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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2003


Commission File Number: 0-29583




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Loudeye Corp.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 91-1908833                              
|(State or other jurisdiction
    of incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

1130 Rainier Avenue South, Seattle, WA
98144

(Address of principal executive
offices)    (Zip Code)


206-832-4000

(Registrants telephone number, including
area code)




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Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:


Common Stock, $0.001 Par Value Per
Share




---

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not 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.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2)     Yes o          No þ

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$33,337,055 as of June 30, 2003, based upon the closing
sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

Indicate the number of shares outstanding of each
of the issuers classes of common stock, as of the latest
practicable date.

|        |  |                                       
|------- |  | --------------------------------------
|Common  |  | 67,852,142                            
|(Class) |  | (Outstanding at February 29,
    2004)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
relating to the registrants 2004 Annual Meeting are
incorporated by reference into Part III of this Annual Report on
Form 10-K where indicated.



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LOUDEYE CORP.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2003


TABLE OF CONTENTS

|              |  |                                                                                                                |    |        |    | 
|------------- |  | -------------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|              |  |                                                                                                                |    | Page  
|              |  |                                                                                                                |    | Number
|              |  |                                                                                                                |    |       
|PART I       
|Item 1        |  | Business                                                                                                       |    |        | 1  | 
|Item 2        |  | Properties                                                                                                     |    |        | 13 | 
|Item 3        |  | Legal Proceedings                                                                                              |    |        | 13 | 
|Item 4        |  | Submission of Matters to a
    Vote of Security Holders                                                        |    |        | 14 | 
|PART II      
|Item 5        |  | Market for Registrants
    Common Equity and Related Stockholder Matters                                      |    |        | 15 | 
|Item 6        |  | Selected Consolidated
    Financial Data                                                                       |    |        | 15 | 
|Item 7        |  | Managements Discussion
    and Analysis of Financial Condition and
    Results of Operations and Risk Factors |    |        | 17 | 
|Item 7A       |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                 |    |        | 47 | 
|Item 8        |  | Financial Statements and
    Supplementary Data                                                                |    |        | 49 | 
|Item 9        |  | Changes in and Disagreements
    with Accountants on Accounting and
    Financial Disclosure                   |    |        | 86 | 
|Item 9A       |  | Controls and Procedures                                                                                        |    |        | 86 | 
|PART III     
|Item 10       |  | Directors and Executive
    Officers of the Registrant                                                         |    |        | 87 | 
|Item 11       |  | Executive Compensation                                                                                         |    |        | 87 | 
|Item 12       |  | Security Ownership of
    Certain Beneficial Owners and Management                                             |    |        | 87 | 
|Item 13       |  | Certain Relationships and
    Related Transactions                                                             |    |        | 87 | 
|Item 14       |  | Principal Accountant Fees
    and Services                                                                     |    |        | 87 | 
|PART IV      
|Item 15       |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                           |    |        | 87 | 
|Exhibit Index |  |                                                                                                                | 88 |       
|EXHIBIT 10.10
|EXHIBIT 10.15
|EXHIBIT 10.23
|EXHIBIT 10.24
|EXHIBIT 14.1 
|EXHIBIT 21.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 





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PART I






|       |         
|------ | --------
|Item I | Business

Forward Looking Statements

Except for the historical information contained
in this Annual Report on Form 10-K, the matters discussed
herein, including, but not limited to Managements
Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of Part II hereof, and
statements regarding regulatory approvals, operating results and
capital requirements, are forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, Section 21E of the Securities Exchange
Act of 1934, as amended, and the Private Securities Litigation
Reform Act of 1995, and are made under the safe harbor
provisions thereof. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
expect, plan, anticipate,
believe, estimate, predict,
potential or continue, the negative of
terms like these or other comparable terminology. These
forward-looking statements are only predictions and actual
events or results may differ materially from those projected.
Specific factors that could cause actual results to differ
materially from those projected include, but are not limited to,
uncertainties related to our new product offerings;
uncertainties related to the effectiveness of our technology and
the development of our products and services; dependence on and
management of existing and future corporate relationships;
dependence on licensed content and technology; dependence on
proprietary technology and uncertainty of patent protection;
management of growth; history of operating losses; future
capital needs and uncertainty of additional funding; dependence
on key personnel; intense competition and probable new entrants;
existing government regulations and changes in, or the failure
to comply with, government regulations, and other risks detailed
below, including the Risk Factors in Item 7 of Part II
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and those included
from time to time in the Companys other reports with the
SEC and press releases, copies of which are available from the
Company upon request. All forward-looking statements included in
this document are based on information available to us on the
date hereof, and we assume no obligation to publicly release any
revisions of the forward-looking statements contained herein to
reflect events or circumstances after the date hereof. Readers
are cautioned not to place undue reliance on these
forward-looking statements, as our business and financial
performance are subject to substantial risks and uncertainties.

Overview

We are an innovative business-to-business
provider of services that facilitate the distribution and
promotion of digital media content to media & entertainment,
retail and enterprise customers. Our services enable our
customers to outsource the management and distribution of audio
and video digital media content over the Internet and on other
digital distribution platforms. Our technical infrastructure and
back-end solutions, combined with our proprietary applications,
comprise an end-to-end solution, from basic digital media
services, such as the hosting, storage, encoding, management and
protection of media assets for content owners, to complex,
fully-outsourced digital media distribution and promotional
services, such as private-labeled digital music download stores
and streaming Internet radio and music sample services. Our
solutions reduce the complexity and cost of internal solutions,
and enable our customers to provide branded digital media
offerings to their users while supporting a variety of digital
media technologies and consumer business models.

Some of our customers include Amazon.com, America
Online, Apple Computer, BuyMusic, The Coca-Cola Company, Digital
Music Initiative, Dreamworks Records, EMI Recorded Music
Holdings, Microsoft Corporation, Siebel Systems, Sirius
Corporation and Yahoo!.

The use of the Internet as a medium for media
distribution has continued to evolve and grow in recent years.
Traditional media & entertainment companies, such as major
record labels, have in recent years faced significant challenges
associated with the digital distribution of music. However,
these companies have recently begun to license some of the
rights to their digital music content for distribution and sale
online on a subscription or individual track or album basis.
Additionally, retailers and advertisers have begun to use digital

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media to aid in the marketing and selling of
their products. As such, traditional distribution channels for
media have expanded as content owners have begun to license and
distribute their content online through new and existing
partners, and consumers have begun to purchase and consume
content using personal computers and other digital devices. In
addition, traditional media formats have expanded to include a
variety of digital technologies, rich media formats and digital
rights management solutions.


We developed our solutions to address the new
methods of media distribution, promotion and content management
that have emerged over recent years. Our digital media services
enable digital distribution of media via the Internet and other
emerging technologies. These services encompass a variety of
related services and provide the major components needed to
address the management and delivery of digital media, from
content management to content distribution, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Advanced application services.Our software applications enable our
    customers to outsource to us the complete requirements to run a
    digital media service over the Internet directed to end users or
    end consumers. We develop and provide proprietary Internet and
    wireless software applications to publish and manage digital
    media for the end users of our customers. The applications
    support private label user interfaces and customized templates.
    We can host the applications on behalf of the customer, and the
    customers deployment of these applications are designed to
    have the look, feel and branding of the customers existing
    products and website. The application platform and services
    support integration to a customers website, inventory, and
    commerce and billing systems. We offer such application services
    as the Loudeye Digital MusicStoreTM,
    iRadioTM, music sample and webcasting services;
|
| |  | Digital media storage and access.Our proprietary systems and technology
    enable the scalable archiving, retrieval and processing of large
    inventories of digital media. Digitized masters of the media
    assets are stored on our high capacity storage array systems and
    accessed via our proprietary, automated, web-based access tools
    to search, deliver and manage such content;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Digital media distribution.Digitally formatted content can be
    distributed to end users on behalf of our customers via
    streaming or download services. Our solution can support full
    tracking and reporting of such end user activity for purposes
    such as royalty settlement or direct marketing. Our scalable
    network infrastructure can deliver to large numbers of end-users
    with high levels of reliability;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Traditional source media ingest and capture.Source content is captured live via
    our extensive signal ingress capabilities, including satellite
    downlinks, video fiber, frame relay, ISDN, automated
    telephony-to-IP switches and teleconferencing equipment, as well
    as on-demand via processing of archived source audio and video
    in a wide range of legacy and digital formats; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Media processing services.Media assets are processed into the
    digital media formats of our customers specifications via
    our proprietary encoding and transcoding systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

To support these solutions, we have obtained
licenses and cultivated relationships with the five major record
labels and hundreds of independent record labels. The target
customers for our digital music services include media &
entertainment companies, such as media portals, broadcasters,
major record labels and advertisers, traditional and
Internet-based retailers, wireless companies and consumer
electronics manufacturers.

We also offer highly scalable live and
on-demand audio and video webcasting services,
supported by proprietary applications and an advanced
Internet-protocol based digital broadcast center based in
Seattle. The target customers for these solutions include media
& entertainment companies, as well as large and medium-sized
enterprises across a range of industries. Webcasting services
are often sold in arrangements that include a continuing
on-demand archival component that enables the
customer access to its content after an event has been webcast.

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Our capabilities include a robust production and
rich media delivery infrastructure, featuring significant
capacity to manage customer requirements and a flexible and
extensible platform to enable tailored solutions and serve a
diverse range of market opportunities. Our solutions offer
customers the following key benefits:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | End-to-end outsourced solutions reduce complexity
    and cost of in-house implementations;      
|
| |  | High degree of flexibility enables tailored
    customer solutions;                              
|
| |  | Scalable systems and network infrastructure
    provide significant capacity and reliability; and
|
| |  | Strategic relationships facilitate authorized
    digital media strategies.                      

In January 2004, we sold our media restoration
services business to a company controlled by the general manager
of those operations. We will continue to sell, for a fee, media
restoration services on behalf of the purchaser for a two-year
period, but this is no longer a material part of our business.

Our shares trade through the Nasdaq SmallCap
Market under the symbol LOUD. Our address is
1130 Rainier Avenue South, Seattle, WA 98144 and our
telephone number is (206) 832-4000. Our Internet site is
located at www.loudeye.com. We make available through our
website free of charge all of our annual reports on
Form 10-K, quarterly reports on Form  10-Q, current
reports on Form 8-K and amendments to those reports filed
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after we
file them electronically with, or furnish them to, the SEC. The
information found on our website is not part of this annual
report.

Industry Background

The digital media industry encompasses many
sectors, software and technologies. Companies operating in the
digital media industry focus on developing and deploying
innovative technologies to perform, promote and distribute audio
and video content over the Internet and over other
digitally-enabled channels such as personal computers,
televisions, mobile phones and other portable devices.

In 2003, digital media continued to grow as a
broad-based tool for communications, online media promotions and
the distribution of content, particularly in the media,
entertainment and corporate sectors. This growth has been driven
in large part by an increase in broadband adoption and
significant improvements in streaming technologies capable of
delivering high quality content in smaller file sizes. A
critical trend in these technology and streaming format
enhancements is a marked increase in ease of use and
effectiveness of streaming media, including, in some cases,
instant-on access to streaming content without buffering. At the
same time, content owners such as major media companies, film
studios and record labels are providing more content in a
digital format to capitalize on these opportunities.

The digital media industry underwent significant
changes in 2003, and is rapidly adapting to satisfy the growing
consumer and business demand for digital media products and
services. Key trends in the industry over the past year have
included:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing consumer broadband connectivity.The estimated number of consumers with
    a broadband Internet connection will reach approximately 30
    million by the end of 2004, according to a 2003 report by
    Forrester Research. Jupiter Research concludes that a larger
    Internet audience using broadband connections will combine to
    shift nearly $2 billion in music spending to online
    distribution in the next five years.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Wide proliferation of digital music
    technologies and devices.Digital
    media is no longer confined to personal computers. For example,
    in 2003 there was a significant increase in the number of
    portable digital music players, as well as an increase in the
    usage of digital music on other mobile devices. Jupiter Research
    predicts up to a 50% growth in the United States MP3 player
    market for the next three years, reaching an estimated install
    base of approximately 26 million players by 2006. Research
    group IDC predicts that the U.S. ringtone market will grow to
    more than $1.0 billion by 2007, and that approximately
    1.5 million ringtones are purchased on the Internet each
    month in North America. Music subscription services are also
    expected to attract approximately 2.0 million subscribers
    and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | account for approximately $125 million, or
    10%, of music sales by 2007, according to Forrester Research.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Major record labels begin licensing digital
    media content.Music companies have
    faced a three-year decline in new CD sales, which they blame
    largely on illegal file swapping and other illegitimate means of
    copying and transferring copyrighted music. To create a legal
    means to meet the strong consumer demand for digital music, and
    to compensate for lost revenue as a result of peer-to-peer file
    sharing, the music industry has generally supported the launch
    of new music stores and services by licensing their catalogs for
    digital distribution.
|
| |  | Consumer migration from illegal file sharing
    to legitimate music downloads.There
    are indications that illegal file sharing is declining due to
    factors including:                                                                                                                                                                                                                                                                                                                                                                                                                       



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased pressure from the Recording Industry
    Association of America (RIAA), including litigation directed at
    individual file traders;
|
| |  | Corrupted files and other viruses embedded in
    files found on peer-to-peer networks;                                                        
|
| |  | Declining pre-pressed CD prices; and                                                                                                           
|
| |  | The introduction of legitimate digital music
    stores.                                                                                       

For example, Nielsen SoundScan concluded that for
the last three months of 2003, CD sales increased 5.6% and
overall music sales, including singles and online downloads,
increased 10.5% from the year-ago period. Forrester Research has
predicted that downloads will generate approximately $2.1
billion by 2007 and account for approximately 33% of music sales
the following year.

These shifts in the industry present market
opportunities for us, as our turnkey product offerings address
the technical challenges our partners face in launching their
own music store or service to distribute digital music content
to end-users.

Challenges in Digital Media
Distribution

To manage and distribute digital media, companies
may develop internally the core competencies required to develop
and deploy digital media content, or they may outsource these
responsibilities to a third party. The core competencies
required to manage and distribute digital media content include:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application and business model support to enhance
    the audio and video experience, track and report usage, monetize
    and protect content, and manage customer service;
|
| |  | Scalable and reliable hosting and network
    distribution;                                                                                                                 
|
| |  | High quality encoding and third-party digital
    media technology support;                                                                                                 
|
| |  | Digital media archive management; and                                                                                                                                       
|
| |  | Source media and metadata capture.                                                                                                                                          

Metadata provides descriptive data to the
consumer such as, in the case of music titles, artist
information, track level data, title name, and cover art.
Metadata may also include additional information that can be
used to facilitate transactions or establish marketing
relationships, such as links to online sale sites or opt-ins for
email marketing campaigns. In addition, metadata is important to
facilitating the administration of tracking and reporting
required in many licensing arrangements with copyright holders.

It may be difficult or cost-prohibitive for
providers and distributors of digital media content to develop,
manage, and maintain these core competencies on an ongoing
basis, as such companies may lack the internal resources or time
to develop the expertise necessary to address these problems
without disrupting their core business activities.

In addition to the technical challenges, digital
media distributors may encounter a number of difficulties in
obtaining copyright licenses from content owners. For example, a
company may obtain a copyright license

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that enables it to distribute certain digital
media content  but only in one particular area (such
as reproduction and performance, wireless delivery or
subscription based programming, to the exclusion of others).
Consequently, the company may need to enter into additional
licensing arrangements to use the same content in other areas.
As such rights are often held by different parties, such as
publishers, artists and record labels, the effort to obtain such
rights is often onerous, and may disrupt, delay or prevent the
launch of a wide range of digital music business models.


For content owners, the digital media industry
presents certain additional challenges. Content owners must:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Ensure proper and timely distribution of their
    music catalog to hundreds of music services around the world;                                                                                                                              
|
| |  | Ensure content is protected against unauthorized
    distribution or prohibited use;                                                                                                                                                          
|
| |  | Collect and manage usage reports and associated
    royalty payments for the sale of content; and                                                                                                                                             
|
| |  | Manage sufficient and reliable technology
    resources to distribute content to partners and stay abreast of
    current technological developments that affect their interest
    and revenue potential in the digital distribution channel.

The Loudeye Solution

We support the end-to-end management and delivery
of digital media content for both content owners and downstream
distributors. Our digital media services enable our business
partners to outsource completely the creation, management and
delivery of audio, video and other visual content via the
Internet and other digital distribution platforms. Our solutions
reduce the complexity and cost of internal digital media
solutions, while supporting a variety of digital media
strategies and customer business models.

We believe we have been and remain a pioneer and
industry leader in the rapidly developing digital music market.
Through our new turnkey products, the Digital
MusicStoreTM and iRadio ServiceTM, we have
expanded our signature services to enable our customers to
launch digital music storefronts under their own private brand
names. We also continue to increase the digital music catalog
available to our customers, the size of which we believe is
unparalleled in the industry.

Our digital media solutions offer our customers
the following key benefits:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | End-to-end outsourced solutions reduce
    complexity and cost of in-house
    implementations.Large and
    medium-sized enterprises and content owners that want to encode
    and distribute their video and audio content can do so either
    from their own production capabilities and network servers or
    through third-party service providers. Our services and
    applications provide a comprehensive solution through a single
    outsourced solution. Our solutions reduce complexity and allow
    our customers to avoid the development and ongoing maintenance
    costs of establishing internal capabilities. Our end-to-end
    services address a series of highly complex steps required to
    deploy digital media effectively and reliably to large
    audiences. We deliver high quality and reliable services at a
    lower cost than the development and maintenance of comparable
    internal solutions, enabling our customers to leverage our
    existing and evolving expertise.
|
| |  | Transferable content license
    rights.We have obtained copyright
    licenses for various offerings within our digital music services
    which are transferable to our customers. We can therefore enable
    our customers to avoid the cost and time required to negotiate
    and obtain such licenses for themselves. We have developed
    relationships and signed content licensing agreements with all
    five of the major record labels: UMG Recordings, Inc., Sony
    Music Entertainment, Inc., Warner Music Group, Inc., EMI
    Recorded Music Holdings, Inc. and BMG Music, and hundreds of
    independent record labels, and we continue to develop working
    relationships with other music companies.                                                                                                                                                                                                                                                                                           
|
| |  | Comprehensive digital media services to
    address the marketing and entertainment markets and enterprise
    communication.Customers in a broad
    range of industries are beginning to deploy digital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | media to communicate, market products, and
    distribute media & entertainment. We support the online
    marketing initiatives of our customers through our digital media
    services including our leading music samples services, online
    radio services, advertisement insertion solutions, and music
    download services. In addition, we provide outsourced services
    to support the management and distribution of our
    customers digital media catalogs, including scalable
    encoding and delivery services. Our proprietary suite of
    webcasting and web conferencing applications and services,
    coupled with our scalable network and production infrastructure
    technologies, provide a simple, cost-effective method for
    companies to communicate online with audiences of any size.
    Using our services, enterprises can offer their target audiences
    access to webcasts of a variety of corporate events such as
    product launches, investor earnings calls, conferences and
    distance learning seminars.                                                                                                                                                                                                                                                                                                   
|
| |  | Scalable systems and network infrastructure
    provide significant capacity and
    reliability.Corporations and content
    owners may encounter capacity and technological limitations if
    they attempt to deliver digital media to large numbers of
    end-users using in-house production capabilities and network
    servers. Our solution is highly scalable, allowing us to process
    a large number of simultaneous audio or video events and to
    seamlessly add additional capacity as necessary. We have
    developed proprietary products and services based upon an
    automated and distributed architecture of encoding, conversion
    and media enhancement systems. We have one of the most extensive
    signal ingress capacities in the industry that allows us to
    acquire hundreds of audio and video signals simultaneously.
    Additionally, we can handle a wide range of other traditional
    and legacy media formats. The content is then encoded by
    hundreds of distributed video/audio encoding servers. The
    content can be delivered back to customers in raw digital
    formats through a variety of methods, or hosted and served by
    our proprietary cell-based streaming network architecture. Our
    facilitys design is modular and scalable to accommodate
    growth and changes in technology.
|
| |  | High degree of flexibility enables tailored
    customer solutions.Because our
    customers require flexibility in the formats and manner that
    their digital media is distributed, as well as the manner in
    which their content is captured, we offer a wide range of media
    ingest and capture methods and support a wide range of digital
    media formats and other third party technologies. In addition,
    our hosting services and proprietary applications provide
    additional support to customers, enabling them to access
    advanced reporting and management tools and offer value-added
    services such as digital rights management and ad insertion to
    enable a variety of business models and strategies for our
    customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Products and Services

Our comprehensive digital media products and
services include private-branded digital music stores, such as
our Digital MusicStoreTM and iRadio
ServiceTM, digital music encoding, metadata
licensing, advanced fingerprint database generation, hosted
music sample services, hosted music download services, including
digital rights management license clearing, online radio
solutions and rich media advertisement insertion. The target
customers for our digital media services include traditional and
Internet-based retailers, media & entertainment companies,
including media portals, broadcasters and the major record
labels.

We also provide enhanced enterprise communication
services, which include highly scalable, live and on-demand
audio and video webcasting services supported by proprietary
applications such as synchronized streaming slide presentation
capabilities. Using our services, enterprises can offer small
and large audiences access to webcasts of a variety of corporate
events, such as product launches, investor earnings calls,
conferences and distance learning seminars. Our web conferencing
service enables companies to easily facilitate small online
slide presentation meetings. The target customers for these
solutions include medium and large-sized enterprises across a
range of industries.

Our digital media solutions are offered through
three tiers of service  application services, hosting
and streaming services and encoding services and customers may
choose any combination of these tiers of service. Our services
are priced based on several criteria, including the extent and
volume of infrastructure usage, particularly of network and
storage; the means used to capture the content; the applications
used; and the extent of additional value-added services provided.

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| |                     
| | --------------------
| | Application Services

We have built an application layer of proprietary
products comprising end-to-end solutions. These applications are
deployed on an application services provider (ASP) basis
where the software runs on equipment managed and monitored by
us. Our customers have flexibility and options to choose their
individual level of customization or integration.

The Loudeye Digital MusicStoreTM
provides the components necessary to enable a partner to create,
promote and operate a superior digital music experience under
its own brand name. Digital MusicStore will permit our partners
to give their customers the ability to search, sample, solicit
recommendations, manage, purchase and download legally
CD-quality music tracks, albums and ring tunes to devices of
their choice. Our Digital MusicStore integrates with a
partners existing technology and infrastructure, offering
either a complete storefront or expanding an existing presence.
Key features of Digital MusicStore include:



| |   |                                                   
| | - | --------------------------------------------------
| |  | Web-based, private-branded music discovery client;
|
| |  | Digital music hosting and download delivery;      
|
| |  | Digital rights management using Windows Media DRM;
|
| |  | Usage reporting;                                  
|
| |  | Digital music royalty settlement;                 
|
| |  | Streaming music samples and cover art;            
|
| |  | Music metadata; and                               
|
| |  | Rich media ring tunes (for wireless applications).

The Loudeye iRadio ServiceTM offers
100 channels of CD-quality streaming music delivered through a
partners own privately branded player interface. It is
capable of supporting delivery to a range of consumer music
devices and appliances. The iRadio service can be deployed
online for web-based retailers and portals, as well as offline
for consumer electronic devices and appliances, digital home
entertainment systems and other digital broadcasting outlets.
Key features in the first release of iRadio include:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | 24x7 music programming in compliance with the
    Digital Millennium Copyright Act;          
|
| |  | Web-based, private-branded music discovery client;                                           
|
| |  | 100 channels of pre-programmed or customizable
    (by artist or genre) CD quality music; and
|
| |  | Support for delivery to PCs and consumer
    electronics products.                           

We have additional proprietary applications that
support a variety of business models and customer strategies.
Our advertisement insertion solutions support dynamic content
insertion that enable digital media advertising and marketing
campaigns and our digital download platform includes rights
management clearing. These applications enable customers to
promote, manage, and monetize their digital media offerings.



| |                                   
| | ----------------------------------
| | Hosting and Streaming
    Services

Our hosting services allow digital media content
to be packaged and converted into a variety of streaming media
and digital download formats via our encoding services. We can
also host this content in a central media repository.

We provide comprehensive webcasting solutions
that enable enterprises to broadcast audio, video and visually
oriented communications over the Internet. Our proprietary suite
of webcast applications and services, coupled with our scalable
network and production infrastructure technologies, provide a
simple, cost-effective way for corporations to communicate
online with large groups. We provide our services to large and
medium sized enterprises as well as traditional media and
broadcast companies.

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We provide our customers with the infrastructure
and service components necessary to deploy a streaming media
offering as part of an Internet or intranet presence. Our
enterprise clients use this offering to augment and support
their existing business initiatives. We also provide streaming
services for audio and video conferencing, distance learning,
corporate or departmental meetings, presentations, conferences,
roadshows and other investor relations offerings. Our webcasting
services include both live events and on-demand streaming
services.

Our web broadcasting capabilities allow customers
to extend significantly the reach of traditional conferencing
services or live events to enable one-to-many communications to
be broadcast conveniently and economically to the widest
possible audience. Companies are able to leverage the creation
of content over a mass medium, reduce communication costs,
maintain brand identity through a controlled user experience,
and in many instances, generate additional revenue streams from
the distribution of content to previously untapped audiences and
markets.

We also provide customers with access to our
samples services, which is a hosted end-to-end streaming service
that delivers high quality music samples to customers in the
online music business. Our music samples are streaming files
containing selected portions or samples of a full
music track. For all musical genres except classical and jazz,
the music samples are generally 30 seconds in duration. For
classical and jazz music tracks, the music samples are typically
60 seconds in duration. Music samples are used by customers for
many purposes, including increasing online music sales, user
traffic and customer retention.



| |                  
| | -----------------
| | Encoding Services

To transmit digital media over the Internet and
other advanced digital distribution networks, the uncompressed
digitized content needs to be encoded into compressed,
Internet-compatible digital formats. Encoding large volumes of
content in an efficient manner is a complex process that
requires highly scalable production technology. In addition, it
is at the encoding stage that metadata is at times merged with
the encoded file from a centralized database, which adds to the
complexity of the encoding process. Various digital encoding
formats and technologies continue to evolve and often conflict
with one another. As a result, content owners often desire to
create multiple versions of their digital content in multiple
formats to support their distribution strategies. Additionally,
the encoding process for a particular item (or for an entire
library) may need to be repeated over time to keep pace with the
introduction of new formats and the changing preferences of
online users.

Our innovative services address these challenges
via the outsourced management and encoding of our
customers content. Typical digital media service projects
can involve conversion of tens of thousands of music titles or
thousands of hours of video content into encoded content of
multiple formats and bit rates. Once content has been encoded,
we can provide watermarking, encryption and other digital rights
management technologies to enable our customers to protect and
manage their content. A file created from the source materials
containing specified database and attribute data relating to a
particular piece of content can then be linked to that content
as part of the overall encoding process. We also provide project
analysis, as well as consulting, integration and custom
application development.

Loudeyes Content Catalog

Our digital music archive includes nearly
4.5 million full song tracks and includes metadata
associated with the music files. In 2003, we delivered
approximately 14.0 million digital music files and served
nearly a billion song samples to consumers through major online
music retailers and websites, such as America Online,
Amazon.com, barnesandnoble.com, CDNow, Yahoo!, House of Blues,
Windowsmedia.com and MSN. We offer the service primarily under
long-term contracts.

Anti-Piracy and Peer-to-Peer Promotional
Tools

In March 2004 we acquired Overpeer, Inc., a
provider of digital media anti-piracy, data mining and
promotional solutions on peer-to-peer (p2p) networks worldwide.
Overpeer holds multiple patents in Asia and Europe, and has
three patents pending in the U.S. for its proprietary
technology, systems and software.

8



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With the inclusion of Overpeers
technologies into our comprehensive package of digital media
solutions, we now provide our content owners with the following
additional benefits:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | Powerful data mining and analytical tools and
    comprehensive information on digital music, video, game and
    software usage;        
|
| |  | Potent anti-piracy solutions to disrupt the
    illegal sharing of copyrighted material; and                                             
|
| |  | Targeted promotional services for companies to
    capitalize on previously untapped revenue streams across content
    sharing networks.

Sales and Marketing

We sell our services through a combination of
direct and indirect sales, with all channels and regional
offices managed by a single sales organization. Our digital
media services direct sales force markets our services to
customers in a diverse range of markets, such as media &
entertainment, retail, computer software, business services,
financial services, pharmaceutical and manufacturing. We
currently have a sales presence in Seattle, Washington and Los
Angeles, California. Sales employees are compensated with a
salary and commission based upon business with existing and new
clients.

Our indirect sales group targets resellers who
market to their established customer bases. We private label or
co-brand our services for these partners depending on their
requirements. We also partner with companies to resell our
services through their websites, or through co-branded websites,
or to include our services with their product offerings. We
offer our reseller partners our services at a discount to our
traditional retail pricing model and our referral partners
receive a percentage of revenue pursuant to terms of the
agreements.

Our marketing objectives are to build awareness
for our brand among key market segments and to maintain a
position as a leading full-service digital media service
provider. To support these objectives, we utilize public
relations, trade shows, advertising and direct marketing.

As of February 15, 2004, we had nine
full-time employees in our sales and marketing organization, all
of whom were located in the United States.

Operations and Technology

We manage all aspects of our digital media
products including encoding, content preparation, digital rights
management, license verification, reporting and royalty
payments, hosting and distribution to the Internet, and digital
music licensing from our Grand Central media
operations center in Seattle, Washington.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital music storage and access.Our proprietary systems and
    technologies enable the scalable archiving, retrieval and
    processing of large inventories of digital music. Digitized
    content is stored on our high capacity storage array systems and
    accessed through our proprietary, automated web-based access
    tools to search, provision and manage such content. Once
    captured and digitized in uncompressed format, content can be
    stored on our digital music archive system for later uses.
|
| |  | Music processing services.We process music to customer
    specifications using our proprietary production systems. The
    production system is an automated, scalable combination of
    hardware and software consisting of advanced digital archive
    technology, proprietary file management systems, customized user
    interfaces and a highly distributed encoding system. Metadata is
    also used to track and report information required by many
    licensing arrangements with copyright holders.           



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We encode customer content in a parallel process
    and we have developed proprietary processes which allow us to
    encode audio and video content across several streaming media
    and download formats simultaneously. Our parallel process
    supports multiple codecs and technologies from third party
    developers such as Microsoft, RealNetworks, Audible Magic and
    others. This format flexibility enables customers to support a
    variety of digital music strategies. Because these formats and
    platforms

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | continue to evolve, we believe that the benefits
    of our multiple platform approach will remain applicable as new
    technologies emerge. Encoded files are reviewed for quality and
    then delivered to the customer as a collection of files or
    routed automatically to our hosting services for direct delivery
    as a hosted stream or available download, over the Internet and
    through the Loudeye Digital MusicStore.



| |   |                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital music distribution.Digitally formatted content can be
    delivered to customers through a range of methods, from secured
    file delivery to a fully hosted streaming or download service
    published and streamed through our network infrastructure and
    the Loudeye Digital MusicStore.

We have invested in a network distribution
infrastructure built around a scalable, redundant,
cell-based network architecture. Depending on the
music format and the bit rate, we are able to stream and host
simultaneously thousands of outbound streams and music
downloads. We can expand our capacity by adding additional
servers within cells. This network is backed by high-capacity
online storage that uses mirroring and other techniques to
increase redundancy and scalability. Our hosting and
distribution operation includes hundreds of servers and supports
load balancing and other network management techniques that have
been optimized for digital music downloads. We can also serve
content across networks of other providers if we exceed our
capacity or if we are requested to do so.

Our operations and production personnel are
organized into functional teams which include project
management, quality control, logistics operations, data
measurement, audio capture and encoding, video capture and
encoding, and production systems engineering support. In
addition, we have a team that supports our network and hosting
services. As of February 15, 2004 we had six full-time
employees in engineering, network services and information
technology support and 32 full-time employees in our production
and research and development areas.

Customers

The target customers for our digital music
products include major consumer electronics companies,
traditional and Internet-based retailers, media &
entertainment companies, wireless carriers and branded consumer
products companies. In 2003, we served over 500 customers. Our
customers include Amazon.com, America Online, Apple Computer,
BuyMusic, The Coca-Cola Company, Digital Music Initiative,
Dreamworks Records, EMI Recorded Music Holdings, Microsoft
Corporation, Siebel Systems, Sirius Corporation and Yahoo!.In 2003, Microsoft Corporation and The Coca-Cola Company
accounted for 5% and 11% of our revenues. In 2002, Microsoft
Corporation and The Coca-Cola Company accounted for 10% and 13%
of our revenues. In 2001, The Coca-Cola Company accounted for
17% of our revenues.

Competition

The market for digital media solutions is rapidly
evolving and intensely competitive. We expect competition to
persist and intensify in the future. Although we do not
currently compete against any one entity with respect to all
aspects of our services, we do compete with various companies
and technologies in regards to specific elements of our
services. In addition, we face competition from in-house
solutions.

For our digital music solutions, we compete with
several companies providing similar levels of outsourced digital
music services including Roxio (through its Napster service),
Liquid Digital, MusicNet, and MusicNow. For encoding services,
we compete with companies including Muze and All Music Guide. In
addition, well-capitalized, diversified digital media technology
companies such as Microsoft, Apple and Real Networks may compete
with us in the future with their own services or applications.
In certain markets, such as music distribution, the major record
labels have acquired and invested in digital music services and
technologies that could compete with our digital music services.
Traditional radio broadcasters could also develop online music
and radio services which could compete with our solutions.

A significant source of competition includes our
potential customers who choose to invest in the resources and
equipment to digitally manage, encode and/or host and deliver
their media themselves on an in-house basis. In-house service is
expected to remain a significant competitor to our services,
although we believe that as digital music strategies expand, and
the scale of infrastructure and applications required to support
business

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strategies increases, companies that currently
manage these processes internally will see a significant
economic advantage to outsourcing.


We believe that the principal competitive factors
in our market include:



| |   |                                             
| | - | --------------------------------------------
| |  | Ability to offer a private branded solution;
|
| |  | Service functionality;                      
|
| |  | Service quality;                            
|
| |  | Service performance;                        
|
| |  | Ease of use of products and services;       
|
| |  | Reliability of services,                    
|
| |  | Scalability of services;                    
|
| |  | Security of services;                       
|
| |  | Breadth of content;                         
|
| |  | Customer service and support; and           
|
| |  | Pricing.                                    

Although we believe that our products and
services compete favorably with respect to each of these
factors, the market for our products and services is new and
evolving rapidly. We may not compete successfully against
current or future competitors, many of which have substantially
more capital, longer operating histories, greater brand
recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These
competitors may also engage in more extensive development of
their technologies, adopt more aggressive pricing policies or
establish more comprehensive marketing and advertising campaigns
than we can. Our competitors may develop products and service
offerings that are more sophisticated than our own. For these
and other reasons, our competitors products and services
may achieve greater acceptance in the marketplace than our own,
limiting our ability to gain market share and customer loyalty
and to generate sufficient revenues to achieve a profitable
level of operations.

Proprietary Rights and Intellectual
Property

We rely primarily on a combination of copyrights,
trademarks, trade secret laws and contractual obligations with
employees and third parties to protect our proprietary rights.
We have one issued patent, and we have filed eight U.S. patent
applications and twelve international patent applications that
claim priority to six previously filed provisional applications.
Our Overpeer subsidiary, acquired in March 2004, holds multiple
patents in Asia and Europe, and has four patents pending in the
U.S. for their proprietary technology, systems and software.
Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain
and use information that we regard as proprietary. In addition,
other parties may breach confidentiality agreements or other
protective contracts we have entered into and we may not be able
to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international
operations in the future and the laws of many foreign countries
do not protect our intellectual property rights to the same
extent as the laws of the United States.

The digital music industry is characterized by
the existence of a large number of patents, licenses and
frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As
discussed above, obtaining the requisite licenses can be
difficult, as separate licenses often must be obtained from a
variety of rights holders for distinct activities related to the
delivery of digital music, such as reproduction and performance,
which requires separate licensing arrangements. In addition,
these copyrights may be held by different parties, such as
publishers, artists and record labels. The music industry in the
United States is generally regarded as highly litigious. As a
result, in the future we may be engaged in litigation with

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others in the music industry, including those
entities with which we have ongoing content license arrangements.


Although we attempt to avoid infringing known
proprietary rights of third parties in our product development
efforts, we may be subject to legal proceedings and claims for
alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights,
by us or our licensees, from time to time in the ordinary course
of business. Any claims relating to the infringement of third
party proprietary rights, even if not meritorious, could result
in costly litigation, divert managements attention and
resources or require us to enter into royalty or license
agreements which are not advantageous to us. In addition,
parties making these claims may be able to obtain an injunction,
which could prevent us from providing our products or services
in the United States or abroad. Any of these results could harm
our business. We may increasingly be subject to infringement
claims if the number of products and competitors in our industry
grow and the functions of products overlap.

Government Regulation

We are not currently subject to direct regulation
by any governmental agency, other than laws and regulations
generally applicable to businesses, although certain U.S. export
controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our
products. Few existing laws or regulations specifically apply to
the Internet. However, it is likely that a number of laws and
regulations may be adopted in the United States and other
countries with respect to the Internet. These laws may relate to
areas such as content issues (such as obscenity, indecency and
defamation), encryption concerns, including export contents,
copyright and other intellectual property rights, caching of
content by server products, electronic authentication or
digital signatures, personal privacy, advertising,
taxation, electronic commerce liability, email, network and
information security and the convergence of traditional
communication services with Internet communications, including
the future availability of broadband transmission capability.
Other countries and political organizations may also impose
regulations, some of which may conflict with U.S. regulation.

The adoption of such laws or regulations, and the
uncertainties associated with their validity and enforcement,
may affect our ability to provide our products and services, may
increase the costs associated with our products and services and
may affect the growth of the Internet generally. These laws or
regulations may therefore harm our business.

We do not know with certainty how existing laws
governing issues such as property ownership, copyright and other
intellectual property issues, taxation, illegal or obscene
content, retransmission of media and personal privacy and data
protection apply to the Internet or to the distribution of music
over the Internet. The vast majority of such laws were adopted
before the advent of the Internet and related technologies and
do not address the unique issues associated with the Internet
and related technologies. Most of the laws that relate to the
Internet have not yet been interpreted. Changes to or the
interpretation of these laws could:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | Limit the growth of the Internet;                                                                                                
|
| |  | Create uncertainty in the marketplace that could
    reduce demand for our products and services;                                
|
| |  | Increase our cost of doing business;                                                                                             
|
| |  | Expose us to significant liabilities associated
    with content distributed or accessed through our products or
    services; or
|
| |  | Lead to increased product and applications
    development costs, or otherwise harm our business.                                

Specifically, with respect to one aspect of
copyright law, on October 28, 1998, the Digital Millennium
Copyright Act, or DMCA, was enacted. The DMCA includes statutory
licenses for the performance of sound recordings and for the
making of recordings to facilitate transmissions. Under these
statutory licenses, depending on our future business activities,
we and our customers may be required to pay licensing fees for
digital sound recordings we deliver or our customers provide on
their web site and through retransmissions of radio broadcasts
and/or other audio content. The DMCA does not specify the rate
and terms of such licenses,

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which will be determined either through voluntary
inter-industry negotiations or arbitration. Moreover, with
respect to digital publishing, sound recording and other music
licenses not directly covered by the DMCA, various parties
interested in distribution of digital music plan to engage in a
proceeding before a tribunal of the United States Copyright
Office along with the RIAA during 2004 to determine what, if
any, licensee fees should be paid to various rights holders.


Depending on the rates and terms adopted for the
statutory licenses, our business could be harmed both by
increasing our own cost of doing business, and by increasing the
cost of doing business for our customers.

Employees

As of February 15, 2004, we had a total of
56 full-time employees, of which 19 were in production, 13 were
in research and development, 9 were in sales and marketing, 6
were in engineering, network services and information technology
support, and 9 were in general and administration. None of our
employees are subject to a collective bargaining agreement. We
consider our relations with our employees to be good.






|       |           
|------ | ----------
|Item 2 | Properties

Following is a summary of our properties and
related lease obligations. We do not own any real property.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1130 Rainier Avenue, Seattle,
    WA.Our principal operations are
    conducted here. We lease 41,763 square feet of this facility.
    The lease expires on December 31, 2005 and annual base rent
    is approximately $823,000 for 2004 and $921,000 for 2005.                                                                                                                                                                                                                                                                                              
|
| | 1601 Cloverfield, Santa Monica,
    CA.We lease offices for our sales
    staff in a shared office space arrangement at this facility. The
    annual rent is approximately $48,000 with a lease term expiring
    November 30, 2004.                                                                                                                                                                                                                                                                                                                          
|
| | 414 Olive Way, Seattle,
    WA.We have a lease obligation for
    39,098 square feet of space at the Times Square Building. The
    current annual rent is $1.1 million with the lease term
    expiring May 31, 2005. We have surrendered the leased
    premises and the landlord has filed suit against us for breach
    of the lease. See Item 3  Legal
    Proceedings for additional information on this suit. An
    estimate of the lease termination settlement and related costs
    is included in accrued special charges at December 31, 2003.
|
| | 1424 Second Street, Santa Monica,
    CA.We lease approximately 4,632
    square feet at an annual base rent of $200,288. We sublease the
    entire premises to a tenant at the full base rent amount. The
    term of the lease and sublease expires on December 31, 2004.                                                                                                                                                                                                                                                                                   
|
| | 110 East 55th Street, New York,
    NY.As a result of our acquisition
    of Overpeer, Inc. in March 2004, we lease approximately 1,500
    square feet at an annual base rent of $60,000. The lease expires
    on April 30, 2004.                                                                                                                                                                                                                                                                                                                            






|       |                  
|------ | -----------------
|Item 3 | Legal Proceedings

Between July 26, 2001 and August 30,
2001, four substantially similar class action complaints were
filed in the United States District Court for the Southern
District of New York against us and certain of our former
officers and directors, as well as against certain underwriters
who handled our March 15, 2000 initial public offering of
common stock. The various complaints were purportedly filed on
behalf of a class of persons who purchased our common stock
during the time period beginning on March 15, 2000 and
ending on December 6, 2000. The complaints together allege
violations of the Securities Act of 1933 and the Securities
Exchange Act of 1934, primarily based on the allegation that
there was undisclosed compensation received by our underwriters
in connection with our initial public offering and the
allegation that the underwriters entered into undisclosed
arrangements with some investors that were designed to distort
and/or inflate the market price for our common stock in the
aftermarket following the initial public offering. These actions
have all been consolidated before the same judge for pretrial
purposes. No specific amount of damages has been claimed. We and
the individual defendants have demanded to be indemnified by the
underwriter defendants pursuant to the underwriting agreement
entered into at the time of the initial public offering.
Presently, all claims against

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the former officers have been withdrawn without
prejudice. We, along with the many other issuer defendants,
moved to dismiss the claims in the complaint. By decision dated
February 19, 2003 the court denied our motion. A proposal
has been made for the settlement and release of claims against
the issuer defendants. The settlement is subject to a number of
conditions, including approval of other proposed settling
parties and the court. If the settlement does not occur, and
litigation against us continues, we believe we have meritorious
defenses and we intend to defend the case vigorously.


On February 3, 2003, we entered into an
agreement with Regent Pacific Management Corporation pursuant to
which Regent Pacific would provide management services. The
agreement was for a term of 26 weeks, with an option to
renegotiate certain terms of the agreement after 13 weeks,
and was terminable by either party under certain circumstances.
Under the agreement, we paid certain fees to Regent Pacific. In
addition, Regent Pacific was to receive stock options to
purchase up to 4,000,000 shares of our common stock based on
Regent Pacifics length of service. These options were to
be granted at various times throughout their engagement at
exercise prices based on the closing market price on each grant
date. On March 7, 2003, Regent Pacific resigned from the
engagement. On July 25, 2003, Regent Pacific filed suit
against us in the United States District Court for the Northern
District of California for breach of the agreement. In this
complaint, Regent Pacific is seeking unspecified damages and
specific performance of our alleged obligation to grant the
stock options due them under the contract. We believe that we
have meritorious defenses to the claims made in the suit, intend
to defend vigorously this suit, and intend to bring certain
counterclaims against Regent Pacific.

On or about January 8, 2003 Dominion Venture
Finance, L.L.C. commenced an action against us and other
defendants in the Superior Court of the State of California,
County of San Francisco. In its complaint, plaintiff alleged
that pursuant to a loan and security agreement and a master
lease agreement (the liabilities for which agreement, plaintiff
alleged, were acquired by us when we merged with an entity known
as DiscoverMusic.com, Inc.), we failed to make certain required
payments to plaintiff. On August 5, 2003, we agreed to
settle all claims under the suit for a cash payment of
approximately $228,000, which represented the outstanding
principal and interest under the agreements.

In April 2003, the landlord of our unoccupied
facility at 414 Olive Way, Seattle, WA filed suit against us in
the Superior Court of Washington, King County, for breach of our
lease and is seeking damages of $2.0 million. In January
2004, the Court entered a judgment in favor of the plaintiff for
rents due through January 2004 of $438,000, which we appealed
immediately. The Court reserved the other issues in the suit,
including mitigation, interest and attorneys fees, for
trial. We believe that we have meritorious defenses to the
claims made in the suit and intend to defend this suit
vigorously and may also bring certain counterclaims against the
landlord. If we do not prevail on our appeal or our
counterclaims, we may be held liable for additional amounts
beyond the amount of the judgment. As of December 31, 2003,
we have recorded in accrued special charges an estimate of the
amount we may ultimately be required to pay with respect to this
matter.

We become involved from time to time in various
other claims and lawsuits incidental to the ordinary course of
our operations, including such matters as contract and lease
disputes and complaints alleging employment discrimination. We
believe that it is likely that the outcome of any such pending
claims or proceedings individually or in the aggregate, will not
have a material adverse effect upon our business or financial
condition, results of operations, or cash flows.






|       |                                                        
|------ | -------------------------------------------------------
|Item 4 | Submission of Matters to a Vote of Security
    Holders

None.

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PART II





|       |                                                                          
|------ | -------------------------------------------------------------------------
|Item 5 | Market for Registrants Common Equity
    and Related Stockholder Matters

The following table sets forth for the periods
indicated the high and low closing prices for our common stock.
These quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not
represent actual transactions.

|                             |  |      |      |     |  |   |      | 
|---------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                             |  | High |      | Low
|                             |  |      |      |    
|Year Ended December 31, 2003 |  |      |      |     |  |   |      | 
|First Quarter 2003           |  | $    | 0.50 |     |  | $ | 0.22 | 
|Second Quarter 2003          |  |      | 1.31 |     |  |   | 0.21 | 
|Third Quarter 2003           |  |      | 2.65 |     |  |   | 0.77 | 
|Fourth Quarter 2003          |  |      | 2.77 |     |  |   | 1.41 | 
|                            
|Year Ended December 31, 2002 |  |      |      |     |  |   |      | 
|First Quarter 2002           |  | $    | 1.10 |     |  | $ | 0.61 | 
|Second Quarter 2002          |  |      | 0.70 |     |  |   | 0.35 | 
|Third Quarter 2002           |  |      | 0.38 |     |  |   | 0.27 | 
|Fourth Quarter 2002          |  |      | 0.49 |     |  |   | 0.30 | 

As of February 15, 2004, there were 476
holders of record of our common stock. Most shares of our common
stock are held by brokers and other institutions on behalf of
shareholders.

We have not paid any cash dividends to date and
do not intend to pay any cash dividends in the foreseeable
future.

Recent Sales of Unregistered
Securities

As discussed in Note 7 to the consolidated
financial statements, in November 2002, we entered into a merger
agreement pursuant to which we acquired TT Holding Corp., also
known as Streampipe. Pursuant to the merger agreement, we issued
the former stockholders of Streampipe shares of our common stock
and unsecured promissory notes bearing interest at
5 percent per annum, in an aggregate original principal
amount of $1,059,435. The notes were redeemable by us in the
form of common stock if we met certain conditions, including
that we were not in default under the notes and our common stock
was listed on a principal exchange or on NASDAQ. In December
2003, we redeemed the notes at a redemption price of $1.76 per
share by issuing 635,386 shares of common stock. The number of
shares was calculated by dividing the principal and all accrued
interest due under the notes as of the date of redemption by the
average of the last sale price of the common shares for the 30
trading days preceding January 1, 2004. The shares issued upon
redemption of the notes were issued in reliance upon the
exemption contained in Section 3(a)(9) of the Securities
Act, since the redemption involved the exchange of securities
with our existing securities holders, and no commission or other
remuneration was paid or given directly or indirectly.

Of the shares of common stock issued upon
redemption of the notes, 624,447 are registered for resale under
the Securities Act on a registration statement on Form S-3
declared effective by the SEC on October 14, 2003. The
remaining 10,939 shares issued upon redemption of the notes have
not been registered under the Securities Act and unless so
registered, may not be sold in the United States, except
pursuant to an applicable exemption from the registration
requirements of the Securities Act and applicable state
securities laws.






|       |                                         
|------ | ----------------------------------------
|Item 6 | Selected Consolidated Financial
    Data

The following selected consolidated financial
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and the notes
thereto included elsewhere in this Form 10-K. The selected
Consolidated Statements of Operations Data for the years ended
December 31, 2003, 2002 and 2001 and Balance Sheet Data as
of December 31,

15



---



##### Table of Contents



2003 and 2002 have been derived from our audited
financial statements appearing elsewhere in this Form 10-K.
The Selected Consolidated Statements of Operations Data for the
years ended December 31, 2000 and 1999 and selected
Consolidated Balance Sheet Data as of December 31, 2001,
2000 and 1999 have been derived from our audited consolidated
financial statements that are not included in the
Form 10-K. The selected Consolidated Balance Sheet Data and
selected Consolidated Statements of Operations Data for each of
the years ended December 31, 2001, 2000 and 1999 have been
derived from consolidated financial statements that were audited
by independent auditors who have ceased operations. The
historical results are not necessarily indicative of results to
be expected for any future period. All amounts are presented in
thousands except for per share amounts.


|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       |        |  
|-------------------------------------------------- | -------------------------------------------- | ------------------------ | ------- | ----- | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ----- | ------ | -
|                                                   |                                              |                         
|                                                   |                                              | Years Ended December 31,
|                                                   |                                              |                         
|                                                   |                                              | 2003                     |         | 2002  |        | 2001 |         | 2000   |        | 1999
|                                                   |                                              |                          |         |       |        |      |         |        |        |     
|Consolidated Statements of Operations
    Data     |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|REVENUES                                           |                                              | $                        | 11,948  |       |        | $    | 12,681  |        |        | $    | 10,388  |        |        | $ | 11,537  |        |        | $ | 2,645   |      
|COST OF REVENUES                                   |                                              |                          | 7,206   |       |        |      | 13,313  |        |        |      | 12,737  |        |        |   | 12,388  |        |        |   | 2,870   |      
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                   |                                              | Gross profit (loss)      |         |       | 4,742  |      |         |        | (632   | )    |         |        | (2,349 | ) |         |        | (851   | ) |         |       | (225   | )
|OPERATING EXPENSES                                 |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                   | Research and development                     |                          |         | 1,688 |        |      |         | 3,159  |        |      |         | 9,719  |        |   |         | 6,784  |        |   |         | 1,248 |       
|                                                   | Sales and marketing                          |                          |         | 3,286 |        |      |         | 7,667  |        |      |         | 9,409  |        |   |         | 14,621 |        |   |         | 3,982 |       
|                                                   | General and administrative                   |                          |         | 7,778 |        |      |         | 11,375 |        |      |         | 11,102 |        |   |         | 8,079  |        |   |         | 3,612 |       
|                                                   | Amortization of intangibles and other assets |                          |         | 1,100 |        |      |         | 3,043  |        |      |         | 8,173  |        |   |         | 7,693  |        |   |         | 302   |       
|                                                   | Stock-based compensation                     |                          |         | 1,298 |        |      |         | (383   | )      |      |         | 359    |        |   |         | 5,409  |        |   |         | 1,554 |       
|                                                   | Special charges(1)                           |                          |         | 8,699 |        |      |         | 6,846  |        |      |         | 37,261 |        |   |         | 947    |        |   |         |      |       
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|                                                   |                                              | Total operating expenses |         |       | 23,849 |      |         |        | 31,707 |      |         |        | 76,023 |   |         |        | 43,533 |   |         |       | 10,698 |  
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|OPERATING LOSS                                     |                                              |                          | (19,107 | )     |        |      | (32,339 | )      |        |      | (78,372 | )      |        |   | (44,384 | )      |        |   | (10,923 | )    
|Increase in fair value of common stock warrants    |                                              |                          | (248    | )     |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |      
|Other, net                                         |                                              |                          | 181     |       |        |      | 1,177   |        |        |      | 1,976   |        |        |   | 4,860   |        |        |   | 21      |      
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|NET LOSS                                           |                                              |                          | (19,174 | )     |        |      | (31,162 | )      |        |      | (76,396 | )      |        |   | (39,524 | )      |        |   | (10,902 | )    
|Beneficial conversion feature                      |                                              |                          |        |       |        |      |        |        |        |      |        |        |        |   |        |        |        |   | (14,121 | )    
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS       |                                              | $                        | (19,174 | )     |        | $    | (31,162 | )      |        | $    | (76,396 | )      |        | $ | (39,524 | )      |        | $ | (25,023 | )    
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Net loss per share  basic and diluted             |                                              | $                        | (0.39   | )     |        | $    | (0.75   | )      |        | $    | (1.84   | )      |        | $ | (1.33   | )      |        | $ | (4.62   | )    
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      
|Weighted average shares  basic and
    diluted(2) |                                              |                          | 49,797  |       |        |      | 41,393  |        |        |      | 41,429  |        |        |   | 29,774  |        |        |   | 5,411   |      
|                                                   |                                              |                          |         |       |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |      

|                                                                        |  |      |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        | 
|----------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------ | 
|                                                                        |  | 2003 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                        |  |      |        |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data                                         |  |      |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        | 
|Cash, cash equivalents, restricted cash, and
    short-term investments |  | $    | 22,256 |      |  | $    | 13,258 |      |  | $    | 60,941 |  |  | $ | 94,989  |  |  | $ | 49,803 | 
|Working capital                                                         |  |      | 16,781 |      |  |      | 7,883  |      |  |      | 55,753 |  |  |   | 90,018  |  |  |   | 44,032 | 
|Total assets                                                            |  |      | 27,044 |      |  |      | 29,529 |      |  |      | 80,883 |  |  |   | 132,676 |  |  |   | 76,775 | 
|Long-term obligations, less current portion                             |  |      | 2,135  |      |  |      | 591    |      |  |      | 22,532 |  |  |   | 7,324   |  |  |   | 1,963  | 
|Total stockholders equity                                              |  |      | 17,033 |      |  |      | 20,352 |      |  |      | 49,194 |  |  |   | 116,068 |  |  |   | 67,489 | 

16



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---



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 4 of Notes to Consolidated
    Financial Statements for an explanation of the special charges.                                                                                          
|   
|(2) | See Note 18 of Notes to Consolidated
    Financial Statements for an explanation of the determination of
    the number of weighted average shares used to compute net loss
    per share amounts






|       |                                                                                          
|------ | -----------------------------------------------------------------------------------------
|Item 7 | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with the Consolidated Financials
Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K. This discussion contains certain
forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from
those discussed here. The cautionary statements made in the
Annual Report on Form 10-K should be read as being
applicable to all forward-looking statements wherever they
appear. Factors that could contribute to such differences
include those discussed in Risk Factors, as well as
those discussed elsewhere herein. We undertake no obligation to
publicly release the result of any revision to these
forward-looking statements that may be required to reflect
events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

Highlights of 2003 Operating Results

The following is an overview of our operating
results for the year ended December 31, 2003. A more
detailed discussion of our operating results, comparing our
operating results for the years ended December 31, 2003,
2002 and 2001, is included below under the heading Results
of Operations.

2003 was a year of significant change for
Loudeye. In the first quarter, we experienced changes in our
senior management and altered our business strategy to focus
more on digital media products and services, with less emphasis
on enterprise communications and media restoration services. By
the end of 2003, revenues from digital media products and
services had not yet increased sufficiently to offset the
decline in enterprise communication and media restoration
services that resulted from this transition. As a result,
revenues decreased from $12.7 million in 2002 to
$11.9 million in 2003.

In addition to our change in business strategy,
we continued to execute those cost reduction initiatives
implemented in 2002, and implemented a number of new cost
reduction initiatives for 2003. These included, among other
things, reductions in our work force and the termination and
renegotiation of several operating leases. These actions
contributed to substantial decreases in expenses. For example,
cost of goods sold decreased from $13.3 million in 2002 to
$7.2 million in 2003 and total operating expenses decreased
from $31.7 million in 2002 to $23.8 million in 2003.
We also recorded special charges related to corporate
restructurings, facilities consolidations and the impairment of
goodwill and tangible and intangible assets of $8.7 million
in 2003 and $6.8 million in 2002. These initiatives are
described in more detail below under the caption Special Charges
and in Note 4 to our consolidated financial statements. We
believe that as a result of these actions and additional
operational and management realignment actions taken in 2003,
gross margins and operating margins should improve for 2004.
However, we may continue to incur net losses for the foreseeable
future.

As a result of the factors described above, our
net loss decreased from $31.2 million in 2002 to
$19.2 million in 2003. We also strengthened our capital
resources by completing a private placement financing
transaction in August 2003 that resulted in net proceeds of
$11.4 million. In February 2004, we completed an additional
private placement financing transaction that resulted in net
proceeds of approximately $18.9 million.

We have recently shifted our strategic focus and
marketing resources more toward our new Tier 3 application level
services. See Business  Products and
Services  Application Services, above, and
The Loudeye Solution, below. Our business prospects
must therefore be considered in light of the risks and
uncertainties often encountered by early-stage companies in the
Internet-related products and services market. We may not be
successful in addressing these risks and uncertainties.

17



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##### Table of Contents



Significant Trends and Developments in our
Industry

The media industry is in the midst of a
significant transition. Business models are changing to
incorporate the migration of media content from analog to
digital and from physical packaging and distribution to
electronic distribution. The changing business models reflect
the increase in consumer adoption of broadband connectivity and
the introduction of new consumer electronics devices, such as
personal MP3 players, and the incorporation of new technologies
and features in traditional devices. Along with the new consumer
electronics devices, media formats and technologies have evolved
at a rapid pace, and standards have not been established by the
industry or marketplace. Finally, the emergence of peer-to-peer
services and illegitimate file sharing, combined with the
increased consumer adoption of digital media, has contributed to
significant declines in physical CD sales in the music sector.
As a result, content owners are beginning to embrace the
legitimate digital distribution channel. To date, these trends
have impacted primarily the music sector of the media industry,
but we anticipate that the video sector will experience many of
the same trends in the future.

Digital media distribution represents a
significant challenge for companies that want to enter or stay
competitive in the space. Problems to overcome include the
following:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Obtain rights from content owners;                                                                                                                             
|
| |  | Obtain access to digital masters of the content;                                                                                                               
|
| |  | Supporting multiple competing digital media
    formats and codecs to meet the needs of competing media players;                                               
|
| |  | Supporting multiple bit rates and quality levels
    for different Internet connection speeds;                                                                 
|
| |  | Supporting multiple content protection
    technologies, including digital rights management (DRM)
    platforms;                                              
|
| |  | Complex reporting and auditing requirements of
    content owners; and                                                                                         
|
| |  | Significant upfront investment to develop a
    comprehensive solution and continued investment to keep pace
    with technology changes and content additions.

The Loudeye Solution

During 2003, we provided our services via two
primary business segments, Digital Media Services and Media
Restoration Services. In January 2004, we sold substantially all
of the assets of our media restoration services subsidiary,
Vidipax, Inc. to a company controlled by the general manager of
that subsidiary. While we will have ongoing rights to co-market
and resell media restoration services for two years after the
sale, we anticipate media restoration services will represent a
significantly smaller portion of our operations for 2004 and
beyond.

Digital Media Services.Our existing products and services,
combined with those we are currently developing, represent and
end-to-end solution for our customers. We provide a full service
business-to-business digital media solution that allows our
customers to deploy, rapidly and cost effectively, their own
privately branded digital media service. Our solution is the
culmination of our significant investments in our systems and
infrastructure. Some of the key features of our solution include:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | Web enabled architecture;                                                                                  
|
| |  | Archive of 4.5 million music tracks in
    uncompressed, digital master format;                            
|
| |  | Highly scalable and reliable operations;                                                                   
|
| |  | Support for multiple media players, digital media
    formats and codecs;                                  
|
| |  | Support for multiple bit rates; and                                                                        
|
| |  | Extensive, transferable content rights and
    experience working with major and independent record labels.

18



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##### Table of Contents



Although our customers may choose any combination
of services we offer, our management views our solutions in
three tiers of service. These tiers are summarized as follows:



|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tier 1: | These services consist primarily of content
    management, encoding and fulfillment, and metadata services.
    Revenues from these services tend to consist of repeat, rather
    than recurring, business. Tier 1 services currently account
    for a substantial portion of our digital media services revenue.
    However, over the next several years we expect the proportion of
    revenues from Tier 1 services to decline relative to
    revenues from Tier 2 and Tier 3 services.



| |                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales of our Tier 1 digital media services are
    generally under nonrefundable time and materials or per unit
    contracts. Under these contracts, we recognize revenues as
    services are rendered and we have no continuing involvement in
    the goods and services delivered, which generally is the date
    the finished media is shipped to the customer.



|        |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tier 2: | These services consist primarily of hosted media
    and delivery as well as rights administration and settlement.
    Revenues from these services tend to consist of recurring
    business and may include some scalable economics. Revenues for
    Tier 2 services may include monthly minimum fees, setup and
    license fees, professional services fees, ongoing maintenance
    fees and a share in our customers revenues.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We sell our music samples service in application
    service provider (ASP) arrangements. We are required to host the
    applications and the customer does not have the ability to have
    the application hosted by another entity without additional
    charge. Billings are generally made based upon volumes of data
    delivered or minutes of content streamed, and revenue is
    recognized as the services are delivered.
|
| | Our enhanced enterprise communication services
    include highly scalable, live and on-demand audio and video
    webcasting services, supported by proprietary applications such
    as synchronized streaming slide presentation capabilities.
    Revenue from live webcasts is recognized when the webcasts are
    delivered. Revenue from on-demand webcasts is recognized over
    the period of time they are made available. 



|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Tier 3: | These services consist primarily of custom
    application development, ASP services, commerce engine,
    analytics and full operational outsourcing. Revenues from
    Tier 3 services will consist of recurring business and may
    include setup and licensing fees, professional services fees,
    ongoing maintenance fees and a share in our customers
    revenues. We expect to launch our first Tier 3 services in
    2004 and expect that over the next several years Tier 3
    services will account for the majority of our revenues.

During 2004, our primary marketing focus will be
on our Tier 3 turnkey, private labeled end-to-end digital
delivery solutions, with comparatively less marketing emphasis
on the Tier 1 and 2 components of our solution,
particularly enterprise webcasting.

Media Restoration Services.Our media restoration services segment
has performed services to restore and migrate legacy media
archives to current media formats. We recognized revenues as
services were rendered and we had no continuing involvement in
the goods and services delivered, which generally was the date
the finished media was shipped to the customer. As described in
Note 5 to the consolidated financial statements, in January
2004 we sold substantially all of the assets of our media
restoration services business pursuant to an agreement dated
October 31, 2003. Accordingly, the assets and certain
liabilities of our media restoration services business have been
classified as held for sale at December 31, 2003 and 2002.

Management Changes and Restructuring

As described below under Special Charges, for the
Year Ended December 31, 2003, we experienced significant
changes in our management during the first quarter of fiscal
2003. In March 2003, we announced our intention to restructure
to reduce costs and to focus our efforts on digital media
services where we anticipated the best customer growth and
higher gross margins. As part of this strategic restructuring,
we announced a reduction in staff affecting approximately 35% of
our workforce. This reduction in staff affected employees in all
departments, but primarily located at our headquarters in
Seattle, Washington.

19



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##### Table of Contents



Since that date, we have retained a highly
experienced management team led by:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Anthony J. Bay, Chairman and Chief
    Strategy Officer:Formerly Corporate
    Vice President and General Manager of Microsofts Digital
    Media Division, Mr. Bay previously managed MSN and
    eCommerce development for Microsoft. Prior to joining Microsoft,
    Mr. Bay served 8 years with Apple Computer in the
    U.S. and Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Jeffrey M. Cavins, President &
    Chief Executive Officer:Formerly
    Senior Vice President of Exodus/ Cable & Wireless where
    he was responsible for North American sales, professional
    services and operations. Mr. Cavins also served as CEO of
    CSI Digital, an advanced technology services firm serving the
    entertainment industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | John H. Martin, Senior Vice President,
    Technology and Development:Formerly
    general manager of Microsofts Windows Media Services,
    Mr. Martin led the development efforts of all
    Internet-based services of the Windows Media Player as well as
    windowsmedia.com, the highest trafficked digital media site on
    the Internet. Mr. Martin pioneered and operated
    microsoft.com in the mid 1990s. Prior to joining
    Microsoft, Mr. Martin was an engineer at NASA working on
    the early Internet backbone.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | William Fasig, Executive Vice President of
    Business Development, Sales and
    Marketing:Formerly senior vice
    president of worldwide marketing and corporate affairs for
    VeriSign, Inc., Mr. Fasig was responsible for the
    development, implementation, and management of worldwide
    marketing strategies. Before joining VeriSign, Mr. Fasig
    served as vice president of corporate communications for Compaq,
    and was chairman and managing director of the global technology
    practice at Young & Rubicam/ Burson-Marsteller. Prior to
    that, he held several senior management roles during his 9-year
    tenure at Apple Computer and served as a policy analyst for the
    U.S. Department of Defense.                                                                                                                                                                                                                                                                                              
|
| |  | Larry Madden, Executive Vice President and
    Chief Financial Officer:Mr. Madden was formerly executive vice president, chief
    financial officer and chief administrative officer for Equity
    Marketing, Inc., a Los Angeles based provider of integrated
    marketing services for connecting multinational corporate brands
    with popular entertainment content. Prior to joining Equity
    Marketing, Mr. Madden was executive vice president and
    chief financial officer for Atomic Pop, an online music
    distribution and marketing venture. He also served as senior
    vice president and chief financial officer for the recorded
    music and music publishing investments of Wasserstein &
    Co., Inc., an investment bank. Mr. Madden also held
    executive financial roles at Def Jam Records and Polygram
    International, a leading music and entertainment company.
    Mr. Madden began his career at Ernst & Young,
    where he spent 8 years in the firms media &
    entertainment practice.
|
| |  | Jerold J. Goade, Jr., Senior Vice
    President of Finance:Mr. Goade
    joined Loudeye in 1999 and has previously held the positions of
    chief financial officer, vice president of finance and
    controller for the Company. Mr. Goades prior
    experience includes serving as CFO of D. Garvey
    Corporation, an international wireless telecommunication
    services company, controller of Video Only, a consumer
    electronics retailer, and on the finance staff of KING
    Broadcasting, a television and radio broadcasting company in
    Seattle. Mr. Goade began his career in audit practice of
    Deloitte & Touche.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Mike Dougherty, Vice President of Corporate
    Development:Mr. Dougherty joined
    Loudeye prior to its initial public offering in 2000.
    Mr. Dougherty was formerly a vice president in the global
    investment banking group of Chase H&Q, focusing on telecom
    and media & Internet infrastructure transactions. Prior to
    joining the global investment banking group, Mr. Dougherty
    served in Chases high yield group focusing on buildout and
    LBO financing. He began his career in Prudential
    Securitiess high yield and merchant banking group.                                                                                                                                                                                                                                                                                                                                                                                                                                                          

20



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##### Table of Contents





| |                      
| | ---------------------
| | Results of Operations



| |                                                  
| | -------------------------------------------------
| | Year Ended December 31, 2003 compared to
    2002

Revenues.Revenues
totaled $11.9 million and $12.7 million for 2003 and
2002 and consisted of the following (in thousands):

|                           |               |      |        |        |  |            |       |        |  |  |       |      |   
|-------------------------- | ------------- | ---- | ------ | ------ |  | ---------- | ----- | ------ |  |  | ----- | ---- | --
|                           |               |      |        |        |  | % Increase
|                           |               | 2003 |        | 2002   |  | (Decrease)
|                           |               |      |        |        |  |           
|Digital Media services     |               | $    | 10,065 |        |  | $          | 9,528 |        |  |  | 5.6   | %   
|Media Restoration services |               |      | 1,883  |        |  |            | 3,153 |        |  |  | (40.3 | )%  
|                           |               |      |        |        |  |            |       |        |  |  |       |     
|                           | Total Revenue |      | $      | 11,948 |  |            | $     | 12,681 |  |  |       | (5.8 | )%
|                           |               |      |        |        |  |            |       |        |  |  |       |     

Revenue from our digital media services segment
increased in 2003 to $10.1 million from $9.5 million
in 2002. This increase is due primarily to an increase in the
volume of encoding and other fulfillment and related services,
as well as the licensing of media player applications, offset by
a decrease in webcasting revenues. Our product mix has changed
significantly over the course of 2003, as we shifted marketing
emphasis away from webcasting and more toward digital media
services, primarily digital music solutions.

Media restoration revenues totaled
$1.9 million in 2003 compared to $3.2 million in 2002.
This decrease was the result of decreased revenue from a
significant customer, as well as decreased customer spending on
discretionary projects due to current economic conditions. As
described in Note 5 to the consolidated financial
statements, in January 2004 we sold substantially all of the
assets of our media restoration services business pursuant to an
agreement dated October 31, 2003. Accordingly, media
restoration services will not be a material portion of our
operations in future periods. At closing, we also entered into a
co-marketing and reseller agreement with the purchaser pursuant
to which we will sell, for a fee, media restoration services on
behalf of the purchaser for a two-year period. The co-marketing
and reseller agreement and earn-out provisions of the
transaction constitute continuing involvement under
FAS 144. Consequently, our media restoration business has
not been reported as a discontinued operation.

Cost of Revenues.Cost of revenues decreased to
$7.2 million for 2003 from $13.3 million for 2002.
Cost of revenues decreased from 105.0% of revenue in 2002 to
60.3% of revenue in 2003, and consisted of the following (in
thousands):

|                           |                        |      |       |       |  |            |        |        |  |  |       |       |   
|-------------------------- | ---------------------- | ---- | ----- | ----- |  | ---------- | ------ | ------ |  |  | ----- | ----- | --
|                           |                        |      |       |       |  | % Increase
|                           |                        | 2003 |       | 2002  |  | (Decrease)
|                           |                        |      |       |       |  |           
|Digital Media services     |                        | $    | 5,613 |       |  | $          | 11,414 |        |  |  | (51.7 | )%   
|Media Restoration services |                        |      | 1,593 |       |  |            | 1,899  |        |  |  | (16.1 | )%   
|                           |                        |      |       |       |  |            |        |        |  |  |       |      
|                           | Total Cost of Revenues |      | $     | 7,206 |  |            | $      | 13,313 |  |  |       | (45.9 | )%
|                           |                        |      |       |       |  |            |        |        |  |  |       |      

Cost of revenues include the cost of production,
including personnel, an allocated portion of facilities and
equipment, and other supporting functions related to the
delivery of our digital media and media restoration services.
Depreciation included in cost of revenues decreased to
approximately $849,000 in 2003 from $3.4 million in 2002.
This decrease is due primarily to impairment charges recorded in
the fourth quarter of 2002 and the first quarter of 2003 for
certain assets of our digital media services and media
restoration services segments. These impairment charges
decreased the cost basis of the assets, resulting in lower
depreciation charges. For 2004, we expect that depreciation
expense will increase compared to 2003 as we invest in upgrading
and enhancing our digital media services infrastructure and
technology. For example, in the first quarter of 2004 we
invested $1.5 million to upgrade the storage and access
systems for our digital music archive. The remainder of the
decrease in cost of revenues is due to cost reduction
initiatives, primarily reductions in our work force, implemented
in the second half of 2002 and the first quarter of 2003. We
expect cost of revenues to increase moderately in 2004 compared
to 2003.

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Operating Expenses.Our operating expenses were as follows
for 2003 and 2002 (in thousands):

|                                            |                          |      |       |        |  |            |        |        |  |  |       |       |   
|------------------------------------------- | ------------------------ | ---- | ----- | ------ |  | ---------- | ------ | ------ |  |  | ----- | ----- | --
|                                            |                          |      |       |        |  | % Increase
|                                            |                          | 2003 |       | 2002   |  | (Decrease)
|                                            |                          |      |       |        |  |           
|Research and development                    |                          | $    | 1,688 |        |  | $          | 3,159  |        |  |  | (46.6 | )%   
|Sales and marketing                         |                          |      | 3,286 |        |  |            | 7,667  |        |  |  | (57.1 | )%   
|General and administrative                  |                          |      | 7,778 |        |  |            | 11,375 |        |  |  | (31.6 | )%   
|Amortization of intangible and other assets |                          |      | 1,100 |        |  |            | 3,043  |        |  |  | (63.9 | )%   
|Stock-based compensation                    |                          |      | 1,298 |        |  |            | (383   | )      |  |  |      |      
|Special charges                             |                          |      | 8,699 |        |  |            | 6,846  |        |  |  | 27.1  | %    
|                                            |                          |      |       |        |  |            |        |        |  |  |       |      
|                                            | Total operating expenses |      | $     | 23,849 |  |            | $      | 31,707 |  |  |       | (24.8 | )%
|                                            |                          |      |       |        |  |            |        |        |  |  |       |      

Research and Development.Research and development expenses
totaled $1.7 million and $3.2 million in 2003 and
2002. This decrease is due to the reduction in the number of
development personnel as a result of the corporate
restructurings. Research and development expenses include labor
and other related costs of the continued development support of
our digital media.

We believe that continued investment in research
and development is critical to attaining our strategic
objectives. However, due to our operational restructurings and a
sharper focus on opportunities which we believe will result in
near term results, development headcount was reduced
significantly in 2003 as compared to 2002 and, as a result,
research and development expenses declined in 2003 as compared
to 2002. In 2004, we expect to increase investment in the
development of future digital media service offerings, including
hiring additional personnel in this area. Accordingly, we expect
that research and development expenses for 2004 will be higher
than 2003.

Sales and Marketing.Sales and marketing expenses totaled
$3.3 million and $7.7 million in 2003 and 2002. Sales
and marketing expenses consist primarily of salaries,
commissions, product branding costs, advertising, trade show
expenses, and cost of marketing collateral. The decrease in
sales and marketing expenses is due to the decreased personnel
related to our reductions in force in the second half of 2002
and first quarter of 2003. We expect sales and marketing
expenses to increase moderately in 2004 as we expand our sales
force and marketing personnel to market and sell our new Tier 3
application level products and services.

General and Administrative.General and administrative expenses
decreased to $7.8 million for 2003 from $11.4 million
for 2002. This decrease was due to the decrease in personnel
related to our reductions in force in the second half of 2002
and first quarter of 2003, and related cost reduction
initiatives. General and administrative expenses consist
primarily of rent, facilities and information technology
charges, salaries, legal expenses, investor relations costs and
other costs associated with being a public company. We
anticipate that general and administrative expenses for 2004
will increase moderately as we increase our personnel and other
resources to support our growth. In addition, we will incur
additional professional fees in order to comply with the new
requirements under the Sarbanes-Oxley Act of 2002.

Amortization of Intangible and Other Assets.Amortization of intangible and other
assets totaled $1.1 million and $3.0 million for 2003
and 2002, and includes amortization of identified intangible
assets related to past acquisitions. The decrease was due to the
impairment charges recorded in the fourth quarter of 2002 and
first quarter of 2003, which resulted in lower amortization
charges during of 2003. All of our intangible and other assets
included on our consolidated balance sheet at December 31,
2003 will be fully amortized by the end of the second quarter of
2004. However, we expect to incur additional amortization
expense in 2004 related to our acquisition of Overpeer, Inc. as
discussed in Note 22 of our consolidated financial
statements.

Stock-Based Compensation.Stock-based compensation for 2003
totaled $1.3 million, consisting of the amortization of
deferred stock compensation of $398,000, stock-based
compensation expense of $730,000 related to stock options
granted to a member of our board of directors for consulting
services provided through September 30, 2003, variable
stock compensation expense of $64,000 related to stock options
that were

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repriced in 2001, stock and options issued to
former employees as severance and termination benefits of
$99,000, and stock options issued to a consultant of $7,000.
Stock-based compensation was a credit of $383,000 for the year
ended December 31, 2002, consisting of the amortization of
deferred stock compensation and the reversal of expense related
to accelerated amortization for options that were cancelled.


Special Charges.We
have recorded special charges related to corporate
restructurings, facilities consolidations and the impairment of
assets in accordance with our long-lived asset policy. Following
is a summary of special charges for 2003 and 2002 (in thousands):

|                                            |  |      |       |      |  |   |       | 
|------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                            |  | 2003 |       | 2002
|                                            |  |      |       |     
|Goodwill impairment                         |  | $    | 5,307 |      |  | $ |      | 
|Intangible and other asset impairments      |  |      | 685   |      |  |   | 1,437 | 
|Property and equipment impairments          |  |      | 670   |      |  |   | 2,029 | 
|Facilities related charges                  |  |      | 658   |      |  |   | 1,490 | 
|Employee severance and termination benefits |  |      | 501   |      |  |   | 1,890 | 
|Other restructuring charges                 |  |      | 878   |      |  |   |      | 
|                                            |  |      |       |      |  |   |       | 
|                                            |  | $    | 8,699 |      |  | $ | 6,846 | 
|                                            |  |      |       |      |  |   |       | 

In February 2003, our Chairman and Chief
Executive Officer, John T. Baker, resigned and we engaged Regent
Pacific Management Corporation to provide management services.
On March 7, 2003, Regent Pacific resigned from the
engagement and Jeffrey M. Cavins was elected President and Chief
Executive Officer. During and subsequent to Regent
Pacifics engagement, we undertook a strategic and
operational analysis of our business and product lines. This
analysis resulted in the development of a new strategic and
operational plan, under which we restructured our business to
focus on our core competencies in digital media services and on
core strategic customers and markets for our enterprise
communications services. We developed a revised corporate
forecast in connection with this plan. The revised forecast also
considered that we had learned that revenue from a significant
customer in our media restoration services segment would be less
than originally anticipated. Utilizing the revised forecast
based on our revised strategy, we performed a reassessment of
the carrying value of all of our assets, both tangible and
intangible. The revised forecast demonstrated that certain
tangible and intangible assets and goodwill related to our media
restoration services and enterprise communications services
businesses were impaired, as the projected undiscounted
discernible cash flows did not exceed the carrying value of the
assets over their estimated useful lives. The fair values of
each of these assets were estimated using a probability weighted
discounted cash flow method. The estimated fair values of each
of the assets were then compared to their carrying values to
measure the impairments. As a result of this analysis, we
recorded impairment charges in the first quarter of 2003 for
goodwill, intangible assets, and property and equipment related
to our enterprise communication services and media restoration
services businesses of $5.3 million, $685,000, and
$670,000, respectively.

In addition to the impairments above, we recorded
severance and termination benefits of $204,000 associated with a
reduction in force announced in March 2003 of approximately 35%
of our consolidated staffing. In addition, we recorded $297,000
of severance and termination benefits with respect to certain
changes in senior management in the first quarter of 2003. We
incurred costs of approximately $658,000 related to the
termination or renegotiation of certain facilities leases in
connection with our ongoing facilities consolidation. The other
restructuring charges of $878,000 represent fees and costs paid
to Regent Pacific Management Corporation with respect to interim
management services provided to us in connection with our
management and operational restructuring.

As discussed above, during the fourth quarter of
2002, we committed to a plan to exit certain of our leased
facilities. The exit plan identified all significant actions to
be taken, including the method of disposition, locations of
those activities and the expected dates of completion. Under the
provisions of EITF 94-3, we recorded the estimated lease
termination costs in accrued special charges at
December 31, 2002. Current year activity for accruals
established under EITF 94-3 is summarized in the following
paragraphs.

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In April 2003, we entered into a lease
termination agreement with the landlord of our unoccupied
facility on Fourth Avenue, Seattle, Washington. Under the terms
of the agreement, we paid a lease termination fee of $200,000.
As a result, all of our obligations under the lease were
terminated effective April 30, 2003. In accordance with
EITF 94-3, the lease termination fee was included in
accrued special charges at December 31, 2002. We had been
paying approximately $29,000 per month under this lease.

In May 2003, we entered into a lease termination
agreement with the landlord of our unoccupied facility in
Ardsley, New York. Under the terms of the agreement, we paid a
lease termination fee of approximately $114,000 which included a
security deposit of $29,000. As a result, all of our obligations
under the lease were terminated effective May 19, 2003. In
accordance with EITF 94-3, the lease termination fee was
included in accrued special charges at December 31, 2002.
We had been paying approximately $19,000 per month under this
lease.

Under the provisions of FAS 146, we recorded
certain additional lease termination costs during the year ended
December 31, 2003. These additional costs were related to
certain leased facilities whereby we had ceased using the
facilities and notified the landlords that we had released our
rights under the lease agreements. These additional costs were
recognized and measured at the present value of the future
minimum lease payments, net of estimated sublease rentals that
could be reasonably obtained for the facilities. Current year
activity for accruals established under FAS 146 is summarized in
the following paragraphs.

In March 2003, we terminated a portion of a lease
for approximately half the space we occupied for our principal
operating facility on Rainier Avenue, Seattle, Washington. Rents
were reduced from approximately $108,000 per month with a term
expiring in November 2005 to rent for the remainder of the
facility of approximately $33,000 per month through June 2003
with options, that we exercised, to extend the term through
December 2003 at a base rent of $33,000 per month and pre-paid
utility expenses of $60,000 per quarter. As consideration for
the lease termination, we allowed the landlord to retain its
security deposit in the amount of $218,500 and made cash
payments of $126,700. In December 2003, we signed a new lease
with the landlord that expires in December 2005. Monthly rental
payments under the new lease are approximately $55,000 through
March 2004 and then $73,000 thereafter, reflecting an increase
in the square footage occupied beginning in April 2004.

In October 2003, we vacated and ceased using our
former Streampipe facility in Washington, D.C. and migrated
its operations to our facility on Rainier Avenue, Seattle,
Washington. At that time, the landlord was informed of our
decision to no longer occupy the Washington D.C. facility
and release of our rights under the lease agreement. The lease
for the facility expires in March 2004 and, under the
requirements of FAS 146, the present value of future minimum
rental payments, net of sublease rentals, of $43,000, were
recorded in accrued special charges during the year ended
December 31, 2003.

We have accrued special charges related to our
media restoration facility in New York, New York. The lease
agreement was originally entered into in December 2002 and we
have never occupied the facility. During 2003, we informed the
landlord of our decision to release our rights under the lease
agreement and have been in ongoing discussions with the landlord
to negotiate a lease termination agreement. Accordingly, under
the requirements of FAS 146, we had accrued $562,000 in accrued
special charges through the third quarter of 2003 representing
the estimated fair value of future rental payments, net of
sublease rentals and related costs with respect to the
termination of this lease. In December 2003, we accrued an
additional $150,000, for a total accrual of $712,000, to adjust
our estimate of the fair value of the liability based on further
negotiations with the landlord. In February 2004, we entered
into a lease settlement agreement with the landlord. The amount
of the settlement was included in accrued special charges at
December 31, 2003.

For certain of the lease terminations described
above, the settlement amounts were less than we had accrued
initially due to favorable negotiations with landlords and
improvements in real estate markets. In other cases, we
increased our accruals as a result of our ongoing evaluations of
our lease obligations. The adjustments resulting from these
settlements and additional accruals were recorded in special
charges in the consolidated statements of operations.

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We will continue to review the carrying value of
our long-lived assets for impairments. Future adverse
developments in our business could result in additional
impairments.

The following table reflects the activity in
accrued special charges for the year ended December 31,
2003 (in thousands). We believe that all of these accrued
charges, which represent primarily future rent obligations, will
ultimately be paid in cash.

|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|--------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ----------- |  | ------------ | ------ | - |  | - | ---- | - |  | - | ----- | 
|                            |  | December 31, |       | Additional |  |          |       |             |  | December 31,
|                            |  | 2002         |       | Accruals   |  | Payments |       | Adjustments |  | 2003        
|                            |  |              |       |            |  |          |       |             |  |             
|Employee severance          |  | $            | 104   |            |  | $        | 501   |             |  | $            | (409   | ) |  | $ | (196 | ) |  | $ |      | 
|Facilities related charges  |  |              | 2,799 |            |  |          | 1,220 |             |  |              | (1,787 | ) |  |   | (562 | ) |  |   | 1,670 | 
|Other restructuring charges |  |              |      |            |  |          | 878   |             |  |              | (878   | ) |  |   |     |   |  |   |      | 
|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|Total                       |  | $            | 2,903 |            |  | $        | 2,599 |             |  | $            | (3,074 | ) |  | $ | (758 | ) |  | $ | 1,670 | 
|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 

We recorded special charges totaling
$6.8 million in 2002 related to impairment of intangible
assets, write-downs of property and equipment, accrued lease
payments related to vacated facilities and employee severance
charges associated with company restructurings. Effective
January 1, 2002 we adopted SFAS No. 142, Goodwill and
Intangible Assets, and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, and determined that
certain intangible assets and property and equipment related to
our Digital Media Services and Enterprise Communications
reporting units were impaired.

Interest Income.Interest income totaled $347,000 and
$1.1 million in 2003 and 2002. The decrease was due to the
lower average cash and investment balances in 2003 resulting
from the voluntary repayment of our credit facility in the third
quarter of 2002 and utilization of cash to fund operations, and
lower interest rates in 2003. For 2004, we expect interest
income will increase due to higher average investment balance
resulting from the proceeds received from the private equity
financings we completed in August 2003 and February 2004.

Interest Expense.Interest expense relates to our debt
instruments, consisting of our line of credit, term loan and
capital lease obligations. Interest expense totaled $286,000 and
$631,000 in 2003 and 2002. The decrease was due primarily to
lower average debt balances in 2003 due to the voluntary
repayment of our credit facility in the third quarter of 2002
and lower interest rates in 2003. We anticipate that interest
expense will increase slightly in 2004 due to higher average
debt balances resulting from borrowings under the
$3 million term loan facility that we put in place at the
end of 2003.

Increase in Fair Value of Common Stock
Warrants.The increase in fair value
of common stock warrants of $248,000 represents the increase in
the estimated fair value of the warrants that we issued in
connection with our private equity financing. This transaction
is described more fully in Note 6 to the consolidated
financial statements.

Other Income.Other
income for 2003 of $120,000 consisted principally of gains on
sales of excess equipment. Other income for 2002 of $659,000
consisted principally of a gain related to the renegotiation of
final closing terms with respect to the acquisition of Activate
and realized gains from the sale of certain investments,
partially offset by expenses incurred related to the sale of our
Canadian subsidiary. On the date of our acquisition of Activate,
the total payment due to the seller was $3.0 million in a
combination of cash and stock. During the third quarter of 2002,
we reached a final settlement with the seller, which required
payment of $2.0 million in cash and 1.0 million
restricted common shares valued at $300,000. The $700,000 of
other income is equal to the difference between the accrued
acquisition consideration of $3.0 million and the
negotiated final consideration of $2.3 million.

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| |                                                  
| | -------------------------------------------------
| | Year Ended December 31, 2002 compared to
    2001

Revenue.Revenues
totaled $12.7 million and $10.4 million for 2002 and
2001, and consisted of the following (in thousands):

|                           |               |      |       |        |  |            |       |        |  |  |      |      |  
|-------------------------- | ------------- | ---- | ----- | ------ |  | ---------- | ----- | ------ |  |  | ---- | ---- | -
|                           |               |      |       |        |  | %         
|                           |               |      |       |        |  | Increase  
|                           |               | 2002 |       | 2001   |  | (Decrease)
|                           |               |      |       |        |  |           
|Digital Media services     |               | $    | 9,528 |        |  | $          | 7,713 |        |  |  | 23.5 | %   
|Media Restoration services |               |      | 3,153 |        |  |            | 2,675 |        |  |  | 17.9 | %   
|                           |               |      |       |        |  |            |       |        |  |  |      |     
|                           | Total Revenue |      | $     | 12,681 |  |            | $     | 10,388 |  |  |      | 22.1 | %
|                           |               |      |       |        |  |            |       |        |  |  |      |     

Digital media services revenue increased to
$9.5 million in 2002 from $7.7 million in 2001. The
increase was due primarily to the acquisition of Activate in
September 2001. The increase in enterprise communications
revenue generated by Activate was partially offset by the
decrease in revenue generated by our encoding services, due to
fewer large encoding projects in 2002 compared to 2001, and a
decrease in samples revenue from the previous year, largely a
result of pricing pressures for this service.

Media restoration revenues totaled
$3.2 million in 2002, as compared to $2.7 million in
2001. This increase was primarily the result of an increase in
revenue generated from a significant customer.

Cost of Revenues.Cost of revenues increased to
$13.3 million in 2002 from $12.7 million in 2001. Cost
of revenues decreased from 122.6% of revenues in 2001 to 105.0%
of revenues in 2002, and consisted of the following
(in thousands):

|                           |                        |      |        |        |  |            |        |        |  |  |      |     |  
|-------------------------- | ---------------------- | ---- | ------ | ------ |  | ---------- | ------ | ------ |  |  | ---- | --- | -
|                           |                        |      |        |        |  | %         
|                           |                        |      |        |        |  | Increase  
|                           |                        | 2002 |        | 2001   |  | (Decrease)
|                           |                        |      |        |        |  |           
|Digital Media services     |                        | $    | 11,414 |        |  | $          | 11,585 |        |  |  | (1.5 | )% 
|Media Restoration services |                        |      | 1,899  |        |  |            | 1,152  |        |  |  | 64.8 | %  
|                           |                        |      |        |        |  |            |        |        |  |  |      |    
|                           | Total Cost of Revenues |      | $      | 13,313 |  |            | $      | 12,737 |  |  |      | 4.5 | %
|                           |                        |      |        |        |  |            |        |        |  |  |      |    

Cost of revenues include the cost of production
including personnel, and an allocated portion of facilities and
equipment and other supporting functions related to the delivery
of digital media services and applications. Depreciation, the
primary non-cash component of cost of revenues, decreased to
$3.4 million from $4.1 million in 2001 as a result of
the property and equipment write-downs recorded in 2001. This
was offset by a higher number of personnel involved in digital
media services production and the increased reliance on
third-party vendors related to webcasting services.

Media restoration cost of revenues totaled
$1.9 million in 2002, an increase from $1.2 million in
2001. The increase was slightly out of proportion to the
increased revenues. This is a result of the variable nature of
the restoration business, which requires adding personnel to
generate additional revenues. Additionally, production facility
expansion at VidiPax resulted in higher levels of depreciation
on a comparative basis.

Operating expenses.Operating expenses were as follows for 2002 and 2001
(in thousands):

|                                            |                          |      |        |        |  |            |        |        |  |  |       |       |   
|------------------------------------------- | ------------------------ | ---- | ------ | ------ |  | ---------- | ------ | ------ |  |  | ----- | ----- | --
|                                            |                          |      |        |        |  | %         
|                                            |                          |      |        |        |  | Increase  
|                                            |                          | 2002 |        | 2001   |  | (Decrease)
|                                            |                          |      |        |        |  |           
|Research and development                    |                          | $    | 3,159  |        |  | $          | 9,719  |        |  |  | (67.5 | )%   
|Sales and marketing                         |                          |      | 7,667  |        |  |            | 9,409  |        |  |  | (18.5 | )%   
|General and administrative                  |                          |      | 11,375 |        |  |            | 11,102 |        |  |  | (2.5  | )%   
|Amortization of intangible and other assets |                          |      | 3,043  |        |  |            | 8,173  |        |  |  | (62.8 | )%   
|Stock-based compensation                    |                          |      | (383   | )      |  |            | 359    |        |  |  |      |      
|Special charges                             |                          |      | 6,846  |        |  |            | 37,261 |        |  |  | (81.6 | )%   
|                                            |                          |      |        |        |  |            |        |        |  |  |       |      
|                                            | Total operating expenses |      | $      | 31,707 |  |            | $      | 76,023 |  |  |       | (58.3 | )%
|                                            |                          |      |        |        |  |            |        |        |  |  |       |      

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Research and Development Expenses.Research and development expenses
totaled $3.2 million and $9.7 million in 2002 and
2001. Research and development expenses include salaries and
consulting fees paid to support technology development, and
costs of technology acquired from third parties to incorporate
into applications. The decrease is due to the significant
reduction in the number of development personnel as a result of
the corporate restructurings. Costs of enhancing webcasting
offerings, the continued support of our music offerings and the
development of internal operational solutions necessary to fully
integrate previous acquisitions comprised a majority of our
research and development expenses in 2002. We had approximately
$263,000 in media restoration research and development expenses
during 2002 primarily as a result of efforts to integrate
certain acquired equipment and efficiency enhancements into the
media restoration production process. There were no research and
development expenses included in media restoration services
in 2001.

Sales and Marketing Expenses.Sales and marketing expenses totaled
$7.7 million and $9.4 million in 2002 and 2001. Sales
and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product
branding costs, advertising and cost of marketing collateral.
The decrease in sales and marketing expenses was primarily due
to decreased personnel subsequent to our reductions in force,
partially offset by a general increase in commissions and other
selling expenses to generate the increased level of sales. The
decrease was partially offset by an increase in advertising and
marketing activities during 2002. Media restoration services
sales and marketing expenses totaled $232,000 and $450,000 in
2001 and 2000, respectively. This decrease was due to a
reduction in personnel and a general change in the sales
compensation structure at our media restoration subsidiary.

General and Administrative Expenses.General and administrative expenses
totaled $11.4 million and $11.1 million in 2002 and
2001. General and administrative expenses consist primarily of
rent, facilities and information technology charges, salaries,
legal expenses for general corporate purposes, professional
services, investor relations and other costs associated with
being a public company. General and administrative expenses
increased over the previous year as a result of integrating
acquisitions into our operations and higher professional fees,
insurance and other costs associated with being a publicly held
company. The increase is partially offset by internal efforts
beginning in the third quarter of 2002 to decrease all operating
expenses, including external and internal legal fees, public
relations, investor relations and insurance premiums. Our media
restoration segment contributed general and administrative
expenses of approximately $1.3 million and
$1.2 million in 2002 and 2001.

Amortization of Intangibles and Other Assets.Amortization of intangibles and other
assets totaled $3.0 million and $8.2 million in 2002
and 2001. The decrease was primarily due to impairment charges
recorded during 2001, which led to lower balances of intangible
assets and, in turn, lower amortization charges. In addition,
effective January 1, 2002, we adopted FAS 142, which
stipulates that goodwill can no longer be amortized but is
subject to review for impairment. Amortization expense decreased
by $2.6 million compared to the previous year as a result
of the implementation of FAS 142.

Stock-Based Compensation.Stock-based compensation was a credit
of $417,000 in 2002, of which $34,000 is included in cost of
revenues, and a charge of $359,000 in 2001. This decrease is a
result of previous reductions in force, which has reduced the
amortization of stock-based compensation, and in reversals of
previously recorded deferred stock compensation associated with
terminated employees. As a result of stock option cancellations
associated with our reductions in force, we recorded a
stock-based compensation credit of $835,000 in the first quarter
of 2002. The remaining charge was due to normal, recurring
amortization.

Special Charges.We
recorded special charges totaling $6.8 million and
$37.3 million in 2002 and 2001 related to impairment of
intangible assets, write-downs of property and equipment,
accrued lease payments related to vacated facilities and
employee severance charges associated with company
restructurings. Effective January 1, 2002 we adopted SFAS
No. 142, Goodwill and Intangible Assets, and SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and determined that certain intangible assets
and property and equipment related to our Digital Media Services
and Enterprise Communications reporting units were impaired. In
addition, as a result of a decline in revenues and other
economic factors, we performed an analysis of carrying values of
property, plant and equipment and amortizable intangibles
pursuant to

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SFAS No. 144 as of November 30,
2002. As a result of these actions and other economic
conditions, we recorded special charges in 2002 and 2001 which
are summarized in the following table (in thousands):


|                                       |  |      |       |      |  |   |        | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | 
|                                       |  | 2002 |       | 2001
|                                       |  |      |       |     
|Goodwill impairments                   |  | $    |      |      |  | $ | 9,418  | 
|Intangible and other asset impairments |  |      | 1,437 |      |  |   | 11,938 | 
|Property and equipment write-downs     |  |      | 2,029 |      |  |   | 6,534  | 
|Facilities related charges and other   |  |      | 1,490 |      |  |   | 6,194  | 
|Employee severance                     |  |      | 1,890 |      |  |   | 3,177  | 
|                                       |  |      |       |      |  |   |        | 
|                                       |  | $    | 6,846 |      |  | $ | 37,261 | 
|                                       |  |      |       |      |  |   |        | 

The following table reflects the activity in
accrued special charges (in thousands).

|                           |  |      |        |      |  |   |        |  
|-------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                           |  | 2002 |        | 2001
|                           |  |      |        |     
|Balance, beginning of year |  | $    | 2,939  |      |  | $ | 310    |  
|Accruals                   |  |      | 2,668  |      |  |   | 3,790  |  
|Paid during year           |  |      | (2,704 | )    |  |   | (1,161 | )
|                           |  |      |        |      |  |   |        |  
|Balance, end of year       |  | $    | 2,903  |      |  | $ | 2,939  |  
|                           |  |      |        |      |  |   |        |  

Interest Income.Interest income representing earnings
on our cash, cash equivalents and short-term investments totaled
$1.1 million and $3.2 million in 2002 and 2001. The
decrease in income was due to lower average cash and investment
balances in 2002, reflecting cash used for operations, as well
as, the voluntary prepayment of our primary outstanding credit
facility during the third quarter of 2002, as well as lower
interest rates.

Interest Expense.Interest expense relating to our debt
instruments, as well as amortization of financing charges
related to our debt instruments, totaled $0.6 million and
$1.2 million in 2002 and 2001. The decrease was due to
lower interest rates resulting from a credit facility signed in
October 2001 and our repayment of this facility in the third
quarter of 2002.

Other Income (Expense).Other income (expense) consists of
$700,000 of other income related to the renegotiation of the
final closing terms with CMGi related to the acquisition of
Activate and realized gains from the sale of certain
investments, partially offset by expenses incurred related to
the sale of our Canadian subsidiary. On the date of our
acquisition of Activate, the total payment due to CMGi on
September 25, 2002 was $3.0 million in a combination
of cash and stock. During the third quarter of 2002, we reached
a final settlement with CMGi, which required payment of
$2.0 million in cash and 1.0 million shares of
restricted common stock valued at $300,000, resulting in a gain
of $700,000 included in other income.

Liquidity and Capital Resources

At December 31, 2003, we had approximately
$22.3 million of cash, cash equivalents, short-term
investments and restricted investments. In February 2004, we
completed an additional private placement financing transaction
that resulted in net proceeds of approximately
$18.9 million.

Cash used in operating activities was
$7.3 million, $22.3 million, and $26.3 million in
2003, 2002, and 2001 and resulted primarily from net losses of
$19.2 million, $31.2 million and $76.4 million,
offset partially by special charges, depreciation and
amortization and increased by other adjustments and working
capital changes. All changes in operating assets and liabilities
are net of amounts acquired in purchases of businesses. Cash
used in operating activities declined steadily over the course
of 2003, as we have realized the benefits of cost reduction
initiatives implemented late in 2002 and in the first quarter of
2003. For example, cash used in operating activities was
$3.1 million for the first quarter of 2003 compared to
approximately $273,000 in the fourth quarter of 2003.

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Cash provided by investing activities was
$1.7 million, $8.5 million, and $7.4 million in
2003, 2002, and 2001. For 2003, cash provided by investing
activities was related primarily to net sales of short-term
investments of $518,000 and payments received on loans made to
related parties of $1.2 million. For 2002, cash provided by
investing activities was related primarily to net sales of
short-term investments of $12.5 million, offset by
purchases of property and equipment totaling $1.7 million
and cash paid for the acquisition of businesses totaling
$2.4 million. For 2001, cash provided from investing
activities was related primarily to net sales of marketable
securities of $19.7 million, offset partially by purchases
of property and equipment of $2.7 million and cash paid for
the acquisitions of businesses of $9.6 million. We expect
purchases of property and equipment to increase moderately in
2004 as we intend to upgrade certain equipment related to our
digital media services infrastructure. In the first quarter of
2004, we will spend approximately $1.5 million on such
equipment pursuant to a purchase commitment executed in
December 2003.

Cash provided by financing activities was
$16.3 million for 2003 and consisted primarily of net
proceeds from a private equity placement financing transaction
of $11.4 million in August 2003, net borrowings under our
line of credit and term loan facilities of $3.3 million,
and proceeds from the exercise of stock options and warrants of
$2.0 million, offset partially by repurchases of stock of
$426,000. Cash used in financing activities was
$21.6 million in 2002 and resulted primarily from the
decision to prepay our primary long-term credit facility in the
third quarter of 2002, as well as payments on our capital lease
obligations and repurchases of our common stock. Cash provided
by financing activities was $4.4 million for 2001 and
consisted primarily from borrowings under our credit facility of
$18.9 million, offset by principal payments on our
long-term debt and capital lease obligations of
$11.8 million. In addition, we repurchased 4.0 million
shares from our founder for $2.0 million and also made a
collateralized loan of $1.0 million to him in 2001.

In December 2003 we entered into a term loan with
a bank under which we borrowed $3.0 million. The term loan
also provides for up to $500,000 to collateralize standby
letters of credit. Borrowings under the term loan are
collateralized by substantially all of our assets and bear
interest at the Prime Rate plus 1.25 percent (5.25% at
December 31, 2003). Principal payments are due in equal
monthly installments, plus interest, through January 1,
2007. In addition, the term loan restricts, among other things,
our borrowings, dividend payments, stock repurchases, and sales
or transfers of ownership or control, and contains certain other
restrictive covenants that require us to maintain a certain
quick ratio and tangible net worth. We were in compliance with
these covenants at December 31, 2003. We intend to use the
proceeds to upgrade certain equipment related to our digital
media services and technology infrastructure, repay certain
capital lease obligations, and for working capital and other
general corporate purposes.

As of December 31, 2003, our principal
commitments consisted of obligations outstanding under our term
loan, line of credit and operating leases and capital leases. We
have other credit facilities and leasing arrangements that, in
general, are not prepayable without penalty. Total principal
amounts outstanding under the line of credit, capital lease
obligations and term loan were $4.8 million at
December 31, 2003. These instruments bear interest ranging
from approximately 2.26% to 7.52% and mature at various times
through 2006. Letters of credit of approximately $316,000
collateralize certain of the capital lease obligations and are
collateralized by short-term investments. These short-term
investments have been classified as restricted investments on
the accompanying consolidated balance sheets.

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| |                        
| | -----------------------
| | Contractual Obligations

The following table provides aggregated
information about our contractual obligations as of
December 31, 2003 (in thousands):

|                                                  |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |   |  |  |   |   | 
|------------------------------------------------- |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | - |  |  | - | - | 
|                                                  |  |                       
|                                                  |  | Payments Due by Period
|                                                  |  |                       
|                                                  |  |                        |        | Less than |  |           |       | After    
|                                                  |  | Total                  |        | 1 year    |  | 1-3 years |       | 4-5 years |  | 5 years
|                                                  |  |                        |        |           |  |           |       |           |  |        
|Contractual Obligations                           |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |   |  |  |   |   | 
|Long-term debt                                    |  | $                      | 3,000  |           |  | $         | 1,000 |           |  | $       | 2,000 |  |  | $ |  |  |  | $ |  | 
|Line of credit                                    |  |                        | 1,285  |           |  |           | 1,285 |           |  |         |      |  |  |   |  |  |  |   |  | 
|Capital lease obligations(1)                      |  |                        | 491    |           |  |           | 322   |           |  |         | 169   |  |  |   |  |  |  |   |  | 
|Operating leases                                  |  |                        | 3,613  |           |  |           | 2,238 |           |  |         | 1,375 |  |  |   |  |  |  |   |  | 
|Commitment to purchase equipment                  |  |                        | 1,500  |           |  |           | 1,500 |           |  |         |      |  |  |   |  |  |  |   |  | 
|Bandwidth and co-location purchase obligations(2) |  |                        | 686    |           |  |           | 517   |           |  |         | 169   |  |  |   |  |  |  |   |  | 
|                                                  |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |   |  |  |   |   | 
|Total contractual obligations                     |  | $                      | 10,575 |           |  | $         | 6,862 |           |  | $       | 3,713 |  |  | $ |  |  |  | $ |  | 
|                                                  |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |   |  |  |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Capital lease obligations represent the total
    minimum future obligations inclusive of interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | Many of the contracts underlying these
    obligations contain renewal provisions, generally for a period
    of one year. In addition, amounts payable under these contracts
    may vary based on the volume of data transferred. The amounts in
    the table represent the base fee amount. We also have contracts
    for bandwidth and co-location services that run on a
    month-to-month basis and for which there is no unconditional
    obligation. Monthly amounts due under the month-to-month
    contracts are approximately $37,000.

Since inception, we have sustained substantial
net losses to sustain our growth and establish our business.
Beginning in 2001, we commenced a variety of cost reduction
initiatives to reduce costs. For 2004, we will continue to focus
on managing costs and increasing sales. We expect the following
items may represent significant uses of capital resources in the
foreseeable future:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have commitments under leases for certain
    facilities which we no longer occupy. One of these leases
    extends past 2004. Scheduled payments under these leases for
    2004 total $1.1 million. We are presently negotiating lease
    reduction or termination agreements that we believe will result
    in a substantial reduction to future obligations under certain
    of these leases. However, there can be no assurance that we will
    be able to do so. In addition, we may have to make up-front cash
    payments to terminate or reduce our obligations under these
    leases. At December 31, 2003 accrued special charges
    includes amounts accrued for estimated rent obligations.
|
| |  | In December 2003, we entered in to a commitment
    to purchase approximately $1.5 million of equipment to
    upgrade our digital media services and technology
    infrastructure. The equipment was delivered in January 2004 and
    we anticipate paying the $1.5 million in the first quarter
    of 2004.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | We have certain commitments under existing
    arrangements with certain licensors of copyrighted materials
    that may require payments estimated to be approximately $600,000
    in 2004. These amounts are included in accrued expenses in the
    accompanying balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | We may enter into future transactions where we
    acquire complementary businesses. Such acquisitions may require
    the use of our capital resources.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

In the first quarter of 2004, we completed a
private placement of 10,811,811 shares of common stock at $1.85
per share to a limited number of accredited investors that
resulted in net proceeds of approximately $18.9 million. We
intend to use the net proceeds for working capital and general
corporate purposes, including expansion of our
business-to-business digital music solutions in the
U.S. and internationally. We agreed to use our best efforts
to file a registration statement for the resale of the
securities sold in the private placement on

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or before March 31, 2004, and to use our
reasonable efforts to have the registration statement declared
effective by the SEC as soon thereafter as practicable.


We believe that our existing cash, cash
equivalents, and short-term investments will be sufficient to
fund our operations and meet our working capital and capital
expenditure requirements for 2004.

Critical Accounting Policies and
Estimates

We have identified the most critical accounting
policies and estimates used in the preparation of our financial
statements by considering accounting policies and estimates that
involve the most complex or subjective decisions or assessments.

Revenue recognition.We recognize revenue in accordance
with Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, as amended by Staff
Accounting Bulletin No. 104, and EITF 00-21. We
recognize revenue associated with the license of software in
accordance with Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2), as amended by
SOP 98-4, SOP 98-9 and related interpretations and
Technical Practice Aids.

We recognize revenues from encoding services,
digital music samples services, Internet radio services, live
and on-demand webcasting services, software licensing, and media
restoration services. We recognize these revenues when
persuasive evidence of an arrangement exists, the product and/or
service has been delivered, the price is fixed and determinable,
and collectibility is reasonably assured.

In arrangements that include rights to multiple
products and/or services, we allocate the total arrangement
consideration among each of the deliverables using the residual
method, under which revenue is allocated to undelivered elements
based on verifiable and objective evidence of the fair value of
the undelivered elements. Multiple element arrangements may
consist of implementation services, development services,
encoding services, digital music samples services, Internet
radio services, and live and on-demand webcasting services.
Verifiable objective evidence is based upon the price charged
when an element is sold separately.

Under the provisions of SOP 97-2, in
software arrangements that involve rights to multiple products
and services, we allocate the total arrangement consideration
among each of the deliverables using the residual method, under
which revenue is allocated to the undelivered elements based on
vendor-specific objective evidence of the fair value of such
undelivered elements. Elements included in multiple element
arrangements consist of software, intellectual property,
implementation services, maintenance and consulting services.
Vendor-specific objective evidence is based on the price charged
when an element is sold separately or, in the case of an element
not sold separately, the price established by management, if it
is probable that the price, once established, will not change
before market introduction.

Deferred revenue arises from payments received in
advance of the culmination of the earnings process. Deferred
revenue expected to be realized within the next twelve months is
classified as current liability.

Long-lived assets.Management periodically evaluates the
recoverability of our long-lived assets in accordance with SFAS
No. 144. When doing so, management is required evaluate the
recoverability of an assets (or group of assets) carrying
value through estimates of undiscounted future cash flows. If
the assets are deemed impaired, the assets are written down to
estimated fair value. Estimates of fair value may differ from
the actual amount that could be realized if we were to sell our
assets.

As described in Note 4, we recorded
impairment charges of $6.7 million, $3.5 million, and
$27.9 million in 2003, 2002 and 2001. These amounts are
included in Special Charges on the accompanying statements of
operations. Managements assessments of the impairment of
property and equipment, intangible assets and goodwill are
sensitive accounting estimates that could result in additional
impairment charges in the near term. Factors that impact these
estimates include, but are not limited to, possible changes in
business plans, market price of our common stock and declining
financial results. Net long-term assets subject to impairment
review in the future totaled $1.2 million at
December 31, 2003. We will continue to review the carrying
value

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of our long-lived assets and goodwill for
impairments. Future adverse developments in our business will
result in additional charges.


Exit costs.We have
followed the provisions of EITF 94-3 to record the costs
associated with exit activities through December 31, 2002
and FAS 146 for exit activities after December 31,
2003. Management is required to make its best estimates of exit
costs such as remaining lease obligations and/or termination
fees, these estimates may be different than the actual amounts
that will be paid under existing lease arrangements. Future
adverse changes in our business could result in additional exit
activities and charges.

Litigation.We
become involved from time to time in various claims and lawsuits
incidental to the ordinary course of our operations, including
such matters as contract and lease disputes and complaints
alleging employment discrimination. We believe that the outcome
of any such pending claims or proceedings individually or in the
aggregate, will not have a material adverse effect upon our
business or financial condition, cash flows, or results of
operations.

Income tax valuation
allowance.Deferred tax assets and
liabilities are determined based on the differences between the
financial statement and tax bases of assets and liabilities
using the enacted tax rates in effect for the periods in which
the differences are expected to reverse. The Companys net
deferred tax asset has been reduced by a full valuation
allowance based upon managements determination that the
criteria for recognition have not been met.

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RISK FACTORS

Set forth below and elsewhere in this report
and in other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking
statements contained in this report.



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | Our company has a short operating history
    and our industry is new and rapidly evolving, which makes it
    difficult to evaluate our business.

We were formed as a limited liability company in
August 1997 and incorporated in March 1998. Our limited
operating history makes it difficult to evaluate us or our
prospects and performance, due to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | Our unproven ability to generate profits;                                             
|
| |  | Our limited historical financial data; and                                            
|
| |  | Our limited experience in addressing emerging
    trends that may affect our business.

We have recently shifted our marketing emphasis
to application level services, which we have only recently begun
to deliver. You should consider our prospects in light of the
risk, expenses and difficulties we may encounter as an early
stage company in the new and rapidly evolving market segments we
serve. As a result of such risks, expenses and difficulties, we
may have difficulty:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Establishing and maintaining broad market
    acceptance of our products and services and converting that
    acceptance into direct and indirect sources of revenue;  
|
| |  | Establishing and maintaining our brand name;                                                                                                                           
|
| |  | Timely and successfully developing new products,
    product features and services and increasing the functionality
    and features of existing products and services;
|
| |  | Successfully responding to our current
    competition including, competition from emerging technologies
    and solutions;                                            
|
| |  | Developing and maintaining strategic
    relationships to enhance the distribution, features, content and
    utility of our products and services; and                
|
| |  | Attracting, training and retaining qualified
    sales, technical and customer support personnel.                                                                      



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Our quarterly financial results will
    continue to fluctuate making it difficult to forecast our
    operating results.

Our quarterly operating results have fluctuated
in the past and we expect our revenues and operating results may
vary significantly from quarter to quarter due to a number of
factors, many of which are beyond our control, including:



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market acceptance of our turn-key application
    level services;                                                                                                                                                                                          
|
| |  | Variability in demand for our digital media
    services and applications;                                                                                                                                                                                 
|
| |  | Market acceptance of our digital media and
    components offered by us and our competitors;                                                                                                                                                               
|
| |  | Ability of our customers and ourselves to procure
    necessary intellectual property rights for digital media content;                                                                                                                                    
|
| |  | Willingness of our customers to enter into
    longer-term volume or recurring revenue digital media and
    applications service agreements and purchase orders in light of
    the economic and legal uncertainties related to their business
    models;
|
| |  | Governmental regulations affecting use of the
    Internet, including regulations concerning intellectual property
    rights and security measures; or                                                                                                    
|
| |  | Competition from other companies entering our
    markets.                                                                                                                                                                                                 

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Our limited operating history and unproven
business model further contribute to the difficulty of making
meaningful quarterly comparisons and forecasts. Our current and
future levels of operating expenses and capital expenditures are
based largely on our growth plans and estimates of expected
future revenues. These expenditure levels are, to a large
extent, fixed in the short term and our sales cycle can be
lengthy. Thus, we may not be able to adjust spending or generate
new revenue sources in a timely manner to compensate for any
shortfall in revenues, and any significant shortfall in revenues
relative to planned expenditures could have an immediate adverse
effect on our business and results of operations. If our
operating results fall below the expectations of securities
analysts and investors in some future periods, our stock price
could decline significantly.



| |                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need to raise additional capital in
    the future, and if we are unable to secure adequate funds on
    terms acceptable to us, we may be unable to execute our business
    plan. If we raise additional capital, current stockholders may
    experience significant dilution.

As of December 31, 2003, we had
approximately $22.3 million in cash and cash equivalents,
short-term investments, and restricted investments. In the first
quarter of 2004, we completed a private placement that resulted
in net proceeds of $18.9 million. We have, however,
experienced net losses from operations, and net losses are
expected to continue into future periods. If our existing cash
reserves prove insufficient to fund operating and other
expenses, we may find it necessary to secure additional
financing, sell assets or reduce expenditures further. In the
event additional financing is required, we may not be able to
obtain such financing on acceptable terms, or at all. If
adequate funds are not available or are not available on
acceptable terms, we may not be able to pursue our business
objectives. This inability could seriously harm our business,
results of operations and financial condition.

If additional funds are raised through the
issuance of equity or convertible debt securities, the
percentage ownership of our current stockholders will be reduced
and these securities may have rights and preferences superior to
those of our current stockholders. If we raise capital through
debt financing, we may be forced to accept restrictions
affecting our liquidity, including restrictions on our ability
to incur additional indebtedness or pay dividends.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we expect to continue to incur net
    losses, we may not be able to implement our business strategy
    and the price of our stock may decline.

As of December 31, 2003, we had an
accumulated deficit of $192.9 million. We have incurred net
losses from inception, and we expect to continue to incur net
losses in future periods.

Accordingly, our ability to operate our business
and implement our business strategy may be hampered by negative
cash flows in the future, and the value of our stock may decline
as a result. Our capital requirements may vary materially from
those currently planned if, for example, we incur unforeseen
capital expenditures, unforeseen operating expenses or make
investments to maintain our competitive position. If we lack
necessary capital, we may have to delay or abandon some or all
of our development plans or otherwise forego market
opportunities. We will need to generate significant additional
revenues to be profitable in the future and we may not generate
sufficient revenues to be profitable on either a quarterly or
annual basis in the future.

We might not be successful in implementing our
business strategy in a cost-effective manner, if at all, and the
implementation may require significant additional expenditures
on our part. The capital requirements of our business strategy
combined with the expectation that we will incur net losses in
future periods could have a serious adverse impact on our
business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our success is dependent on the performance
    and retention of our executive officers and key
    employees.

Our business and operations are substantially
dependent on the performance of our executive officers and key
employees who have worked together for only a relatively short
period of time. We do not maintain key person life
insurance on any of our executive officers.. The loss of one or
several key employees could

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seriously harm our business. Any reorganization
or reduction in the size of our employee base could harm our
ability to attract and retain other valuable employees critical
to the success of our business.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We must integrate our recent acquisition of
    Overpeer, Inc. and we may need to make additional future
    acquisitions to remain competitive. The process of identifying,
    acquiring and integrating future acquisitions may constrain
    valuable management resources, and our failure to effectively
    integrate future acquisitions may result in the loss of key
    employees and the dilution of stockholder value and have an
    adverse effect on our operating results.

We have completed a number of acquisitions during
the past three fiscal years and we expect to continue to pursue
strategic acquisitions in the future. In March 2004, we
completed the acquisition of Overpeer, Inc.

Integrating the Overpeer acquisition and
completing any potential future acquisitions could cause
significant diversions of management time and resources.
Financing for future acquisitions may not be available on
favorable terms, if at all. If we identify an appropriate
acquisition candidate for any of our businesses, we may not be
able to negotiate the terms of the acquisition successfully,
finance the acquisition or integrate the acquired business,
products, technologies or employees into our existing business
and operations. Future acquisitions may not be well-received by
the investment community, which may cause our stock price to
fall. We cannot ensure that we will be able to identify or
complete any acquisition in the future.

If we acquire businesses, new products or
technologies in the future, we may be required to amortize
significant amounts of identifiable intangible assets and we may
record significant amounts of goodwill that will be subject to
at least annual testing for impairment. For example, we recorded
in our first quarter of fiscal 2003 impairments of
$5.3 million, $685,000 and $601,000 to goodwill, intangible
assets, and property and equipment related to our enterprise
communication services and media restoration services business.
A significant portion of those impairments related to assets
acquired in our acquisition of TT Holding Corp. in November
2002. If we consummate one or more significant future
acquisitions in which the consideration consists of stock or
other securities, our existing stockholders ownership
could be diluted significantly. If we were to proceed with one
or more significant future acquisitions in which the
consideration included cash, we could be required to use a
substantial portion of our available cash. The anticipated
benefits of any acquisition may not be realized. If any of the
negative events occur, our operations and financial position
could be harmed.



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face competition from free
    peer-to-peer services such as KaZaA and Morpheus, from emerging
    paid online music services delivered electronically, and from
    traditional retail music distributors.

The online music services of our customers face
significant competition from free peer-to-peer
services, such as KaZaA, Morpheus, Grokster and a variety of
other similar services that allow computer users to connect with
each other and to copy many types of program files, including
music and other media, from one anothers hard drives, all
without securing licenses from content providers. The legal
status of these free services is uncertain, because
although some courts have found that these services violate
copyright laws, other services have been found to not violate
any copyright laws, particularly in the case of Grokster.
Additionally, enforcement efforts against those in violation
have not effectively shut down these services, and there can be
no assurance that these services will ever be shut down. The
ongoing presence of these free services
substantially impairs the marketability of legitimate services,
regardless of the ultimate resolution of their legal status.

Because digital recorded music formats, such as
MP3, do not always contain mechanisms for tracking the source or
ownership of digital recordings, users are able to download and
distribute unauthorized or pirated copies of
copyrighted recorded music over the Internet. This piracy is a
significant concern to record companies and artists, and is a
primary reason many record companies and artists are reluctant
to digitally deliver their recorded music over the Internet. As
long as pirated recordings are available, many consumers will
choose free pirated recordings rather than paying for legitimate
recordings. Accordingly, if this issue is not addressed, our
business might be harmed.

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| |                                                                                     
| | ------------------------------------------------------------------------------------
| | Many of our competitors have substantially
    greater capital resources than we do.

Many of our competitors have significantly more
resources than we do, including access to content, and some of
our competitors may be able to leverage their experience in
providing online music distribution services or similar services
to their customers in other businesses. Some of these
competitors may be able to offer services at a lower price than
we can. In addition, competing services may be able to obtain
more or better music content or may be able to license such
content on more favorable terms than we can, which could harm
the ability of our online music services to compete effectively
in the marketplace.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Online music distribution services in
    general are new and rapidly evolving and may not prove to be
    viable business models.

Online music distribution services are a
relatively new business model for delivering digital media over
the Internet. It is too early to predict whether consumers will
accept in significant numbers online music services and
accordingly whether the services will be financially viable. If
online music distribution services do not prove to be popular
with consumers, or if these services cannot sustain any such
popularity, our business and prospects would be harmed.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We must provide digital rights management
    solutions that are acceptable to both content providers and
    consumers.

We must also provide digital rights management
solutions and other security mechanisms in order to address
concerns of content providers and artists, and we cannot be
certain that we can develop, license or acquire such solutions,
or that content licensors or consumers will accept them.
Consumers may be unwilling to accept the use of digital rights
management technologies that limit their use of content,
especially with large amounts of free content readily available.
No assurance can be given that such solutions will be available
to us upon reasonable terms, if at all. If we are unable to
acquire these solutions on reasonable or any terms, or if
customers are unwilling to accept these solutions, our business
and prospects could be harmed.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Our business could be harmed by a lack of
    availability of popular content.

Our digital media services business is affected
by the release of hit music titles, which can create
cyclical trends in sales distinctive to the music industry. It
is not possible to determine the timing of these cycles or the
future availability of hit titles. Hit products are important
because they generate consumer interest. We depend upon the
music content providers to continue to produce hit products. To
the extent that new hits are not available, or not available at
prices attractive to consumers, our sales and margins may be
adversely affected.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | The growth of our business depends on the
    increased use of the Internet for communications, electronic
    commerce and advertising.

The growth of our business depends on the
continued growth of the Internet as a medium for media
consumption, communications, electronic commerce and
advertising. Our business will be harmed if Internet usage does
not continue to grow, particularly as a source of media
information and entertainment and as a vehicle for commerce in
goods and services. Our success also depends on the efforts of
third parties to develop the infrastructure and complementary
products and services necessary to maintain and expand the
Internet as a viable commercial medium, and identifying
additional viable revenue models for digital media-bases
business. We believe that other Internet-related issues, such as
security, privacy, reliability, cost, speed, ease of use and
access, quality of service, and necessary increases in bandwidth
availability and access on an affordable basis, remain largely
unresolved and may affect the amount and type of business that
is conducted over the Internet, and may adversely affect our
ability to sell our products and services and ultimately impact
our business results and prospects.

If Internet usage grows, the Internet
infrastructure may not be able to support the demands placed on
it by such growth, specifically the demands of delivering
high-quality media content. As a result, the performance and
reliability of the Internet may decline. In addition, Websites
have experienced interruptions

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in service as a result of outages, system attacks
and other delays occurring throughout the Internet network
infrastructure. If these outages, attacks or delays occur
frequently or on a broad scale in the future, Internet usage, as
well as the usage of our products, services and Websites, could
grow more slowly or decline.




| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If broadband technologies do not become
    widely available or widely adopted, our online media
    distribution services may not achieve broad market acceptance,
    and our business may be harmed.

We believe that increased Internet use and
especially the increased use of media over the Internet may
depend on the availability of greater bandwidth or data
transmission speeds (also known as broadband transmission). If
broadband technologies do not become widely available or widely
adopted, our online media distribution services may not achieve
broad market acceptance and our business and prospects could be
harmed. Congestion over the Internet and data loss may interrupt
audio and video streams, resulting in unsatisfying user
experiences. The success of digital media distribution over the
Internet depends on the continued rollout of broadband access to
consumers on an affordable basis. To date, we believe that
broadband technologies have been adopted at a slower rate than
expected, which we believe has delayed broader-based adoption of
the Internet as a media Internet distribution medium. Our
business and prospects may be harmed if the rate of adoption
does not increase.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | More consumers are utilizing non-PC devices
    to access digital content, and we may not be successful in
    developing versions of our products and services that will gain
    widespread adoption by users
    of such devices.

In the coming years, the number of individuals
who access digital content through devices other than a personal
computer, such as personal digital assistants, cellular
telephones, television set-top devices, game consoles and
Internet appliances, may increase dramatically. Manufacturers of
these types of products are increasingly investing in
media-related applications, but these devices are in an early
stage of development and business models are new and unproven.
If we are unable to offer our services on these alternative
non-PC devices, we may fail to capture a sufficient share of an
increasingly important portion of the market for digital media
services or our costs may increase significantly.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on a limited number of customers
    for a majority of our revenues so the loss of, or delay in
    payment from, one or a small number of customers could have a
    significant impact on our revenues
    and operating results.

A limited number of customers have accounted for
a majority of our revenues and may continue to do so for the
foreseeable future. During 2003 and 2002, one customer accounted
for approximately 11% and 13% of our revenues and another
customer accounted for 5% and 10% of our revenues. We believe
that a small number of customers may continue to account for a
significant percentage of our revenues for the foreseeable
future. Due to high revenue concentration among a limited number
of customers, the cancellation, reduction or delay of a large
customer order or our failure to timely complete or deliver a
project during a given quarter is likely to significantly reduce
revenues. In addition, if any significant customer fails to pay
amounts it owes us, or does not pay those amounts on time, our
revenues and operating results could suffer. If we are
unsuccessful in increasing and broadening our customer base, our
business could be harmed.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Average selling prices of our products and
    services may decrease, which may harm our gross
    margins.

The average selling prices of our products and
services may be lower than expected as a result of competitive
pricing pressures, promotional programs and customers who
negotiate price reductions in exchange for longer term purchase
commitments or otherwise. The pricing of services sold to our
customers depends on the duration of the agreement, the specific
requirements of the order, purchase volumes, the sales and
service support and other contractual agreements. We have
experienced and expect to continue to experience pricing
pressure and anticipate that the average selling prices and
gross margins for our products will decrease over product life
cycles. We may not be successful in developing and introducing
on a timely basis new products with enhanced features that can
be sold at higher gross margins.

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| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be liable or alleged to be liable to
    third parties for music, software, and other content that we
    encode, distribute, or make available on
    to our customers.

We may be liable or alleged to be liable to third
parties for the content that we encode, distribute or make
available to our customers:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the content or the performance of our services
    violates third party copyright, trademark, or other intellectual
    property rights;              
|
| |  | If our customers violate the intellectual
    property rights of others by providing content to us or by
    having us perform digital media services; or
|
| |  | If content that we encode or otherwise handle for
    our customers is deemed obscene, indecent, or defamatory.                                          

Any alleged liability could harm our business by
damaging our reputation, requiring us to incur legal costs in
defense, exposing us to awards of damages and costs and
diverting managements attention which could have an
adverse effect on our business, results of operations and
financial condition. Our customers for encoding services
generally agree to hold us harmless from claims arising from
their failure to have the right to encode the content given to
us for that purpose. However, customers may contest this
responsibility or not have sufficient resources to defend claims
and we have limited insurance coverage for claims of this nature.

Because we host, stream and Webcast audio and
video content on or from our Web site and on other Websites for
customers and provide services related to digital media content,
we face potential liability or alleged liability for negligence,
infringement of copyright, patent, or trademark rights,
defamation, indecency and other claims based on the nature and
content of the materials we host. Claims of this nature have
been brought, and sometimes successfully prosecuted, against
content distributors. In addition, we could be exposed to
liability with respect to the unauthorized duplication of
content or unauthorized use of other parties proprietary
technology. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage or any alleged
liability could harm our business.

We cannot assure you that third parties will not
claim infringement by us with respect to past, current, or
future technologies. The music industry in particular has
recently been the focus of infringement claims. We expect that
participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in
our industry segment grows. In addition, these risks are
difficult to quantify in light of the continuously evolving
nature of laws and regulations governing the Internet. Any claim
relating to proprietary rights, whether meritorious or not,
could be time-consuming, result in costly litigation, cause
service upgrade delays or require us to enter into royalty or
licensing agreements, and we can not assure you that we will
have adequate insurance coverage or that royalty or licensing
agreements will be available on terms acceptable to us or at all.



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | If we do not continue to add customers for
    our services, our revenues and business will be
    harmed.

In order to achieve return on our investments in
new products and services, we must continue to add new customers
while minimizing the rate of loss of existing customers. If our
other marketing and promotional activities fail to add new
customers at a rate significantly higher than our rate of loss,
our business will suffer. In addition, if the costs of such
marketing and promotional activities increase in order to add
new customers, our margins and operating results will suffer.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot be certain that we will be able
    to protect our intellectual property, and we may be found to
    infringe on proprietary rights of others, which could
    harm our business.

Our intellectual property is important to our
business, and we seek to protect our intellectual property
through copyrights, trademarks, patents, trade secrets,
confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with
third parties, and invention assignment agreements with our
employees and contractors. We cannot assure you that measures we
take to protect our

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intellectual property will be successful or that
third parties will not develop alternative solutions that do not
infringe upon our intellectual property.


In addition, we could be subject to intellectual
property infringement claims by others. Potential customers may
be deterred from distributing content over the Internet for fear
of infringement claims. The music industry in particular has
recently been the focus of heightened concern with respect to
copyright infringement and other misappropriation claims, and
the outcome of developing legal standards in that industry is
expected to affect music, video and other content being
distributed over the Internet. If, as a result, potential
customers forego distributing traditional media content over the
Internet, demand for our digital media services and applications
could be reduced which would harm our business. The music
industry in the U.S. is generally regarded as extremely
litigious in nature compared to other industries and we could
become engaged in litigation with others in the music industry.
Claims against us, and any resultant litigation, should they
occur in regard to any of our digital media services and
applications, could subject us to significant liability for
damages including treble damages for willful infringement. In
addition, even if we prevail, litigation could be time-consuming
and expensive to defend and could result in the diversion of our
time and attention. Any claims from third parties may also
result in limitations on our ability to use the intellectual
property subject to these claims. Further, we plan to offer our
digital media services and applications to customers worldwide
including customers in foreign countries that may offer less
protection for our intellectual property than the United States.
Our failure to protect against misappropriation of our
intellectual property, or claims that we are infringing the
intellectual property of third parties could have a negative
effect on our business, revenues, financial condition and
results of operations.



| |                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on strategic relationships to
    promote our services and for access to licensed technology; if
    we fail to maintain or enhance these relationships, our ability
    to serve our customers and develop new services and applications
    could be harmed.

Our ability to provide our services to users of
multiple technologies and platforms depends significantly on our
ability to develop and maintain our strategic relationships with
key streaming media technology companies and content providers.
We rely on these relationships for licensed technology and
content. We also rely on relationships with major recording
labels for our music content licensing strategy. Obtaining
comprehensive music content licenses is challenging, as doing so
may require us to obtain copyright licenses with various third
parties in the fragmented music recording and publishing
industries. These copyrights often address differing activities
related to the delivery of digital media, including reproduction
and performance, some of which may require separate licensing
arrangements from various rights holders such as publishers,
artists and record labels. The effort to obtain the necessary
rights by such third parties is often significant, and could
disrupt, delay, or prevent us from executing our business plans.
Because of the large number of potential parties from which we
must obtain licenses, we may never be able to obtain a
sufficient number of licenses to allow us to provide services
that will meet our customers expectations.

Due to the evolving nature of our industry, we
will need to develop additional relationships to adapt to
changing technologies and standards and to work with newly
emerging companies with whom we do not have pre-existing
relationships. We cannot be certain that we will be successful
in developing new relationships or that our partners will view
these relationships as significant to their own business or that
they will continue their commitment to us in the future. If we
are unable to maintain or enhance these relationships, we may
have difficulty strengthening our technology development and
increasing the adoption of our brand and services.



| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Our business will suffer if we do not
    anticipate and meet specific customer requirements or respond
    to technological change.

The market for digital media services is
characterized by rapid technological change, frequent new
product introductions and changes in customer requirements, some
of which are unique or on a custom by custom basis. We may be
unable to respond quickly or effectively to these developments
or requirements. Our future success will depend to a substantial
degree on our ability to offer services that incorporate leading
technology, address the increasingly sophisticated, varied or
individual needs of our current and prospective

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customers and respond to technological advances
and emerging industry standards and practices on a timely and
cost-effective basis. You should be aware that:




| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our technology or systems may become obsolete
    upon the introduction of alternative technologies;                                                                                    
|
| |  | We may not have sufficient resources to develop
    or acquire new technologies or to introduce new services capable
    of competing with future technologies or service offerings; and
|
| |  | The price of our services is likely to decline as
    rapidly as the cost of any competitive alternatives.                                                                              

The development of new or enhanced services
through technology development activities is a complex and
uncertain process that requires the accurate anticipation of
technological and market trends. We may experience design,
manufacturing, marketing and other difficulties that could delay
or prevent the development, introduction or marketing of new
services and enhancements. In addition, our inability to
effectively manage the transition from older services to newer
services could cause disruptions to customer orders and harm our
business and prospects.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | Our music content licenses could result in
    operational complexity that may divert resources or make our
    business more expensive to conduct.

The large number of licenses that we need to
maintain in order to expand our music-related services creates
operational difficulties in connection with tracking the rights
that we have acquired and the complex royalty structures under
which we must pay. In addition, our licensing agreements
typically allow the third party to audit our royalty tracking
and payment mechanisms to ensure that we are accurately
reporting and paying the royalties owed. If we are unable to
accurately track the numerous parties that we must pay in
connection with each delivery of digital music services and
deliver the appropriate payment in a timely fashion, we may risk
penalties up to and including termination of certain licenses.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Competition may decrease our market share,
    revenues, and gross margins.

We face intense and increasing competition in the
digital media services market. If we do not compete effectively
or if we experience reduced market share from increased
competition, our business will be harmed. In addition, the more
successful we are in the emerging market for digital media
services, the more competitors are likely to emerge. We believe
that the principal competitive factors in our market include:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Ability to offer a private branded solution                                
|
| |  | Service functionality, quality and performance;                            
|
| |  | Ease of use, reliability, scalability and
    security of services;        
|
| |  | Establishing a significant base of customers and
    distribution partners;
|
| |  | Ability to introduce new services to the market
    in a timely manner;    
|
| |  | Customer service and support;                                              
|
| |  | Attracting third-party web developers; and                                 
|
| |  | Pricing.                                                                   

Many of our competitors have substantially more
capital, longer operating histories, greater brand recognition,
larger customer bases and significantly greater financial,
technical and marketing resources than we do. These competitors
may also engage in more extensive development of their
technologies, adopt more aggressive pricing policies and
establish more comprehensive marketing and advertising campaigns
than we can. Our competitors may develop products and service
offerings that we do not offer or that are more sophisticated or
more cost effective than our own. For these and other reasons,
our competitors products and services may achieve greater
acceptance in the marketplace than our own, limiting our ability
to gain market share and customer loyalty and to generate
sufficient revenues to achieve a profitable level of operations.
Our failure to adequately address any of the above factors could
harm our business and operating results.

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| |                                                                               
| | ------------------------------------------------------------------------------
| | Our industry is experiencing consolidation
    that may intensify competition.

The Internet and digital media services
industries are undergoing substantial change that has resulted
in increasing consolidation and a proliferation of strategic
transactions. Many companies in these industries have failed or
are being acquired by larger entities. As a result, we are
increasingly competing with larger competitors which have
substantially greater resources than we do. We expect this
consolidation and strategic partnering to continue. Acquisitions
or strategic relationships could harm us in a number of ways.
For example:



| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Competitors could acquire or enter into
    relationships with companies with which we have strategic
    relationships and discontinue our relationship, resulting in the
    loss of distribution opportunities for our products and services
    or the loss of certain enhancements or value-added features to
    our products and services;
|
| |  | Competitors could obtain exclusive access to
    desirable multimedia content and prevent that content from being
    available in certain formats, thus impairing our content
    selection and our ability to attract customers;                                                                                                               
|
| |  | Suppliers of important or emerging technologies
    could be acquired by a competitor or other company which could
    prevent us from being able to utilize such technologies in our
    offerings, and disadvantage our offerings relative to those of
    competitors;                                                                        
|
| |  | A competitor could be acquired by a party with
    significant resources and experience that could increase the
    ability of the competitor to compete with our products and
    services; and                                                                                                                                                 
|
| |  | Other companies with related interests could
    combine to form new, formidable competition, which could
    preclude us from obtaining access to certain markets or content;
    or which could significantly change the market for our products
    and services.                                                                             

Any of these results could put us at a
competitive disadvantage that could cause us to lose customers,
revenue and market share. They could also force us to expend
greater resources to meet the competitive threat, which could
also harm our operating results.



| |                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We must enhance our existing digital media
    services and applications, and develop and introduce new
    services and applications to remain competitive in that segment.
    Any failure to do so in a timely manner will cause our results
    of operations in that segment to suffer.

The market for digital media service solutions is
characterized by rapidly changing technologies and short product
life cycles. These market characteristics are heightened by the
emerging nature of the Internet and the continuing trend of
companies from many industries to offer Internet-based
applications and services. The widespread adoption of the new
Internet, networking, streaming media, or telecommunications
technologies or other technological changes could require us to
incur substantial expenditures to modify or adapt our operating
practices or infrastructure. Our future success will depend in
large part upon our ability to:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identify and respond to emerging technological
    trends in the market;                                                                                
|
| |  | Enhance our products by adding innovative
    features that differentiate our digital media services and
    applications from those of our competitors;
|
| |  | Acquire and license leading technologies;                                                                                                               
|
| |  | Bring digital media services and applications to
    market and scale our business and operations on a timely basis
    at competitive prices; and      
|
| |  | Respond effectively to new technological changes
    or new product announcements by others.                                                            

We will not be competitive unless we continually
introduce new services and applications or enhancements to
existing services and applications that meet evolving industry
standards and customer needs. In the future, we may not be able
to address effectively the compatibility and interoperability
issues that arise as a result of technological changes and
evolving industry standards. The technical innovations required
for us to

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remain competitive are inherently complex,
require long development schedules and are dependent in some
cases on sole source suppliers. We will be required to continue
to invest in research and development in order to attempt to
maintain and enhance our existing technologies and products, but
we may not have the funds available to do so. Even if we have
sufficient funds, these investments may not serve the needs of
customers or be compatible with changing technological
requirements or standards. Most development expenses must be
incurred before the technical feasibility or commercial
viability of new or enhanced services and applications can be
ascertained. Revenue from future services and applications or
enhancements to services and applications may not be sufficient
to recover the associated development costs.




| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The technology underlying our services and
    applications is complex and may contain unknown defects that
    could harm our reputation, result in product liability or
    decrease market acceptance of our
    services and applications.

The technology underlying our digital media
services and applications is complex and includes software that
is internally developed and software licensed from third
parties. These software products may contain errors or defects,
particularly when first introduced or when new versions or
enhancements are released. We may not discover software defects
that affect our current or new services and applications or
enhancements until after they are sold. Furthermore, because our
digital media services are designed to work in conjunction with
various platforms and applications, we are susceptible to errors
or defects in third-party applications that can result in a
lower quality product for our customers. Because our customers
depend on us for digital media management, any interruptions
could:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Damage our reputation;                                                     
|
| |  | Cause our customers to initiate product liability
    suits against us;    
|
| |  | Increase our product development resources;                                
|
| |  | Cause us to lose sales; and                                                
|
| |  | Delay market acceptance of our digital media
    services and applications.

We do not possess product liability insurance,
and our errors and omissions coverage is not likely to be
sufficient to cover our complete liability exposure.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | Our network is subject to security and
    stability risks that could harm our business and reputation and
    expose us to litigation or liability.

Online commerce and communications depend on the
ability to transmit confidential information and licensed
intellectual property securely over private and public networks.
Any compromise of our ability to transmit such information and
data securely or reliably, and any costs associated with
preventing or eliminating such problems, could harm our
business. Our systems and operations are susceptible to, and
could be damaged or interrupted by a number of security and
stability risks, including: outages caused by fire, flood, power
loss, telecommunications failure, Internet breakdown, earthquake
and similar events. We do not have complete redundancy in our
webcasting facilities and therefore any damage or destruction to
these would significantly harm our webcasting business. Our
systems are also subject to human error, security breaches,
power losses, computer viruses, break-ins, denial of
service attacks, sabotage, intentional acts of vandalism
and tampering designed to disrupt our computer systems, Websites
and network communications. A sudden and significant increase in
traffic on our Websites could strain the capacity of the
software, hardware and telecommunications systems that we deploy
or use. This could lead to slower response times or system
failures.

Our operations also depend on receipt of timely
feeds from our content providers, and any failure or delay in
the transmission or receipt of such feeds could disrupt our
operations. We also depend on Web browsers, ISPs and online
service providers to provide access over the Internet to our
product and service offerings. Many of these providers have
experienced significant outages or interruptions in the past,
and could experience outages, delays and other difficulties due
to system failures unrelated to our systems. These types of
interruptions could continue or increase in the future.

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The occurrence of any of these or similar events
could damage our business, hurt our ability to distribute
products and services and collect revenue, threaten the
proprietary or confidential nature of our technology, harm our
reputation, and expose us to litigation or liability. We may be
required to expend significant capital or other resources to
protect against the threat of security breaches, hacker attacks
or system malfunctions or to alleviate problems caused by such
breaches, attacks or failures.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our services are complex and are deployed
    in complex environments and therefore may have errors or defects
    that could seriously harm our business.

Our services are highly complex and are designed
to be deployed in and across numerous large complex networks.
Our digital distribution activities are managed by sophisticated
software and computer systems. From time to time, we have needed
to correct errors and defects. In addition, we must continually
develop and update these systems over time as our business and
business needs grow and change, and these systems may not
adequately reflect the current needs of our business. We may
encounter delays in developing these systems, and the systems
may contain undetected errors and defects that could cause
system failures. Any system error or failure that causes
interruption in availability of products or content or an
increase in response time could result in a loss of potential or
existing business services customers, users, advertisers or
content providers. If we suffer sustained or repeated
interruptions, our products, services and Websites could be less
attractive to such entities or individuals and our business
could be harmed.



| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our transmission capacity is not entirely
    in our control, as we rely in part on transmission capacity
    provided by third parties. Insufficient transmission capacity
    could result in interruptions in our services and
    loss of revenues.

Significant portions of our business are
dependent on providing customers with efficient and reliable
services to enable customers to broadcast content to large
audiences on a live or on-demand basis. Our operations are
dependent in part upon transmission capacity provided by
third-party telecommunications network providers. Any failure of
such network providers to provide the capacity we require may
result in a reduction in, or interruption of, service to our
customers. If we do not have access to third-party transmission
capacity, we could lose customers and if we are unable to obtain
such capacity on terms commercially acceptable to us, our
business and operating results could suffer.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our business and operations may be
    especially subject to the risks of earthquakes and other natural
    catastrophes

Our computer and communications infrastructure is
located at a single leased facility in Seattle, Washington, an
area that is at heightened risk of earthquake and volcanic
events. We do not have fully redundant systems, and we may not
have adequate business interruption insurance to compensate us
for losses that may occur from a system outage. Despite our
efforts, our network infrastructure and systems could be subject
to service interruptions or damage and any resulting
interruption of services could harm our business, operating
results and reputation.



| |                                                                         
| | ------------------------------------------------------------------------
| | Government regulation could adversely
    affect our business prospects.

Few existing laws or regulations specifically
apply to the Internet, other than laws and regulations generally
applicable to businesses. Certain U.S. export controls and
import controls of other countries, including controls on the
use of encryption technologies, may apply to our products. Many
laws and regulations, however, are pending and may be adopted in
the United States, individual states and local jurisdictions and
other countries with respect to the Internet. These laws may
relate to many areas that impact our business, including content
issues (such as obscenity, indecency and defamation), copyright
and other intellectual property rights, digital rights
management, encryption, caching of content by server products,
personal privacy, taxation, e-mail, sweepstakes, promotions,
network and information security and the convergence of
traditional communication services with Internet communications,
including the future availability of broadband transmission
capability and wireless networks. These types of regulations are
likely to differ between countries and other political and
geographic divisions. Other countries and political organiza-

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tions are likely to impose or favor more and
different regulation than that which has been proposed in the
United States, thus furthering the complexity of regulation. In
addition, state and local governments may impose regulations in
addition to, inconsistent with, or stricter than federal
regulations. The adoption of such laws or regulations, and
uncertainties associated with their validity, interpretation,
applicability and enforcement, may affect the available
distribution channels for and costs associated with our products
and services, and may affect the growth of the Internet. Such
laws or regulations may harm our business. Our products and
services may also become subject to investigation and regulation
of foreign data protection and e-commerce authorities, including
those in the European Union. Such activities could result in
additional product and distribution costs for us in order to
comply with such regulation.


There is uncertainty regarding how existing laws
governing issues such as property ownership, copyright and other
intellectual property issues, digital rights management,
taxation, gambling, security, illegal or obscene content,
retransmission of media, and personal privacy and data
protection apply to the Internet. The vast majority of such laws
was adopted before the advent of the Internet and related
technologies and does not address the unique issues associated
with the Internet and related technologies. Most of the laws
that relate to the Internet have not yet been interpreted. In
addition to potential legislation from local, state and federal
governments, labor guild agreements and other laws and
regulations that impose fees, royalties or unanticipated
payments regarding the distribution of media over the Internet
may directly or indirectly affect our business. While we and our
customers may be directly affected by such agreements, we are
not a party to such agreements and have little ability to
influence the degree such agreements favor or disfavor Internet
distribution or our business models. Changes to or the
interpretation of these laws and the entry into such industry
agreements could:



| |   |                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Limit the growth of the Internet;                                                                                                                                                                                                                                                                                                               
|
| |  | Create uncertainty in the marketplace that could
    reduce demand for our products and services;                                                                                                                                                                                                                                               
|
| |  | Increase our cost of doing business;                                                                                                                                                                                                                                                                                                            
|
| |  | Expose us to increased litigation risk,
    substantial defense costs and significant liabilities associated
    with content available on our Websites or distributed or
    accessed through our products or services, with our provision of
    products and services, and with the features or performance of
    our products and Websites;
|
| |  | Lead to increased product development costs or
    otherwise harm our business; or                                                                                                                                                                                                                                                              
|
| |  | Decrease the rate of growth of our user base and
    limit our ability to effectively communicate with and market to
    our user base.                                                                                                                                                                                                         

The Digital Millennium Copyright Act
(DMCA) includes statutory licenses for the performance of
sound recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, we and our
broadcast customers may be required to pay licensing fees for
digital sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The
DMCA does not specify the rate and terms of the licenses, which
are determined by arbitration proceedings, known as CARP
proceedings, supervised by the United States Copyright Office.
Past CARP proceedings have resulted in proposed rates for
statutory webcasting that were significantly in excess of rates
requested by webcasters. CARP proceedings relating to music
subscription and non-subscription services offering music
programming that qualify for various licenses under U.S.
copyright law are pending. We cannot predict the outcome of
these CARP proceedings and may elect instead to directly license
music content for our subscription and/or non-subscription
services, either alone or in concert with other affected
companies.

Such licenses may apply only to music performed
in the United States, and the availability of corresponding
licenses for international performances is unclear. Therefore,
our ability to find rights holders and negotiate appropriate
licenses is uncertain. Many of our customers may be affected by
these rates, which may negatively affect our revenue. Several
CARP proceedings are pending for subscription music services and
services that deliver digital downloads of music, and the
outcome of these CARPs will also likely affect our business in
ways that we cannot predict. Depending on the rates and terms
adopted for the statutory licenses, our business could be harmed
both by increasing our own cost of doing business, as well as by
increasing the

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cost of doing business for our customers. We
anticipate future CARPs relating to music subscription delivery
services, which may also adversely affect the online
distribution of music.


The Child Online Protection Act and the Child
Online Privacy Protection Act impose civil and criminal
penalties on persons distributing material harmful to minors
over the Internet to persons under the age of 17, or
collecting personal information from children under the age
of 13. We do not knowingly distribute harmful materials to
minors or collect personal information from children under the
age of 13. The manner in which these Acts may be
interpreted and enforced cannot be fully determined, and future
legislation similar to these Acts could subject us to potential
liability if we were deemed to be non-compliant with such rules
and regulations, which in turn could harm our business.

There are a large number of legislative proposals
before the United States Congress and various state legislatures
regarding intellectual property, digital rights management, copy
protection requirements, privacy, email marketing and security
issues related to our business. It is not possible to predict
whether or when such legislation may be adopted, and certain
proposals, if adopted, could materially and adversely affect our
business through a decrease in user registration and revenue,
and influence how and whether we can communicate with our
customers.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We may be subject to market risk and legal
    liability in connection with the data collection capabilities of
    our products and services.

Many of our products are interactive Internet
applications that by their very nature require communication
between a client and server to operate. To provide better
consumer experiences and to operate effectively, our products
send information to servers. Many of the services we provide
also require that a user provide certain information to us. We
post an extensive privacy policy concerning the collection, use
and disclosure of user data involved in interactions between our
client and server products. Any failure by us to comply with our
posted privacy policy and existing or new legislation regarding
privacy issues could impact the market for our products and
services, subject us to litigation and harm our business.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A class action lawsuit has been filed
    against us which may result in litigation that is costly to
    defend and the outcome of which is uncertain and may harm our
    business.

We, and various underwriters for our initial
public offering are defendants in a putative shareholder class
action. The complaint alleges undisclosed improper underwriting
practices concerning the allocation of shares for our IPO, in
violation of the federal securities laws. Similar complaints
have been filed concerning the IPOs of more than
300 companies, and the litigation has been coordinated in
federal court for the Southern District of New York as In re
Initial Public Offering Securities Litigation,
21 MC 92. A proposal has been made for the settlement
and release of claims against the issuer defendants. The
settlement is subject to a number of conditions, including
approval of other proposed settling parties and the court. If
the settlement does not occur, and litigation against us
continues, we believe we have meritorious defenses and intend to
defend the case vigorously. In addition, because class action
litigation has often been brought against companies with periods
of volatility in their stock prices, we could become involved in
additional litigation.



| |                                                                               
| | ------------------------------------------------------------------------------
| | Our stock price is volatile and may
    continue to be volatile in the future.

Our common stock trades on the Nasdaq SmallCap
Market. The market price of our common stock has fluctuated
significantly to date. In the future, the market price of our
common stock could be subject to significant fluctuations due to
general market conditions and in response to quarter-to-quarter
variations in:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | Our anticipated or actual operating results;                       
|
| |  | Developments concerning our technologies and
    market offerings; 
|
| |  | Technological innovations or setbacks by us or
    our competitors;
|
| |  | Conditions in the digital media and Internet
    markets;          

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| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Announcements of merger or acquisition
    transactions; and           
|
| |  | Other events or factors and general economic and
    market conditions.

The stock market in recent years has experienced
extreme price and volume fluctuations that have affected the
market price of many technology companies, and that have often
been unrelated or disproportionate to the operating performance
of companies.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | Future sales of our common stock or the
    perception that future sales could occur, may adversely affect
    our common stock price.

If a large number of shares of our common stock
are sold in the open market or if there is a perception that
such sales could occur, the trading price of our common stock
could decline materially. In addition, the sale of these shares,
or possibility of such sale, could impair our ability to raise
capital through the sale of additional shares of common stock.

The 17,358,553 shares subject to our recent
prospectus represent 30.5% of our common shares outstanding on
December 31, 2003. In addition, in the first quarter of
2004, we sold an additional 10,810,811 shares of common stock to
a limited number of accredited investors and we have agreed to
file a registration statement covering the resale of the shares
sold in that financing. The selling stockholders under the
registration statements will be permitted to sell their
registered shares in the open market from time to time without
advance notice to us or to the market and without limitations on
volume.

Sales of shares pursuant to exercisable options
and warrants could also lead to subsequent sales of the shares
in the public market. These sales, together with sales of shares
by the selling stockholders, could depress the market price of
our stock by creating an excess in supply of shares for sale.
Availability of these shares for sale in the public market could
also impair our ability to raise capital by selling equity
securities.



| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Securities analysts may not continue to
    cover our common stock or may issue negative reports, and this
    may have a negative impact on our common stocks market
    price.

There is no guarantee that securities analysts
will continue to cover our common stock. If securities analysts
do not cover our common stock, the lack of research coverage may
adversely affect our common stocks market price. The
trading market for our common stock relies in part on the
research and reports that industry or financial analysts publish
about our business or us. If one or more of the analysts who
cover us downgrades our stock, our stock price would likely
decline rapidly. If one or more of these analysts ceases
coverage of our company, we could lose visibility in the market,
which in turn could cause our stock price to decline. In
addition, recently adopted rules mandated by the Sarbanes-Oxley
Act of 2002, and a global settlement reached between the SEC,
other regulatory analysts and a number of investment banks in
April 2003, may lead to a number of fundamental changes in how
analysts are reviewed and compensated. In particular, many
investment banking firms will now be required to contract with
independent financial analysts for their stock research. It may
be difficult for companies with smaller market capitalizations,
such as our company, to attract independent financial analysts
that will cover our common stock, which could have a negative
effect on our market price.



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If proposed accounting regulations that
    require companies to expense stock options are adopted, our
    earnings will decrease and our stock price may
    decline.

A number of publicly-traded companies have
recently announced that they will begin expensing stock option
grants to employees. In addition, the Financial Accounting
Standards Board (FASB) has indicated that possible rule changes
requiring expensing of stock options may be adopted in the near
future. Currently, we include such expenses on a pro forma basis
in the notes to our annual financial statements in accordance
with accounting principles generally accepted in the United
States, but do not include stock option expense for employee
options in our reported financial statements. If accounting
standards are changed to require us to expense stock options,
our reported earnings will decrease significantly and our stock
price could decline.

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| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Some provisions of our certificate of
    incorporation and bylaws and of Delaware law may deter takeover
    attempts, which may limit the opportunity of our stockholders to
    sell their shares at a favorable price.

Some of the provisions of our certificate of
incorporation and bylaws could make it more difficult for a
third party to acquire us, even if doing so might be beneficial
to our stockholders by providing them with the opportunity to
sell their shares possibly at a premium over the then market
price. For example, our board of directors is divided into three
classes. At each annual meeting of stockholders, the terms of
approximately one-third of the directors will expire, and new
directors will be elected to serve for three years. It will take
at least two annual meetings to effect a change in control of
our board of directors because a majority of the directors
cannot be elected at a single meeting, which may discourage
hostile takeover bids.

In addition, our certificate of incorporation
authorizes the board of directors to issue up to
5,000,000 shares of preferred stock. The preferred stock
may be issued in one or more series, the terms of which may be
determined at the time of issuance by our board of directors
without further action by the stockholders. These terms may
include voting rights including the right to vote as a series on
particular matters, preferences as to dividends and liquidation,
conversion rights, redemption rights and sinking fund
provisions. No shares of preferred stock are currently
outstanding and we have no present plans for the issuance of any
preferred stock. The issuance of any preferred stock, however,
could diminish the rights of holders of our common stock, and
therefore could reduce the value of our common stock. In
addition, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with, or
sell assets to, a third party. The ability of our board of
directors to issue preferred stock could make it more difficult,
delay, discourage, prevent or make it more costly to acquire or
effect a change in control, thereby preserving the current
stockholders control.

Our bylaws contain provisions that require
stockholders to act only at a duly-called meeting and make it
difficult for any person other than management to introduce
business at a duly-called meeting by requiring such other person
to follow certain notice procedures.

Finally, we are also subject to Section 203
of the Delaware General Corporation Law which, subject to
certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested
stockholder for a period of three years following the date that
the stockholder became an interested stockholder. The preceding
provisions of our certificate of incorporation and bylaws, as
well as Section 203 of the Delaware General Corporation
Law, could discourage potential acquisition proposals, delay or
prevent a change of control and prevent changes in our
management, even if such things would be in the best interests
of our stockholders.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We have not, and currently do not
    anticipate, paying dividends on our common stock.

We have never paid any dividends on our common
stock and do not plan to pay dividends on our common stock for
the foreseeable future.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 7A | Quantitative and Qualitative Disclosures
    About Market Risk

Our financial results could be affected by
factors such as changes in interest rates and fluctuations in
the stock market. As substantially all sales are currently made
in U.S. dollars, a strengthening of the dollar could make
our services less competitive in foreign markets. We do not use
derivative instruments to hedge our risks. Our interest income
is sensitive to changes in the general level of
U.S. interest rates. Based on our invested cash balances of
$22.3 million at December 31, 2003, a one percent
change in interest rates would cause a change in interest income
of $223,000 per year. Due to the investment grade level of our
investments, we anticipate no material market risk exposure. In
addition, our revolving credit facility and our term loan are
based on the prime rate. Based on the $4.3 million balance
outstanding at December 31, 2003, a one percent increase in
the prime rate would increase our interest expense by $43,000
per year.

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We invest in investment-grade government
obligations, institutional money market funds and other
obligations with FDIC insured US banks. Concentration is
limited to 10% in any one instrument or issuer. Our primary
investment focus is to preserve capital and earn a market rate
of return on our investments. We do not speculate nor invest in
publicly traded equity securities and, therefore, do not believe
that our capital is subject to significant market risk.

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|       |                                                
|------ | -----------------------------------------------
|Item 8 | Financial Statements and Supplementary
    Data

LOUDEYE CORP.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                    |  |        |    | 
|--------------------------------------------------- |  | ------ | -- | 
|                                                    |  | Page  
|                                                    |  | Number
|                                                    |  |       
|Report of Independent Auditors                      |  |        | 50 | 
|Report of Arther Andersen LLP                       |  |        | 51 | 
|Consolidated Balance Sheets                         |  |        | 52 | 
|Consolidated Statements of Operations               |  |        | 53 | 
|Consolidated Statements of Stockholders
    Equity |  |        | 54 | 
|Consolidated Statements of Cash Flows               |  |        | 55 | 
|Notes to Consolidated Financial Statements          |  |        | 56 | 

49



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors

and Shareholders of


Loudeye Corp.


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of stockholders equity, and of cash flows
present fairly, in all material respects, the financial position
of Loudeye Corp. (formerly Loudeye Technologies, Inc.) and
subsidiaries at December 31, 2003 and 2002, and the results
of their operations and of their cash flows for the years then
ended in conformity with accounting principles generally
accepted in the United States of America. 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 of these statements in accordance with auditing standards
generally accepted in the United States of America, which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. The
consolidated financial statements of Loudeye Technologies, Inc.
and subsidiaries, for the year ended December 31, 2001,
prior to the revision described in Note 2, were audited by
other independent auditors who have ceased operations. Those
independent auditors expressed an unqualified opinion on those
consolidated financial statements in their report dated
February 14, 2002.

As described in Note 2, the Company adopted
the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
as of January 1, 2002.

As discussed above, the consolidated financial
statements of Loudeye Technologies, Inc. for the year ended
December 31, 2001 were audited by other independent
auditors who have ceased operations. As described in
Note 2, these consolidated financial statements have been
revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, which was
adopted by the Company as of January 1, 2002. We audited
the transitional disclosures described in Note 2. In our
opinion, the transitional disclosures for 2001 in Note 2
are appropriate. However, we were not engaged to audit, review
or apply any procedures to the 2001 consolidated financial
statements of the Company other than with respect to such
disclosures and, accordingly, we do not express an opinion or
any other form of assurance on the 2001 consolidated financial
statements taken as a whole.

/s/ PRICEWATERHOUSECOOPERS LLP

Seattle, Washington

March 18, 2004


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REPORT OF ARTHUR ANDERSEN LLP

The following is a copy of the report of
Arthur Andersen LLP dated February 14, 2002 on their
audits of the financial statements of Loudeye Technologies, Inc
and subsidiaries for December 31, 2001 and 2000 and each of
the three years in the period ended December 31, 2001.
Arthur Andersen LLP has ceased operations and has not
reissued this report. In 2002, the Company adopted the
provisions of the Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS No. 142). As discussed in Note 2, the Company
has presented the transitional disclosures for 2001 required by
SFAS No. 142. The Arthur Andersen LLP report does not
extend to these changes to the 2001 consolidated financial
statements. These revisions to the 2001 consolidated financial
statements were reported on by PricewaterhouseCoopers LLP
as stated in their report appearing herein. The footnote shown
below was not part of Arthur Andersen LLPs
report.

To Loudeye Technologies, Inc.:

We have audited the accompanying consolidated
balance sheets of Loudeye Technologies, Inc. and subsidiaries
(Loudeye) as of December 31, 2001* and 2000*, and the
related consolidated statements of operations, stockholders
equity (deficit) and cash flows for each of the three years* in
the period ended December 31, 2001. These financial
statements are the responsibility of Loudeye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 Loudeye Technologies, Inc. and subsidiaries as of
December 31, 2001* and 2000*, and the results of their
operations and their cash flows for each of the three years* in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

February 14, 2002

Seattle, Washington






---

|  |                                                                                                                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The consolidated balance sheets as of
    December 31, 2001 and 2000 and the consolidated statements
    of operations, of stockholders equity and of cash flows
    for the years ended December 31, 2000 and 1999 are not
    required to be included in this Annual Report on Form 10-K.

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LOUDEYE CORP.

CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |          |        | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------ | - | -------- | ------ |  | - | -------- | ------ | 
|                                     |                                                                                                                                                                                                                                                  |                                           
|                                     |                                                                                                                                                                                                                                                  | December 31,                              
|                                     |                                                                                                                                                                                                                                                  |                                           
|                                     |                                                                                                                                                                                                                                                  | 2003                                       |   | 2002    
|                                     |                                                                                                                                                                                                                                                  |                                            |   |         
|                                     |                                                                                                                                                                                                                                                  |                                           
|                                     |                                                                                                                                                                                                                                                  | (in thousands, except                     
|                                     |                                                                                                                                                                                                                                                  | per share amounts)                        
|ASSETS                               |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     | Cash and cash equivalents                                                                                                                                                                                                                        |                                            | $ | 12,480   |        |  | $ | 1,780    |       
|                                     | Short-term investments                                                                                                                                                                                                                           |                                            |   | 9,460    |        |  |   | 9,978    |       
|                                     | Accounts receivable, net of allowances of $235
    and $254                                                                                                                                                                                      |                                            |   | 1,781    |        |  |   | 2,107    |       
|                                     | Notes receivable from related parties                                                                                                                                                                                                            |                                            |   |         |        |  |   | 1,187    |       
|                                     | Prepaid expenses and other                                                                                                                                                                                                                       |                                            |   | 345      |        |  |   | 736      |       
|                                     | Assets held for sale                                                                                                                                                                                                                             |                                            |   | 363      |        |  |   | 681      |       
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total current assets                       |   |          | 24,429 |  |   |          | 16,469 | 
|                                     | Restricted investments                                                                                                                                                                                                                           |                                            |   | 316      |        |  |   | 1,500    |       
|                                     | Property and equipment, net                                                                                                                                                                                                                      |                                            |   | 1,123    |        |  |   | 2,002    |       
|                                     | Goodwill                                                                                                                                                                                                                                         |                                            |   |         |        |  |   | 5,307    |       
|                                     | Intangibles assets, net                                                                                                                                                                                                                          |                                            |   | 86       |        |  |   | 1,758    |       
|                                     | Other assets, net                                                                                                                                                                                                                                |                                            |   | 360      |        |  |   | 821      |       
|                                     | Assets held for sale                                                                                                                                                                                                                             |                                            |   | 730      |        |  |   | 1,672    |       
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total assets                               |   | $        | 27,044 |  |   | $        | 29,529 | 
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     | Accounts payable                                                                                                                                                                                                                                 |                                            | $ | 1,229    |        |  | $ | 1,193    |       
|                                     | Line of credit                                                                                                                                                                                                                                   |                                            |   | 1,285    |        |  |   |         |       
|                                     | Accrued compensation and benefits                                                                                                                                                                                                                |                                            |   | 378      |        |  |   | 904      |       
|                                     | Other accrued expenses                                                                                                                                                                                                                           |                                            |   | 1,155    |        |  |   | 1,424    |       
|                                     | Accrued special charges                                                                                                                                                                                                                          |                                            |   | 1,670    |        |  |   | 2,903    |       
|                                     | Accrued acquisition consideration                                                                                                                                                                                                                |                                            |   |         |        |  |   | 1,059    |       
|                                     | Deposits and deferred revenue                                                                                                                                                                                                                    |                                            |   | 485      |        |  |   | 305      |       
|                                     | Current portion of long-term debt and capital
    leases                                                                                                                                                                                         |                                            |   | 1,348    |        |  |   | 773      |       
|                                     | Liabilities related to assets held for sale                                                                                                                                                                                                      |                                            |   | 98       |        |  |   | 25       |       
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total current liabilities                  |   |          | 7,648  |  |   |          | 8,586  | 
|                                     | Deposits and deferred revenue                                                                                                                                                                                                                    |                                            |   | 228      |        |  |   |         |       
|                                     | Long-term debt and capital leases, net of current
    portion                                                                                                                                                                                    |                                            |   | 2,135    |        |  |   | 591      |       
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total liabilities                          |   |          | 10,011 |  |   |          | 9,177  | 
|                                     | Commitments and contingencies                                                                                                                                                                                                                    |                                            |   |          |        |  |   |          |       
|Stockholders Equity                 |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     | Preferred stock, $0.001 par value, 5,000 shares
    authorized, none outstanding                                                                                                                                                                 |                                            |   |         |        |  |   |         |       
|                                     | Common stock, treasury stock and additional
    paid-in capital; for common stock, $0.001 par value, 100,000
    shares authorized; 56,974 shares issued and outstanding in 2003
    and 53,871 and 47,176 shares issued and outstanding in 2002 |                                            |   | 210,134  |        |  |   | 194,195  |       
|                                     | Deferred stock compensation                                                                                                                                                                                                                      |                                            |   | (214     | )      |  |   | (130     | )     
|                                     | Accumulated deficit                                                                                                                                                                                                                              |                                            |   | (192,887 | )      |  |   | (173,713 | )     
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total stockholders equity                 |   |          | 17,033 |  |   |          | 20,352 | 
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                  | Total liabilities and stockholders equity |   | $        | 27,044 |  |   | $        | 29,529 | 
|                                     |                                                                                                                                                                                                                                                  |                                            |   |          |        |  |   |         

The accompanying notes are an integral part of
these consolidated financial statements

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LOUDEYE CORP.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |        |        |  
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ---------------------------- | ------- | ----- | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                                |                                                                                                                   |                             
|                                                |                                                                                                                   | Years Ended December 31,    
|                                                |                                                                                                                   |                             
|                                                |                                                                                                                   | 2003                         |         | 2002  |        | 2001
|                                                |                                                                                                                   |                              |         |       |        |     
|                                                |                                                                                                                   |                             
|                                                |                                                                                                                   | (in thousands, except       
|                                                |                                                                                                                   | per share amounts)          
|REVENUES                                        |                                                                                                                   | $                            | 11,948  |       |        | $    | 12,681  |        |        | $ | 10,388  |       
|COST OF REVENUES                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                | Other cost of revenues                                                                                            |                              |         | 7,144 |        |      |         | 13,347 |        |   |         | 12,737 |       
|                                                | Non-cash stock-based compensation                                                                                 |                              |         | 62    |        |      |         | (34    | )      |   |         |       |       
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                |                                                                                                                   | Total cost of revenues       |         |       | 7,206  |      |         |        | 13,313 |   |         |        | 12,737 |  
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                |                                                                                                                   | Gross profit (loss)          |         |       | 4,742  |      |         |        | (632   | ) |         |        | (2,349 | )
|OPERATING EXPENSES                              |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                | Research and development (excluding non-cash
    stock-based compensation of $57 in 2003 and $(21) in 2002)       |                              |         | 1,688 |        |      |         | 3,159  |        |   |         | 9,719  |       
|                                                | Sales and marketing (excluding non-cash
    stock-based compensation of $47 in 2003 and $(55) in 2002)            |                              |         | 3,286 |        |      |         | 7,667  |        |   |         | 9,409  |       
|                                                | General and administrative (excluding non-cash
    stock-based compensation of $1,194 in 2003 and $(307) in 2002) |                              |         | 7,778 |        |      |         | 11,375 |        |   |         | 11,102 |       
|                                                | Amortization of intangibles and other assets                                                                      |                              |         | 1,100 |        |      |         | 3,043  |        |   |         | 8,173  |       
|                                                | Stock-based compensation                                                                                          |                              |         | 1,298 |        |      |         | (383   | )      |   |         | 359    |       
|                                                | Special charges  goodwill impairments                                                                            |                              |         | 5,307 |        |      |         |       |        |   |         | 9,418  |       
|                                                | Special charges  other                                                                                           |                              |         | 3,392 |        |      |         | 6,846  |        |   |         | 27,843 |       
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                |                                                                                                                   | Total operating expenses     |         |       | 23,849 |      |         |        | 31,707 |   |         |        | 76,023 |  
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|OPERATING LOSS                                  |                                                                                                                   |                              | (19,107 | )     |        |      | (32,339 | )      |        |   | (78,372 | )     
|OTHER INCOME (EXPENSE), net                     |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                | Interest income                                                                                                   |                              |         | 347   |        |      |         | 1,149  |        |   |         | 3,157  |       
|                                                | Interest expense                                                                                                  |                              |         | (286  | )      |      |         | (631   | )      |   |         | (1,181 | )     
|                                                | Increase in fair value of common stock warrants                                                                   |                              |         | (248  | )      |      |         |       |        |   |         |       |       
|                                                | Other, net                                                                                                        |                              |         | 120   |        |      |         | 659    |        |   |         |       |       
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|                                                |                                                                                                                   | Total other income (expense) |         |       | (67    | )    |         |        | 1,177  |   |         |        | 1,976  |  
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|NET LOSS                                        |                                                                                                                   | $                            | (19,174 | )     |        | $    | (31,162 | )      |        | $ | (76,396 | )     
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|Net loss per share  basic and diluted          |                                                                                                                   | $                            | (0.39   | )     |        | $    | (0.75   | )      |        | $ | (1.84   | )     
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       
|Weighted average shares  basic and
    diluted |                                                                                                                   |                              | 49,797  |       |        |      | 41,393  |        |        |   | 41,429  |       
|                                                |                                                                                                                   |                              |         |       |        |      |         |        |        |   |         |       

The accompanying notes are an integral part of
these consolidated financial statements

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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                            |  |                       |        |          |  |              |         |               |  |        |        |   |  |   |          |   |  |   |         |  
|--------------------------------------------------------------------------- |  | --------------------- | ------ | -------- |  | ------------ | ------- | ------------- |  | ------ | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                            |  |                       |        |          |  |              |         |              
|                                                                            |  | Common Stock,         |        |          |  |              |         |              
|                                                                            |  | Treasury              |        |          |  |              |         |              
|                                                                            |  | Stock, and Additional |        |          |  |              |         |              
|                                                                            |  | Paid-in Capital       |        | Deferred |  |              |         | Total        
|                                                                            |  |                       |        | Stock    |  | Accumulated  |         | Stockholders
|                                                                            |  | Shares                |        | Amount   |  | Compensation |         | Deficit       |  | Equity
|                                                                            |  |                       |        |          |  |              |         |               |  |       
|                                                                            |  |                      
|                                                                            |  | (in thousands)       
|BALANCES, January 1, 2001                                                   |  |                       | 37,072 |          |  | $            | 185,609 |               |  | $      | (3,387 | ) |  | $ | (66,154  | ) |  | $ | 116,068 |  
|Issuance of shares for acquisition and strategic
    partnerships           |  |                       | 7,153  |          |  |              | 10,836  |               |  |        |       |   |  |   |         |   |  |   | 10,836  |  
|Repurchase of common stock                                                  |  |                       | (4,000 | )        |  |              | (2,000  | )             |  |        |       |   |  |   |         |   |  |   | (2,000  | )
|Other                                                                       |  |                       |       |          |  |              | 61      |               |  |        |       |   |  |   |         |   |  |   | 61      |  
|Stock option exercises, repurchases and shares
    issued under ESPP        |  |                       | 250    |          |  |              | 266     |               |  |        |       |   |  |   |         |   |  |   | 266     |  
|Modification of common stock options                                        |  |                       |       |          |  |              | (2,145  | )             |  |        | 943    |   |  |   |         |   |  |   | (1,202  | )
|Amortization of deferred stock-based compensation                           |  |                       |       |          |  |              |        |               |  |        | 1,561  |   |  |   |         |   |  |   | 1,561   |  
|Net loss                                                                    |  |                       |       |          |  |              |        |               |  |        |       |   |  |   | (76,396  | ) |  |   | (76,396 | )
|                                                                            |  |                       |        |          |  |              |         |               |  |        |        |   |  |   |          |   |  |   |         |  
|BALANCES, December 31, 2001                                                 |  |                       | 40,475 |          |  |              | 192,627 |               |  |        | (883   | ) |  |   | (142,550 | ) |  |   | 49,194  |  
|Issuance of shares for acquisitions                                         |  |                       | 9,228  |          |  |              | 3,786   |               |  |        |       |   |  |   |         |   |  |   | 3,786   |  
|Repurchase of shares                                                        |  |                       | (2,696 | )        |  |              | (1,105  | )             |  |        |       |   |  |   |         |   |  |   | (1,105  | )
|Stock option exercises and shares issued under
    ESPP                     |  |                       | 169    |          |  |              | 57      |               |  |        |       |   |  |   |         |   |  |   | 57      |  
|Amortization of deferred stock compensation, net
    of cancellations       |  |                       |       |          |  |              | (1,170  | )             |  |        | 753    |   |  |   |         |   |  |   | (417    | )
|Net loss                                                                    |  |                       |       |          |  |              |        |               |  |        |       |   |  |   | (31,162  | ) |  |   | (31,162 | )
|                                                                            |  |                       |        |          |  |              |         |               |  |        |        |   |  |   |          |   |  |   |         |  
|BALANCES, December 31, 2002                                                 |  |                       | 47,176 |          |  |              | 194,195 |               |  |        | (130   | ) |  |   | (173,713 | ) |  |   | 20,352  |  
|Repurchase of common stock                                                  |  |                       | (1,469 | )        |  |              | (425    | )             |  |        |       |   |  |   |         |   |  |   | (425    | )
|Stock option and warrant exercises and shares
    issued under ESPP         |  |                       | 2,084  |          |  |              | 2,023   |               |  |        |       |   |  |   |         |   |  |   | 2,023   |  
|Shares issued in private placement                                          |  |                       | 7,839  |          |  |              | 9,975   |               |  |        |       |   |  |   |         |   |  |   | 9,975   |  
|Conversion of common stock warrants from a
    liability to equity          |  |                       |       |          |  |              | 1,704   |               |  |        |       |   |  |   |         |   |  |   | 1,704   |  
|Shares issued to pay accrued acquisition
    consideration                  |  |                       | 636    |          |  |              | 1,118   |               |  |        |       |   |  |   |         |   |  |   | 1,118   |  
|Shares issued for prior acquisitions and accrued
    bonus                  |  |                       | 629    |          |  |              | 25      |               |  |        |       |   |  |   |         |   |  |   | 25      |  
|Deferred stock-based compensation                                           |  |                       |       |          |  |              | 544     |               |  |        | (544   | ) |  |   |         |   |  |   |        |  
|Amortization of deferred stock-based
    compensation, net of cancellations |  |                       |       |          |  |              |        |               |  |        | 460    |   |  |   |         |   |  |   | 460     |  
|Stock-based compensation                                                    |  |                       | 79     |          |  |              | 900     |               |  |        |       |   |  |   |         |   |  |   | 900     |  
|Issuance of common stock warrants                                           |  |                       |       |          |  |              | 75      |               |  |        |       |   |  |   |         |   |  |   | 75      |  
|Net loss                                                                    |  |                       |       |          |  |              |        |               |  |        |       |   |  |   | (19,174  | ) |  |   | (19,174 | )
|                                                                            |  |                       |        |          |  |              |         |               |  |        |        |   |  |   |          |   |  |   |         |  
|BALANCES, December 31, 2003                                                 |  |                       | 56,974 |          |  | $            | 210,134 |               |  | $      | (214   | ) |  | $ | (192,887 | ) |  | $ | 17,033  |  
|                                                                            |  |                       |        |          |  |              |         |               |  |        |        |   |  |   |          |   |  |   |         |  

The accompanying notes are an integral part of
these consolidated financial statements

54



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##### Table of Contents



LOUDEYE CORP.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |         |        |         |  
|------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                                           |                                                                           |                                                  
|                                                                                           |                                                                           | Years Ended December 31,                         
|                                                                                           |                                                                           |                                                  
|                                                                                           |                                                                           | 2003                                              |                                                 | 2002    |        | 2001  
|                                                                                           |                                                                           |                                                   |                                                 |         |        |       
|                                                                                           |                                                                           |                                                  
|                                                                                           |                                                                           | (in thousands)                                   
|OPERATING ACTIVITIES                                                                       |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           | Net Loss                                                                  |                                                   | $                                               | (19,174 | )      |        | $       | (31,162 | )      |         | $       | (76,396 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities:            |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           | Depreciation and amortization                                             |                                                   |                                                 | 2,378   |        |        |         | 7,223   |        |         |         | 15,422  |       
|                                                                                           | Special charges and other non-cash items                                  |                                                   |                                                 | 6,744   |        |        |         | 3,575   |        |         |         | 29,736  |       
|                                                                                           | Other income from settlement of acquisition terms                         |                                                   |                                                 |        |        |        |         | (700    | )      |         |         |        |       
|                                                                                           | Stock-based compensation                                                  |                                                   |                                                 | 1,360   |        |        |         | (417    | )      |         |         | 359     |       
|                                                                                           | Increase in fair value of common stock warrants                           |                                                   |                                                 | 248     |        |        |         |        |        |         |         |        |       
|                                                                                           | Changes in operating assets and liabilities, net
    of amounts acquired: |                                                   |                                                 |         |        |        |         |         |        |         |         |         |       
|                                                                                           |                                                                           | Accounts receivable                               |                                                 |         | 326    |        |         |         | 358    |         |         |         | 2,902  |        
|                                                                                           |                                                                           | Prepaid expenses and other                        |                                                 |         | 1,889  |        |         |         | 464    |         |         |         | 396    |        
|                                                                                           |                                                                           | Accounts payable                                  |                                                 |         | 36     |        |         |         | 24     |         |         |         | (1,162 | )      
|                                                                                           |                                                                           | Accrued compensation, benefits and other expenses |                                                 |         | (1,916 | )      |         |         | (1,226 | )       |         |         | 2,610  |        
|                                                                                           |                                                                           | Deposits and deferred revenue                     |                                                 |         | 408    |        |         |         | (306   | )       |         |         | (161   | )      
|                                                                                           |                                                                           | Assets and liabilities held for sale              |                                                 |         | 402    |        |         |         | (109   | )       |         |         |       |        
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           |                                                                           |                                                   | Cash used in operating activities               |         |        | (7,299 | )       |         |        | (22,276 | )       |         |        | (26,294 | )
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|INVESTING ACTIVITIES                                                                       |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|Purchases of property and equipment                                                        |                                                                           |                                                   | (115                                            | )       |        |        | (1,676  | )       |        |         | (2,696  | )      
|Proceeds from sales of property and equipment                                              |                                                                           |                                                   | 185                                             |         |        |        | 109     |         |        |         |        |        
|Cash paid for acquisitions of businesses, net of
    cash acquired                         |                                                                           |                                                   | (82                                             | )       |        |        | (2,361  | )       |        |         | (9,580  | )      
|Loans made to related party and related interest                                           |                                                                           |                                                   |                                                |         |        |        | (801    | )       |        |         |        |        
|Payments received on loans made to related party                                           |                                                                           |                                                   | 1,187                                           |         |        |        | 734     |         |        |         |        |        
|Purchases of short-term investments                                                        |                                                                           |                                                   | (11,750                                         | )       |        |        | (11,105 | )       |        |         |        |        
|Sales of short-term investments                                                            |                                                                           |                                                   | 12,268                                          |         |        |        | 23,563  |         |        |         | 19,689  |        
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           |                                                                           |                                                   | Cash provided by investing activities           |         |        | 1,693  |         |         |        | 8,463   |         |         |        | 7,413   |  
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|FINANCING ACTIVITIES                                                                       |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|Proceeds from sale of stock and exercise of
    options                                    |                                                                           |                                                   | 2,023                                           |         |        |        | 47      |         |        |         | 270     |        
|Proceeds from private equity placement financing,
    net                                  |                                                                           |                                                   | 11,431                                          |         |        |        |        |         |        |         |        |        
|Proceeds from line of credit and long-term debt                                            |                                                                           |                                                   | 8,320                                           |         |        |        |        |         |        |         | 18,908  |        
|Principal payments on line of credit and
    long-term obligations                         |                                                                           |                                                   | (5,043                                          | )       |        |        | (20,495 | )       |        |         | (11,827 | )      
|Loans made to related party and related interest                                           |                                                                           |                                                   |                                                |         |        |        |        |         |        |         | (1,000  | )      
|Repurchase of common stock from related party                                              |                                                                           |                                                   | (425                                            | )       |        |        | (1,118  | )       |        |         | (2,000  | )      
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           |                                                                           |                                                   | Cash provided by (used in) financing activities |         |        | 16,306 |         |         |        | (21,566 | )       |         |        | 4,351   |  
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|                                                                                           |                                                                           |                                                   | Net change in cash and cash equivalents         |         |        | 10,700 |         |         |        | (35,379 | )       |         |        | (14,530 | )
|Cash and cash equivalents, beginning of period                                             |                                                                           |                                                   | 1,780                                           |         |        |        | 37,159  |         |        |         | 51,689  |        
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|Cash and cash equivalents, end of period                                                   |                                                                           | $                                                 | 12,480                                          |         |        | $      | 1,780   |         |        | $       | 37,159  |        
|                                                                                           |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|Supplemental Disclosures:                                                                  |                                                                           |                                                   |                                                 |         |        |        |         |         |        |         |         |        
|Cash paid for interest                                                                     |                                                                           | $                                                 | 200                                             |         |        | $      | 623     |         |        | $       | 970     |        
|Issuance of common stock for acquisition of
    businesses                                 |                                                                           |                                                   |                                                |         |        |        | 3,786   |         |        |         | 10,756  |        
|Repayment of related party note with shares                                                |                                                                           |                                                   |                                                |         |        |        | 777     |         |        |         |        |        
|Issuance of common stock to pay accrued
    acquisition consideration and accrued interest |                                                                           |                                                   | 1,118                                           |         |        |        |        |         |        |         |        |        
|Assets acquired under capital leases                                                       |                                                                           |                                                   | 112                                             |         |        |        | 467     |         |        |         | 368     |        
|Reversal of deferred stock compensation as a
    result of option cancellations            |                                                                           |                                                   |                                                |         |        |        | 1,170   |         |        |         |        |        
|Issuance of common stock and common stock
    warrants to strategic partners               |                                                                           |                                                   |                                                |         |        |        |        |         |        |         | 76      |        
|Conversion of common stock warrants from a
    liability to equity                         |                                                                           |                                                   | 1,704                                           |         |        |        |        |         |        |         |        |        

The accompanying notes are an integral part of
these consolidated financial statements

55



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##### Table of Contents



LOUDEYE CORP.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003


1.     The Company,
Risks and Uncertainties, and Basis of Consolidation:



| |            
| | -----------
| | The Company

Loudeye Corp. (the Company or
Loudeye) provides digital media services and media
restoration services. The Company is headquartered in Seattle,
Washington and to date has conducted business in the United
States, Canada and Europe in two business segments, digital
media services and media restoration services.



| |                        
| | -----------------------
| | Risks And Uncertainties

The Company is subject to a number of risks
similar to other companies in a comparable stage of development
including reliance on key personnel, successful marketing of its
services in an emerging market, competition from other companies
with greater technical, financial, management and marketing
resources, successful development of new services, successful
integration of acquired businesses and technology, the
enhancement of existing services, and the ability to secure
adequate financing to support future operations.

The Company has incurred net losses and negative
cash flows from operations since inception and has an
accumulated deficit of $192.9 million at December 31,
2003. Management has restructured the Companys operations,
reduced its work force, renegotiated leases, and taken other
actions to limit the Companys expenditures. In August
2003, the Company sold shares of common stock in a private
placement transaction that raised net proceeds of approximately
$11.4 million.

In the first quarter of 2004, the Company
completed an additional private placement financing transaction
that resulted in net proceeds of approximately
$18.9 million. The Company believes that its existing cash,
cash equivalents, and short-term investments will be sufficient
to fund its operations and meet its working capital and capital
expenditure requirements for 2004. However, there can be no
assurance that the Companys cash balances will be
sufficient to sustain its operations until profitable operations
and positive cash flows are achieved. Accordingly, the Company
may require additional capital to fund its operations. There can
be no assurance that additional capital will be available to the
Company on acceptable terms, or at all.



| |                       
| | ----------------------
| | Basis of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.

2.     Summary of
Significant Accounting Policies



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with an original maturity of three months or less to
be cash equivalents. Cash and cash equivalents consist of demand
deposits and money market accounts maintained with financial
institutions and certain other investment grade instruments,
which at times exceeds federally insured limits. The Company has
not experienced any losses on its cash and cash equivalents



| |                       
| | ----------------------
| | Short-term Investments

The Company has invested amounts in
investment-grade government obligations, institutional money
market funds and other obligations with FDIC insured U.S. banks.
Marketable securities are accounted for as available for sale.
These securities all mature within one year and reported amounts
approximate fair value due to the relatively short maturities of
these investments and their relatively low risk.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company has approximately $316,000 of
short-term investments which are utilized as collateral for
certain irrevocable standby letters of credit. Accordingly,
these investments are classified as restricted investments in
the consolidated balance sheets. These securities all mature
within one year and reported amounts approximate fair value due
to the relatively short maturities of these investments. These
investments are related to standby letters of credit required
for certain lease agreements which expire through 2005.
Accordingly, the restricted investments have been classified in
long-term assets in the accompanying consolidated balance sheets.



| |                                    
| | -----------------------------------
| | Impairment of Long-lived
    Assets

The Company assesses the recoverability of
long-lived assets whenever events or changes in business
circumstances indicate that the carrying value of an asset may
not be recoverable. An impairment loss is recognized when the
sum of the expected undiscounted future net cash flows over the
remaining useful life is less than the carrying amount of the
asset. As described in Note 4, the Company recorded impairment
charges of $6.7 million, $3.6 million and $27.9
million in 2003, 2002 and 2001, respectively. These amounts are
included in Special Charges in the accompanying consolidated
statements of operations.



| |                  
| | -----------------
| | Advertising Costs

Advertising costs are expensed as incurred. The
Company incurred $85,000, $787,000 and $122,000 in advertising
costs for the years ended December 31, 2003, 2002 and 2001,
respectively. These expenses have been included as a component
of sales and marketing expenses in the accompanying consolidated
statements of operations.



| |                                                                          
| | -------------------------------------------------------------------------
| | Fair Value of Financial Instruments and
    Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist of cash and
cash equivalents, short-term investments, and long-term
obligations. Fair values of cash and cash equivalents
approximate their carrying value due to the short period of time
to maturity. Short-term investments are reported at their market
value. The carrying value of the Companys line of credit
and long-term obligations approximate fair value because the
interest rates of the obligations reflects the current market
rates of similar facilities for comparable companies. In
addition, the interest rates on the line of credit and term loan
are variable.

The Company is exposed to credit risk since it
extends credit to its customers. The Company performs initial
and ongoing evaluations of its customers financial
condition, and generally extends credit on open account,
requiring collateral as deemed necessary.

During the three years in the period ended
December 31, 2003, the company had sales to certain
significant customers, as a percentage of revenues, as follows:

|           |  |      |    |      |  |      |    |   |  |  |    |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | 2003 |    | 2002 |  | 2001
|           |  |      |    |      |  |     
|Customer A |  |      | 5  | %    |  |      | 10 | % |  |  |   |  
|Customer B |  |      | 11 | %    |  |      | 13 | % |  |  | 17 | %
|           |  |      |    |      |  |      |    |   |  |  |    |  
|           |  |      | 16 | %    |  |      | 23 | % |  |  | 17 | %
|           |  |      |    |      |  |      |    |   |  |  |    |  

Revenues from Customer A were reported primarily
in the Digital Media Services segment and revenues from Customer
B were reported primarily in the Media Restoration Services
segment.

57



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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment is stated at historical
cost less accumulated depreciation and impairment write-downs.
Depreciation is computed using the straight-line method over the
estimated useful lives of the property and equipment, ranging
from three to five years. Leasehold improvements are amortized
over the lesser of the applicable lease term or the estimated
useful life of the asset. Expenditures and improvements that
increase the value or extend the life of an asset are
capitalized. Expenditures for maintenance and repair are
expensed as incurred. Gains or losses on the disposition of
assets are reflected in the consolidated statement of operations
in the period of disposal.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

The Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS 142) effective January 1,
2002. Under the new rule, goodwill and intangible assets deemed
to have indefinite lives are no longer amortized, but are
subject to, at a minimum, annual impairment tests in accordance
with the Statement. The Company completes its annual impairment
test as of November 30 of each year. This change has
reduced amortization expense during the years ended
December 31, 2003 and 2002 compared to prior years. Other
than goodwill, the Company has no intangible assets deemed to
have indefinite lives. The impact of adopting FAS 142 on the
Companys net loss and net loss per share for 2001, as if
FAS 142 had been adopted effective January 1, 2001, is as
follows (in thousands, except per share amounts):

|                                                               |  |      |         |  
|-------------------------------------------------------------- |  | ---- | ------- | -
|                                                               |  | 2001
|                                                               |  |     
|Net loss, as reported                                          |  | $    | (76,396 | )
|Goodwill amortization                                          |  |      | 2,422   |  
|Amortization of intangible assets reclassified to
    goodwill |  |      | 152     |  
|                                                               |  |      |         |  
|Adjusted net loss                                              |  | $    | (73,822 | )
|                                                               |  |      |         |  
|Basic and diluted net loss per share:                          |  |      |         |  
|Net loss, as reported                                          |  | $    | (1.84   | )
|Goodwill amortization                                          |  |      | 0.06    |  
|Amortization of intangible assets reclassified to
    goodwill |  |      |        |  
|                                                               |  |      |         |  
|Adjusted net loss                                              |  | $    | (1.78   | )
|                                                               |  |      |         |  

The Company determined that it has three
reporting units for purposes of FAS 142; Enterprise
Communications, Digital Media Services, and Restoration. The
Companys Digital Media Services segment consists of the
Enterprise Communications and Digital Media Services reporting
units. Assets reclassified to goodwill ($222,000) consisted of
acquired technology and workforce from the Companys
acquisition of Vidipax. The Company performed its annual
impairment tests for 2002 under FAS 142 and recorded resulting
impairment charges. These charges are discussed in greater
detail in Note 4. The Company does not have any goodwill at
December 31, 2003.



| |                           
| | --------------------------
| | Software Development Costs

Research and development costs consist primarily
of salaries, wages and benefits for development personnel and
are expensed as incurred. Software developed for internal use is
capitalized once the preliminary project stage has been
completed and management has committed to funding the
continuation of the development project. Capitalization is
ceased when the software project is substantially complete and
ready for its intended use. Internally developed software and
software acquired in business combinations are recorded in

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

other long term assets and intangibles,
respectively. Purchased software is recorded in property, plant
and equipment.



| |                         
| | ------------------------
| | Stock-based Compensation

The Company accounts for stock-based employee
compensation plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issues to Employees, (APB
No. 25), as interpreted by Financial Accounting Standards
Board Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB No. 25 (FIN 44) and related interpretations.
In addition, the Company complies with the disclosure provisions
of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(FAS 123) and related interpretations. The Company records
deferred stock-based compensation for the difference between the
exercise price of employee stock options and the fair value of
the Companys common stock at the date of grant. These
differences are deferred and amortized on an accelerated basis
over the vesting period of the individual options in accordance
with Financial Accounting Standards Board Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans (FIN 28).

Equity instruments issued to non-employees are
accounted for in accordance with the provisions of Statement of
Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation (FAS 123) and Emerging
Issues Task Force Issue No. 96-18, Accounting for
Equity Investments that are Issued to Other than Employees for
Acquiring or in Conjunction with Selling Goods or Services
(EITF 96-18) and related interpretations.

Stock-based compensation for the year ended
December 31, 2003 totaled $1.4 million, consisting of
the amortization of deferred stock compensation of $460,000, of
which $62,000 is included in cost of revenues, stock-based
compensation expense of $730,000 related to options granted to a
member of the Companys board of directors for consulting
services, variable stock compensation expense of $64,000 related
to stock options that were repriced in 2001, stock and options
issued to former employees as severance and termination benefits
of $99,000, and stock options issued to an outside consultant of
$7,000. Stock-based compensation was a credit of $417,000 for
the year ended December 31, 2002, of which $34,000 is
included in cost of revenues, consisting of the amortization of
deferred stock compensation net of the reversal of expense
related to accelerated amortization for options that were
cancelled. Stock-based compensation totaled $359,000 for the
year ended December 31, 2001, consisting of the
amortization of deferred stock compensation.

The Company records stock-based compensation
charges as a separate component of expenses. These amounts can
be allocated to the other expense categories in the accompanying
consolidated statements of operations as follows for the year
ended December 31, 2001 (in thousands):

|                              |  |   |     | 
|----------------------------- |  | - | --- | 
|Production (cost of revenues) |  | $ | 30  | 
|Research and development      |  |   | 19  | 
|Sales and marketing           |  |   | 50  | 
|General and administrative    |  |   | 260 | 
|                              |  |   |     | 
|                              |  | $ | 359 | 
|                              |  |   |     | 

59



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table illustrates the effect on net
loss and loss per share if the Company had applied the fair
value recognition provisions of FAS 123 to stock-based
employee compensation and shares issued to employees under the
Companys employee stock purchase plan (in thousands):

|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------ | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |                                 |                         
|                                                                                                              |                                 | Years Ended December 31,
|                                                                                                              |                                 |                         
|                                                                                                              |                                 | 2003                     |         | 2002  |   | 2001
|                                                                                                              |                                 |                          |         |       |   |     
|Net loss, as reported                                                                                         |                                 | $                        | (19,174 | )     |   | $    | (31,162 | )     |   | $ | (76,396 | )    
|Add: stock-based employee compensation expense
    (credit) included in reported net loss                     |                                 |                          | 593     |       |   |      | (417    | )     |   |   | 359     |      
|Deduct: total stock-based employee compensation
    expense determined under fair value method for all awards |                                 |                          | (929    | )     |   |      | (1,114  | )     |   |   | (1,223  | )    
|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                            |                                 | $                        | (19,510 | )     |   | $    | (32,693 | )     |   | $ | (77,260 | )    
|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |      
|Loss per share:                                                                                               |                                 |                          |         |       |   |      |         |       |   |   |         |      
|                                                                                                              | Basic and diluted  as reported |                          | $       | (0.39 | ) |      | $       | (0.75 | ) |   | $       | (1.84 | )
|                                                                                                              | Basic and diluted  pro-forma   |                          | $       | (0.39 | ) |      | $       | (0.79 | ) |   | $       | (1.86 | )

To determine compensation expense under
FAS 123, the Company used the following assumptions:

|                           |  |      |            |      |  |      |            |   |  |  |           |  
|-------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | --------- | -
|                           |  | 2003 |            | 2002 |  | 2001
|                           |  |      |            |      |  |     
| Risk-free interest rates |  |      | 2.68- 5.71 | %    |  |      | 3.93- 5.71 | % |  |  | 4.0- 5.71 | %
| Expected lives           |  |      | 5 years    |      |  |      | 5 years    |   |  |  | 5 years   |  
| Expected dividend yields |  |      | 0          | %    |  |      | 0          | % |  |  | 0         | %
| Expected volatility      |  |      | 135-136    | %    |  |      | 75         | % |  |  | 75        | %



| |             
| | ------------
| | Income Taxes

The Company recognizes deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements or tax
returns. Deferred tax assets and liabilities are determined
based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in
effect for the periods in which the differences are expected to
reverse. A valuation allowance is recorded when it is more
likely than not that the net deferred tax asset will not be
realized.



| |         
| | --------
| | Segments

The Company has adopted Statement of Financial
Accounting Standards No. 131, Disclosure about
Segments of an Enterprise and Related Information, which
establishes annual and interim reporting standards for an
enterprises operating segments and related disclosures
about its products, services, geographic areas and major
customers. Management has determined that the Company operates
in two segments, digital media services and media restoration
services.



| |           
| | ----------
| | Guarantees

In the normal course of business, the Company
indemnifies other parties, including business partners, lessors
and parties to other transactions with the Company. The Company
has agreed to hold the other parties harmless against losses
arising from a breach of representation or covenants, or out of
intellectual property infringement or other claims made by third
parties. These agreements may limit the time within which an
indemnification claim can be made. In addition, the Company has
entered into indemnification agreements with certain of its
officers and directors and the Companys by-laws contain
similar indemnification obligations to the Companys
officers and directors. It is not possible to determine the
maximum potential amount under these indemnification agreements
since the Company has not had any prior indemnification claim
upon which

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to base an estimate and each claim would be based
on the unique facts and circumstances of the claim and the
particular provisions of each agreement.



| |                     
| | --------------------
| | Comprehensive Income

The Company has adopted the provisions of
Statement of Accounting Standards No. 130, Reporting
Comprehensive Income (FAS 130). FAS 130 requires
the disclosure of comprehensive income or loss and its
components in the consolidated financial statements.
Comprehensive income or loss is the change in stockholders
equity from transactions and other events and circumstances
other than those resulting from investments by owners and
distributions to owners. The Company had no such transactions in
2003, 2002 or 2001.



| |                  
| | -----------------
| | Reclassifications

Certain information reported in previous periods
has been reclassified to conform to the current period
presentation. These reclassifications had no impact on net loss,
stockholders equity, or cash flows as reported previously.



| |                 
| | ----------------
| | Use of Estimates

The preparation of the financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, 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.

Managements assessments of the impairment
of property and equipment and intangible assets are sensitive
accounting estimates that could result in additional impairment
charges in the near term. Factors that impact these estimates
include, but are not limited to, possible changes in business
plans, decreases in the market price of the Companys
common stock and declining financial results.

Management evaluates the potential loss exposure
on various claims and lawsuits arising in the normal course of
business. An accrual is made if the amount of a particular claim
or lawsuit is probable and reasonably estimable.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement
Obligations (FAS 143), which establishes requirements
for the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard is effective
for fiscal years beginning after June 15, 2002. The
adoption of this statement has not impacted the results of
operations or the financial position of the Company.

In 2002, the FASB issued statement of Financial
Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment to FASB Statement
No. 13, and Technical Corrections (FAS 145).
FAS 145 eliminates the requirement in FAS 4 that gains
and losses from the extinguishments of debt be aggregated and
classified as extraordinary items, net of the related income
tax. The rescission of FAS 4 is effective for fiscal years
beginning after May 15, 2002. Adoption of this statement has not
impacted the results of operations or the financial position of
the Company.

In 2002, the FASB issued Statement of Financial
Accounting Standards no. 146, Accounting for Costs
Associated with Exit or Disposal Activities
(FAS 146). FAS 146 requires the recognition of such
costs when

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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

they are incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of
FAS 146 are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company
adopted the provisions of FAS 146 on January 1, 2003. As
discussed in Note 4, the Company recorded restructuring charges
under FAS 146 for activities initiated after December 31,
2002.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities, which is generally effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003.
SFAS 149 clarifies under what circumstances a contract with
an initial net investment meets the characteristic of a
derivative as discussed in SFAS No. 133, when a derivative
contains a financing component, amends the definition of an
underlying to conform it to the language used in
FASB interpretation No. 45, Guarantor Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others and amends certain
other existing pronouncements. The adoption of this standard did
not have an impact on the results of operations or financial
position of the Company.

In May 2003, the FASB issued Statement of
Financial Accounting Standard No. 150 Accounting for
Certain Financial Instruments with Characteristics of Both
Liability and Equity (FASB No. 150). FASB
No. 150 establishes standards for how companies classify
and measure certain financial instruments with characteristics
of both liabilities and equity. This Statement is effective for
financial instruments entered into or modified after
May 31, 2003. In October 2003, the FASB deferred certain
provisions of FASB No. 150 relating to mandatorily
redeemable non-controlling interests. The adoption of this
standard did not have an impact on the results of operations or
financial position of the Company.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which
clarifies the requirements of SFAS No. 5, Accounting
for Contingencies, relating to a guarantors
accounting for and disclosures of certain guarantees issued.
FIN 45 requires enhanced disclosures for certain
guarantees. It also requires certain guarantees that are issued
or modified after December 31, 2002, including certain
third-party guarantees, to be initially recorded on the balance
sheet at fair value. The adoption of this standard did not have
an impact on the results of operations or financial position of
the Company. Disclosures required by FIN 45 are included in
the Notes to the consolidated financial statements.

In December 2003, the Financial Accounting
Standards Board issued a revised Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation
of Accounting Research Bulletin No. 51,
(FIN 46R). FIN 46R requires the
consolidation of entities in which an enterprise absorbs a
majority of the entity s expected losses, receives a majority of
the entitys expected residual returns, or both, as a
result of ownership, contractual or other financial interests in
the entity. Currently entities are generally consolidated by an
enterprise when it has a controlling financial interest through
ownership of a majority voting interest in the entity. The
provisions of FIN 46R are generally effective for existing
(prior to February 1, 2003) variable interest relationships
of a public entity no later than the end of the first reporting
period that ends after March 15, 2004. However, prior to
the required application of this interpretation, a public entity
that is not a small business issuer shall apply FIN 46R to
those entities that are considered to be special-purpose
entities no later than the end of the first reporting period
that ends after December 15, 2003. The Company does not
have any special purpose entities and will apply the remaining
provisions of FIN 46R to its first quarter 2004 financial
statements.

In 2002, the Emerging Issues Task Force
(EITF) finalized its tentative consensus on EITF Issue
No. 00-21, Revenue Arrangements With Multiple
Deliverables(EITF 00-21), which provides guidance on
the timing and methods of revenue recognition for sales
agreements that include delivery of more than one product or
service. EITF 00-21 is effective prospectively for
arrangements entered into in fiscal periods beginning after
June 15, 2003. The Company recognizes revenue in accordance
with the provisions of EITF 00-21.

62



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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Revenue
Recognition

The Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, (SAB 101) as
amended by Staff Accounting Bulletin No. 104
(SAB 104), and EITF 00-21. The Company recognizes
revenue associated with the license of software in accordance
with Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended by SOP 98-4,
SOP 98-9 and related interpretations and Technical Practice
Aids.

The Company recognizes revenues from encoding
services, digital music samples services, Internet radio
services, live and on-demand webcasting services, software
licensing, and media restoration services. The Company
recognizes these revenues when persuasive evidence of an
arrangement exists, the product and/or service has been
delivered, the price is fixed and determinable, and
collectibility is reasonably assured.

In arrangements that include rights to multiple
products and/or services, the Company allocates the total
arrangement consideration among each of the deliverables using
the residual method, under which revenue is allocated to
undelivered elements based on verifiable and objective evidence
of the fair value of the undelivered elements. Multiple element
arrangements may consist of implementation services, development
services, encoding services, digital music samples services,
Internet radio services, and on-demand webcasting services.
Verifiable and objective evidence is based upon the price
charged when an element is sold separately.

Under the provisions of SOP 97-2, in software
arrangements that involve rights to multiple products and
services, the Company allocates the total arrangement
consideration among each of the deliverables using the residual
method, under which revenue is allocated to the undelivered
elements based on vendor-specific objective evidence of the fair
value of such undelivered elements. Elements included in
multiple element arrangements consist of software, intellectual
property, implementation services, maintenance and consulting
services. Vendor-specific objective evidence is based on the
price charged when an element is sold separately or, in the case
of an element not sold separately, the price established by
management, if it is probable that the price, once established,
will not change before market introduction.

Deferred revenue arises from payments received in
advance of the culmination of the earnings process. Deferred
revenue expected to be realized within the next twelve months is
classified as a current liability.

Encoding services consist of the conversion of
audio and video content into Internet media formats. Sales of
encoding services are generally under nonrefundable time and
materials or per unit contracts. Under the provisions of SAB
101, as amended by SAB 104, and EITF 00-21, the Company
recognizes revenues as the encoding services are rendered and
the Company has no continuing involvement in the goods and
services delivered, which generally is the date the finished
media is shipped to the customer.

Digital music samples services are provided to
customers using the Companys proprietary streaming media
software, tools, and processes. Music samples are streamed files
containing selected portions, or samples, of a full music track
and are typically 30 to 60 seconds in length. Customer billings
are based on the volume of data streamed at rates agreed upon in
the customer contract, subject to a nonrefundable monthly
minimum fee. Under the provisions of SAB 101, as amended by SAB
104, and EITF 00-21, the Company recognizes revenue in the
period in which the samples are delivered.

Similar to the digital music samples services,
Internet radio and video services are provided to customers
using the Companys proprietary media software, tools and
processes. Internet radio and video services can consist of the
rebroadcasting over the Internet of a customers
over-the-air radio programming. Services provided may also
include playlist selection and programming services for online
radio channels and may include related video content, such as
music videos. Under the provisions of SAB 101, as amended by SAB
104, and EITF 00-21, revenue from the sale of Internet radio and
video services is recognized on a monthly basis as the services
are provided and customers are typically billed monthly in
arrears.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Webcasting services are provided to customers
using the Companys proprietary streaming media software,
tools and processes. Services for live webcast events may be
sold separately or combined with on-demand webcasting services
in which the Company may host an archive of the webcast event
for future use on an on-demand basis. In addition, on-demand
webcasting services are often sold separately without the live
event component. As a result, the Company has verifiable and
objective evidence of the fair value for both the live and
on-demand services. Accordingly, under the provisions of SAB
101, as amended by SAB 104, and EITF 00-21, the Company
recognizes revenue for live webcasting in the period in which
the webcast event occurs. Revenue for on-demand webcasting
services are deferred and recognized ratably over the period in
which the services are provided. Customer billings are typically
based on the volume of data streamed at rates agreed upon in the
customer contract or a set monthly fee.

Media restoration services consist of services
provided by our VidiPax subsidiary to restore and upgrade old or
damaged archives of traditional media. Under the provisions of
SAB 101, as amended by SAB 104, and EITF 00-21, the Company
recognizes revenues as these services are rendered and the
Company has no continuing involvement in the goods and services
delivered, which generally is the date the finished media is
shipped to the customer. As discussed in Note 6, the Company
sold its Vidipax subsidiary on January 30, 2004 pursuant to
an agreement dated October 31, 2003.

4.     Special
Charges

Beginning in the fourth quarter of 2000 and
through the first quarter of 2003, the Company commenced a
series of operational restructurings and facilities
consolidations. As a result of these activities, the Company has
recorded special charges in the years ended December 31,
2003, 2002 and 2001.

In the fourth quarter of 2000, the Company
assessed each product and service offering and the costs related
to each in making the determination to cease providing, or
otherwise change the level of support the Company would provide
to these offerings. The Company determined that it was not
feasible to continue to provide or support digital media
consulting services, certain digital media applications and the
Alive e-show platform in 2001. Additionally, the decision was
made to decrease the level of emphasis placed on video encoding
activities. This decision was made as a response to the
decreased demand for such services, which started in the third
quarter of 2000 and continued into the first quarter of 2001, at
which time the Company determined that no further resources
would be provided to support video encoding in the Seattle
facility. In the second quarter of 2001, the Company terminated
approximately 45% of its workforce. That reduction in force
created excess facilities, resulting in the development of
facilities consolidation plans. During 2002 the Company
implemented additional consolidation and cost savings
initiatives, which included continued integration and
realignment processes related to our acquisition activity. As a
result of these initiatives the Company consolidated its digital
media services operations in the first quarter of 2002 from
three separate facilities to one facility acquired in the
Activate acquisition. Implementing these consolidation plans
have generated a number of special charges in 2002, and 2001.

On February 4, 2003, the Companys
Chairman and Chief Executive Officer, John T. Baker, resigned
and the Company engaged Regent Pacific Management Corporation to
provide management services to the Company. On March 7,
2003, Regent Pacific resigned from the engagement and Jeffrey M.
Cavins was elected President and Chief Executive Officer. During
and subsequent to Regent Pacifics engagement, the Company
undertook a strategic and operational analysis of its business
and product lines. This analysis resulted in the development of
a new strategic and operational plan, under which the Company
restructured itself to focus on its core competencies in digital
media services and on core strategic customers and markets for
its enterprise communications services.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Implementing the consolidation and restructuring
plans described above have generated a number of special
charges, summarized as follows (in thousands):

|                                            |  |      |       |      |  |      |       |  |  |   |        | 
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ------ | 
|                                            |  | 2003 |       | 2002 |  | 2001
|                                            |  |      |       |      |  |     
|Goodwill impairment                         |  | $    | 5,307 |      |  | $    |      |  |  | $ | 9,418  | 
|Intangible and other asset impairments      |  |      | 685   |      |  |      | 1,437 |  |  |   | 11,938 | 
|Property and equipment impairments          |  |      | 670   |      |  |      | 2,029 |  |  |   | 6,534  | 
|Facilities related charges                  |  |      | 658   |      |  |      | 1,490 |  |  |   | 6,194  | 
|Employee severance and termination benefits |  |      | 501   |      |  |      | 1,890 |  |  |   | 3,177  | 
|Other restructuring charges                 |  |      | 878   |      |  |      |      |  |  |   |       | 
|                                            |  |      |       |      |  |      |       |  |  |   |        | 
|                                            |  | $    | 8,699 |      |  | $    | 6,846 |  |  | $ | 37,261 | 
|                                            |  |      |       |      |  |      |       |  |  |   |        | 

Following is a more detailed description of the
special charges for each of the categories in the table above:

Goodwill Impairment.A revised corporate forecast was developed in connection with
the 2003 strategic and operational plan. The revised forecast
also considered that the Company had learned that revenue from a
significant customer in its Media Restoration Services segment
would be less than originally anticipated. Utilizing the revised
forecast, the Company performed a reassessment of the carrying
value of all of its assets, both tangible and intangible. The
revised forecast demonstrated that certain tangible and
intangible assets and goodwill related to its media restoration
services and enterprise communications services businesses were
impaired, as the projected undiscounted discernible cash flows
did not exceed the carrying value of the assets over their
estimated useful lives. The fair values of each of these assets
were estimated using primarily a probability weighted discounted
cash flow method. The fair value of goodwill was estimated under
the two-step process required by FASB No. 142 and resulted
in an impairment of the goodwill associated with the Media
Restoration Services segment of $5.3 million during the
first quarter of 2003.

Intangible and other asset impairments.The Company recorded impairments of
$685,000, $1.4 million and $21.4 million in 2003, 2002
and 2001, respectively, related to intangibles and other
long-term assets. The Company decided in 2001 to focus on areas
of business that it believed had a near-term opportunity to
drive increases in revenue. This decision led to certain
acquisitions described in Note 10.

The goodwill previously recognized associated
with the Alive.com acquisition and certain other digital
applications had no discernable cash flows or fair value and, as
a result, were impaired. The remaining unamortized balances,
totaling $10.6 million were written off in the first
quarter of 2001. In the third and fourth quarters of 2001, the
Company reassessed the remaining Alive intangibles and recorded
additional impairment charges of $180,000 and $117,000,
respectively. The Company previously had capitalized the cost of
warrants issued to a strategic partner. In the first quarter of
2001, the Company terminated this relationship and, accordingly,
the Company recorded a charge of $708,000 related to the
unamortized portion of the warrants.

In the fourth quarter of 2001, the Company
performed a reassessment of the carrying value of all of the
Companys assets, both tangible and intangible, in
conjunction with the corporate forecast for 2002 and beyond. The
development of this forecast demonstrated that certain assets
related to acquisitions in 2000 and 2001 were impaired, as the
projected undiscounted discernible cash flows did not exceed the
carrying value of the assets over the estimated useful life of
those assets.

In the fourth quarter of 2001, the Company
recorded a charge totaling $5.0 million related to intangible
assets acquired from DiscoverMusic in March 2001. Increased
competition, including pricing pressures and

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the continued economic downturn caused the
Company to lower its initial projections for the business and
subsequently write-down the value originally assigned to the
acquired customer list and other acquired intangibles. The
Company did not expect to fully recover the current carrying
value of the assets in the near term, resulting in the
impairment. The assets were written down to estimated current
cost to replace, which the Company believed was a reliable
estimate of the fair value.

In the fourth quarter of 2001, the Company
recorded a charge totaling $3.5 million related to the
impairment of various intangibles that were recorded as a result
of its online radio transactions. Through December 31,
2001, the Company had not generated significant revenues from
radio customers. Internal projections for online radio-related
revenues were revised and were lower than those projections that
existed at the time of the acquisitions. This revision and the
general uncertainty of the economic situation and the
advertising market required the Company to perform an assessment
of these assets. The projected undiscounted cash flows over the
remaining estimated life of two years did not fully support the
carrying value of these assets on the balance sheet.
Accordingly, the Company obtained an independent valuation to
assess the fair values of these assets. The Company used this as
the new basis of the intangible assets and recorded the
difference between the carrying value and the assessed fair
market value to special charges.

The Company also recorded a charge totaling
$1.2 million in the fourth quarter of 2001 related to the
impairment of VidiPax goodwill. The projected undiscounted cash
flows did not fully support the carrying value of the related
goodwill. The Company estimated the fair value of VidiPaxs
long-lived assets and charged the $1.2 million difference
between the carrying value and the estimated fair market value
to special charges.

In the fourth quarter of 2002, in connection with
the Companys annual impairment test for goodwill and as a
result of declining revenue, the Company obtained an independent
valuation to assist in evaluating its goodwill and intangible
assets for impairment in accordance with FAS 142 and FAS 144.
The fair values of the Companys reporting units and their
respective intangible assets were estimated using primarily a
discounted cash flow method. As a result of this analysis, the
Company determined that certain of the intangible assets in its
digital media services and enterprise communication services
reporting units were impaired as the cash flows did not support
the carrying value of the assets. Accordingly, the Company
recorded special charges reflecting the impairment of these
intangible assets as follows (in thousands):

|                    |  |               |     |               |  |       |       |  |  |   |       | 
|------------------- |  | ------------- | --- | ------------- |  | ----- | ----- |  |  | - | ----- | 
|                    |  | Enterprise    |     | Digital Media |  |      
|                    |  | Communication |     | Services      |  | Total
|                    |  |               |     |               |  |      
|Customer lists      |  | $             |    |               |  | $     | 743   |  |  | $ | 743   | 
|Acquired technology |  |               | 268 |               |  |       | 426   |  |  |   | 694   | 
|                    |  |               |     |               |  |       |       |  |  |   |       | 
|                    |  | $             | 268 |               |  | $     | 1,169 |  |  | $ | 1,437 | 
|                    |  |               |     |               |  |       |       |  |  |   |       | 

In the first quarter of 2003, the revised
corporate forecast developed in connection with the 2003
strategic and operational plan described above demonstrated that
certain intangible assets related to the Companys media
restoration services and enterprise communications services
reporting units were impaired, as the projected undiscounted
discernible cash flows over the estimated useful lives of the
assets did not exceed their carrying value. The fair values of
each of these assets were estimated using primarily a discounted
cash flow method, and resulted in impairments as follows (in
thousands):

|                             |  |               |     |                   |  |       |    |  |  |   |     | 
|---------------------------- |  | ------------- | --- | ----------------- |  | ----- | -- |  |  | - | --- | 
|                             |  | Enterprise    |     |                   |  |      
|                             |  | Communication |     | Media Restoration |  | Total
|                             |  |               |     |                   |  |      
|Customer lists and contracts |  | $             | 33  |                   |  | $     | 22 |  |  | $ | 55  | 
|Acquired technology          |  |               | 601 |                   |  |       |   |  |  |   | 601 | 
|Other intangible assets      |  |               |    |                   |  |       | 29 |  |  |   | 29  | 
|                             |  |               |     |                   |  |       |    |  |  |   |     | 
|                             |  | $             | 634 |                   |  | $     | 51 |  |  | $ | 685 | 
|                             |  |               |     |                   |  |       |    |  |  |   |     | 

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Property and equipment.The Company recorded special charges
of $6.5 million related to property and equipment in 2001. These
included charges of approximately $820,000 related to previously
capitalized software that the Company abandoned during 2001. The
Company determined that due to the acquisition of a music
samples platform from DiscoverMusic, the previously capitalized
software costs associated with Loudeyes separately
developed music samples platform were redundant and not
recoverable. Accordingly, since the code base developed by
Loudeye would not be sold or otherwise used, it was determined
to have no further value and the remaining unamortized cost,
approximately $600,000, was adjusted to zero. The Company also
discontinued all sales efforts related to certain digital media
applications and terminated the related development efforts.
This resulted in a full impairment and a related charge of
$250,000.

The Companys decision in early 2001 to
focus on the audio business led to a further review of its video
assets. The Company performed a review of the current market
prices for similar used equipment and adjusted the remaining
value of its video assets down to the estimated net realizable
value. The Company sold a significant amount of these assets at
auction during the second quarter of 2001, at amounts
approximately equal to their adjusted values. Prior to the sale,
the Company had ceased depreciation the assets until such time
as they were disposed of. The Company also recorded in the third
quarter of 2001 charges of $607,000 related to assets acquired
from DiscoverMusic that were abandoned due to obsolescence or
otherwise unusable in its restructured business. In conjunction
with the consolidated forecast for 2002 and beyond, it became
apparent that the projected undiscounted cash flows were
insufficient to recover fully the carrying value of the
remaining property and equipment (excluding those recently
acquired from Activate). The Company then performed an analysis
of all remaining property and equipment that had not been
purchased recently to determine its fair value. These analyses
resulted in charges of $5.1 million in 2001.

In the fourth quarter of 2002, as a result of
declining revenue and economic conditions, it became apparent
that projected undiscounted cash flows were insufficient to
recover fully the carrying value of the remaining property and
equipment related to the Companys digital media services
reporting unit (excluding those acquired from Streampipe). The
Company then performed an analysis of the remaining property and
equipment to determine its fair value. These analyses resulted
in impairment charges of $2.0 million in 2002.

In the first quarter of 2003, the revised
corporate forecast developed in connection with the 2003
strategic and operational plan described above demonstrated that
certain tangible assets related to the Companys Digital
Media Services and Media Restoration Services segments were
impaired, as the projected undiscounted discernible cash flows
of the assets over their estimated useful lives did not exceed
their carrying value. The fair values of each of these assets
were estimated using primarily a discounted cash flow method. In
the fourth quarter of 2003, the Company vacated its facility in
Washington, D.C. and migrated its operations to its facility on
Rainier Avenue, Seattle, Washington. As a result of this
decision, the Company recorded impairment charges of $68,000
related to the property and equipment located at the Washington,
D.C. facility. The fair value of this equipment was estimated to
be $90,000, based on discussions and negotiations with parties
interested in purchasing the equipment, and is reported in
assets held for sale in the accompanying consolidated balance
sheets. Total impairments of property and equipment were
$670,000, consisting of $219,000 in the digital media services
segment and $451,000 in the media restoration services segment.

Facilities related
charges.As a result of acquisition
activity, the de-emphasis of video encoding operations and the
reductions in force that led to excess facilities, the board of
directors approved plans to consolidate facilities during the
course of 2001. In addition to the closing of the Companys
Santa Monica facility, these plans called for the closing of its
London offices in early 2001 and the migration from four
facilities in Seattle into one facility in late 2001 and early
2002. Accordingly, all unamortized leasehold improvements
related to the vacated facilities, totaling $2.1 million, were
charged to special charges in 2001. The Company also accrued for
the rental payments it believed would be paid on these abandoned
facilities while it sought a suitable sublessor or negotiate a
termination of the lease. Related rent charges of
$3.6 million were recorded in 2001, including $2.3 million
in the fourth quarter of 2001, reflecting current local
real-estate

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

market conditions. In the fourth quarter of 2002,
the Company accrued additional charges of $1.5 million to
adjust its estimate of future rental payments and related costs
associated with these leases and to reflect updated current
local real estate market conditions.

As discussed above, during the fourth quarter of
2002, management committed to a plan to exit certain of the
Companys leased facilities. The exit plan identified all
significant actions to be taken, including the method of
disposition, locations of those activities and the expected
dates of completion. Under the provisions of EITF 94-3, the
Company recorded the estimated lease termination costs in
accrued special charges at December 31, 2002. Current year
activity for accruals established under EITF 94-3 is summarized
in the following paragraphs.

In April 2003, the Company entered into a lease
termination agreement with the landlord of its unoccupied
facility on Fourth Avenue, Seattle, Washington. Under the terms
of the agreement, the Company paid a lease termination fee of
$200,000. As a result, all of the Companys obligations
under the lease were terminated effective April 30, 2003.
In accordance with EITF 94-3, the lease termination fee was
included in accrued special charges at December 31, 2002.
The Company had been paying approximately $29,000 per month
under this lease.

In May 2003, the Company entered into a lease
termination agreement with the landlord of its unoccupied
facility in Ardsley, New York. Under the terms of the agreement,
the Company paid a lease termination fee of approximately
$114,000 which included its security deposit of $29,000. As a
result, all of the Companys obligations under the lease
were terminated effective May 19, 2003. In accordance with
EITF 94-3, the lease termination fee was included in
accrued special charges at December 31, 2002. The Company
had been paying approximately $19,000 per month under this lease.

Under the provisions of FAS 146, the Company
recorded certain additional lease termination costs during the
year ended December 31, 2003. These additional costs were
related to certain leased facilities whereby the Company had
ceased using the facilities and notified the landlords that it
had released its rights under the lease agreements. These
additional costs were recognized and measured at the present
value of the future minimum lease payments, net of estimated
sublease rentals that could be reasonably obtained for the
facilities. Current year activity for accruals established under
FAS 146 is summarized in the following paragraphs.

In March 2003, the Company terminated a portion
of a lease for approximately half the space it occupied for its
principal operating facility on Rainier Avenue, Seattle,
Washington. Rents were reduced from approximately $108,000 per
month with a term expiring on November 30, 2005 to rent for
the remainder of the facility of approximately $33,000 per month
through June 30, 2003 with options, that the Company
exercised, to extend the term through December 31, 2003 at
a base rent of $33,000 per month and pre-paid utility expenses
of $60,000 per quarter. As consideration for the lease
termination, the Company allowed its landlord to retain its
security deposit in the amount of $218,500 and made cash
payments of $126,700. On December 31, 2003, the Company
signed a new lease with the landlord that expires on
December 31, 2005. Monthly rental payments under the new
lease are approximately $55,000 through March 2004 and then
$73,000 thereafter, reflecting an increase in the square footage
leased commencing April 1, 2004.

In October 2003, the Company vacated and ceased
using its former Streampipe facility in Washington, D.C.
and migrated its operations to its facility on Rainier Avenue,
Seattle Washington. At that time, the landlord was informed of
the Companys decision to no longer occupy the
Washington D.C. facility and the Companys release of
its rights under the lease agreement. The lease for the facility
expired in March 2004 and, under the requirements of FAS 146,
the present value of future minimum rental payments, net of
sublease rentals, of $43,000 were recorded in accrued special
charges during the year ended December 31, 2003.

The Company has accrued special charges related
to its Vidipax facility in New York, New York. The lease
agreement was originally entered into in December 2002 and the
Company has never occupied the

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

facility. During 2003, the Company informed the
landlord of its decision to release its rights under the lease
agreement and has been in ongoing discussions with the landlord
to negotiate a lease termination agreement. Accordingly, under
the requirements of FAS 146, the Company had accrued $562,000 in
accrued special charges through the third quarter of 2003
representing the estimated fair value of future rental payments,
net of sublease rentals and related costs with respect to the
termination of this lease. In December 2003, the Company accrued
an additional $150,000, for a total accrual of $712,000, to
adjust its estimate of the fair value of the liability based on
further negotiations with the landlord In February 2004, the
Company entered into a lease settlement agreement with the
landlord. The amount of the settlement has been included in
accrued special charges at December 31, 2003.

Employee severance.In connection with the operational
restructurings and facilities consolidations described above,
the Company has reduced is work force on several occasions
during 2003, 2002 and 2001. Severance and related costs paid
related to these employee terminations were as follows (in
thousands):

|               |  |      |     |      |  |      |       |  |  |   |       | 
|-------------- |  | ---- | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|               |  | 2003 |     | 2002 |  | 2001
|               |  |      |     |      |  |     
|First quarter  |  | $    | 91  |      |  | $    | 748   |  |  | $ | 682   | 
|Second quarter |  |      | 264 |      |  |      | 1,142 |  |  |   | 1,537 | 
|Third quarter  |  |      | 52  |      |  |      |      |  |  |   | 104   | 
|Fourth quarter |  |      | 2   |      |  |      |      |  |  |   | 854   | 
|               |  |      |     |      |  |      |       |  |  |   |       | 
|Total          |  | $    | 409 |      |  | $    | 1,890 |  |  | $ | 3,177 | 
|               |  |      |     |      |  |      |       |  |  |   |       | 

Other restructuring charges.The other restructuring charges of
$878,000 represent fees and costs paid to Regent Pacific
Management Corporation with respect to interim management
services provided to the Company in connection with its
management and operational restructuring.

Accrued special charges.The following table reflects the
activity in accrued special charges for the year ended
December 31, 2003 related to the events described above (in
thousands). The Company believes that it will ultimately pay all
of these accrued charges, which primarily represent future rent
obligations, in cash.

|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|--------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ----------- |  | ------------ | ------ | - |  | - | ---- | - |  | - | ----- | 
|                            |  | December 31, |       | Additional |  |          |       |             |  | December 31,
|                            |  | 2002         |       | Accruals   |  | Payments |       | Adjustments |  | 2003        
|                            |  |              |       |            |  |          |       |             |  |             
|Employee severance          |  | $            | 104   |            |  | $        | 501   |             |  | $            | (409   | ) |  | $ | (196 | ) |  | $ |      | 
|Facilities related charges  |  |              | 2,799 |            |  |          | 1,220 |             |  |              | (1,787 | ) |  |   | (562 | ) |  |   | 1,670 | 
|Other restructuring charges |  |              |      |            |  |          | 878   |             |  |              | (878   | ) |  |   |     |   |  |   |      | 
|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|Total                       |  | $            | 2,903 |            |  | $        | 2,599 |             |  | $            | (3,074 | ) |  | $ | (758 | ) |  | $ | 1,670 | 
|                            |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 

For certain of the lease terminations described
above, the settlement amounts were less than the Company had
accrued initially due to favorable negotiations with landlords
and improvements in real estate markets. In other cases, the
Company increased its accruals as a result of its ongoing
evaluations of its lease obligations. The adjustments resulting
from these settlements and additional accruals were recorded in
special charges expense in the consolidated statements of
operations.

For certain of the employment terminations, the
amounts paid were less than the Company had accrued initially
due to favorable settlements with the former employees. These
adjustments were recorded in special charges in the consolidated
statements of operations.

5.     Assets Held
for Sale

On January 30, 2004, the Companys
wholly-owned media restoration services subsidiary, Vidipax,
Inc., sold substantially all of its assets and certain
liabilities to a company controlled by the current general
manager of Vidipax pursuant to an asset purchase agreement
signed on October 31, 2003. The total purchase price of

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$1.2 million was placed in escrow when the
asset purchase agreement was signed. $900,000 will be released
from escrow upon the assignment of a certain customer contract
and $300,000 will be released from escrow upon the satisfaction
of certain conditions. In addition, the Company may receive up
to an additional $500,000 based on the purchaser achieving
certain performance targets over a period of two years from the
closing date. At closing, the Company also entered into a
co-marketing and reseller agreement with the purchaser pursuant
to which the Company will sell, for a fee, media restoration
services on behalf of the purchaser for a two-year period. The
co-marketing and earn-out provisions constitute continuing
involvement by the Company under FAS 144. Consequently, Vidipax
has not been reported as a discontinued operation. In addition,
the Company has recorded in assets held for sale $90,000 of
equipment located in its Washington D.C. facility that was
vacated in October 2003.

The following assets and liabilities of the media
restoration services business to be sold have been classified as
held for sale in the consolidated balance sheet (in
thousands):

|                                            |                   |              |     |       |  |   |       |       | 
|------------------------------------------- | ----------------- | ------------ | --- | ----- |  | - | ----- | ----- | 
|                                            |                   |             
|                                            |                   | December 31,
|                                            |                   |             
|                                            |                   | 2003         |     | 2002 
|                                            |                   |              |     |      
|Cash                                        |                   | $            | 113 |       |  | $ | 109   |      
|Accounts receivable, net                    |                   |              | 147 |       |  |   | 394   |      
|Other current assets                        |                   |              | 103 |       |  |   | 178   |      
|Property & equipment, net                   |                   |              | 645 |       |  |   | 1,588 |      
|Other noncurrent assets                     |                   |              | 85  |       |  |   | 84    |      
|                                            |                   |              |     |       |  |   |       |      
|                                            | Total assets      |              | $   | 1,093 |  |   | $     | 2,353 | 
|                                            |                   |              |     |       |  |   |       |      
|Accounts payable                            |                   | $            | 98  |       |  | $ | 10    |      
|Current portion of capital lease obligation |                   |              |    |       |  |   | 15    |      
|                                            |                   |              |     |       |  |   |       |      
|                                            | Total liabilities |              | $   | 98    |  |   | $     | 25    | 
|                                            |                   |              |     |       |  |   |       |      

6.     Private Equity
Financing

On August 28, 2003, the Company issued
7,838,708 shares of common stock to institutional investors in a
private placement transaction for $1.55 per share, raising gross
proceeds of approximately $12.1 million. In connection with
the transaction, the Company also issued warrants to the
investors to purchase 783,871 shares of the Companys
common stock and warrants to the placement agent to purchase
195,968 shares of the Companys common stock, representing
total warrant shares of 979,839 shares of common stock. The
exercise price of the warrants is $2.00 per share. The warrants
are exercisable beginning February 27, 2004 and expire
February 27, 2007. Net proceeds from the transactions,
after issuance costs and a placement fee of 4% of the gross
proceeds, were approximately $11.4 million.

Within 45 calendar days following the closing
date, the Company was required to file with the Securities and
Exchange Commission (SEC) a registration statement covering the
resale of all of the common stock purchased and the common stock
underlying the warrants, including common stock underlying the
placement agents warrant. The Company was required to use
its commercially reasonable efforts to obtain effectiveness of
the registration statement before the earlier of (a) the
120th calendar day following the closing date or (b) the
fifth trading day following notification by the SEC that the
registration statement will not be reviewed or is no longer
subject to further review and comments.

The registration rights agreement provided that
if a registration statement was not filed, or did not become
effective, within the defined time period, then in addition to
any other rights the holders may have, the Company would be
required to pay to each holder an amount in cash, as liquidated
damages, equal to 2% per month of the aggregate purchase price,
prorated daily. The registration statement was filed within the
allowed

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

time, and was declared effective by the SEC on
October 14, 2003. Accordingly, no liquidated damages were
required to be paid in connection with the initial registration.

In accordance with EITF 00-19, Accounting
for Derivative Financial Instruments Indexed To, and Potentially
Settled In a Companys Own Stock, and the terms of
the warrants, the fair value of the warrants were accounted for
as a liability, with an offsetting reduction to the carrying
value of the common stock. The warrant liability was
reclassified to equity as of the October 14, 2003 effective
date of the registration statement.

The fair value of the warrants was estimated
using the Black-Scholes option-pricing model with the following
assumptions: no dividends; risk-free interest rate of 2.71%, the
contractual life of 3.5 years and volatility of 136%. The
fair value of the warrants was estimated to be $1.5 million
on the closing date of the transaction. The fair value of the
warrants was re-measured at September 30, 2003 and
estimated to be $1.7 million. The increase in the fair
value of $222,000 from the transaction date to
September 30, 2003 was recorded as a charge to other
expenses in the statement of operations during the third quarter
of 2003. The fair value of the warrants increased by
approximately $26,000 from September 30, 2003 to
October 14, 2003 and such increase was reflected as a
charge to other expenses in the statement of operations in the
fourth quarter of 2003.

7.     Acquisitions

Generally, the Companys goodwill,
intangibles and other assets have resulted from purchase
acquisitions, equity transactions or the capitalization of
software development costs. The acquisitions described below
were accounted for under the purchase method of accounting.

StreampipeIn
November 2002, the Company acquired TT Holding Corp.
(Streampipe), a New York company which provided
enterprise Webcasting technology and services pursuant to an
agreement and plan of reorganization (Merger
Agreement). The acquisition price was $4.5 million,
consisting of $3.1 million of common stock issued at
closing (7,900,165 shares), unsecured promissory notes
(Notes) aggregating $1.1 million and
transaction costs of $0.3 million. The Notes bear interest
at an annual rate of 5% and matured on January 1, 2004. In
addition, the Notes contained an equity redemption option
pursuant to which the Company could, at its option, satisfy its
obligation under the Notes by issuing additional shares of
common stock. On December 31, 2003, the Company redeemed
the Notes at a redemption price of $1.76 per share by issuing
635,386 shares of its common stock. The number of shares of
common stock issued to redeem the Notes was calculated by
dividing the principal and all accrued interest due under the
Notes as of the date of redemption, by the average of the last
sale price of its common shares for the 30 trading days
preceding January 1, 2004.

The Company accounted for the acquisition in
accordance with FAS 141. The purchase price allocation was as
follows (in millions):

|                          |  |   |       |  
|------------------------- |  | - | ----- | -
|Current assets            |  | $ | 0.70  |  
|Property and equipment    |  |   | 0.30  |  
|Goodwill                  |  |   | 3.80  |  
|Acquired technology       |  |   | 0.30  |  
|Website development costs |  |   | 0.02  |  
|Liabilities               |  |   | (0.60 | )
|                          |  |   |       |  
|                          |  | $ | 4.52  |  
|                          |  |   |       |  

EncodeThisIn June
2002, The Company acquired certain assets of Digital Media
Broadcast (EncodeThis), a California company that
provided digital media services similar to those of the Company.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The total acquisition price was $608,000,
consisting of $400,000 of the Companys common stock
(667,418 shares), a warrant to purchase 100,000 shares of common
stock at a price of $1.00 per share, and $200,000 in cash.
Approximately $169,000 of the purchase price was allocated to
accounts receivable and property and equipment, with the
remaining $439,000 allocated to customer related intangible
assets.

Activate.netIn
September 2001, the Company acquired Activate.net Corporation
(Activate, a Seattle-based company which provided
live and on-demand webcasting services for a variety of
enterprise business communication needs. Activate had been
operated as a majority-owned operating company of CMGi, Inc.

Total acquisition consideration was
$6.6 million. $1.0 million was paid in cash at closing
and the Company assumed $2.4 million of liabilities as a
part of its working capital and incurred costs of
$0.2 million. The remaining $3.0 million of the
purchase price was to be paid in stock or cash in September
2002. This remaining obligation was settled in the fourth
quarter of 2002 for $2.0 million in cash and $300,000 of
the Companys common stock, resulting in a gain of $700,000
which has been included in other income in the consolidated
statements of operations for the year ended December 31,
2002. The acquisition consideration was as follows (in millions):

|                                  |  |   |     | 
|--------------------------------- |  | - | --- | 
|Liabilities assumed               |  | $ | 2.4 | 
|Direct acquisition costs          |  |   | 0.2 | 
|Cash paid at closing              |  |   | 1.0 | 
|Accrued acquisition consideration |  |   | 3.0 | 
|                                  |  |   |     | 
|                                  |  | $ | 6.6 | 
|                                  |  |   |     | 

The Company accounted for the acquisition in
accordance with FAS No. 141. The primary identified
intangibles were related to technology in service which has not
yet been patented and purchased contracts with firmly committed
customer backlog. No purchase price was assigned to goodwill or
in-process research and development. The purchase price
allocation was as follows (in millions):

|                       |  |   |     | 
|---------------------- |  | - | --- | 
|Current assets         |  | $ | 2.5 | 
|Property and equipment |  |   | 2.4 | 
|Unpatented technology  |  |   | 1.6 | 
|Acquired contracts     |  |   | 0.1 | 
|                       |  |   |     | 
|                       |  | $ | 6.6 | 
|                       |  |   |     | 

Amounts allocated to unpatented technology were
amortized over two years, while the amounts allocated to
acquired contracts were amortized over one year.

DiscoverMusicIn
March 2001, the Company purchased DiscoverMusic, a Seattle
company that was the largest provider of music samples on the
Internet. The Company paid $4.0 million in cash, net of
DiscoverMusics cash, and issued 3,677,013 shares of common
stock valued at $6.1 million for cash and stock
consideration of $10.7 million. As part of the acquisition
price, the Company placed $1.0 million in cash into an
escrow account to pay for certain legal exposures assumed. In
conjunction with the settlement of these legal matters, the
Company paid the remaining portion of the legal escrow fund in
March 2002. The total

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acquisition price, including costs of the
acquisition and liabilities assumed, of $16.3 million was
allocated as follows (in millions):

|                        |  |   |      | 
|----------------------- |  | - | ---- | 
|Current assets          |  | $ | 5.2  | 
|Property and equipment  |  |   | 1.1  | 
|Customer list           |  |   | 7.9  | 
|Digital samples archive |  |   | 2.1  | 
|                        |  |   |      | 
|                        |  | $ | 16.3 | 
|                        |  |   |      | 

The customer list and digital samples archive
acquired were being amortized over three and two years,
respectively. In conjunction with its long-lived assets policy,
the Company determined that some of the above acquired assets
were impaired at December 31, 2001, and accordingly
recorded an impairment charge. See Note 4.

Online RadioIn
March and June 2001, the Company made three other asset
acquisitions, primarily related to content and ad insertion
technology and online radio technology. These acquisitions are
presented in the following table (in thousands):

|                     |  |                    |       |         |  |       |       |       |  |   |       |  |  |   |       | 
|-------------------- |  | ------------------ | ----- | ------- |  | ----- | ----- | ----- |  | - | ----- |  |  | - | ----- | 
|                     |  |                   
|                     |  | Consideration Paid
|                     |  |                   
|                     |  | Addition           |       |        
|                     |  | Systems            |       | theDial |  | OnAir |       | Total
|                     |  |                    |       |         |  |       |       |      
|Cash                 |  | $                  | 1,479 |         |  | $     | 1,511 |       |  | $ | 726   |  |  | $ | 3,716 | 
|Stock                |  |                    | 847   |         |  |       |      |       |  |   | 693   |  |  |   | 1,540 | 
|                     |  |                    |       |         |  |       |       |       |  |   |       |  |  |   |       | 
|Total Purchase price |  | $                  | 2,326 |         |  | $     | 1,511 |       |  | $ | 1,419 |  |  | $ | 5,256 | 
|                     |  |                    |       |         |  |       |       |       |  |   |       |  |  |   |       | 

|                     |  |                                 |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|-------------------- |  | ------------------------------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                     |  |                                
|                     |  | Allocation of Acquisition Price
|                     |  |                                
|                     |  |                                 |       | 
|Fixed Assets         |  | $                               | 383   |  |  | $ |      |  |  | $ | 304   |  |  | $ | 687   | 
|Intangibles          |  |                                 | 1,943 |  |  |   | 1,511 |  |  |   | 1,115 |  |  |   | 4,569 | 
|                     |  |                                 |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Total Purchase price |  | $                               | 2,326 |  |  | $ | 1,511 |  |  | $ | 1,419 |  |  | $ | 5,256 | 
|                     |  |                                 |       |  |  |   |       |  |  |   |       |  |  |   |       | 

The following table presents the unaudited pro
forma results assuming that the Company had acquired Streampipe
and EncodeThis at the beginning of fiscal year 2002 (in
thousands):

|                                     |  |      |         |  
|------------------------------------ |  | ---- | ------- | -
|                                     |  | 2002
|                                     |  |     
|Total revenues                       |  | $    | 16,013  |  
|Net loss                             |  |      | (32,912 | )
|Basic and diluted net loss per share |  | $    | (0.80   | )

8.     Allowance for
Doubtful Accounts

The activity in the allowance for doubtful
accounts is summarized as follows (in thousands)

|                                             |  |      |      |      |  |   |      |  
|-------------------------------------------- |  | ---- | ---- | ---- |  | - | ---- | -
|                                             |  | 2003 |      | 2002
|                                             |  |      |      |     
|Balance at beginning of year                 |  | $    | 254  |      |  | $ | 474  |  
|Additions charged to expense                 |  |      | 129  |      |  |   | 121  |  
|Write-offs of receivables, net of recoveries |  |      | (148 | )    |  |   | (341 | )
|                                             |  |      |      |      |  |   |      |  
|Balance at end of year                       |  | $    | 235  |      |  | $ | 254  |  
|                                             |  |      |      |      |  |   |      |  

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Prepaid
Expenses and Other

Prepaid expenses and other current assets
consisted of the following (in thousands):

|                                                         |  |      |     |      |  |   |     | 
|-------------------------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                                         |  | 2003 |     | 2002
|                                                         |  |      |     |     
|Prepaid insurance                                        |  | $    | 49  |      |  | $ | 243 | 
|Miscellaneous receivables                                |  |      | 68  |      |  |   | 225 | 
|Prepaid software licenses and maintenance
    agreements |  |      | 46  |      |  |   | 178 | 
|Other prepaid expenses                                   |  |      | 182 |      |  |   | 90  | 
|                                                         |  |      |     |      |  |   |     | 
|                                                         |  | $    | 345 |      |  | $ | 736 | 
|                                                         |  |      |     |      |  |   |     | 

10.     Property and
Equipment

Property and equipment consists of the following
(in thousands):

|                                          |          |      |        |       |  |                   |        |       |  |  |           |  | 
|----------------------------------------- | -------- | ---- | ------ | ----- |  | ----------------- | ------ | ----- |  |  | --------- |  | 
|                                          |          | 2003 |        | 2002  |  | Depreciable Lives
|                                          |          |      |        |       |  |                  
|Production and computer equipment         |          | $    | 5,201  |       |  | $                 | 5,221  |       |  |  | 3 years   | 
|Furniture, fixtures and equipment         |          |      | 5      |       |  |                   | 5      |       |  |  | 5 years   | 
|Leasehold improvements                    |          |      | 355    |       |  |                   | 491    |       |  |  | 3-5 years | 
|Software                                  |          |      | 376    |       |  |                   | 386    |       |  |  | 3 years   | 
|                                          |          |      |        |       |  |                   |        |       |  |  |           | 
|                                          | Subtotal |      |        | 5,937 |  |                   |        | 6,103 |  |  |           |  | 
|Accumulated depreciation and amortization |          |      | (4,814 | )     |  |                   | (4,101 | )     |  |  |           | 
|                                          |          |      |        |       |  |                   |        |       |  |  |           | 
|Property and equipment, net               |          | $    | 1,123  |       |  | $                 | 2,002  |       |  |  |           | 
|                                          |          |      |        |       |  |                   |        |       |  |  |           | 

Depreciation and amortization expense related to
property and equipment was $1.3 million, $4.3 million
and $7.2 million for the years ended December 31,
2003, 2002 and 2001, respectively.

11.     Intangible
Assets and Goodwill

The Companys intangible assets at
December 31, 2003 and 2002 were as follows (in thousands):

|                    |  |                |     |              |  |                |       |      |  |      |     |      |  |   |       |  |  |   |    |  |  |   |       | 
|------------------- |  | -------------- | --- | ------------ |  | -------------- | ----- | ---- |  | ---- | --- | ---- |  | - | ----- |  |  | - | -- |  |  | - | ----- | 
|                    |  |                |     |              |  |                |       |     
|                    |  | Gross Carrying |     | Accumulated  |  |               
|                    |  | Amount         |     | Amortization |  | Net Book Value
|                    |  |                |     |              |  |               
|                    |  | 2003           |     | 2002         |  | 2003           |       | 2002 |  | 2003 |     | 2002
|                    |  |                |     |              |  |                |       |      |  |      |     |     
|Trade name          |  | $              |    |              |  | $              | 685   |      |  | $    |    |      |  | $ | 580   |  |  | $ |   |  |  | $ | 105   | 
|Customer list       |  |                | 748 |              |  |                | 2,219 |      |  |      | 662 |      |  |   | 1,339 |  |  |   | 86 |  |  |   | 880   | 
|Acquired technology |  |                |    |              |  |                | 830   |      |  |      |    |      |  |   | 57    |  |  |   |   |  |  |   | 773   | 
|                    |  |                |     |              |  |                |       |      |  |      |     |      |  |   |       |  |  |   |    |  |  |   |       | 
|                    |  | $              | 748 |              |  | $              | 3,734 |      |  | $    | 662 |      |  | $ | 1,976 |  |  | $ | 86 |  |  | $ | 1,758 | 
|                    |  |                |     |              |  |                |       |      |  |      |     |      |  |   |       |  |  |   |    |  |  |   |       | 

As described in Note 4, the Company recorded
impairment charges related to certain intangible assets in 2003,
2002 and 2001. The customer list intangible asset will be
amortized fully in the first quarter of 2004.

Amortization of goodwill and intangible assets
totaled $1.1 million, $3.0 million and
$8.2 million for the years ending December 31, 2003,
2002 and 2001, respectively.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The changes in the carrying amount of goodwill
were as follows (in thousands):

|                                                   |  |              |        |      |  |   |       | 
|-------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ----- | 
|                                                   |  |             
|                                                   |  | Years ending
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2003         |        | 2002
|                                                   |  |              |        |     
|Beginning balance                                  |  | $            | 5,307  |      |  | $ | 1,310 | 
|Impairment of goodwill from Streampipe acquisition |  |              | (3,775 | )    |  |   |      | 
|Vidipax intangible assets reclassified to goodwill |  |              |       |      |  |   | 222   | 
|Goodwill (impairment) from Vidipax acquisition     |  |              | (1,532 | )    |  |   | 3,775 | 
|                                                   |  |              |        |      |  |   |       | 
|Ending balance                                     |  | $            |       |      |  | $ | 5,307 | 
|                                                   |  |              |        |      |  |   |       | 

The Streampipe acquisition is a component of the
Companys digital media services segment and the Vidipax
acquisition is a component of the Companys media
restoration services segment.

12.     Other
Long-Term Assets

Other long-term assets consisted of the following
(in thousands):

|                                                                                  |  |              |     |      |  |   |     | 
|--------------------------------------------------------------------------------- |  | ------------ | --- | ---- |  | - | --- | 
|                                                                                  |  |             
|                                                                                  |  | December 31,
|                                                                                  |  |             
|                                                                                  |  | 2003         |     | 2002
|                                                                                  |  |              |     |     
|Long-term deposits                                                                |  | $            | 300 |      |  | $ | 592 | 
|Capitalized software costs (net of accumulated
    amortization of $244 and $147) |  |              | 49  |      |  |   | 146 | 
|Other                                                                             |  |              | 11  |      |  |   | 83  | 
|                                                                                  |  |              |     |      |  |   |     | 
|                                                                                  |  | $            | 360 |      |  | $ | 821 | 
|                                                                                  |  |              |     |      |  |   |     | 

The decrease in long-term deposits resulted from
the negotiated settlement of operating leases for unoccupied
facilities. As described in more detail in Note 4, in
several of these settlements the landlords were allowed to
retain the security deposits for the facilities. These security
deposits were included in other long-term assets in the
consolidated balance sheet at December 31, 2002.

In 2001, the company recorded impairment charges
on capitalized software development costs of approximately
$820,000. The Company did not capitalize any software
development costs in 2003 or 2002.

13.     Other Accrued
Expenses

Other accrued expenses consisted of the following
(in thousands):

|                          |  |              |       |      |  |   |       | 
|------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2003         |       | 2002
|                          |  |              |       |     
|Accrued royalties         |  | $            | 600   |      |  | $ | 490   | 
|Accrued interest          |  |              | 15    |      |  |   |      | 
|Accrued legal fees        |  |              | 137   |      |  |   | 249   | 
|Other accrued liabilities |  |              | 403   |      |  |   | 685   | 
|                          |  |              |       |      |  |   |       | 
|                          |  | $            | 1,155 |      |  | $ | 1,424 | 
|                          |  |              |       |      |  |   |       | 

14.     Line of
Credit

In June, 2003, the Company entered into a
revolving credit facility (the Revolver) with a bank
under which it may borrow up to $2.5 million based on a
certain percentage of eligible accounts receivable. The Revolver
expires in June, 2004 and is collateralized by substantially all
of the Companys assets. Borrowings

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

under the Revolver bear interest at the greater
of the prime rate plus 1.75% (5.75% at December 31, 2003)
or 5.75%. In addition, the Company was required to establish a
lockbox account with the lender to which all payments from
customers are deposited. The lender applies such deposits to the
outstanding borrowings and transfers any excess funds to the
Companys operating bank account. Annual fees for the
lockbox arrangement are 0.35% of the average daily outstanding
principal balance. At December 31, 2003, outstanding
borrowings under the Revolver were $1.3 million. The
Company is utilizing borrowings under the 2003 Revolving
Facility for working capital and general corporate purposes.

The Company also issued a warrant to the lender
to purchase 47,500 shares of its common stock at $0.89 per
share. The warrant expires in June 2010. The fair value of the
warrants was estimated using the Black-Scholes option-pricing
model with the following assumptions: no dividends; risk-free
interest rate of 2.0%, contractual life of seven years and
volatility of 136%. The fair value of the warrant was estimated
to be $28,000 and was recorded in interest expense.

15.     Long-Term
Debt and Capital Lease Obligations

Long-Term
Debt

On December 31, 2003, the Company entered
into a Loan and Security Agreement (the Term Loan)
with a bank under which it borrowed $3,000,000. The Term Loan
also provides for up to $500,000 to collateralize standby
letters of credit. Borrowings under the Term Loan are
collateralized by substantially all of the Companys assets
and bear interest at the Prime Rate plus 1.25 percent
(5.25% at December 31, 2003). Principal payments are due in
equal monthly installments, plus interest, through
January 1, 2007. In addition, the Term Loan restricts,
among other things, the Companys borrowings, dividend
payments, stock repurchases, and sales or transfers of ownership
or control, and contains certain other restrictive covenants
that require the Company to maintain a certain quick ratio and
tangible net worth, as defined in the Term Loan. The Company was
in compliance with these covenants at December 31, 2003.
The Company intends to use the proceeds to upgrade certain
equipment related to its digital media services and technology
infrastructure, repay certain capital lease obligations, and for
working capital and other general corporate purposes.

The Company also issued a warrant to the lender
to purchase 25,000 shares of its common stock at $1.75 per
share. The warrant expires in December 2010. The fair value of
the warrant was estimated using the Black-Scholes option-pricing
model with the following assumptions: no dividends; risk-free
interest rate of 3.81%, the contractual life of seven years and
volatility of 137%. The fair value of the warrant was estimated
to be $46,000 and will be recorded in interest expense ratably
over the term of the loan.

Capital Lease
Obligations

The Company has financed the acquisition of
certain equipment with capital lease arrangements. These leases
are collateralized by the equipment as well as by standby
letters of credit totaling approximately $316,000. The leases
bear interest at rates ranging form 2.26% to 7.52% with
outstanding balances totaling approximately $481,000 at
December 31, 2003.

As of December 31, 2003, future minimum
payments under capital leases are as follows (in thousands):

|                             |  |   |     |  
|---------------------------- |  | - | --- | -
|2004                         |  | $ | 322 |  
|2005                         |  |   | 169 |  
|                             |  |   |     |  
|                             |  |   | 491 |  
|Amount representing interest |  |   | (10 | )
|                             |  |   |     |  
|                             |  | $ | 481 |  
|                             |  |   |     |  

76



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The carrying value of assets held under capital
lease obligations at December 31, 2003 was approximately
$580,000.

16.     Income
Taxes

At December 31, 2003, the Company had net
operating loss carryforwards of approximately
$193.5 million related to Federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to
certain limitations. These carryforwards will expire in 2018
through 2023. The Company did not provide for any current or
deferred Federal or state income tax expense or benefit for any
of the periods presented because it has experienced operating
losses since inception, and has provided full valuation
allowances on net deferred tax assets because of uncertainty
regarding their realizability. The valuation allowance increased
by $5.5 million, $29.1 million, and $24.3 million
in 2003, 2002, and 2001, respectively. Deferred income taxes
consist primarily of net operating loss carryforwards and
temporary differences for customer deposits, accrued special
charges, allowances, stock-compensation expense and the
difference between book and tax depreciation and amortization.

The difference between the statutory tax rate of
35% (34% federal and 1% state, net of federal benefits) and the
tax benefit of zero recorded by the Company is due to the
Companys full valuation allowance against its net deferred
tax assets.

The components of the deferred tax assets and
liabilities were as follows (in thousands):

|                     |                                        |                               |         |        |        |  |         |        |        | 
|-------------------- | -------------------------------------- | ----------------------------- | ------- | ------ | ------ |  | ------- | ------ | ------ | 
|                     |                                        |                              
|                     |                                        | December 31,                 
|                     |                                        |                              
|                     |                                        | 2003                          |         | 2002  
|                     |                                        |                               |         |       
|Deferred tax assets: |                                        |                               |         |        |        |  |         |       
|                     | Net operating loss carryforwards       |                               | $       | 67,732 |        |  | $       | 60,217 |       
|                     | Basis difference in depreciable assets |                               |         | 4,819  |        |  |         | 6,676  |       
|                     | Accrued special charges                |                               |         | 585    |        |  |         | 1,016  |       
|                     | Stock options and warrants             |                               |         | 477    |        |  |         |       |       
|                     | Other                                  |                               |         | 609    |        |  |         | 785    |       
|                     |                                        |                               |         |        |        |  |         |       
|                     |                                        | Total net deferred tax assets |         |        | 74,222 |  |         |        | 68,695 | 
|Valuation allowance  |                                        |                               | (74,222 | )      |        |  | (68,695 | )     
|                     |                                        |                               |         |        |        |  |         |       
|                     |                                        | Total                         |         | $      |       |  |         | $      |       | 
|                     |                                        |                               |         |        |        |  |         |       

17.     Stockholders
Equity

Common
Stock

The holders of common stock are entitled to one
vote per share on all matters to be voted on by the
stockholders. Subject to preferences that may be applicable to
any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be
declared from time to time by the board of directors out of
funds legally available for that purpose. To date the Company
has not declared any dividends on its common stock. In the event
of a liquidation, dissolution or winding up of the Company, the
holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock.

77



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Preferred
Stock

The board of directors has the authority, without
action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to
designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of the common
stock.

Shares
Reserved for Future Issuance

The following shares of common stock have been
reserved for future issuance as of December 31, 2003:

|                                  |  |  |            | 
|--------------------------------- |  |  | ---------- | 
|Stock option plans                |  |  | 12,873,661 | 
|2000 Employee stock purchase plan |  |  | 652,055    | 
|Common stock warrants             |  |  | 1,726,136  | 
|                                  |  |  |            | 
|                                  |  |  | 15,251,852 | 
|                                  |  |  |            | 

18.     Net Loss Per
Share

Basic loss per share is computed by dividing net
loss by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is
computed by dividing net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during
the year. Common equivalent shares consist of shares issuable
upon the exercise of stock

options and warrants (using the treasury stock
method). Common equivalent shares are excluded from the
calculation if their effect is antidilutive, which is the case
for all periods presented. The Company has excluded the
following numbers of shares using this method:

|                     |  |      |           |      |  |      |           |  |  |  |           | 
|-------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                     |  | 2003 |           | 2002 |  | 2001
|                     |  |      |           |      |  |     
|Options outstanding  |  |      | 6,683,707 |      |  |      | 8,059,358 |  |  |  | 8,206,103 | 
|Warrants outstanding |  |      | 1,027,816 |      |  |      | 262,978   |  |  |  | 140,000   | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 
|Shares excluded      |  |      | 7,711,523 |      |  |      | 8,322,336 |  |  |  | 8,346,103 | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 

The Company had 1,207 and 87,291 shares
outstanding that had been issued through stock option exercises
but which were subject to repurchase at December 31, 2002 and
2001, with weighted average purchase prices of $0.17 and 0.31,
respectively. There were no shares subject to repurchase at
December 31, 2003. The impact of these unvested shares has
been removed from the calculation of weighted average shares
outstanding for purposes of determining basic and diluted
earnings per share and basic and diluted pro forma earnings per
share.

The following table presents a reconciliation of
shares used to calculate basic and diluted earnings per share:

|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                                                                   |  | 2003 |            | 2002 |  | 2001
|                                                                                   |  |      |            |      |  |     
|Weighted average shares outstanding                                                |  |      | 49,797,540 |      |  |      | 41,416,228 |   |  |  | 41,606,726 |  
|Weighting of shares subject to repurchase                                          |  |      | (626       | )    |  |      | (23,072    | ) |  |  | (177,622   | )
|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  
|Weighted average shares used to calculate basic
    and diluted earnings per share |  |      | 49,796,914 |      |  |      | 41,393,156 |   |  |  | 41,429,104 |  
|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

19.     Employee
Benefit Plans



| |            
| | -----------
| | 401(k) Plan

The Company maintains a 401(k) plan covering its
full-time employees over age twenty-one. Employees are eligible
after three months employment. Under the 401(k) plan, employees
may elect to reduce their current compensation by up to 80% up
to the statutorily prescribed annual limit ($12,000 in 2003) and
to have the amount of such reduction contributed to the 401(k)
plan. The 401(k) plan permits, but does not require, Company
matching contributions on behalf of all participants in the
401(k) plan. The Company expensed a contribution of $94,000 in
2001 that was contributed to the plan participants
accounts in March 2002. No expense was incurred in 2003 or 2002.



| |                                      
| | -------------------------------------
| | 2000 Employee Stock Purchase
    Plan

In December 1999, the board of directors approved
the creation of the 2000 Employee Stock Purchase Plan (ESPP). A
total of 200,000 shares of common stock were reserved for
issuance under the ESPP, with the number of shares reserved for
issuance under the ESPP subject to an automatic annual increase
on the first day of each of the fiscal years beginning in 2001,
2002, 2003, 2004 and 2005 equal to the lesser of 300,000 shares
or 0.75% of the Companys outstanding common stock on the
last day of the immediately preceding fiscal year or a lesser
number of shares as the board of directors determines. At
December 31, 2003, the total number of shares reserved for
issuance was 1,075,175, and a total of 423,120 shares have been
issued under the Plan.



| |                   
| | ------------------
| | Stock Option Plans

Under the Companys various stock option
plans, the board of directors and its stock option committee may
grant to employees, consultants, and directors both incentive
and nonstatutory options to purchase the Companys common
stock. At December 31, 2003, the plans provided for options
to purchase up to 17,824,487 of the Companys common stock.
One of the option plans provides for an automatic annual
increase on the first day of each of the fiscal years beginning
in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of
2.5 million shares or 5% of our outstanding common stock on
the last day of the immediately preceding fiscal year or a
lesser number of shares as our Board determines. Option grants
under the plans have terms of ten years and generally vest over
three to four and one half years.

79



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Option activity under the plans was as follows:

|                               |                             |                  |           |                      |   |                          |  |      |  |  |      |      | 
|------------------------------ | --------------------------- | ---------------- | --------- | -------------------- | - | ------------------------ |  | ---- |  |  | ---- | ---- | 
|                               |                             |                 
|                               |                             | Weighted Average
|                               |                             |                 
|                               |                             | Number of        |           | Grant Date           |   | Weighted Average        
|                               |                             | Shares           |           | Fair Value per Share |   | Exercise Price per Share
|                               |                             |                  |           |                      |   |                         
|Outstanding, January 1, 2001   |                             |                  | 5,603,023 |                      |   |                          |  |      |  |  | 4.64 |     
|                               | Granted                     |                  |           | 7,996,606            |   |                          |  | 0.97 |  |  |      | 1.11 | 
|                               | Exercised                   |                  |           | (257,093             | ) |                          |  |      |  |  |      | 0.48 | 
|                               | Cancelled                   |                  |           | (5,136,433           | ) |                          |  |      |  |  |      | 4.36 | 
|                               |                             |                  |           |                      |   |                          |  |      |  |  |      |     
|Outstanding, December 31, 2001 |                             |                  | 8,206,103 |                      |   |                          |  |      |  |  | 1.51 |     
|                               | Granted                     |                  |           | 4,422,225            |   |                          |  | 0.42 |  |  |      | 0.42 | 
|                               | Exercised                   |                  |           | (91,621              | ) |                          |  |      |  |  |      | 0.28 | 
|                               | Cancelled                   |                  |           | (4,477,349           | ) |                          |  |      |  |  |      | 1.41 | 
|                               |                             |                  |           |                      |   |                          |  |      |  |  |      |     
|Outstanding, December 31, 2002 |                             |                  | 8,059,358 |                      |   |                          |  |      |  |  | 0.98 |     
|                               | Granted at below fair value |                  |           | 473,300              |   |                          |  | 1.12 |  |  |      | 0.29 | 
|                               | Granted at fair value       |                  |           | 4,867,490            |   |                          |  | 0.52 |  |  |      | 0.52 | 
|                               | Exercised                   |                  |           | (1,998,452           | ) |                          |  |      |  |  |      | 0.80 | 
|                               | Cancelled                   |                  |           | (4,717,989           | ) |                          |  |      |  |  |      | 0.96 | 
|                               |                             |                  |           |                      |   |                          |  |      |  |  |      |     
|Outstanding, December 31, 2003 |                             |                  | 6,683,707 |                      |   |                          |  |      |  |  | 0.67 |     
|                               |                             |                  |           |                      |   |                          |  |      |  |  |      |     

The following information is provided for options
outstanding and exercisable at December 31, 2003:

|                  |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|----------------- |  | ----------- | --------- | ---------------- |  | ---------------- | ---- | --------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                  |  |             |           |                 
|                  |  | Outstanding |           | Exercisable     
|                  |  |             |           |                 
|                  |  |             |           | Weighted Average |  |                 
|                  |  |             |           | Weighted Average |  | Remaining        |      |           |  | Weighted Average
|                  |  | Number of   |           | Exercise Price   |  | Contractual Life |      | Number of |  | Exercise Price  
|Range per Share   |  | Shares      |           | per Share        |  | (in years)       |      | Shares    |  | per Share       
|                  |  |             |           |                  |  |                  |      |           |  |                 
|$0.25  $0.27     |  |             | 2,653,000 |                  |  | $                | 0.27 |           |  |                  | 9.19 |  |  |  | 1,778,333 |  |  | $ | 0.27 | 
|$0.28  $0.29     |  |             | 1,219,506 |                  |  |                  | 0.29 |           |  |                  | 9.38 |  |  |  | 253,326   |  |  |   | 0.28 | 
|$0.31  $0.36     |  |             | 1,243,461 |                  |  |                  | 0.36 |           |  |                  | 8.84 |  |  |  | 313,257   |  |  |   | 0.36 | 
|$0.38  $1.54     |  |             | 667,428   |                  |  |                  | 0.76 |           |  |                  | 7.77 |  |  |  | 395,467   |  |  |   | 0.72 | 
|$1.74  $19.75    |  |             | 900,312   |                  |  |                  | 2.75 |           |  |                  | 8.96 |  |  |  | 344,979   |  |  |   | 3.74 | 
|                  |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|December 31, 2003 |  |             | 6,683,707 |                  |  | $                | 0.67 |           |  |                  | 8.99 |  |  |  | 3,085,362 |  |  | $ | 0.72 | 
|                  |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|December 31, 2002 |  |             | 8,059,358 |                  |  | $                | 0.98 |           |  |                  | 8.83 |  |  |  | 2,808,823 |  |  | $ | 1.56 | 
|                  |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|December 31, 2001 |  |             | 8,206,103 |                  |  | $                | 1.51 |           |  |                  | 9.08 |  |  |  | 3,229,942 |  |  | $ | 1.47 | 
|                  |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 

20.     Commitments
and Contingencies



| |                 
| | ----------------
| | Operating Leases

The Company leases its facilities and certain
equipment under non-cancelable operating leases. The leases
expire at various dates through August 2005 and generally
provide that the Company pay taxes, insurance, maintenance and
other operating costs related to the leased assets.

80



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum lease payments under operating
leases, net of sublease payments, as of December 31, 2003
are as follows (in thousands):

|     |  |            |       |            |  |       |       |  |  |   |       | 
|---- |  | ---------- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- | 
|     |  | Unoccupied |       | Occupied   |  |      
|     |  | Facilities |       | Facilities |  | Total
|     |  |            |       |            |  |      
|2004 |  | $          | 1,108 |            |  | $     | 923   |  |  | $ | 2,031 | 
|2005 |  |            | 454   |            |  |       | 921   |  |  |   | 1,375 | 
|     |  |            |       |            |  |       |       |  |  |   |       | 
|     |  | $          | 1,562 |            |  | $     | 1,844 |  |  | $ | 3,406 | 
|     |  |            |       |            |  |       |       |  |  |   |       | 

Amounts due related to the unoccupied facilities
may not represent the actual amount that will be paid under
their respective leases, as the Company is in settlement
negotiations with the landlord of one of the facilities and in
litigation with the landlord of another facility. At
December 31, 2003, the Company has recorded in accrued
special charges an estimated liability of $1.7 million with
respect to leases for its unoccupied facilities.

Rent expense under operating leases totaled
approximately $1.6 million, $2.0 million and
$2.8 million during 2003, 2002 and 2001, respectively. In
addition, the Company paid approximately $1.6 million in
2002 for operating leases that had been accrued as special
charges in the prior year, related to unoccupied facilities.
Approximately $600,000 of the 2001 rent expense is included
within the special charge, as it related to that portion of rent
for facilities which had been vacated under the Companys
plans of consolidation.

At December 31, 2003, the Company had a
commitment to purchase for $1.5 million certain equipment to
upgrade its digital media services and technology
infrastructure. The $1.5 million will be paid in the first
quarter of 2004.

The Company is also required to make royalty
payments to the music companies and other various rights
holders, based upon the amount of revenues the Company generates
from its music related services. Amounts due under such
agreements are included in cost of revenues.



| |                  
| | -----------------
| | Legal Proceedings

Between July 26, 2001 and August 30,
2001, four substantially similar class action complaints were
filed in the Untied States District Court for the Southern
District of New York against the Company and certain of its
former officers and directors, as well as against certain
underwriters who handled its March 15, 2000 initial public
offering of common stock. The various complaints were
purportedly filed on behalf of a class of persons who purchased
the Companys common stock during the time period beginning
on March 15, 2000 and ending on December 6, 2000. The
complaints together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934, primarily based on
the allegation that there was undisclosed compensation received
by the Companys underwriters in connection with its
initial public offering and the allegation that the underwriters
entered into undisclosed arrangements with some investors that
were designed to distort and/or inflate the market price for the
Companys common stock in the aftermarket following the
initial public offering. These actions have all been
consolidated before the same judge for pretrial purposes. No
specific amount of damages has been claimed. The Company and the
individual defendants have demanded to be indemnified by the
underwriter defendants pursuant to the underwriting agreement
entered into at the time of the initial public offering.
Presently, all claims against the former officers have been
withdrawn without prejudice. The Company, along with the many
other issuer defendants, moved to dismiss the claims in the
complaint. By decision dated February 19, 2003 the court
denied the Companys motion. A proposal has been made for
the settlement and release of claims against the issuer
defendants. The settlement is subject to a number of conditions,
including approval of other proposed settling parties and the
court. If the settlement does not occur, and litigation against
the Company continues, management believes the Company has
meritorious defenses and intends to defend the case vigorously.

81



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On February 3, 2003, the Company entered
into an agreement with Regent Pacific Management Corporation
pursuant to which Regent Pacific would provide management
services. The agreement was for a term of 26 weeks, with an
option to renegotiate certain terms of the agreement after
13 weeks, and was terminable by either party under certain
circumstances. Under the agreement, the Company paid certain
fees to Regent Pacific. In addition, Regent Pacific was to
receive stock options to purchase up to 4,000,000 shares of our
common stock based on Regent Pacifics length of service.
These options were to be granted at various times throughout
their engagement at exercise prices based on the closing market
price on each grant date. On March 7, 2003, Regent Pacific
resigned from the engagement. On July 25, 2003, Regent
Pacific filed suit against the Company in the United States
District Court for the Northern District of California for
breach of the agreement. In this complaint, Regent Pacific is
seeking unspecified damages and specific performance of the
alleged obligation to grant the stock options due to them under
the contract. The Company believes that it has meritorious
defenses to the claims made in the suit, intends to defend
vigorously this suit, and intends to bring certain counterclaims
against Regent Pacific.

On or about January 8, 2003, Dominion
Venture Finance, L.L.C. commenced an action against the
Company and John Doe defendants in the Superior
Court of the State of California, County of San Francisco. In
its complaint, plaintiff alleges that pursuant to a loan and
security agreement and a master lease agreement (the liabilities
for which agreement, plaintiff alleges, were acquired by the
Company when it merged with DiscoverMusic.com, Inc.) the Company
failed to make certain required payments to plaintiff. On
August 5, 2003, the Company agreed to settle all claims
under the suit for a cash payment of approximately $228,000,
which represented the outstanding principal and interest under
the agreements.

In April 2003, the landlord of the Companys
unoccupied facility at 414 Olive Way, Seattle, WA filed
suit against the Company in the Superior Court of Washington,
King County, for breach of its lease and is seeking damages of
$2.0 million. In January 2004, the Court entered a judgment
in favor of the plaintiff for rents due through January 2004 of
$438,000, which the Company appealed immediately. The Court
reserved the other issues in the suit, including mitigation,
interest and attorneys fees, for trial. Management
believes that the Company has meritorious defenses to the claims
made in the suit and intends to defend this suit vigorously and
the Company may also bring certain counterclaims against the
landlord. If the Company does not prevail on its appeal or its
counterclaims, the Company may be held liable for additional
amounts beyond the amount of the judgment. As of
December 31, 2003, the Company has recorded in accrued
special charges an estimate of the amount the Company may
ultimately be required to pay with respect to this matter.

The Company becomes involved from time to time in
various other claims and lawsuits incidental to the ordinary
course of its operations, including such matters as contract and
lease disputes and complaints alleging employment
discrimination. The Company believes that the outcome of any
such pending claims or proceedings individually or in the
aggregate, will not have a material adverse effect upon its
business or financial condition, cash flows, or results of
operations.

21.     Related Party
Transactions

On September 1, 1998, the Company entered
into a five-year lease agreement with the Companys
founder, largest shareholder and former Chairman of the Board,
Martin Tobias, and his wife, Alex Tobias (the
Tobiass). The monthly rental payments were
approximately $10,000 per month. Total payments were
approximately $120,000 during each of the three years ended
December 31, 2001. The Company terminated this lease
effective February 28, 2002 and made an early termination
payment of $72,000.

On October 26, 2001, the Company entered
into an agreement with the Tobiass, pursuant to which
Loudeye purchased four million shares of Loudeye common stock
from the Tobiass for $2.0 million, or $0.50 per
share, and also entered into a comprehensive agreement with the
Tobiass, including the extension of a $2.0 million
collateralized line of credit to the Tobiass (the
Loan). The Tobiass had previously entered into a
loan agreement with City National Bank to borrow a principal
amount of $3.0 million. The Company

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

collateralized $2.5 million of the principal
amount with a letter of credit. The $2.0 million payment
due to Mr. Tobias from the Company for the common stock was
paid directly to City National Bank to reduce the current
outstanding principal balance to $500,000. The new credit line
was collateralized by liens on certain real property assets
owned by Mr. Tobias, as well as all his remaining
4.6 million Loudeye shares. Under the terms of the
agreement, the collateral shares were restricted from public
market sale, without Loudeyes consent, until the later of
January 31, 2003, or the full repayment of the credit
facility, which occurred in June of 2003. At December 31,
2002, amounts outstanding under the credit line were
$1.1 million and are reflected in notes receivable from
related parties. As part of the agreement, Mr. Tobias
granted the Board of Directors of the Company an irrevocable
proxy to vote the remaining shares of Common Stock owned by
Mr. Tobias at any stockholders meeting. The proxy
terminated on the repayment of the Loan in June of 2003. In
addition, as part of the agreement, Mr. Tobias resigned
from the Companys Board of Directors. The agreement also
permitted Mr. Tobias to establish a program for sales of
his shares consistent with Rule 10b5-1 under the Securities
Exchange Act of 1934 and with Rule 144 under the Securities
Act of 1933, so long as the minimum per share sales price of the
shares under such plan equaled or exceeded $1.25.

In addition, under the Rule 10b5-1 program
described above, if Mr. Tobias was unable to sell shares of
Loudeye common stock so that the proceeds from these sales equal
the lesser of (a) $500,000 or (b) the proceed from
sales of 150% of the maximum number of shares that could have
been sold by Mr. Tobias under Rule 144 during the
calendar quarter multiplied by a discounted share price as
defined in the agreement, the Company agreed to purchase a
limited number of shares from Mr. Tobias at a discount from
market price. During 2003, the Company purchased a total of
1,468,850 shares from Mr. Tobias for $426,000. During 2002,
the Company purchased a total of 1,812,170 shares from
Mr. Tobias for $0.8 million.

In March 2001, the Company loaned its former
President, David L. Weld Jr., $90,000 pursuant to a
promissory note bearing interest at the prime rate plus 1%. This
loan was due in three equal installments of principal plus
accrued interest in each of March 2002, September 2003, and
September 2004. At December 31, 2002, $60,000 remained
outstanding under the note and is included in notes receivable
from related parties. The loan was repaid in full in September
of 2003.

In April 2001, the Company loaned its former Sr.
Vice President of Sales, Todd A. Hinders $64,000 pursuant to a
promissory note bearing interest at the prime rate plus 4%. This
loan was due in annual installments on anniversary of the loan
equal to the greater of $3,000 or the Alternative Minimum Tax
credit carry forward utilized on Mr. Hinders income
tax return for that year. At December 31, 2002, $38,169
remained outstanding under the note and is included in notes
receivable from related parties. The remaining balance was
repaid in full in January 2003.

In May 2001, the Company acquired all of the
capital stock of Addition Systems, Inc., owned by Digital Media
Campus Inc., for $1,323,766 in cash. In connection with this
transaction, Digital Media Campus assigned to the Company a
promissory note receivable from eWave Networks. John Baker, the
Companys former Chief Executive Officer and Chairman of
the Board of Directors, was Chief Operating Officer of Digital
Media Campus until he joined Loudeye in March 2001. At
December 31, 2002, the balance of the note receivable from
eWave was $133,545 and is included in prepaid expenses and other
current assets. The note receivable was repaid in full in June
of 2003.

On June 14, 2000, the Company entered into a
five-year lease agreement with a company whose president and
sole shareholder was a vice president of the Company until his
employment terminated in August of 2001. Total payments during
2001 were approximately $362,000.

22.     Subsequent
Events

In February 2004, the Company sold 10,810,811
shares of common stock at $1.85 per share to a limited number of
accredited investors. The gross proceeds received from the
financing were $20,000,000. The

83



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Company paid a placement fee equal to 5% of the
gross proceeds. The net proceeds of the offering, after
commissions and expenses, will be used for working capital and
general corporate purposes, including expansion of the
Companys business-to-business digital music solutions in
the U.S. and internationally. The Company has agreed to use its
best efforts to file a registration statement covering the
resale of the shares sold in the financing.

In March 2004, the Company completed the
acquisition of Overpeer, Inc. (Overpeer), a
privately held company based in New York. Pursuant to the
Agreement and Plan of Merger and Reorganization (the
Merger Agreement), among Loudeye, Privateer
Acquisition Corp., a wholly owned subsidiary of the Company,
Overpeer and certain of Overpeers stockholders, Privateer
Acquisition Corp. was merged with and into Overpeer, with
Overpeer continuing as the surviving company and a wholly-owned
subsidiary of the Company (the Merger). As a result
of the Merger, all of the outstanding capital stock of Overpeer
was exchanged for a total of 1,752,772 shares of Loudeyes
common stock. The number of shares issued in the Merger was
calculated by dividing $4,000,000 by the volume weighted average
closing sales price of Loudeyes common stock on each of
the thirty consecutive trading days preceding the closing of the
Merger, or $2.2821 per share. 262,916 of the shares issued in
the Merger will be held in escrow for one year and will be
available during that time to satisfy indemnity claims under the
Merger Agreement. The Company agreed to use its best efforts to
file a registration statement for the resale of the securities
sold in the private placement on or before March 31, 2004,
and to use its reasonable efforts to have the registration
statement declared effective by the SEC as soon thereafter as
practicable. The Company is currently in the process of
determining the allocation of the purchase price and will record
the purchase price allocation when a valuation of the assets
acquired is completed.

23.     Segment
Disclosures

The Company operates in two business segments,
digital media services and media restoration services, for which
the Company receives revenues from its customers. The
Companys Chief Operating Decision Maker is considered to
be the Companys Executive Team (CET) that is
comprised of the Companys Chief Executive Officer, Chief
Financial Officer, and certain of its Vice Presidents. The CET
reviews financial information presented on a consolidated basis
accompanied by disaggregated information about products and
services for purposes of making decisions and assessing
financial performance. The following table provides information
about the Companys segments (in thousands):

|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|-------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                           |  |                         
|                           |  | Years ended December 31,
|                           |  |                         
|                           |  | 2003                     |         | 2002 |  | 2001
|                           |  |                          |         |      |  |     
|Revenues                   |  |                          |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $                        | 10,065  |      |  | $    | 9,528   |   |  | $ | 7,713   |  
|Media Restoration Services |  |                          | 1,883   |      |  |      | 3,153   |   |  |   | 2,675   |  
|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|                           |  | $                        | 11,948  |      |  | $    | 12,681  |   |  | $ | 10,388  |  
|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|Net Loss                   |  |                          |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $                        | (17,635 | )    |  | $    | (30,614 | ) |  | $ | (76,235 | )
|Media Restoration          |  |                          | (1,539  | )    |  |      | (548    | ) |  |   | (161    | )
|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|                           |  | $                        | (19,174 | )    |  | $    | (31,162 | ) |  | $ | (76,396 | )
|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|Assets                     |  |                          |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $                        | 25,829  |      |  | $    | 27,243  |   |  | $ | 78,781  |  
|Media Restoration Services |  |                          | 1,215   |      |  |      | 2,286   |   |  |   | 2,102   |  
|                           |  |                          |         |      |  |      |         |   |  |   |         |  
|                           |  | $                        | 27,044  |      |  | $    | 29,529  |   |  | $ | 80,883  |  
|                           |  |                          |         |      |  |      |         |   |  |   |         |  

84



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The media restoration segment reflects the
operating results and assets of the Companys wholly-owned
subsidiary, Vidipax, Inc. As disclosed in Note 5, on
January 30, 2004 the Company sold substantially all of the
assets of Vidipax.

24.     Quarterly
Consolidated Financial Information (Unaudited)

The following table sets forth certain unaudited
consolidated quarterly statement of operations data for the
eight quarters ended December 31, 2003. In the opinion of
management, this information has been prepared substantially on
the same basis as the audited consolidated financial statements
and all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated
below to present fairly the unaudited quarterly results of
operations. The quarterly data should be read in conjunction
with our audited consolidated financial statements and the notes
thereto. The operating results for any quarter are not
necessarily indicative of the operating results for any future
period.

|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |       |       | 
|----------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------ | -------- | ----- | -------- | ------ | --------- | ----- | -------- | ------ | -------- | ----- | -------- | ------- | --------- | ------ | - | ------- | ----- | ------ | - | ------ | ----- | ----- | - | ------ | ----- | ----- | - | ------ | ----- | ----- | 
|                                                |                                             |                                         
|                                                |                                             | Three Months Ended                      
|                                                |                                             |                                         
|                                                |                                             | Dec. 31,                                 |        | Sep. 30, |       | June 30, |        | March 31, |       | Dec. 31, |        | Sep. 30, |       | June 30, |         | March 31,
|                                                |                                             | 2003                                     |        | 2003     |       | 2003     |        | 2003      |       | 2002     |        | 2002     |       | 2002     |         | 2002     
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |          
|                                                |                                             |                                         
|                                                |                                             | (In thousands, except per share amounts)
|REVENUES                                        |                                             | $                                        | 2,924  |          |       | $        | 2,811  |           |       | $        | 2,903  |          |       | $        | 3,310   |           |        | $ | 2,578   |       |        | $ | 3,626  |       |       | $ | 3,217  |       |       | $ | 3,260  |      
|COST OF REVENUES                                |                                             |                                          | 1,418  |          |       |          | 1,561  |           |       |          | 1,682  |          |       |          | 2,545   |           |        |   | 2,961   |       |        |   | 3,521  |       |       |   | 3,641  |       |       |   | 3,190  |      
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|GROSS PROFIT (LOSS)                             |                                             |                                          | 1,506  |          |       |          | 1,250  |           |       |          | 1,221  |          |       |          | 765     |           |        |   | (383    | )     |        |   | 105    |       |       |   | (424   | )     |       |   | 70     |      
|OPERATING EXPENSES:                             |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|                                                | Research and development                    |                                          |        | 320      |       |          |        | 399       |       |          |        | 392      |       |          |         | 577       |        |   |         | 470   |        |   |        | 425   |       |   |        | 974   |       |   |        | 1,290 |      
|                                                | Sales and marketing                         |                                          |        | 419      |       |          |        | 485       |       |          |        | 835      |       |          |         | 1,547     |        |   |         | 1,836 |        |   |        | 1,370 |       |   |        | 2,245 |       |   |        | 2,216 |      
|                                                | General and administrative                  |                                          |        | 1,670    |       |          |        | 1,615     |       |          |        | 1,740    |       |          |         | 2,753     |        |   |         | 2,772 |        |   |        | 2,366 |       |   |        | 2,762 |       |   |        | 3,475 |      
|                                                | Amortization of intangible and other assets |                                          |        | 158      |       |          |        | 157       |       |          |        | 260      |       |          |         | 525       |        |   |         | 824   |        |   |        | 810   |       |   |        | 713   |       |   |        | 696   |      
|                                                | Stock-based compensation                    |                                          |        | 345      |       |          |        | 724       |       |          |        | 191      |       |          |         | 38        |        |   |         | 42    |        |   |        | 83    |       |   |        | 93    |       |   |        | (601  | )    
|                                                | Special Charges                             |                                          |        | 262      |       |          |        |          |       |          |        |         |       |          |         | 8,437     |        |   |         | 4,956 |        |   |        |      |       |   |        | 1,142 |       |   |        | 748   |      
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|                                                |                                             | Total operating expenses                 |        |          | 3,174 |          |        |           | 3,380 |          |        |          | 3,418 |          |         |           | 13,877 |   |         |       | 10,900 |   |        |       | 5,054 |   |        |       | 7,929 |   |        |       | 7,824 | 
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|OPERATING LOSS                                  |                                             |                                          | (1,668 | )        |       |          | (2,130 | )         |       |          | (2,197 | )        |       |          | (13,112 | )         |        |   | (11,283 | )     |        |   | (4,949 | )     |       |   | (8,353 | )     |       |   | (7,754 | )    
|Increase in fair value of common stock warrants |                                             |                                          | (26    | )        |       |          | (222   | )         |       |          |       |          |       |          |        |           |        |   |        |       |        |   |       |       |       |   |       |       |       |   |       |      
|OTHER INCOME                                    |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|                                                | (EXPENSE)  NET                             |                                          |        | (19      | )     |          |        | 12        |       |          |        | 135      |       |          |         | 53        |        |   |         | 126   |        |   |        | 861   |       |   |        | 74    |       |   |        | 116   |      
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|NET LOSS                                        |                                             | $                                        | (1,713 | )        |       | $        | (2,340 | )         |       | $        | (2,062 | )        |       | $        | (13,059 | )         |        | $ | (11,157 | )     |        | $ | (4,088 | )     |       | $ | (8,279 | )     |       | $ | (7,638 | )    
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|NET LOSS PER SHARE                             |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      
|                                                | BASIC AND DILUTED                           |                                          | $      | (0.03    | )     |          | $      | (0.05     | )     |          | $      | (0.04    | )     |          | $       | (0.28     | )      |   | $       | (0.25 | )      |   | $      | (0.10 | )     |   | $      | (0.21 | )     |   | $      | (0.19 | )    
|                                                |                                             |                                          |        |          |       |          |        |           |       |          |        |          |       |          |         |           |        |   |         |       |        |   |        |       |       |   |        |       |       |   |        |      



---



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss per share is computed independently for each
    of the periods presented. Therefore, the sum of the quarterly
    per share amounts will not necessarily equal the total amount
    for the year.

85



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|       |                                                                                         
|------ | ----------------------------------------------------------------------------------------
|Item 9 | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

On May 23, 2002, the audit committee of our
board of directors decided to replace Arthur Andersen LLP, our
independent accountants. Arthur Andersen LLP had served as our
independent accountants since 1999.

Arthur Andersen LLPs reports on our
consolidated financial statements for the two years ended
December 31, 2001 did not contain an adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles. During the
two fiscal years ended December 31, 2001 and 2000, and
through the date of dismissal, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to Arthur Andersen LLPs
satisfaction, would have caused Arthur Andersen LLP to make
reference to the subject matter in connection with its report on
our consolidated financial statements for such years; and there
were no reportable events as defined in Item 304(a)(1)(v)
of Regulation S-K.

On June 6, 2002, based on the recommendation
of the audit committee, the Board of Directors appointed
PricewaterhouseCoopers LLP as our independent auditors for the
fiscal year ending December 31, 2002.

During the two fiscal years ended
December 31, 2001 and 2000 and through the date of
retention, we did not consult with PricewaterhouseCoopers LLP
with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our consolidated
financial statements, or any other matters or reportable events
as set forth in Items 304(a)(2)(i) and (ii) of Regulation
S-K.






|        |                        
|------- | -----------------------
|Item 9A | Controls and Procedures

Our management, with the participation of the our
Chief Executive Officer and Principal Financial Officer, has
evaluated the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period covered by this
report. Based on that evaluation, the our Chief Executive
Officer and Chief Financial Officer have concluded that, as of
the end of such period, our disclosure controls and procedures
are effective.

There have not been any changes in our internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during our fiscal fourth quarter that have materially affected,
or are reasonably likely to materially affect, our internal
control over financial reporting.

Limitations.Our
management, including our Chief Executive Officer and Principal
Financial Officer, does not expect that our disclosure controls
or internal controls over financial reporting will prevent all
errors or all instances of fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our
company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty,
and that breakdowns can occur because of simple error or
mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the
likelihood of future events, and any design may not succeed in
achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent
limitation of a cost-effective control system, misstatements due
to error or fraud may occur and not be detected.

86



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##### Table of Contents






PART III






|        |                                                       
|------- | ------------------------------------------------------
|Item 10 | Directors and Executive Officers of the
    Registrant

The information required by this Item is
incorporated herein by reference under the captions Board
of Directors-Nominees for Director, Board of
Directors  Continuing Directors Not Standing for
Election This Year, Board of Directors 
Contractual Arrangements, Executive Officers
and Voting Securities and Principal Holders 
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement for our 2004 Annual
Meeting of Stockholders.

We have adopted a code of ethics that applies to
our directors, officers and employees, including our principal
executive officer, principal financial officer and principal
accounting officer and persons performing similar functions. Our
code of ethics is filed as Exhibit 14.1 to this Annual
Report on Form 10-K. We intend to satisfy the disclosure
requirement under Item 10 of Form 8-K, regarding an
amendment to or waiver from our code of ethics, by posting the
required information on our Internet website at
www.loudeye.com or as otherwise permitted under
applicable law.





|        |                       
|------- | ----------------------
|Item 11 | Executive Compensation

The information required by this Item is
incorporated herein by reference to the information under the
caption Compensation and Benefits in the Proxy
Statement for our 2004 Annual Meeting of Stockholders.





|        |                                                                   
|------- | ------------------------------------------------------------------
|Item 12 | Security Ownership of Certain Beneficial
    Owners and Management

The information required by this Item is
incorporated herein by reference to the information under the
caption Voting Securities and Principal Holders in
the Proxy Statement for our 2004 Annual Meeting of Stockholders.





|        |                                                   
|------- | --------------------------------------------------
|Item 13 | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated herein by reference to the information under the
caption Voting Securities and Principal
Holders  Certain Transactions in the Proxy
Statement for our 2004 Annual Meeting of Stockholders.





|        |                                           
|------- | ------------------------------------------
|Item 14 | Principal Accountant Fees and
    Services

Information with respect to principal
accountants fees and services is incorporated herein by
reference to the information under the caption Information
About Our Independent Accountants in the Proxy Statement
for our 2004 Annual Meeting of Stockholders.



PART IV





|        |                                                                     
|------- | --------------------------------------------------------------------
|Item 15 | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) Documents filed as part of
Form 10-K

1.     Financial
Statements:

The following financial statements of Loudeye are
submitted in a separate section pursuant to the requirements of
Form 10-K, Part I, Item 8:



| |                                                    
| | ---------------------------------------------------
| | Index to Consolidated Financial Statements         
| | Report of Independent Auditors                     
| | Report of Arthur Andersen LLP                      
| | Consolidated Balance Sheets                        
| | Consolidated Statements of Operations              
| | Consolidated Statements of Stockholders
    Equity
| | Consolidated Statements of Cash Flows              
| | Notes to Consolidated Financial Statements         

87



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##### Table of Contents



2.     Exhibits:

|          |        |                                                                                                                                                                                                                                       |                                                                               
|--------- | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------
|          | 3.1(1) |                                                                                                                                                                                                                                       | Fifth Amended and Restated Certificate of
    Incorporation of Loudeye Corp.  
|          | 3.2(1) |                                                                                                                                                                                                                                       | Form of Amended and Restated Certificate of
    Incorporation of Loudeye Corp.
|          | 3.4(2) |                                                                                                                                                                                                                                       | Amended Bylaws of Loudeye Corp. dated
    January 18, 2002.                   
|          | 4.1(1) |                                                                                                                                                                                                                                       | Form of Loudeye Corp. common stock certificate.                               
|10.1(1)   |        | Form of Indemnification Agreement between Loudeye
    Corp. and each of its officers and directors.                                                                                                                                  
|10.2(1)   |        | 1998 Stock Option Plan, as amended.                                                                                                                                                                                                  
|10.3(1)   |        | Alive.com, Inc. 1998 Stock Option Plan.                                                                                                                                                                                              
|10.4(1)   |        | 2000 Stock Option Plan.                                                                                                                                                                                                              
|10.5(1)   |        | 2000 Director Stock Option Plan.                                                                                                                                                                                                     
|10.6(1)   |        | 2000 Employee Stock Purchase Plan.                                                                                                                                                                                                   
|10.7(3)   |        | 2000 Employee Stock Option Plan as amended
    March 5, 2001.                                                                                                                                                                        
|10.8(1)   |        | Amended and Restated Investors Rights
    Agreement dated December 14, 1999 among Loudeye Corp. and
    certain holders of our preferred stock.                                                                                     
|10.9(4)   |        | Consulting Agreement dated April 1, 2003
    between Anthony J. Bay and Loudeye Corp.                                                                                                                                                
|10.10     |        | Employment Agreement dated December 5, 2003
    between Anthony J. Bay and Loudeye Corp., filed herewith.                                                                                                                            
|10.11(4)  |        | Employment Agreement dated April 1, 2003
    between Jeffrey M. Cavins and Loudeye Corp.                                                                                                                                             
|10.12(4)  |        | Employment Agreement dated April 1, 2003
    between Jerold J. Goade, Jr. and Loudeye Corp.                                                                                                                                          
|10.13(4)  |        | Employment Agreement dated April 1, 2003
    between Michael S. Dougherty and Loudeye Corp.                                                                                                                                          
|10.14(4)  |        | Offer letter dated June 16, 2003 between
    Michael R. Harburg and Loudeye Corp.                                                                                                                                                    
|10.15     |        | Offer letter dated August 13, 2003 between
    John H. Martin and Loudeye Corp., filed herewith.                                                                                                                                     
|10.16(5)  |        | Securities Purchase Agreement dated
    August 28, 2003.                                                                                                                                                                             
|10.17(5)  |        | Registration Rights Agreement dated
    August 28, 2003.                                                                                                                                                                             
|10.18(5)  |        | Form of Common Stock Purchase Warrant dated
    August 28, 2003.                                                                                                                                                                     
|10.19(6)  |        | Accounts Receivable Financing Agreement dated
    June 27, 2003 between Silicon Valley Bank and Loudeye Corp.
    and related modification agreement and warrant agreement.                                                          
|10.20(10) |        | Credit facility, dated December 31, 2003
    between Silicon Valley Bank and Loudeye Corp.                                                                                                                                           
|10.21(7)  |        | Fifth Amendment and Assignment of Lease dated
    April 1, 2003 among 1130 Rainier, LLC, Activate.Net
    Corporation, and Loudeye Enterprise Communications, Inc. for
    offices at 1130 Rainier Avenue South, Seattle, Washington.
|10.22(7)  |        | Lease Termination Agreement dated April 28,
    2003 between Westlake Park Associates and Loudeye Corp. with
    respect to offices at 1904 Fourth Avenue, Seattle, Washington.                                                      
|10.23     |        | Lease agreement dated December 20, 2003 for
    offices at 1130 Rainier Avenue South, Seattle, Washington, filed
    herewith.                                                                                                       
|10.24     |        | Asset Purchase agreement dated October 31,
    2003 between Gail Clarke Acquisition Corp. and Vidipax, Inc.,
    filed herewith.                                                                                                     
|10.25(8)  |        | Agreement and Plan of Reorganization with TT
    Holding Corp.                                                                                                                                                                       
|10.26(9)  |        | Retainer Agreement with Regent Pacific Management
    Corporation.                                                                                                                                                                   
|14.1      |        | Code of Ethics, filed herewith.                                                                                                                                                                                                      
|21.1      |        | Subsidiaries of Loudeye Corp., filed herewith.                                                                                                                                                                                       
|23.1(2)   |        | Consent of Arthur Andersen LLP                                                                                                                                                                                                       
|23.2      |        | Consent of PricewaterhouseCoopers LLP, filed
    herewith.                                                                                                                                                                           
|24.1      |        | Powers of Attorney of Board of Directors (see
    Form 10-K).                                                                                                                                                                        

88



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|     |  |                                                                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Jeffrey M. Cavins, President and
    Chief Executive Officer of Loudeye Corp., Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.
|31.2 |  | Certification of Jerold J. Goade Jr., Senior Vice
    President of Finance of Loudeye Corp., Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.   
|32.1 |  | Certification of Jeffrey M. Cavins, President and
    Chief Executive Officer of Loudeye Corp., Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|32.2 |  | Certification of Jerold J. Goade Jr., Senior Vice
    President of Finance of Loudeye Corp., Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.   



---



| |     |                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to Loudeye Corp.s
    registration statement on Form S-1 file
    number 333-93361.
|
| | (2) | Incorporated by reference to Loudeye Corp.s
    Form 10-K for the period ended December 31, 2001.            
|
| | (3) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q, for the period ending March 31, 2001.             
|
| | (4) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q/ A filed on September 2, 2003.                     
|
| | (5) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on September 2, 2003.                         
|
| | (6) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated July 15, 2003.                                
|
| | (7) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q dated May 20, 2003.                                
|
| | (8) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated November 19, 2002.                            
|
| | (9) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated February 3, 2003.                             



|     |                                                                                 
|---- | --------------------------------------------------------------------------------
|(10) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated January 9, 2004.

(b) Reports on Form 8-K

On November 6, 2003, we furnished a Report
on Form 8-K containing disclosure for Item 12.

89



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Seattle, State of Washington,
March 19, 2004.



| |              
| | -------------
| | LOUDEYE CORP.



| |     |                      
| | --- | ---------------------
| | By: | /s/ JEFFREY M. CAVINS

| |                        
| | -----------------------
| |                        
| | Jeffrey M. Cavins      
| | Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby
constitutes and appoints Jeffrey M. Cavins and
Jerold J. Goade, Jr., and each of them severally, his true
and lawful attorneys-in-fact and agents, with full power to act
without the other and with full power of substitution and
resubstitution, to execute in his name and on his behalf,
individually and in each capacity stated below, any and all
amendments and supplements to this Report on Form 10-K, and
any and all other instruments necessary or incidental in
connection herewith, and to file the same with the Commission.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report on Form 10-K has been
signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

|                                           |  |                                                                                   |  |               
|------------------------------------------ |  | --------------------------------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                                             |  | Date          
|                                           |  |                                                                                   |  |               
|/s/ JEFFREY M. CAVINSJeffrey M. Cavins     |  | Chief Executive Officer
    (Principal Executive Officer
    and Director)        |  | March 19, 2004
|                                          
|/s/ JEROLD J. GOADE, JRJerold J. Goade, Jr |  | Senior Vice President of Finance (Principal
    Financial and Accounting Officer) |  | March 19, 2004
|                                          
|/s/ JOHAN C. LIEDGRENJohan C. Liedgren     |  | Director                                                                          |  | March 19, 2004
|                                          
|/s/ KURT R. KRAUSSKurt R. Krauss           |  | Director                                                                          |  | March 19, 2004
|                                          
|/s/ ANTHONY J. BAYAnthony J. Bay           |  | Chief Strategy Officer
    and Director                                           |  | March 19, 2004
|                                          
|/s/ JAMES R. KUSTERJames R. Kuster         |  | Director                                                                          |  | March 19, 2004
|                                          
|/s/ MICHAEL A. BROCHUMichael A. Brochu     |  | Director                                                                          |  | March 19, 2004

90



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The following is a copy of the report of
Arthur Andersen LLP dated March 26, 2002 on their audit of the
financial statement schedule of Loudeye Technologies, Inc. and
subsidiaries for December 31, 2001. Arthur Andersen LLP has
ceased operations and has not reissued this
report.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE

We have audited in accordance with auditing
standards, generally accepted in the United States, the
financial statements of Loudeye Technologies, Inc. included in
this Form 10-K and have issued our report thereon dated
February 14, 2002. Our audit was made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
The schedule listed in Item 14(a)(2) of this Form 10-K
is the responsibility of the Companys management and is
presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as
a whole.



| |                        
| | -----------------------
| | /s/ ARTHUR ANDERSEN LLP

Seattle, Washington

March 26, 2002


91



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##### Table of Contents



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(Amounts in thousands)


|                                   |                               |            |  |            |  |            |  |            |  |  |  |        |   |  |  |       | 
|---------------------------------- | ----------------------------- | ---------- |  | ---------- |  | ---------- |  | ---------- |  |  |  | ------ | - |  |  | ----- | 
|                                   |                               | Balance at |  | Charged to |  |            |  | Balance at
|                                   |                               | Beginning  |  | Costs and  |  |            |  | End of    
|                                   |                               | of Period  |  | Expenses   |  | Deductions |  | Period    
|                                   |                               |            |  |            |  |            |  |           
|Allowance for Doubtful Accounts(1) |                               |            |  |            |  |            |  |            |  |  |  |        |   |  |  |      
|                                   | Year Ended December 31, 2001. |            |  | 709        |  |            |  |           |  |  |  | (217   | ) |  |  | 492   | 
|Accrued Special Charges(2)         |                               |            |  |            |  |            |  |            |  |  |  |        |   |  |  |      
|                                   | Year Ended December 31, 2001. |            |  | 310        |  |            |  | 3,790      |  |  |  | (1,161 | ) |  |  | 2,939 | 



---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Deductions represent write-offs of specifically
    identified uncollectible accounts.
|   
|(2) | Deductions represent amounts paid in cash during
    the period.                      

92