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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,
2002


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




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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.     þ

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
$11,034,257 as of June 28, 2002, 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  |  | 46,384,768                     
|(Class) |  | (Outstanding at March 14, 2003)



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TABLE OF CONTENTS



|             |                                                                                              |  |  |  |  |  |  | 
|------------ | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item I Business                                                                             
|             | Item 2 Properties                                                                           
|             | Item 3 Legal Proceedings                                                                    
|             | Item 4 Submission of Matters to a Vote of Security Holders                                  
|PART II     
|             | Item 5 Market for Registrants Common Equity and Related Stockholder Matters                
|             | Item 6 Selected Consolidated Financial Data                                                 
|             | Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
|             | Item 7a Quantitative and Qualitative Disclosures About Market Risk                          
|             | Item 8 Financial Statements and Supplementary Data                                          
|             | Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III    
|             | Item 10 Directors and Executive Officers of the Registrant                                  
|             | Item 11 Executive Compensation                                                              
|             | Item 12Security Ownership of Certain Beneficial Owners and Management                       
|             | Item 13 Certain Relationships and Related Transactions                                      
|PART IV     
|             | Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EXHIBIT 21.1
|EXHIBIT 23.2
|EXHIBIT 99.1
|EXHIBIT 99.2



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##### Table of Contents



LOUDEYE CORP.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31,
2002


TABLE OF CONTENTS

|              |  |                                                                                                            |  |        |    | 
|------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|              |  |                                                                                                            |  | Page  
|              |  |                                                                                                            |  | Number
|              |  |                                                                                                            |  |       
|PART I       
|Item 1        |  | Business                                                                                                   |  |        | 1  | 
|Item 2        |  | Properties                                                                                                 |  |        | 15 | 
|Item 3        |  | Legal Proceedings                                                                                          |  |        | 17 | 
|Item 4        |  | Submission of Matters to a Vote of Security
    Holders                                                    |  |        | 17 | 
|PART II      
|Item 5        |  | Market for Registrants Common Equity and
    Related Stockholder Matters                                  |  |        | 17 | 
|Item 6        |  | Selected Consolidated Financial Data                                                                       |  |        | 19 | 
|Item 7        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations and Risk Factors |  |        | 20 | 
|Item 7A       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                             |  |        | 45 | 
|Item 8        |  | Financial Statements and Supplementary Data                                                                |  |        | 46 | 
|Item 9        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure                   |  |        | 78 | 
|PART III     
|Item 10       |  | Directors and Executive Officers of the Registrant                                                         |  |        | 78 | 
|Item 11       |  | Executive Compensation                                                                                     |  |        | 79 | 
|Item 12       |  | Security Ownership of Certain Beneficial Owners
    and Management                                         |  |        | 86 | 
|Item 13       |  | Certain Relationships and Related Transactions                                                             |  |        | 88 | 
|Item 14       |  | Controls and Procedures                                                                                    |  |        | 89 | 
|PART IV      
|Item 15       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                                       |  |        | 89 | 
|Exhibit Index |  |                                                                                                            |  |       



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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
early stage; 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; 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.

Company Overview

We are a leading provider of services which
facilitate the use of digital media for live and on-demand
applications for enterprise communication, marketing and
entertainment. Our services enable our customers to outsource
the management and delivery of audio, video and other visual
content over the Internet and on other digital distribution
platforms. Our technical infrastructure and proprietary
applications comprise an end-to-end solution, including rich
media application support, webcasting, web conferencing,
hosting, storage, encoding, capture and media restoration. Our
solutions reduce complexity and cost of internal solutions,
while supporting a variety of digital media strategies and
customer business models.

In 2002 we served over 800 customers directly
including The Coca Cola Company, Microsoft, CDNow, Amazon,
America Online, American Association for Cancer Research,
Universal Music Group, barnesandnoble.com, the Metropolitan
Opera and the New York City Ballet.

Traditional communication methods and media
formats have expanded to include a variety of digital
technologies and rich media formats. The use of the Internet as
a medium for communication and media distribution has continued
to evolve and grow in recent years. For example, large and
medium-sized enterprises are using webcasting as a
cost-effective means to communicate to employees, customers,
investors, partners and the public at large. Traditional
media & entertainment companies, such as major
recording labels and radio broadcasters, have faced significant
challenges posed by the distribution of music digitally and are
now integrating digital data as a key component of their online
music initiatives for security purposes and to extend the
marketing of music online. Additionally, retailers and
advertisers have begun to use digital media to aid in the
marketing and selling of their products.

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We developed our solutions to address the new
methods of communication, media distribution and content
management that have emerged over recent years. We provide our
services via two primary business segments, digital media
services and media restoration services. See Footnote 6 to
the accompanying Consolidated Financial Statements for financial
information about our two segments.



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital Media Services.Our digital media services enable
    enhanced enterprise communication, digital media management and
    distribution via the Internet and other emerging technologies.

Our enhanced enterprise communication services
include our web conferencing services and our 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 large and small 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 slide presentations and meetings
online, when coupled with a conference call. The target
customers for these solutions include large and medium-sized
enterprises across a range of industry segments. 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. We recognize revenues as services are rendered, or in
agreements with an archive component, the value of the ongoing
services is recognized over the term of the arrangement. Web
conferencing is sold primarily as a subscription service,
providing recurring monthly revenue.

Our other digital media services encompass a
variety of related services primarily focused on the digital
music market, including digital music and video encoding,
metadata licensing, audio fingerprint database generation,
hosted music sample services, hosted music download services,
hosted video services, online radio solutions, and rich media
advertisement insertion. Supporting some of these offerings, we
have music licenses and relationships with the five major
recording labels and hundreds of independent record labels. The
target customers for our digital music services include
traditional and Internet-based retailers, media and
entertainment companies, including media portals, broadcasters,
the major record labels and advertisers.

Sales of these other digital media services are
generally made 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.

We sell our music samples service in application
service provider 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 penalty to the
customer. Billings are made based upon volumes of data delivered
or minutes of content streamed, and revenue is recognized as the
services are delivered.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Media Restoration Services.Our media restoration services
    solutions address the need to restore and migrate legacy media
    archive collections to current media formats. The target
    customers for these services include most of the customers for
    our digital media services as well as large legacy media
    archives, specifically including those found at major libraries,
    universities and enterprises. 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.

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:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | Comprehensive digital media services to address
    enterprise communication, marketing and entertainment markets;
|
| |  | End-to-end outsourced solutions reduce complexity
    and cost of in-house implementations;                       
|
| |  | High degree of flexibility enables tailored
    customer solutions;                                               

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| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Scalable systems and network infrastructure
    provides significant capacity and reliability; and
|
| |  | Strategic relationships to facilitate authorized
    digital media strategies.                    

We have made a significant investment in
capabilities to address the major processes supporting the
end-to-end management and delivery of digital media, from
content capture to content distribution, including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Media processing services.Content is processed to customer
    specifications via our proprietary encoding and transcoding
    systems and media restoration capabilities;                                                                                                                                                                                                                                    
|
| |  | Digital media storage and access.Our proprietary systems and technology
    enable the scalable archiving, retrieval and processing of large
    inventories of digital media. Digitized content is stored on our
    high capacity storage array systems and accessed via our
    proprietary, automated, web-based access tools to search,
    provision and manage such content;                           
|
| |  | Digital media distribution.Digitally formatted content can be
    delivered to customers via a range of methods from secured file
    delivery to a fully-hosted streaming or download service. Our
    scalable streaming network infrastructure can simultaneously
    deliver multiple webcasts to small and large audiences and
    support our music samples service with high levels of
    reliability;
|
| |  | Advanced application services.Our applications improve the end user
    experience while supporting a variety of customer requirements.
    As part of our service offerings we provide applications for
    streaming slide presentations, audience polling and chat
    sessions, flexible reporting and management, customized
    templates, content syndication and rich media content insertion;
    and
|
| |  | 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.        

Our digital media services and infrastructure are
robust and highly scalable. We served approximately
700 million music samples to our online retail partners in
2002, representing 100 million more samples delivered than
in 2001. The total reach and size of Webcasts we produced in
2002 more than doubled compared to 2001. We measure reach and
size as the number of times each event is accessed. In addition
to total growth doubling, we saw a 105% increase in the reach
and size of the average individual event.

Loudeye was founded as a Washington limited
liability company in 1997 and was incorporated in Delaware in
1998. Our headquarters are located in Seattle, Washington, and
we have additional facilities in New York and Ardsley, New York.

Recent Management Changes and
Developments

In January 2003 we engaged Regent Pacific
Management Corporation (Regent Pacific) to provide
certain management consulting and advisory services. On
February 3, 2003, our former Chairman and Chief Executive
Officer, John T. Baker IV, resigned from the company.
Simultaneous with Mr. Bakers resignation, we entered
into a new agreement with Regent Pacific, expanding its role
with the Company. In connection with that agreement, we
appointed Philip J. Gioia, a principal of Regent Pacific,
to serve as our President and Chief Executive Officer and agreed
to have selected Regent Pacific principals, including
Mr. Gioia, serve as part of the Loudeye executive
management team. Additionally, Mr. Gary J. Sbona, the
chairman and Chief Executive Officer of Regent Pacific, was
elected to the board of directors of Loudeye and Charles P.
Waite, Jr., a member of Loudeyes board of directors and a
partner of OVP Venture Partners, was elected as Chairman.

On March 11, 2003, the engagement of Regent
Pacific, and the involvement of Regent Pacific principals as
part of the Companys executive management team concluded.
As a result, Mr. Gioia resigned as President and Chief
Executive Officer of the Company, and Mr. Sbona resigned
from his seat on the Companys board of directors. On
March 11, 2003, our board of directors appointed
Jeffrey M. Cavins, who had been our Senior Vice President
of Sales, as our President and Chief Executive Officer, and
elected him to the Companys

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board of directors. The Companys board of
directors appointed Anthony J. Bay, a three-year member of
the board, as chairman of the board, replacing Mr. Waite,
who resigned.


On March 14, 2003 we announced our intention
to restructure to reduce costs and to focus our efforts on our
core competencies on digital media services where we anticipate
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
force primarily affected employees in all departments at our
headquarters in Seattle, Washington.

The Company entered into Employment Agreements
dated as of April 1, 2003 with Jeffrey M. Cavins, President
and Chief Executive Officer of the Company, and Jerold J.
Goade, Jr., the Vice President and Chief Financial Officer
of the Company. In addition, the Company entered into a
Consulting Agreement dated as of April 1, 2003 with
Anthony J. Bay, the Chairman of the Company.

Industry Background

Digital media continues to grow as a pervasive
tool for communications, online media promotions and the
distribution of content, particularly in the media/entertainment
and corporate sectors. This growth is 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 environment to capitalize on these
opportunities. In corporations, the recent passing of certain
legislative acts, such as Sarbanes Oxley, are stiffening
regulatory requirements for information dissemination, creating
a growing interest in Webcasting and enterprise streaming to
cost effectively reach a worldwide audience in a timely manner.

Consumer Broadband Penetration.According to a 2003 study of digital
consumer trends by Arbitron and Edison Media Research, more than
103 million Americans over the age of 12 have experienced
Internet audio or video broadcasts. The study concluded that
75 percent of Americans have Net access versus
55 percent three years ago and that in the last two years
home broadband penetration has leaped from 7 percent to
18 percent.

Media and Entertainment.The primary concern among media and
entertainment companies relates to finding a solution for
driving the sale of legitimate music, mainly CDs and DVDs, in
light of the continued use of illegal file sharing software.
Music samples have been a key driver of CD sales in the past for
online retailers. These same companies can benefit from the
growing interest among film studios to use online DVD samples in
the same way. A recent study conducted by comScore Networks
found that movies and video were among the top ten fastest
growing non-travel e-commerce categories, attracting
$205 million in sales between November 1, 2002 to
December 20, 2002, a 45% increase over the same period one
year ago. Arbitron and Edison Media Research noted in 2002 that
streaming media users bought more than 1.5 times the number of
compact discs in the past year than the average American and
62 percent of online video-watchers have viewed movie
trailers or previews on the Web. Additionally, digital media
samples for both CDs and DVDs are moving to physical in-store
kiosks where consumers can scan an item and view related
material to help drive the purchase.

New Digital Media Business Models.The Internet provides a platform for a
next generation of digital music business models focused on the
direct digital distribution of content to users on a
subscription basis. These services are endorsed, and sometimes
financially backed, by the major labels and represent additional
opportunities for digital media services on a large scale. Key
to the growth and consumer adoption of these models is the
ability to offer a large catalog of high quality content with
access to new releases. Subscription models are also being
developed to support the distribution of films online. In 2002,
the Cable & Telecommunications Association for Marketing,
concluded that 27 percent of Americans are likely to pay a

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transaction fee to view full-length movies via
streaming media and 17 percent of users were also
interested in paying a transaction fee to watch trailers from
recently released movies.


Enterprise Communications.Fortune 1000 companies are leveraging
streaming media and Webcasting technologies across all areas and
departments of their business to increase the effectiveness,
cost efficiency and reach of their communications. According to
The National Investor Relations Institute in 2002, the use of
streaming media for earnings Webcasts among publicly traded
companies has reached more than 90%. With travel spending
declining, enterprises are turning to Webcasting solutions for
maintaining frequent and effective communications with global
workforces for a number of critical business initiatives.
Eighty-six percent of corporate marketers surveyed by media
research firm Interactive Media Strategies say they have viewed
online Webcasts with 60% of all respondents saying they are
using online multimedia at work more frequently than a year ago.
According to The Yankee Group, streaming audio and video
applications for employee education and salesforce training,
along with corporate communications, investor relations,
corporate events, conferences, and trade shows will experience
growth of greater than 100% over the next year. Gartner predicts
that by 2006, 80% of Global 2000 enterprises will be supporting
live video and video-on-demand to the desktop.

Challenges in Digital Media
Distribution.In both the
media/entertainment and corporate sectors of the streaming
market, companies can be challenged to develop the technical
infrastructure, delivery systems, experienced staff and digital
asset base to effectively deploy streaming media in-house. A
2002 Jupiter research report concluded, by working with
end-to-end outsourced service providers, companies can shift the
burden of amortizing capital expenditures. This frees up
resources so companies can focus on developing content and
programming (core competencies) rather than on optimizing
distribution.Enterprise Webcasting projects
frequently require multiple forms of signal ingress, major
content hosting capabilities and complex distribution systems to
deliver high bit rate, rich media to a worldwide audience.
Assembling the resources to deploy such a solution would be
costly and complicated to execute internally for a company.
Media and entertainment companies face similar challenges in
delivering high quality content to millions of users while
trying to maintain a music catalog and/or up-to-date film
content in the latest formats.

In order for companies to manage and distribute
digital media, they must develop internally the ability to
deliver, or hire outside firms to migrate their existing and
newly created audio and video content onto the Internet and
other digital platforms. The core competencies required to
complete this migration process include the following areas:



| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application and business model support to enhance
    audio and video experience, track and report usage, monetize and
    protect content, and at times obtain and comply with complex
    copyright licenses from original content owners;
|
| |  | Scalable and reliable hosting and network
    distribution;                                                                                                                                                                                 
|
| |  | High quality encoding and third-party digital
    media technology support;                                                                                                                                                                 
|
| |  | Digital media archive management;                                                                                                                                                                                                           
|
| |  | Source media and metadata capture; and                                                                                                                                                                                                      
|
| |  | Legacy archive preservation and restoration.                                                                                                                                                                                                

It is often difficult and costly for enterprises,
content owners and media companies to develop and manage all of
these core competencies themselves. They often do not have the
internal resources or time to develop the expertise necessary to
address these problems without disrupting their core business
activities.

Moreover, apart from technical challenges,
companies who seek to distribute digital media over the Internet
are often faced with challenges in obtaining copyright licenses
from a variety of content owners. For example, digital music
copyrights often address differing activities, such as
reproduction and performance, which may require separate
licensing arrangements or which may be held by different
parties, such as publishers, artists and record labels. The
effort to obtain the necessary rights by such third parties is
often

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significant, and frequently disrupts, delays or
prevents the launch of a wide range of digital media business
models.


The Loudeye Solution

We are a global leader in digital media services
and Webcasting technologies used by some of the worlds
leading companies for marketing, entertainment and
communications. Our services enable our customers to outsource
the management and delivery of audio, video and other visual
content via the Internet and other digital distribution
platforms. Our solutions reduce complexity and cost of internal
solutions, while supporting a variety of digital media
strategies and customer business models.

Our technical infrastructure and proprietary
applications provide a complete, outsourced solution for the
management and delivery of digital media, including:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Advanced digital media application services;               
|
| |  | Digital media distribution infrastructure and
    services;
|
| |  | Media processing services;                                 
|
| |  | Digital media storage and access;                          
|
| |  | Traditional source media ingest and capture; and           
|
| |  | Media restoration and migration services.                  

Our solutions offer customers the following key
benefits:

Comprehensive digital media services to
address enterprise communication, marketing and entertainment
markets.Customers in a range of
industries are beginning to deploy digital media to communicate,
market products and distribute media and entertainment. 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 way for corporations to communicate with any size
online audience, large or small. Using our services, enterprises
can offer their target audiences access to Webcasts of a
variety of corporate events such as product launches, investor
earnings calls, conferences and distance learning seminars. In
addition, we support the online marketing initiatives of our
customers through our other digital media services including our
leading music samples services, online radio services,
advertisement insertion solutions, and music download services.
Finally we provide outsourced services to support the management
and distribution of our customers digital media catalogs,
including scalable encoding and delivery services.

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 provider. Our
solutions reduce complexity and allow our customers to avoid
development and ongoing maintenance costs of establishing
internal capabilities. Our end-to-end capabilities address a
series of highly complex process 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
for our customers, enabling them to leverage our significant
investments in these processes and avoid purchasing capital
equipment, developing system expertise, training personnel and
managing evolving technology platforms. In addition, we have
obtained copyright licenses in certain offerings within our
digital music services, which are transferable to our customers
and enable them to avoid the cost and effort to negotiate and
obtain such licenses for themselves.

High degree of flexibility enables tailored
customer solutions.Because our
customers require flexibility in the manner in which their
content is captured, as well as in the formats and manner that
their digital media is distributed, we offer a wide range of
media ingest and capture methods and support a wide range
digital media formats and other third-party technologies with
our digital media services. In addition, our hosting services
and proprietary applications provide additional support to
customers, enabling clients access to

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advanced reporting and management tools and offer
value-added services like digital rights management and ad
insertion to enable a variety of business models and strategies
for our customers.


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, if 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 allowing us to acquire
hundreds of simultaneous audio and video signals. 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.

Strategic relationships facilitate authorized
digital media strategies.From our
inception we have positioned our products and services as the
enabling infrastructure to support content owners in the
authorized distribution of digital media over the Internet and
over new digital distribution platforms. At times, obtaining the
requisite copyright licenses can prove challenging to customers,
as they must often obtain copyright licenses from a variety of
rights holders. For example, these copyrights often address
differing activities related to the delivery of digital media,
such as reproduction and performance, which may require separate
licensing arrangements. In addition, these copyrights may be
held by different parties such as publishers, artists and record
labels. We have developed relationships and signed content
licensing agreements with all five the major music companies,
Universal Music, Sony Music Group, Warner Music Group, EMI Group
and BMG Entertainment, and hundreds of independent record
labels, and developed working relationships with other music
companies.

Products and Services

Our products and services encompass an end-to-end
solution for customers, from content restoration and capture to
content distribution, which includes Digital Media Services and
Restoration Services.



| |                       
| | ----------------------
| | Digital Media Services

Our Digital Media Services enable enhanced
enterprise communication and digital media management and
distribution via the Internet and other emerging technologies.
Our Digital Media Services provide a complete suite of services
for customers offered via long-term and project-specific
contracts.

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. Using
our services, enterprises can offer small and large
audiences 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 slide
presentation meetings online. The target customers for these
solutions include medium and large-sized enterprises across a
range of industry segments.

Our other Digital Media Services include a
variety of related services primarily focused on the digital
music market. These services include 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.
Supporting these digital music service offerings, we have
certain content licenses and relationships with the five major
recording labels and hundreds of independent music labels. The
target customers for our digital music services include
traditional and Internet-based retailers, media and
entertainment companies, including media portals, broadcasters
and the major record labels.

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We combine three layers of rich media value chain
expertise  application services, hosting and
streaming services and encoding services  in multiple
ways to provide services to our customers. 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 across
the entire value chain.

Application Services.We have built an application layer of
proprietary products to facilitate and improve the end user
experience, provide the client with reporting and management
tools, and allows the client to implement new business models or
expand current initiatives. These applications are deployed on
an application services provider (ASP) basis whereby 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.

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 can enable customers to
promote, manage, and monetize their digital media offerings.

Hosting and Streaming
Services.Our hosting services allow
content to be packaged and converted into a variety of streaming
media and digital download formats via our encoding services and
hosted 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 with
large, online groups. We provide our services to large and
medium sized enterprises as well as traditional media and
broadcast companies.

We provide our clients 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 provide streaming
services for audio and video conferencing, distance learning,
corporate or departmental meetings, presentations, conferences,
roadshows and other investor relations offerings.

Live events involve broadcasting content that
audience members listen to or watch simultaneously as the
content originates. Our live event services range from
audio-only conference calls and interactive events with slides
to video product launches and customized video conference events
with audience feedback. We also provide on-demand streaming
services, which allow an audience to listen to or view media
content at any time. The content of our on-demand clients spans
both business content, such as investor relations calls,
corporate training, and consumer content, such as sports events
and highlights. Most of our live events are also captured for
replay as on-demand content.

Our web broadcasting capabilities allow clients
to significantly extend 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. The total reach and size of Webcasts we produced in
2002 more than doubled compared to 2001.

We also provide customers with access to Loudeye
samples services, which is a hosted end-to-end streaming
service, delivering 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.

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Our catalog includes more than 3.3 million
songs from approximately 300,000 CDs. Formats supported
include Microsoft Windows Media and RealAudio formats at
multiple bit rates. In addition to hosting the music samples,
our subscription solution includes metadata associated with the
music samples. For example, this may include front cover art
scans of the music title from which the song has been captured.

In 2002, we served over 700 million song
samples to consumers through major online music retailers and
websites, such as America Online, BMG Direct,
barnesandnoble.com, CDNow and MSN. We offer the service
primarily under long-term contracts.

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. This
adds to the complexity of the encoding process. Since the
Internet is still at a formative stage of development, the
various encoding formats and technologies continue to conflict
and evolve. As a result, content owners many times desire to
create multiple copies of their digital content in multiple
formats, to support their distribution strategies. Additionally,
the encoding process for a particular item or entire libraries
may need to be repeated over time to keep pace with the
introduction of new formats and the changing preferences of
online users, adding to the complexity.

Our services address these challenges via
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 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.



| |                     
| | --------------------
| | Restoration Services

Industry sources estimate there are millions of
hours of archived video and audio content worldwide,
representing content categories such as entertainment, news,
sporting events, corporate communications, historical archives,
etc. Much of this video and audio content resides in enormous,
discrete library archives that were originally recorded and
archived in a wide variety of traditional and sometimes obscure
magnetic media formats, all of which degrade over time. The
content owner must eventually either restore the content on
newer media formats or risk it degrading completely and losing
it forever. Recently, some of these archive and content owners
have recognized the need to both restore their media assets and
adapt them for use under the new distribution channels and
business models now available on the Internet. The process of
restoring the content in parallel with managing and encoding the
files for Web distribution is complex.

Our VidiPax subsidiary, based in New York, is a
leading independent provider of video and audio restoration,
preservation and migration services. VidiPax provides industry
leading technical expertise in the restoration of older or
damaged archives of traditional media. VidiPaxs highly
specialized media services are offered from a comprehensive
magnetic tape restoration facility, which features rare and
one-of-a-kind equipment to address a wide range of audio or
video formats, current or obsolete, that require restoration and
repair. Some examples of these media formats include 35mm and
16mm film, 2quad high band and low band, 2 Helical,
1 Types A, B and C, Digital Betacam, Betacam SP,
VHS/SVHS, 8mm/Hi8, Betamax/SuperBeta, among many others.
VidiPaxs customers include leading broadcast networks,
production studios, Fortune 1000 corporations, major
libraries, museums and universities. By offering media
preservation and restoration capabilities, we provide our
customers with support for more formats of source content and a
significantly greater ability to prepare older and poor quality
and damaged originals prior to the capture and encoding process.

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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 sales focus
is built on maintaining long-term relationships with clients,
and our reseller and referral partners.

Our Digital Media Services direct sales force
targets our services primarily 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 sales presence in Seattle,
Los Angeles, Washington DC and New York. Sales employees are
compensated with a salary and commissions based upon business
with existing and new clients.

Our indirect sales objective is to develop
alternative distribution channels for the sale of our services.
The efforts of our indirect sales group focus on partnering with
resellers to leverage their large and 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 Web sites,
co-branded Web sites or to include our services in their product
offerings. These indirect sales channels allow us to extend our
reach to businesses of all sizes. We offer our reseller partners
our services at a discount to our traditional retail pricing
model and our referral partners a percentage of revenue pursuant
to terms of the agreements.

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

As of March 14, 2003 we had 13 permanent
employees in our sales and marketing organization, all of which
were located in the United States.

Customers

The target customers for our Webcasting and Web
conferencing solutions include large and medium-sized
enterprises across a range of industry segments. The target
customers for our other digital media services include
traditional and Internet-based retailers, media &
entertainment companies, including media portals, broadcasters
and the major record labels, and large legacy archives including
those found at major libraries, universities and enterprises.

In 2002 we served over 800 customers directly
including The Coca Cola Company, Microsoft, BeMusic, Inc.,
Amazon, America Online, Yahoo!, Inc., Siebel Systems, Inc.,
barnesandnoble.com, and the Metropolitan Opera. In 2002, The
Coca-Cola Company and Microsoft accounted for 13% and 10% of our
revenues, respectively. In 2001, The Coca-Cola Company accounted
for 17% of our revenues.

Content Licensing Agreements

In 2001 we entered into license agreements with
Sony Music and EMI Group enabling us to store, deliver and
stream music samples and related content to companies authorized
to use the content. We currently have music content licenses
with Universal Music Group, Warner Music Group, BMG
Entertainment, Sony Music Group and EMI Group for similar, or in
some cases, more expansive digital music distribution
activities. We also have entered into similar licensing
arrangements with hundreds of independent music label and
recording companies.

Operations and Technology

We manage our Digital Media Services operations
from our Seattle and Washington DC facilities and our
Restoration Services from our New York facility. These
operations manage all aspects of content restoration, capture,
encoding, pre-and post-production processing, indexing, storage,
and distribution to the Internet.

Our media restoration services are offered from a
comprehensive magnetic tape restoration facility in New York,
which features rare and one-of-a-kind equipment to address a
wide range of audio or video

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formats, current or obsolete, that require
restoration and repair. Some examples of these media formats
include 35mm and 16mm film, 2 quad high band and low band,
2 Helical, 1 Types A, B and C, Digital Betacam,
Betacam SP, VHS/SVHS, 8mm/Hi8, Betamax/SuperBeta, among many
others.


Our digital media services and infrastructure are
robust and highly scalable, 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.

We have made a significant investment in
capabilities to address the major processes supporting the
end-to-end management and delivery of digital media, from
content capture to content distribution.

Traditional source media ingest and capture.Capturing digital media involves the
conversion of content from traditional analog formats to digital
formats while maintaining the original quality. Once captured,
the high quality, uncompressed digital content can be archived
or used to create compressed, encoded files that are ready for
digital distribution. We support virtually all commercially
available input formats. Customers deliver their source content
to us through a variety of means including satellite transfer,
source tapes, compact discs and electronic file transfer. The
capture process covers a broad spectrum of media formats and can
be automated or managed as a manual system depending on volume
and complexity of the project.

For live content acquisition, we have deployed
satellite downlink capacity, extensive frame relay, fiber,
automated telephony-to-IP switches, and H.320/ H.322
teleconferencing equipment to supplement our raw ingress
bandwidth. These capabilities enable us to support a variety of
customer requirements, from low bandwidth to HDTV formats, up to
1.5 gigabit-per-second broadband applications.

Our facilitys design is modular and
scalable to accommodate growth and changes in technology. We can
capture hundreds of simultaneous inbound video or audio signals.

The process of managing digital media is made
more complex due to a range of processes necessary to support
the creation of metadata files. Metadata, or data and
information about the original content, is especially important
as companies attempt to sell and distribute content over the
Internet. Metadata provides descriptive data to the consumer
such as, in the case of music titles, artist information, track
level data, title name, cover art and additional information
that can be used to consummate commerce transactions or
establish marketing relationships associated with the music,
such as an online CD sale or an email marketing campaign. In
addition, metadata is critical in facilitating the
administration of tracking and reporting required in many
licensing arrangements with copyright holders.

We offer customers the ability to record and
utilize a wide array of metadata relating to the captured
content, such as artist, title, style, universal product code,
album and track data and other data that a particular customer
may find useful for their particular content. This metadata
enables customers to leverage their traditional content over the
Internet by allowing them to track and manage their digital
media content more efficiently. We perform custom metadata
capture projects on a selective basis for customers.

Digital media storage and access.Our proprietary systems and technology
enable the scalable archiving, retrieval and processing of large
inventories of digital media. Digitized content is stored on our
high capacity storage array systems and accessed via 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 advanced
digital media archive system for later uses.

Media processing services.Once media is captured we leverage our
production expertise, transforming the received media into
digitally formatted content for our clients. Content is
processed to customer specifications using our proprietary
production systems and is then passed through our enhanced
monitoring and quality assurance systems before being delivered
to customers.

The production system is a combination of
hardware and software, developed by our research and development
organization and consisting of advanced digital archive
technology, proprietary file management systems, customized user
interfaces and a highly distributed encoding system. It is
designed to automate the time consuming, error prone steps
inherent in a complex management and encoding operation, and to
scale for larger volume demands with minimal configuration of
additional capture and encoding machines.

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We encode customer content in a parallel, rather
than serial, process allowing us to rapidly and cost-effectively
deliver encoded content to customers. In addition we have
developed proprietary processes that allow us to encode audio
and video content across several streaming media and download
formats simultaneously, including support for multiple codecs
and technologies from third party developers such as Microsoft,
RealNetworks, Audible Magic, and others. This format flexibility
enables customers to distribute their content to a wide audience
and support a variety of digital media strategies. Given that
these formats and platforms continue to evolve, the benefits of
our multiple platform approach remain applicable as new
technologies emerge.

This encoding architecture creates an automated
and highly scalable system. As capacity demands grow, additional
computing resources can be added with little or no configuration
effort, allowing us to rapidly respond to increased encoding
demands.

The resulting encoded files are checked for
quality and then delivered to the customer as a collection of
files or automatically routed to our hosting services for direct
delivery as a hosted stream, over the Internet.

Digital media distribution.Digitally formatted content can be
delivered to customers via a range of methods from secured file
delivery to a fully-hosted streaming or download service
published and streamed through our network infrastructure. Our
scalable streaming network infrastructure can simultaneously
deliver multiple Webcasts to small and large audiences and
support our music samples service with high levels of
reliability.

We have invested in a network distribution
infrastructure built around a highly-scalable, highly-redundant,
cell-based network architecture. This approach
provides us with redundancy in the event of system failure,
scalability for future expansion, and allows us to optimize each
cell for the unique needs of each type of client. Depending on
the streaming format and the bit rate, we are able to currently
stream thousands of simultaneous outbound streams. 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 provide a
high degree of redundancy and scalability. Our hosting and
distribution operation includes hundreds of streaming media
servers and supports load balancing and other network management
techniques that have been optimized for streaming. We can also
stream 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, March 14, 2003 we had 12 permanent
employees in engineering, network services and information
technology support and 57 permanent employees in our production
and research and development areas.

Research and Development

We are focused on improving our services through
research and development. We believe that a strong emphasis on
automation and product development are essential to our strategy
of continuing to enhance and expand our capabilities.

Since inception, we have focused our efforts on
building efficient, scalable and quality-based capture,
archival, management and encoding processes through hardware and
software integration and development. Software built to optimize
encoding, combined with our expertise learned through our
automated encoding process, has provided a platform upon which
we build digital media products and services.

Our team of developers, quality assurance
engineers and program managers has significant experience in
database development, Java development and Internet software
development. In addition, we have recruited senior management
with significant experience in the area of digital media
distribution, Internet development, streaming media and
networking.

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Our core team of developers is focused in the
following areas:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | digital media services, which focuses on network
    services, automated capture, archive, encoding and media
    management; and                                                                                     
|
| |  | application services which include building a
    core component layer for digital media applications, our
    Webcasting applications, our music samples offerings as well as
    advertisement insertion technology.

Most of our technology is developed internally.
We also purchase and license technology and intellectual
property rights.

As of March 14, 2003, approximately
57 permanent employees were engaged in production and
ongoing research and development work for our services,
solutions and applications. Of these, seven employees were
dedicated to research and development.

Competition

The market for digital media services 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
encoding and webcasting services by potential customers.

Our primary competitors for our Webcasting
services are content distribution networks, such as Akamai and
divisions of Williams Communication and Cable &
Wireless, and Internet broadcasters, such as Yahoo! Broadcast.
Each of these competitors provides services similar to ours and
each has a well-established market presence. Companies focused
on other enhanced communication services such as web
collaboration, web conferencing and application demonstration,
such as WebEx and Raindance, compete with our web conference
service, Loudeye Express. In addition, some of our current
partners, telecom carriers, teleconference companies, or other
infrastructure companies have, or in the future may choose to,
enter our market. We compete with providers of traditional
communications technologies such as teleconferencing and
videoconferencing as well as applications software and tools
companies, such as Centra Software, Lotus (SameTime), Microsoft
(NetMeeting and Placeware).

For our other digital media services, there
several companies who are providing some level of outsourced
digital media services today. We compete with companies such as
Sonic Foundry, Muze, All Music Guide, Liquid Audio, RioPort,
HiWire and Lightningcast that provide encoding services, music
samples services, music download services, advertising insertion
solutions and advertising sales. In addition, well-capitalized,
diversified digital media technology companies such as Microsoft
and Real Networks may in the future compete with us in any of
these markets with their own services or applications. In
certain markets, such as music distribution, the major recording
labels have acquired and invested in digital music service
providers such as MP3.com (acquired by Vivendi Universal),
PressPlay and MusicNet and developed in-house services which
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 media strategies expand and
the scale of infrastructure and applications required to support
business strategies increases, companies that currently manage
these processes internally will see a significant economic
advantage to outsourcing to a third-party expert.

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



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | service functionality, quality and performance;                            
|
| |  | ease of use, reliability, scalability and
    security of services;        
|
| |  | establishing a significant base of customers and
    distribution partners;

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| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | ability to introduce new services to the market
    in a timely manner;
|
| |  | customer service and support; and                                      
|
| |  | pricing.                                                               

Although we believe our services compete
favorably with respect to each of these factors, the market for
our services is new and rapidly evolving. 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 and 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 or 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.
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 streaming media, digital media and software
industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent
infringement and the violation of other intellectual property
rights. As discussed above, at times obtaining the requisite
licenses can be difficult for customers, as they must obtain
copyright licenses from a variety of rights holders to grant
rights to distinct activities related to the delivery of digital
media, such as reproduction and performance, which require
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 also
is generally regarded as extremely litigious in nature compared
to other industries. As a result, in the future we may be
engaged in litigation with 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 expect that 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 functionalities 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

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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 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.


The adoption of such laws or regulations, and
uncertainties associated with their validity and enforcement,
may affect our ability to provide our products and services and
increase the costs associated with our products and services,
and may affect the growth of the Internet. 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,
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 Recording Industry Association of America during 2001
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 March 14, 2003, we had a total of
92 permanent employees, of which 50 were in
production, 7 were in research and development,
13 were in sales and marketing, 12 were in
engineering, network services and information technology
support, and 10 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

The Company, directly or through certain or its
subsidiaries, has an interest is several real property leases
and conducts its business from several of these locations. In an
effort to streamline its operations and to

15



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##### Table of Contents



continue to execute against its cost control
plan, the Company has undertaken to renegotiate or exit certain
of its interests in real property leases. The following is a
summary of each of the Companys (inclusive of its
subsidiaries) lease obligations and the current status of
such leases.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     1130
    Rainier Avenue, Seattle, WA. The Companys
    principal operations are conducted from this facility through a
    sublease with the Companys Loudeye Enterprise
    Communications, Inc. subsidiary. In March 2003, we reduced the
    space we occupy, term of the lease and rental payments for the
    premises from 62,200 square feet at a base rent of $1,292,140
    per annum ($107,678/ month) with a term expiring on
    November 30, 2005 to approximately 17,010 square feet at a
    base rent of $350,000 per annum for the remainder of the term
    which has been shortened to June 30, 2003. We have the
    option of extending the term for two 3-month periods at a base
    rent of $100,000 and pre-paid utility expenses of $60,000 for
    each 3-month extension. As consideration for the reduction of
    space and lease term, we have agreed to allow the Landlord to
    retain our security deposit in the amount of $218,500 and
    liquidate a letter of credit in the amount of $19,623.
|
| | 2.     450 West
    34th Street, 4th Floor, New York, NY. The Companys
    Vidipax subsidiary leases approximately 12,200 square feet of
    space at the premises at an annual rental rate of $360,000
    ($30,000/ month) for a term expiring on May 14, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | 3.     1919 M
    Street, Washington, D.C. We recently reduced the space
    we occupy at the premises to 2,316 square feet. The annual base
    rent is currently $78,631 ($6,553/ month) with a lease term that
    expires on March 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 4.     6464 Sunset
    Blvd., Hollywood, CA. We lease approximately 3,000
    square feet at the premises at an annual base rent of $41,706
    ($3,475/ month) with a lease term that expires on
    December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | 5.     111 West
    19th Street, New York, NY. A subsidiary of the Company,
    Vidipax, Inc., has recently entered in a lease for the entire
    seventh floor at the premises with a lease expiration date of
    January 31, 2013. The lease is currently in a free rent
    period with lease payments to begin on June 1, 2003 at a
    rate of $423,200 per annum ($35,267/ month).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | 6.     414 Olive
    Way, Seattle, WA. We currently lease 39,098 square feet
    of space at the Times Square Building, of which 2,555 square
    feet of space is subleased to an unrelated entity. The current
    annual rent is $847,932 ($70,661/ month) with the lease term
    expiring May 31, 2005. We have surrendered the leased
    premises and are negotiating a termination agreement with the
    landlord. We can not assure you that we will be successful in
    reaching agreement on the terms of such termination agreement.
    Estimated lease payments and costs associated with this vacated
    facility have been included in accrued special charges at
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                    
|
| | 7.     450 Saw
    Mill River Road, Ardsley, NY. We are in the process of
    terminating the leasehold interest of our TenTV subsidiary. In
    that connection, TenTV has surrendered all of the approximately
    17,333 square feet of space leased through June 1, 2004.
    The current rent for the premises is $230,270 per annum
    ($19,189/ month). We are presently negotiating a termination
    agreement that we believe will result in a substantial reduction
    to future obligations under that lease. We can not assure you
    that we will be successful in reaching agreement on the terms of
    such termination agreement. Estimated lease payments and costs
    associated with this vacated facility have been included in
    accrued special charges at December 31, 2002.                                                                                                                                                                                                                                    
|
| | 8.     1904 Fourth
    Avenue, Seattle, WA. We lease approximately 12,697
    square feet at the premises at an annual base rent of $342,819
    ($28,568/ month). The term of the lease expires on
    November 14, 2004. We are presently negotiating a
    termination agreement that we believe will result in a
    substantial reduction to future obligation under that lease. We
    cannot assure you that we will be successful in reaching
    agreement on the terms of such agreement. Estimated lease
    payments and costs associated with this vacated facility have
    been included in accrued special charges at December 31,
    2002.                                                                                                                                                                                                                                                                                                                                                                                   

16



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 9.     1424 Second
    Street, Santa Monica, CA. We lease approximately 4,632
    square feet at the premises at an annual base rent of $200,288
    ($16,691/ month). 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.




Item 3     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. The allegations set forth in these
complaints are substantially similar to those made in class
actions filed against over 300 other companies that issued
securities within the past four years. These actions have all
been consolidated before the same judge for pretrial purposes.
No specific amount of damages has been claimed. The individual
defendants and the Company 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. We believe that we have
meritorious defenses to the claims made in the foregoing
complaint and we intend to defend the actions vigorously.
However, there can be no assurance that we will be successful on
our defenses or in our assertion of indemnification, and an
adverse resolution of the lawsuit could have a material adverse
affect on our financial position and results of operation in the
period in which the lawsuit is resolved.

On or about January 8, 2003 a company known
as 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 the Company merged with an entity known as
DiscoverMusic.com, Inc.) the Company failed to make certain
required payments to plaintiff. Plaintiff asserts causes of
action of breach of loan and security agreement, claim and
delivery, money lent, breach of master lease agreement and book
account. Plaintiff seeks relief in the form of money damages,
interest, attorneys fees and costs. The Company has filed
an answer to the complaint denying the material allegations. We
believe that we have meritorious defenses to the claims made in
the foregoing complaint and we intend to defend the action
vigorously. However, there can be no assurance that we will be
successful on our defenses.






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

None.




PART II






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

Our common stock has been traded on the Nasdaq
National Market under the symbol LOUD since our
initial public offering in March 2000 through July 16,
2002, after which we have been traded on the Nasdaq SmallCap
Market. Since July 30, 2001, our common stock has failed to
maintain a minimum bid price of $1.00 per share for at least 10
consecutive days, which caused our stock price to fail to meet
one of the minimum standards required by the Nasdaq Stock Market
for continued listing as a Nasdaq National Market

17



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##### Table of Contents



security. In order to avoid delisting from Nasdaq
entirely, we voluntarily applied to Nasdaq to have our listing
transferred to the SmallCap Market. On July 16, 2002 our
application was approved to transfer the listing of our common
stock to the Nasdaq SmallCap Market. The Nasdaq SmallCap Market
also requires compliance with a minimum bid price of $1.00 per
share for at least 10 consecutive days. We were notified
that we must be in compliance with this requirement by
March 28, 2003 (including all grace periods) or face
delisting from Nasdaq. On March 31, 2003 we were notified
by Nasdaq that we will be provided an additional 90 calendar
days, or until June 26, 2003 to regain compliance.


There is currently only a limited trading market
for the shares of our common stock and accordingly there is no
assurance that any quantity of the common stock could be sold at
or near reported trading prices.

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
necessarily represent actual transactions.

|                             |  |      |      |     |  |   |      | 
|---------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                             |  | High |      | Low
|                             |  |      |      |    
|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 | 
|                            
|Year Ended December 31, 2001 |  |      |      |     |  |   |      | 
|First Quarter 2001           |  | $    | 2.31 |     |  | $ | 0.75 | 
|Second Quarter 2001          |  |      | 1.97 |     |  |   | 0.50 | 
|Third Quarter 2001           |  |      | 1.46 |     |  |   | 0.48 | 
|Fourth Quarter 2001          |  |      | 0.76 |     |  |   | 0.43 | 

As of March 14, 2003, there were
approximately 517 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

(a) Recent Sales of Unregistered
Securities

On November 19, 2002, we issued 7,892,741
shares of our common stock to TT Holding Corp. and provided
other consideration in exchange for a 100% interest in TT
Holding Corp. The shares issued pursuant to the acquisition were
issued in reliance on the exemption from registration provided
by Section 4(2) under the Act. The investors made certain
representations to us as to investment intent, their receipt of
all information they considered necessary or appropriate in
deciding whether to purchase the securities, their knowledge and
experience in financial or business matters such that they were
capable of evaluating the risks and merits of the investment in
the securities, and their ability to bear the economic risk of
the investment in the securities, that they possessed a
sufficient level of financial sophistication and that they
received information about us. The shares issued in the
transactions were subject to restrictions on transfer absent
registration under the Securities Act, and no offers to sell the
securities were made by any form of general solicitation or
general advertisement.

18



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##### Table of Contents








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

The selected financial data set forth below
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
information in the table below has been derived from audited
consolidated financial statements. The historical results are
not necessarily indicative of results to be expected for any
future period. Amounts are presented in thousands except for
shares outstanding and per share amounts.

|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |     |      |  
|--------------------------------------------------------------------------------- | -------------------------------------------- | ----------------------- | ---------- | ------ | ---- | ---- | ---------- | ------ | ------ | ---- | ---------- | ------ | ---- | - | --------- | ----- | ---- | - | --------- | --- | ---- | -
|                                                                                  |                                              |                        
|                                                                                  |                                              | Year Ended December 31,
|                                                                                  |                                              |                        
|                                                                                  |                                              | 2002                    |            | 2001   |      | 2000 |            | 1999   |        | 1998
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |     
|REVENUES                                                                          |                                              | $                       | 12,681     |        |      | $    | 10,388     |        |        | $    | 11,537     |        |      | $ | 2,645     |       |      | $ | 286       |    
|COST OF REVENUES                                                                  |                                              |                         | 13,347     |        |      |      | 12,737     |        |        |      | 12,388     |        |      |   | 2,870     |       |      |   | 504       |    
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|                                                                                  |                                              | Gross margin            |            |        | (666 | )    |            |        | (2,349 | )    |            |        | (851 | ) |           |       | (225 | ) |           |     | (218 | )
|OPERATING EXPENSES                                                                |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|                                                                                  | Research and development                     |                         |            | 3,159  |      |      |            | 9,719  |        |      |            | 6,784  |      |   |           | 1,248 |      |   |           | 204 |     
|                                                                                  | Sales and marketing                          |                         |            | 7,667  |      |      |            | 9,409  |        |      |            | 14,621 |      |   |           | 3,982 |      |   |           | 588 |     
|                                                                                  | General and administrative                   |                         |            | 11,375 |      |      |            | 11,102 |        |      |            | 8,079  |      |   |           | 3,612 |      |   |           | 674 |     
|                                                                                  | Amortization of intangibles and other assets |                         |            | 3,043  |      |      |            | 8,173  |        |      |            | 7,693  |      |   |           | 302   |      |   |           |    |     
|                                                                                  | Stock-based compensation                     |                         |            | (417   | )    |      |            | 359    |        |      |            | 5,409  |      |   |           | 1,554 |      |   |           |    |     
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|                                                                                  |                                              |                         | 24,827     |        |      |      | 38,762     |        |        |      | 42,586     |        |      |   | 10,698    |       |      |   | 1,466     |    
|                                                                                  | Special charges(1)                           |                         |            | 6,846  |      |      |            | 37,261 |        |      |            | 947    |      |   |           |      |      |   |           |    |     
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|OPERATING LOSS                                                                    |                                              |                         | (32,339    | )      |      |      | (78,372    | )      |        |      | (44,384    | )      |      |   | (10,923   | )     |      |   | (1,684    | )  
|Other, net                                                                        |                                              |                         | 1,177      |        |      |      | 1,976      |        |        |      | 4,860      |        |      |   | 21        |       |      |   | 34        |    
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|NET LOSS                                                                          |                                              | $                       | (31,162    | )      |      | $    | (76,396    | )      |        | $    | (39,524    | )      |      | $ | (10,902   | )     |      | $ | (1,650    | )  
|Beneficial conversion feature                                                     |                                              |                         |           |        |      |      |           |        |        |      |           |        |      |   | (14,121   | )     |      |   |          |    
|NET LOSS TO COMMON STOCKHOLDERS                                                   |                                              | $                       | (31,162    | )      |      | $    | (76,396    | )      |        | $    | (39,524    | )      |      | $ | (25,023   | )     |      | $ | (1,650    | )  
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|Basic and diluted net loss per share                                              |                                              | $                       | (0.75      | )      |      | $    | (1.84      | )      |        | $    | (1.33      | )      |      | $ | (4.62     | )     |      | $ | (0.41     | )  
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    
|Weighted average shares outstanding 
    basic and diluted net loss per share(2) |                                              |                         | 41,393,156 |        |      |      | 41,429,104 |        |        |      | 29,773,886 |        |      |   | 5,410,507 |       |      |   | 4,039,444 |    
|                                                                                  |                                              |                         |            |        |      |      |            |        |        |      |            |        |      |   |           |       |      |   |           |    

|                                                  |  |      |        |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |       | 
|------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ----- | 
|                                                  |  | 2002 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                  |  |      |        |      |  |      |        |      |  |     
|Balance Sheet Data                                |  |      |        |      |  |      |        |      |  |      |         |  |  |   |        |  |  |   |       | 
|Cash, cash equivalents and short-term investments |  | $    | 11,867 |      |  | $    | 60,941 |      |  | $    | 94,989  |  |  | $ | 49,803 |  |  | $ | 1,442 | 
|Working capital                                   |  |      | 7,883  |      |  |      | 55,753 |      |  |      | 90,018  |  |  |   | 44,032 |  |  |   | 759   | 
|Total assets                                      |  |      | 29,529 |      |  |      | 80,883 |      |  |      | 132,676 |  |  |   | 76,775 |  |  |   | 2,940 | 
|Long-term obligations, less current portion       |  |      | 591    |      |  |      | 22,532 |      |  |      | 7,324   |  |  |   | 1,963  |  |  |   | 900   | 
|Total stockholders equity                        |  |      | 20,352 |      |  |      | 49,194 |      |  |      | 116,068 |  |  |   | 67,489 |  |  |   | 1,242 | 



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Note 4 of Notes to Consolidated Financial
    Statements                                                                                                                                    
|   
|(2) | See Note 5 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

19



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##### Table of Contents








|       |                                                                                          
|------ | -----------------------------------------------------------------------------------------
|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.

Overview

We are a leading provider of services which
facilitate the use of digital media for live and on-demand
applications in enterprise communication, marketing and
entertainment. Our services enable our customers to outsource
the management and delivery of audio, video and other visual
content on the Internet and other digital distribution
platforms. Our technical infrastructure and proprietary
applications comprise an end-to-end solution, including rich
media application support, webcasting, hosting, storage,
encoding, capture and media restoration. Our solutions reduce
complexity and cost of internal solutions, while supporting a
variety of digital media strategies and customer business models.

Recent Management Changes and
Developments

In January 2002 we engaged Regent Pacific
Management Corporation (Regent Pacific) to provide
certain management consulting and advisory services. On
February 3, 2003, our former Chairman and Chief Executive
Officer, John T. Baker IV, resigned from the company.
Simultaneous with Mr. Bakers resignation, we entered
into a new agreement with Regent Pacific, expanding its role
with the Company. In connection with that agreement, we
appointed Philip J. Gioia, a principal of Regent Pacific, to
serve as our President and Chief Executive Officer and agreed to
have selected Regent Pacific principals, including
Mr. Gioia, serve as part of the Loudeye executive
management team. Additionally, Mr. Gary J. Sbona, the
chairman and Chief Executive Officer of Regent Pacific, was
elected to the board of directors of Loudeye and Charles P.
Waite, Jr., a member of Loudeyes board of directors and a
partner of OVP Venture Partners, was elected as Chairman.

On March 11, 2003, the engagement of Regent
Pacific, and the involvement of Regent Pacific principals as
part of the Companys executive management team concluded.
As a result, Mr. Gioia resigned as President and Chief
Executive Officer of the Company, and Mr. Sbona resigned
from his seat on the Companys board of directors. On
March 11, 2003, our board of directors appointed Jeffrey M.
Cavins, who had been our Senior Vice President of Sales, as our
President and Chief Executive Officer, and elected him to the
Companys board of directors. The Companys board of
directors appointed Anthony J. Bay, a three-year member of the
board, as chairman of the board, replacing Mr. Waite, who
resigned.

On March 14, 2003 we announced our intention
to restructure to reduce costs and to focus our efforts on our
core competencies on digital media services where we anticipate
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
force primarily affected employees in all departments at our
headquarters in Seattle, Washington.

The Company entered into an Employment Agreement
dated as of April 1, 2003 with Jeffery M. Cavins, the
President and Chief Executive Officer of the Company, and
Jerold J. Goade, Jr., the Vice President and Chief
Financial Officer of the Company. In addition, the Company
entered into a Consulting Agreement dated as of April 1,
2003 with Mr. Bay, the Chairman of the Company.

20



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##### Table of Contents



Organization

We provide our services via two primary business
segments, Digital Media Services and Media Restoration Services.

Digital Media Services.Our Digital Media Services enable
enhanced enterprise communication, digital media management and
distribution via the Internet and other emerging technologies.

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. Using our services, enterprises can offer small
and large audiences access to Webcasts of a variety of
corporate events, such as product launches, investor earnings
calls, conferences and distance learning seminars. The target
customers for these solutions include medium and large-sized
enterprises across a range of industry segments. We recognize
revenues as services are rendered.

Our other Digital Media Services encompass a
variety of related services primarily focused on the digital
music market, including digital music encoding, metadata
licensing, audio fingerprint database generation, hosted music
sample services, hosted music download services, online radio
solutions and rich media advertisement insertion. Supporting
some of these offerings, we have certain music licenses and
relationships with the five major recording labels and over 800
independent record labels. The target customers for our digital
music services include traditional and Internet-based retailers,
media and entertainment companies, including media portals,
broadcasters, the major record labels, and advertisers.

Sales of these other 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.

We sell our music samples service in application
service provider 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 penalty to the
customer. Billings are generally made based upon volumes of data
delivered or minutes of content streamed, and revenue is
recognized as the services are delivered.

Media Restoration Services.Our Media Restoration Services
solutions address the need to restore and migrate legacy media
archives to current media formats. The target customers for
these services include many of the customers for our Digital
Media Services as well as large legacy media archives,
specifically including those found at major libraries,
universities and enterprises. 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.

One of our key strategies is to pursue
selectively strategic acquisitions or partnerships to enter new
markets, expand our suite of services and product offering,
increase our customer base and strengthen our market position.
Since 2000 we have completed the following acquisitions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Streampipe.In
    November 2002, we acquired TT Holding Corp.
    (Streampipe) a New York company which provides
    enterprise Webcasting technology and services. The acquisition
    price was $4.5 million, consisting of $3.1 million of
    common stock issued at closing (7,892,741 shares),
    unsecured promissory notes (Notes) aggregating
    $1.1 million and transaction costs of $0.3 million.
    The Notes contain an equity redemption option pursuant to which
    we may, at our option, satisfy our obligation under the Notes by
    issuing additional shares of common stock.
|
| |  | Encode This.In June
    2002, we acquired certain assets of Digital Media Broadcast,
    Inc. (Encode This) a Los Angeles company that
    provides digital media services to a similar customer base that
    Loudeye has historically serviced. 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.                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Activate.net.In
    September 2001, we acquired Activate.net Corporation, a Seattle
    company which provides live and on-demand webcasting services
    for a variety of enhanced enterprise communication needs.
    Activate had been operated as a majority-owned operating company
    of CMGi, Inc. The total acquisition price was $6.6 million,
    $1.0 million was paid in cash at closing, and we assumed
    $2.4 million of liabilities as 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 our common stock, resulting in a gain of $700,000.
|
| |  | Addition Systems.In
    June 2001, we acquired Addition Systems, Inc., a Los Angeles
    company which develops proprietary content insertion technology.
    The acquisition price was $1.5 million in cash plus
    acquisition costs and 550,000 shares of common stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Online Radio.In
    March and June 2001, we acquired the assets and technology of
    two online radio companies, OnAir Streaming Networks and
    theDial. The acquisition price was $2.2 million in cash and
    645,096 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | DiscoverMusic.In
    March 2001, we acquired DiscoverMusic, a Seattle company which
    is the largest provider of music samples on the Internet. The
    acquisition price was $4.6 million in cash plus acquisition
    costs and accrued liabilities, net of DiscoverMusics cash,
    and 3,677,013 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Vidipax.In June
    2000 we acquired Vidipax, a New York company which performs
    audio and video media restoration and migration services. The
    acquisition price was $1.9 million in cash,
    68,284 shares of common stock and an additional contingent
    payment in July 2001 of 2,189,111 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

During 2002 and 2001, we implemented operational
consolidation and cost saving initiatives, which included the
integration and realignment processes related to our acquisition
activity. As a result of these initiatives, in 2001 we
consolidated our production operations from three separate
facilities to the one facility acquired in the Activate
transaction, and implemented reductions in personnel. Details
related to these initiatives are described in more detail below
under the caption Special Charges. 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. However, we expect to continue to incur
net losses for the foreseeable future.

A majority of our cost of revenues, general and
administrative expenses and research and development expenses
are fixed. Sales commissions are variable depending upon orders
booked and when revenue is recognized. We have sustained losses
on a quarterly and annual basis since inception and we expect to
sustain losses for the foreseeable future as we invest in and
grow our operations. As of December 31, 2002, we had an
accumulated deficit of $173.7 million.

We anticipate that operating expenses, ongoing
payments for the facilities that we vacated as a result of our
restructurings and facility consolidation plan, continuing debt
service on capital lease obligations and any acquisitions, will
constitute a material use of our cash resources in 2003 and
beyond. We have incurred losses and have experienced negative
cash flows from operations since inception and have an
accumulated deficit. We expect to incur additional losses and
negative cash flow from operations in the foreseeable future.
These matters have raised substantial doubt about our ability to
continue as a going concern. We have restructured our
operations, reduced employee headcount, renegotiated leases and
taken other actions to limit our expenditures. However, there
can be no assurance that our cash balances will be sufficient to
sustain our operations until profitable operations and positive
cash flows are achieved. Consequently, we may require additional
capital to fund our operations. There can be no assurance that
capital will be available to us on acceptable terms or at all.
Our financial statements do not reflect any adjustments that may
result from the outcome of this uncertainty.

Our limited operating history makes the
prediction of future operating results difficult. In view of our
limited operating history and the early and rapidly evolving
nature of our business, we believe that interim and

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annual period-to-period comparisons of our
operating results are not meaningful and should not be relied
upon as an indication of future performance. Our business
prospects must 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. We have
experienced growth in revenues in certain previous periods;
however, we do not believe that prior growth rates or possibly
even sequential quarterly growth are sustainable or indicative
of future growth rates (see Forward-Looking
Statements). In some future quarter our operating results
may fall below our expectations as well as those of securities
analysts and investors. In this event, the trading price of our
common stock may fall significantly.




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



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

Revenue.Revenues
totaled $12.7 million and $10.4 million for 2002 and
2001, respectively. The increase reflects increases in our
digital media service revenue due primarily to the acquisition
of Activate in September 2001, and growth in revenue from our
Vidipax subsidiary.

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 is partially offset by the
decrease in revenue generated by our encoding services, due to
fewer large encoding projects in 2003 compared to 2002, and a
decrease in samples revenue from the previous year, largely a
result of pricing pressures for this service. We believe that
this trend has now abated and expect revenues from encoding and
samples services to remain relatively stable in 2003.

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. We expect
revenues generated from VidiPax to remain relatively stable or
modestly decline in 2003.

Cost of Revenues.Cost of revenues increased to
$13.3 million in 2002 from $12.7 million in 2001. 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. Excluding depreciation and
amortization, costs of revenues increased to $10.0 million
in 2002 from $8.7 million in 2001. This was primarily due
to the higher number of personnel involved in digital media
services production and the increased reliance on certain
third-party vendors related to webcasting services.
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.

Media restoration cost of revenues totaled
$1.9 million in 2002, an increase from $1.2 million in
2001. The increase rose 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.

Research and Development Expenses.Research and development expenses
totaled $3.2 million and $9.7 million in 2002 and
2001, respectively. Research and development expenses include
salaries and consulting fees paid to support technology
development, costs of technology acquired from third parties to
incorporate into applications and other proprietary technology
currently under development. 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, including the recently announced Loudeye
Express, 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.

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

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believe will result in near term results,
development headcount was significantly reduced as compared to
2001 and, as a result, research and development expenses
declined in 2002 as compared to 2001. We expect research and
development expenses to remain relatively stable in the
foreseeable future.


Sales and Marketing Expenses.Sales and marketing expenses totaled
$7.7 million and $9.4 million in 2002 and 2001,
respectively. 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 VidiPax.

General and Administrative Expenses.General and administrative expenses
totaled $11.4 million and $11.1 million in 2002 and
2001, respectively. 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 the impact 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 in 2002 and 2001,
respectively. We believe that general and administrative
expenses will decrease in future periods as a result of our
corporate restructurings and continued efforts to reduce
operating expenses.

Amortization of Intangibles and Other Assets.Amortization of intangibles and other
assets totaled $3.0 million and $8.2 million in 2002
and 2001, respectively. 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 and a charge of $359,000 in 2002 and 2001,
respectively. 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. Future
amortization of deferred stock compensation should decline as
the deferred stock compensation recorded prior to our Initial
Public Offering is being amortized on an accelerated basis.
Future stock-based compensation charges may vary as a result of
variable accounting following our option exchange in the third
quarter of 2001. As of December 31, 2002, approximately
$130,000 remains in deferred stock based compensation, which is
expected to be amortized in full by the end of 2003.

Special Charges.We
recorded special charges totaling $6.8 million and
$37.3 million in 2002 and 2001, respectively, 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 SFAS No. 144 as of
November 30, 2002. As a result of these actions and

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other economic conditions, we recorded special
charges in 2002 and 2001 which are summarized in the following
table (in thousands):


|                                       |  |      |       |      |  |   |        | 
|-------------------------------------- |  | ---- | ----- | ---- |  | - | ------ | 
|                                       |  | 2002 |       | 2001
|                                       |  |      |       |     
|Intangible and other asset impairments |  | $    | 1,437 |      |  | $ | 21,356 | 
|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  |  
|                           |  |      |        |      |  |   |        |  

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

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, respectively. 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. Our interest income will decrease in the future
as our cash balances decrease to fund our operating, investing
and financing activities.

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, respectively. The decrease was due to lower
interest rates resulting from the new credit facility signed in
October 2001 and our repayment of this facility in the third
quarter of 2002. Interest expense should decrease in 2003 as a
result of the repayment of our long-term debt.

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.

Year Ended
December 31, 2001 compared to 2000

Revenue.Revenues
totaled $10.4 million and $11.5 million for 2001 and
2000, respectively. The decrease was primarily due to lower
digital media services revenues offset by increases in media
restoration revenues.

Digital media services revenue decreased to
$7.6 million in 2001 from $10.5 million in 2000 due to
fewer large encoding projects in 2001, and the decision in early
2001 to discontinue our digital media consulting services. This
decrease was partially offset by the inclusion of music samples
revenues from the acquisition of DiscoverMusic in March 2001 and
enterprise webcasting revenues from the acquisition of Activate
in September 2001. Music samples revenues totaled
$2.8 million in 2001. We had no such services available in
2000, and accordingly had no such revenues. Enterprise
webcasting services contributed $1.6 million in

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revenues since our acquisition of Activate on
September 26, 2001. In 2000 we generated revenues from
consulting services and the sale or license of custom
applications and other totaling $2.6 million. These
revenues related to product and service offerings that we
decided to no longer support after our operational
restructurings. In 2001 we generated approximately $250,000 from
such offerings before their discontinuation.


Media restoration revenues totaled
$2.7 million in 2001, as compared to $850,000 in 2000. This
increase was the result of the inclusion of a full year of
results in 2001 as compared to six months in 2000, and increased
orders from customers, notably Coca-Cola, which provided
approximately 17% of consolidated revenues in 2001.

Cost of Revenues.Cost of revenues increased to
$12.7 million in 2001 from $12.4 million in 2000 on a
consolidated basis. 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.
Costs, excluding depreciation and amortization, to generate the
revenues described above decreased to $8.7 million in 2001
from $9.7 million in 2000. This decrease was primarily due
to the significantly lower number of personnel involved in
digital media services production. This reduction in headcount
came as a result of the completion of our digital media archive
system, which has allowed us to fulfill digital music encoding
orders in a more automated manner rather than the historical
method requiring significant manual processing. The non-cash
component of cost of revenues, which is primarily depreciation,
increased to $4.0 million from $2.7 million in 2000 as
a result of a full years depreciation in 2001 of our
production facility. Adding to this increase was higher levels
of equipment purchases throughout 2000, contributing only a
partial year of depreciation in 2000, but a full year in 2001.
Cost of revenues increased from 2000 primarily due to decreased
revenues and capacity utilization, as well as increased
depreciation expense in 2001 from significant asset acquisitions
in 2000. These increases were partially offset by the inclusion
of higher margin product offerings acquired from DiscoverMusic
and VidiPax.

Media restoration cost of revenues totaled
$1.2 million in 2001, an increase from $474,000 in 2000.
The increase in gross margin was a result of increased levels of
capacity utilization of its production lab as well as greater
levels of orders on a relatively fixed cost of production.

Research and Development Expenses.Research and development expenses
totaled $9.7 million and $6.8 million in 2001 and
2000, respectively. Research and development expenses include
salaries and consulting fees paid to support technology
development, costs of technology acquired from third parties to
incorporate into applications and other proprietary technology
currently under development. The increase over the same period
in 2000 is primarily due to the acquisition of online radio
technology and personnel in 2001, increased headcount in the
first quarter of 2001 over the same period in the prior year and
the cessation of capitalization of software development costs on
projects completed in 2000. Additionally, research and
development headcount increased as a result of the acquisition
of Activate in September 2001. Costs of enhancing the automated
production system, the development of our archival platform and
the continued development of online radio technology and other
unannounced applications and service offerings comprised a
majority of our research and development expenses in 2001, while
2000 included a number of projects which have since been
terminated.

Due to our operational restructuring in 2001 and
focus on digital audio opportunities and enterprise webcasting
services, development headcount was significantly reduced. We
had no media restoration services costs classified as research
and development, and accordingly this had no impact on the
consolidated results.

Sales and Marketing Expenses.Sales and marketing expenses totaled
$9.4 million and $14.6 million in 2001 and 2000,
respectively. 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 significant decrease in sales and
marketing expenses was primarily due to the decreased personnel
subsequent to our corporate restructuring and an overall
reduction in marketing spending.

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Media restoration services sales and marketing
expenses totaled $450,000 and $88,000 in 2001 and 2000,
respectively. This increase was due to a full year of results in
2001 as compared to six months in 2000 and a general increase in
commissions and other selling expenses to generate the increased
level of sales.

General and Administrative
Expenses.General and administrative
expenses totaled $11.1 million and $8.1 million in
2001 and 2000, respectively. General and administrative expenses
consist primarily of unallocated rent, facilities and
information technology charges, salaries, legal expenses for
general corporate purposes and investor relations and other
costs associated with being a public company. The increase was
primarily due to the higher average headcount in 2001 compared
to 2000, an increase in unallocated facilities charges in 2001,
contractual bonuses paid to employees acquired in the Vidipax
transaction and increased legal expenses related to ongoing
corporate initiatives. General and administrative expenses also
increased as a result of the acquisition of Activate.

Fourth quarter of 2001 general and administrative
expenses included a reduction of $736,000 in our bonus accrual
resulting from a board of directors decision in late 2001
to conserve our cash resources and not pay cash bonuses to
executives and certain other employees. This reduction in our
bonus accrual was partially offset by a one-time charge of
approximately $450,000 related to the write-off of a significant
receivable from a company that declared bankruptcy in December
2001. There were no revenues recognized in 2001 from that
company.

Media restoration general and administrative
expenses totaled $1.2 million and $509,000 in 2001 and
2000, respectively. This increase was due to a full year of
results in 2001 as compared to six months in 2000. There were no
appreciable differences in administrative expenses at VidiPax
from year to year, and accordingly, the monthly expense rate was
relatively flat between years.

Amortization of Intangibles and Other Assets.Amortization of intangibles and other
assets totaled $8.2 million and $7.7 million in 2001
and 2000, respectively, and includes amortization of the
goodwill and identified intangible assets related to past
acquisitions and amortization related to the fair value of
warrants granted to certain partners. The increase was primarily
due to increased amortization resulting from the DiscoverMusic,
OnAir, Addition Systems, Inc. and theDial transactions completed
in 2001 and amortization of intangibles resulting from the
VidiPax acquisition in June 2000, partially offset by lower
amortization on intangibles resulting from the Alive.com
transaction in 1999, which were written down to estimated fair
market value in the 2001 special charge. This impairment charge
is described more fully in the section entitled Special Charges
below. There was no amortization of intangibles and other assets
from media restoration in 2001 or 2000.

Stock-Based Compensation.Stock-based compensation totaled
$359,000 and $5.4 million in 2001 and 2000, respectively.
Stock-based compensation in 2001 was insignificant. Stock-based
compensation in 2000 consisted of $4.5 million in
amortization of deferred stock compensation, related to stock
options previously granted below deemed fair market value,
$1.3 million in compensation expense related to the
variable accounting treatment and the subsequent termination in
the third quarter of 2000 of our consultant options, a charge of
$400,000 related to the acceleration of options and $820,000 in
credits related to the reversal of previously amortized deferred
stock compensation due to option cancellations. In the fourth
quarter of 2000, we accelerated the vesting of approximately
660,000 options that resulted in a charge of approximately
$400,000 to stock-based compensation. As of December 31,
2001, approximately $883,000 remains in unamortized deferred
stock compensation. There was no stock-based compensation
recorded at VidiPax in 2001 or 2000.

In July 2001, we exchanged 1,083,250 employee
options with an exercise price greater than $4.30 for 812,443
new options with an exercise price of $1.21. These new options
are accounted for as variable options; however since the
exchange, our stock price has declined in value, and no
stock-based compensation charges have been generated. Should our
stock price increase above the new options exercise
prices, there could be substantial non-cash charges recorded.

Special Charges.In
2001, we commenced a series of operational restructurings and
facilities consolidations. We assessed each product and service
offering and the costs related to each in making the
determination

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to cease providing, or otherwise change the level
of support we provide for these offerings. We 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 we determined that no further resources would be
provided to support video encoding in our Seattle facility. In
the second quarter of 2001 we terminated approximately 45% of
our workforce. That reduction in force created excess
facilities, resulting in the development of facilities
consolidation plans. These plans of consolidation generated
additional special charges for rent accruals as well as tenant
improvement impairments throughout the remainder of 2001. The
continued economic conditions surrounding our digital media
services led to other impairment charges related to the
valuation of our assets acquired from DiscoverMusic, in the
third quarter of 2001. In the fourth quarter of 2001, we
performed an analysis of all long-lived assets in accordance
with our accounting policies, and determined that certain of
these assets were impaired. Impairment charges were then
recorded as appropriate. As a result of these actions and other
economic conditions, we recorded special charges of
$37.3 million in 2001. These charges are summarized in the
table following:


|                                       |  |                |        |      |  |   |     | 
|-------------------------------------- |  | -------------- | ------ | ---- |  | - | --- | 
|                                       |  | 2001           |        | 2000
|                                       |  |                |        |     
|                                       |  |               
|                                       |  | (In thousands)
|Intangible and other asset impairments |  | $              | 21,356 |      |  | $ |    | 
|Property and equipment write-downs     |  |                | 6,534  |      |  |   | 453 | 
|Facilities related charges and other   |  |                | 6,194  |      |  |   | 184 | 
|Employee severance                     |  |                | 3,177  |      |  |   | 310 | 
|                                       |  |                |        |      |  |   |     | 
|                                       |  | $              | 37,261 |      |  | $ | 947 | 
|                                       |  |                |        |      |  |   |     | 

Interest Income.Interest income representing earnings
on our cash, cash equivalents and short-term investments totaled
$3.2 million and $5.8 million in 2001 and 2000,
respectively. The decreased income was due primarily to our
lower average cash and investment balances in 2001 in addition
to lower interest rates.

Interest Expense.Interest expense consists of interest
expense related to our debt instruments as well as amortization
of financing charges related to our debt instruments. This
totaled $1.2 million and $907,000 in 2001 and 2000,
respectively. The increase was due primarily to increased levels
of borrowings incurred to finance equipment purchases and
acquisitions, partially offset by decreased interest rates and
the refinancing of our credit facility in 2001.

Liquidity and Capital Resources

As of December 31, 2002, we had
approximately $13.4 million of cash, cash equivalents,
short-term investments and restricted investments.

Cash used in operating activities was
$22.2 million and $26.3 million in 2002 and 2001,
respectively. For 2002 and 2001, respectively, cash used in
operating activities resulted primarily from net losses of
$31.2 million and $76.4 million, partially offset 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 provided by investing activities was
$8.5 million $7.4 million in 2002 and 2001,
respectively. 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 by investing activities was primarily related to
the net sales of short-term investments of $19.7 million,
partially offset by purchases of property and equipment of
$2.7 million and cash paid for the business acquisitions
that closed in 2001 of $9.6 million

Cash used in financing activities was
$21.6 million in 2002 and cash provided by investing
activities was $4.3 million in 2001. The cash used in
financing activities in 2002 primarily resulted from the
decision to

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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. The cash
provided by financing activities in 2001 resulted primarily from
borrowings under our credit facility of $18.9 million,
offset by principal payments of our long-term debt and capital
lease obligations of $11.8 million. 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.


As of December 31, 2002, our principal
commitments consisted of obligations outstanding under operating
and capital leases. We prepaid our primary credit facility in
the third quarter of 2002. This prepayment of $18.9 million
was made to reduce future interest expense and remove any
restrictions that the facility might have placed upon our cash
balances. The credit facility was terminated in the third
quarter of 2002.

We have other credit facilities and leasing
arrangements that, in general, are not prepayable without
penalty. Total principal amounts outstanding under these
arrangements were $1.4 million at December 31, 2002.
These instruments bear interest ranging from approximately 6.9%
to 9.7% and mature at various times through 2005. Letters of
credit of approximately $980,000 collateralize certain of these
notes and capital lease obligations. We have $1.5 million
of short-term investments that are utilized as collateral for
certain irrevocable letters of credit. These short-term
investments have been classified as restricted investments on
the accompanying balance sheets.

Contractual
Obligations and Commercial Commitments

The following table provides aggregated
information about the Companys contractual obligations as
of December 31, 2002.

|                                     |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|------------------------------------ |  | ---------------------- | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                     |  |                       
|                                     |  | Payments Due by Period
|                                     |  |                       
|                                     |  |                        |        | Less than |  |           |       | After    
|                                     |  | Total                  |        | 1 year    |  | 1-3 years |       | 4-5 years |  | 5 years
|Contractual Obligations              |  |                        |        |           |  |           |       |           |  |        
|Long-term debt                       |  | $                      | 370    |           |  | $         | 223   |           |  | $       | 73    |  |  | $ | 74    |  |  | $ |      | 
|Capital lease obligations(1)         |  |                        | 1,051  |           |  |           | 562   |           |  |         | 320   |  |  |   | 169   |  |  |   |      | 
|Operating leases                     |  |                        | 14,594 |           |  |           | 4,314 |           |  |         | 4,175 |  |  |   | 2,467 |  |  |   | 3,638 | 
|Other purchase obligations           |  |                        | 341    |           |  |           | 338   |           |  |         | 3     |  |  |   |       |  |  |   |       | 
|Accrued acquisition consideration(2) |  |                        | 1,062  |           |  |           | 1,062 |           |  |         |      |  |  |   |      |  |  |   |      | 
|                                     |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|Total contractual obligations        |  | $                      | 17,418 |           |  | $         | 6,499 |           |  | $       | 4,571 |  |  | $ | 2,710 |  |  | $ | 3,638 | 
|                                     |  |                        |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 






|    |                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Capital lease obligations represent the total
    minimum future obligations inclusive of interest.                                                                                                                                                                                                                                                                                 
|   
|(2) | Accrued acquisition consideration represents
    promissory notes related to the acquisition of Streampipe. The
    notes contain an equity redemption option pursuant to which the
    Company may, at its option, satisfy its obligation under the
    Notes by issuing additional shares of the Companys common
    stock. See Note 10 to the Consolidated Financial Statements.

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 2003, we will continue to focus
on reducing costs and increasing sales. We expect the following
items may represent significant uses of cash in the foreseeable
future:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have commitments under leases for certain
    facilities which we no longer occupy. These leases extend past
    2003. Scheduled payments under these leases for 2003 total
    $1.6 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, 2002 accrued special charges
    includes amounts accrued for rent obligations which meeting the
    criteria for accrual under Emerging Issues Task Force Issue
    Number 94-3.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We paid approximately $850,000 in fees to Regent
    Pacific Management Corporation in the first quarter of 2003 for
    interim management services and expenses. The engagement of
    Regent Pacific and the involvement of Regent Pacific principals
    as part of our management team concluded in March 2003.                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Severance payments resulting from workforce
    reductions in 2002 and in the first quarter of 2003, including
    certain of our former executives, are estimated to be $700,000
    and are expected to be paid in cash in 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Acquisition consideration resulting from the
    Streampipe acquisition in November 2002, totaling
    $1.1 million plus accrued interest, is due January 1,
    2004. The notes contain an equity redemption option pursuant to
    which we may, at our option, satisfy our obligation by issuing
    additional shares of our common stock. However, if certain
    events occur, such as our stock no longer being listed on a
    principal securities exchange or trading market, we may be
    required to pay a portion of this consideration in cash. This
    amount is included in accrued acquisition consideration in the
    accompanying balance sheets.
|
| |  | We have certain commitments under existing
    arrangements with certain licensors of copyrighted materials
    that may require payments estimated to be approximately $490,000
    in 2003. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We do not have significant capital spending plans
    for 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

There can be no assurance 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 2003. Accordingly, if we are unable
to fund operating and other expenses, working capital and
capital expenditures from our operations, we may find it
necessary to secure additional financing, sell assets or reduce
expenditures further. In the event additional financing is
required, there can be no assurance that we will be able to
obtain such financing on acceptable terms, or at all.

Going Concern

The accompanying consolidated financial
statements have been prepared under the assumption that the
Company will continue to operate as a going concern, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has
incurred losses since inception, has an accumulated deficit, and
has experienced negative cash flows from operations since its
inception and the expansion and development of its business will
require additional capital. These matters raise substantial
doubt about the companys ability to continue as a going
concern.

Management has restructured the Companys
operations, reduced its work force, renegotiated leases, and
taken other actions to limit the Companys expenditures.
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.
Consequently, the Company may require additional capital to fund
its operations. There can be no assurance that capital will be
available to the Company on acceptable terms, or at all.

The accompanying consolidated financial
statements do not include any adjustments that may result from
the outcome of this uncertainty.

Recent Management Changes

In January 2003 the Company engaged Regent
Pacific Management Corporation (Regent Pacific) to
provide certain management consulting and advisory services.
This agreement contemplated the payment to Regent Pacific of two
hundred thousand dollars ($200,000) for a two (2) month
consulting engagement.

On February 3, 2003, the Companys
former Chairman and Chief Executive Officer, John T.
Baker IV, resigned from the Company. Simultaneous with
Mr. Bakers resignation, the Company entered into a new

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agreement with Regent Pacific, expanding its role
with the Company. Pursuant to the Regent Pacific agreement,
Loudeye agreed to pay Regent Pacific Sixty Thousand Dollars
($60,000) per week, and four weeks of payments in advance. This
agreement provided for a minimum term of six months, with a
review and restructuring of fees after three months. The
agreement also provided for the issuance to Regent Pacific of
stock options to purchase up to four million (4,000,000) shares
of Loudeye common stock, based upon length of service, at an
exercise price based upon the closing price per share on
February 3, 2003 ($0.39). The agreement was terminable by
either party under certain circumstances. In connection with
that agreement, the Company appointed Philip J. Gioia, a
principal of Regent Pacific, to serve as its President and Chief
Executive Officer and agreed to have selected Regent Pacific
principals, including Mr. Gioia, serve as part of the
Loudeye executive management team. Additionally,
Mr. Gary J. Sbona, the chairman and Chief Executive
Officer of Regent Pacific, was elected to the board of directors
of Loudeye and Charles P. Waite, Jr., a member of
Loudeyes board of directors and a partner of OVP Venture
Partners, was elected as Chairman.


On March 11, 2003, the engagement of Regent
Pacific, and the involvement of Regent Pacific principals as
part of the Companys executive management team concluded.
As a result, Mr. Gioia resigned as President and Chief
Executive Officer of the Company, and Mr. Sbona resigned
from his seat on the Companys board of directors. On
March 11, 2003, the Companys board of directors
appointed Jeffrey M. Cavins, who had been the Senior Vice
President of Sales for the Company, as the Companys
President and Chief Executive Officer, and elected him to the
Companys board of directors. The Companys board of
directors appointed Anthony J. Bay, a three-year member of
the board, as chairman of the board, replacing Mr. Waite,
who resigned. The Company entered into an Employment Agreement
dated as of April 1, 2003 with Mr. Cavins. The
agreement provides for a base salary of $250,000 and the
granting of options to purchase 1,500,000 shares of common stock
of the Company. The agreement also provides for the opportunity
to receive bonuses based upon the achievement of certain
performance criteria by the Company and in the event of a sale
of all of the stock or all or substantially all of the assets of
the Company.

The Company entered into an Employment Agreement
dated as of April 1, 2003 with Jerold J.
Goade, Jr., the Vice President and Chief Financial Officer
of the Company. The agreement provides for a base salary of
$160,000 and the granting of options to purchase 300,000 shares
of common stock of the Company. The agreement also provides for
the opportunity to receive bonuses based upon the achievement of
certain performance criteria by the Company and in the event of
a sale of all of the stock or all or substantially all of the
assets of the Company.

The Company entered into a Consulting Agreement
dated as of April 1, 2003 with Mr. Bay, the Chairman
of the Company. The agreement provides for a base compensation
of $100,000 and the granting of options to purchase 500,000
shares of common stock of the Company. The agreement provides
for the opportunity to receive bonuses based upon the
achievement of certain performance criteria by the Company and
in the event of a sale of all of the stock or all or
substantially all of the assets of the Company.

Recent Accounting Pronouncements

We adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (FAS 142) effective January 1, 2002. The
impact of adopting FAS 142 is discussed in Note 4 to the
consolidated financial statements.

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
is effective January 1, 2003. This standard addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated retirement costs. We are currently assessing the
application of SFAS No. 143.

We also adopted Statement of Financial Accounting
standards No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), effective
January 1, 2002. FAS 144 supercedes FAS 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, providing a single
accounting model for long-lived assets to be disposed of. In
addition, FAS 144 amends certain provisions of Accounting
Principles Board Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of the
Disposal of a Segment of a Business, Extraordinary Items,
Unusual and

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Infrequently Occurring Events and
Transactions, with respect to the accounting for
discontinued operations. The impact of impairment charges
recorded under FAS 144 is discussed in Note 4 to the
consolidated financial statements.


In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities
(FAS 146), which is effective for exit or disposal
activities that are initiated after December 31, 2002.
FAS 146 nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
FAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the
liability is incurred. FAS 146 does not require restatement
of prior financial results. We plan to adopt FAS 146
beginning with any exit or disposal activity initiated after
December 31, 2002.

In December 2002, the FASB issues SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
standard amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. We adopted the disclosure provisions of this standard
during 2002.

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 will require 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 Company has determined that the
implementation of this standard will not have a material effect
on its previously issued financial statements. We cannot
reasonably estimate the impact of adopting FIN 45 until
guarantees are issued or modified in future periods, at which
time their results will be initially reported in the financial
statements.

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, relating to
consolidation of certain entities. First, FIN 46 will
require identification of our participation in variable
interests entities (VIE), which are defined as
entities with a level of invested equity that is not sufficient
to fund future activities to permit them to operate on a
standalone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. Then, for
entities identified as VIE, FIN 46 sets forth a model to
evaluate potential consolidation based on an assessment of which
party to the VIE, if any, bears a majority of the exposure to
its expected losses, or stands to gain from a majority of its
expected returns. FIN 46 also sets forth certain
disclosures regarding interests in VIE that are deemed
significant, even if consolidation is not required. We are
currently assessing the application of FIN 46.

In February 2003, the EITF issued an abstract,
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. This Issue addresses certain aspects of the
accounting by a vendor for arrangements under which it will
perform multiple revenue-generating activities. Specifically,
this Issue addresses how to determine whether an arrangement
involving multiple deliverables contains more than one unit of
accounting. We believe our current revenue recognition policies
comply with the provisions of EITF No. 00-21.

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.

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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 $3.5 million, $27.9 million and
$435,000 in 2002, 2001 and 2000, respectively. 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 $10.7 million at
December 21, 2002. We will continue to review the carrying
value 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. Management is required to make
its best estimates of exit costs such as remaining lease
obligations and/or termination fees, these estimates be
different than the actual amounts that will be paid under
existing lease arrangements. As noted above, beginning
January 1, 2003, we will follow the provisions of FAS 146
to record the costs associated with exit activities. Future
adverse changes in our business could result in additional exit
activities and charges.

Revenue Recognition.We generate revenues primarily from
two sources: (1) digital media services, licensing and
selling digital media applications and (2) media
restoration services.

Digital media services and
other.We recognize Enterprise
Webcasting Services revenues as services are rendered. We
recognize encoding services revenues when the services have been
rendered and we have no continuing involvement in the goods and
services delivered, which is generally the date the finished
media is shipped to our customer. Other revenues are generated
from our music samples service business and in the prior year
from licensing and selling of software and through application
service provider arrangements. We sell services in application
service provider 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 penalty to the
customer. Billings are made based upon quantity of content
streamed, and revenue is recognized as the services are
delivered.

Media restoration
services.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.

We believe that our revenue recognition policy is
consistent with the provisions of Staff Accounting Bulletin
No. 101, Revenue Recognition.

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RISK FACTORS

We have incurred losses and negative cash flow
since inception and have an accumulated deficit at
December 31, 2002, raising substantial doubt about our
ability to continue as a Going Concern

The accompanying consolidated financial
statements have been prepared under the assumption that the
Company will continue to operate as a going concern. The Company
has incurred losses from inception, has an accumulated deficit,
and has experienced negative cash flows from operations since
its inception. These matters raise substantial doubt about the
companys ability to continue as a going concern.

Management has restructured the Companys
operations, reduced its work force, renegotiated leases, and
taken other actions to limit the Companys expenditures.
However, there can be no assurance that Companys cash
balances will be sufficient to sustain its operations until
profitable operations and positive cash flows are achieved.
Consequently, the Company may require additional capital to fund
its operations. There can be no assurance that capital will be
available to the Company on acceptable terms, or at all.

The accompanying consolidated financial
statements do not include any adjustments that may result from
the outcome of this uncertainty.

We have a limited operating history, making it
difficult for you to evaluate our business and your
investment

Loudeye was formed as a limited liability company
in August 1997 and incorporated in March 1998. Following our
acquisition of Activate in 2001, we began to place greater
emphasis on our enterprise Webcasting services. We therefore
still have a very limited operating history upon which an
investor may evaluate our operations and future prospects, as
well as limited insight into trends that may emerge and affect
our business. In addition, the revenue and income potential of
our business and market are unproven. Because of the emerging
nature of the industry, our executives have limited experience
in it. As a young company operating in an emerging industry, we
face risks and uncertainties relating to our ability to
implement our business plan successfully. Our potential for
future profitability must be considered in light of these risks,
uncertainties and difficulties.

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:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Variability in demand for our Webcasting services
    and our other digital media services and applications;                                                                                                                      
|
| |  | Market acceptance of new Webcasting and other
    digital media services and applications offered by us and our
    competitors;                                                                                                  
|
| |  | Ability of our customers to procure necessary
    intellectual property rights for the digital media content they
    intend to utilize in their businesses;                                                                      
|
| |  | Willingness of our customers to enter into
    longer-term volume 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.                                                                                                                                                                        

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

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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 will likely 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
and current stockholders may experience significant
dilution

As of December 31, 2002, we had
approximately $13.4 million in cash and cash equivalents,
short-term investments, and restricted investments. There can be
no assurance that our existing cash, cash equivalents,
short-term investments and restricted investments will be
sufficient to fund our operations and meet our working capital
and capital expenditure requirements for 2003. Accordingly, if
we are unable to fund operating and other expenses, working
capital and capital expenditures from our operations, we may
find it necessary to secure additional financing, sell assets or
reduce expenditures further. In the event additional financing
is required, there can be no assurance that we will 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
that 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, 2002, we had an
accumulated deficit of $173.7 million. We have incurred net
losses quarterly from August 12, 1997
(inception) through December 31, 2002, and we expect
to continue to incur net losses for the foreseeable future.

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 this is the
case, 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. To address the risks an uncertainties facing our
business strategy, we must, among other things:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Achieve broad customer adoption and acceptance of
    our products and services;                       
|
| |  | Successfully integrate our acquisition of
    TT Holdings and execute our Webcasting services strategy;
|
| |  | Successfully integrate, leverage and expand our
    sales force;                                       
|
| |  | Successfully scale our current operations;                                                             
|
| |  | Implement and execute our business and marketing
    strategies;                                       
|
| |  | Address copyright issues that effect our business;                                                     
|
| |  | Develop and maintain strategic relationships to
    enhance our products and services;                 
|
| |  | Respond to competitive developments in the
    digital media infrastructure industry;                  

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We might not be successful in achieving any or
all of these objectives in a cost-effective manner, if at all,
and the failure to achieve these could have a serious adverse
impact on our business, results of operations and financial
position. Each of these objectives may require significant
additional expenditures on our part. Even if we ultimately do
achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis.

If we are unable to comply with NASDAQs
continued listing requirements, our common stock could be
desisted from the Nasdaq SmallCap Market

Since July 30, 2001, our common stock has
failed to maintain a minimum bid price of $1.00 per share for at
least 10 consecutive days, which caused our stock price to fail
to meet one of the minimum standards required by the Nasdaq
Stock Market for continued listing as a Nasdaq National Market
security. In order to avoid delisting from Nasdaq entirely, we
voluntarily applied to Nasdaq to have our listing transferred to
the SmallCap Market. On July 16, 2002 our application was
approved to transfer the listing of our common stock to the
Nasdaq SmallCap Market. The Nasdaq SmallCap Market also requires
compliance with a minimum bid price of $1.00 per share for at
least 10 consecutive days. We were notified that we must be in
compliance with this requirement by March 28, 2003
(including all grace periods) or face delisting from Nasdaq. On
March 31, 2003 we were notified by Nasdaq that we will be
provided an additional 90 calendar days, or until June 26,
2003 to regain compliance.

There can be no assurance that we will be able to
satisfy all requirements for continued listing of our common
stock on the Nasdaq SmallCap Market, including the minimum bid
price requirement and minimum tangible assets or
stockholders equity requirements. If we are unable to meet
Nasdaq requirements in the future, our stock will be subject to
delisting, which may have a material adverse effect on the price
of our common stock and the levels of liquidity currently
available to our stockholders. Delisting would also make it more
difficult for us to raise capital in the future. If our common
stock is removed from the Nasdaq SmallCap Market, an investor
could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our common
shares. Additionally, our stock may then be subject to
penny stock regulations.

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, all of whom are employed on an at-will basis and 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. In addition, we have hired or named new
employees in 2003 in key executive positions, including Jeffrey
Cavins, our Chief Executive. The loss of one or several key
executives could 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.

Acquisitions we have made or may make could
disrupt our business and harm our financial condition

We expect to continue to evaluate and acquire
businesses, technologies, services, or products that we believe
are a strategic fit with our business. In June 2000 we acquired
VidiPax, Inc., in June 2001 we acquired Addition Systems, Inc.,
in March 2001 we acquired DiscoverMusic, and in September 2001
we acquired Activate. and we have also acquired certain assets
and technology from OnAir and theDial.com.

Pursuant to an Asset Purchase Agreement dates as
of May 29, 2002, the Company acquired certain assets of
EncodeThis!, Inc. Pursuant to the Asset Purchase Agreement, the
Company acquired certain assets of EncodeThis!, Inc. in exchange
for cash and common stock, as well as a warrant to purchase
common stock of the Company.

On November 19, 2002, the Company, TenTV
Acquisition Corp., a Delaware corporation wholly-owned by the
Company, and TT Holding Corp. (Holding), a Delaware
corporation and sole shareholder of Technology Education
Network, Inc. (TenTV) entered into an Agreement and
Plan of Reorganization (the Merger Agreement).
Pursuant to the Merger Agreement, TenTV Acquisition Corp. was
merged into Holding and the former stockholders of Holding
received, subject to the Merger Agreement and certain

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Unsecured Promissory Notes with Equity Redemption
Option (the Notes), 7,900,165 newly issued
unregistered shares of the Companys common stock and Notes
in the aggregate original principal amount of $1,062,329. At
December 31, 2002, 7,559,306 shares had been issued and
340,859 shares are being held in escrow until January 1,
2004, pursuant to the terms of the Merger Agreement. Subject to
the terms of each Note, which provide in part that there is not
an event of default and that the Company is listed on a
principal exchange excluding the over-the-counter market, the
Notes may be redeemed, at the option of the Company, for common
stock of the Company. In the event that the Company elects to
redeem the Notes for Common Stock, the number of shares issuable
upon redemption shall be calculated by dividing (i) the
principal amount and all accrued interest due under the Notes as
of the date of redemption, by (ii) the average of the last
sale price of the common stock for the thirty (30) trading
days preceding January 1, 2004. In such event, the
aggregate number of shares of common stock issued in connection
with the transactions contemplated by the Merger Agreement will
be in excess of twenty percent (20%) of the issued and
outstanding common stock of the Company. Nasdaq rules require
that the a majority of the companys stockholders approve
any transaction resulting in the issuance of twenty percent
(20%) or more of the Companys common stock.


We have limited operating history as a combined
company and therefore limited experience in addressing emerging
trends that may affect our combined business. The integration of
these and any future acquisitions into our operations may place
a significant strain on our employees, systems and other
resources. If any acquisition fails to integrate well, our
operations and financial position could be harmed.

Acquisitions require integrating the business,
personnel, technology and products of the acquired entity and
may result in unforeseen operating difficulties and
expenditures. In addition, acquisitions may absorb significant
management attention that would otherwise be available for
ongoing development of our business. Moreover, we cannot assure
you that the anticipated benefits of any acquisition will be
realized. Acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt, the
assumption of known and unknown liabilities associated with the
acquired business, or amortization expenses related to goodwill
and other intangible assets and the incurrence of large and
immediate write-offs, any of which could seriously harm our
business, results of operations and financial condition.

We are dependent on the development and rate
of adoption of digital media and the delay or failure of this
development would seriously harm our business

We are dependent on the development and rate of
adoption of digital media services and applications and the
delay or failure of this development would seriously harm our
business. The development of commercial services and
applications for digital media content is in its relatively
early stages. If the Internet does not develop as an effective
medium for the distribution of digital media content to
consumers or if businesses predicated on the distribution of
digital media content are not profitable or are unable to raise
necessary operating capital, then we may not succeed in
executing our business plan. Many factors could inhibit the
growth of the distribution of digital media content, including
concerns about the profitability of Internet-related businesses,
uncertainty about intellectual property rights associated with
music and other digital media, bandwidth constraints, piracy and
privacy.

Our success depends on users having access to the
necessary hardware, software and bandwidth, or data transmission
capability, to receive and broadcast high quality digital media
over the Internet. 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. Widespread adoption
of digital media technology depends on overcoming obstacles to
the deployment and use of digital media software, identifying
additional viable revenue models for digital media-based
businesses, improving audio and video quality and educating
customers and users in the use of digital media technology. If
digital media technology fails to overcome these obstacles, our
business could be seriously harmed.

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

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companies and artists, and is the 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.


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 the year ended December 31,
2002, two of our customers accounted for 23% of our revenues and
during the year ended December 31, 2001, one of our
customers accounted for approximately 17% 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.

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 Web sites 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

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brought, and sometimes successfully pressed,
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.

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 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 impact 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 it 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.

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 certain of our current or former officers
and directors are named as defendants in a purported class
action complaint which has been filed allegedly on behalf of
certain persons who purchased our common stock during the time
period beginning on March 15, 1999 and ending on
December 6, 2000. The complaint alleges violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934.
Primarily it alleges that there was undisclosed compensation
received by our underwriters in connection with our initial
public offering. We can provide no assurance as to the outcome
of this matter. Any resolution of this matter in a manner
adverse to us could have a material adverse affect on our
financial position and results of operation. In addition, the
costs to us of defending any litigation or other proceeding,
even if resolved in our favor, could be

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substantial. Such litigation could also
substantially divert the attention of our management and our
resources in general. Uncertainties resulting from the
initiation and continuation of any litigation or other
proceedings could harm our ability to compete in the
marketplace. In addition, because class action litigation has
often been brought against companies following periods of
volatility in their stock prices, we could become involved in
additional litigation.


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 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
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:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | 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;    

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| |   |                                           
| | - | ------------------------------------------
| |  | Customer service and support;             
|
| |  | Attracting third-party web developers; and
|
| |  | Pricing.                                  

Although we do not currently compete against any
one entity with respect to all aspects of our digital media
services, there are two principal types of companies we do
compete with: enterprise Webcasting companies and digital media
services companies.

Enterprise Webcasting
Competition.Our primary competitors
are content distribution networks, such as Akamai, and Internet
broadcasters, such as Yahoo!Broadcast. Each of these companies
provide services similar to ours and each has a well-established
market presence. We also compete with providers of traditional
communications technologies, such as teleconferencing and
videoconferencing, as well as applications software and tools
companies, such as Centra Software, Lotus (SameTime), Microsoft
(NetMeeting and Placeware). There are also smaller competitors
that focus on certain of our individual market segments, such as
investor relations webcasts.

Other Digital Media Services
Competition.There are a number of
companies that provide outsourced digital media services. As the
digital media services market continues to develop, we expect to
see increased competition from traditional telecommunication
service providers or resellers of those services. We also face
competition from the in-house encoding services, streaming
networks and content management systems and encoding services.

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.

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 been going
out of business or are being acquired by larger entities. As a
result, we are increasingly competing with larger competitors
that 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 decreasing the use of our
    products and services to distribute and experience the content
    that audiences most desire, and hurting 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;                                                                        

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| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 dramatically 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.

If we fail to enhance our existing services
and applications products or develop and introduce new digital
media services, applications and features in a timely manner to
meet changing customer requirements and emerging industry trends
or standards, our ability to grow our business will
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:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Obtain the necessary intellectual property rights
    from music companies and other content owners to be able to
    legally provide our services;     
|
| |  | 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 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 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

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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 business will suffer if our systems fail
or our operations facilities become unavailable

A reduction in the performance, reliability and
availability of our systems and network infrastructure may harm
our ability to distribute our products and services to our
customers and other users, as well as harm our reputation and
ability to attract and retain customers and content providers.
Our systems and operations are susceptible to, and could be
damaged or interrupted by, outages caused by fire, flood, power
loss, telecommunications failure, Internet breakdown, earthquake
and similar events. We do not have any 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, Web
sites and network communications. A sudden and significant
increase in traffic on our Web sites 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.

Our digital distribution activities are managed
by sophisticated software and computer systems. 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 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 Web sites could be less attractive to
such entities or individuals and our business could be harmed.

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 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

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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.


Because our principal stockholders and
management may have the ability to control a significant
percentage of stockholder votes , the premium over market price
that an acquiror might otherwise pay may be reduced and any
merger or takeover may be prevented or delayed

Our officers and directors beneficially own or
control the voting of approximately 14% of our outstanding
common stock. Martin Tobias, our former chief executive officer
and former member of the board of directors, has given the board
of directors, an irrevocable proxy to vote all of the
approximately 4.6 million shares of our Common Stock that
he owns. See Note 18 to the Notes to Consolidated Financial
Statements and our Report on Form 8-K as filed with the
Securities and Exchange Commission on October 30, 2001 for
a more complete description of the proxy. As a result, these
stockholders, acting together, have the ability to substantially
influence all matters submitted to our stockholders for
approval, including:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Election or removal of our board of directors;                                                                                                       
|
| |  | Amendment of our certificate of incorporation or
    bylaws; and                                                                                     
|
| |  | Adoption of measures that could delay or prevent
    a change in control or impede a merger, takeover or other
    business combination involving us.

These stockholders have substantial influence
over our management and our affairs. Accordingly, this
concentration of ownership may have the effect of impeding a
merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a
tender offer for our shares. This concentration of ownership
could also adversely affect our stocks market price or
lessen any premium over market price that an acquiror might
otherwise pay.

Certain provisions of our certificate of
incorporation and bylaws and the provisions of Delaware law
could also have the effect of delaying, deferring or preventing
an acquisition of Loudeye, even if an acquisition would be
beneficial to our stockholders. See Description of Capital
Stock for more information on our charter and by-law
provisions.

Government regulation could adversely affect
our business prospects

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, personal privacy and data
protection will apply to the Internet or to the distribution of
music and other proprietary content over the Internet. Most of
these laws were adopted before the advent of the Internet and
related technologies and therefore do not address the unique
issues associated with the Internet and related technologies.
Depending on how these laws developed and are interpreted by the
judicial system, they could have the effect of:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | Limiting the growth of the Internet;                                                                                               
|
| |  | Creating uncertainty in the marketplace that
    could reduce demand for our products and services;                                
|
| |  | Increasing our cost of doing business;                                                                                             
|
| |  | Exposing us to significant liabilities associated
    with content distributed or accessed through our products or
    services; or
|
| |  | Leading 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,

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depending on our future business activities, we
and our customers may be required to pay licensing fees in
connection with digital sound recordings we deliver or our
customers provide on their web site and through retransmissions
of radio broadcasts and/or other audio content. A Copyright
Arbitration Royalty Panel has determined that, for eligible
non-subscription services, sound recording performance rates
should be $0.0014 per performance for the period October
1998-2000, with a surcharge of 9% of the total performance fee
for the ephemeral copies used to facilitate such performances.
However, that decision is subject to review and revision by the
U.S. Copyright Office, and several appeal petitions have been
filed. Furthermore, the Copyright Offices review is
subject to an appeal to a Federal Court of Appeals. The fees for
the same types of transmissions offered on a subscription basis
have not been determined and will be the subject of another
Copyright Arbitration Royalty Panel proceeding, as will fees for
digital phono-record deliveries pursuant to the mechanical
license provisions of the U.S. Copyright Act. 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.


Because of this rapidly evolving and uncertain
regulatory environment, both domestically and internationally,
we cannot predict how existing or proposed laws and regulations
might affect our business. In addition, these uncertainties make
it difficult to ensure compliance with the laws and regulations
governing digital music. These laws and regulations could harm
us by subjecting us to liability or forcing us to change our
business.






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

We provide Internet media infrastructure services
and applications. 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, particularly since substantially all of our investments
are in short-term instruments with original maturities of less
than six months. Due to the limited duration of our short-term
investments and their investment grade level, we anticipate no
material market risk exposure. Therefore, no quantitative
tabular disclosures are presented.

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. The average
portfolio balance must remain under one year in duration.

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

LOUDEYE CORP.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                    |  |        |    | 
|--------------------------------------------------- |  | ------ | -- | 
|                                                    |  | Page  
|                                                    |  | Number
|                                                    |  |       
|Report of Independent Accountants                   |  |        | 47 | 
|Consolidated Balance Sheets                         |  |        | 49 | 
|Consolidated Statements of Operations               |  |        | 50 | 
|Consolidated Statements of Stockholders
    Equity |  |        | 51 | 
|Consolidated Statements of Cash Flows               |  |        | 52 | 
|Notes to Consolidated Financial Statements          |  |        | 53 | 

46



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors

and Shareholders of


Loudeye Corp.


In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 and the related
consolidated statements of operations, of shareholders
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, 2002, and the results of their operations and
of their cash flows for the year 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 audit. We
conducted our audit 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 audit provides a reasonable
basis for our opinion. The consolidated financial statements of
Loudeye Technologies, Inc. and subsidiaries as of
December 31, 2001, and for each of the two years in the
period ended December 31, 2001, prior to the revision
described in Note 2, were audited by other independent
accountants who have ceased operations. Those independent
accountants 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
Number 142, Goodwill and Other Intangible
Assets as of January 1, 2002.

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered
recurring losses and negative cash flows and has an accumulated
deficit. These matters raise substantial doubt about the
Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
disclosed in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome
of this uncertainty.

As discussed above, the consolidated financial
statements of Loudeye Technologies, Inc. as of December 31,
2001, and for each of the two years in the period ended
December 31, 2001, were audited by other independent
accountants 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 and 2000 in Note 2 are
appropriate. However, we were not engaged to audit, review or
apply any procedures to the 2001 and 2000 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 or 2000 consolidated
financial statements taken as a whole.

/s/ PRICEWATERHOUSECOOPERS LLP

April 11, 2003

Seattle, Washington


47



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##### Table of Contents



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 and 2000 required by SFAS
No. 142. The Arthur Andersen LLP report does not extend to
these changes to the 2001 and 2000 consolidated financial
statements. These revisions to the 2001 and 2000 consolidated
financial statements were reported on by PricewaterhouseCoopers
LLP as stated in their report appearing herein.

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 sheet as of
    December 31, 2000 and the consolidated statements of
    operations, of stockholders equity and of cash flows for
    the year ended December 31, 1999 are not required to be
    included in this Annual Report on Form 10-K.

48



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LOUDEYE CORP.

CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |          |        | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | -------- | ------ |  | - | -------- | ------ | 
|                                     |                                                                                                                                                                                                                                                                                               |                                           
|                                     |                                                                                                                                                                                                                                                                                               | December 31,                              
|                                     |                                                                                                                                                                                                                                                                                               |                                           
|                                     |                                                                                                                                                                                                                                                                                               | 2002                                       |   | 2001    
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |         
|                                     |                                                                                                                                                                                                                                                                                               |                                           
|                                     |                                                                                                                                                                                                                                                                                               | (Amounts in thousands                     
|                                     |                                                                                                                                                                                                                                                                                               | except share and per share                
|                                     |                                                                                                                                                                                                                                                                                               | amounts)                                  
|ASSETS                               |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     | Cash and cash equivalents                                                                                                                                                                                                                                                                     |                                            | $ | 1,889    |        |  | $ | 37,159   |       
|                                     | Short-term investments                                                                                                                                                                                                                                                                        |                                            |   | 9,978    |        |  |   | 23,782   |       
|                                     | Accounts receivable, net of allowances of $290
    and $492                                                                                                                                                                                                                                   |                                            |   | 2,501    |        |  |   | 2,200    |       
|                                     | Notes receivable from related parties                                                                                                                                                                                                                                                         |                                            |   | 1,187    |        |  |   |         |       
|                                     | Prepaid expenses and other current assets                                                                                                                                                                                                                                                     |                                            |   | 914      |        |  |   | 1,769    |       
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total current assets                       |   |          | 16,469 |  |   |          | 64,910 | 
|                                     | Restricted investments                                                                                                                                                                                                                                                                        |                                            |   | 1,500    |        |  |   |         |       
|                                     | Property and equipment, net                                                                                                                                                                                                                                                                   |                                            |   | 3,590    |        |  |   | 7,306    |       
|                                     | Goodwill                                                                                                                                                                                                                                                                                      |                                            |   | 5,307    |        |  |   | 1,310    |       
|                                     | Intangibles assets, net                                                                                                                                                                                                                                                                       |                                            |   | 1,758    |        |  |   | 5,374    |       
|                                     | Note receivable from related party                                                                                                                                                                                                                                                            |                                            |   |         |        |  |   | 1,005    |       
|                                     | Other assets, net                                                                                                                                                                                                                                                                             |                                            |   | 905      |        |  |   | 978      |       
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total assets                               |   | $        | 29,529 |  |   | $        | 80,883 | 
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     | Accounts payable                                                                                                                                                                                                                                                                              |                                            | $ | 1,203    |        |  | $ | 913      |       
|                                     | Accrued compensation and benefits                                                                                                                                                                                                                                                             |                                            |   | 904      |        |  |   | 1,439    |       
|                                     | Other accrued expenses                                                                                                                                                                                                                                                                        |                                            |   | 1,421    |        |  |   | 1,859    |       
|                                     | Accrued special charges                                                                                                                                                                                                                                                                       |                                            |   | 2,903    |        |  |   | 2,939    |       
|                                     | Accrued acquisition consideration                                                                                                                                                                                                                                                             |                                            |   | 1,062    |        |  |   |         |       
|                                     | Deposits and deferred revenues                                                                                                                                                                                                                                                                |                                            |   | 305      |        |  |   | 639      |       
|                                     | Current portion of long-term debt and capital
    leases                                                                                                                                                                                                                                      |                                            |   | 788      |        |  |   | 1,368    |       
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total current liabilities                  |   |          | 8,586  |  |   |          | 9,157  | 
|                                     | Accrued acquisition consideration                                                                                                                                                                                                                                                             |                                            |   |         |        |  |   | 3,000    |       
|                                     | Long-term debt and capital leases, net of current
    portion                                                                                                                                                                                                                                 |                                            |   | 591      |        |  |   | 19,532   |       
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total liabilities                          |   |          | 9,177  |  |   |          | 31,689 | 
|                                     | Commitments and contingencies                                                                                                                                                                                                                                                                 |                                            |   |          |        |  |   |          |       
|STOCKHOLDERS EQUITY                 |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     | Preferred stock, $0.001 par value, 5,000,000
    shares authorized, none outstanding                                                                                                                                                                                                          |                                            |   |         |        |  |   |         |       
|                                     | Common stock, treasury stock, additional paid-in
    capital and warrants; for common stock, $0.001 par value,
    100,000,000 shares authorized; 53,871,295 and 47,157,568 shares
    issued and outstanding in 2002 and 44,475,174 and 40,475,174
    shares issued and outstanding in 2001 |                                            |   | 194,195  |        |  |   | 192,627  |       
|                                     | Deferred stock compensation                                                                                                                                                                                                                                                                   |                                            |   | (130     | )      |  |   | (883     | )     
|                                     | Accumulated deficit                                                                                                                                                                                                                                                                           |                                            |   | (173,713 | )      |  |   | (142,550 | )     
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total stockholders equity                 |   |          | 20,352 |  |   |          | 49,194 | 
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         
|                                     |                                                                                                                                                                                                                                                                                               | Total liabilities and stockholders equity |   | $        | 29,529 |  |   | $        | 80,883 | 
|                                     |                                                                                                                                                                                                                                                                                               |                                            |   |          |        |  |   |         

See accompanying notes

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LOUDEYE CORP.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |        |        |  
|-------------------------------------------------------------------------------- | -------------------------------------------- | -------------------------------------- | ---------- | ------ | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | -
|                                                                                 |                                              |                                       
|                                                                                 |                                              | Years Ended December 31,              
|                                                                                 |                                              |                                       
|                                                                                 |                                              | 2002                                   |            | 2001   |        | 2000
|                                                                                 |                                              |                                        |            |        |        |     
|                                                                                 |                                              |                                       
|                                                                                 |                                              | (Amounts in thousands except share and
|                                                                                 |                                              | per share amounts)                    
|REVENUES                                                                         |                                              | $                                      | 12,681     |        |        | $    | 10,388     |        |        | $ | 11,537     |       
|COST OF REVENUES                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 | Cost of revenues                             |                                        |            | 9,966  |        |      |            | 8,667  |        |   |            | 9,684  |       
|                                                                                 | Depreciation                                 |                                        |            | 3,381  |        |      |            | 4,070  |        |   |            | 2,704  |       
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 |                                              | Total cost of revenues                 |            |        | 13,347 |      |            |        | 12,737 |   |            |        | 12,388 |  
|                                                                                 |                                              | Gross margin                           |            |        | (666   | )    |            |        | (2,349 | ) |            |        | (851   | )
|OPERATING EXPENSES                                                               |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 | Research and development                     |                                        |            | 3,159  |        |      |            | 9,719  |        |   |            | 6,784  |       
|                                                                                 | Sales and marketing                          |                                        |            | 7,667  |        |      |            | 9,409  |        |   |            | 14,621 |       
|                                                                                 | General and administrative                   |                                        |            | 11,375 |        |      |            | 11,102 |        |   |            | 8,079  |       
|                                                                                 | Amortization of intangibles and other assets |                                        |            | 3,043  |        |      |            | 8,173  |        |   |            | 7,693  |       
|                                                                                 | Stock-based compensation                     |                                        |            | (417   | )      |      |            | 359    |        |   |            | 5,409  |       
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 |                                              |                                        | 24,827     |        |        |      | 38,762     |        |        |   | 42,586     |       
|                                                                                 | Special charges                              |                                        |            | 6,846  |        |      |            | 37,261 |        |   |            | 947    |       
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|OPERATING LOSS                                                                   |                                              |                                        | (32,339    | )      |        |      | (78,372    | )      |        |   | (44,384    | )     
|OTHER INCOME (EXPENSE), net                                                      |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 | Interest income                              |                                        |            | 1,149  |        |      |            | 3,157  |        |   |            | 5,767  |       
|                                                                                 | Interest expense                             |                                        |            | (631   | )      |      |            | (1,181 | )      |   |            | (907   | )     
|                                                                                 | Other                                        |                                        |            | 659    |        |      |            |       |        |   |            |       |       
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|                                                                                 |                                              | Total other income (expense)           |            |        | 1,177  |      |            |        | 1,976  |   |            |        | 4,860  |  
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|NET LOSS                                                                         |                                              | $                                      | (31,162    | )      |        | $    | (76,396    | )      |        | $ | (39,524    | )     
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|Basic and diluted net loss per share                                             |                                              | $                                      | (0.75      | )      |        | $    | (1.84      | )      |        | $ | (1.33      | )     
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       
|Weighted average shares used to compute basic and
    diluted net loss per share |                                              |                                        | 41,393,156 |        |        |      | 41,429,104 |        |        |   | 29,773,886 |       
|                                                                                 |                                              |                                        |            |        |        |      |            |        |        |   |            |       

See accompanying notes

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LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |         |          |        |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------------------------------------------ | ----------- | --------------------- |  | ---------------------- | ------- | ---------- |  | -------- | ---------- | ----------- |  | ------------- | ------- | ------------ |  | ------- | -------- | ------ |  | - | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |        
|                                                                          |  |                                                  |             |                       |  | Common Stock, Treasury |         |            |  |          |            |             |  |               |         |              |  |        
|                                                                          |  |                                                  |             | Stock, and Additional |  |                        |         |            |  |          |            |             |  |              
|                                                                          |  | Convertible Preferred Stock                      |             | Paid-in Capital       |  | Stock Warrants         |         | Beneficial |  | Deferred |            |             |  | Total        
|                                                                          |  |                                                  |             |                       |  |                        |         | Conversion |  | Stock    |            | Accumulated |  | Stockholders
|                                                                          |  | Shares                                           |             | Amount                |  | Shares                 |         | Amount     |  | Shares   |            | Amount      |  | Feature       |         | Compensation |  | Deficit |          | Equity
|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |         |          |       
|                                                                          |  |                                                 
|                                                                          |  | (Amounts in thousands, except for share amounts)
|BALANCES, January 1, 2000                                                 |  |                                                  | 21,063,236  |                       |  | $                      | 58,536  |            |  |          | 8,696,257  |             |  | $             | 27,146  |              |  |         | 691,053  |        |  | $ | 1,159  |   |  | $ | 14,121  |   |  | $ | (6,843 | ) |  | $ | (26,630  | ) |  | $ | 67,489  |  
|Conversion of preferred stock                                             |  |                                                  | (21,063,236 | )                     |  |                        | (58,536 | )          |  |          | 21,063,236 |             |  |               | 58,536  |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   |        |  
|Beneficial conversion feature                                             |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | 14,121  |              |  |         |         |        |  |   |       |   |  |   | (14,121 | ) |  |   |       |   |  |   |         |   |  |   |        |  
|Initial Public Offering and sale of shares to
    strategic partner       |  |                                                  |            |                       |  |                        |        |            |  |          | 5,511,022  |             |  |               | 80,748  |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 80,748  |  
|Exercise and conversion of warrants                                       |  |                                                  |            |                       |  |                        |        |            |  |          | 526,528    |             |  |               | 1,159   |              |  |         | (691,053 | )      |  |   | (1,159 | ) |  |   |        |   |  |   |       |   |  |   |         |   |  |   |        |  
|Stock option exercises, repurchases and shares
    issued under ESPP      |  |                                                  |            |                       |  |                        |        |            |  |          | 1,207,115  |             |  |               | 727     |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 46     |   |  |   |         |   |  |   | 773     |  
|Deferred stock compensation                                               |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | 3,100   |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   | (3,100 | ) |  |   |         |   |  |   |        |  
|Issuance of shares for acquisition and warrants
    to strategic partners |  |                                                  |            |                       |  |                        |        |            |  |          | 68,284     |             |  |               | 1,105   |              |  |         | 140,000  |        |  |   | 159    |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 1,264   |  
|Cancellation and acceleration of common stock
    options                 |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | (2,459  | )            |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 1,997  |   |  |   |         |   |  |   | (462    | )
|Stock-based compensation                                                  |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | 1,267   |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 4,513  |   |  |   |         |   |  |   | 5,780   |  
|Net loss                                                                  |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               |        |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (39,524  | ) |  |   | (39,524 | )
|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |         |          |        |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCES, DECEMBER 31, 2000                                               |  |                                                  |            |                       |  |                        |        |            |  |          | 37,072,442 |             |  |               | 185,450 |              |  |         | 140,000  |        |  |   | 159    |   |  |   |        |   |  |   | (3,387 | ) |  |   | (66,154  | ) |  |   | 116,068 |  
|Issuance of shares for acquisition and strategic
    partnerships         |  |                                                  |            |                       |  |                        |        |            |  |          | 7,152,887  |             |  |               | 10,832  |              |  |         |         |        |  |   | 4      |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 10,836  |  
|Repurchase of common stock                                                |  |                                                  |            |                       |  |                        |        |            |  |          | (4,000,000 | )           |  |               | (2,000  | )            |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | (2,000  | )
|Other                                                                     |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | 61      |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 61      |  
|Stock option exercises, repurchases and shares
    issued under ESPP      |  |                                                  |            |                       |  |                        |        |            |  |          | 249,845    |             |  |               | 266     |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 266     |  
|Modification of common stock options                                      |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | (2,145  | )            |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 943    |   |  |   |         |   |  |   | (1,202  | )
|Amortization of deferred stock                                            |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               |        |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 1,561  |   |  |   |         |   |  |   | 1,561   |  
|Net loss                                                                  |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               |        |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (76,396  | ) |  |   | (76,396 | )
|BALANCES, DECEMBER 31, 2001                                               |  |                                                  |            |                       |  |                        |        |            |  |          | 40,475,174 |             |  |               | 192,464 |              |  |         | 140,000  |        |  |   | 163    |   |  |   |        |   |  |   | (883   | ) |  |   | (142,550 | ) |  |   | 49,194  |  
|Issuance of shares for acquisitions                                       |  |                                                  |            |                       |  |                        |        |            |  |          | 9,226,724  |             |  |               | 3,786   |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 3,786   |  
|Repurchase of shares                                                      |  |                                                  |            |                       |  |                        |        |            |  |          | (2,713,727 | )           |  |               | (1,105  | )            |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | (1,105  | )
|Stock option exercises and shares issued under
    ESPP                   |  |                                                  |            |                       |  |                        |        |            |  |          | 169,397    |             |  |               | 57      |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 57      |  
|Amortization of deferred stock compensation, net
    of cancellations     |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               | (1,170  | )            |  |         |         |        |  |   |       |   |  |   |        |   |  |   | 753    |   |  |   |         |   |  |   | (417    | )
|Net loss                                                                  |  |                                                  |            |                       |  |                        |        |            |  |          |           |             |  |               |        |              |  |         |         |        |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (31,162  | ) |  |   | (31,162 | )
|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |         |          |        |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCES, DECEMBER 31, 2002                                               |  |                                                  |            |                       |  | $                      |        |            |  |          | 47,157,568 |             |  | $             | 194,032 |              |  |         | 140,000  |        |  | $ | 163    |   |  | $ |        |   |  | $ | 130    |   |  | $ | (173,713 | ) |  | $ | 20,352  |  
|                                                                          |  |                                                  |             |                       |  |                        |         |            |  |          |            |             |  |               |         |              |  |         |          |        |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  

See accompanying notes

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LOUDEYE CORP.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |         |        |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                                |                                                                           |                                                   
|                                                                                |                                                                           | Years Ended December 31,                          
|                                                                                |                                                                           |                                                   
|                                                                                |                                                                           | 2002                                               |                                                 | 2001    |        | 2000   
|                                                                                |                                                                           |                                                    |                                                 |         |        |        
|                                                                                |                                                                           |                                                   
|                                                                                |                                                                           | (Amounts in thousands)                            
|OPERATING ACTIVITIES                                                            |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                | Net Loss                                                                  |                                                    | $                                               | (31,162 | )      |         | $       | (76,396 | )      |         | $       | (39,524 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                | Depreciation and amortization                                             |                                                    |                                                 | 7,223   |        |         |         | 15,422  |        |         |         | 12,494  |       
|                                                                                | Special charges and other non-cash items                                  |                                                    |                                                 | 3,575   |        |         |         | 29,736  |        |         |         | 661     |       
|                                                                                | Other income from settlement of acquisition terms                         |                                                    |                                                 | (700    | )      |         |         |        |        |         |         |        |       
|                                                                                | Stock-based compensation                                                  |                                                    |                                                 | (417    | )      |         |         | 359     |        |         |         | 5,409   |       
|                                                                                | Changes in operating assets and liabilities, net
    of amounts acquired: |                                                    |                                                 |         |        |         |         |         |        |         |         |         |       
|                                                                                |                                                                           | Accounts receivable                                |                                                 |         | 358    |         |         |         | 2,902  |         |         |         | (2,121 | )      
|                                                                                |                                                                           | Prepaid expenses and other assets                  |                                                 |         | 464    |         |         |         | 396    |         |         |         | (701   | )      
|                                                                                |                                                                           | Accounts payable                                   |                                                 |         | 24     |         |         |         | (1,162 | )       |         |         | (3,758 | )      
|                                                                                |                                                                           | Accrued compensation, benefits, and other expenses |                                                 |         | (1,226 | )       |         |         | 2,610  |         |         |         | 1,801  |        
|                                                                                |                                                                           | Customer deposits and deferred revenue             |                                                 |         | (306   | )       |         |         | (161   | )       |         |         | 362    |        
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                |                                                                           |                                                    | Cash used in operating activities               |         |        | (22,167 | )       |         |        | (26,294 | )       |         |        | (25,377 | )
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|INVESTING ACTIVITIES                                                            |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|Purchases of property and equipment                                             |                                                                           |                                                    | (1,676                                          | )       |        |         | (2,696  | )       |        |         | (15,814 | )      
|Proceeds from sales of property and equipment                                   |                                                                           |                                                    | 109                                             |         |        |         |        |         |        |         |        |        
|Capitalized software development costs                                          |                                                                           |                                                    |                                                |         |        |         |        |         |        |         | (1,304  | )      
|Cash paid for acquisitions of businesses, net of
    cash acquired              |                                                                           |                                                    | (2,361                                          | )       |        |         | (9,580  | )       |        |         | (1,907  | )      
|Loans made to related party and related interest                                |                                                                           |                                                    | (67                                             | )       |        |         |        |         |        |         | -       |        
|Purchases of short-term investments                                             |                                                                           |                                                    | (11,105                                         | )       |        |         |        |         |        |         |        |        
|Sales of short-term investments                                                 |                                                                           |                                                    | 23,563                                          |         |        |         | 19,689  |         |        |         | (42,605 | )      
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                |                                                                           |                                                    | Cash provided by (used in) investing activities |         |        | 8,463   |         |         |        | 7,413   |         |         |        | (61,630 | )
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|FINANCING ACTIVITIES                                                            |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|Proceeds from sale of stock and exercise of
    options                         |                                                                           |                                                    | 47                                              |         |        |         | 270     |         |        |         | 81,100  |        
|Proceeds from long-term debt                                                    |                                                                           |                                                    |                                                |         |        |         | 18,908  |         |        |         | 10,205  |        
|Principal payments on long-term obligations                                     |                                                                           |                                                    | (20,495                                         | )       |        |         | (11,827 | )       |        |         | (1,882  | )      
|Loans made to related party and related interest                                |                                                                           |                                                    |                                                |         |        |         | (1,000  | )       |        |         |        |        
|Repurchase of common stock                                                      |                                                                           |                                                    | (1,118                                          | )       |        |         | (2,000  | )       |        |         |        |        
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                |                                                                           |                                                    | Cash provided by (used in) financing activities |         |        | (21,566 | )       |         |        | 4,351   |         |         |        | 89,423  |  
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|                                                                                |                                                                           |                                                    | Net change in cash and cash equivalents         |         |        | (35,270 | )       |         |        | (14,530 | )       |         |        | 2,416   |  
|Cash and cash equivalents, beginning of period                                  |                                                                           |                                                    | 37,159                                          |         |        |         | 51,689  |         |        |         | 49,273  |        
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|Cash and cash equivalents, end of period                                        |                                                                           | $                                                  | 1,889                                           |         |        | $       | 37,159  |         |        | $       | 51,689  |        
|                                                                                |                                                                           |                                                    |                                                 |         |        |         |         |         |        |         |         |        
|Cash paid for interest                                                          |                                                                           | $                                                  | 623                                             |         |        | $       | 970     |         |        | $       | 683     |        
|Issuance of common stock for acquisition of
    businesses                      |                                                                           |                                                    | 3,786                                           |         |        |         | 10,756  |         |        |         | 1,105   |        
|Assets acquired under capital leases                                            |                                                                           |                                                    | 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      |         |        |         | 159     |        

See accompanying notes

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LOUDEYE CORP.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002


1.     Organization,
Risks and Going Concern:



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

Loudeye Corp. (formerly Loudeye Technologies,
Inc.) (the Company) provides enterprise webcasting, related
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

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.



| |                       
| | ----------------------
| | 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.



| |              
| | -------------
| | Going Concern

The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern, which contemplates realization of
assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses since inception,
has an accumulated deficit of approximately $173.7 million
at December 31, 2002, has experienced negative cash flows
from operations since inception and the expansion and
development of the Companys business will require
additional capital. These matters raise substantial doubt about
the companys ability to continue as a going concern.

Management has restructured the Companys
operations, reduced its work force, renegotiated leases, and
taken other actions to limit the Companys expenditures.
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.
Consequently, the Company may require additional capital to fund
its operations. There can be no assurance that capital will be
available to the Company on acceptable terms, or at all.

If the Company fails to generate positive cash
flows or fails to obtain additional capital when required, the
Company could continue to modify, delay or abandon some or all
of the Companys business and expansion plans. The
accompanying consolidated financial statements do not include
any adjustments that may result from the outcome of this
uncertainty.

2.     Summary of
Significant Accounting Policies



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

Cash and cash equivalents consist of demand
deposits and money market accounts maintained with financial
institutions and certain other investment grade instruments. The
Company considers all cash deposits and highly liquid
investments with an original maturity at the date of acquisition
of three months or less to be cash equivalents.

53



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | 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. Short-term investments are generally held to
maturity and 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.

The Company has approximately $1.5 million
of short-term investments which are utilized as collateral for
certain irrevocable standby letters of credit. These securities
all mature within one year and reported amounts approximate fair
value due to the relatively short maturities of these
investments.



| |                                    
| | -----------------------------------
| | 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 $3.5 million, $27.9 million and
$435,000 in 2002, 2001 and 2000, respectively. These amounts are
included in Special Charges on the accompanying statements of
operations.



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

Advertising costs are expensed as incurred. The
Company incurred $787,000, $122,000 and $1.1 million in
advertising costs for the years ended December 31, 2002,
2001 and 2000, respectively.



| |                       
| | ----------------------
| | Concentrations of 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 and short-
term investments approximate cost due to the short period of
time to maturity. The fair values of financial instruments that
are short-term and/or that have little or no market risk are
considered to have a fair value equal to book value. The Company
maintains cash and cash equivalents on deposit at various
institutions that at times exceed the insured limits by the
Federal Deposit Insurance Corporation. 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.



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



| |                       
| | ----------------------
| | 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

54



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 year of disposal.



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

Certain information reported in previous periods
has been reclassified to conform to the current period
presentation.



| |                 
| | ----------------
| | 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, 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, decreases in the market price of the
Companys common stock and declining financial results.



| |                         
| | ------------------------
| | 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, and Interpretation of
APB No. 25 (FIN 44) and related interpretations.
The Company records deferred stock based compensation for the
difference between the exercise price of employee stock options
granted and the fair value of the Companys common stock at
the date of grant. Deferred compensation, if any is amortized
over the vesting period of the related options, which is
generally four and one-half years. Through December 31,
2002, $10.9 million had been recorded as deferred stock
compensation.

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 No. 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, 2000 aggregated $5.4 million, consisting
of $4.5 million in amortization of deferred stock
compensation related to stock options previously granted below
fair value, $1.3 million in compensation expense related to
the variable accounting treatment and the subsequent termination
in the third quarter of 2000 of our consultant options, a charge
of $0.4 million related to the accelerated vesting of
approximately 660,000 options, and $0.8 million in credits
related to the reversal of previously amortized deferred stock
compensation due to option cancellations. Stock compensation
totaled $0.4 million for the year ended December 31,
2001 and a credit of $0.4 million for the year ended
December 31, 2002, consisting of the amortization deferred
stock compensation and the reversal of expense related to
accelerated amortization for options that were cancelled. In
July 2001, the Company exchanged 1,083,250 employee options with
an exercise price greater than $4.30 for 812,443 new options
with an exercise price of $1.21. These new options are accounted
for as variable options; however, since the exchange, the

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

market price of the Companys stock price
has declined in value, and no stock-based compensation charges
have been generated.

The Company records stock-based compensation
charges as a separate component of operating expenses. The
amount represents the consulting expenses, amortization of stock
options granted below fair value, the charges for acceleration
of options and amounts paid under recission. These amounts can
be allocated to the other expense categories in the accompanying
consolidated statements of operations as follows (in thousands):

|                           |  |      |      |      |  |      |     |  |  |   |       | 
|-------------------------- |  | ---- | ---- | ---- |  | ---- | --- |  |  | - | ----- | 
|                           |  | 2002 |      | 2001 |  | 2000
|                           |  |      |      |      |  |     
|Production (cost of sales) |  | $    | (34  | )    |  | $    | 30  |  |  | $ | 456   | 
|Research and development   |  |      | (21  | )    |  |      | 19  |  |  |   | 283   | 
|Sales and marketing        |  |      | (55  | )    |  |      | 50  |  |  |   | 749   | 
|General and administrative |  |      | (307 | )    |  |      | 260 |  |  |   | 3,921 | 
|                           |  |      |      |      |  |      |     |  |  |   |       | 
|                           |  | $    | (417 | )    |  | $    | 359 |  |  | $ | 5,409 | 
|                           |  |      |      |      |  |      |     |  |  |   |       | 

The following table illustrates the effect on net
loss and loss per share if the company had applied the fair
value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to
stock-based employee compensation (in thousands):

|                                                                                                              |                                 |                         |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |                                 |                        
|                                                                                                              |                                 | Year Ended December 31,
|                                                                                                              |                                 |                        
|                                                                                                              |                                 | 2002                    |         | 2001  |   | 2000
|                                                                                                              |                                 |                         |         |       |   |     
|Net loss, as reported                                                                                         |                                 | $                       | (31,162 | )     |   | $    | (76,396 | )     |   | $ | (39,524 | )    
|Add: stock-based employee compensation expense
    (credit) included in reported net loss                     |                                 |                         | (417    | )     |   |      | 359     |       |   |   | 5,409   |      
|Deduct: total stock-based employee compensation
    expense determined under fair value method for all awards |                                 |                         | (1,114  | )     |   |      | (1,223  | )     |   |   | (10,557 | )    
|                                                                                                              |                                 |                         |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                            |                                 | $                       | (32,693 | )     |   | $    | (77,260 | )     |   | $ | (44,672 | )    
|                                                                                                              |                                 |                         |         |       |   |      |         |       |   |   |         |      
|Loss per share:                                                                                               |                                 |                         |         |       |   |      |         |       |   |   |         |      
|                                                                                                              | Basic and diluted  as reported |                         | $       | (0.75 | ) |      | $       | (1.84 | ) |   | $       | (1.33 | )
|                                                                                                              | Basic and diluted  pro-forma   |                         | $       | (0.79 | ) |      | $       | (1.86 | ) |   | $       | (1.50 | )

To determine compensation expense under
SFAS No. 123, the Company used the following
assumptions:

|                           |  |      |            |      |  |      |           |   |  |  |           |  
|-------------------------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                           |  | 2002 |            | 2001 |  | 2000
|                           |  |      |            |      |  |     
| Risk-free interest rates |  |      | 3.93- 5.71 | %    |  |      | 4.0- 5.71 | % |  |  | 5.0- 5.71 | %
| Expected lives           |  |      | 5 years    |      |  |      | 5 years   |   |  |  | 5 years   |  
| Expected dividend yields |  |      | 0          | %    |  |      | 0         | % |  |  | 0         | %
| Expected volatility      |  |      | 75         | %    |  |      | 75        | % |  |  | 0-75      | %

Income
Taxes

Income taxes are accounted for under the
liability method. The Company recognizes deferred income tax
assets and liabilities for the expected future income tax
consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax bases of
assets, liabilities and tax carryforwards. Deferred tax assets
are then reduced, if deemed necessary, by a valuation allowance
for the amount of any tax benefits that, more likely than not
based on current circumstances, are not expected to be realized.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

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 annual impairment tests in accordance with the
Statement. This change had the impact of reducing amortization
expense. 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 and 2000, as if FAS 142 had been adopted
effective January 1, 2000, is as follows (in thousands,
except per share amounts):

|                                                               |  |      |         |      |  |   |         |  
|-------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                               |  | 2001 |         | 2000
|                                                               |  |      |         |     
|Net loss, as reported                                          |  | $    | (76,396 | )    |  | $ | (39,524 | )
|Goodwill amortization                                          |  |      | 2,422   |      |  |   | 4,895   |  
|Amortization of intangible assets reclassified to
    goodwill |  |      | 152     |      |  |   | 83      |  
|                                                               |  |      |         |      |  |   |         |  
|Adjusted net loss                                              |  | $    | (73,822 | )    |  | $ | (34,546 | )
|                                                               |  |      |         |      |  |   |         |  
|Basic and diluted net loss per share:                          |  |      |         |      |  |   |         |  
|Net loss, as reported                                          |  | $    | (1.84   | )    |  | $ | (1.33   | )
|Goodwill amortization                                          |  |      | 0.06    |      |  |   | 0.16    |  
|Amortization of intangible assets reclassified to
    goodwill |  |      |        |      |  |   |        |  
|                                                               |  |      |         |      |  |   |         |  
|Adjusted net loss                                              |  | $    | (1.78   | )    |  | $ | (1.17   | )
|                                                               |  |      |         |      |  |   |         |  

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) consist of
acquired technology and workforce from the Companys
acquisition of Vidipax. The Company has performed its annual
impairment tests under FAS 142 and recorded resulting
impairment charges. These charges are discussed in greater
detail in Note 4.

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
is effective January 1, 2003. This standard addresses
financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the
associated retirement costs. The Company is currently assessing
the impact of SFAS No. 143 and will adopt this
standard in the first quarter of 2003.

The Company also adopted Statement of Financial
Accounting Standards No. 144 Accounting for the
Impairment or Disposal of Long-Lived Assets
(FAS 144), effective January 1, 2002. FAS 144
supercedes FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. In addition, FAS 144 amends certain provisions of
Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations  Reporting the Effects of
the Disposal of a Segment of a Business, Extraordinary Items,
Unusual and Infrequently Occurring Events and
Transactions, with respect to the accounting for
discontinued operations. The impact of the impairment charges
recorded under FAS 144 is discussed in Note 4 to the
consolidated financial statements.

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities,
(FAS 146), which is effective for exit or disposal
activities that are initiated after December 31, 2002.
FAS 146 nullifies Emerging Issues Task Force (EITF) Issue
No. 94-3, Liability recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
FAS 146 requires that a liability for costs associated with
an exit or disposal activity be recognized when the liability is
incurred. FAS 146 does not

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

require restatement of prior financial results.
The Company will adopt FAS 146 beginning with any exit or
disposal activity initiated after December 31, 2002.

In December 2002, the FASB issues SFAS
No. 148, Accounting for Stock-Based
CompensationTransition and Disclosure. This standard
amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company adopted the
disclosure provisions of this standard during the fourth quarter
of 2002.

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 will require 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 Company has determined that the
implementation of this standard will not have a material effect
on its previously issued financial statements. The Company
cannot reasonably estimate the impact of adopting FIN 45
until guarantees are issued or modified in future periods, at
which time their results will be initially reported in the
Companys consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of
Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, relating to
consolidation of certain entities. First, FIN 46 will
require identification of the Companys participation in
variable interests entities (VIE), which are
defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate
on a standalone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. Then, for
entities identified as VIEs, FIN 46 sets forth a
model to evaluate potential consolidation based on an assessment
of which party to the VIE, if any, bears a majority of the
exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN 46 also sets forth
certain disclosures regarding interests in VIE that are deemed
significant, even if consolidation is not required. The Company
is currently assessing the impact of FIN 46.

In March 2003, the Emerging Issues Task Force
(EITF) issued an abstract, Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables. This Issue
addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple
revenue-generating activities. Specifically, this Issue
addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting.
The Company believes its revenue recognition policies comply
with the provisions of EITF 00-21.

3.     Revenue
Recognition

The Company generates revenues primarily from the
sale of digital media services and media restoration services.



| |                       
| | ----------------------
| | Digital Media Services

Digital media services encompasses Webcasting
services, encoding services and the sale of music samples and
the licensing and selling of software through application
service provider arrangements.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company provides corporate Webcasting
services using licensed and proprietary streaming media
software, tools and processes to provide corporations with the
ability communicate to their large, online communities over the
Internet. Customers use these communication services to announce
financial, legal, product and training information in real-time
to investors, partners, employees and customers located all over
the world. The Company recognizes revenues as the Webcasting
services are rendered.

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 these contracts, 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.

Other revenues are generated from the sale of
music samples and, in 2000, from licensing and selling of
software and through application service provider arrangements.
The Company sold digital media applications in application
service provider arrangements. The Company was required to host
the applications and the customer did not have the ability to
have the application hosted by another entity without penalty to
the customer. Billings were made based upon minutes of content
streamed, and revenue was recognized as the services were
delivered. In 2000, we recognized applications and other
revenues in accordance with Statement of Financial
Position 97-2 (SOP 97-2), which requires revenues to
be recognized when persuasive evidence of an arrangement exists,
delivery has occurred, price is fixed or determinable, and
collectibility is probable.

While the Company does not currently have any
arrangements accounted for in accordance with SOP 97-2, it
uses these four principles as embodied within Staff Accounting
Bulletin No. 101, Revenue Recognition as its
primary revenue recognition policy.

In 2000, other revenues also included consulting
revenues; certain contractual revenues associated with forfeited
deposits; and the recognition of deferred revenue upon either
the completion of the earn-out period, the removal of our
continuing obligation under such agreements, maintenance
revenues related to our applications or the recognition of
contractually guaranteed minimum revenues. Contractual revenues
were recognized in 2000 when our further contractual obligations
and all uncertainties related to performance were resolved.
Consulting revenues were generally short-term contracts under
which revenue was recognized on a time and materials basis.



| |                           
| | --------------------------
| | Media Restoration Services

Media restoration services consist of services
provided by our VidiPax subsidiary to restore and upgrade old or
damaged archives of traditional media. 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.

4.     Special
Charges

Beginning in the fourth quarter of 2000 and
through the fourth quarter of 2002, the Company commenced a
series of operational restructurings and facilities
consolidations. In addition, the Company adopted FAS 142
and 144 effective January 1, 2002. As a result of these
activities, the Company has recorded special charges in the
years ended December 31, 2002, 2001 and 2000.

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

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 we consolidated our 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, 2001, and
2000, summarized as follows (in thousands):

|                                       |  |      |       |      |  |      |        |  |  |   |     | 
|-------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | --- | 
|                                       |  | 2002 |       | 2001 |  | 2000
|                                       |  |      |       |      |  |     
|Intangible and other asset impairments |  | $    | 1,437 |      |  | $    | 21,356 |  |  | $ |    | 
|Property and equipment write-downs     |  |      | 2,029 |      |  |      | 6,534  |  |  |   | 453 | 
|Facilities related charges and other   |  |      | 1,490 |      |  |      | 6,194  |  |  |   | 184 | 
|Employee severance                     |  |      | 1,890 |      |  |      | 3,177  |  |  |   | 310 | 
|                                       |  |      |       |      |  |      |        |  |  |   |     | 
|                                       |  | $    | 6,846 |      |  | $    | 37,261 |  |  | $ | 947 | 
|                                       |  |      |       |      |  |      |        |  |  |   |     | 

Intangible and other asset
impairments.The Company recorded
impairments of $1.4 and $21.4 million in 2002 and 2001,
respectively, related to intangibles and other long-term assets.
There were no such charges recorded in 2000. 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 were impaired and, as each of these assets had no
determinable cash flows associated with them, and no discernible
fair market value, 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 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 does 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 our 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 current economic situation and the
advertising market required the Company to perform an assessment
of these assets. The projected

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

undiscounted cash flows over the remaining
estimated life of two years did not fully support the valuation
these assets had on the balance sheet. Accordingly, we 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 current 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 current 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 current carrying value
and the estimated fair market value to special charges.

In the fourth quarter of 2002, in connection with
our 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 its intangible assets 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):

|                    |  |   |       | 
|------------------- |  | - | ----- | 
|Customer lists      |  | $ | 743   | 
|Acquired technology |  |   | 694   | 
|                    |  |   |       | 
|                    |  | $ | 1,437 | 
|                    |  |   |       | 

Property and
equipment.In December 2000 the board
of directors approved a cost-savings initiative that resulted in
the closing of our Santa Monica facility in the first quarter of
2001. This resulted in an impairment in 2000 of the video
encoding equipment at our Santa Monica facility totaling
approximately $453,000.

The Company recorded special charges of
$6.5 million related to property and equipment in 2001.
This 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 will 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.

As the Company had previously disclosed, its
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 until
such time as the assets 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, which were generated resulted in
charges of $5.1 million in 2001.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In the fourth quarter of 2002, as a result of
declining revenue and current 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 our digital media
services reporting unit (excluding those recently 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.

Facilities related charges and
other.The closing of our Santa Monica
facility described above resulted in the impairment in 2000 of
all tenant improvements at that facility totaling approximately
$184,000.

As a result of acquisition activity, the
de-emphasis of our video encoding operations and the reductions
in force that led to excess facilities, our board of directors
approved plans to consolidate facilities during the course of
2001. In addition to the closing of our Santa Monica facility,
these plans called for the closing of our 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 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 of December 31, 2002, the Company has
accrued a liability of $1.8 million in accrued special
charges related to estimated future rental payments. The Company
believes that the current reserve on all facilities is adequate
to cover rents for the period of time until they are sublet or
it negotiates effective terminations.

In March 2003, we reduced the space we occupy,
the term of our lease and the rental payments for our
headquarters facility in Seattle from 62,200 square feet at a
base rent of $1,292,140 per annum ($107,678/month) with a term
expiring on November 30, 2005 to approximately 17,010
square feet at a base rent of $350,000 per annum for the
remainder of the term, which has been shortened to June 30,
2003. We have the option of extending the term for two 3-month
periods at a base rent of $100,000 and pre-paid utility expenses
of $60,000 for each 3-month extension. As consideration for the
reduction of space and lease term, we have agreed to allow the
Landlord to retain our security deposit in the amount of
$218,500 and liquidate a letter of credit in the amount of
$19,623.

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

|               |  |      |       |      |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | - | ----- | 
|               |  | 2002 |       | 2001
|               |  |      |       |     
|First quarter  |  | $    | 748   |      |  | $ | 682   | 
|Second quarter |  |      | 1,142 |      |  |   | 1,537 | 
|Third quarter  |  |      |      |      |  |   | 104   | 
|Fourth quarter |  |      |      |      |  |   | 854   | 
|               |  |      |       |      |  |   |       | 
|Total          |  | $    | 1,890 |      |  | $ | 3,177 | 
|               |  |      |       |      |  |   |       | 

In March 2003, the Company announced that it
would terminate approximately 35% of its workforce in connection
with a strategic restructuring of its business to focus on its
core competencies in digital media services. This reduction in
force will affect primarily employees in all departments at the
Companys headquarters in Seattle, Washington. Estimated
costs associated with these terminations are approximately
$160,000 and will be accrued in the first quarter of 2003.

62



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accrued special
charges.The following table reflects
the activity in accrued special charges related to the events
described above. The Company believes that it will ultimately
pay all of these accrued charges, which primarily represent
future rent obligations, in cash.

|                           |  |                |        |      |  |      |        |   |  |   |     | 
|-------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | - |  | - | --- | 
|                           |  | 2002           |        | 2001 |  | 2000
|                           |  |                |        |      |  |     
|                           |  |               
|                           |  | (In thousands)
|Balance, beginning of year |  | $              | 2,939  |      |  | $    | 310    |   |  | $ |    | 
|Accruals                   |  |                | 2,668  |      |  |      | 3,790  |   |  |   | 310 | 
|Paid during year           |  |                | (2,704 | )    |  |      | (1,161 | ) |  |   |    | 
|                           |  |                |        |      |  |      |        |   |  |   |     | 
|Balance, end of year       |  | $              | 2,903  |      |  | $    | 2,939  |   |  | $ | 310 | 
|                           |  |                |        |      |  |      |        |   |  |   |     | 



|   |                   
|-- | ------------------
|5. | Net Loss Per Share

Basic earnings per share is computed by dividing
net loss by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings 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 of
common stock issuable upon the conversion of the convertible
preferred stock (using the if-converted method) and shares
issuable upon the exercise of stock options and warrants (using
the treasury stock method); common equivalent shares are
excluded from the 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:

|                     |  |      |           |      |  |      |           |  |  |  |           | 
|-------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                     |  | 2002 |           | 2001 |  | 2000
|                     |  |      |           |      |  |     
|Options outstanding  |  |      | 8,059,358 |      |  |      | 8,206,103 |  |  |  | 5,603,023 | 
|Warrants outstanding |  |      | 262,978   |      |  |      | 140,000   |  |  |  | 140,000   | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 
|Shares excluded      |  |      | 8,322,336 |      |  |      | 8,346,103 |  |  |  | 5,743,023 | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 

The Company had 1,207 and 87,291 stock options
outstanding that had been exercised but which were subject to
repurchase at December 31, 2002 and 2001, respectively. The
weighted average repurchase price of these options subject to
repurchase was $0.17 and $0.31, at December 31, 2002 and
2001, respectively. The impact of these unvested but exercised
options 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:

|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  
|---------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                                                                   |  | 2002 |            | 2001 |  | 2000
|                                                                                   |  |      |            |      |  |     
|Weighted average shares outstanding                                                |  |      | 41,416,228 |      |  |      | 41,606,726 |   |  |  | 31,143,841 |  
|Weighting of shares subject to repurchase                                          |  |      | (23,072    | )    |  |      | (177,622   | ) |  |  | (1,369,955 | )
|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  
|Weighted average shares used to calculate basic
    and diluted earnings per share |  |      | 41,393,156 |      |  |      | 41,429,104 |   |  |  | 29,773,886 |  
|                                                                                   |  |      |            |      |  |      |            |   |  |  |            |  

63



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                    
|-- | -------------------
|6. | 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 for the years ended
December 31, 2002, 2001 and 2000, respectively (in
thousands).

|                           |  |      |         |      |  |      |         |   |  |   |         |  
|-------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                           |  | 2002 |         | 2001 |  | 2000
|                           |  |      |         |      |  |     
|Revenues                   |  |      |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $    | 9,528   |      |  | $    | 7,713   |   |  | $ | 10,688  |  
|Media Restoration Services |  |      | 3,153   |      |  |      | 2,675   |   |  |   | 849     |  
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|                           |  | $    | 12,681  |      |  | $    | 10,388  |   |  | $ | 11,537  |  
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|Gross Margin               |  |      |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $    | (1,920  | )    |  | $    | (3,872  | ) |  | $ | (1,294  | )
|Media Restoration Services |  |      | 1,254   |      |  |      | 1,523   |   |  |   | 443     |  
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|                           |  | $    | (666    | )    |  | $    | (2,349  | ) |  | $ | (851    | )
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|Net Loss                   |  |      |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $    | (30,614 | )    |  | $    | (76,235 | ) |  | $ | (39,291 | )
|Media Restoration          |  |      | (548    | )    |  |      | (161    | ) |  |   | (233    | )
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|                           |  | $    | (31,162 | )    |  | $    | (76,396 | ) |  | $ | (39,524 | )
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|Assets                     |  |      |         |      |  |      |         |   |  |   |         |  
|Digital Media Services     |  | $    | 27,243  |      |  | $    | 78,781  |   |  |   |         |  
|Media Restoration Services |  |      | 2,286   |      |  |      | 2,102   |   |  |   |         |  
|                           |  |      |         |      |  |      |         |   |  |   |         |  
|                           |  | $    | 29,529  |      |  | $    | 80,883  |   |  |   |         |  
|                           |  |      |         |      |  |      |         |   |  |   |         |  

During the three years in the period ended
December 31, 2002, the company had sales to certain
significant customers, as a percentage of revenues, as follows:

|           |  |      |    |      |  |      |    |   |  |  |    |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | 2002 |    | 2001 |  | 2000
|           |  |      |    |      |  |     
|Customer A |  |      |   |      |  |      |   |   |  |  | 19 | %
|Customer B |  |      | 10 | %    |  |      |   |   |  |  | 10 | %
|Customer C |  |      | 13 | %    |  |      | 17 | % |  |  |   |  
|           |  |      |    |      |  |      |    |   |  |  |    |  
|           |  |      | 23 | %    |  |      | 17 | % |  |  | 29 | %
|           |  |      |    |      |  |      |    |   |  |  |    |  

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

64



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                
|-- | -------------------------------
|7. | Allowance for Doubtful Accounts

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

|                                             |  |      |      |  
|-------------------------------------------- |  | ---- | ---- | -
|                                             |  | 2002
|                                             |  |     
|Balance at beginning of year                 |  | $    | 492  |  
|Additions charged to expense                 |  |      | 139  |  
|Write-offs of receivables, net of recoveries |  |      | (341 | )
|                                             |  |      |      |  
|Balance at end of year                       |  | $    | 290  |  
|                                             |  |      |      |  



|   |                       
|-- | ----------------------
|8. | Property and Equipment

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

|                                          |  |      |        |      |  |   |        |  
|----------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                          |  | 2002 |        | 2001
|                                          |  |      |        |     
|Production and computer equipment         |  | $    | 7,229  |      |  | $ | 14,663 |  
|Furniture, fixtures and equipment         |  |      | 212    |      |  |   | 720    |  
|Leasehold improvements                    |  |      | 491    |      |  |   | 109    |  
|Software                                  |  |      | 443    |      |  |   | 1,792  |  
|Accumulated depreciation and amortization |  |      | (4,845 | )    |  |   | (9,978 | )
|                                          |  |      |        |      |  |   |        |  
|Property and equipment, net               |  | $    | 3,590  |      |  | $ | 7,306  |  
|                                          |  |      |        |      |  |   |        |  

Depreciation and amortization expense related to
property and equipment was $4.3 million, $7.2 million
and $4.6 million for the years ended December 31,
2002, 2001 and 2000, respectively.



|   |                                              
|-- | ---------------------------------------------
|9. | Prepaid Expenses and Other Current
    Assets

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

|                                                         |  |      |     | 
|-------------------------------------------------------- |  | ---- | --- | 
|                                                         |  | 2002
|                                                         |  |     
|Prepaid insurance                                        |  | $    | 243 | 
|Miscellaneous receivables                                |  |      | 225 | 
|Prepaid software licenses and maintenance
    agreements |  |      | 178 | 
|Other prepaid expenses                                   |  |      | 268 | 
|                                                         |  |      |     | 
|                                                         |  | $    | 914 | 
|                                                         |  |      |     | 



|    |             
|--- | ------------
|10. | 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 provides
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. At December 31,
2002, 7,559,306 shares had been issued and 340,859 shares are
being held in escrow until January 1, 2004, pursuant to the
terms of the Merger Agreement. The Notes bear interest at an
annual rate of 5% and mature on January 1, 2004. In
addition, the Notes contain an equity redemption option pursuant
to which the Company may, at its option, satisfy its obligation
under the Notes by issuing additional shares of common stock.

65



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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company accounted for the acquisition in
accordance with SFAS No. 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 that of the company.
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 provides
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 SFAS 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 has been 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 | 
|                       |  |   |     | 

67



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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

DiscoverMusicIn
March 2001, the Company purchased DiscoverMusic, a Seattle
company that is 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 released the remaining portion of the legal escrow fund
in March 2002. The total acquisition price, including costs of
the acquisition and liabilities assumed, of $16.3 million
was allocated as follows (in millions):

|                        |  |   |      | 
|----------------------- |  | - | ---- | 
|Current assets acquired |  | $ | 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 are 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 | 
|                     |  |                                 |       |  |  |   |       |  |  |   |       |  |  |   |       | 

VidiPaxIn June
2000, the Company purchased VidiPax, a New York company which
performs audio and video media restoration and migration
services. The Company paid $1.9 million in cash and issued
68,284 shares of common stock for initial consideration of
$3.1 million. Additionally, pursuant to the terms of the
agreement, the Company was required to make certain additional
payments to the selling shareholder based upon the resolution of
certain contingencies. In June 2001, those contingencies were
resolved, resulting in an additional 2,189,111 shares being
issued valued at approximately $3.2 million.

68



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The total acquisition price, including costs of
the acquisition, of $6.3 million was allocated as follows
(in thousands):

|                                  |  |   |       | 
|--------------------------------- |  | - | ----- | 
|Goodwill                          |  | $ | 3,657 | 
|Tradename                         |  |   | 685   | 
|Customer list                     |  |   | 1,524 | 
|Acquired technology and workforce |  |   | 457   | 
|                                  |  |   |       | 
|Total purchase price              |  | $ | 6,323 | 
|                                  |  |   |       | 

The following table presents the unaudited pro
forma results assuming that the Company had acquired Streampipe
and EncodeThis at the beginning of fiscal year 2001 (in
thousands):

|                                     |  |      |         |      |  |   |         |  
|------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                     |  | 2002 |         | 2001
|                                     |  |      |         |     
|Total revenues                       |  | $    | 16,013  |      |  | $ | 13,388  |  
|Net loss to common stockholders      |  |      | (32,912 | )    |  |   | (83,442 | )
|Basic and diluted net loss per share |  | $    | (0.80   | )    |  | $ | (2.01   | )

The following table presents the unaudited pro
forma results assuming that the Company had acquired Activate at
the beginning of fiscal year 1999 (in thousands):



|                                     |  |      |         |  
|------------------------------------ |  | ---- | ------- | -
|                                     |  | 2000
|                                     |  |     
|Total revenues                       |  | $    | 19,252  |  
|Net loss to common stockholders      |  |      | (86,731 | )
|Basic and diluted net loss per share |  | $    | (2.54   | )

11.     Intangible
Assets and Goodwill

The Companys intangible assets at
December 31, 2002 and 2001 were as follows (in thousands):

|                    |  |                |       |              |  |                |       |      |  |      |       |      |  |   |        |   |  |   |       |  |  |   |       | 
|------------------- |  | -------------- | ----- | ------------ |  | -------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- |  |  | - | ----- | 
|                    |  |                |       |              |  |                |       |     
|                    |  | Gross Carrying |       | Accumulated  |  |               
|                    |  | Amount         |       | Amortization |  | Net Book Value
|                    |  |                |       |              |  |               
|                    |  | 2002           |       | 2001         |  | 2002           |       | 2001 |  | 2002 |       | 2001
|                    |  |                |       |              |  |                |       |      |  |      |       |     
|Trade name          |  | $              | 685   |              |  | $              | 685   |      |  | $    | 580   |      |  | $ | (352   | ) |  | $ | 105   |  |  | $ | 333   | 
|Acquired work force |  |                |      |              |  |                | 305   |      |  |      | 0     |      |  |   | (157   | ) |  |   |      |  |  |   | 148   | 
|Customer list       |  |                | 2,219 |              |  |                | 3,653 |      |  |      | 1,339 |      |  |   | (783   | ) |  |   | 880   |  |  |   | 2,870 | 
|Acquired technology |  |                | 830   |              |  |                | 2,319 |      |  |      | 57    |      |  |   | (296   | ) |  |   | 773   |  |  |   | 2,023 | 
|                    |  |                |       |              |  |                |       |      |  |      |       |      |  |   |        |   |  |   |       |  |  |   |       | 
|                    |  | $              | 3,734 |              |  | $              | 6,962 |      |  | $    | 1,976 |      |  | $ | (1,588 | ) |  | $ | 1,758 |  |  | $ | 5,374 | 
|                    |  |                |       |              |  |                |       |      |  |      |       |      |  |   |        |   |  |   |       |  |  |   |       | 

As described in Note 4, the Company recorded
impairment charges related to certain intangible assets in 2002
and 2001. The customer list intangible asset is being amortized
on a straight-line basis over one year and the acquired
technology intangible asset is being amortized on a
straight-line basis over 5 years. Estimated amortization expense
for the next five years is as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 1,429 | 
|2004 |  |   | 148   | 
|2005 |  |   | 62    | 
|2006 |  |   | 62    | 
|2007 |  |   | 57    | 

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the provisions of FAS 142, certain
intangible assets are no longer reported separately, but are
recorded in goodwill. Accordingly, in the first quarter of 2002
approximately $222,000 of intangible assets were reclassified to
goodwill. The changes in the carrying amount of goodwill for the
year ended December 31, 2002 were as follows (in thousands):

|                                            |  |   |       | 
|------------------------------------------- |  | - | ----- | 
|Balance, January 1, 2002                    |  | $ | 1,310 | 
|Amounts reclassified from intangible assets |  |   | 222   | 
|Goodwill from Streampipe acquisition        |  |   | 3,775 | 
|                                            |  |   |       | 
|Balance, December 31, 2002                  |  | $ | 5,307 | 
|                                            |  |   |       | 

12.     Other
Long-Term Assets

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

|                                                                                 |  |              |     |      |  |   |     | 
|-------------------------------------------------------------------------------- |  | ------------ | --- | ---- |  | - | --- | 
|                                                                                 |  |             
|                                                                                 |  | December 31,
|                                                                                 |  |             
|                                                                                 |  | 2002         |     | 2001
|                                                                                 |  |              |     |     
|Long-term deposits                                                               |  | $            | 676 |      |  | $ | 428 | 
|Capitalized software costs (net of accumulated
    amortization of $147 and $49) |  |              | 146 |      |  |   | 244 | 
|Other                                                                            |  |              | 83  |      |  |   | 306 | 
|                                                                                 |  |              |     |      |  |   |     | 
|                                                                                 |  | $            | 905 |      |  | $ | 978 | 
|                                                                                 |  |              |     |      |  |   |     | 

At December 31, 2000, $1.3 million in
software development costs had been capitalized and included in
other long-term assets. The Company did not capitalize any
software development costs in 2002 or 2001. In 2001, the company
recorded impairment charges on capitalized software development
costs of approximately $820,000.

13.     Other Accrued
Expenses

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

|                          |  |              |       |      |  |   |       | 
|------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                          |  |             
|                          |  | December 31,
|                          |  |             
|                          |  | 2002         |       | 2001
|                          |  |              |       |     
|Accrued royalties         |  | $            | 490   |      |  | $ | 248   | 
|Accrued interest          |  |              |      |      |  |   | 340   | 
|Accrued legal fees        |  |              | 249   |      |  |   | 319   | 
|Other accrued liabilities |  |              | 682   |      |  |   | 962   | 
|                          |  |              |       |      |  |   |       | 
|                          |  | $            | 1,421 |      |  | $ | 1,859 | 
|                          |  |              |       |      |  |   |       | 

14.     Long-Term
Debt, Capital Leases, Commitments and Contingencies

On August 22, 2001, the Company entered into
a credit agreement (the Credit Agreement) with a
bank providing for a revolving credit facility and letters of
credit aggregating up to $15.0 million. On October 25,
2001, the Credit Agreement was amended to increase the principal
sum to $19.0 million. During the third quarter of 2002, the
Company paid the outstanding balance owed to the bank and the
Credit Agreement was terminated.

The Company also has a credit facility that
provided advances for the purchase of capital equipment.
Advances under the equipment loan are payable in 36 equal
monthly installments from inception date and are secured by
assets financed under the agreement. As of December 31,
2002, approximately $155,000 was

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding under this equipment facility, which
does not allow for prepayment without penalty. The notes payable
bear interest at rates ranging from 8.57% to 9.65%, with various
maturity dates through February 2003. A fee equal to 15% of the
principal balance is due with the final payment of each advance.
That additional fee is accrued on a monthly basis and is
included in other accrued expenses and interest expense over the
term of the loan.

In connection with the acquisition of Activate in
September 2001, the Company assumed the balance of a promissory
note between Activate and the landlord of the Companys
primary office facility. As of December 31, 2002,
approximately $215,000 was outstanding under the promissory
note. The promissory note bears interest at Prime rate (4.25% at
December 31, 2002), and is collateralized by a letter of
credit in the amount of $285,000. Principal and interest is
payable monthly and the remaining principal is due on
November 30, 2005. The note was paid in full in March 2003.

As of December 31, 2002, maturities of
long-term debt are as follows (in thousands):

|     |  |   |     | 
|---- |  | - | --- | 
|2003 |  | $ | 223 | 
|2004 |  |   | 73  | 
|2005 |  |   | 74  | 
|     |  |   |     | 
|     |  | $ | 370 | 
|     |  |   |     | 



| |                          
| | -------------------------
| | Capital Lease Obligations

In December 2001, the Company entered into a
master lease agreement for the lease of certain equipment and
costs associated with the relocation of our data centers into
one facility. The lease agreement is for a period of
24 months, bears interest at 7.25% and is collateralized by
a letter of credit in the amount of approximately $251,000. As
of December 31, 2002, approximately $240,000 was
outstanding under the lease.

During 2002, the Company entered into a master
lease agreement for the lease of certain networking and data
storage equipment used in providing services to its customers.
At December 31, 2002, outstanding balances on the two
leases under the master lease agreement were approximately
$249,000, expiring in December 2004, and $466,000, expiring in
December 2005, and bear interest at 2.26% and 6.90%,
respectively. The leases are collateralized by the underlying
equipment and letters of credit totaling approximately $305,000.

The Company also maintains other various capital
leases with outstanding balances totaling approximately $54,000
at December 31, 2002.

As of December 31, 2002, future minimum
payments under capital leases are as follows (in thousands):

|                             |  |   |       |  
|---------------------------- |  | - | ----- | -
|2003                         |  | $ | 562   |  
|2004                         |  |   | 320   |  
|2005                         |  |   | 169   |  
|                             |  |   |       |  
|                             |  |   | 1,051 |  
|Amount representing interest |  |   | (42   | )
|                             |  |   |       |  
|                             |  | $ | 1,009 |  
|                             |  |   |       |  



| |                 
| | ----------------
| | 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.

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum lease payments under operating
leases as of December 31, 2002 are as follows (in
thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 4,314  | 
|2004       |  |   | 4,175  | 
|2005       |  |   | 2,467  | 
|2006       |  |   | 456    | 
|Thereafter |  |   | 3,182  | 
|           |  |   |        | 
|           |  | $ | 14,594 | 
|           |  |   |        | 

Rent expense under operating leases totaled
approximately $2.0 million, $2.8 million and
$1.8 million during 2002, 2001 and 2000, 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.

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 paid 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 individual
defendants and the Company 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. We believe that we have
meritorious defenses to the claims made in the foregoing
complaint and we intend to defend the actions vigorously.
However, there can be no assurance that we will be successful on
our defenses or in our assertion of indemnification, and an
adverse resolution of the lawsuit could have a material adverse
affect on our financial position and results of operation in the
period in which the lawsuit is resolved.

On or about January 8, 2003 a company known
as 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 the Company merged with an entity known as
DiscoverMusic.com, Inc.) the Company failed to make certain
required payments to plaintiff. Plaintiff asserts causes of
action of breach of loan and security agreement, claim and
delivery, money lent, breach of master lease agreement and book
account. Plaintiff

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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

seeks relief in the form of money damages,
interest, attorneys fees and costs. The Company has filed
an answer to the complaint denying the material allegations. The
Company believes that it has meritorious defenses to the claims
made in the foregoing complaint and intends to defend the action
vigorously. However, there can be no assurance that the Company
will be successful on its defenses.

15.     Income
Taxes

At December 31, 2002, the Company had net
operating loss carryforwards of approximately
$172.0 million related to Federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to
certain limitations under Section 382 of the Internal
Revenue Code of 1986, as amended. These carryforwards will
expire in 2013 through 2022. The Company did not provide any
current or deferred Federal or state income tax provision 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 $29.1 million, $24.3 million
and $11.2 million in 2002, 2001 and 2000, respectively.
Deferred taxes consist primarily of net operating loss
carryforwards and timing 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,                 
|                     |                                        |                              
|                     |                                        | 2002                          |         | 2001  
|                     |                                        |                               |         |       
|Deferred tax assets: |                                        |                               |         |        |        |  |         |       
|                     | Net operating loss carryforwards       |                               | $       | 60,217 |        |  | $       | 34,731 |       
|                     | Basis difference in depreciable assets |                               |         | 6,676  |        |  |         | 2,821  |       
|                     | Accrued special charges                |                               |         | 1,016  |        |  |         | 1,029  |       
|                     | Other                                  |                               |         | 785    |        |  |         | 1,021  |       
|                     |                                        |                               |         |        |        |  |         |       
|                     |                                        | Total net deferred tax assets |         |        | 68,695 |  |         |        | 39,602 | 
|Valuation allowance  |                                        |                               | (68,695 | )      |        |  | (39,602 | )     
|                     |                                        |                               |         |        |        |  |         |       
|                     |                                        | Total                         |         | $      |       |  |         | $      |       | 
|                     |                                        |                               |         |        |        |  |         |       

16.     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.

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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. The Company has no present plans to issue any shares of
preferred stock.



| |                                        
| | ---------------------------------------
| | Shares Reserved for Future
    Issuance

The following shares of common stock have been
reserved for future issuance as of December 31, 2002:

|                                  |  |  |            | 
|--------------------------------- |  |  | ---------- | 
|Employee stock option plans       |  |  | 12,766,832 | 
|2000 Director stock option plan   |  |  | 250,000    | 
|2000 Employee stock purchase plan |  |  | 354,055    | 
|Common stock warrants             |  |  | 262,978    | 
|                                  |  |  |            | 
|                                  |  |  | 13,633,865 | 
|                                  |  |  |            | 

17.     Employee
Benefit Plans



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

The Company has a 401(k) plan covering our
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 20% up
to the statutorily prescribed annual limit ($11,000 in 2002) 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 to our 401(k) plan 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 2002 or 2000.



| |                                      
| | -------------------------------------
| | 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 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, 2002,
the total number of shares reserved for issuance was 775,175,
and a total of 421,120 shares have been issued under the Plan.



| |                       
| | ----------------------
| | 1998 Stock Option Plan

Under the Companys 1998 Stock Option Plan,
the board of directors and any of its committees may grant to
employees, consultants and directors options to purchase the
Companys common stock at terms and prices determined by
the board of directors. Incentive stock options may be granted
to employees at a price set by the plan administrator. Options
under this plan may generally be exercised after six months of
employment, and within 10 years of the date of grant,
whether or not fully vested, or within three months of
termination of employment, and typically vest over
4.5 years. Unvested shares issued are subject to repurchase
upon termination of service at the original exercise price. The
Plan provides for the issuance of options to purchase up to
4,660,000 shares of the Companys stock. The Company
accounts for the Plan under APB No. 25.

73



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                       
| | ----------------------
| | 2000 Stock Option Plan

In December 1999 the board of directors approved
the creation of the 2000 Stock Option Plan. This plan provides
for the grant of incentive stock options to employees, including
employee directors, and of nonstatutory stock options to
employees, directors and consultants. The 2000 plan provides for
the issuance of options to purchase up to 2,500,000 shares of
the Companys common stock, plus 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 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. At December 31, 2002, the plan provided for
options to purchase of to 6,558,259 shares of the Companys
stock. Options granted prior to the March 2000 initial public
offering may be exercised whether or not fully vested. Unvested
shares issued are subject to repurchase upon termination of
service at the original exercise price.



| |                                     
| | ------------------------------------
| | 2000 Directors Stock Option
    Plan

In December 1999 the board of directors approved
the creation of the 2000 Directors Stock Option Plan.
Under the plan 250,000 shares of common stock has been reserved
for issuance. This plan provides for the grant of nonstatutory
stock options to the Companys nonemployee directors.



| |                                    
| | -----------------------------------
| | 2000 Employee Stock Option
    Plan

In November 2000 the board of directors approved
the creation of the 2000 Employee Stock Option Plan. Under the
plan 800,000 shares of common stock were reserved for issuance.
This plan provides for the grant of nonstatutory stock options
to Company employees and consultants.

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, 2000   |                                |           | 4,223,209 |                      |   |                          |  |      |  |  | 0.97 |     
|                               | Granted equal to market value  |           |           | 4,127,847            |   |                          |  | 5.46 |  |  |      | 7.28 | 
|                               | Granted less than market value |           |           | 140,000              |   |                          |  | 6.60 |  |  |      | 7.03 | 
|                               | Exercised                      |           |           | (1,031,869           | ) |                          |  |      |  |  |      | 0.32 | 
|                               | Cancelled                      |           |           | (1,856,164           | ) |                          |  |      |  |  |      | 4.79 | 
|                               |                                |           |           |                      |   |                          |  |      |  |  |      |     
|Outstanding, December 31, 2000 |                                |           | 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                      |           |           | 68,933               |   |                          |  |      |  |  |      | 0.28 | 
|                               | Cancelled                      |           |           | (4,637,903           | ) |                          |  |      |  |  |      | 1.41 | 
|                               |                                |           |           |                      |   |                          |  |      |  |  |      |     
|Outstanding, December 31, 2002 |                                |           | 8,059,358 |                      |   |                          |  |      |  |  | 0.98 |     
|                               |                                |           |           |                      |   |                          |  |      |  |  |      |     

74



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following information is provided for options
outstanding and exercisable at December 31, 2002:

|                |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|--------------- |  | ----------- | --------- | ---------------- |  | ---------------- | ---- | --------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                |  |             |           |                 
|                |  | Outstanding |           | Exercisable     
|                |  |             |           |                 
|                |  |             |           | Weighted Average |  |                 
|                |  |             |           | Weighted Average |  | Remaining        |      |           |  | Weighted Average
|                |  | Number      |           | Exercise Price   |  | Contractual Life |      | Number    |  | Exercise Price  
|Range per Share |  | of Shares   |           | per Share        |  | (in years)       |      | of Shares |  | per Share       
|                |  |             |           |                  |  |                  |      |           |  |                 
|$0.25  $ 0.35  |  |             | 387,300   |                  |  | $                | 0.33 |           |  |                  | 9.46 |  |  |  | 45,000    |  |  | $ | 0.25 | 
|$0.36  $ 0.36  |  |             | 2,795,225 |                  |  |                  | 0.36 |           |  |                  | 9.84 |  |  |  |          |  |  |   |     | 
|$0.37  $ 0.69  |  |             | 1,717,556 |                  |  |                  | 0.52 |           |  |                  | 8.22 |  |  |  | 804,929   |  |  |   | 0.49 | 
|$0.75  $ 1.13  |  |             | 1,916,689 |                  |  |                  | 1.10 |           |  |                  | 8.27 |  |  |  | 876,872   |  |  |   | 1.10 | 
|$1.18  $19.75  |  |             | 1,242,588 |                  |  |                  | 3.03 |           |  |                  | 8.05 |  |  |  | 1,082,022 |  |  |   | 2.77 | 
|                |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 
|                |  |             | 8,059,358 |                  |  | $                | 0.98 |           |  |                  | 8.83 |  |  |  | 2,808,823 |  |  | $ | 1.56 | 
|                |  |             |           |                  |  |                  |      |           |  |                  |      |  |  |  |           |  |  |   |      | 

18.     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 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 is 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 will be
restricted from public market sale, without Loudeyes
consent, until the later of January 31, 2003, or the full
repayment of the credit facility. The credit line matures
June 30, 2003. As of December 31, 2001, the Company
had extended loans of $1.0 million under the credit line,
which is presented in intangibles and other long-term assets in
the accompanying balance sheets. The Company extended an
additional $350,000 under the credit facility in 2002. 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 terminates on the later of January 31, 2003 or the
repayment of the Loan. In addition, as part of the agreement,
Mr. Tobias resigned from the Companys Board of
Directors. The agreement also permits 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
equals or exceeds $1.25. The Company has also agreed to exercise
reasonable efforts to identify and to assist Mr. Tobias in
identifying a private buyer for some or all of
Mr. Tobiass shares, on terms acceptable to
Mr. Tobias.

In addition, if under the Rule 10b5-1
program described above, Mr. Tobias is 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 the Discounted Share Price (as
defined below) (the

75



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##### Table of Contents



LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Minimum Liquidity Commitment), then
Mr. Tobias may require the Company to purchase shares from
him at the Discounted Share Price so that his total proceeds for
the quarter equal the Minimum Liquidity Amount. The Discounted
Share Price is the lesser of (x) the average closing bid
price of the Companys common stock for the trailing 30
trading days or (y) 95% of the closing bid price of the
Companys common stock on the last trading day of the
quarter. This right expires on the earlier of (i) three
business days following June 30, 2003, (ii) repayment
in full of the Loan or (iii) such time as Mr. Tobias
ceases to be the beneficial or record owner of any shares of the
Companys common stock. During 2002, the Company purchased
a total of 1,812,170 shares from Mr. Tobias for
$0.8 million. In addition, on January 13, 2003 the
company purchased an additional 772,800 shares for
$0.2 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 is 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.

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 is 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.

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. The
monthly rental payments are approximately $25,000 per month,
with scheduled annual increases throughout the term of the
lease. Total payments during the years ended December 31,
2002, 2001, and 2000 were approximately $458,000, $362,000 and
$163,000, respectively. This vice president resigned in June
2001.

19.     Subsequent
Events

In January 2003, the Company engaged Regent
Pacific Management Corporation (Regent Pacific) to
provide certain management consulting and advisory services.
This agreement provided for the payment to Regent Pacific of two
hundred thousand dollars ($200,000) for a two (2) month
consulting engagement.

On February 3, 2003, the Companys
former Chairman and Chief Executive Officer, John T.
Baker IV, resigned from the Company. Simultaneous with
Mr. Bakers resignation, the Company entered into a
new agreement with Regent Pacific, expanding its role with the
Company. Pursuant to the new Regent Pacific agreement, the
Company agreed to pay Regent Pacific $60,000 per week, and four
weeks of payments in advance. This agreement provided for a
minimum term of six months, with a review and restructuring of
fees after three months. The agreement also provided for the
issuance to Regent Pacific of stock options to purchase four
million (4,000,000) shares of common stock, based upon length of
service, at an exercise price based upon the closing price per
share on February 3, 2003 ($0.39). The agreement was
terminable by either party under certain circumstances. In
connection with that agreement, the Company appointed a
principal of Regent Pacific, to serve as its President and Chief
Executive Officer and agreed to have selected Regent

76



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LOUDEYE CORP.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pacific principals serve as part of the Loudeye
executive management team. Additionally, the chairman and Chief
Executive Officer of Regent Pacific, was elected to the board of
directors of Loudeye.

On March 11, 2003, the engagement of Regent
Pacific, and the involvement of Regent Pacific principals as
part of the Companys executive management team concluded.
As a result, the Regent Pacific principal resigned as President
and Chief Executive Officer of the Company, and the Chief
Executive of Regent Pacific resigned from the seat on the
Companys board of directors. On March 11, 2003, the
Companys board of directors appointed the Senior Vice
President of Sales for the Company as the Companys
President and Chief Executive Officer, and elected him to the
Companys board of directors. The Companys board of
directors appointed a new chairman of the board, replacing the
Chairman who resigned. The Company entered into an Employment
Agreement dated as of April 1, 2003 with the new President.
The agreement provides for a base salary of $250,000 and the
granting of options to purchase 1,500,000 shares of common stock
of the Company. The agreement also provides for the opportunity
to receive bonuses based upon the achievement of certain
performance criteria by the Company and in the event of a sale
of all of the stock or all or substantially all of the assets of
the Company.

In March and April 2003, the Company restructured
its work force to focus on its core business and customers.
Approximately 45 employees in its Seattle, Washington location
and 10 employees in its Ardsley, New York location were
terminated. Severance and related costs associated with this
reduction in force are estimated to be approximately $175,000 in
the first quarter of 2003 and $20,000 in the second quarter of
2003.

20.     Quarterly
Financial Information (Unaudited)

The following table sets forth certain unaudited
quarterly statement of operations data for the eight quarters
ended December 31, 2002. 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-Month Periods Ended               
|                                       |                                              |                                         
|                                       |                                              | Dec. 31,                                 |         | Sep. 30, |  | June 30, |        | March 31, |  | Dec. 31, |        | Sep. 30, |  | June 30, |        | March 31,
|                                       |                                              | 2002                                     |         | 2002     |  | 2002     |        | 2002      |  | 2001     |        | 2001     |  | 2001     |        | 2001     
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |          
|                                       |                                              |                                         
|                                       |                                              | (In thousands, except per share amounts)
|REVENUES                               |                                              | $                                        | 2,578   |          |  | $        | 3,626  |           |  | $        | 3,217  |          |  | $        | 3,260  |           |   | $ | 3,285   |        |  | $ | 2,498   |       |  | $ | 2,676   |       |   | $ | 1,929   |       
|COST OF REVENUES                       |                                              |                                          | 2,957   |          |  |          | 3,513  |           |  |          | 3,632  |          |  |          | 3,245  |           |   |   | 4,189   |        |  |   | 2,738   |       |  |   | 2,539   |       |   |   | 3,271   |       
|OPERATING EXPENSES:                    |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       
|                                       | Research and development                     |                                          |         | 470      |  |          |        | 425       |  |          |        | 974      |  |          |        | 1,290     |   |   |         | 1,851  |  |   |         | 2,459 |  |   |         | 2,739 |   |   |         | 2,670  | 
|                                       | Sales and marketing                          |                                          |         | 1,836    |  |          |        | 1,370     |  |          |        | 2,245    |  |          |        | 2,216     |   |   |         | 2,068  |  |   |         | 2,001 |  |   |         | 2,728 |   |   |         | 2,612  | 
|                                       | General and administrative                   |                                          |         | 2,772    |  |          |        | 2,366     |  |          |        | 2,762    |  |          |        | 3,475     |   |   |         | 3,392  |  |   |         | 2,508 |  |   |         | 2,452 |   |   |         | 2,750  | 
|                                       | Amortization of intangibles and other assets |                                          |         | 824      |  |          |        | 810       |  |          |        | 713      |  |          |        | 696       |   |   |         | 2,232  |  |   |         | 2,131 |  |   |         | 1,582 |   |   |         | 2,228  | 
|                                       | Stock-based compensation                     |                                          |         | 46       |  |          |        | 91        |  |          |        | 102      |  |          |        | (656      | ) |   |         | 148    |  |   |         | 313   |  |   |         | (995  | ) |   |         | 893    | 
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       
|                                       |                                              |                                          | 5,948   |          |  |          | 5,062  |           |  |          | 6,796  |          |  |          | 7,021  |           |   |   | 9,691   |        |  |   | 9,412   |       |  |   | 8,506   |       |   |   | 11,153  |       
|                                       | Special Charges                              |                                          |         | 4,956    |  |          |        |          |  |          |        | 1,142    |  |          |        | 748       |   |   |         | 16,799 |  |   |         | 2,721 |  |   |         | 3,118 |   |   |         | 14,623 | 
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       
|OPERATING LOSS                         |                                              |                                          | (11,283 | )        |  |          | (4,949 | )         |  |          | (8,353 | )        |  |          | (7,754 | )         |   |   | (27,394 | )      |  |   | (12,373 | )     |  |   | (11,487 | )     |   |   | (27,118 | )     
|OTHER INCOME (EXPENSE)  NET           |                                              |                                          | 126     |          |  |          | 861    |           |  |          | 74     |          |  |          | 116    |           |   |   | 188     |        |  |   | 364     |       |  |   | 504     |       |   |   | 920     |       
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       
|NET LOSS                               |                                              | $                                        | (11,157 | )        |  | $        | (4,088 | )         |  | $        | (8,279 | )        |  | $        | (7,638 | )         |   | $ | (27,206 | )      |  | $ | (12,009 | )     |  | $ | (10,983 | )     |   | $ | (26,198 | )     
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       
|EARNINGS PER SHARE  BASIC AND DILUTED |                                              | $                                        | (0.25   | )        |  | $        | (0.10  | )         |  | $        | (0.21  | )        |  | $        | (0.19  | )         |   | $ | (0.65   | )      |  | $ | (0.27   | )     |  | $ | (0.26   | )     |   | $ | (0.68   | )     
|                                       |                                              |                                          |         |          |  |          |        |           |  |          |        |          |  |          |        |           |   |   |         |        |  |   |         |       |  |   |         |       |   |   |         |       



---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings 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.

77



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##### Table of Contents






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

See Form 8-K filed by the Company on
May 29, 2002.




PART III




Item
10Directors and Executive
Officers of the Registrant

Our Certificate of Incorporation requires that
the Board of Directors is divided into three classes, with
staggered three-year terms. The Class III directors, whose
terms expire at the 2003 Annual Meeting, are Jeffrey Cavins and
Thomas A. Heymann; the Class II director, whose term
expires at the Companys 2005 Annual Meeting of
Stockholders is Anthony J. Bay; and the Class I directors,
whose terms expire at the Companys 2004 Annual Meeting of
Stockholders are James Kuster and Johan C. Liedgren. Only one
class of directors is elected at each annual meeting. The other
class continues to serve for the remainder of its three-year
term.

Detailed information on the Class III
directors is provided below.

Jeffrey M. Cavinshas served as a director since March
2003. He joined us in November 2002 as senior vice president of
worldwide sales. Prior to that time, Mr. Cavins served as
senior vice president of North America for Exodus
Communications, a leading managed hosting and interactive web
services company, from 1999 to 2002. Prior to that,
Mr. Cavins served as president and CEO of CSI Digital.
Mr. Cavins is 41 years old.

Thomas A. Heymannhas served as a director since June
2002. Mr. Heymann is a managing director and co-founder of
Digital Coast Ventures Corp., an investment fund focused on
later-stage opportunities in broadband, wireless services,
digital media, enterprise software, and Web services. Prior to
Digital Coast, Mr. Heymann served as chairman and chief
executive officer at GT Interactive Software, a leading
global developer, publisher and distributor of interactive
entertainment. Mr. Heymann also spent eight years with Walt
Disney Company, the last five as president of The Disney Stores.
Mr. Heymann currently serves as a member of the board of
Infogrames Inc., Tickets.com and several private companies.
Mr. Heymann is 45 years old.



| |                                   
| | ----------------------------------
| | Class I and Class II
    Directors

Anthony J. Bayhas
served as one of our directors since April 2000 and has served
as Chairman of the Board since March 2003. Mr. Bay is a
private venture capital investor and advisor to technology
companies. From 1994 to 2000, Mr. Bay worked for Microsoft
Corporation, a software company, last serving as Vice President
and General Manager of Microsofts Digital Media Division
and a member of Microsofts executive staff. Mr. Bay
holds a B.A. from the University of California at Los Angeles
and a M.B.A. from San Jose State University. Mr. Bay is
47 years old.

Johan C. Liedgrenhas served as one of our directors
since April 1998. Since October 1997, Mr. Liedgren has
served as Chief Executive Officer of Honkworm, International, an
entertainment studio. From January 1994 to August 1997, he
worked for Microsoft Corporation in several positions, most
recently as Director of Channel Policy. Mr. Liedgren serves
as a Director of Netsolutions of Sweden, a provider of
Internet-based professional services. Mr. Liedgren attended
the University of Stockholm in Sweden. Mr. Liedgren is
37 years old.

James R. Kusterhas
served as one of our directors since November 2002.
Mr. Kuster is Managing Director of Crest Communications
Holdings, which he joined in 1999. Prior to joining Crest, he
served as Vice President for Corporate Development of
Reciprocal, Inc. Mr. Kuster worked in the Media and
Telecommunications group of Chase Securities from 1986 until
1999, most recently as Managing Director. He earned his MBA from
Duke University and his BA from Davidson College.
Mr. Kuster is 44 years old.

78



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##### Table of Contents





| |                                                  
| | -------------------------------------------------
| | Section 16(a) Beneficial Ownership
    Compliance

Our directors and executive officers, and persons
holding more than ten percent (10%) of our outstanding common
stock, are required to report their share ownership to the
Securities and Exchange Commission. In general, those parties
must report their share ownership (1) when they become
directors, executive officers or ten percent shareholders, and
(2) whenever they engage in share transactions involving
our common stock.

Based upon the written representations of our
directors and executive officers, and copies of the reports that
they have filed with the Securities and Exchange Commission, we
have determined that our directors and executive officers have
filed timely all of the reports that they were required to file
during 2002.




Item
11Executive
Compensation

All of our executive officers receive
compensation for their services. Compensation information
concerning the Chief Executive Officer and concerning the four
most highly compensated executive officers who received
aggregate cash compensation in excess of $100,000 during the
last fiscal year (Named Executives) is set forth in
this Item 11 in the following table. The table covers
compensation paid or accrued during the fiscal years ended
December 31, 2002, 2001, and 2000.

Summary Compensation Table

|                          |                                            |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 
|------------------------- | ------------------------------------------ | ------ | ---- | ---------- |  | --------- | ------- | ------------ |  | ----------- | - | ------------ |  | - | - | - |  |  | ------- | --------- |  | - | - | ------- | 
|                          |                                            |        |      |            |  |           |         | Other Annual |  | Securities  |   | All Other   
|                          |                                            | Fiscal |      | Salary ($) |  | Bonus ($) |         | Compensation |  | Underlying  |   | Compensation
|Name & Principal Position |                                            | Year   |      | (1)        |  | (2)       |         | ($)          |  | Options (#) |   | ($)         
|                          |                                            |        |      |            |  |           |         |              |  |             |   |             
|John T. Baker IV(3)       |                                            |        | 2002 |            |  | $         | 287,680 |              |  | $           |  |              |  | $ |  |   |  |  | 650,000 |           |  | $ |  |        
|                          | Chairman and Chief                         |        |      | 2001       |  |           |         | 247,884      |  |             |   | 75,000       |  |   |   |  |  |  |         | 1,200,000 |  |   |   | 121,438 | 
|                          | Executive Officer                          |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 
|                         
|Joel H. McConaughy(4)     |                                            |        | 2002 |            |  |           | 216,470 |              |  |             |  |              |  |   |  |   |  |  |        |           |  |   |  |        
|                          | Senior Vice President and                  |        |      | 2001       |  |           |         | 173,077      |  |             |   | 10,000       |  |   |   |  |  |  |         | 450,000   |  |   |   | 75,000  | 
|                          | Chief Technology Officer                   |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 
|                         
|Michael S. Dougherty(5)   |                                            |        | 2002 |            |  |           | 139,515 |              |  |             |  |              |  |   |  |   |  |  | 110,000 |           |  |   |  |        
|                          | Vice President of                          |        |      | 2001       |  |           |         | 127,083      |  |             |   |             |  |   |   |  |  |  |         | 115,000   |  |   |   |        | 
|                          | Corporate Development                      |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 
|                         
|Jerold J. Goade, Jr.(6)   |                                            |        | 2002 |            |  |           | 122,612 |              |  |             |  |              |  |   |  |   |  |  | 187,750 |           |  |   |  |        
|                          | Vice President and Chief Financial Officer |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 
|                         
|Gail H. Clarke(7)         |                                            |        | 2002 |            |  |           | 161,570 |              |  |             |  |              |  |   |  |   |  |  | 223,750 |           |  |   |  |        
|                          | General Manager, Vidipax,                  |        |      | 2001       |  |           |         | 120,704      |  |             |   | 73,193       |  |   |   |  |  |  |         | 61,625    |  |   |   |        | 
|                          | Inc. and Vice President, Loudeye Corp.     |        |      |            |  |           |         |              |  |             |   |              |  |   |   |   |  |  |         |           |  |   |   |         | 



---



|    |                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes amounts deferred under our 401(k) plan.                                                                                                                                                                                                                                  
|   
|(2) | Includes bonuses earned in the year indicated and
    paid in the subsequent year.                                                                                                                                                                                                
|   
|(3) | In lieu of a cash bonus, Mr. Baker was
    awarded 133, 929 shares of Loudeye common stock in 2001.
    Mr. Baker also received relocation assistance in 2001 in
    the amount of $121,438 that is included in All Other
    Compensation. Mr. Baker resigned in February, 2003. 
|   
|(4) | Mr. McConaughy received a $10,000 cash bonus
    related to the year ended December 31, 2001, and a lump-sum
    payment of $75,000 for his signing bonus and relocating
    assistance that is included in All Other Compensation.
    Mr. McConaughy resigned in February, 2003.
|   
|(5) | Mr. Dougherty became Vice President of
    Corporate Development in April 2001. He served previously as
    Vice President of Strategic Development and Finance.                                                                                                                  

79



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|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(6) | Mr. Goade became Chief Financial Officer,
    Vice President in November 2002. He served previously as Vice
    President of Finance and Controller.                                             
|   
|(7) | Ms. Clarke was appointed General Manager of
    Vidipax, Inc. and Vice President of Loudeye Corp. in August
    2001. She served previously as General Manager of Operations of
    Vidipax, Inc.



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

We entered into a letter agreement with
Mr. Baker that provides for 50% accelerated vesting of
Mr. Bakers remaining options if he is terminated
without cause and not related to a change in control and if
Mr. Baker is terminated for any reason other than for
cause, he is entitled to receive continuation of his base salary
and reimbursement for insurance benefits for twelve months.
Mr. Baker will receive full acceleration of the vesting of
his options in the event of a change in control. We entered into
a letter agreement with Mr. McConaughy pursuant to which
the vesting will accelerate with respect to 50% of his options
in the event of a change in control. Additionally, if Mr.
McConaughy is subsequently terminated without cause within
twelve months of a change in control, the vesting will
accelerate with respect to 100% of these options.

In addition, we have severance arrangements with
each of our officers which provides that if an officer is
terminated without cause, he or she will receive the
then-current base salary and benefits for six months in the case
of a vice president, for nine months in the case of a senior
vice president and twelve months in the case of our current
Chief Executive Officer, plus COBRA benefits. In addition, the
severance arrangements with our executive officers provide that
upon consummation of a change in control of the company, the
vesting of 25% of the total number of outstanding options held
by such officers will accelerate, and the vesting of 100% of the
total number of outstanding options held by such officer will
accelerate if the officer is terminated within twelve months of
the change of control. However, if the change in control occurs
within the first two years of the officers employment, the
percentage of the outstanding options that would be vested upon
consummation of the change in control will be at least 50%.

The Company entered into an Employment Agreement
dated as of April 1, 2003 with Jeffrey Cavins, the
President and Chief Executive Officer of the Company. The
agreement provides for a base salary of $250,000 and the
granting of options to purchase 1,500,000 shares of common
stock of the Company. The agreement provides for the opportunity
to receive bonuses based upon the achievement of certain
performance criteria by the Company and in the event of a sale
of all of the stock or all or substantially all of the assets of
the Company.

The Company entered into an Employment Agreement
dated as of April 1, 2003 with Jerold J. Goade, the Vice
President and Chief Financial Officer of the Company. The
agreement provides for a base salary of $160,000 and the
granting of options to purchase 300,000 shares of common
stock of the Company. The agreement also provides for the
opportunity to receive bonuses based upon the achievement of
certain performance criteria by the Company and in the event of
a sale of all of the stock or all or substantially all of the
assets of the Company.

The Company entered into a Consulting Agreement
dated as of April 1, 2003 with Anthony J. Bay, the
Chairman of the Company. The agreement provides for a base
compensation of $100,000 and the granting of options to purchase
500,000 shares of common stock of the Company. The
agreement provides for the opportunity to receive bonuses based
upon the achievement of certain performance criteria by the
Company and in the event of a sale of all of the stock or all or
substantially all of the assets of the Company.



| |                                      
| | -------------------------------------
| | Option Grants in Last Fiscal
    Year

Pursuant to our stock option plans, we have, from
time to time, granted options to acquire shares of our common
stock to some of the Named Executives. The following table
provides information with respect to stock options granted to
the Named Executives during the last fiscal year. As required by
SEC rules, the table also sets for the hypothetical gains that
would exist for the options based on the assumed rates of annual
compound stock price appreciation during the option term.

80



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OPTION GRANTS IN LAST FISCAL YEAR

|                      |  |                      |           |                      |  |          |      |                       |  |                        |      |         |  |  |           |  |  |   |        |  |  |   |         | 
|--------------------- |  | -------------------- | --------- | -------------------- |  | -------- | ---- | --------------------- |  | ---------------------- | ---- | ------- |  |  | --------- |  |  | - | ------ |  |  | - | ------- | 
|                      |  |                      |           |                      |  |         
|                      |  | Individual Grants(1) |           |                     
|                      |  |                      |           | Potential Realizable
|                      |  |                      |           | Percent of           |  |          |      | Value at assumed     
|                      |  | Number of            |           | Total Options        |  |          |      | Annual Rates of Stock
|                      |  | Securities           |           | Granted to           |  | Exercise |      |                       |  | Price Appreciation for
|                      |  | Underlying           |           | Employees in         |  | of Base  |      |                       |  | Option Term(2)        
|                      |  | Options              |           | Fiscal Year          |  | Price    |      | Expiration            |  |                       
|Name                  |  | Granted (#)          |           | (%)(3)               |  | ($/sh.)  |      | Date                  |  | 5% ($)                 |      | 10% ($)
|                      |  |                      |           |                      |  |          |      |                       |  |                        |      |        
|John T. Baker IV(4)   |  |                      | 250,000(4 | )                    |  |          | 5.65 | %                     |  | $                      | 0.58 |         |  |  | 4/16/2012 |  |  | $ | 91,205 |  |  | $ | 168,113 | 
|                      |  |                      | 400,000(5 | )                    |  |          | 9.05 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 90,576 |  |  |   | 66,954  | 
|Joel H. McConaughy(5) |  |                      | 50,000(6  | )                    |  |          | 1.13 | %                     |  |                        | 0.58 |         |  |  | 4/16/2012 |  |  |   | 18,241 |  |  |   | 33,623  | 
|                      |  |                      | 200,000(5 | )                    |  |          | 4.52 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 45,288 |  |  |   | 83,477  | 
|Michael S. Dougherty  |  |                      | 10,000(7  | )                    |  |          | 0.23 | %                     |  |                        | 0.58 |         |  |  | 4/16/2012 |  |  |   | 3,648  |  |  |   | 6,725   | 
|                      |  |                      | 100,000(5 | )                    |  |          | 2.26 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 22,644 |  |  |   | 41,738  | 
|Jerold J. Goade, Jr.  |  |                      | 10,000(7  | )                    |  |          | 0.23 | %                     |  |                        | 0.58 |         |  |  | 4/16/2012 |  |  |   | 3,648  |  |  |   | 6,725   | 
|                      |  |                      | 100,000(5 | )                    |  |          | 2.26 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 22,644 |  |  |   | 41,738  | 
|                      |  |                      | 77,750(8  | )                    |  |          | 1.76 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 17,606 |  |  |   | 32,452  | 
|Gail H. Clarke        |  |                      | 75,000(6  | )                    |  |          | 1.70 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 16,938 |  |  |   | 31,304  | 
|                      |  |                      | 134,880(8 | )                    |  |          | 3.05 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 30,542 |  |  |   | 56,297  | 
|                      |  |                      | 13,870(5  | )                    |  |          | 0.31 | %                     |  |                        | 0.36 |         |  |  | 11/1/2012 |  |  |   | 3,141  |  |  |   | 5,789   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | No stock appreciation rights (SARs) were granted
    to the Named Executives in the last fiscal year. The options
    have a 10-year term, but are subject to earlier termination in
    connection with termination of employment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | The potential realizable value illustrates value
    that might be realized upon exercise of the options immediately
    prior to the expiration of their terms, assuming the specified
    compounded rates of appreciation of the market price per share
    from the date of grant to the end of the option term. Actual
    gains, if any, on stock option exercise are dependent upon a
    number of factors, including the future performance of the
    Common Stock and the timing of option exercises, as well as the
    optionees continued employment throughout the vesting
    period. These are calculated based on the requirements
    promulgated by the SEC and do not reflect the Companys
    estimate of future stock price appreciation.
|   
|(3) | The Company granted stock options representing
    4,422,225 shares to employees in the last fiscal year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | Denotes stock option grants that vest at a 6.25%
    of the total number of options granted every quarter until fully
    vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) | Denotes stock option grants that vest at a rate
    of one third of the total number of options granted after twelve
    months and ratably thereafter at a rate of 8.33% every quarter
    until fully vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(6) | Denotes stock option grants that vest on
    January 1, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(7) | Denotes stock option grants that vested on
    January 2, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(8) | Denotes stock option grants that vest at a rate
    of 18.75% of the total number of options granted after nine
    months and ratably thereafter at a rate of 6.25% of the total
    number of options granted every quarter until fully vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| |                                          
| | -----------------------------------------
| | Options Exercised in Last Fiscal
    Year

The following table provides certain information
with respect to stock options exercised by the Named Executives
during the last fiscal year that ended December 31, 2002.
The table also provides the number of shares covered by stock
options as of the end of the fiscal year and the value of
in-the-money stock options, which represents the
positive difference between the exercise price of the stock
option and the market price of the shares subject to such option
at the end of the fiscal year.

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AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR

AND FISCAL YEAR-END OPTION VALUES


|                      |  |              |   |              |  |                        |   |                   |  |  |           |         |  |  |     | 
|--------------------- |  | ------------ | - | ------------ |  | ---------------------- | - | ----------------- |  |  | --------- | ------- |  |  | --- | 
|                      |  |              |   |              |  |                        |   | Value of         
|                      |  |              |   |              |  |                        |   | Unexercised      
|                      |  |              |   |              |  | Number of              |   | In-the-Money     
|                      |  |              |   |              |  | Unexercised Options at |   | Options at Fiscal
|                      |  |              |   |              |  | Fiscal Year End (#)    |   | Year End ($)     
|                      |  | Shares       |   |              |  |                        |   |                  
|                      |  | Acquired on  |   | Value        |  | Exercisable /          |   | Exercisable /    
|Name                  |  | Exercise (#) |   | Realized ($) |  | Unexercisable(1)       |   | Unexercisable(2) 
|                      |  |              |   |              |  |                        |   |                  
|John T. Baker IV(3)   |  |              |  |              |  |                        |  |                   |  |  | 587,500/0 |         |  |  | 0/0 | 
|Joel H. McConaughy(3) |  |              |  |              |  |                        |  |                   |  |  | 215,625/0 |         |  |  | 0/0 | 
|Michael S. Dougherty  |  |              |  |              |  |                        |  |                   |  |  | 142,500/  | 132,500 |  |  | 0/0 | 
|Jerold J. Goade, Jr.  |  |              |  |              |  |                        |  |                   |  |  | 95,000/   | 216,250 |  |  | 0/0 | 
|Gail H. Clarke        |  |              |  |              |  |                        |  |                   |  |  | 59,313/   | 240,687 |  |  | 0/0 | 



---



|    |                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | No stock appreciation rights (SARs) were
    outstanding during 2002.                                                                                                                                                                                                      
|   
|(2) | Based on the $0.30 closing price of our common
    stock as of December 31, 2002, there were no
    in-the-money options.                                                                                                                                                
|   
|(3) | Mr. Bakers and
    Mr. McConaughys employment with the Company ended in
    February and March, 2003, respectively. In connection with their
    departure, all of their unvested options were cancelled in
    accordance with the terms of the respective option plans.



| |                          
| | -------------------------
| | Long Term Incentive Plans

We did not grant any long-term incentive
compensation to any of our Named Executives during 2002.



| |                                       
| | --------------------------------------
| | Defined Benefit or Actuarial
    Plans

We do not have a defined benefit or actuarial
plan.



| |                          
| | -------------------------
| | Compensation of Directors

All non-employee directors participate in the
2000 Director Stock Option Plan. Under the Director Plan, when
each non-employee director first becomes a director, they
receive non-statutory options to purchase 20,000 shares. At
each annual meeting of the Companys stockholders, each
non-employee director who will continue serving on the Board
following the meeting and who has been a director for at least
six months prior to the meeting will receive options to purchase
an additional 7,500 shares. In each case, the size of the
option grants would be adjusted to reflect any stock splits,
stock dividends, combinations or similar transactions. These
options are for a ten-year term and become available for
purchase in installments of 25% on each anniversary of the date
of grant in the case of the initial grants and become fully
vested on the first anniversary of the grant date in the case of
subsequent grants. The exercise price of the options must be at
least 100% of the fair market value of the common stock on the
Nasdaq National Market on the date the option was granted. The
options may be exercised only (a) while the individual is
serving as a director on the Board, (b) within twelve
months after termination by death or disability, or
(c) within three months after the individuals term as
director ends.

Each of the non-employee directors who serve on
the Board will receive a grant of options to purchase
7,500 shares as of the date of the Annual Meeting, pursuant
to the 2000 Director Stock Option Plan. In addition, each
non-employee director currently receives an annual retainer in
connection with his service of $30,000, paid quarterly (but
contingent on his attending a specific number of Board
meetings). Messrs. Bay, Waite, and Liedgren each received
cash compensation of $30,000 in connection with their service
during fiscal year 2002. Mr. Heymann received cash
compensation of $7,500 in connection with his service during
fiscal year 2002.

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| |                                                                  
| | -----------------------------------------------------------------
| | Repricing, Replacement or Cancellation and
    Regrant of Options

We did not adjust or amend the exercise price of
stock options previously granted to any of our Named Executives
at any time during 2002.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION

The following is a report of the Compensation
Committee of the Board of Directors describing the compensation
policies applicable to the Companys executive officers
during the fiscal year that ended December 31, 2002. The
Compensation Committee is responsible for establishing and
monitoring our general compensation policies and compensation
plans, as well as the specific compensation levels for executive
officers. It also makes recommendations to the Board of
Directors concerning the granting of options under our 1998 and
2000 Stock Option Plan, 2000 Employee Stock Option Plan, 2000
Director Stock Option Plan and 2000 Employee Stock Purchase Plan
and oversees the Stock Option Committee. Executive officers who
are also directors have not participated in deliberations or
decisions involving their own compensation.



| |                            
| | ---------------------------
| | General Compensation Policy

Under the supervision of the Board of Directors,
our compensation policy is designed to attract and retain
qualified key executives critical to our growth and long-term
success. It is the objective of the Board of Directors to have a
portion of each executives compensation contingent upon
Company performance as well as upon the individuals
personal performance. Accordingly, each executive officers
compensation package is comprised of three elements:
(i) base salary which reflects individual performance and
expertise, (ii) variable bonus awards payable in cash, part
of which is tied to the achievement of certain performance goals
that the Board of Directors establishes from time to time for
the Company and the balance of which is tied to individual
performance and (iii) long-term stock-based incentive
awards which are designed to strengthen the mutuality of
interests between the executive officers and our stockholders.

The summary below describes in more detail the
factors which the Board of Directors considers in establishing
each of the three primary components of the compensation package
provided to the executive officers.



| |            
| | -----------
| | Base Salary

The level of base salary is established primarily
on the basis of the individuals qualifications and
relevant experience, the strategic goals for which he or she has
responsibility, the compensation levels at similar companies and
the incentives necessary to attract and retain qualified
management. Base salary is reviewed each year to take into
account the individuals performance and to maintain a
competitive salary structure. Company performance does not play
a significant role in the determination of base salary.



| |                                      
| | -------------------------------------
| | Cash-Based Incentive
    Compensation

Cash bonuses are awarded on a discretionary basis
to executive officers on the basis of their success in achieving
designated individual goals and our success in achieving
specific company-wide goals for revenue growth. Goals are
established at the beginning of each year. Annual bonus payments
under the incentive plan are generally computed as a percentage
of the executives base salary, with the actual percentages
being a function of the extent to which goals were achieved as
well as other significant accomplishments.



| |                                     
| | ------------------------------------
| | Long-Term Incentive
    Compensation

We have utilized our stock option plans to
provide executives and other key employees with incentives to
maximize long-term stockholder values. Awards under the plans by
the Board of Directors take the form of stock options designed
to give the recipient a significant equity stake and thereby
closely align his or her interests with those of our
stockholders. Factors considered in making such awards include
the individuals position, his or her performance and
responsibilities, competitive employment opportunities and
internal comparability considerations. Each option grant allows
the executive officer to acquire shares of common

83



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stock at a fixed price per share (typically the
fair market value on the date of grant) over a specified period
of time (up to 10 years). The options typically vest in periodic
installments over a four year, six month period, contingent upon
the executive officers continued employment with us. Since
fair market value stock options can only produce value to an
executive if the price of the Companys stock increases
above the exercise price, option grants provide a direct link
between executive compensation and the Companys stock
price performance. The Committee believes that stock options
directly motivate an executive to maximize long-term stockholder
value. The options also utilize vesting periods that encourage
key executives to continue in the employ of the Company.


Compensation
of the Chief Executive Officer

John T. Baker IV served as our Chief
Executive Officer from March 2001 to March 2003. His base salary
for fiscal 2002 was $287,680.

The factors discussed above in Base
Salaries, Cash-Based Incentive Compensation,
and Long-Term Incentive Compensation were also
applied in establishing the amount of Mr. Bakers
compensation. Significant factors in establishing Chief
Executive Officer compensation were compensation levels at
similarly situated companies and assigned responsibilities.

Deductibility
of Executive Compensation

The Compensation Committee has considered the
impact of Section 162(m) of the Internal Revenue Code
adopted under the Omnibus Budget Reconciliation Act of 1993,
which section disallows a deduction for any publicly held
corporation for individual compensation exceeding
$1 million in any taxable year for the CEO and four other
most highly compensated executive officers, respectively, unless
such compensation meets the requirements for the
performance-based exception to Section 162(m).
As the cash compensation paid by the Company to each of its
executive officers is expected to be below $1 million and
the committee believes that options granted to such officers
will meet the requirements for qualifying as performance-based,
the committee believes that Section 162(m) will not affect
the tax deductions available to the Company with respect to the
compensation of its executive officers. It is the compensation
committees policy to qualify, to the extent reasonable,
its executive officers compensation for deductibility
under applicable tax law. However, the Company may from time to
time pay compensation to its executive officers that may not be
deductible.



| |                        
| | -----------------------
| | Compensation Committee:
|
| | Anthony J. Bay         
| | Johan C. Liedgren      

Compensation
Committee Interlocks and Insider Participation

The Compensation Committee of the Board of
Directors currently consists of Anthony J. Bay and Johan C.
Liedgren. No member of the committee or executive officer of the
Company has a relationship that would constitute an interlocking
relationship with executive officers or directors of another
entity.

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Shareholder
Return Performance Graph

Set forth below is a graph comparing the
cumulative total return to shareholders on the Companys
Common Stock with the cumulative total return of the Nasdaq
Stock Market (U.S. companies) Index (the Nasdaq Market
Index) and an index that is comprised of other
publicly-traded digital media technology companies (the
Peer Group) for the period beginning on
March 15, 2000, the date of our initial public offering and
based upon the price to the public in our initial public
offering of $16.00 per share, and ending on December 31,
2002.

Comparison of Cumulative Total
Return

Among Loudeye Corp. Common Stock,


Nasdaq Stock Market (U.S.) Index and Our Peer
Group Index


(GRAPH)

|         |  |               |      |            |  |       |       |  |  |  |       | 
|-------- |  | ------------- | ---- | ---------- |  | ----- | ----- |  |  |  | ----- | 
|        
|        
|         |  | Nasdaq Marker |      | Peer Group
|Date     |  | Loudeye       |      | Index      |  | Index
|        
|        
|3/15/00  |  |               | 100  |            |  |       | 100   |  |  |  | 100   | 
|        
|12/31/00 |  |               | 7.42 |            |  |       | 52.49 |  |  |  | 5.84  | 
|        
|12/31/01 |  |               | 4.56 |            |  |       | 41.44 |  |  |  | 5.94  | 
|        
|12/31/02 |  |               | 1.94 |            |  |       | 28.38 |  |  |  | 12.37 | 
|        

Our Peer Group was initially comprised of five
publicly-traded digital media technology companies. As required,
the returns of each of the component companies in the Peer Group
return are calculated and weighted according to their respective
market capitalization as of March 15, 2000, prior to
trading on that date. The Peer Group was initially composed of:
Sonic Foundry, Inc. (Nasdaq: SOFO); Liquid Audio, Inc.
(Nasdaq: LQID); Preview Systems, Inc. (Nasdaq: PRVW);
InterTrust Technologies Corp. (Nasdaq: ITRU); and, MP3.com,
Inc. (Nasdaq: MPPP). In August 2001, Preview Systems, Inc.
subject to a previously announced plan of dissolution,
distributed substantially all of its assets through a $3.50 per
share cash dividend to common stockholders. Also in August 2001,
MP3.com, Inc. stockholders approved a merger with Vivendi
Universal based on a price of $5.00 per common share. Preview
Systems and MP3.com were removed from the Peer Group Index
effective August 28, 2001, and the related index
value attributed to those companies at that date was
reallocated to the remaining three members of the Peer Group
Index based upon their relative market capitalization on that
date. On November 13, 2002, InterTrust entered into a
definitive merger agreement pursuant to which affiliates of Sony
Corporation of America, Koninklijke Philips Electronics N.V.,
and certain other investors offered to purchase all outstanding
shares of common stock of InterTrust for $4.25 per share in
cash. On January 3, 2003 affiliates of Sony Corporation of
America, Koninklijke Philips Electronics N.V. and Stephens
Acquisition LLC announced the successful completion of

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their cash tender offer. InterTrust was included
in the Peer Group Index for the entire period and its price on
December 31, 2002 recorded at $4.25 per share, the price
per share of the tender offer.







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

The following table shows how much common stock
is owned by the directors, the Named Executive Officers
identified in Part III, Item 11, all executive
officers and directors as a group and owners of more than 5% of
our outstanding common stock, as of March 14, 2003. Except
as otherwise noted, the address of each person listed in the
table is c/o Loudeye Corp., 1130 Rainier Avenue South, Seattle,
WA 98144.

Beneficial ownership is determined in accordance
with SEC rules. In computing the number of shares beneficially
owned by a person, we have included shares for which the named
person has sole or shared power over voting or investment
decisions. The number of shares beneficially owned includes
common stock which the named person has the right to acquire,
through conversion, option or warrant exercise, or otherwise,
within 60 days after March 14, 2003. Percentage of
beneficial ownership is based on 46,384,768 shares outstanding
as of March 14, 2003, not including 7,486,527 treasury
shares. For each named person, the percentage ownership includes
stock which the person has the right to acquire within
60 days after March 14, 2003. However, such shares
shall not be deemed outstanding with respect to the calculation
of ownership percentage for any other person.

|                                                                                     |                           |                      |           |            |  |  |      |     |  
|------------------------------------------------------------------------------------ | ------------------------- | -------------------- | --------- | ---------- |  |  | ---- | --- | -
|                                                                                     |                           | Amount and           |           | Percent of
|                                                                                     |                           | Nature of            |           | Common    
|Name and Address                                                                     |                           | Beneficial Ownership |           | Stock     
|                                                                                     |                           |                      |           |           
|OVP Partners, L.P.(1)                                                                |                           |                      |           |            |  |  |      |    
|                                                                                     | 1010 Market Street        |                      |           |            |  |  |      |     |  
|                                                                                     | Kirkland, WA 98033        |                      |           | 4,388,259  |  |  |      | 9.5 | %
|Crest Communications Holding LLC(2)                                                  |                           |                      | 4,367,955 |            |  |  | 9.4  | %  
|Martin G. Tobias(3)                                                                  |                           |                      |           |            |  |  |      |    
|                                                                                     | 55 Bell Street, Suite 200 |                      |           |            |  |  |      |     |  
|                                                                                     | Seattle, WA 98121         |                      |           | 2,816,779  |  |  |      | 6.1 | %
|Anthony J. Bay(4)                                                                    |                           |                      | 86,250    |            |  |  | 0.2  | %  
|James R. Kuster(5)                                                                   |                           |                      | 4,367,955 |            |  |  | 9.4  | %  
|Thomas A. Heymann(6)                                                                 |                           |                      | 667,418   |            |  |  | 1.4  | %  
|Johan C. Liedgren(7)                                                                 |                           |                      | 86,250    |            |  |  | 0.2  | %  
|John T. Baker(8)                                                                     |                           |                      | 737,731   |            |  |  | 1.6  | %  
|Jeffrey Cavins                                                                       |                           |                      |          |            |  |  |     |    
|Jerold J. Goade, Jr.(9)                                                              |                           |                      | 92,667    |            |  |  | 0.2  | %  
|Michael S. Dougherty(10)                                                             |                           |                      | 164,479   |            |  |  | 0.4  | %  
|All directors and executive officers as a group
    as of March 14, 2003 (7 persons) |                           |                      | 5,226,854 |            |  |  | 13.5 | %  



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes 3,644,754 shares held by Olympic Venture
    Partners IV, L.P., 423,862 shares held by Olympic
    Venture Partners V, L.P., 272,547 shares held by Olympic
    Venture Partners IV Entrepreneurs Fund, L.P. and 47,096 shares
    held by Olympic Venture Partners V Entrepreneurs Fund, L.P.
    Beneficial ownership calculations for OVP Partners, L.P. are
    based solely on its publicly-filed Schedule 13G dated
    February 14, 2002, which 5% stockholders are required to
    file with the SEC, and which generally set forth ownership
    interests as of December 31, 2001.
|
| | (2) | Includes 4,179,502 shares held by Crest
    Communications Holdings LLC. Crest Communications Holdings
    LLCs shares are held in escrow subject to the terms of
    that certain Agreement and Plan of Reorganization among the
    Company, TT Holding Corp. and TenTV Acquisition Corp. dated as
    of November 19, 2002. Pursuant to the terms of such
    Agreement, Crest Communications Holdings LLC has the contingent
    right to receive 188,453 shares.                                                                                                                               

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Includes 2,002,033 shares held by Martin G.
    Tobias directly and through family trusts, and 41,696 shares
    held by Martin G. Tobias as custodian for Finn Tobias under the
    Washington Uniform Transfers to Minors Act.
    Mr. Tobias shares are subject to a voting proxy in
    favor of the Company that Mr. Tobias executed in connection
    with a certain loan that the Company made to Mr. Tobias.
    Under the proxy, Mr. Tobias granted the Board of Directors
    of the Company an irrevocable proxy, with full power of
    substitution, to vote any and all shares of Company common stock
    owned by Mr. Tobias, in its discretion, on all matters that
    may properly come before any meeting of the Companys
    stockholders. The proxy terminates on the later of
    January 31, 2003 or the repayment of all principal and
    accrued interest on the loan.
|
| | (4) | Consists of 11,950 shares held by Anthony J.
    Bay, 50 shares held by his son, and 86,250 shares
    issuable upon exercise of outstanding options within
    60 days of February 13, 2003. Mr. Bay disclaims
    beneficial ownership of all securities held by his son.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (5) | Consists of 4,179,502 shares held by Crest
    Communications Holdings LLC and 188,453 shares that Crest
    Communications Holdings LLC has the contingent right to receive.
    Mr. Kuster is one of our directors and a principal of Crest
    Communications Holdings LLC. Mr. Kuster disclaims
    beneficial ownership of shares held by Crest Communications
    Holdings LLC, except to the extent of his pecuniary interest in
    those shares.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (6) | Consists of 667,418 shares beneficially
    owned by Digital Coast Ventures. Mr. Heymann is one of our
    directors and a principal of Digital Coast Ventures.
    Mr. Heymann disclaims beneficial ownership of shares held
    by Digital Coast Ventures, except to the extent of his pecuniary
    interest in those shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (7) | Consists of 26,250 shares held by Johan C.
    Liedgren and 60,000 shares issuable upon exercise of
    outstanding options within 60 days of March 14, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (8) | Consists of 6,000 shares owned by
    Mr. Baker pursuant to the Companys Employee Stock
    Purchase Plan, 587,500 shares issuable upon exercise of
    outstanding options within 60 days of March 14, 2003,
    and 144,231 shares awarded to Mr. Baker effective
    April 30, 2002. Mr. Baker resigned as Chairman and
    Chief Executive Officer of the Company on February 3, 2003.
    See Recent Events. Upon the resolution of certain issues,
    Mr. Baker may be entitled to an additional
    631,250 shares issuable upon exercise of outstanding
    options within 60 days of March 14, 2003                                                                                                                                                                                                                                                                                     
|
| | (9) | Consists of 1,562 shares owned by
    Mr. Goade pursuant to the Companys Employee Stock
    Purchase Plan, and 91,105 shares issuable upon exercise of
    outstanding options within 60 days of March 14, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|     |                                                                                                                                                                                                                                                                
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Consists of 9,000 shares owned by
    Mr. Dougherty, 7,562 shares owned by Mr. Dougherty
    pursuant to the Companys Employee Stock Purchase Plan, and
    147,917 shares issuable upon exercise of outstanding
    options within 60 days of March 14, 2003.

The following table sets forth certain
information with respect to securities authorized for issuance
under our equity compensation plans.

|                                                               |  |                      |           |                    |  |                        |      |  |  |  |           | 
|-------------------------------------------------------------- |  | -------------------- | --------- | ------------------ |  | ---------------------- | ---- |  |  |  | --------- | 
|                                                               |  |                      |           |                    |  | Number of Securities  
|                                                               |  |                      |           |                    |  | Remaining Available   
|                                                               |  |                      |           |                    |  | for Future Issuance   
|                                                               |  | Number of Securities |           | Weighted Average   |  | Under Equity          
|                                                               |  | to be Issued upon    |           | Exercise Price of  |  | Compensation Plans    
|                                                               |  | Exercise of          |           | Outstanding        |  | (excluding outstanding
|                                                               |  | Outstanding Options, |           | Options, Warrants, |  | options, warrants     
|                                                               |  | Warrants and Rights  |           | and Rights         |  | and rights)           
|                                                               |  |                      |           |                    |  |                       
|Equity compensation plans approved by security
    holders     |  |                      | 8,059,358 |                    |  | $                      | 0.98 |  |  |  | 4,957,474 | 
|Equity compensation plans not approved by
    security holders |  |                      |          |                    |  |                        |     |  |  |  |          | 
|                                                               |  |                      |           |                    |  |                        |      |  |  |  |           | 
|Total                                                          |  |                      | 8,059,358 |                    |  | $                      | 0.98 |  |  |  | 4,957,474 | 
|                                                               |  |                      |           |                    |  |                        |      |  |  |  |           | 

87



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|        |                                                   
|------- | --------------------------------------------------
|Item 13 | Certain Relationships and Related
    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
secured 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 secured
$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 is 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 will be
restricted from public market sale, without Loudeyes
consent, until the later of January 31, 2003, or the full
repayment of the credit facility. The credit line matures
June 30, 2003. As of December 31, 2001, the Company
had extended loans of $1.0 million under the credit line,
which is presented in intangibles and other long-term assets in
the accompanying balance sheets. The Company extended an
additional $350,000 under the credit facility in 2002. 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 terminates on the later of January 31, 2003 or the
repayment of the Loan. In addition, as part of the agreement,
Mr. Tobias resigned from the Companys Board of
Directors. The agreement also permits 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
equals or exceeds $1.25 per share. The Company has also agreed
to exercise reasonable efforts to identify and to assist
Mr. Tobias in identifying a private buyer for some or all
of Mr. Tobiass shares, on terms acceptable to
Mr. Tobias. In addition, if under the Rule 10b5-1
program described above, Mr. Tobias is 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 the Discounted Share Price
(as defined below) (the Minimum Liquidity
Commitment), then Mr. Tobias may require the Company
to purchase shares from him at the Discounted Share Price so
that his total proceeds for the quarter equal the Minimum
Liquidity Amount. The Discounted Share Price is the lesser of
(x) the average closing bid price of the Companys
common stock for the trailing 30 trading days or (y) 95% of
the closing bid price of the Companys common stock on the
last trading day of the quarter. This right expires on the
earlier of (i) three business days following June 30,
2003, (ii) repayment in full of the Loan or (iii) such
time as Mr. Tobias ceases to be the beneficial or record
owner of any shares of the Companys common stock. During
2002, the Company purchased a total of 1,812,170 shares
from Mr. Tobias for $0.8 million. In addition, on
January 13, 2003 the company purchased an additional
772,800 shares for $0.2 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 is 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.

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 is 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

88



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##### Table of Contents



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, our
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.

In connection with the hiring of Mr. Baker
as our President and Chief Executive Officer in March 2001, we
entered into a letter agreement with Mr. Baker which is
described within this document in the section titled
Compensation of Executive Officers.

We have severance arrangements with each of our
officers which is described in the section titled
Employment Contracts, Termination of Employment and Change
in Control Arrangements.

Item 14     Controls
and Procedures

We maintain a set of disclosure controls and
procedures designed to ensure that information required to be
disclosed by us in the reports filed under the Securities
Exchange Act, is recorded, processed, summarized and reported
within the time periods specified by the SECs rules and
forms. Disclosure Controls are also designed with the objective
of ensuring that this information is accumulated and
communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

Within 90 days prior to the date of filing this
report, we carried out an evaluation of our disclosure controls
and procedures under the supervision and with the participation
of management including the Chief Executive Officer and Chief
Financial Officer. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely
alerting us to material information relating to the Company
required to be included in our periodic SEC filings.

Subsequent to the date of that evaluation, there
have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls,
nor were any corrective actions required with regard to
significant deficiencies and material weaknesses. However, we
were unable to file our Form 10-K for the fiscal year ended
December 31, 2002 within the prescribed timeframe due to
additional time required by us to close our annual accounting
records and adequately prepare our financial statements and
related disclosures, as we had recently made changes in
management and staffing, including the appointment of the
Companys third Chief Executive Officer since
December 31, 2002, a restructuring of the Company and a
reduction-in-force in March, 2003.




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 Accountants         
| | Consolidated Balance Sheets               
| | Consolidated Statements of Operations     

89



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| |                                                              
| | -------------------------------------------------------------
| | Consolidated Statements of Stockholders
    Equity (Deficit)
| | Consolidated Statements of Cash Flows                        
| | Notes to Consolidated Financial Statements                   

3.     Exhibits:

|         |        |                                                                                                                                                                                               |                                                                                                                                      
|-------- | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------
|         | 2.1(1) |                                                                                                                                                                                               | Agreement and Plan of Reorganization dated
    November 19, 1999 between Loudeye Corp. and Alive.com, Inc.                           
|         | 2.2(5) |                                                                                                                                                                                               | Agreement and Plan of Merger among Loudeye.Corp.,
    DiscoverMusic.com, Inc. and Santa Acquisition, Inc. dated
    January 30, 2001.
|         | 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(8) |                                                                                                                                                                                               | 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(1)  |        | Amended and Restated Investors Rights
    Agreement dated December 14, 1999 among Loudeye Corp. and
    certain holders of our preferred stock.                                             
|10.8(1)  |        | Lease Agreement dated August 10, 1999
    between Loudeye Corp. and Times Square Building L.L.C. for
    offices at Times Square Building, 414 Olive Way,
    Suite 300, Seattle, Washington.
|10.9(1)  |        | Lease Agreement dated September 1, 1998
    between Loudeye Corp. and Martin Tobias for offices at
    3406 E. Union Street, Seattle, Washington.                                            
|10.10(1) |        | Lease Agreement dated October 28, 1999
    between Loudeye Corp. and Westlake Park Associates for offices
    at Centennial Building, 1904 Fourth Avenue, Seattle,
    Washington.           
|10.11(1) |        | Lease Agreement dated November 9, 1999
    between Loudeye Corp. and Downtown Entertainment Associates, LP
    for offices at 1424 Second Street, Santa Monica, California.                  
|10.12(1) |        | Loan and Security Agreement with Dominion Venture
    Finance L.L.C. dated June 15, 1999 between Loudeye Corp.
    and Dominion Venture Finance L.L.C.                                       
|10.13(1) |        | Offer Letter to Douglas Schulze dated
    August 30, 1999.                                                                                                                                   
|10.14(1) |        | Offer Letter to James Van Kerkhove dated
    November 5, 1999.                                                                                                                               
|10.15(1) |        | Offer Letter to David Weld dated December 2,
    1999.                                                                                                                                       
|10.16(1) |        | Services Agreement between Loudeye Corp. and
    Akamai Technologies, Inc. dated as of February 15, 2000.                                                                                    
|10.17(2) |        | Amended and Restated Loan and Security Agreement
    between Imperial Bank and Loudeye Corp. dated May 17, 2000.                                                                             
|10.18(2) |        | Amended and Restated Services Agreement between
    Valley Media, Inc. and Loudeye Corp. dated April 2000.                                                                                   
|10.19(2) |        | Stock Purchase Agreement dated as of
    June 14, 2000 by and among Loudeye Corp., Vidipax, Inc. and
    James Lindner.                                                                      
|10.20(2) |        | First Amendment of Office Lease Agreement dated
    April 3, 2000 between Times Square Building L.L.C. and
    Loudeye Corp.                                                                 
|10.21(2) |        | Second Amendment of Office Lease Agreement dated
    May 1, 2000 between Times Square Building L.L.C. and
    Loudeye Corp.                                                                  
|10.22(2) |        | Lease Agreement dated June 14, 2000 between
    Brown Bear Realty Corporation and Loudeye Corp.                                                                                              

90



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|          |  |                                                                                                                                                                                                                                                
|--------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.23(3) |  | Volume Purchase Order dated July 19, 2000 by
    and between MusicBank and Loudeye Corp.                                                                                                                                                       
|10.24(6)  |  | Offer Letter to Todd Hinders dated
    December 15, 2000.                                                                                                                                                                                      
|10.25(4)  |  | Underlease Agreement and Agreement to Lease dated
    December 21, 2000 between WCRS Limited and Loudeye Corp.                                                                                                                                 
|10.26(4) |  | Encoding Services and Compact Disc Purchase
    Agreement between XM Satellite Radio, Inc., and Loudeye Corp.,
    dated August 25, 2000.                                                                                                      
|10.27(4) |  | First Addendum to Encoding Services and Compact
    Disc Purchase Agreement between XM Satellite Radio, Inc., and
    Loudeye Corp., dated October 10, 2000.                                                                                   
|10.28(6)  |  | 2000 Employee Stock Option Plan as amended
    March 5, 2001.                                                                                                                                                                                  
|10.29(6)  |  | Offer Letter to Joel McConaughy dated
    March 14, 2001.                                                                                                                                                                                      
|10.30(6)  |  | Offer Letter to John Shaw dated April 4,
    2001.                                                                                                                                                                                             
|10.31(6)  |  | Offer Letter to John Baker dated
    February 23, 2001.                                                                                                                                                                                        
|10.32(5)  |  | Registration Rights Agreement among Loudeye Corp.
    and the former stockholders of DiscoverMusic.                                                                                                                                            
|10.33(7)  |  | Credit Agreement between US Bank National
    Association and Loudeye Corp., dated as of August 22, 2001.                                                                                                                                      
|10.34(7)  |  | First Amendment to Credit Agreement between US
    Bank National Association and Loudeye Corp., dated as of
    October 25, 2001.                                                                                                              
|10.35(8)  |  | Martin Tobias Credit Arrangement.                                                                                                                                                                                                              
|10.36(9)  |  | Agreement and Plan of Reorganization with TT
    Holding Corp.                                                                                                                                                                                 
|10.37(10) |  | Retainer Agreement with Regent Pacific Management
    Corporation.                                                                                                                                                                             
|21.1      |  | Subsidiaries of Loudeye Corp. (filed herewith).                                                                                                                                                                                                
|23.1(8)   |  | 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).                                                                                                                                                                                  
|99.1      |  | Certification of Jeffrey 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                                  
|99.2      |  | Certification of Jerold J. Goade Jr., Chief
    Financial Officer, Vice President Finance and Controller of
    Loudeye Corp., Pursuant to 18 U.S.C. Section 1350, as
    Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002



---



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Confidential treatment has been requested as to
    certain portions of this Exhibit.



| |     |                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------
| | (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-Q, for the period ending June 30, 2000.          
|
| | (3) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q, for the period ending September 30, 2000.     
|
| | (4) | Incorporated by reference to Loudeye Corp.s
    Form 10-K, for the period ending December 31, 2000.      
|
| | (5) | Incorporated by reference to Loudeye Corp.s
    Report on Form 8-K dated March 13, 2001.                 
|
| | (6) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q, for the period ending March 31, 2001.         
|
| | (7) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q, for the period ending September 30, 2001.     
|
| | (8) | Incorporated by reference to Loudeye Corp.s
    Form 10-K for the period ended December 31, 2001.        
|
| | (9) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated November 19, 2002                         



|     |                                                                                 
|---- | --------------------------------------------------------------------------------
|(10) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated February 3, 2003

(b) Reports on Form 8-K

On December 4, 2002, we filed a Report on
Form 8-K that announced that on November 19, 2002, we
acquired TT Holding Corp. pursuant to an Agreement and Plan of
Reorganization dated November 19, 2002.

91



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##### Table of Contents



CERTIFICATIONS

I, Jeffrey M. Cavins, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Loudeye Corp.;                                                                                                                                                                                                                                                                           
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officer and I have disclosed,
    based on our most recent evaluation, to the registrants
    auditors and the audit committee of registrants board of
    directors (or persons performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officer and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ JEFFREY M. CAVINS                    
| |                                          
| | Jeffrey M. Cavins                        
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

Date: April 14, 2003

92



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##### Table of Contents



CERTIFICATIONS

I, Jerold J. Goade Jr., certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Loudeye Corp.;                                                                                                                                                                                                                                                                           
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report                        
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                             



| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officer and I have disclosed,
    based on our most recent evaluation, to the registrants
    auditors and the audit committee of registrants board of
    directors (or persons performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officer and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |                                                 
| | ------------------------------------------------
| | /s/ JEROLD J. GOADE JR.                         
| |                                                 
| | Jerold J. Goade Jr.                             
| | Vice President and Chief Financial
    Officer  
| | (Principal Financial and Accounting
    Officer)

Date: April 14, 2003

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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,
April 14, 2003



| |              
| | -------------
| | 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)   |  | April 14, 2003
|                                          
|/s/ JEROLD J. GOADE, JRJerold J. Goade, Jr |  | Chief Financial Officer
    (Principal Financial and
    Accounting Officer) |  | April 14, 2003
|                                          
|/s/ JOHAN C. LIEDGRENJohan C. Liedgren     |  | Director                                                                     |  | April 14, 2003
|                                          
|/s/ THOMAS A. HEYMANNThomas A. Heymann     |  | Director                                                                     |  | April 14, 2003
|                                          
|/s/ ANTHONY J. BAYAnthony J. Bay           |  | Director                                                                     |  | April 14, 2003
|                                          
|/s/ JAMES R. KUSTERJames R. Kuster         |  | Director                                                                     |  | April 14, 2003

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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


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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, 2000 |            |  | 187        |  |            |  | 662        |  |  |  | (140   | ) |  |  | 709   | 
|                                   | Year Ended December 31, 2001 |            |  | 709        |  |            |  |           |  |  |  | (217   | ) |  |  | 492   | 
|Accrued Special Charges(2)         |                              |            |  |            |  |            |  |            |  |  |  |        |   |  |  |      
|                                   | Year Ended December 31, 2000 |            |  |           |  |            |  | 310        |  |  |  |       |   |  |  | 310   | 
|                                   | 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.                      

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