e10-k405

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

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

The aggregate market value of voting stock held by non-affiliates of the Issuer as of March 1, 2001, was $1,389,015.

The number of shares outstanding of the Issuer’s only class of common stock on March 1, 2001, was 10,081,037.

We are a media company that is the leading online distributor of originally programmed audio entertainment over the Internet through our website, NetRadio.com. NetRadio.com provides more than 100 channels of music and information, 24 hours a day, seven days a week. Visitors to the site can access music, news and information within NetRadio.com’s 16 music genres. Approximately 2-3 million unique guests visit NetRadio.com several times per month.

We provide our advertisers and marketing partners with the ability to reach focused segments of users defined by specific demographic and lifestyle characteristics. NetRadio.com allows advertisers to utilize the combined strength of audio messaging with banner advertising.

We also provide our consumer Internet experience to other online businesses. Our business to business (“B2B”) initiative began in July 2000. We provide our B2B customers (primarily leading online sites) with co-branded players that include 10 to 20 channels of our originally programmed music. The co-branded player delivers a passive music experience to our B2B customers’ end users, and is intended to increase the length of stay on a site by an end-user, or “site stickiness.” The co-branded player also allows our B2B customers to deliver synchronized audio and banner advertising messages to their users.

In February 2001, we entered into a co-branding agreement to provide custom audio entertainment programming to BestBuy.com. Under the terms of this agreement, we will provide BestBuy.com with a co-branded player that will include 20 originally programmed NetRadio channels for use on the BestBuy.com website. In addition, BestBuy.com will program, and we will host, two custom radio channels to leverage marketing and content from Best Buy enterprise initiatives.

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

Streaming audio combines the Internet’s interactivity with traditional, more passive radio listening. Music broadcasts can serve as a unifying vehicle, drawing Internet listeners into lifestyle communities of similar musical tastes and allowing them to interact with one another. Communities segregated by specific musical tastes or interests provide Internet businesses with a target for direct marketing and advertising programs.

A recent study by The Arbitron Company and Edison Media Research found that “streamies,” Internet users those who watch or listen to webcasts online, now represent 44 percent of all Internet users and 27 percent of Americans overall. According to a study performed in January 2001 by Arbitron/ Edison Media Research, streamies are highly responsive to online advertising and purchase more on the Web than Internet users who are not listening online. Streaming media consumers are far more interactive, are more oriented to e-commerce and spend far more time online compared to Internet users who don’t stream. This report stated that “advertisers wishing to target high-value Internet users should focus their marketing on streamies.”

By focusing on our breadth of music and information content, we seek to capture a wide audience across a variety of musical tastes. Our programming has been developed by a team of eleven full-time and two part-time experienced, award-winning content and programming professionals. These music programmers bring specific musical expertise and an average of more than 18 years of experience to us. Their awards have included national awards and nominations from Billboard Magazine (Major Market Country Programmer of the Year nominee) and Gavin Magazine (Programmer of the Year multiple winner and nominee), as well as Minnesota Music awards (Club DJ of the Year winner). As a result of our programmers’ musical expertise, NetRadio was recognized in the Forbes February 2000 and 2001 “Best of the Web” editions as a “Best of the Web” site. NetRadio was the only music or Internet radio-related site to receive the “Best of the Web” designation in 2000. In describing the NetRadio.com site, Forbes noted that the site has the widest selection of music on the Internet and that the music is “passionately and expertly programmed.”

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

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

Music Genres and Channels. The NetRadio.com site is a complete music resource, providing listeners with approximately 100 channels of music and information 24 hours a day, seven days a week. NetRadio.com appeals to a wide range of musical tastes, ages and demographics. Visitors to the site can access music, news and information within NetRadio.com’s 16 music genres. Within a music genre, each music or information channel contains content that can be targeted to specific audience lifestyle segments and linked to potential advertising and e-commerce revenue opportunities.

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

All of our channels can be heard using a 28.8kbps narrow bandwidth modem through a telephone line. We offer ten channels in broadband stereo, which is a special “higher quality” 64.4kbps stereo audio streaming channel featuring music from NetRadio’s most popular music channels, and requires a high-speed connection.

Our c-commerce (content enabled commerce) strategy provides the listener the opportunity to immediately purchase the music, product or service being promoted. Listeners do not need to be visually connected to NetRadio’s Web pages in order to receive audio content and promotional messages. Listeners stay connected to audio content for extended periods of time while NetRadio exposes them to commerce, advertising and promotional messages.

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

Fulfillment. We used fulfillment alliances with Navarre and Valley Media to fulfill our sale of products through mid March 2001. In mid March 2001, we became an affiliate of Amazon.com for the sale of products through our website. We also have an agreement with Liquid Audio under which our visitors are able to link to the Liquid Audio Web site and download over 20,000 authorized music tracks using Liquid Audio’s Liquid Player.

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

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

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

Banner Advertising. Visitors to our Web site are exposed to banner advertising messages placed on our Web pages. Banner advertising allows a user to travel immediately to the Web site displayed in the banner. These banners are sold to advertisers primarily by our sales staff and through third parties.

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

Video Advertising. We have incorporated video advertisements into our programming. Before an audio stream begins, we can display a video advertisement in the player window which allows our advertisers a way to deliver a visual message very similar to broadcast television.

Co-Branded Player. We have developed co-branded players as another means to generate revenues. We place a co-branded player on a partner’s Internet site, which allows consumers to listen to a variety of music while perusing or shopping at their site. Our partner has the ability to use audio advertisements to inform their consumers about special promotions or other areas of their site. Comedy Central.com and BestBuy.com are examples of some of our partners with co-branded players.

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

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

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


	•	Microsoft. We have a broad technology and marketing agreement with Microsoft Corp. that allows us to offer our channels in the Windows Media format and to be prominently featured on windowsmedia.com. As a result of this relationship, millions of Windows Media Player users will be able to enjoy the wide range of music offered by NetRadio.com.

	•	RealNetworks. RealNetworks licenses software that allows our listeners to hear our audio streams. In addition to providing technology, we believe that RealNetworks is an important source of traffic to our Web site. We have 20 channel pre-sets on RealPlayer G2, a recent version of RealNetworks’ audio player.

	•	Roadrunner Network. We offer ten 64.4kbps channels on the Roadrunner Network, a division of AT&T. Roadrunner provides high-speed, fully-integrated multimedia Internet and online services using cable television technology. Roadrunner subscribers have the opportunity to listen to our programming through a higher quality connection than is normally available through a standard telephone line.

	•	INTERVU/ Akamai Inc. In January 2000, we entered a streaming media distribution agreement with INTERVU/ Akamai Inc. to stream our audio content through their distributed network. This agreement provides us additional bandwidth capacity and redundancy in our streaming technology network. In October 2000 we renegotiated our contract to reduce our cost per megabyte in exchange for a monthly minimum commitment.

	•	iBeam Broadcasting Corporation. In February 2000, we entered a streaming media distribution agreement with iBeam Broadcasting Corporation to stream our audio content through their streaming media network. iBeam’s sophisticated distribution model utilizes a hybrid satellite and fiber network to stream media to the edges of the Internet in the most efficient manner possible. This agreement provides us additional bandwidth capacity and redundancy in our streaming technology network.

	•	Kerbango, Inc. In February, 2000, we entered a strategic relationship with Kerbango, Inc., creator of the world’s first standalone Internet radio. Under this relationship, the Kerbango standalone Internet radio device will prominently feature all of NetRadio’s 100 channels of music. The Kerbango radio can be plugged in anywhere in the home or office — only a power outlet and standard Internet connection — dial-up, cable modem, DSL, home network, or other connection — is needed.

	•	Akoo.com. In October, 2000, we entered an affiliate and content licensing agreement with Akoo.com, creator of the Kima System, which wirelessly transmits the music from a computer to a stereo system. Under the agreement, NetRadio will provide banner advertising for Akoo.com to promote the Kima System in exchange for guaranteed affiliate commissions equating to the same value. The Kima System transmitter plugs into a PC and wirelessly transmits to the Kima receiver, which in-turn wirelessly plays through a home stereo via frequency waves over the stereo’s tuner. The transmitter can also be used with RCA Cables via a stereo’s auxiliary jacks.


	•	AudioBasket.com. In August, 2000, we entered into a content licensing agreement with AudioBasket.com, an audio content provider over computer networks, to provide six audio news programs for a fixed monthly fee.

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

Most transmissions over telephone lines occur at a rate of 56kbps. Transmissions also occur at higher speeds using digital subscriber line, or DSL, cable modem and broadband technologies. Audio clarity varies with the speed of transmission. Audio streaming differs from traditional radio broadcasting in its ability to be transmitted to a worldwide audience. RealNetworks pioneered the development of audio streaming technology in 1995. This technology has transformed the Internet from a graphic and text-based information platform into a multimedia audio/visual platform.

Our Web site is currently running on a Microsoft NT platform. E-commerce data stores are hosted in a secure Oracle environment. NetRadio.com staffs a fulltime Network Operations Center (“NOC”) to ensure availability of our broadcast streams. All mission critical services are monitored 24/7.

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

We have contracts in place with Akamai Corporation and iBeam to provide streaming capabilities. These partnerships allow NetRadio to take advantage of aggressive scalability and pricing plans without the need for up-front capital expenditures. Both iBeam and Akamai provide 24-hour network and streaming services support to NetRadio.com.

Copyrights and Trademarks. We rely upon a combination of trademark and copyright law, trade secret protection and confidentiality and license agreements with employees, strategic partners and others to protect our proprietary rights. Our success depends in part upon developing, building and protecting our trademarks, trade secrets and similar intellectual property. There can be no assurance that the steps that we have taken or will take will be adequate to prevent misappropriation, infringement or other violations of our intellectual property. A third party could, without authorization, copy or otherwise use our intellectual property. There also can be no assurance that the United States intellectual property laws and our agreements with employees, consultants and others who participate in developing our proprietary rights will adequately protect our rights, or that our trade secrets will not otherwise become known or independently developed by competitors. Moreover, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in those jurisdictions, and we have not sought protection for our intellectual property in every country where our broadcasts may be heard.

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

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

NetRadio, along with several other media companies, is a participant in the current Copyright Arbitration Royalty Panel (“CARP”) proceeding, conducted under the auspices of the U.S. Copyright Office, to determine royalty fees payable to sound recording copyright owners for public performances and ephemeral reproductions of their works by eligible non-interactive, non-subscription services under sections 112 and 114 of the Copyright Act. The CARP will set fees for the time periods 1998-2000 and 2001-2002. Sound recording copyright owners in the CARP are represented by the Recording Industry Association of America. CARP hearings are scheduled to commence on July 30, 2001, and the CARP is required to render a decision within 180 days of that date. The CARP decision is then subject to review by the Register of Copyrights, and is appealable to the United States District Court for the District of Columbia.

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

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

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


	•	streaming media sites such as Yahoo/ Broadcast.com, Real.com, Spinner, Launch, Sonicnet, Rolling Stone Radio, Live 365 and discjockey.com,

	•	online retail vendors of music including CDNow, E-music, MP3, Amazon.com, and Barnes & Noble.com,

	•	traditional radio broadcasters,

	•	other small online vendors, and

	•	publishers and traditional retail vendors of music and software, including large specialty music stores such as MusicLand, Tower Records and Best Buy, that have significant brand awareness, sales volume and customer bases. Many of these traditional retailers also support dedicated Web sites that compete directly with NetRadio.

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

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

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

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

Our offices are located in one facility in Eden Prairie, Minnesota. We lease approximately 13,700 square feet of office space under one lease, which includes space for our executive offices, technical center, sales and marketing, content and commerce areas. Our lease expires on May 1, 2005.

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

During the quarter ended December 31, 2000, no matter was submitted to a vote of security holders.

The Common Stock is traded on the Nasdaq National market under the symbol NETR since the initial public offering in October 1999. As of March 1, 2000, the Company’s common stock was held by approximately 23 holders of record and an estimated 2,700 additional beneficial owners. The following table sets forth the high and low sales price for the Common Stock as reported by Nasdaq for the period indicated. These prices reflect inter-dealer prices, without retail mark-up or mark-down or commissions. The Company has paid no dividends and does not expect to in the foreseeable future.

The Nasdaq National Market has notified us that we are not in compliance with the continued listing requirements with respect to minimum market value of public float of $5 million, minimum bid price of $1.00 and net tangible assets of $4 million. NetRadio appeared at a hearing with Nasdaq on March 28, 2001 to address its continued listing compliance issues. There can be no assurance that the hearing will result in continued listing of the common stock on the Nasdaq Stock Market. Delisting of the common stock from Nasdaq could have a material adverse effect on the market price of, and the efficiency of the trading market for, NetRadio’s common stock.

On February 17, 2000, we issued 1,000 shares of common stock in connection with an option exercise by a former employee at an exercise price of $5.00 per share. On March 8, 2000 we issued 2,800 shares of common stock in connection with an option exercise by a former employee at an exercise price of $3.00 per share. All of these issuances were made in transactions exempt from registration under Rule 701 of the Securities Act. On August 31, 2000, we issued 19,337 shares of common stock as compensation to a consulting firm for executive recruiting services. This issuance was made in a transaction exempt from registration under Section 4(2) of the Securities Act.

The following selected financial data should be read together with the financial statements and related notes and “Management Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this document. The selected statement of operations data shown below for the period ended December 31, 1998, 1999 and 2000 and the balance sheet data as of December 31, 1998, 1999 and 2000 are derived from our audited statements included elsewhere in this document. The selected statement of operations data shown below for the year ended December 31, 1996 and 1997, and the

This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect management’s current expectations or beliefs and future actual results could differ materially from those in any forward-looking statements depending on the outcome of certain factors. Any such forward-looking statements are subject to risks and uncertainties, including but not limited to our ability to generate revenue from a new and unproven business model, the incurrence of operating losses, the necessity to obtain additional financing to achieve our strategic business objectives, the fluctuation of subscription and advertising revenues, our ability to expand our technical capacity, competition and other risks and uncertainties, including the factors set forth on Exhibit 99.1 to this Form 10-K. Except as required by applicable law, we undertake no obligation to update or revise any such forward-looking statements.

We are the leading broadcaster of originally programmed audio entertainment over the Internet through our Web site, www.netradio.com. During the period from our inception through June 30, 1999, we had insignificant revenues and were engaged primarily in developing infrastructure, assembling our

management team, and establishing our audio channels. Our initial business model consisted of distributing coupons and other promotional material on behalf of third parties. Substantially all of our revenues prior to 1998 were derived from these activities. In January 1998, we decided to add e-commerce to our operations and to discontinue coupon and other promotional material distribution activities.

Our current revenues are generated from sales of audio merchandise and Internet advertising. We are beginning to derive revenues, but do not currently derive substantial revenue, from our services to provide our B2B customers with co-branded players. Our Internet advertising revenues consist of banner advertisements placed on our Web site, barter advertising, special promotional advertisements and audio and video advertisements placed before and in our audio streams.

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

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

Net revenues increased to $2,067,000 in 2000, from $1,449,000 in 1999, a 43% increase and consisted primarily of product sales and Internet advertising revenues.

Product Sales. Product sales increased to $706,000 in 2000, from $684,000 in 1999. Product sales in 2000 consisted of sales of audio merchandise, including shipping and handling costs.

Internet Advertising. Internet advertising revenues in 2000 increased to $1,361,000 from $765,000 in 1999. Internet advertising revenues reflect audio, video and banner advertising as well as promotional advertising revenues. Included in these amounts were $156,000 and $245,000 of non-cash barter advertising for 2000 and 1999, respectively.

Cost of Revenues. Cost of revenues include the cost of audio merchandise that we sell, including fulfillment costs through third party vendors that ship directly to our customers. Cost of revenues increased to $650,000 in 2000, from $646,000 in 1999. The increase in cost of revenues was due to the increase in our product sales.

Operations and Technical Support. Operations and technical support expenses consist primarily of data communications expenses, personnel expenses associated with broadcasting, e-commerce and technical support, software and content license fees, operating supplies and overhead. Operations and technical support expenses were $9,333,000 in 2000 compared to $7,368,000 in 1999. The increase in operations and technical support expenses was due primarily to bandwidth costs and the building of technical and personnel infrastructure necessary to meet listener demand. We expect operations and technical support expenses to decrease in 2001 from 2000 due to a reduction in bandwidth costs.

Sales and Marketing. Sales and marketing expenses consist primarily of personnel expenses associated with Internet advertising and the marketing of our Web site. Sales and marketing expenses were $5,869,000 in 2000 compared to $4,430,000 in 1999. The increase in sales and marketing expenses due to higher advertising expenses incurred to grow our site traffic and continue building our brand. We expect

General and Administrative. General and administrative expenses consist primarily of administrative personnel expenses, professional fees and expenditures for facilities. General and administrative expenses were $2,922,000 in 2000 compared to $3,254,000 in 1999. In 1999 the company recognized $1,139,000 in non-cash compensation expense associated with the issuance of stock options to employees and directors with exercise prices below the estimated fair market value of our common stock on the date of grant, and the acceleration of vesting of stock options as part of an executive officer’s severance agreement. The increase of $800,000 in cash expenditures from 1999 to 2000 was due to increased personnel and professional fees. A portion of the increase was due to the accrual of severance obligations under an employment agreement for our former chief executive officer who resigned in September 2000. We expect our general and administrative expenses to decrease in 2001 from 2000 due to reductions in personnel costs, professional fees and office rent.

Interest Expense. Interest expense in 2000 was $972,000 compared to $857,000 in 1999. The increase was due to interest expense associated with our term note with Navarre. In connection with our 1999 initial public offering, our borrowings, including accrued interest from Navarre, were restructured. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a description of this restructuring.

Interest Income. Interest income in 2000 was $1,335,000 compared to $108,000 in 1999. The increase was due to interest from investments in short- and long-term securities purchased with the 1999 initial public offering proceeds.

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

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

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

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

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

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

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

General and Administrative. General and administrative expenses consist primarily of administrative personnel expenses, professional fees, goodwill amortization and expenditures for facility costs. General and administrative expenses were $3,254,000 in 1999 compared to $2,234,000 in 1998. Goodwill amortization recognized from Navarre’s acquisition of NetRadio Nevada amounted to $421,000 in 1999 and 1998. The increase in general and administrative expenses was due primarily to a recognition of $1,139,000 in non-cash compensation expense associated with the issuance of stock options to employees and directors with exercise prices below the estimated fair market value of our common stock on the date of grant, and the acceleration of vesting of stock options as part of an executive officer’s severance agreement.

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

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

The Company had working capital of $471,000 and $26,860,000 at December 31, 2000 and 1999, respectively, and a working capital deficit of $176,000 at December 31, 1998. Net cash used in operating activities was $15,663,000, $10,076,000 and $2,772,000 for the years ended December 31, 2000, 1999 and 1998. Net cash used in operating activities for the year ended December 31, 2000 was primarily composed of funding our net losses and a decrease in accounts payable, offset in part by depreciation and amortization and an increase in accrued expenses.

Accounts receivable grew to $292,000 at December 31, 2000 from $147,000 at December 31, 1999 and $26,000 at December 31, 1998, and consisted primarily of agency-placed advertising revenue accounts. Advertising revenues placed by an agency typically are collected in 60 to 120 days. We expect advertising revenue accounts generally to be collected within 60 to 120 days in the future.

Accounts payable decreased to $1,792,000 at December 31, 2000 from $3,158,000 at December 31, 1999. The decrease was due primarily to the timing of payments at the end of 1999 and 2000.

Net cash generated from investing activities was $4,127,000 for the year ended December 31, 2000. Net cash used in investing activities was $20,435,000 for the year ended December 31, 1999 and $906,000 for the year ended December 31, 1998. Net cash generated in investing activities in 2000 was related primarily to sales of short-term investments. Net cash used in investing activities in 1999 was related primarily to the purchases of short-term investments. Net cash used in investing activities in 1998 was related primarily to the purchases of property and equipment.

We used net cash from financing activities of $102,000 for the year ended December 31, 2000. We generated net cash from financing activities of $42,182,000 for the year ended December 31, 1999 and $3,725,000 for the year ended December 31, 1998. Net cash used in financing activities for the year ended December 31, 2000 was primarily payments made on capital leases. Net cash from financing activities for the year ended December 31, 1999 was generated primarily from $9,597,000 in advances from Navarre, and $33,236,000 from our initial public offering.

In March 2001, we restructured our term note of approximately $9.6 million owing to Navarre. Under the terms of the restructuring, Navarre forgave $5.5 million of the principal amount in exchange for a $1 million prepayment by NetRadio. In addition, Navarre extended the maturity date of the term note from November 14, 2001 to March 31, 2002. The term note with Navarre bears interest at Midwest prime plus one half-percentage point (9% as of March 1, 2001) and is payable monthly. After giving effect to this restructuring, the principal balance of the term note with Navarre is currently approximately $3.1 million

We believe that our current cash, cash equivalents and short-term investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. To fund future operations, we may need to raise additional funds, through public or private financing, or other arrangements. We are evaluating potential issuances of our debt or equity securities to strategic partners and are exploring potential strategic transactions. There can be no assurance that additional financing, if needed, will be available on terms attractive to us, if at all. Our failure to raise capital when needed could have a material adverse effect on our business, results of operations and financial condition. If additional funds are raised through the issuance of equity securities, the percentage ownership of our then current shareholders will be reduced. Furthermore, these equity securities might have rights, preferences or privileges senior to those of our common stock.

As of December 31, 2000, we had available net operating loss carryforwards totaling $34,385,000, which begin to expire in 2011. See Note 5 to the financial statements included elsewhere herein. The tax Reform Act of 1986 imposes limitations on the use of net operating loss carryforwards if specified stock ownership changes have occurred, which could limit our ability to utilize the net operating loss carryforwards.

We have established a valuation allowance against the entire amount of our deferred tax asset because we have not been able to conclude that it is more likely than not that we will be able to realize the deferred tax asset, due primarily to our history of operating losses.

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

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

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

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

Eric H. Paulson. Mr. Paulson has served as our Chairman of the Board since May 1996 and interim Chief Executive Officer since September 1, 2000; he previously served as Chief Executive Officer of NetRadio from April 1997 to January 1999. Mr. Paulson has served as Chairman of the Board, Chief Executive Officer and a director of Navarre since 1983.

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

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

Stephen F. Holderman. Mr Holderman has served as our Executive Vice President for Marketing, Sales & Business Development since August 2000. From February 1997 to July 2000, Mr. Holderman served as senior vice president of Integrated Marketing Services at CoActive Marketing Group, a promotional media consulting firm. From January 1989 to January 1997, Mr. Holderman served as owner and president of Cornerstone Marketing, Inc., a sales and marketing consulting firm.

James Caparro. Mr. Caparro has served as a director of NetRadio since January 1999. He is Chairman and Chief Executive Officer of Island/ Def Jam Music Group, a division of Universal/ PolyGram Music Operations. From 1992 to 1998,he served as President and Chief Executive Officer of PolyGram Group Distribution, Polygram Video, Polymedia, New Media and Business Development, Polygram Merchandising and Independent Label Sales.

Charles E. Cheney. Mr. Cheney has served as a director of NetRadio since May 1996. From March 1997 to August 1998, he also served as our Chief Financial Officer. Mr. Cheney is currently Vice Chairman, Executive Vice President and Chief Strategic Officer of Navarre; he previously served as Chief Financial Officer Navarre.

Marc H. Kalman. Mr. Kalman has served as a director of NetRadio since January 1999. From 1992 through October 2000, Mr. Kalman served as Vice President and General Manager for KDWB-FM and Cities 97-FM and from May 1997 through October 2000, served as Vice President and General Manager for WLOL-FM, three leading FM stations in the Minneapolis/ Saint Paul market. Since 1993, Mr. Kalman also has served as an Executive Board Member of the Variety Childrens Association Board of Directors and as a director of the Minnesota Broadcasters Board of Directors.

Gene McCaffery. Mr. McCaffery has served as a director of NetRadio since November 1998. He currently is Chief Executive Officer, Chairman of the Board and a director of ValueVision. Prior to joining ValueVision in 1998, Mr. McCaffery served as Chief Executive Officer and Managing Partner of Marketing Advocates, a celebrity-driven product and marketing development company based in Los Angeles. From 1982 to 1996, Mr. McCaffery was employed in several capacities with Montgomery Ward & Co., Inc., serving most recently as Senior Executive Vice President. Montgomery Ward filed for Chapter 11 bankruptcy protection in 1997. From 1994 to 1996, Mr. McCaffery also served as Vice Chairman of The Signature Group, one of the nation’s largest direct marketing companies. Mr. McCaffery also serves as a director of Metal Management, Inc. Mr. McCaffery is one of two directors that ValueVision is entitled to elect to the Company’s board of directors pursuant to the terms of the 1997 Stock Purchase Agreement.

Section 16(a) of the Securities Exchange Act of 1934, as amended, and related regulations requires NetRadio’s directors, executive officers and any persons holding more than 10% of NetRadio’s common stock (collectively, “Reporting Persons”) to report their initial ownership of NetRadio’s common stock and any subsequent changes in that ownership to the Securities and Exchange Commission (“SEC”) and to Nasdaq. Specific due dates for these reports have been established, and NetRadio is required to disclose in this 10-K any failure of a reporting person to file a required report by the applicable due date during 2000. Based in its review of the reports and written representations submitted to it, NetRadio believes that each Reporting Person timely filed all required reports during this period, except that an initial statement of beneficial ownership of securities on Form 3 was not timely filed by Mr. Holderman.

Summary Compensation. The following table sets forth the cash and noncash compensation for fiscal years 2000, 1999 and 1998 earned by or awarded to the Chief Executive Officer, Chief Financial Officer and Chief Technical Officer (the “Named Executive Officers”). No other executive officers received salary and bonus in excess of $100,000 during 2000:

Option Grants. The following table summarizes options granted during the year ended December 31, 2000 to the Named Executive Officers:

Option Values. The following table summarizes the value of options held at December 31, 2000 by the Named Executive Officers. No options held by such executive officers were exercised during 2000.

Under rules established by the SEC, the Company is required to provide certain data and information in regard to the compensation and benefits provided to the Company’s Chief Executive Officer and other executive officers (collectively, the “Executive Officers”). The SEC rules require the Compensation Committee of the Board of Directors to issue a report explaining the rationale and considerations that led to fundamental executive compensation decisions affecting the Executive Officers. In fulfillment of this requirement, the Compensation Committee of the Board of Directors (the “Committee”), at the direction of the Board of Directors, has furnished the following report on executive compensation:

The Committee is responsible for setting salaries for officers and for granting incentive awards and stock-based compensation to the Company’s executive officers, including the Chief Executive Officer, on behalf of the Board of Directors and the shareholders. The Committee also oversees the operation of the Company’s executive compensation benefits.

The Committee consists entirely of outside directors of the Company. During 2000 Messrs. Caparro, Kalman and McCaffery served on the Committee. Mr. McCaffery is Chairman of the Committee.

The Company is committed to attracting, hiring and retaining an experienced management team that can successfully develop and manufacture the Company’s products in commercial quantities, penetrate target markets, obtain and maintain required regulatory approvals worldwide, and develop new products. With these goals in mind, the Committee closely aligns its compensation plan for executive management to the milestones achieved and the influence that each executive has as the Company grows and matures. The Committee annually reviews and evaluates the Company’s corporate performance, compensation levels and equity ownership of its executive officers. The Committee strives to establish competitive levels of compensation that are consistent with the Company’s annual and long-term performance goals, are appropriate for each officer’s scale of responsibility and performance, recognize individual initiative and achievements, will attract and retain the highest quality personnel possible consistent with the Company’s resources, and provide an incentive to such executives to focus on the Company’s long-term strategic goals by aligning their financial interests closely with long-term shareholder interests. The Committee intends to make the executive compensation program competitive with the marketplace while emphasizing compensation in the form of equity ownership, the value of which is contingent on the Company’s long-term market performance. It is intended that, in judging appropriate levels of compensation, the Committee will take into account internally set performance goals and comparisons with the performance of a self-selected group of companies with similar business characteristics and strategies.

The Company’s compensation program has three primary components: base salary, short-term incentives and long-term incentives. The ultimate composition of executive compensation reflects the Company’s goals of attracting and retaining highly qualified personnel and supporting a performance-oriented environment that rewards both corporate and personal performance over the long term. In general, stock option grants are used to enhance the competitiveness of compensation packages, to reward exceptional performance and provide incentive for reaching further performance goals. The Compensation Committee also believes that the use of stock options is important to align the interests of the officers with the interests of the shareholders.

The Compensation Committee has access to and meets with independent compensation consultants regarding industry and geographic compensation levels and practices. For 2000, the Compensation Committee used compensation survey (the “Compensation Survey”) data from three peer groups to provide comparative data on the appropriate mix of compensation elements and overall compensation levels. The first peer group included Minnesota companies, the second peer group consisted of Internet professionals and the third peer group consisted of a general industry group. The comparative compensation data was interpolated to most nearly approximate a company with sales and growth assumptions approximately equal to those of the Company in order to make appropriate compensation comparisons.

The Committee establishes annual base salaries after an analysis of each executive officer’s individual performance during the prior year, the overall performance of the Company during the prior year and historical compensation levels within the executive officer group. The Committee believes that executive salaries must be sufficiently competitive to attract and retain key individuals. In this regard, salaries for officers are based on experience levels and are intended to be competitive with median salaries paid to comparable executives in similar positions in the Compensation Survey. By augmenting base salary with equity-based compensation, the Company seeks to continue to attract and retain quality management personnel. Annual increases in base salaries for existing officers are generally consistent with the merit increase formula used throughout the Company. The Company grants annual merit increases to all employees in the range of 0-10% based on performance. Larger increases are given, as appropriate, to reflect changes in job responsibility and authority or to internally balance the salary structure among the executive officer group.

The Committee believes that executive compensation should be based in part on the achievement of milestones that are important to the short-term success of the Company. Accordingly, the Committee periodically sets short-term milestones and then compares the Company’s progress against these targets. Members of the executive team, along with all Company employees, are periodically granted options to purchase shares of the Common Stock with vesting tied to the achievement of specified operating and personal objectives. The number of options granted with these vesting provisions is determined based on the individual’s experience and position within the Company.

The Committee believes that long-term shareholder interests and executive compensation should be closely aligned. The Committee believes that stock ownership by management and stock-based performance compensation arrangements are beneficial in aligning management’s and shareholders’ interests in enhancing shareholder value. Stock options are generally granted to executive officers at the time they are elected. In determining the number of options to be granted at such time, the Committee takes into consideration job responsibilities, experience and contributions of the individual and recommendations of the President. The stock options give the holder the right to purchase shares of the Common Stock over a ten-year period. Because the options are granted at the fair market value on the date of grant, they will provide value only when the price of the Common Stock increases above the share price on the date of the grant. Options are also subject to vesting provisions designed to encourage executives to remain employed by the Company. Additional options are granted from time to time based on individual performance, increased job responsibilities and the prior level of grants.

The determination of the Chief Executive Officer’s salary, bonus and grants of stock options followed the policies set forth above for all executives’ compensation. During 2000, Mr. Tomechko was chief executive officer until September 30, 2000 and his compensation for that period was based upon the terms of his employment agreement with the Company. Effective as of the resignation of Mr. Tomechko, Mr. Paulson assumed the role of interim chief executive officer. Mr. Paulson is chairman of the board and chief executive officer of Navarre Corporation, NetRadio’s largest shareholder, and is chairman of the board of NetRadio. The Committee and Mr. Paulson agreed that Mr. Paulson would not receive any compensation for serving as interim chief executive officer, but would continue to receive compensation as an outside director.

Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), generally limits the corporate deduction for compensation paid to executive officers to $1.0 million, unless the compensation qualifies as “performance-based compensation” under the Code. Section 162(m) did not affect the deductibility of compensation paid to the Company’s executive officers in 1999 and will not affect the deductibility of such compensation expected to be paid in 2000. The Committee will continue to monitor this matter and may propose changes to the executive compensation program if warranted.

Employment Contracts And Termination Of Employment And Change-In-Control Agreements

On August 23, 2000 NetRadio entered into an employment agreement with Michael Wise to act as Chief Financial Officer for a two year term commencing August 1, 2000. Mr. Wise’s agreement provides for an annual base salary of $145,000, a guaranteed bonus of $35,000 for 2000 and a grant of 125,000 incentive stock options in 2000, which vest over a three year period. Under the terms of this agreement, Mr. Wise is eligible for bonus compensation after 2000 pursuant to the terms of NetRadio’s Executive Compensation Plan. In the event that Mr. Wise’s employment is terminated by NetRadio without cause or he terminates his employment with NetRadio under certain circumstances, Mr. Wise is entitled to receive his salary , bonus (in at least the amount that he received in the year preceding termination) and other benefits for the remainder of the term of his employment agreement, any commissions Mr. Wise would have been paid during the remainder of the term of his employment agreement, any accrued but unpaid vacation and any unpaid expense reimbursement and all unvested stock options and restricted stock will become immediately vested. In the event that Mr. Wise’s employment is terminated for any reason following a change in control, Mr. Wise is entitled to receive his salary and bonus (in at least the amount that he received in the year preceding termination) for the remainder of the term of his employment agreement, any accrued but unpaid vacation and any unpaid expense reimbursement and all unvested stock options and restricted stock will become immediately vested.

On August 23, 2000 NetRadio entered into an employment agreement with Richard Hailey to act as Chief Technology Officer for a two year term commencing August 1, 2000. Mr. Hailey’s agreement provides for an annual base salary of $175,000, a guaranteed bonus of $35,000 for 2000, a grant of 125,000 incentive stock options in 2000, which vest over a three year period and a grant of 50,000 shares of restricted stock which vest on the second anniversary of the date of grant. Under the terms of this agreement, Mr. Hailey is eligible for bonus compensation after 2000 pursuant to the terms of NetRadio’s Executive Compensation Plan. In the event that Mr. Hailey’s employment is terminated by NetRadio without cause or he terminates his employment with NetRadio under certain circumstances, Mr. Hailey is entitled to receive his salary , bonus (in at least the amount that he received in the year preceding termination) and other benefits for the remainder of the term of his employment agreement, any commissions Mr. Hailey would have been paid during the remainder of the term of his employment agreement, any accrued but unpaid vacation and any unpaid expense reimbursement and all unvested stock options and restricted stock will become immediately vested. In the event that Mr. Hailey’s employment is terminated for any reason following a change in control, Mr. Wise is entitled to receive his salary and bonus (in at least the amount that he received in the year preceding termination) for the remainder of the term of his employment agreement, , any accrued but unpaid vacation and any unpaid expense reimbursement and all unvested stock options and restricted stock will become immediately vested.

On January 11, 1999, NetRadio entered into an employment agreement with Mr. Tomechko for the period from January 11, 1999 through January 10, 2002. Mr. Tomechko resigned from NetRadio on September 30, 2000. Mr. Tomechko’s agreement provided for annual base salary of $200,000 and the

opportunity to receive an annual performance bonus of up to 60% of his base salary if NetRadio achieves certain operating. In connection with his initial employment with NetRadio and his relocation to Minnesota, NetRadio advanced Mr. Tomechko $62,500 pursuant to a promissory note, which NetRadio forgave in 2001. The note bears interest at an annual rate of 7.75% beginning December 1999 and matures in December 2001.

On August 1, 1998, NetRadio entered into an employment agreement with Mr. Pederson for the period from August 1, 1998 through July 31, 2000. This agreement provided annual base salary of $140,000 and the opportunity to receive an annual performance bonus of up to 40% of his base salary, if NetRadio achieved certain operating objectives. This agreement also provided for accelerated vesting of Mr. Pederson’s options in the event that the employment agreement was not renewed.

In addition, the exercisability of options granted to executive officers is accelerated in the event of a “change in control” over the Company (as such term is defined in the stock option agreements entered into by the executive officers).

Messrs. Caparro, Kalman and McCaffery served as members of our Compensation Committee during 1999. Mr. McCaffery is Chief Executive Officer of ValueVision.

ValueVision has engaged in certain transactions with the Company, as described in Item 13 below.

The graph below sets forth a comparison of the cumulative shareholder return of NetRadio common stock with the cumulative total return of the Nasdaq Stock Market–U.S. Index and the Hambricht & Quist Internet Index from October 14, 1999 (the date of the initial public offering of NetRadio common stock) to December 31, 2000. The graph assumes the investment of $100 in the common stock on October 14, 1999, and in each of the indices on September 30, 1999, and that dividends, if any, were reinvested.

The following table sets forth certain information regarding beneficial ownership of the Common Stock, as of March 1, 2000, by: (i) each person who is known by the Company to beneficially own more than 5% of the Common Stock, (ii) each of the Company’s directors, (iii) each of the Named Executive Officers and (iv) all directors and executive officers of the Company as a group. Unless otherwise noted below, the address of each of the following shareholders is the same as the Company.


(1)	Beneficial ownership is determined in accordance with rules of the SEC, and includes voting power and/or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days of March 1, 2000 are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, the Company believes that the persons named in this table, based on information provided by such persons, have sole voting and investment power with respect to the shares of Common Stock indicated.

(2)	Disclosure is made in reliance upon a Schedule 13G filed with the SEC by Navarre on January 28, 2000. Such Schedule 13G indicates that Navarre has the sole voting and investment power with respect to such shares.

(3)	Disclosure is made in reliance upon a Schedule 13G filed with the SEC by ValueVision on February 14, 2000. Such Schedule 13G indicates that ValueVision has the sole voting and investment power with respect to such shares.

(4)	Includes 13,000 shares of Common Stock held by Mr. Paulson’s spouse, for which shares Mr. Paulson disclaims beneficial ownership. Does not include 5,000,000 shares held by Navarre for which Mr. Paulson disclaims beneficial ownership. Mr. Paulson is Chairman of the Board and Chief Executive Officer of Navarre and holds approximately 10% of the outstanding shares of Navarre.

(5)	Includes the following number of shares of Common Stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days: Mr. Paulson: 18,000 shares;


	Mr. Caparro: 4,000 shares; Mr. Cheney: 12,000 shares; Mr. Kalman: 4,000 shares; Mr. Wise: 33,334 shares; Mr. Hailey: 16,667 shares; and Mr. Tomechko: 200,000 shares.


(6)	Does not include 5,000,000 shares held by Navarre for which Mr. Cheney disclaims beneficial ownership. Mr. Cheney is Vice Chairman, Executive Vice President and Chief Strategic Officer of Navarre.

(7)	Does not include 1,432,500 shares held by Value Vision for which Mr. McCaffery disclaims beneficial ownership.

(8)	Includes 88,001 shares of common stock issuable upon the exercise of options that are currently exercisable or will become exercisable within 60 days.

Under the terms of the stock purchase agreement by and among NetRadio, ValueVision and Navarre, and based upon our total number of directors, ValueVision has the right to elect the number of directors equal to its proportionate share of ownership of NetRadio, rounded up to the next whole number. ValueVision currently has the right to elect one directors of NetRadio.

ValueVision also has registration rights with respect to its shares of our common stock, including the right to have 550,000 shares registered for resale one year from the closing of our initial public offering, and the right to have its remaining shares registered two years from the closing of our initial public offering. ValueVision also has the right to have its shares included in other registration statements filed by NetRadio.

In addition, under the terms of the March 1997 stock purchase agreement, if NetRadio has revenues, other than from product sales, of at least $3,000,000 in any rolling consecutive four quarter period, NetRadio has a one-time option for a 12-month period to require ValueVision to purchase 4.95% of the outstanding shares of common stock of NetRadio for $500,000. ValueVision similarly has the right during this period to purchase 4.95% of the outstanding common stock of NetRadio for $500,000. In connection with the initial offering, NetRadio and ValueVision have terminated this right in exchange for ValueVision’s purchase of 550,000 shares of common stock immediately prior to the closing of our initial public offering for $500,000.

Fulfillment Agreement. In December 1998, we entered into a five year fulfillment agreement with Navarre, under which we are required to fulfill our customer purchase orders for identified products from Navarre before any other fulfillment source may be utilized. The fulfillment agreement governs order procedures, product returns, shipping procedures, payments and price lists. The fulfillment agreement may be terminated by either party if, among other things, we discontinue online sales of pre-recorded music or Navarre discontinues fulfillment services to online customers. The amount paid by us for these services for the year ended December 31, 2000, was $26,269. We believe the terms of this agreement are at least as favorable as we could obtain from an unrelated third party. As of mid March 2001, we have discontinued fulfilling customer purchase orders under this agreement.

Separation Agreement. In March 1999, we entered into a separation agreement with Navarre to be effective upon the closing of our initial public offering. Under the separation agreement, Navarre and NetRadio separated the accounting, finance, human resources and other administrative functions of NetRadio and Navarre in the 45-day period following the closing of our initial public offering. NetRadio paid Navarre $7,500 for services provided during the transition period. In addition, concurrent with the closing of our initial public offering, Navarre contributed to the capital of NetRadio $5,234,840 of principal indebtedness owed by NetRadio to Navarre. In exchange for this contribution, we have granted Navarre registration rights with respect to 600,000 shares of our common stock owned by Navarre. These registration rights are exercisable beginning six months after the closing of our initial public offering. Navarre and NetRadio have also agreed that for a period of four years from the date of the closing of our initial public offering, Navarre will not directly or indirectly engage in the Internet broadcasting of music and information or online retail sales of entertainment-related products in substantially the same manner

and format as currently conducted by NetRadio. We have indemnification obligations to Navarre and its affiliates under the separation agreement, including indemnification for liability arising out of statements made in connection with our initial public offering. Except for the contractual obligations set forth in the separation agreement or other intercompany agreements, Navarre and NetRadio have agreed to discharge all claims they may have against each other existing before the closing of this offering. In connection with the execution of the separation agreement, NetRadio and Navarre entered into a term note. In March 2001, we restructured our term note of approximately $9.6 million owing to Navarre. Under the terms of the restructuring, Navarre forgave $5.5 million of the principal amount in exchange for a $1 million prepayment by NetRadio. In addition, Navarre extended the maturity date of the term note from November 14, 2001 to March 31, 2002. The term note with Navarre bears interest at Midwest prime plus one half-percentage point (9% as of March 1, 2001) and is payable monthly. After giving effect to this restructuring, the principal balance of the term note with Navarre is currently approximately $3.1 million.

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

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

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

NetRadio filed a Report of Form 8-K dated October 2, 2000 in connection with the resignation of Edward Tomechko.

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

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Eric H. Paulson and Michael P. Wise, with full power to each to act without the other, his or her true and lawful attorney-in-fact and agent with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of NetRadio Corporation (the “Company”) for the Company’s year ended December 31, 2000, and any or all amendments to said Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and to file the same with such other authorities as necessary, granting unto each such attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each such attorney-in-fact and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.

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

We have audited the accompanying balance sheets of NetRadio Corporation as of December 31, 2000 and 1999, and the related statements of operations, shareholders’ equity (deficit) and cash flows for each of the three years ended December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NetRadio Corporation at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

NetRadio Corporation (“the Company”) is a media company that is the leading online distributor of originally programmed audio entertainment over the Internet through its website, NetRadio.com. The Company provides more than 100 channels of music and information, 24 hours a day, seven days a week. Visitors to the site can access music, news and information within the Company’s 16 music genres. Approximately two million unique guests visit NetRadio.com several times per month.

The Company provides its advertisers and marketing partners with the ability to reach focused segments of users defined by specific demographic and lifestyle characteristics. The Company allows advertisers to utilize the combined strength of audio messaging with banner advertising.

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

Short-term investments consist of U.S. Government obligations and corporate debt securities with maturities of less than one year. Management determines the appropriate classification of debt and equity securities at the time of purchase and reevaluates such designation as of each balance sheet date. Management has classified the debt securities as available for sale. Available for sale securities are carried at fair value with the unrealized gains and losses, net of tax, reported as a separate component of shareholder’s equity. At December 31, 2000 the fair value of the Company’s investments approximates cost.

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

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

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

The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases for operating losses and tax credit carryforwards.

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

The Company’s revenues are derived from the sale of audio merchandise at its online store and Web site banner and video and audio advertisements. Product sales, including shipping and handling, are recognized in the period that the merchandise is shipped to the customer. Advertising revenues are recognized in the period in which the advertisement is displayed, provided that no significant Company obligations remain and collection of the resulting receivable is probable.

The Company recognized revenues and expenses related to barter advertising transactions totaling $156,000, $245,000 and $-0- for the years ended December 31, 2000, 1999 and 1998.

Shipping and handling costs related to the compact disc fulfillment services are included in cost of goods sold.

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

Advertising expenses are capitalized during the production phase of specific commercials or campaigns and charged to operations at the time the campaign is initially presented to the audience. In addition, television advertising time contributed by ValueVision International, Inc. is charged to operations as the advertising time is used. Advertising expenses, were $3,400,364, $2,510,313 and $262,820 for the years ended December 31, 2000, 1999 and 1998.

Goodwill is amortized on the straight-line method over the estimated useful life of three years and was fully amortized at December 31, 2000. Accumulated amortization at December 31, 1999 was $420,250.

Basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities, while diluted earnings per share gives effect to dilutive potential common shares. Diluted and basic earnings per share are the same in the periods presented as the effect of outstanding options and warrants is antidilutive.

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

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

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

In March 2001, the Company and Navarre amended the term note. Under the amendment, the Company made a prepayment of $1 million, $5.5 million of the balance due was forgiven with the remaining balance of approximately $3.1 million due on March 31, 2002.

Interest paid on the Company’s note payable and capital leases was $971,562, $97,048 and $23,442 for the year ended December 31, 2000, 1999 and 1998.

Other current assets consist of 20 pre-set channels on RealNetworks, Inc.’s (“RealNetworks”) RealPlayer and promotional space on RealNetworks’ home page that the Company acquired in May 1999 in exchange for cash and advertising of RealNetworks on the Company’s Web site. The Company acquired the one-year right to the pre-set channels for $760,000 payable in four quarterly payments. RealNetworks is also obligated, for one year, to promote the Company twice per month on RealNetworks’ home page in exchange for $250,000 in RealNetworks advertising on the Company’s Web site. These assets are being amortized over one year.

The note receivable consisted of an advance to an officer which was payable on demand. The note incurred interest at 7.75% per year. During 2000, this note was forgiven.

At December 31, 2000, the Company had net operating loss carryforwards of approximately $34,385,000. These carryforwards are available to offset future taxable income, expire beginning in 2011, and are subject to the limitations of Internal Revenue Code Section 382 resulting from changes in ownership.

The Board of Directors adopted, and the shareholders approved the NetRadio Corporation 1998 Stock Option and Incentive Plan (the “1998 Stock Option Plan”) pursuant to which officers, employees, consultants, independent contractors and non-employee directors are eligible to receive options to purchase shares of NetRadio common stock, stock appreciation rights and awards of deferred or restricted stock. A total of 2,000,000 shares of common stock may be issued under the 1998 Stock Option Plan with vesting periods of up to five years and maximum option terms of ten years.

The weighted average fair value of options granted in 2000, 1999 and 1998 was $1.01, $3.95 and $1.37, respectively. The exercise price of options outstanding at December 31, 2000 ranged from $.22 to $11.00 per share. The number of options exercisable at December 31, 2000, 1999 and 1998 was 615,820, 78,717 and 117,333, respectively, with a weighted average exercise price of $3.38, $10.86 and $2.27 and a remaining contractual life of 4.0, 6.0 and 6.5 years, respectively.

Pro forma information regarding net loss and loss per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of Statement 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, risk-free interest rate of 5.0%, 4.7% and 4.7%, respectively, volatility factor of the expected market price of the Company’s Common stock of .70 and a weighted average expected life of the option of five years.

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

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

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

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

In August 2000, the Company recognized $22,990 in expense associated with extending the exercise period of options granted to two terminated employees.

Also in August 2000, the Company issued a restricted stock grant of 50,000 shares of common stock to an employee. The $90,500 value of the grant is being amortized to expense over the twenty-four month vesting period.

In August 2000, the Company issued 19,337 shares of company stock to a non-employee. The fair value of the stock was determined to be $35,000, which was expensed during 2000.

The Company is obligated under operating and capital leases for office space and office equipment. Future annual minimum lease payments under leases in effect at December 31, 2000 are as follows:

Rent expense under operating leases was $242,973, $239,954 and $134,491, for the years ended December 31, 2000, 1999 and 1998.

The Company sponsors a retirement savings plan for all employees who have completed one year of continuous service. The retirement savings plan is a 401(k) plan under which eligible employees are allowed to contribute a maximum of 20% of their earnings on a tax-deferred basis subject to Internal Revenue Code maximum limitations. The Company made no matching contributions for the years ended December 31, 2000, 1999 and 1998.


PART I
PART II
PART III
PART IV
SIGNATURES
NetRadio Corporation
Report of Independent Auditors
Balance Sheets
Statements of Operations
Statement of Shareholders’ Equity
NetRadio Corporation
Statements of Cash Flows
Notes to Financial Statements
Consent of Independent Auditors
Cautionary Statement Re. Forwarding-Looking Stmt.






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




10025 Valley View Road, Suite 190 Eden Prairie, Minnesota		55344
(Address of Principal Executive Offices)		(Zip Code)



	Price Range of
	Common Stock
	1999 and 2000

	High		Low

Fourth Quarter, 1999	$	14.00	$	6.63




First Quarter, 2000	$	9.00	$	4.13




Second Quarter, 2000	$	4.75	$	1.88




Third Quarter, 2000	$	5.00	$	1.38




Fourth Quarter, 2000	$	1.50	$	0.16



			NetRadio Nevada									NetRadio

						Period from			Period from
						January 1,			March 21,
			Year Ended			1997 through			1997 through			Year Ended			Year Ended			Year Ended
			December 31,			March 20,			December 31,			December 31,			December 31,			December 31,
			1996			1997			1997			1998			1999			2000


			(Dollars in thousands, except per share data)




Statement of Operations Data:




Net Revenues:




	Product Sales		$	—		$	—		$	—		$	50		$	684		$	706




	Internet Advertising			—			—			—			205			765			1,361




	Miscellaneous			321			168			163			—			—			—

		Total Net Revenues	$	321		$	168		$	163		$	255		$	1,449		$	2,067




	Loss from Operations			(2,260	)		(737	)		(1,955	)		(3,925	)		(14,249	)		(16,707	)




	Net Loss		$	(2,254	)	$	(754	)	$	(1,987	)	$	(3,977	)	$	(14,998	)	$	(16,344	)




	Loss per share — basic and diluted											$	(0.67	)	$	(2.21	)	$	(1.63	)




	Weighted average shares outstanding (1)												5,899,167			6,787,995			10,038,453



	December 31,

	1996			1997			1998			1999		2000


	(Dollars in thousands)




Balance Sheet Data:




Cash, cash equivalents and short term investments	$	91		$	4		$	51		$	29,567	$	11,523




Working capital (deficit)		(828	)		(930	)		(176	)		26,860		471




Total assets		223			2,395			2,740			33,781		16,343




Long term obligations, less current portion		486			1,389			5,363			9,686		—




Total shareholders’ equity (deficit)		(537	)		13			(3,830	)		19,968		3,715

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BLUES Blues Blues Revival Chicago Blues Rockin’ Blues BROADWAY/MOVIES Showtunes Soundtracks CHRISTIAN/GOSPEL Christian Hits CLASSICAL Baroque and Before Chamber Chant Maestro Opera Piano Quiet Classics Symphony COMEDY Comedy Central Radio Dot Comedy COUNTRY 60s Country 70s Country 80s Country Alternative Country Bluegrass Route 1 Country ELECTRONICA/DANCE Ambient Big Beat/Breaks Club Mix DJ Mix Drum ‘n’ Bass Dub Electric Electronica Hardcore Techno House Industrial Starstreams	ELECTRONICA/DANCE (Continued) Techno Trance Acid Trip Hop FOLK Celtic Folk HOLIDAY Country Holiday Holiday Hits Holiday Pop Jazz Holiday Manheim Steamroller New Age Holiday JAZZ Acid Jazz Big Band Bop Café Jazz Classic Jazz Vocals Jazz Rock Lounge Modern Jazz Vocals Quiet Storm Smooth Jazz Swing KIDS Kidz Hits Kidz News NEW AGE New Age POP 80s Hits Adult Alternative Big Ballad 50s British Invasion Disco Hits Groovin 70s Hits Lite Hits	POP (Continued) Fab 60s Party Hits Power Hits Pre-Fab 60s Rhythmic Hits Rockin’ Rhythm 50s Showtunes Teen Scene R&B Smooth Urban Hits Solid Gold Soul RAP/HIP HOP Hip Hop Rap ROCK Adult Alternative Hard Rock Progressive Rock Psychedelic Punk Ska The X Vintage Rock Woodstock 69 WORLD Alternative Latino Earthbeat Latino Mix Reggae Romance Latino Tropical NEWS AND INFO Classical Notes Country Music News Hits Music News Jazz Notes Music Industry News NetRadio Today Today in Rock


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


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


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


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


Name	Age		Position

Eric H. Paulson		52	Interim Chief Executive Officer, President and Chairman




Michael P. Wise		43	Vice President and Chief Financial Officer




Richard W. Hailey		44	Chief Technology Officer




Steven F. Holderman		42	Executive Vice President of Sales, Marketing and Business Development



				Annual Compensation				Restricted		Long-term
		Fiscal						Stock		Compensation		All Other
Name and Principal Position		Year		Salary		Bonus		Awards($)		Options (# Shares)		Compensation

Eric H. Paulson			2000		—		—		—		—	$	2,000
	Interim Chief Executive Officer and chairman of the Board (1)




Michael P. Wise			2000	$	135,684	$	35,000				125,000
	Chief financial Officer (2)		1999		98,558		29,400				50,000




Richard W. Hailey			2000		151,000		35,500	$	90,500		125,000
	Chief Technical Officer (3)		1999		56,455		22,500				50,000




Edward A. Tomechko			2000		153,846		—						329,833
	Former Chief Executive Officer (4)		1999		175,865		20,000				125,000
			1998		46,846		—				75,000




Donovan W. Pederson			2000		102,308		—		—		—		—
	Former Chief Operating Officer (5)		1999		123,846		23,300		—		—		—
			1998		88,656		—		—		175,000		—


(1)	Mr. Paulson has served as Chairman of the Board since May 1996 and began serving as our interim Chief Executive Officer on September 30, 2000. All other compensation consists of director’s fees. Mr. Paulson has elected not to receive a salary for his services as interim chief executive officer.

(2)	Mr. Wise has served as our Chief Financial Officer since March 15, 1999.

(3)	Mr. Hailey has served as our Chief Technical Officer since July 26, 1999. The valuation of restricted stock is based on the closing price of the common stock on August 23, 2000 the date of grant of $1.81.

(4)	Mr. Tomechko resigned as our Chief Executive Officer on September 30, 2000. All other compensation consists of $329,833 in severance accrued by the Company in 2000 in contemplation of the severance owing in connection with the resignation of Mr. Tomechko, of which $62,140 was paid in 2000.

(5)	Mr. Pederson’s employment agreement expired on July 31, 2000 and was not renewed.



										Potential Realizable Value
										at Assumed Annual Rates
			% of Total							of Stock Price
			Options							Appreciated for Option
			Granted to			Exercise				Term (1)
	Options		Employees			Price Per		Expiration
	Granted (2)		in 2000 (3)			Share (4)		Date		5%		10%

Eric H. Paulson		—		—			—		—		—		—




Michael P. Wise		125,000		22	%	$	1.81		8/23/2006	$	62,500	$	138,125




Richard W. Hailey		125,000		22	%	$	1.81		8/23/2006	$	62,500	$	138,125




Edward A. Tomechko		—		—			—		—		—		—




Donovan W. Pederson		—		—			—		—		—		—


(1)	The compounding assumes a ten year exercise period for all option grants. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by rules of the SEC and do not represent the Company’s estimate or projection of the Company’s future Common Stock prices. These amounts represent certain assumed rates of appreciation only. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock and overall stock market conditions. The amounts reflected in this table may not necessarily be achieved.

(2)	Each option represents the right to purchase one share of Common Stock. The options shown in this column were granted pursuant to the 1998 Stock Option and Incentive Plan. To the extent not already exercisable, the options become exercisable in the event of a “change in control” (as defined in the stock option agreement) involving the Company.

(3)	In 2000 the Company granted employees options to purchase an aggregate of 566,100 shares of Common Stock.

(4)	The exercise price may be paid in cash, in shares of Common Stock with a market value as of the date of exercise equal to the option price or a combination of cash and shares of Common Stock.


	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


	TRANSITION REPORT UNDER SECTION 13 OR 15(d)


	Gene McCaffery, Chair
	James Caparro
	Mark H. Kalman


	NETRADIO		NASDAQ STOCK		JP MORGAN H & Q
	CORPORATION		MARKET (U.S.)		INTERNET

10/14/99		100.00		100.00		100.00
12/99		75.00		144.92		188.89
12/00		1.71		87.21		72.68



					Value of Unexercised
	Number of Unexercised Options				In-the-Money Options
	at December 31, 2000				at December 31, 2000 (1)

Name	Exercisable		Unexercisable		Exercisable		Unexercisable

Eric H. Paulson		18,000		36,000	$	—	$	—




Michael P. Wise		16,667		158,333	$	—	$	—




Richard W. Hailey		16,667		158,333	$	—	$	—




Edward A. Tomechko		200,000		—	$	—	$	—




Donovan W. Pederson		84,000		—	$	—	$	—


(1)	Value based on the difference between the last sale price of the Common Stock as reported by the Nasdaq National Market on December 31, 2000 and the option exercise price per share, multiplied by the number of shares subject to the in-the-money options.


*	$100 INVESTED ON 10/14/99 IN STOCK OR INDEX — INCLUDING REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


		Shares		Percentage of
		Beneficially		Outstanding
		Owned (1)		Shares Owned (1)

Navarre Corporation (2)			5,000,000		49.85	%
	7400 49th Avenue, North New Hope, Minnesota 55428




Value Vision International, Inc. (3)			1,432,500		14.28	%
	6740 Shady Oak Road Eden Prairie, Minnesota 55344-3433




Eric Paulson (4)(5)			72,000		*




James Caparro (5)			6,000		*




Charles E. Cheney (5)(6)			36,000		*




Marc H. Kalman (5)			4,000		*




Gene McCaffery (7)			—		*




Michael P. Wise (5)			33,334		*




Richard W. Hailey (5)			68,667		*




Edward A. Tomechko (5)			200,000		1.95	%




Donovan W. Pederson			101,000		1.00	%




All current executive officers and directors as a group (11 persons) (8)			264,000		2.61	%


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


Exhibit
No.		Description

	3.1	Articles of Incorporation, as amended (1)
	3.2	Bylaws of the Registrant (1)
	4.1	Specimen of Common Stock Certificate (1)
	4.3	Form of Warrant to Purchase 125,000 Shares of Common Stock, dated October 19, 1999, issued to Gerard Klauer Mattison & Co., Inc. (1)
	4.4	Form of Warrant to Purchase 75,000 Shares of Common Stock, dated October 19, 1999 to First Union Securities, Inc. (1)
	10.1	Employment Agreement, dated as of August 1, 1998 between NetRadio Corporation and Edward A. Tomechko (1)
	10.2	Promissory Note, dated December 1, 1998 between NetRadio Corporation and Edward Tomechko (1)
	10.3	Employment Agreement, dated as of August 1, 1998 between NetRadio Corporation and Donavan W. Pederson (1)
	10.4	Agreement and Plan of Reorganization, dated March 7, 1997, by and among NetRadio Nevada, Navarre and NetRadio Corporation (2)
	10.5	Stock Purchase Agreement, dated as of March 7, 1997, by and among ValueVision, NetRadio, Navarre and NetRadio Nevada (2)


(1)	Incorporated by reference to the Registrant’s previously filed Form S-1 Registration Statement No. 333-73261

(2)	Incorporated by reference to the Form 10-K of Navarre Corporation for the fiscal year ended, March 31, 1997

(3)	Incorporated by reference to the Form 10-Q for the quarter ended August 30, 2000 of the Registrant

(4)	Incorporated by reference to the Form 10-K of Navarre Corporation for the fiscal year ended March 31, 2000

(5)	Incorporated by reference to the Form 10-K of the Registrant for the year ended December 31, 1999

(b)	Reports on Form 8-K.


Name	Title		Date

By /s/ ERIC H. PAULSON Eric H. Paulson	Interim Chief Executive Officer Chairman of the Board (Principal Executive Officer)			March 26, 2001

By /s/ MICHAEL P. WISE Michael P. Wise	Chief Financial Officer (Principal Financial and Accounting Officer)			March 26, 2001

By /s/ JAMES CAPARRO James Caparro		Director		March 27, 2001

By /s/ CHARLES E. CHENEY Charles E. Cheney		Director		March 25, 2001

By /s/ MARC H. KALMAN Marc H. Kalman		Director		March 27, 2001

By /s/ GENE MCCAFFERY Gene McCaffery		Director		March 27, 2001






Report of Independent Auditors			F-1

Audited Financial Statements




Balance Sheets			F-2




Statements of Operations			F-3




Statement of Shareholders’ Equity			F-4




Statements of Cash Flows			F-5




Notes to Financial Statements			F-6



			December 31

			2000			1999

Assets




Current assets:




	Cash and cash equivalents		$	82,943		$	11,721,536




	Short term investments			11,440,356			17,845,905




	Accounts receivable, less allowance for doubtful accounts of $20,458 at December 31, 2000 and $55,000 at December 31, 1999			291,692			146,863




	Prepaid advertising			833,873			802,793




	Prepaid expenses			98,948			97,420




	Other current assets			350,667			372,220

Total current assets				13,098,479			30,986,737




Property and equipment, net				3,075,455			2,626,227




Patents and trademarks, net				48,553			—




Note receivable — officer				—			62,141




Goodwill				—			106,000




Other assets				120,254			—

Total assets			$	16,342,741		$	33,781,105

Liabilities and shareholders’ equity




Current liabilities:




	Accounts payable		$	1,791,671		$	3,157,622




	Accrued expenses			1,149,681			853,436




	Note payable			9,596,827			—




	Current maturities of capital lease obligations			89,630			115,223

Total current liabilities				12,627,809			4,126,281




Note payable				—			9,596,827




Capital lease obligations, less current portion				—			89,630




Shareholders’ equity (deficit):




	Common stock, no par value:




		Authorized shares — 50,000,000 Issued and outstanding shares — 10,081,037 and 10,007,900 at December 31, 2000 and 1999, respectively		41,092,133			40,930,243




	Deferred compensation			(71,646	)		—




	Accumulated deficit			(37,305,555	)		(20,961,876	)

Total shareholders’ equity				3,714,932			19,968,367

Total liabilities and shareholders’ equity			$	16,342,741		$	33,781,105



		Year Ended December 31,

		2000			1999			1998

Net revenues:




	Internet advertising	$	1,360,723		$	764,712		$	205,423




	Product sales		706,360			684,144			49,639

Total net revenues			2,067,083			1,448,856			255,062




Costs and operating expenses:




	Cost of product sales		650,087			645,625			64,825




	Operations and technical support		9,332,825			7,368,185			1,635,160




	Sales and marketing		5,869,271			4,430,063			273,426




	General and administrative		2,921,746			3,253,668			2,234,451

Total operating expenses			18,773,929			15,697,541			4,207,862

Loss from operations			(16,706,846	)		(14,248,685	)		(3,952,800	)




Other income and expense:




	Interest income		(1,334,729	)		(107,941	)		—




	Interest expense		971,562			857,466			23,883

Net loss		$	(16,343,679	)	$	(14,998,210	)	$	(3,976,683	)

Loss per share — basic and diluted		$	(1.63	)	$	(2.21	)	$	(.67	)

Weighted average shares outstanding			10,038,453			6,787,995			5,899,167



		Common Stock
						Deferred			Retained
		Shares		Amount		Compensation			Earnings			Total

Balance, December 31, 1997			11,765	$	2,000,000	$	—		$	(1,986,983	)	$	13,017




	Stock split		5,870,735		—		—			—			—




	Stock issued		40,000		65,600		—			—			65,600




	Stock option compensation		—		20,500		—			—			20,500




	Notes forgiven by shareholders		—		48,050		—			—			48,050




	Net loss		—		—		—			(3,976,683	)		(3,976,683	)

Balance, December 31, 1998			5,922,500		2,134,150		—			(5,963,666	)		(3,829,516	)




	Stock issued in initial public offering, net of offering costs of $1,353,432		3,750,000		31,882,788		—			—			31,882,788




	Conversion of debt to common stock		—		5,234,840		—			—			5,234,840




	Stock option compensation		—		1,113,625		—			—			1,113,625




	Stock options exercised		335,400		564,840		—			—			564,840




	Net loss		—		—		—			(14,998,210	)		(14,998,210	)

Balance, December 31, 1999			10,007,900		40,930,243		—			(20,961,876	)		19,968,367




	Stock option compensation		—		22,990		—			—			22,990




	Stock options exercised		3,800		13,400		—			—			13,400




	Stock issued for services		19,337		35,000		—			—			35,000




	Issuance of restricted stock		50,000		90,500		(90,500	)		—			—




	Amortization of deferred compensation		—		—		18,854			—			18,854




	Net loss		—		—		—			(16,343,679	)		(16,343,679	)

Balance, December 31, 2000			10,081,037	$	41,092,133	$	(71,646	)	$	(37,305,555	)	$


										Weighted
		Shares								Average
		Available			Plan Options			Non-Plan		Exercise
		for Grant			Outstanding			Options		Price

Balance on December 31, 1997			—			—			—	$	—




	Shares reserved		1,475,000			—			—		—




	Granted		(939,500	)		939,500			—		2.27

Balance on December 31, 1998			535,500			939,500			—		2.27




	Shares reserved		525,000			—			—




	Granted		(453,850	)		453,850			—		7.06




	Forfeited		65,600			(65,600	)		—		3.87




	Exercised		—			(335,400	)		—		1.68

Balance on December 31, 1999			672,250			992,350			—		4.45




	Granted		(436,100	)		436,100			150,000		1.83




	Restricted stock grant		(50,000	)		—			—		—




	Forfeited		163,950			(163,950	)		—		5.51




	Exercised		—			(3,800	)		—		3.53

Balance on December 31, 2000			350,100			1,260,700			150,000	$	3.20


	Operating		Capital

2001	$	144,060	$	96,600




2002		148,633		—




2003		150,920		—




2004		150,920		—




2005		50,307		—

Total minimum lease payments	$	644,840		96,600

Less amount representing interest				6,970

Present value of minimum capitalized lease payments			$	89,630


	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter

2000




Net revenues	$	564,822		$	616,237		$	456,435		$	429,589




Operating expenses		5,000,942			4,851,650			5,008,149			3,913,188




Net loss		(4,295,840	)		(4,143,272	)		(4,383,671	)		(3,520,896	)




Loss per share — basic and diluted	$	(0.43	)	$	(0.41	)	$	(0.44	)	$	(.35	)




1999




Net revenues	$	171,799		$	233,866		$	374,074		$	669,117




Operating expenses		2,800,138			2,499,709			4,302,872			6,094,822




Net loss		(2,640,316	)		(2,568,022	)		(4,216,848	)		(5,573,024	)




Loss per share — basic and diluted	$	(.45	)	$	(.43	)	$	(.71	)	$	(.60	)