 compared to
1998 as a result of investing the net proceeds from the IPO and its subsequent
warrant call.

    As a result of the factors described above, for the twelve months ended
December 31, 1999, the Company incurred a net loss of $12,672,000 compared to a
net loss of $5,867,000 for the same period in 1998, an increase of approximately
116%.

LIQUIDITY AND CAPITAL RESOURCES

    The Company has financed its operations since inception almost entirely from
the sale of equity and debt securities, supplemented with a bank line of credit.
In December 1998, it completed its initial public offering of securities, in
which it sold an aggregate of 2,530,000 units consisting of Common Stock and
redeemable Common Stock Purchase Warrants (the "Units"), at an initial public
offering price of $6.50 per Unit. The offering netted the Company approximately
$14,052,000 after deducting expenses related to the offering. In January 1999,
the conditions for redemption set forth in the Common Stock Purchase Warrants
were satisfied, and the Company redeemed its outstanding public warrants as of
February 22, 1999. As a result, a total of approximately 1,269,000 warrants were
exercised, which resulted in gross proceeds to the Company of approximately
$12,374,000. The Company paid approximately $333,000 to holders of Warrants who
chose not to redeem during the 30-day redemption period. As of December 31,
1999, the Company had $13,152,000 in cash and cash equivalents and investments,
$9,524,000 of which was invested in high grade short-term debt instruments. As
of December 31, 1999, the Company had $10,223,000 in working capital. The
Company currently is financing its daily operations primarily through the
application of the net proceeds from the IPO and its subsequent warrant call.

    The Company has issued subordinated convertible promissory notes which bear
interest at 8% to 10%, are convertible into Common Stock at rates ranging from
$3.25 to $14.39 per share and other non-convertible debt at rates from 8% to
10%. During 1999, the Company converted $240,000 of debt into Common Stock. The
carrying value of the remaining debt as of December 31, 1999 was $440,000. The
remaining debt is all due on or before June 30, 2000.

    As of December 31, 1999, the Company used $10,303,000 in operating
activities compared to $3,478,000 in 1998. This increase was largely due to the
significantly increased net loss in 1998, but also reflected increased uses of
cash in most aspects of operating activities, other than Common Stock issued for
services and amortization of debt discounts and conversion features, which were
larger in 1998. The Company also used $10,522,000 in investing activities
compared to $55,000 in 1998. The most significant portion of the 1999 increase
was from the purchase of held-to-maturity investment securities. Net cash
provided by financing activities decreased in 1999, from $16,535,000 in 1998 to
$11,446,000 in 1999, primarily because the net proceeds of the Company's initial
public offering were received in 1998. The

                                       20
<PAGE>
$11,446,000 received in 1999 was primarily the result of the sale of Common
Stock in connection with the warrant call.

    The Company believes that its current financial resources will be sufficient
to fund its operations for at least the next 12 months and that, during that
period, it will not be necessary for the Company to raise additional funds to
meet the expenditures required for operating its business. However, there can be
no assurance that presently unforeseen events may result in the Company
determining to raise additional funds.

    The Company will make significant ongoing investments in research and
development for future generation products and services. It also expects to have
significant expenditures in sales and marketing and further content acquisition
in order to attract customers to its Web site. There is no assurance that the
Company's analysis of its capital requirements will be accurate, particularly in
light of the fact that it is entering a new business in a new market.

    The Company's future expenditures and capital requirements will depend on a
number of factors including the development and implementation of next
generation technologies, technological developments on the Internet and the
regulatory and competitive environment for Internet based products and services.

NET OPERATING LOSS CARRYFORWARDS

    At December 31, 1999, the Company fully provided against its deferred tax
assets. The Company believes sufficient uncertainty exists regarding the
realizability of the deferred tax assets such that a full valuation allowance is
required. At December 31, 1999, the Company had approximately $21,899,000 of
federal net operating loss carryforwards for tax reporting purposes available to
offset future taxable income; such carryforwards will expire beginning in 2009.
Additionally, the Company has approximately $10,335,000 of California net
operating loss carryforwards for tax reporting purposes which begin to expire in
2000.

    The Tax Reform Act of 1986 imposes limitations on the use of net operating
loss carryforwards if certain stock ownership changes have occurred or could
occur in the future. The sale of the Units sold in the Company's December 1998
IPO constituted such a change in ownership and therefore, utilization of the
Company's net operating loss carryforwards may be limited.

IMPACT OF YEAR 2000

    In prior years, the Company implemented a Year 2000 project to address the
issue of computer software and hardware correctly processing dates through and
beyond the Year 2000. The goal of this project was to ensure that all computer
software and hardware that the Company uses or relies upon was retired, replaced
or made Year 2000 compliant before December 31, 1999. To date, the Company has
not experienced any Year 2000-related operational issues and is not aware of any
material potential problems that may arise as a result of Year 2000 issues
either from its own internal systems or from the products and services of third
parties upon which it relies.

ITEM 7.  FINANCIAL STATEMENTS

    The Balance Sheet of the Company at December 31, 1999 and the related
Statements of Operations, Stockholders' Equity and Cash Flows for the years
ended December 31, 1998 and 1999, and the Notes to Financial Statements are
located on pages 22 through 37 of this Report. The Report of Independent
Certified Public Accountants, Financial Statements and Notes to Financial
Statements are incorporated into this Item 7.

                                       21
<PAGE>
                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              FORM 10-KSB
                                                              PAGE NUMBER
                                                              -----------
<S>                                                           <C>
Report of Independent Certified Public Accountants..........      23

Balance Sheet at December 31, 1999..........................      24

Statements of Operations for the years ended December 31,
1999 and 1998...............................................      25

Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998..................................      26

Statement of Cash Flows for the years ended December 31,
1999 and 1998...............................................      27

Notes to Financial Statements...............................      28
</TABLE>

                                       22
<PAGE>
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
audiohighway.com

    We have audited the accompanying balance sheet of audiohighway.com (the
"Company"), as of December 31, 1999, and the related statements of operations,
stockholders' equity, and cash flows for each of the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 1999, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with accounting principles generally
accepted in the United States.

San Jose, California
April 12, 2000

                                       23
<PAGE>
                                audiohighway.com

                                 BALANCE SHEET

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1999
                                                              ------------
<S>                                                           <C>
                                  ASSETS

Current assets:
  Cash and cash equivalents.................................    $  3,628
  Investments...............................................       9,524
  Accounts receivable, less allowance for doubtful accounts
    of $125.................................................         212
  Accrued interest receivable...............................         236
  Prepaid expenses..........................................         140
                                                                --------
        Total current assets................................      13,740

  Property and equipment, net...............................       1,048
  Note receivable from director.............................         107
  Lease deposits............................................         400
  Other assets, less accumulated amortization of $500.......         500
                                                                --------

TOTAL ASSETS................................................    $ 15,795
                                                                ========

                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long term debt.........................    $    440
  Current portion of capital lease obligations..............          47
  Accounts payable..........................................       1,770
  Accrued expenses and other current liabilities............       1,260
                                                                --------
        Total current liabilities...........................       3,517

Capital lease obligations, less current portion.............         111
                                                                --------
        Total liabilities...................................       3,628

Stockholders' equity:
  Preferred stock, no par value; 5,000 shares authorized;
    none issued.............................................          --
  Common stock, no par value; 50,000 shares authorized;
    5,746 shares issued and outstanding.....................      33,162
  Additional paid-in capital................................       4,194
  Accumulated deficit.......................................     (25,189)
                                                                --------
        Total stockholders' equity..........................      12,167
                                                                --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................    $ 15,795
                                                                ========
</TABLE>

                See accompanying notes to financial statements.

                                       24
<PAGE>
                                audiohighway.com

                            STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1998       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Revenues:
  e-commerce................................................  $     6    $  1,601
  Advertising...............................................      133         459
                                                              -------    --------
        Total revenues......................................      139       2,060

Costs and expenses:
  Costs of products sold through e-commerce.................        4       1,925
  Operating and development.................................    1,283       3,830
  Sales and marketing.......................................    1,832       6,298
  General and administrative................................      631       2,622
                                                              -------    --------
        Total costs and expenses............................    3,750      14,675
                                                              -------    --------

Loss from operations........................................   (3,611)    (12,615)

Other income (expense):
  Interest expense..........................................   (1,845)       (950)
  Interest income...........................................       12         896
  Other.....................................................        2          (3)
                                                              -------    --------

        Net loss before extraordinary item..................   (5,442)    (12,672)

Extraordinary loss on conversion of subordinated debt.......      425          --
                                                              -------    --------

        Net loss............................................  $(5,867)   $(12,672)
                                                              =======    ========

Basic and diluted net loss per share from continuing
  operations................................................  $ (4.75)   $  (2.37)
Basic and diluted net loss per share from extraordinary
  item......................................................    (0.37)         --
                                                              -------    --------

Basic and diluted net loss per share........................  $ (5.12)   $  (2.37)
                                                              =======    ========
Shares used in computing basic and diluted net loss per
  share.....................................................    1,146       5,345
</TABLE>

                See accompanying notes to financial statements.

                                       25
<PAGE>
                                audiohighway.com

                       STATEMENT OF STOCKHOLDERS' EQUITY

                                 (IN THOUSANDS)

                       TWO YEARS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                    COMMON STOCK       ADDITIONAL
                                                 -------------------    PAID-IN     ACCUMULATED
                                                  SHARES     AMOUNT     CAPITAL       DEFICIT      TOTAL
                                                 --------   --------   ----------   -----------   --------
<S>                                              <C>        <C>        <C>          <C>           <C>
Balance at January 1, 1998.....................     944     $ 2,321      $1,884       $ (6,650)   $ (2,445)

  Public Offering of Common Stock, net of
    issuance costs of $2,343...................   2,530      14,052          --             --      14,052
  Conversion of Subordinated Notes and accrued
    interest to Common Stock...................     626       2,730          --             --       2,730
  Issuance of Common Stock from exercise of
    warrants...................................       3          18          --             --          18
  Issuance of Common Stock for services........       1           9          --             --           9
  Beneficial conversion feature on convertible
    notes......................................      --          --         609             --         609
  Issuance of warrants with debt...............      --          --       1,701             --       1,701
  Net loss.....................................      --          --          --         (5,867)     (5,867)
                                                  -----     -------      ------       --------    --------

Balance at December 31, 1998...................   4,104      19,130       4,194        (12,517)     10,807

  Conversion of Subordinated Notes to Common
    Stock......................................      80         240          --             --         240
  Issuance of Common Stock from exercise of
    options and warrants, net of costs of
    $333.......................................   1,526      12,992          --             --      12,992
  Conversion of note payable to Common Stock
    related to the acquisition of Mass Music,
    Inc........................................      36         800          --             --         800
  Net loss.....................................      --          --          --        (12,672)    (12,672)
                                                  -----     -------      ------       --------    --------

Balance at December 31, 1999...................   5,746     $33,162      $4,194       $(25,189)   $ 12,167
                                                  =====     =======      ======       ========    ========
</TABLE>

                See accompanying notes to financial statements.

                                       26
<PAGE>
                                audiohighway.com

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1998       1999
                                                              --------   --------
<S>                                                           <C>        <C>
Cash flows from operating activities:
  Net loss..................................................  $(5,867)   $(12,672)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Depreciation and amortization...........................      100         679
    Common Stock issued for services........................        9          --
    Amortization of debt discounts and conversion
      features..............................................    1,948         853
    Provision for doubtful accounts.........................       --         125
    Changes in operating assets and liabilities:
      Accounts receivable...................................      (78)       (257)
      Accrued interest receivable...........................       --        (236)
      Prepaid expenses......................................       (5)        (93)
      Lease deposits........................................       --        (400)
      Accounts payable......................................      305         642
      Accrued expenses and other current liabilities........      110       1,056
                                                              -------    --------
        Net cash used in operating activities...............   (3,478)    (10,303)
Cash flows from investing activities:
  Purchase of held-to-maturity investment securities........       --     (11,529)
  Proceeds on maturity of held-to-maturity investment
    securities..............................................       --       2,005
  Acquisition of Mass Music, Inc............................       --        (200)
  Acquisition of property and equipment.....................      (55)       (691)
  Issuance of note receivable...............................       --        (107)
                                                              -------    --------
        Net cash used in investing activities...............      (55)    (10,522)
Cash flows from financing activities:
  Proceeds from issuance of Common Stock....................   14,070      12,992
  Proceeds from issuance of long term debt..................    2,613          --
  Principal payments on long term debt......................     (148)     (1,501)
  Principal payments on capital lease obligations...........       --         (45)
                                                              -------    --------
        Net cash provided by financing activities...........   16,535      11,446
                                                              -------    --------
        Net increase (decrease) in cash and cash
          equivalents.......................................   13,002      (9,379)
Cash and cash equivalents at beginning of year..............        5      13,007
                                                              -------    --------
Cash and cash equivalents at end of year....................  $13,007    $  3,628
                                                              =======    ========
Cash paid during the year for:
  Interest..................................................  $    87    $     88
                                                              =======    ========
  Income taxes..............................................  $    --    $     --
                                                              =======    ========
Noncash investing and financing activities:
  The Company acquired equipment under capital lease obligations totaling $203
    during the year ended December 31, 1999.
  The Company converted Subordinated Notes and accrued interest thereon of $240
    and $2,730 to Common Stock during the years ended December 31, 1999 and 1998,
    respectively.
  The Company converted an $800 note payable to Common Stock in connection with
    the acquisition of Mass Music, Inc. during the year ended December 31, 1999.
</TABLE>

                See accompanying notes to financial statements.

                                       27
<PAGE>
                                audiohighway.com

                         NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

    audiohighway.com (the "Company") is an online retailer and a global Internet
    media company that offers a library of pre-recorded audio content via the
    World Wide Web (the "Web"). The Company contracts with an outside vendor for
    fulfillment services to deliver e-commerce products to customers and
    therefore maintains no inventories. The Company was incorporated in
    California in 1994 and conducts its business within one operating segment.

    REVENUE RECOGNITION

    The Company's revenues are derived principally from the e-commerce sale of
    music products, primarily compact discs, through the Company's Web site.
    Revenues from sales of music products are recognized at the time of shipment
    of music products. Revenues also include audio commercials included in its
    downloaded programming ("deliveries") and from the sale of banner
    advertisements, both on short-term contracts. Advertising revenues on both
    banner advertisements and deliveries are recognized in the period in which
    the advertisement is delivered, provided that collection of the resulting
    receivable is probable. Advertisers are charged on a per impression or
    delivery basis or for a fixed number of impressions as specified in the
    contract. The Company generally does not guarantee a minimum number of
    impressions or deliveries. Revenue sharing agreements with advertisers may
    provide that the Company receive revenues from e-commerce transactions.
    These revenues are recognized by the Company upon notification from the
    advertiser of revenues earned.

    OPERATING AND DEVELOPMENT

    Operating and development expenses consist primarily of data communications
    expenses, content and software licensing fees, operating supplies, related
    overhead and expenses incurred by the Company to maintain, monitor and
    manage the Company's Web site. The Company recognizes Web site development
    costs in accordance with Statement of Position ("SOP") 98-1, ACCOUNTING FOR
    THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. As
    such, the Company expenses all costs incurred that relate to the planning
    and post implementation phases of development. Costs incurred in the
    development phase are capitalized and recognized over the product's
    estimated useful life if the product is expected to have a useful life
    beyond one year. Costs associated with repair or maintenance of the existing
    site or the development of Web site content are included in operating and
    development expenses in the accompanying statements of operations.

    ADVERTISING COSTS

    Advertising costs are expensed as incurred. The Company does not incur any
    direct-response advertising costs. Advertising expenses totaled $343 and
    $1,816 for 1998 and 1999, respectively.

    CASH AND CASH EQUIVALENTS

    All highly liquid instruments with an original maturity of three months or
    less are considered cash equivalents. Cash equivalents include short term
    investments in low risk investment grade securities.

                                       28
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    INVESTMENTS

    Investments in debt securities purchased with maturities greater than three
    months are classified as held-to-maturity in accordance with Statement of
    Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN
    INVESTMENTS IN DEBT AND EQUITY SECURITIES, and related amendments.
    Held-to-maturity investments are debt securities that the Company has the
    positive intent and ability to hold to maturity. These investments are
    recorded at cost adjusted for amortization of premiums and accretion of
    discounts.

    CONCENTRATION OF CREDIT RISK

    Financial instruments that potentially subject the Company to significant
    concentrations of credit risk consist primarily of cash and cash
    equivalents, investments, and accounts receivable. Substantially all of the
    Company's cash and cash equivalents and investments are managed by one
    financial institution. Accounts receivable are typically unsecured and are
    derived from revenues earned from customers primarily located in the United
    States. The Company performs ongoing credit evaluations of its customers and
    maintains reserves for potential credit losses.

    PROPERTY AND EQUIPMENT

    Property and equipment, including leasehold improvements, are stated at
    cost. Depreciation is computed using the straight-line method over the
    estimated useful lives of the assets, generally two to five years. For
    leasehold improvements, amortization is computed over the shorter of the
    lease terms or the estimated useful lives of the improvements.

    INCOME TAXES

    Income taxes are computed using an asset and liability method. Under the
    asset and liability method, deferred income tax assets and liabilities are
    determined based on the differences between the financial reporting and tax
    bases of assets and liabilities and are measured using the currently enacted
    tax rates and laws. A valuation allowance is provided against deferred tax
    assets when realization of the asset is not expected.

    STOCK-BASED COMPENSATION

    The Company accounts for stock-based employee compensation arrangements in
    accordance with the provisions of Accounting Principles Board Opinion
    ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and complies with
    the disclosure provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
    COMPENSATION. Under APB No. 25, compensation cost is recognized over the
    vesting period based on the difference, if any, on the date of grant between
    the fair value of the Company's stock and the amount an employee must pay to
    acquire the stock.

                                       29
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1--THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    USE OF ESTIMATES

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

    BASIC AND DILUTED NET LOSS PER SHARE

    Basic earnings per share is computed using the weighted average number of
    common shares outstanding during the period. Diluted earnings per share is
    computed using the weighted average number of common and common equivalent
    shares outstanding during the period. Common equivalent shares consist of
    the incremental common shares issuable upon conversion of convertible
    securities (using the if-converted method) and shares issuable upon the
    exercise of stock options and warrants (using the treasury stock method).
    Common equivalent shares are excluded from the computation if their effect
    is anti-dilutive.

    FAIR VALUE OF FINANCIAL INSTRUMENTS

    The fair value of cash and cash equivalents, accounts receivable, accrued
    interest receivable, and trade payables approximates carrying value due to
    the short term nature of such instruments. The fair value of the related
    party note receivable is not determinable because of the related party
    nature of the instrument. The fair value of investment securities are based
    on quoted market prices of comparable instruments. The carrying amount and
    estimated fair value of investment securities as of December 31, 1999 was
    $9,524 and $9,516, respectively. The fair value of long-term obligations,
    including subordinated debt, approximates carrying value based on terms
    available for similar instruments.

    RECLASSIFICATIONS

    Certain reclassifications have been made to 1998 amounts and disclosures to
    conform to the 1999 presentation.

NOTE 2--ACQUISITION OF MASS MUSIC, INC.

    Effective January 1, 1999, the Company completed the acquisition of
    substantially all the assets of Mass Music, Inc., which markets and sells
    music products through its Internet site. The acquisition was accounted for
    as a purchase. Under the purchase method of accounting, the purchase price
    is allocated to the assets acquired and liabilities assumed based on their
    estimated fair values at the date of acquisition. Results of operations for
    Mass Music, Inc. have been included with those of the Company for periods
    subsequent to the date of acquisition. The total purchase price of the
    acquisition was $1,000 which consisted of $200 in cash and a note payable in
    the amount of $800. In April 1999,

                                       30
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 2--ACQUISITION OF MASS MUSIC, INC. (CONTINUED)
    the Company converted the note payable into 36 shares of the Company's
    Common Stock. The purchase price was allocated to the assets acquired based
    on their estimated fair values as follows:

<TABLE>
<S>                                                           <C>
Customer lists..............................................   $  874
Software operating systems..................................      102
Other.......................................................       24
                                                               ------
Total.......................................................   $1,000
                                                               ======
</TABLE>

    Customer lists and other intangible assets are amortized on a straight-line
    basis over a period of two years. Amortization expense for the year ended
    December 31, 1999 was $500.

    The following unaudited pro-forma results of operations for the year ended
    December 31, 1998 assume that the purchase occurred on January 1, 1998.

<TABLE>
<S>                                                           <C>
Revenues....................................................  $   929
Net loss before extraordinary item..........................  $(6,031)
Net loss....................................................  $(6,456)
Basic and diluted net loss per share from continuing
  operations................................................  $ (5.26)
Basic and diluted net loss per share from extraordinary
  item......................................................  $ (0.37)
Basic and diluted net loss per share........................  $ (5.63)
</TABLE>

NOTE 3--BALANCE SHEET COMPONENTS

    Investments

    The amortized cost, unrealized gains and losses, and fair values of the
    Company's held-to-maturity investment securities at December 31, 1999 are
    summarized as follows:

<TABLE>
<CAPTION>
                                                     GROSS        GROSS      ESTIMATED
                                       AMORTIZED   UNREALIZED   UNREALIZED     FAIR
                                         COST        GAINS        LOSSES       VALUE
                                       ---------   ----------   ----------   ---------
<S>                                    <C>         <C>          <C>          <C>
Corporate Debt Securities............   $1,004     $      --        $4        $1,000
U.S. State Debt Securities...........    8,520            --         4         8,516
                                        ------     ---------        --        ------
                                        $9,524     $      --        $8        $9,516
                                        ======     =========        ==        ======
</TABLE>

    The following table lists the maturities of debt securities held at
    December 31, 1999 classified as held-to-maturity:

<TABLE>
<CAPTION>
                                                         HELD-TO-MATURITY
                                               -------------------------------------
                                               AMORTIZED COST   ESTIMATED FAIR VALUE
                                               --------------   --------------------
<S>                                            <C>              <C>
Due in one year or less......................      $9,524              $9,516
</TABLE>

                                       31
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 3--BALANCE SHEET COMPONENTS (CONTINUED)
    Property and Equipment:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1999
                                                              ------------
<S>                                                           <C>
  Computers and equipment...................................     $1,085
  Computers and equipment held under capital leases.........        203
  Furniture and fixtures....................................        113
  Leasehold improvements....................................         31
                                                                 ------
                                                                  1,432
  Less: accumulated depreciation and amortization...........       (384)
                                                                 ------
                                                                 $1,048
                                                                 ======
</TABLE>

    The accumulated depreciation associated with computers and equipment held
    under capital lease was $24 at December 31, 1999.

    Accrued Expenses and Other Current Liabilities:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1999
                                                              ------------
<S>                                                           <C>
  Compensation costs........................................     $  723
  Interest..................................................        149
  Litigation settlements....................................        250
  Other.....................................................        138
                                                                 ------
                                                                 $1,260
                                                                 ======
</TABLE>

NOTE 4--LONG TERM DEBT

    Prior to 1999, the Company issued promissory notes (the "Notes") bearing
    interest at rates ranging from 8% to 10%, convertible into Common Stock at
    rates ranging from $3.25 to $14.39 per share. During 1999, the Company
    converted $240 of the Notes into Common Stock. During 1998, the Company
    converted $2,466 of the Notes and accrued interest of $264 into Common
    Stock, including $1,738 that immediately converted upon closing of the
    Company's initial public offering in December 1998. The remaining Notes are
    all due by June 30, 2000. Officers and directors of the Company had
    purchased $130 of the Notes, of which none are outstanding at December 31,
    1999.

    The Company has issued 1,221 warrants to purchase shares of Common Stock in
    connection with the issuance and conversion of the Notes and for guarantees
    provided by stockholders. As of December 31, 1999, 963 warrants are
    outstanding. The Company calculated the fair value of the warrants at the
    date of issuance and is amortizing this amount as interest expense over the
    life of the related debt.

                                       32
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 4--LONG TERM DEBT (CONTINUED)

    The carrying value of the debt is as follows:

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                                  1999
                                                              ------------
<S>                                                           <C>
Debt principal..............................................      $ 617
Unamortized discount........................................       (177)
                                                                  -----
Carrying value..............................................      $ 440
                                                                  =====
</TABLE>

NOTE 5--CAPITALIZED LEASE OBLIGATIONS

    The Company leases certain computers and equipment, which have been
    capitalized. The leases are non-cancelable and expire on various dates
    through 2004. The following is a schedule, by years, of future minimum
    payments under capital leases together with the present value, calculated at
    the Company's incremental borrowing rate at the inception of the leases, of
    future minimum rentals as of December 31, 1999:

<TABLE>
<S>                                                           <C>
Year ended December 31,
  2000......................................................  $ 61
  2001......................................................    58
  2002......................................................    43
  2003......................................................    37
  2004......................................................     5
                                                              ----
Total minimum lease payments................................   204
Amount representing interest................................   (46)
Current portion of capital lease obligations................   (47)
                                                              ----
Present value of long term obligations under capital
  leases....................................................  $111
                                                              ====
</TABLE>

NOTE 6--STOCKHOLDERS' EQUITY

    In December 1998, the Company completed an initial public offering (IPO)
    whereby 2,530 units were sold at a price of $6.50. Each unit consisted of
    one share of Common Stock and one warrant to purchase one share of Common
    Stock at $9.75 (the "Unit Warrants", collectively the "Units"). The net
    proceeds received by the Company totaled $14,052. The Unit Warrants
    contained a call provision, which was exercised by the Company in
    January 1999 (the "Warrant Call"). The Warrant Call and other warrant
    exercises resulted in net proceeds to the Company of approximately $12,992.
    As a result of the Warrant Call no Unit Warrants are outstanding as of
    December 31, 1999.

    The underwriter of the initial public offering was granted a warrant to
    acquire 220 Units, exercisable at $7.80 per Unit (the "Representative's
    Warrants"). The Representative's Warrants expire in December 2003 and all of
    them remain outstanding as of December 31, 1999.

                                       33
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
    The Board of Directors and the stockholders approved a 1 for 3.837 reverse
    split of the Common Stock that was effective on December 11, 1998. All
    references to the number of shares of Common Stock, weighted average common
    shares, and per share amounts in the accompanying financial statements and
    notes reflect this reverse split.

    The 1996 Stock Option Plan (the "Plan") allows for the issuance of incentive
    stock options, non-qualified stock options and stock purchase rights to
    purchase shares of the Company's Common Stock. During 1999, the Plan was
    amended and the Company reserved for issuance an aggregate of 1,800 shares
    under the Plan and 1,535 shares remain available for granting at
    December 31, 1999.

    Under the Plan, incentive stock options may be granted to employees,
    directors, and officers of the Company, and non-qualified stock options and
    stock purchase rights may be granted to consultants, employees, directors,
    and officers of the Company. Options granted under the Plan are for periods
    not to exceed ten years, and must be issued at prices not less than 100% and
    85%, for incentive and nonqualified stock options, respectively, of the fair
    market value of the stock on the date of grant. Options granted to
    stockholders who own greater than 10% of the outstanding stock are for
    periods not to exceed five years and must be issued at prices not less than
    110% of the fair market value of the stock on the date of grant. Options
    granted under the Plan generally vest within 3 to 5 years.

    The Company has also granted options and warrants to purchase Common Stock
    outside of the Plan to employees, directors and consultants. These
    instruments generally vest within 3 to 5 years.

    Stock option and warrant activity, excluding warrants issued in connection
    with long term debt, the Unit Warrants, and the Representative's Warrants,
    is summarized as follows:

<TABLE>
<CAPTION>
                                                                         WEIGHTED
                                                                         AVERAGE
                                                                         EXERCISE
                                                               SHARES     PRICE
                                                              --------   --------
<S>                                                           <C>        <C>
Balance at January 1, 1998..................................    272       $ 6.98
  Granted...................................................    164         6.50
  Exercised.................................................     --           --
  Cancelled.................................................    (31)       13.19
                                                                ---       ------

Balance at December 31, 1998................................    405         6.29
  Granted...................................................     --           --
  Exercised.................................................    (47)        5.88
  Cancelled.................................................     (3)        6.50
                                                                ---       ------

Balance at December 31, 1999................................    355       $ 6.49
                                                                ===       ======
</TABLE>

                                       34
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 6--STOCKHOLDERS' EQUITY (CONTINUED)
    The following table summarizes information about stock options and warrants
    outstanding as of December 31, 1999:

<TABLE>
<CAPTION>
                                             WEIGHTED
                                WEIGHTED     AVERAGE                    WEIGHTED
   RANGE OF                     AVERAGE     REMAINING                   AVERAGE
   EXERCISE         NUMBER      EXERCISE   CONTRACTUAL      NUMBER      EXERCISE
     PRICE        OUTSTANDING    PRICE     TERM (YEARS)   EXERCISABLE    PRICE
---------------   -----------   --------   ------------   -----------   --------
<S>               <C>           <C>        <C>            <C>           <C>
$ 1.92 - $ 5.76       155        $ 4.46           4           155        $ 4.46
$ 5.77 - $11.50       153        $ 6.50           9           147        $ 6.50
$11.51 - $14.39        47        $13.11           8            40        $13.39
                      ---                                     ---
                      355                                     342
                      ===                                     ===
</TABLE>

    The following table depicts the pro forma results of operations had
    compensation expense been determined based on the fair value at the grant
    dates, as prescribed in SFAS No. 123.

<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                           -------------------
                                                             1998       1999
                                                           --------   --------
<S>                                                        <C>        <C>
Net loss
  As reported............................................  $(5,867)   $(12,672)
  Pro forma..............................................  $(6,305)   $(13,090)

Basic and diluted net loss per share
  As reported............................................  $ (5.12)   $  (2.37)
  Pro forma..............................................  $ (5.50)   $  (2.45)
</TABLE>

    Prior to the Company's initial public offering, the fair value of each
    option grant has been determined on the date of grant using the minimum
    value method. After the Company's initial public offering, the fair value of
    option grants has been determined using the Black-Scholes option pricing
    model. The weighted average fair value of options and warrants granted to
    employees was $5.84 for 1998. The following weighted average assumptions
    were used to perform the calculations: expected life of 3 years; interest
    rate of 5.5%, volatility of 200% (for grants after the initial public
    offering) and no dividend yield. The pro forma disclosures may not be
    representative of pro forma effects on reported financial results for future
    years.

                                       35
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 7--INCOME TAXES

    No provision for federal and state income taxes has been recorded, as the
    Company has incurred net operating losses through December 31, 1999. The
    following table sets forth the primary components of deferred tax assets at
    December 31, 1999:

<TABLE>
<S>                                                           <C>
Net operating loss and credit carryforwards.................  $ 8,353
Valuation allowance.........................................   (8,353)
                                                              -------
                                                              $    --
                                                              =======
</TABLE>

    At December 31, 1999, the Company fully provided against its deferred tax
    assets. The valuation allowance was increased by $4,429 during the year
    ended December 31, 1999. The Company believes sufficient uncertainty exists
    regarding the realizability of the deferred tax assets such that a full
    valuation allowance is required. At December 31, 1999, the Company had
    approximately $21,899 of federal net operating loss carryforwards for tax
    reporting purposes available to offset future taxable income; such
    carryforwards will expire beginning in 2009. Additionally, the Company has
    approximately $10,335 of California net operating loss carryforwards for tax
    reporting purposes which will expire beginning in 2000.

    Federal and state laws impose restrictions on the utilization of net
    operating loss carryforwards in the event of an "ownership change" as
    defined in Section 382 of the Internal Revenue Code. As a result of the
    initial public offering, the Company believes an ownership change has
    occurred and utilization of the net operating losses may be limited.

NOTE 8--COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS

    Litigation

    In August 1999, Spirit Partners, L.P. and Gaines Berland, Inc, filed suit
    against the Company in the Supreme Court of the State of New York seeking
    damages according to proof, punitive damages in the amount of $3,000,
    attorneys' fee, costs and equitable relief, based on allegations of breach
    of contract, negligent misrepresentation and deceptive trade practices
    relating to the Company's redemption of its publicly traded warrants during
    February 1999. The Company removed the case to the United States District
    Court for the Southern District of New York. Due to the nature of litigation
    generally and because the lawsuit is at an early stage, the Company cannot
    estimate the total expense, possible damages or settlement value, if any,
    that may ultimately be incurred in connection with the suit. However, the
    Company believes that the suit is wholly without merit, intends to
    vigorously oppose the suit and believes that the matter will not have a
    material adverse effect on the Company's results of operations or financial
    condition.

    The Company is engaged in various other claims and legal actions arising out
    of the normal course of business, either as plaintiff or defendant. In the
    opinion of management, based upon advice of counsel, the ultimate outcome of
    these lawsuits will not have a material impact on the Company's financial
    statements.

                                       36
<PAGE>
                                audiohighway.com

                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)

                           DECEMBER 31, 1998 AND 1999

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 8--COMMITMENTS, CONTINGENCIES, AND CONCENTRATIONS (CONTINUED)
    Operating Leases

    The Company leases various operating facilities and equipment under
    noncancelable operating lease agreements that expire at various dates though
    2004. A portion of the operating facilities is subleased under a lease which
    expires in 2001. Total future minimum sublease rentals amount to $329. Rent
    expense under these operating lease agreements totaled $429 and $1,213 in
    1998 and 1999, respectively.

    The future minimum rental commitments, excluding sublease income, under
    operating lease agreements are as follows:

<TABLE>
<S>                                                           <C>
Year ended December 31,
  2000......................................................  $1,148
  2001......................................................   1,186
  2002......................................................   1,161
  2003......................................................   1,080
  2004......................................................     931
                                                              ------
Total future minimum lease payments required................  $5,506
                                                              ======
</TABLE>

    Concentrations

    During the year, the Company entered into a distribution agreement in which
    a single outside vendor provides direct-to-customer order fulfillment
    services for e-commerce orders placed over the Web. The original terms of
    the agreement expired on December 31, 1999; however the agreement provides
    that the term will automatically be renewed for a subsequent one-year term,
    unless the Company or the outside vendor provides notice to the other party
    at least 30 days prior to December 31, 1999 or any subsequent one-year term
    of its intent not to renew the agreement. Although management believes other
    vendors could provide fulfillment services on similar terms, it believes a
    change in the outside vendor could adversely affect operating results by
    causing a delay in fulfilling orders and a possible loss of e-commerce
    revenues.

NOTE 9--RELATED PARTY TRANSACTIONS

    During the year ended December 31, 1998 and 1999, the Company incurred $264
    and $713, respectively, in expenses to TDP, Inc., for software consulting
    and systems development expenses. Mr. Rehki, a member of the Board of
    Directors of the Company, was the Chief Executive Officer of TDP, Inc. until
    February 1999. As of December 31, 1999, $85 of this amount was unpaid.

    On February 23, 1999, the Company made an unsecured loan to Mr. Rehki in the
    amount of $107, bearing interest at the rate of 10% per annum and due
    February 23, 2000. In February 2000, the Company extended the maturity date
    of the unsecured loan to February 23, 2001.

                                       37
<PAGE>
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    There were no disagreements on accounting and financial disclosure.

                                    PART III

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

    The executive officers and directors of the Company as of March 24, 2000 are
as follows:

<TABLE>
<CAPTION>
NAME                                       AGE                           POSITIONS
----                                     --------   ---------------------------------------------------
<S>                                      <C>        <C>
Nathan M. Schulhof.....................     50      President, Chief Executive Officer and Director
Grant Jasmin(1)........................     48      Executive Vice President, Chief Operating Officer,
                                                    Vice President Finance, Secretary and Director
Robert S. Leff.........................     53      Director
Lee M. Gammill(2)......................     63      Director
Muninderpal Rehki(1)(2)................     50      Director
Marvin M. Reiss........................     55      Director
Gregory Sutyak.........................     43      Chief Financial Officer
Theodore Richards......................     53      Vice President and Creative Director
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

    Mr. Schulhof is one of the founders of the Company and has served as Chief
Executive Officer, President and a Director since the Company's inception in
June 1994. Mr. Schulhof received a Bachelor of Arts degree in English from the
University of Wisconsin.

    Mr. Jasmin is one of the founders of the Company and has served as Executive
Vice President, Chief Operating Officer, Secretary and a Director since the
Company's inception in June 1994. From June 1994 until January 1998, Mr. Jasmin
also served as the Company's Vice President, Finance. He again was appointed
Vice President, Finance in December 1998. Mr. Jasmin received the degree of
Juris Doctor from the University of California Hastings College of the Law,
Master of Business Administration from the University of Santa Clara and a
Bachelor of Arts degree in Economics from San Jose State University.

    Mr. Leff has served as a Director of the Company since February 1995.
Mr. Leff has served as an independent financial consultant since December 1994.
Mr. Leff holds both a Master of Science degree and a Bachelor of Science degree
from the State University of New York at Albany.

    Mr. Gammill has served as a Director of the Company since November 1997.
Since May 1997, Mr. Gammill has served as Chief Executive Officer of The Gammill
Group, a consultant to the insurance and financial industry. In May 1997,
Mr. Gammill retired from 40 year career with New York Life Insurance Company
where he served as Vice Chairman of the Board of Directors. Mr. Gammill also
serves on the Board of Directors of Guarantee Life Insurance Company, Omaha
Nebraska, and is a Trustee of the American College, Bryn Mawr, Pennsylvania.
Mr. Gammill received a Bachelor of Arts degree in Business Administration from
Dartmouth College.

    Mr. Rehki has served as a Director of the Company since April 1998. Since
February 1999, Mr. Rehki has been an independent business consultant. Mr. Rehki
was Chief Executive Officer of TDP, Inc., a high technology software consulting
firm, from January 1998 until February 1999. From October 1997 to January 1998,
he was Chief Executive Officer of TransWeb, a software consulting firm to the
medical industry. TransWeb is a wholly-owned subsidiary of CyberPlus, an
Internet-based software medical support company in which Mr. Rehki served as
Chief Executive Officer and Director from February 1996 to

                                       38
<PAGE>
October 1997. From December 1993 to January 1996, Mr. Rehki was Vice President
of Operations for Intellimatch, Inc., an Internet-based human resources company.
Mr. Rehki received a Bachelor of Arts degree in Economics and a Master of Arts
degree in Economics from Christ Church College, India.

    Mr. Reiss has served as a Director of the Company since October 1998. For
more than the past five years, Mr. Reiss has been Chairman and Chief Executive
Officer of The Rebot Corporation, a record company that produces, manufactures
and distributes recorded music under various labels including Arabesque
Recordings. Mr. Reiss received the degrees of Master of Business Administration,
Master of International Affairs and Master of Arts in Sociology from Columbia
University, Bachelor of Law degree from Brooklyn Law School, Master of Science
degree in Physiology from the Fairleigh Dickenson Dental School, Master of
Science degree in Microbiology from Marquette University School of Medicine and
Bachelor of Arts degree in Biology from Yeshiva University.

    Mr. Sutyak has served as Chief Financial Officer since January 1998. From
January 1995 through December 1997, Mr. Sutyak served as a consultant to the
Company performing financial services. From March 1996 through December 1997,
Mr. Sutyak was an independent consultant. From May 1993 through February 1996,
Mr. Sutyak was Chief Financial Officer for TestDrive. Mr. Sutyak received a
Bachelor of Arts degree in Economics from the University of Pittsburgh and a
Masters of Business Administration degree from the University of San Francisco.

    Mr. Richards has served as Vice President and Creative Director since
July 1996. From November 1994 to July 1996, Mr. Richards was Vice President of
User Interface Design and Creative Director for SoftAd, a firm specializing in
the design and implementation of sales force automation and integrated
client-server-based Web sites. Mr. Richards received a Bachelor of Arts degree
in Creative Writing from San Francisco State University.

    All members of the Board of Directors hold office until the next annual
meeting of shareholders and the election and qualification of their successors,
or until death, resignation, or removal. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the directors
and executive officers of the Company.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

    As permitted by the General Corporation Law of California (the "Corporations
Code"), the Company's Articles of Incorporation eliminate, to the fullest extent
permitted under California law, the personal liability of a director to the
Company for monetary damages in an action brought by or in the right of the
Company for breach of a director's duties to the Company and its shareholders.
Under current California law, liability is not eliminated for (i) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of law; (ii) acts or omissions that a director believed to be contrary
to the best interests of the corporation or its shareholders or that involve the
absence of good faith on the part of the director; (iii) any transaction from
which a director derived an improper personal benefit; (iv) acts or omissions
that show a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders; (v) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders;
(vi) contracts or other transactions between corporations and directors having
interrelated directors in violation of Section 310 of the Corporations Code; and
(vii) distributions, loans or guarantees made in violation of Section 316 of the
Corporations Code. In addition, the Company's Articles of Incorporation and
bylaws provide for indemnification, to the fullest extent permitted under the
Corporations Code, of directors, officers and agents of the Company and persons
who serve at the request of the Company as a director, officer, employee,
trustee or agent of another corporation, partnership, joint venture, trust or
other enterprise.

                                       39
<PAGE>
    The Company has also entered into indemnification agreements with its
directors and executive officers, as permitted under the bylaws. The
indemnification agreements provide that the directors and executive officers
will be indemnified to the fullest extent permitted by applicable law against
all expenses (including attorneys' fees), judgments, fines and amounts
reasonably paid or incurred by them for settlement in any threatened, pending or
completed action, suit or proceeding, including any derivative action, on
account of their services as a director or executive officer of the Company or
of any subsidiary of the Company or of any other company or enterprise in which
they are serving at the request of the Company. No indemnification will be
provided under the indemnification agreements, however, to any director or
executive officer in certain limited circumstances, including on account of
knowingly fraudulent, deliberately dishonest or willful misconduct. To the
extent the provisions of the indemnification agreements exceed the
indemnification permitted by applicable law, such provisions may be
unenforceable or may be limited to the extent they are found by a court of
competent jurisdiction to be contrary to public policy. In addition, in the
opinion of the Securities and Exchange Commission, indemnification for
liabilities arising under the Securities Act of 1933, as amended (the "Act"), is
against public policy and, therefore, unenforceable. Accordingly, these
indemnification provisions may not limit the liability of directors and
executive officers under the Act.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

    Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a class of the Company's equity
securities registered under the Exchange Act, to file with the Commission
reports of ownership and changes in ownership of Common Stock and other equity
securities of the Company. Executive officers, directors and greater than ten
percent stockholders are required by Commission regulations to furnish the
Company with copies of all Section 16(a) forms they file. Based solely on review
of this information, including written representations that no other reports
were required, the Company believes that during the fiscal year ended
December 31, 1999, each of the Company's executive officers, directors and
holders of ten percent or more of the Company's Common Stock timely filed all
reports required to be filed pursuant to Section 16(a) of the Exchange Act.
However, each of Messrs. Schulhof, Jasmin and Leff filed Amended Form 3s during
February 2000 to reflect an inadvertent mistake with respect to the application
of the December 11, 1998 reverse stock split on warrants originally reported on
the Form 3s filed on December 17, 1998.

                                       40
<PAGE>
ITEM 10.  EXECUTIVE COMPENSATION

    The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1999 to the Company's
Chief Executive Officer and to each of the other three executive officer who
received salary and bonus in excess of $100,000 in 1999 (the "Named Executive
Officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                           ANNUAL              LONG TERM
                                                        COMPENSATION         COMPENSATION
                                                     -------------------   -----------------    ALL OTHER
                                                      SALARY     BONUS          AWARDS         COMPENSATION
NAME AND PRINCIPAL POSITION                 YEAR       ($$)       ($$)     OPTIONS/SAR'S (#)       ($$)
---------------------------               --------   --------   --------   -----------------   ------------
<S>                                       <C>        <C>        <C>        <C>                 <C>
Nathan M. Schulhof......................    1999     200,000    100,000         175,000                --
  Chief Executive Officer and               1998     170,500     75,000          20,850                --
  President                                 1997     157,500         --              --                --

Grant Jasmin............................    1999     196,000    107,500         175,000                --
  Executive Vice President,                 1998     140,000     37,500          20,850           172,000*
  Chief Operating Officer and               1997     108,000         --              --                --
  Vice President, Finance

Theodore Richards.......................    1999     144,000     50,000          75,000                --
  Vice President and                        1998     114,500     31,000              --                --
  Creative Director                         1997      99,500      4,000              --                --

Greg Sutyak.............................    1999     120,000     50,000          75,000                --
  Chief Financial Officer                   1998      66,000     10,000              --                --
                                            1997          --         --              --                --
</TABLE>

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

 * Represents payroll accrued during earlier periods which was paid during 1998.

    DIRECTORS' COMPENSATION

    Each non-employee director receives an automatic option to purchase 75,000
shares of common stock upon election to the Board and an automatic additional
annual grant of options to purchase 10,000 shares of common stock at a price
equal to the fair market value on the date of grant.

    EMPLOYMENT AGREEMENTS

    The Company presently has no formal employment agreements with any of the
Named Executive Officers.

STOCK OPTION GRANTS AND EXERCISES

    At the 1999 annual meeting of shareholders, the shareholders approved an
increase in the number of shares available under the Company's 1996 Stock Option
Plan (the "1996 Plan"), authorizing the grant of up to 1,800,000 options. The
1996 Plan was adopted to promote and advance the interests of the Company and
its shareholders by (i) enabling the Company to attract, retain and reward
managerial and other key employees, non-employees and directors and
(ii) strengthening the mutuality of interests between participants in the 1996
Plan and the shareholders of the Company in its long-term growth, profitability
and financial success by offering stock options.

                                       41
<PAGE>
    The following table sets forth information regarding the grant of stock
options during the year ended December 31, 1999 to the Named Executive Officers:

                     OPTION/SAR GRANTS IN LAST FISCAL YEAR
                              (INDIVIDUAL GRANTS)

<TABLE>
<CAPTION>
                                                 NUMBER OF
                                                 SECURITIES    PERCENT OF TOTAL
                                                 UNDERLYING        OPTIONS
                                                OPTIONS/SARS      GRANTED TO      EXERCISE OR
                                                  GRANTED        EMPLOYEES IN     BASE PRICE    EXPIRATION
                                                    (#)          FISCAL YEAR       ($/SHARE)       DATE
                                                ------------   ----------------   -----------   ----------
<S>                                             <C>            <C>                <C>           <C>
Nathan M. Schulhof............................     175,000             25%           $5.50        3/12/09
Grant Jasmin..................................     175,000             25%           $5.50        3/12/09
                                                    50,000              7%           $6.50       12/18/08
                                                    25,000              4%           $7.50        3/12/09
Theodore Richards.............................
                                                    50,000              7%           $6.50       12/18/08
                                                    25,000              4%           $7.50        3/12/09
Gregory Sutyak................................
</TABLE>

    The following table sets forth information regarding exercises of stock
options and other related information as of the year ended December 31, 1999 by
the executive officers named in the Summary Compensation Table:

              AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                      AND FISCAL YEAR-END OPTION/SAR VALUE

<TABLE>
<CAPTION>
                                                              NUMBER OF UNEXERCISED       VALUE OF IN-THE-MONEY
                                                             OPTIONS/SARS AT FISCAL      OPTIONS/SARS AT FISCAL
                                     SHARES                         YEAR-END                    YEAR-END
                                   ACQUIRED ON    VALUE     -------------------------   -------------------------
NAME                                EXERCISE     REALIZED   EXERCISABLE/UNEXERCISABLE   EXERCISABLE/UNEXERCISABLE
----                               -----------   --------   -------------------------   -------------------------
<S>                                <C>           <C>        <C>          <C>            <C>          <C>
Nathan M. Schulhof...............         0      $     0      20,850             0        43,003(1)          0(1)
                                                              20,850             0        58,432(2)          0(2)
                                                             128,125        46,875       392,383(3)    143,554(3)

Grant Jasmin.....................         0      $     0      20,850             0        43,003(1)          0(1)
                                                              20,850             0        58,432(2)          0(2)
                                                             128,125        46,875       392,383(3)    143,554(3)

Theodore Richards................         0      $     0      26,062             0        73,039(2)          0(2)
                                                              18,750        31,250        64,453(1)     38,672(1)
                                                               4,167        20,833         4,427(4)     22,135(4)

Gregory Sutyak...................         0      $     0      18,750        31,250        64,453(1)     38,672(1)
                                                               4,167        20,833         4,427(4)     22,135(4)
</TABLE>

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

(1) Calculated as the difference between the fair market value of the Common
    Stock at December 31, 1999 of $8 9/16 and the option exercise price of $6.50
    per share.

(2) Calculated as the difference between the fair market value of the Common
    Stock at December 31, 1999 of $8 9/16 and the option exercise price of $5.76
    per share.

(3) Calculated as the difference between the fair market value of the Common
    Stock at December 31, 1999 of $8 9/16 and the option exercise price of $5.50
    per share.

(4) Calculated as the difference between the fair market value of the Common
    Stock at December 31, 1999 of $8 9/16 and the option exercise price of $7.50
    per share.

                                       42
<PAGE>
ITEM 11.  SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The following table sets forth certain information as of March 31, 2000 with
respect to the shares of Common Stock beneficially owned by (i) persons known by
the Company to own more than five percent of the outstanding shares of Common
Stock; (ii) each director of the Company; (iii) the Named Executive Officers
(see "Executive Compensation") and (iv) all directors and executive officers of
the Company as a group. Ownership information is based upon information
furnished by the respective individuals.

<TABLE>
<CAPTION>
NAME & ADDRESS OF DIRECTORS                            NUMBER OF SHARES
& 5% SHAREHOLDERS (2)                               BENEFICIALLY OWNED (1)   PERCENT
---------------------------                         ----------------------   --------
<S>                                                 <C>                      <C>
Nathan M. Schulhof................................           508,112(3)         7.7%
Grant Jasmin......................................           394,769(3)         6.0%
Gregory Sutyak....................................            37,599(4)           *
Theodore Richards.................................            55,752(5)           *
Robert S. Leff....................................           157,176(6)         2.5%
Lee M. Gammill....................................            63,562(7)           *
Muninderpal Rehki.................................            98,500(6)           *
Marvin M. Reiss...................................           182,847(8)         1.5%
All Executive Officers and Directors as a Group (8
  persons)........................................         1,277,871(9)        18.2%
</TABLE>

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

 * Less than 1%.

(1) Beneficial ownership of shares by directors, officers and 5% or more
    shareholders includes both outstanding Common Stock and shares issuable upon
    exercise of warrants or options that are currently exercisable or will be
    exercisable within 60 days after the date of this table. Except as indicated
    in the footnotes to this table and pursuant to applicable community property
    laws the persons named in the table have sole voting and investment power
    with respect to all shares of Common Stock beneficially owned by them.

(2) The address of Messrs. Schulhof, Jasmin, Sutyak, Richards, Leff, Gammill,
    Rehki and Reiss is c/o audiohighway.com, 20300 Stevens Creek Boulevard,
    Suite 100, Cupertino, California 95014.

(3) Includes 179,200 shares of Common Stock issuable upon exercise of
    outstanding warrants and options exercisable within 60 days of March 31,
    2000.

(4) Includes 27,084 shares of Common Stock issuable upon exercise of outstanding
    options exercisable within 60 days of March 31, 2000.

(5) Includes 53,146 shares of Common Stock issuable upon exercise of outstanding
    options exercisable within 60 days of March 31, 2000.

(6) Includes 37,500 shares of Common Stock issuable upon exercise of outstanding
    warrants exercisable within 60 days of March 31, 2000.

(7) Includes 63,562 shares of Common Stock issuable upon exercise of outstanding
    warrants and options exercisable within 60 days of March 31, 2000.

(8) Includes (i) 75,737 shares of Common Stock issuable upon exercise of
    outstanding warrants and options exercisable within 60 days of March 31,
    2000, (ii) 32,828 shares of Common Stock issuable upon exercise of
    outstanding warrants exercisable within 60 days of March 31, 1999 held by
    Susan L. Reiss, Mr. Reiss's spouse.

(9) Includes 685,757 shares of Common Stock issuable upon exercise of
    outstanding warrants and options exercisable within 60 days of March 31,
    2000.

                                       43
<PAGE>
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    From October 1996 through June 1998, Marvin M. Reiss, a director of the
Company since October 1998, together with his wife, invested in the Company from
time to time by purchasing Common Stock and by participating in certain of the
Company's convertible promissory note offerings. During the three year period
ended December 31, 1999, Mr. Reiss invested a total of $350,000, all of which
occurred prior to 1999. For his various investments, he received 10% convertible
notes and warrants to purchase an aggregate of 23,589 shares of the Company's
Common Stock. The warrants are exercisable at exercise prices ranging from $4.88
to $7.67.

    The Company incurred $265,221 and $713,122 in expenses to TDP, Inc., during
1998 and 1999, respectively for software consulting and systems development
expenses. Mr. Rehki, a member of the Board of Directors of the Company, was the
CEO of TDP, Inc. until February 1999.

    On February 23, 1999, the Company made an unsecured loan to Mr. Rehki in the
amount of $107,250 bearing interest at the rate of 10% per annum due
February 23, 2001.

    The Company has adopted a policy with respect to future related party
transactions. Pursuant to that policy, any future transactions with officers,
directors or affiliates of the Company will be approved or ratified by a
majority of independent, outside members of the Board of Directors who do not
have an interest in the transactions, and such transactions will be no less
favorable to the Company than those that can be obtained from unaffiliated third
parties. At all times, the Company expects to maintain at least two independent
directors on its Board.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) The following documents are filed as part of this report:

<TABLE>
    <S>          <C>
     3.1.1(1)    Articles of Incorporation of the Registrant

     3.1.2(1)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.1.3(2)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.1.4(2)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.2(1)      Bylaws of the Registrant

     4.1(2)      Specimen Common Stock Certificate

     4.2(1)      Form of Representative's Warrants

    10.1(3)      Office Lease dated June 14, 1999 between audiohighway.com
                   and Symantec Corporation for premises located at
                   20300 Stevens Creek Boulevard, Cupertino, California

    10.2(3)      Sublease dated October 1, 1999 between audiohighway.com and
                   Be Here Corporation for premises located at 20300 Stevens
                   Creek Boulevard, Suite 100B, Cupertino, California

    10.3(3)      Landlord's Consent to Sublease of Symantec Corporation dated
                   October 28, 1999

    10.4(1)      High Speed Services agreement dated April 3, 1998 between
                   Audio Highway and UUNET Technologies, Inc.

    10.5(1)      Edge Information Systems Mission Critical Tricord
                   Maintenance Agreement dated March 28, 1997 between Audio
                   Highway and Edge Information Systems, Inc.

    10.6(1)      Settlement Agreement and Mutual Release dated April 24, 1998
                   between Tricord Systems, Inc. and Audio Highway
</TABLE>

                                       44
<PAGE>
<TABLE>
    <S>          <C>
    10.7(1)      Mobile Audio Delivery Agreement dated July 13, 1998 between
                   Sycom Technologies, Inc. and Audio Highway

    10.8(3)      Amended and Restated 1996 Stock Option Plan(4)

    10.9(3)      Content Distribution Agreement, dated May 14, 1999 between
                   Dow Jones & Company, Inc. and audiohighway.com

    10.10(3)     Audio File Production Services Agreement, dated as of
                   July 28, 1999 between audiohighway.com and Audio Concepts

    10.11(3)     AEC One Stop Group, Inc. Database License and Consumer
                   Direct Fulfillment Services Agreement, dated as of
                   November   , 1999 between AEC One Stop Group, Inc. and
                   audiohighway.com

    10.12(3)     Distribution and Fulfillment Agreement dated December 10,
                   1999 between audiohighway.com and Ingram Entertainment
                   Inc.

    23(3)        Consent of Grant Thornton LLP

    27.1(3)      Financial Data Schedule
</TABLE>

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

(1) Filed as an exhibit to the Registrant's original filing of the Registration
    Statement on Form SB-2, filed July 24, 1998.

(2) Filed as an exhibit to the Registrant's Pre-effective Amendment No. 2 to the
    Registration Statement on Form SB-2, filed December 11, 1998.

(3) Filed herewith.

(4) Denotes a contract or compensatory plan or arrangement.

    (b) There were no reports on Form 8-K filed by the Registrant during the
last quarter covered by this Report.

                                       45
<PAGE>
                                   SIGNATURES

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

<TABLE>
<S>                                                    <C>  <C>
Dated: April 14, 2000                                  audiohighway.com

                                                       By:            /s/ NATHAN M. SCHULHOF
                                                            -----------------------------------------
                                                                        Nathan M. Schulhof
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

    KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Nathan M. Schulhof and Grant Jasmin and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

    In accordance with the Securities Exchange Act of 1934, as amended, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:

<TABLE>
<C>                                                    <S>                              <C>
               /s/ NATHAN M. SCHULHOF                  President, Chief Executive
     -------------------------------------------         Officer and Director           April 14, 2000
                 Nathan M. Schulhof                      (Principal Executive Officer)

                 /s/ GREGORY SUTYAK                    Chief Financial Officer
     -------------------------------------------         (Principal Accounting and      April 14, 2000
                   Gregory Sutyak                        Financial Officer)

                  /s/ GRANT JASMIN                     Chief Operating Officer, Vice
     -------------------------------------------         President, Finance and         April 14, 2000
                    Grant Jasmin                         Director

                 /s/ ROBERT S. LEFF
     -------------------------------------------       Director                         April 14, 2000
                   Robert S. Leff

                 /s/ LEE M. GAMMILL
     -------------------------------------------       Director                         April 14, 2000
                   Lee M. Gammill
</TABLE>

                                       46
<PAGE>
<TABLE>
<C>                                                    <S>                              <C>
                /s/ MUNINDERPAL REHKI
     -------------------------------------------       Director                         April 14, 2000
                  Muninderpal Rehki

                 /s/ MARVIN M. REISS
     -------------------------------------------       Director                         April 14, 2000
                   Marvin M. Reiss
</TABLE>

                                       47
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      EXHIBIT
      NUMBER                        DESCRIPTION OF EXHIBIT
      -------    ------------------------------------------------------------
    <S>          <C>
     3.1.1(1)    Articles of Incorporation of the Registrant

     3.1.2(1)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.1.3(2)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.1.4(2)    Certificate of Amendment of Articles of Incorporation of the
                   Registrant

     3.2(1)      Bylaws of the Registrant

     4.1(2)      Specimen Common Stock Certificate

     4.2(1)      Form of Representative's Warrants

    10.1(3)      Office Lease dated June 14, 1999 between audiohighway.com
                   and Symantec Corporation for premises located at
                   20300 Stevens Creek Boulevard, Cupertino, California

    10.2(3)      Sublease dated October 1, 1999 between audiohighway.com and
                   Be Here Corporation for premises located at 20300 Stevens
                   Creek Boulevard, Suite 100B, Cupertino, California

    10.3(3)      Landlord's Consent to Sublease of Symantec Corporation dated
                   October 28, 1999

    10.4(1)      High Speed Services agreement dated April 3, 1998 between
                   Audio Highway and UUNET Technologies, Inc.

    10.5(1)      Edge Information Systems Mission Critical Tricord
                   Maintenance Agreement dated March 28, 1997 between Audio
                   Highway and Edge Information Systems, Inc.

    10.6(1)      Settlement Agreement and Mutual Release dated April 24, 1998
                   between Tricord Systems, Inc. and Audio Highway

    10.7(1)      Mobile Audio Delivery Agreement dated July 13, 1998 between
                   Sycom Technologies, Inc. and Audio Highway

    10.8(3)      Amended and Restated 1996 Stock Option Plan(4)

    10.9(3)      Content Distribution Agreement, dated May 14, 1999 between
                   Dow Jones & Company, Inc. and audiohighway.com

    10.10(3)     Audio File Production Services Agreement, dated as of
                   July 28, 1999 between audiohighway.com and Audio Concepts

    10.11(3)     AEC One Stop Group, Inc. Database License and Consumer
                   Direct Fulfillment Services Agreement, dated as of
                   November   , 1999 between AEC One Stop Group, Inc. and
                   audiohighway.com

    10.12(3)     Distribution and Fulfillment Agreement dated December 10,
                   1999 between audiohighway.com and Ingram Entertainment
                   Inc.

    23(3)        Consent of Grant Thornton LLP

    27.1(3)      Financial Data Schedule
</TABLE>

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

(1) Filed as an exhibit to the Registrant's original filing of the Registration
    Statement on Form SB-2, filed July 24, 1998.

(2) Filed as an exhibit to the Registrant's Pre-effective Amendment No. 2 to the
    Registration Statement on Form SB-2, filed December 11, 1998.

(3) Filed herewith.

(4) Denotes a contract or compensatory plan or arrangement.

                                       48