Document:

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                                                                   EXHIBIT 10.27

                                    [* * *] -- TEXT OMITTED AND FILED SEPARATELY
                                          CONFIDENTIAL TREATMENT REQUESTED UNDER
                           17 C.F.R. SECTIONS 200.80(b)(4), 200.83 AND 240.24b-2

                              SETTLEMENT AGREEMENT

        This Settlement Agreement and Mutual Release (hereinafter "Settlement
Agreement") is entered into effective as of June 8, 2000 by and between MP3.COM,
INC. ("MP3" herein) on the one hand, and Warner Music Group Inc. ("Company"), on
the other hand, all of which are sometimes collectively referred to as the
"Parties" and is made with reference to the following:

1.      RECITALS:

        a)      Company's affiliates, Warner Bros. Records Inc., Atlantic
                Recording Corporation, Sire Records Group Inc. (now known as
                London-Sire Records Inc.) and Elektra Entertainment Group Inc.,
                are Plaintiffs (the "Company Plaintiffs") and MP3 is the
                defendant in the following litigation (the "Litigation"): UMG
                RECORDINGS, INC., SONY MUSIC ENTERTAINMENT INC., WARNER BROS.
                RECORDS INC., ARISTA RECORDS INC., ATLANTIC RECORDING
                CORPORATION, BMG MUSIC D/B/A THE RCA RECORDS LABEL, CAPITOL
                RECORDS, INC., ELEKTRA ENTERTAINMENT GROUP, INC., INTERSCOPE
                RECORDS, AND SIRE RECORDS GROUP INC., Plaintiffs, vs. MP3.COM,
                INC., Defendant.

        b)      Each of the Parties to this Settlement Agreement desire to
                permanently settle and resolve any and all claims, disputes,
                issues or matters that exist between them raised by or related
                to the Litigation as of the date of this Settlement Agreement
                and to dismiss the Litigation with prejudice .

        c)      NOW, THEREFORE, in consideration of the mutual promises,
                covenants and agreements set forth herein, and subject to the
                terms and conditions set forth below, the Parties desire to, and
                hereby do, resolve their differences and agree as follows:

2.      SETTLEMENT TERMS:

        a)      In consideration hereof, promptly upon execution hereof and the
                filing of the Dismissal With Prejudice of the Litigation as
                described hereinbelow MP3 will pay Company the sum of [* * *].

        b)      As further consideration, promptly upon execution hereof and the
                filing of the Dismissal With Prejudice of the Litigation as
                described hereinbelow, MP3 will [* * *]

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                [* * *].

        c)      [* * *]

                i)      [* * *]

                ii)     [* * *]

                        a)      Sony Music Entertainment, Inc., - [* * *];

                        b)      BMG Entertainment - [* * *];

                        c)      UMG Recordings, Inc. - [* * *]; and

                        d)      EMI Records Group - [* * *].

                iii)    [* * *]

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<PAGE>   3

                        [* * *].

        d)      Intentionally deleted.

        e)      Concurrently herewith, Company and MP3 are entering into a
                License Agreement in the form annexed hereto as Exhibit A. As
                soon as reasonably possible (but in no event more than ninety
                (90) days following the date hereof), MP3 shall provide Company
                detailed information on a confidential basis setting forth [* *
                *]. MP3 shall not be in breach of this Agreement by reason of
                any inadvertent failure resulting in a deficiency with respect
                to the foregoing [* * *] provided such failure promptly is cured
                by MP3 following its receipt of written notice thereof from
                Company.

        f)      The parties agree that a press release with respect to this
                Settlement Agreement shall be issued within a reasonable period
                after execution hereof, the text of which shall be approved in
                writing by each party.

3.      RELEASES

        a)      Company Release. Company, on behalf of Company and entities
                controlled by Company and each of their heirs, agents,
                employees, representatives, attorneys, transferees,
                predecessors, successors and assigns (the "Company Releasors")
                does hereby irrevocably release, acquit and forever discharge
                MP3 and each of its respective heirs, agents, employees,
                representatives, partners, parents, subsidiaries, divisions,
                affiliates, officers, directors, attorneys, transferees,
                predecessors, successors, and assigns, jointly and severally
                (the "MP3 Releasees"), of and from any and all debts, suits,
                claims, actions, causes of action, controversies, demands,
                rights, damages, losses, expenses, costs, attorneys' fees,
                compensation, liabilities and obligations whatsoever, suspected
                or unsuspected, known or unknown, foreseen or unforeseen,
                arising at any time up to and including the date of this
                Settlement Agreement, (i) which Company Releasors have asserted
                or at any time

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                heretofore could have asserted against the MP3 Releasees with
                respect to the subject matter of the Litigation  [* * *]
                (hereinafter "Claims"). "Claims" shall not include any claims
                with respect to which a Company Releasor, [* * *] is party to a
                written contract which requires that it secure the consent of an
                unrelated third party prior to its settlement; provided, the
                Company Releasors, Warner/Chappell Music, Inc. and the
                Warner/Chappell Affiliates hereby waive their separate right to
                retain their share of any compensation payable as a result of
                any such excluded claims and/or shall repay such share to MP3
                promptly upon receipt thereof. Company shall not include labels
                owned, distributed or controlled [* * *].

        b)      Statutory Waiver. With respect to the Claims, all rights under
                California Civil Code Section 1542 (and any other law of similar
                effect), are hereby expressly waived by the Parties, and each of
                them, notwithstanding any provision to the contrary. Section
                1542 provides as follows:

                        "A general release does not extend
                        to claims which the creditor does
                        not know or suspect to exist in his
                        favor at the time of executing the
                        Release, which if known by him must
                        have materially affected his
                        settlement with the debtor."

                The Parties, and each of them, and their representatives, heirs
                and assigns expressly waive and release any right or benefit
                which they have or may have under Section 1542 of the Civil Code
                of the State of California, to the fullest extent that they may
                waive all such rights and benefits pertaining to the matters
                released herein. It is the intention of the Parties, and each of
                them, through this Settlement Agreement, and with the advice of
                counsel, to fully, finally and forever settle and release all
                such matters, and all claims relative thereto, in furtherance of
                such intention.

        c)      Dismissal With Prejudice. Company concurrently shall execute and
                deliver to MP3 a Dismissal With Prejudice of the Litigation, in
                the form annexed hereto as Exhibit B.

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4.      NOTICES

        a)      Any notice, demand, request, consent, approval, or communication
                that either Party desires or is required to give to the other
                Party is ordered to be addressed and served on or delivered to
                the other Party at the address set forth below. Any Party may
                change his/his/its address by notifying the other Parties of
                their change of address(es) in writing.

                i)      The addresses for MP3 are as follows:

                        MP3.com, Inc.
                        4790 Eastgate Mall
                        San Diego, CA 92121
                        Attn: General Counsel

                        With simultaneous copies to:

                        Gary Stiffelman, Esq.
                        Ziffren, Brittenham, Branca & Fischer
                        1801 Century Park West
                        Los Angeles, CA 90067

                ii)     The address for Company is as follows:

                                  Warner Music Group Inc.
                                  75 Rockefeller Plaza
                                  New York, NY 10019
                                  Attn:  General Counsel

5.      MISCELLANEOUS PROVISIONS

        a)      In order to carry out the terms and conditions of this
                Settlement Agreement, the Parties agree to promptly execute upon
                reasonable request any and all documents and instruments
                consistent herewith necessary to effectuate the terms of this
                Settlement Agreement.

        b)      By entering into this Settlement Agreement, no Party admits or
                acknowledges that they committed any wrongdoing on their part.

        c)      This Agreement shall be governed and construed in accordance
                with the laws of the State of New York applicable to agreements
                made and to be performed

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                entirely within such State. The New York courts (State and
                Federal), will have exclusive jurisdiction over any
                controversies regarding this agreement; any action or other
                proceeding which involves such a controversy will be brought in
                those courts and not elsewhere. Nothing in this Agreement is
                intended to confer on any person not a party hereto any rights
                or remedies under this Agreement.

        d)      This Settlement Agreement is the entire agreement between the
                Parties with respect to the Claims or subject matter of this
                Settlement Agreement and supersedes all prior and
                contemporaneous oral and written agreements and discussions
                pertaining to the Claims or subject matter of this Settlement
                Agreement. This Settlement Agreement may be amended only by a
                written agreement executed by each of the Parties hereto.

        e)      No breach of any provision hereof can be waived unless in
                writing. Waiver of any one breach of any provision hereof shall
                not be deemed to be a waiver of any other breach of the same or
                any other provision hereof.

        f)      This Settlement Agreement shall be binding upon and inure to the
                benefit of the Parties hereto and his/his/its respective heirs,
                agents, employees, representatives, partners, parents,
                subsidiaries, divisions, affiliates, officers, directors,
                shareholders, investors, attorneys, transferors, transferees,
                predecessors, successors, trustees in bankruptcy, and assigns
                and each and every entity which now or ever was a division,
                parent, successor, predecessor, division, affiliate, officer,
                director, shareholder, investor, employee, attorney, transferor,
                transferee, or subsidiary for each Party and its respective
                legal successors and assigns.

        g)      The Parties represent and warrant that each of them have not
                assigned all or any portion of any claim pertaining to the
                Claims to any person or entity. In the event any claims are made
                by any third persons or entities based upon any purported
                assignment or any such liens or claims are asserted in
                connection with the Claims or proceeds of the Settlement
                Agreement, then the Party who has breached his representation or
                warranty contained herein agrees to indemnify and hold harmless
                the other Party from any said claims being made. [* * *]

        h)      In the event that any covenant, condition or other provision
                herein contained is held to be invalid, void or illegal by any
                court of competent jurisdiction, the same shall be deemed
                severable from the remainder of this Settlement Agreement and
                shall in no way affect, impair or invalidate any other

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                covenant, condition or other provision herein contained. If such
                condition, covenant or other provisions shall be deemed invalid
                due to its scope or breadth, such covenant, condition or other
                provision shall be deemed valid to the extent of the scope or
                breadth permitted by law.

        i)      The Parties hereto, and each of them, represent and declare that
                in executing this Settlement Agreement, they rely solely upon
                their own judgment, belief and knowledge, and on the advice and
                recommendations of their own independently selected counsel,
                concerning the nature, extent and duration of their rights and
                claims and that they have not been influenced to any extent
                whatsoever in executing the same by any representations or
                statements covering any matters made by any of the Parties
                hereto or by any person representing them or any of them. The
                Parties acknowledge that no Party hereto nor any of their
                representatives have made any promise, representation or
                warranty whatsoever, written or oral, as any inducement to enter
                into this Settlement Agreement, except as expressly set forth in
                this Settlement Agreement.

        j)      The Parties hereto or responsible officer or representative
                thereof, and each of them, further represent and warrant that
                they have carefully read this Settlement Agreement and know and
                understand the contents hereof, and that they signed this
                Settlement Agreement freely and voluntarily. Each of the
                representatives executing this Settlement Agreement on behalf of
                their respective corporations or partnerships is empowered to do
                so and thereby binds his respective corporation or partnership.
                The Parties hereto acknowledge and agree that this Settlement
                Agreement shall be deemed to have been drafted jointly by all
                Parties hereto.

        k)      This Settlement Agreement may be executed in counterparts and
                when each Party has signed and delivered at least one such
                counterpart to each of the other Parties, each counterpart shall
                be deemed an original, and all counterparts taken together shall
                constitute one and the same agreement, which shall be binding
                and effective as to all Parties. This Settlement Agreement may
                be executed via facsimile signatures, which shall have the same
                force and effect as if they were original signatures to be
                followed by executed originals.

IN WITNESS WHEREOF, the Parties hereto have executed this Settlement Agreement
on the date(s) written beside his/his/its name, respectively.

                                          Warner Music Group Inc.

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Dated:                                        By:   //signed//
       -------------------------                 -------------------------

                                             Its:
                                                 -------------------------

Dated:                                       MP3.com, Inc.
      -------------------------

                                             By:   //signed//
                                                 -------------------------
                                             Its:
                                                 -------------------------

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              EXHIBIT A TO SETTLEMENT AGREEMENT - LICENSE AGREEMENT

                                  MP3.com, Inc.
                               4790 Eastgate Mall
                               San Diego, CA 92121

                                  June 8, 2000

Warner Music Group Inc.
75 Rockefeller Plaza
New York, NY 10019
Gentlepersons:

This letter, when and if fully executed, will set forth the basic terms of the
license agreement between ("Company" or "you", which terms are deemed to include
all of Company's Affiliates) and MP3.com, Inc. ("MP3", "us" or "we"), with
respect to your licensing certain rights to us on the following terms:

1.      DEFINITIONS:

        a)      [* * *]

        b)      "Affiliate": Any corporation or other person or entity
                controlled by a party or Person, as the case may be. Affiliates
                shall not include [* * *].

        c)      "Artist": A recording artist, record producer, or other third
                party entitled to a royalty or other participation in revenues
                derived from Company or its

<PAGE>   10

                Affiliate's exploitation of Company Recordings ("Record Revenue
                Participation"). [* * *].

        d)      "Beam It": [* * *].

        e)      "Company Album": [* * *].

        f)      "Company Master": [* * *].

        g)      "Company Recordings": [* * *].

        h)      "Company Shelf": [* * *].

                                      -2-
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                [* * *].

        i)      "Download" or "Downloading": [* * *].

        j)      [* * *]

        k)      "Instant Listen": [* * *].

        l)      "Internet": A medium consisting of wired or wireless electronic
                or electromagnetic networks (including without limitation, fiber
                optic, microwave, twisted-pair copper wires, coaxial cable,
                satellite, wireless transmission, cellular networks, and
                combinations thereof) and collections thereof now or hereafter
                existing, wherever, located, for the transmission from a distant
                location of digital data (e.g., text, information, graphics,
                audio, video, or combination of the foregoing), through the use
                of any protocols or standards now known or hereafter devised
                (including without limitation, Transmission Control
                Protocol/Internet Protocol ["TCP/IP"] and subsequent extensions
                or modifications thereof) from or to electronic devices (e.g.,
                computers [mainframe, desktop, laptop, handheld, etc.], set-top
                boxes, cable modems, handheld devices, cell phones, televisions,
                etc.) capable of transmitting or receiving digital data or
                digital information, irrespective of whether such networks are
                open or proprietary, public or private, or whether a fee is
                charged or a subscription or membership is required in order to
                access

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                such networks. "Internet" also includes the computer network
                comprising inter-connected networks commonly referred to as the
                "Internet" and the "World Wide Web." [* * *].

        m)      "Locker": [* * *].

        n)      "Locker Owner": The Person who shall have established a
                particular Locker. A Locker Owner shall not be authorized to
                transfer, sell or otherwise assign ownership of such Person's
                Locker without Company's consent.

        o)      "MyMP3": [* * *].

        p)      "Person": Any individual, corporation, partnership or other
                legal entity.

        q)      "Record": Any and all forms of reproductions of audio-only
                recordings (e.g., Albums, singles, etc.), now or hereafter
                known, manufactured or distributed primarily for non-public use,
                including, without limitation, home use, school use, juke box
                use, or use in means of transportation including both physical
                and digitized reproductions. A DVD-audio is not included in the
                definition of a Record hereunder.

        r)      "Recording": every audio recording of an individual performance
                or medley, by any method and on any substance or material,
                whether now or hereafter known, which is used or useful in the
                recording, production and/or manufacture of Records.

        s)      "Stream": [* * *].

        t)      "Title List(s)": The unique set of Recordings, including Albums
                and individual master recordings or other copyrightable
                recordings, accessible from within an individual Locker.

                                      -4-
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2.      LICENSE:

        a)      Company hereby irrevocably licenses to MP3 the right to make any
                and all Company Recordings available for inclusion on Title
                Lists and to do only the following:

                i)      The right to make only that number of copies of Company
                        Recordings employing any compression technologies
                        selected by MP3 as may reasonably be needed in order to
                        create a database of recorded music which Locker Owners
                        can access only via the methods described herein.

                ii)     The right to use the names and tradenames of Company and
                        its Affiliates (as same appear on Company Recordings),
                        the titles of Company Albums and Company Masters, the
                        names and approved likenesses of any Artists or other
                        Persons rendering services or granting rights to Company
                        with respect to Company Recordings (it being understood
                        that any Album cover artwork utilized by Company and its
                        Affiliates in connection with Company Recordings other
                        than soundtrack album cover artwork shall be deemed
                        approved for purposes hereof), and any Album cover
                        artwork utilized by Company and its Affiliates in
                        connection with Company Recordings other than soundtrack
                        album cover artwork, all of the foregoing for
                        informational purposes as part of MyMP3, in any and all
                        Title Lists and Lockers. MP3 shall not have the right to
                        use any of said materials, without Company's reasonable
                        approval, in the promotion, marketing and advertising of
                        MyMP3 or MP3.

        b)      MP3 covenants and agrees that Company Recordings can be added to
                or inserted in an individual Locker only as follows:

                i)      Via MP3's "Instant Listen" system (or any equivalent
                        system established by MP3), or

                ii)     Via MP3's "Beam-it" system (or any equivalent system
                        established by MP3).

                iii)    [* * *]

        c)      [* * *]

                                      -5-
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        d)      [* * *]

        e)      It is agreed that if any Person can enhance that Person's speed
                and method of access to Recordings using any consumer
                electronics device, MP3 shall have the right to provide such
                enhancement through any means on a basis which [* * *].

        f)      It is agreed that no rights whatsoever to musical compositions
                are being conveyed herein and that MP3 separately shall secure
                any rights required in connection with the use of musical
                compositions in connection with MyMP3.

3.      EXCLUSIVITY: The rights granted to MP3 hereunder shall be non-exclusive.

4.      TERM AND TERRITORY:

        a)      The Territory shall be  [* * *]

        b)      The term of this license shall commence forthwith and shall
                continue until [* * *].

5.      CONSIDERATION: In consideration of this license, Company shall receive
        the following:

        a)      [* * *]

                                      -6-
<PAGE>   15

                [* * *].

        b)      [* * *].

        c)      It is agreed that revenues associated with a Company-owned or
                controlled Locker(s) shall be excluded in computing MP3's
                payment obligations hereunder.

        d)      [* * *]

6.      COMPANY SHELF:[* * *]

                                      -7-
<PAGE>   16

        [* * *].

7.      ACCOUNTINGS:

        a)      MP3 will compute the sums due Company under paragraphs 5(a),
                5(b) and 5(d) as of each March 31, June 30, September 30 and
                December 31 after the date hereof. Within forty-five (45) days
                after each calendar quarterly period, MP3 will send Company a
                statement covering sums due hereunder and shall concurrently pay
                Company any sums shown due thereunder.

        b)      MP3 will maintain books and records with respect to sums payable
                to Company hereunder. Company may, at its own expense no more
                than once per calendar year, examine and copy those books and
                records, as provided in this paragraph. Company may make such an
                examination for a particular statement within two (2) years
                after the date when Company receives the statement concerned.
                Company shall only have the right to institute suit with respect
                to a particular statement within three (3) years after Company's
                receipt thereof. Company shall be deemed to have received each
                statement hereunder when due unless MP3 receives notice of
                non-receipt from Company within 120 days thereafter. Company's
                failure to send such notice shall not affect its right to
                receive such statement (and, if applicable, payments due
                thereunder) after such 120-day period. Company may make those
                examinations only during MP3's usual business hours, and at the
                place where it keeps the books and records. Such books and
                records shall be kept at the MP3 office in San Diego,
                California, unless otherwise notified. Company will be required
                to notify MP3 at least ten (10) days before the date of

                                      -8-
<PAGE>   17
                planned examination. No audit shall exceed 30 consecutive days.
                If an audit reveals an underpayment which the parties agree or
                which is determined by a court of competent jurisdiction to be
                greater than 10% of the total amount payable throughout the
                applicable period of the audit, MP3 shall reimburse Company for
                its reasonable audit costs.

        c)      The statements referred to in paragraph 7(a) above shall provide
                Company information setting forth [* * *]. MP3 will work in good
                faith with Company to develop formats for MP3's accounting
                statements, including computer-sensible formats, which will
                assist Company in accounting to Artists with respect to the
                exploitation by MP3 of Company Recordings and incorporating the
                information directly into Company's royalty accounting systems.

8.      AUTHORITY TO CONTRACT: Each party represents and warrants to the other
        party that such party has the full legal right, power and all authority
        and approval required to enter into, execute and deliver this Agreement,
        to grant the rights and licenses herein granted and fully to perform its
        obligations hereunder. Company represents that no third party consent is
        required to grant to MP3 the rights and licenses herein granted by
        Company to MP3. Company will be responsible for payment of any sums due
        [* * *]. This Agreement has been duly authorized, executed and delivered
        by such party and constitutes the valid and binding obligation of such
        party enforceable in accordance with its terms, subject, as to
        enforcement, to applicable bankruptcy, insolvency, reorganization,
        moratorium or other similar laws affecting creditors' rights generally.

9.      INDEMNITY: Each party hereby agrees to hold harmless and indemnify the
        other party from any and all damages, liabilities, costs, losses and
        expenses (including costs and reasonable attorneys' fees) arising out of
        or connected with any claim, demand or action (collectively referred to
        as a "Claim") which:

        a)      If proven, would constitute a breach of any of the warranties,
                representations or covenants made by the indemnifying party in
                this Agreement, and

        b)      is reduced to a final, adverse judgment or settled with the
                indemnified party's consent, which consent shall not
                unreasonably be withheld. The indemnifying party agrees to
                reimburse the indemnified party, on demand, for any payment made
                by the indemnified party at any time with respect to any such
                damage, liability, cost, loss or expense to which the foregoing
                indemnity applies.

10.     NOTICES: All notices to be given hereunder shall be sent to the
        applicable address set forth on page 1 hereof or at such other address
        as shall be designated in

                                      -9-
<PAGE>   18

        writing from time to time by the party receiving notice. Company shall
        send a copy of each such notice to MP3 to Ziffren, Brittenham, Branca &
        Fischer, LLP., 1801 Century Park West, Los Angeles, California 90067,
        Attn: Gary Stiffelman, Esq. MP3 shall send a copy of each notice to
        Company to the attention of its General Counsel at the address set forth
        above. All notices shall be in writing and shall either be served by
        personal delivery, mail or telefax, all charges prepaid. Except as
        otherwise provided herein, such notices shall be deemed given when
        personally delivered, mailed or telefaxed, all charges prepaid, except
        that notices of change of address shall be effective only after the
        actual receipt thereof.

11.     MISCELLANEOUS:

        a)      This Agreement sets forth the entire understanding of the
                parties hereto relating to the subject matter hereof and
                supersedes all prior and contemporaneous agreements and
                understandings, whether oral or written. This Agreement may be
                amended, modified, superseded, canceled, renewed or extended,
                and the terms hereof may be waived, only by a written instrument
                signed by the parties hereto or, in the case of a waiver, by the
                party waiving compliance.

        b)      Each party shall have the right to assign this Agreement and any
                or all of its rights and obligations hereunder only to a Person
                owning or acquiring all or substantially all of its stock or
                assets. No such assignments shall relieve the assignor of any of
                its obligations hereunder.

        c)      This Agreement shall be binding upon and inure to the benefit of
                the parties, their permitted assigns and the respective
                successors and legal representatives of the foregoing.

        d)      This Agreement shall be governed and construed in accordance
                with the laws of the State of New York applicable to agreements
                made and to be performed entirely within such State. Subject to
                paragraph 12(a) and (b), the New York courts (State and
                Federal), will have exclusive jurisdiction over any
                controversies regarding this Agreement; any action or other
                proceeding which involves such a controversy will be brought in
                those courts and not elsewhere. Except as is specifically
                provided herein, nothing in this Agreement is intended to confer
                on any person not a party hereto any rights or remedies under
                this Agreement.

        e)      Neither party shall be deemed to be in breach of any of its
                obligations hereunder unless and until the other party shall
                have given specific written notice by certified or registered
                mail, return receipt requested, describing in detail the breach
                and the allegedly breaching party shall have failed to cure that
                breach within thirty (30) days (ten (10) days with respect to
                payment of monies) after its receipt of that written notice. If
                MP3 fails to tender payment of a specific sum which MP3
                acknowledges in writing is due and payable to Company (it being
                acknowledged that an accounting statement prepared and

                                      -10-
<PAGE>   19

                sent to Company shall constitute such an acknowledgment in
                writing) within ten (10) business days after written demand
                therefor from Company, Company shall have the right to terminate
                the term hereof by written notice at any time prior to the date
                payment of such sum is tendered.

12.     [* * *]

13.     PRESS RELEASE:The parties agree that a press release with respect to
        this Agreement shall be issued within a reasonable period after
        execution hereof, the text of which shall be approved in writing by each
        party.

        Please indicate your acceptance of the above terms by signing in the
space indicated below.

                                           Very truly yours,

                                           MP3.COM, INC.

                                      -11-
<PAGE>   20

                                              By:  //signed//
                                                 -------------------------

AGREED AND ACCEPTED:

Warner Music Group Inc.

By:  //signed//
   -------------------------

                                      -12-
<PAGE>   21

                         EXHIBIT A TO LICENSE AGREEMENT

                                     [* * *]

<PAGE>   22

                         EXHIBIT B TO LICENSE AGREEMENT

                                     [* * *]

<PAGE>   23

          EXHIBIT B TO SETTTLEMENT AGREEMENT - DISMISSAL WITH PREJUDICE

<PAGE>   24

                                   EXHIBIT B

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

__________________________________

UMG RECORDINGS, INC., SONY
MUSIC ENTERTAINMENT INC.,
WARNER BROS. RECORDS INC.,
ARISTA RECORDS INC., ATLANTIC
RECORDING CORPORATION, BMG                      STIPULATION AND ORDER
MUSIC d/b/a THE RCA RECORDS                     OF DISCONTINUANCE
LABEL, CAPITOL RECORDS, INC.,                   WITH PREJUDICE
ELEKTRA ENTERTAINMENT
GROUP, INC., INTERSCOPE
RECORDS, and SIRE RECORDS                       00 Civ. 0472 (JSR)
GROUP INC.,

             Plaintiffs,

    vs.

MP3.COM, INC.,

             Defendant.

__________________________________

                                       1.
<PAGE>   25
     IT IS HEREBY STIPULATED AND AGREED, by and among the undersigned counsel
for Plaintiffs Warner Bros. Records Inc., Atlantic Recording Corporation,
Elektra Entertainment Group, Inc., and London-Sire Records Inc. (formerly Sire
Records Group Inc.) only (the "Settling Plaintiffs"), and Defendant MP3.com,
Inc. that, pursuant to said parties' settlement agreement, the Complaint in the
above-captioned action is hereby dismissed with prejudice pursuant to Fed. R.
Civ. P. 41(a)(1)(ii) as to the claims of the Settling Plaintiffs.

June __, 2000                           CRAVATH, SWAINE & MOORE

                                        ----------------------------------------
                                        KATHERINE B. FORREST (KF 1979)
                                        Worldwide Plaza
                                        825 Eighth Avenue
                                        New York, New York 10019
                                        (212) 715-1000

                                        Attorneys for Plaintiffs
                                        Warner Bros. Records Inc.,
                                        Atlantic Recording Corporation,
                                        Elektra Entertainment Group, Inc., and
                                        Sire Records Group, Inc.

                                        COOLEY GODWARD LLP

                                        ----------------------------------------
                                        MICHAEL G. RHODES (MR 0426)
                                        4365 Executive Drive, Suite 1100
                                        San Diego, California 92121
                                        (858) 550-6000

                                        Attorneys for Defendant MP3.com, Inc.

IT IS SO ORDERED.

Dated: June __, 2000

-------------------------------------
           Hon. Jed Rakoff
               U.S.D.J.

                                       2PURCHASE AGREEMENT

     THIS PURCHASE AGREEMENT ("Agreement") is made as of the 18th day of July,
2000, by and among Derma Sciences, Inc., a Pennsylvania corporation with offices
located at 214 Carnegie Center, Suite 100, Princeton, New Jersey, 08540 ("Derma
Sciences" or "the Company"), Kensington Management Group, LLC, 200 Park Avenue,
New York, New York, 10016, Redwood Asset Management, Ovre Ullorn Terrasse No.
32, 0358, Oslo, Norway and Edward J. Quilty, 214 Carnegie Center, Suite 100,
Princeton, New Jersey, 08540 (these latter individually, "Purchaser" and
collectively, "Purchasers").

     IN CONSIDERATION of the mutual covenants contained in this Agreement, the
Company and each of the Purchasers agree as follows:

     1. DESIGNATION AND AUTHORIZATION OF SALE OF THE UNITS. Subject to the terms
and conditions of this Agreement, the Company has authorized the sale of
$500,000 in dollar amount of the Company's series E units (the "Unit(s)") at the
price of $0.75 per Unit. The Units shall provide, and shall be in the form,
described below:

     1.1. UNITS. Each Unit consists of one share of common stock, par value $.01
per share, ("Common Stock ") and one and one tenth (1.1) warrants to purchase
one share of Common Stock at a price of $0.85 per whole share ("Warrant(s)").
The provisions governing the Warrants are set forth in the Form of Warrant
Agreement attached hereto as Exhibit 1.

     1.2. REGISTRATION RIGHTS. The Common Stock comprising the Units and the
Common Stock issuable upon exercise of the Warrants ("Underlying Common Stock")
will be registered by the Company for public sale. Terms and conditions
governing registration of the Underlying Common Stock are set forth in the
Registration Rights Agreement attached hereto as Exhibit 2.

     2. AGREEMENT TO SELL AND PURCHASE THE UNITS. At the Closing (as defined in
Section 3), the Company will sell and deliver to each Purchaser, and each
Purchaser will buy from the Company and accept delivery of, the Units at the
price of $0.75 per Unit and upon the terms and conditions hereinafter set forth:

     2.1. DOLLAR AMOUNTS OF THE UNITS. The dollar amounts of the Units to be
purchased by each Purchaser are as follows:

                PURCHASER                              AMOUNT

                Kensington Management Group, LLC      $300,000
                Redwood Asset Management              $ 50,000
                Edward J. Quilty                      $ 50,000

     2.2. DOCUMENTS. This Agreement and the agreements executed by the Company
and the Purchasers relative to the Units are hereinafter sometimes collectively
referred to as the "Documents." The term Documents shall mean this Agreement,

                                       1
<PAGE>

the Form of Warrant Agreement and the Registration Rights Agreement together
with any schedules or exhibits thereto.

     3. DELIVERY OF THE UNITS AT THE CLOSING. The completion of the purchase and
sale of the Units (the "Closing") shall occur at a place and time (the "Closing
Date") to be determined by the Company and of which the Purchasers will be
notified by facsimile transmission or otherwise; provided, however, that the
Closing shall not occur later than July 28, 2000. At the Closing, the Company
shall deliver to each Purchaser one or more certificates registered in the name
of the Purchaser, or in such nominee name(s) as designated by the Purchaser,
representing the Common Stock and Warrants comprising the Units purchased by
such Purchaser as set forth in section 2.1 hereof. Fractional shares of
Underlying Common Stock shall be rounded to the next higher number of whole
shares. The Company's obligation to complete the purchase and sale of the Units
at the Closing shall be subject to receipt of Federal Reserve (same-day) funds
in the full amount of the purchase price for the Units being purchased hereunder
by such Purchaser. Each Purchaser's obligation to accept and to pay for the
Units shall be subject to the condition that the Company shall have (a) entered
into a Registration Rights Agreement in the form of Exhibit 2 hereto (the
"Registration Rights Agreement") and (b) the accuracy in all material respects
of the representations and warranties made by the Company herein and the
fulfillment in all material respects of those undertakings of the Company to be
fulfilled prior to Closing. The parties agree that there may be more than one
Closing; provided, that all Closings for the sale of Units must be held not
later than July 28, 2000.

     4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
hereby represents and warrants to, and covenants with, each Purchaser as
follows:

     4.1. ORGANIZATION AND QUALIFICATION. Each of the Company and its subsidiary
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has all requisite corporate power
and authority to conduct its business as currently conducted and to own its
assets wherever located. Each of the Company and its subsidiary is qualified to
do business as a foreign corporation and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on the operations of the Company and its subsidiary, taken as a whole.

     4.2. DUE EXECUTION, DELIVERY AND PERFORMANCE OF THE AGREEMENT. The Company
has full power and authority to enter into this Agreement and each of the
Documents. This Agreement has been, and each Document and the Units will be,
duly authorized, executed and delivered by the Company. The Company's execution,
delivery and performance of this Agreement and each Document will not violate
(i) any law, rule or regulation applicable to the Company or its subsidiary or
(ii) the Certificate of Incorporation or Bylaws of the Company or its subsidiary
or (iii) any provision of any indenture, mortgage, agreement, contract or other
instrument to which the Company or its subsidiary is a party or by which the
Company or its subsidiary or any of their properties or assets is bound as of
the date hereof, or result in a breach of or constitute (upon notice or lapse of
time or both) a default under any such indenture, mortgage, agreement, contract
or other instrument or result in the creation or imposition of any lien,
security interest, mortgage, pledge, charge or other encumbrance upon any
properties or assets of the Company or its subsidiary, except, in the case of
such clause (iii), where such violation, breach or default would not have a

                                       2
<PAGE>

material adverse effect on the business, properties, prospects, condition
(financial or otherwise), net worth or results of operations of the Company and
its subsidiary taken as a whole (a "Material Adverse Effect"). Upon their
execution and delivery (assuming the valid execution thereof by the respective
parties thereto other than the Company), this Agreement and the Documents will
constitute valid and binding obligations of the Company, enforceable in
accordance with their respective terms, except as enforceability may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' and contracting parties' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).

     4.3. ISSUANCE OF THE COMMON STOCK AND WARRANTS. Upon issuance, the Warrants
and Underlying Common Stock will be duly authorized and validly issued and, upon
payment therefor, will be non-assessable.

     4.4. LITIGATION. There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened against or affecting the Company or its
subsidiary which might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiary, taken as a whole, or which might
materially and adversely affect their property or assets or which might
materially and adversely affect the consummation of this Agreement and the other
Documents. All pending legal or governmental proceedings to which the Company or
its subsidiary is a party or of which any of their property or assets is the
subject, including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material to the business of the Company and its
subsidiary.

     4.5. EXCHANGE ACT REPORTS; NO MATERIAL MISSTATEMENT OR OMISSION. The
Company has timely filed all periodic reports required to be filed under the
Securities Exchange Act of 1934 ("Exchange Act Reports"). As of their respective
dates, the Company's Exchange Act Reports do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

     4.6. NO MATERIAL CHANGE. Save as disclosed in the Company's Exchange Act
Reports, the Company has not incurred any material liabilities or obligations,
direct or contingent, nor has the Company or its subsidiary purchased any of
their outstanding capital stock, nor paid or declared any dividends or other
distributions on their capital stock; and there has been no change in the
capital stock or consolidated long-term debt or any increase in the consolidated
short-term borrowings (other than in the ordinary course of business) of the
Company or any material adverse change to the business, properties, assets, net
worth, condition (financial or other), results of operations or prospects of the
Company and its subsidiary, taken as a whole.

     4.7. LEGAL OPINION. Prior to closing, Hedger & Hedger, counsel to the
Company, will deliver its legal opinion to the Company in the form of Appendix
II hereto and stating that each of the Purchasers may rely thereon as though
such opinion were addressed directly to such Purchaser.

                                       3
<PAGE>

     4.8. ISSUANCE OF COMMON STOCK UPON WARRANT EXERCISE. The Company shall
issue its Common Stock upon exercise of the Warrants in accordance with the
terms of the Warrant Agreement, which shall be legended as provided therein.
After the Registration Statement (as defined in the Registration Rights
Agreement) is declared effective by the Securities and Exchange Commission, if
any holder of Underlying Common Stock shall deliver to the Company 's transfer
agent (i) the certificate representing such Underlying Common Stock and (ii) a
letter of representations to the effect of Sections 5(b) and (c) herein, then
the Company's transfer agent shall within 3 business days after receipt of the
foregoing issue new Underlying Common Stock in exchange for the aforementioned
legended Underlying Common Stock which new Underlying Common Stock shall be
legended as follows:

         THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN REGISTERED
         UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY BE
         SOLD PURSUANT TO THE REGISTRATION STATEMENT PROVIDED THAT THE
         HOLDER COMPLIES WITH THE PROSPECTUS DELIVERY REQUIREMENTS UNDER
         THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SALE IS IN
         COMPLIANCE WITH THE PLAN OF DISTRIBUTION SET FORTH IN THE
         PROSPECTUS.

     4.9. CERTIFICATE. The Company shall deliver a certificate of the Company
executed by the Chairman of the Board or President and the chief financial or
accounting officer of the Company, to be dated the Closing Date, in form and
substance satisfactory to the Purchasers to the effect that the representations
and warranties of the Company set forth in this Section 4 are true and correct
as of the date of this Agreement and as of the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on its part to
be performed or satisfied on or prior to such Closing Date.

     5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER. (a) Each
Purchaser represents and warrants to, and covenants with, the Company that: (i)
the Purchaser is know-ledgeable, sophisticated and experienced in making, and is
qualified to make, decisions with respect to investments presenting an
investment decision like that involved in the purchase of the Units, including
investments in securities issued by the Company, and has requested, received,
reviewed and considered all information it deems relevant in making an informed
decision to purchase the Units; (ii) the Purchaser is acquiring the Units set
forth in Section 2 above in the ordinary course of its business and for its own
account for investment (as defined for purposes of the Hart-Scott-Rodino
Antitrust Improvement Act of 1976 and the regulations thereunder) only and with
no present intention of distributing any of such Units, Warrants or Underlying
Common Stock or any arrangement or understanding with any other persons
regarding the distribution or purchase of such Units, Warrants or Underlying
Common Stock; (iii) the Purchaser will not, directly or indirectly, offer, sell,
pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
or otherwise acquire or take a pledge of) any of the Units, Warrants or
Underlying Common Stock except in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder and the Exchange Act, and the rules and regulations promulgated
thereunder, and the terms and conditions of this Agreement; (iv) the Purchaser
has, in connection with its decision to purchase the principal amount of Units
set forth in Section 2 above, relied solely upon the representations and

                                       4
<PAGE>

warranties of the Company contained in writing herein, and has not relied upon
any other statements, representations, warranties, covenants or assurances of
the Company, (v) the Purchaser is an "accredited investor" within the meaning of
Rule 501 of Regulation D promulgated under the Securities Act ("Regulation D");
and (vi) the Purchaser understands that the Units and, except as provided in
Section 4.8 hereof, the Warrants and the Underlying Common Stock will contain a
legend to the following effect (provided that certificates for the Warrants
shall omit the last sentence thereof):

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE
         SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE
         SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF EITHER AN
         EFFECTIVE REGISTRATION STATEMENT FOR THESE SHARES UNDER THE
         SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL
         THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT. THESE
         SECURITIES ARE SUBJECT TO CERTAIN REGISTRATION RIGHTS AS SET
         FORTH IN A REGISTRATION RIGHTS AGREEMENT A COPY OF WHICH MAY BE
         OBTAINED FROM THE COMPANY.

     (b) Each Purchaser hereby covenants with the Company that it will not
directly or indirectly make any offer, sale, pledge, transfer or other
disposition of the Units, the Warrants or the Underlying Common Stock other than
in accordance with all applicable federal and state securities laws and the
terms and conditions of this Agreement, including, but not limited to, the other
representations, warranties and covenants of the Purchaser in this Section 5.

     (c) Each Purchaser hereby covenants with the Company not to make any public
sale of the Underlying Common Stock without effectively causing any applicable
prospectus delivery requirement under the Securities Act to be satisfied, and
the Purchaser acknowledges and agrees that the Underlying Common Stock is not
transferable on the books of the Company unless the certificate submitted to the
transfer agent evidencing the Underlying Common Stock is accompanied by a
separate officer's certificate: (i) in the form of Appendix I hereto, (ii)
executed by an officer of, or other authorized person designated by, the
Purchaser, and (iii) to the effect that (A) the Underlying Common Stock has been
sold in accordance with a Registration Statement and (B) the requirement of
delivering a current prospectus has been satisfied or does not apply.

     (d) Each Purchaser further represents and warrants to, and covenants with,
the Company that (i) the Purchaser has full right, power, authority and capacity
to enter into this Agreement and to consummate the transactions contemplated
hereby and has taken all necessary action to authorize the execution, delivery
and performance of this Agreement, and (ii) upon the execution and delivery of
this Agreement, this Agreement shall constitute a valid and binding obligation
of the Purchaser enforceable in accordance with its terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' and contracting
parties' rights generally and except as enforceability may be subject to general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law).

                                       5
<PAGE>

     (e) Each Purchaser acknowledges that it has had such access to financial
and other information concerning the Company, the Units, and the Warrants as it
deemed necessary in connection with its decision to purchase same, including an
opportunity to ask questions and request information from the Company and its
management, and all such questions have been answered and all information
requested has been provided to the satisfaction of the Purchaser.

     (f) If a Purchaser proposes to sell, pledge, assign or otherwise transfer
or convey, directly or indirectly, any of the Underlying Common Stock prior to
the date that the Registration Statement becomes effective, then the Purchaser
shall provide the Company, prior to the sale of any such Underlying Common
Stock, with a legal opinion in form and substance satisfactory to the Company
that such sale, pledge, assignment, transfer or conveyance is exempt from the
registration requirements under the Securities Act and any applicable state
securities and blue sky laws.

     6. NOMINATION TO BOARD OF DIRECTORS. In the event the Company is delisted
from the Nasdaq SmallCap Market, Kensington Management Group, LLC ("Kensington")
shall have the option of nominating one individual for election to the board of
directors of the Company. Upon any such nomination, the Company shall cause its
board of directors to (i) expand the board of directors by one member and (ii)
elect the nominee of Kensington to fill the vacancy on the board of directors
thereby created. Thereafter, during the pendency of the Company's delisting from
the Nasdaq SamllCap Market, the Company shall cause its board of directors to
nominate the nominee of Kensington for election to the Company's board of
directors upon the occasion of each of the Company's annual meetings of
shareholders.

     7. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Notwithstanding
any representation made by any party to this Agreement, all covenants,
agreements, representations and warranties made by the Company and the
Purchasers in writing herein and in the closing certificates delivered pursuant
hereto shall survive the execution of this Agreement, the delivery to the
Purchasers of the Units being purchased and the payment therefor.

     8. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing, shall be by telecopier with the original being
forwarded by a nationally recognized overnight express courier, shall be deemed
given when receipt is acknowledged by transmit confirmation report and shall be
addressed as set forth at the head of this Agreement or to such other address as
may hereafter be furnished in writing.

     9. CHANGES. This Agreement may not be modified or amended except pursuant
to an instrument in writing signed by the Company and each Purchaser.

     10. HEADINGS. The headings of the various sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed to be
part of this Agreement.

     11. SEVERABILITY. In case any provision contained in this Agreement should
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.

                                       6
<PAGE>

     12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania (without reference
to its rules as to conflicts of law) and the federal law of the United States of
America.

     13. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties. Facsimile signatures are considered to be
originals and shall have the same effect.

     14. ENTIRE AGREEMENT. This Agreement is intended by the parties as a final
expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.

                            [Signatures on next page]

                                       7
<PAGE>

     IN WITNESS WHEREOF, the Purchasers and the Company have caused this
Agreement to be executed by their duly authorized representatives as of the day
and year first above written.

                                    COMPANY:

                                    DERMA SCIENCES, INC.

                                    By:_________________________________________
                                       Edward J. Quilty, President and CEO

                                   PURCHASERS:

                                   KEINSINGTON MANAGEMENT GROUP, LLC

                                    By:_________________________________________

                                    REDWOOD ASSET MANAGEMENT

                                    By:_________________________________________
                                       Morten Hornness, Analyst

                                    EDWARD J. QUILTY

                                    ____________________________________________

                                       8
<PAGE>

                                                                     APPPENDIX I

                   PURCHASER'S CERTIFICATE OF SUBSEQUENT SALE

     The below named institution, by the undersigned duly authorized, hereby
certifies that:

     1. It is the purchaser of the shares evidenced by the attached certificate;

     2. It sold such shares on ___________________________________ in accordance
with the registration statement dated ____________________________ and numbered
______________________________; and

     3. The requirement of delivering a current prospectus and current annual
and quarterly reports of the Company has been complied with in connection with
such sale.

                                 Name of Institution:

                                 _______________________________________________

                                 Name of Individual representing Institution:

                                 _______________________________________________

                                 Title of Individual representing Institution:

                                 _______________________________________________

                                 Signature:_____________________________________

<PAGE>

                                                                     APPENDIX II

                          [HEDGER & HEDGER LETTERHEAD]

July 18, 2000

Board of Directors
Derma Sciences, Inc.
214 Carnegie Center, Suite 100
Princeton, NJ 08540

Re:  Offer and Sale of Series E Units

Members of the Board:

We are counsel to Derma Sciences, Inc. (the "Company") in connection with the
offer and sale of those certain series E units ("Unit(s)") consisting of one
share of common stock, par value $.01 per share ("Common Stock") and one and one
tenth (1.1) warrants to purchase one share of Common Stock at $0.85 per whole
share ("Warrant(s)"). We have examined the originals, or certified, conformed or
reproduction copies, of all records, agreements, instruments and documents
relative to the Units as we have deemed relevant or necessary as the basis for
the opinion hereinafter expressed. Our examination included review of the
purchase agreement, form of warrant agreement, registration rights agreement and
certificate of compliance ("Document(s)"). In all such examinations, we have
assumed the genuineness of all signatures on original or certified copies and
the conformity to original or certified copies of all copies submitted to us as
conformed or reproduction copies. As to various questions of fact relevant to
our opinion, we have relied upon, and assumed the accuracy of, certificates and
oral or written statements and other information of or from public officials,
officers or representatives of the Company and others.

Based upon the foregoing, we are of opinion as follows:

     1. The Company and its subsidiary are corporations duly organized, validly
existing and in good standing under the laws of their jurisdictions of
incorporation and have all requisite corporate power and authority to conduct
their business as currently conducted.

     2. As of the date hereof, the authorized capital stock of the Company
consists of: (a) 30,000,000 shares of Common Stock of which 1,325,938 shares are
outstanding, (b) 1,750,000 shares of Series A Convertible Preferred Stock of
which 272,500 shares are outstanding, (c) 3,333,340 shares of Series B
Convertible Preferred Stock of which 666,668 shares are outstanding, (d) 795,457
shares of Series C Convertible Preferred Stock of which 431,818 shares are

<PAGE>

Board of Directors
July 18, 2000
Page 2

outstanding, (e) 592,597 shares of Series D Convertible Preferred Stock of which
148,149 are outstanding, (f) 5,278,606 shares of undesignated preferred stock of
which none are outstanding, and, (g) $850,000 aggregate principal amount of
convertible bonds due January 7, 2001.

     3. Each of the Documents, upon their execution and delivery (assuming the
valid execution thereof by the respective parties thereto other than the
Company), will constitute valid and binding obligations of the Company,
enforceable in accordance with their respective terms, except as enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting creditors' rights generally and except as
enforceability may be subject to general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Upon payment therefor, the Common Stock, together with all Common Stock issuable
upon exercise of the Warrants, will be validly issued and nonassessable.

     4. The Company has full corporate power and authority to enter into each
Document. Each Document has been duly authorized, executed and delivered by the
Company. The Company's execution, delivery and performance under each Document
will not violate (i) any statute, rule or regulation applicable to the Company
or its subsidiary, (ii) to the best of our knowledge, any order, judgment,
ruling or decree of any court or any governmental, regulatory or administrative
body applicable to the Company or its subsidiary, (iii) the Articles of
Incorporation or Bylaws of the Company, or (iv) to our knowledge, any provision
of any indenture, mortgage, agreement, contract or other instrument to which the
Company or its subsidiary is bound or constitute (upon notice or lapse of time
or both) a default under any thereof, or result in the creation or imposition of
any lien, security interest, mortgage, pledge, charge or other encumbrance upon
any properties or assets of the Company or its subsidiary, except in the case of
the foregoing clauses (i), (ii) and (iv) for those violations, breaches or
defaults which would not, singly or in the aggregate, have a material adverse
effect upon the Company's operations, prospects or financial condition
("Material Adverse Effect").

     5. To our knowledge (without independent investigation), there is no
action, suit or proceeding before or by any court or governmental agency or
body, domestic or foreign, now pending, or threatened, against or affecting the
Company or its subsidiary which might, singly or in the aggregate, have a
Material Adverse Effect, or which might materially and adversely affect the
consummation of the Documents; to our knowledge (without independent
investigation) all pending legal or governmental proceedings to which the
Company or its subsidiary is a party or of which any of their property or assets
is the subject, including ordinary routine litigation incidental to the
business, are, considered in the aggregate, not material to the business of the
Company and its subsidiary.

     6. Except for compliance with Rule 506 of Regulation D under the Securities
Act of 1933 and applicable state securities laws in connection with the offer
and sale of the Units, and except for compliance with applicable federal and

<PAGE>

Board of Directors
July 18, 2000
Page 3

state securities laws in connection with the resale by purchasers of the
Underlying Common Stock (as defined in the purchase agreement), no consent,
approval, authorization, order, registration, filing, qualification, license or
permit of or with any court or any public, governmental, or regulatory agency or
body having jurisdiction over the Company or its subsidiary or any of their
respective properties or assets is required for the execution, delivery and
performance under the Documents or the consummation of the transactions
contemplated hereby.

                              ____________________

We hereby authorize the Purchasers to rely upon this opinion as if it were
addressed individually to each Purchaser.

Very truly yours,

HEDGER & HEDGER

Raymond C. Hedger, Jr.

RCH:JMH

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