##### Table of Contents









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,
2004


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, par value $0.001 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.     o

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$119.4 million as of June 30, 2004, based upon the
closing sale price of $1.579 per share on The Nasdaq
SmallCap 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 Stock |  | 112,062,955                    
|(Class)      |  | (Outstanding at March 29, 2005)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Loudeyes Proxy Statement
relating to Loudeyes 2005 Annual Meeting are incorporated
by reference into Part III of this Annual Report on
Form 10-K where indicated.



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LOUDEYE CORP.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2004


TABLE OF CONTENTS

|              |  |                                                                                                                      |     |        |     | 
|------------- |  | -------------------------------------------------------------------------------------------------------------------- | --- | ------ | --- | 
|              |  |                                                                                                                      |     | Page  
|              |  |                                                                                                                      |     | Number
|              |  |                                                                                                                      |     |       
|PART I       
|Item 1.       |  | Business                                                                                                             |     |        | 1   | 
|Item 2.       |  | Properties                                                                                                           |     |        | 33  | 
|Item 3.       |  | Legal Proceedings                                                                                                    |     |        | 33  | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                              |     |        | 35  | 
|             
|PART II      
|Item 5.       |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |     |        | 35  | 
|Item 6.       |  | Selected Financial Data                                                                                              |     |        | 39  | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |     |        | 41  | 
|Item 7A.      |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |     |        | 70  | 
|Item 8.       |  | Financial Statements                                                                                                 |     |        | 72  | 
|Item 9.       |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |     |        | 116 | 
|Item 9A.      |  | Controls and Procedures                                                                                              |     |        | 118 | 
|Item 9B.      |  | Other Information                                                                                                    |     |        | 128 | 
|             
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                               |     |        | 128 | 
|Item 11.      |  | Executive Compensation                                                                                               |     |        | 129 | 
|Item 12.      |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters               |     |        | 129 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                                   |     |        | 129 | 
|Item 14.      |  | Principal Accounting Fees
    and Services                                                                           |     |        | 129 | 
|             
|PART IV      
|Item 15.      |  | Exhibits and Financial
    Statement Schedules                                                                       |     |        | 129 | 
|Exhibit Index |  |                                                                                                                      | 130 |       
|Signatures    |  |                                                                                                                      | 135 |       
|EXHIBIT 2.2  
|EXHIBIT 4.1  
|EXHIBIT 10.3 
|EXHIBIT 10.14
|EXHIBIT 16.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



Market data and industry statistics used in
Item 1 Business of this annual report are based
on industry publications and other publicly available
information. We do not guarantee, and we have not independently
verified, this information.

Loudeye® and the stylized Loudeye logo are
registered trademarks of Loudeye Corp and Digital
MusicStoreTM and iRadio ServiceTM are also
our trademarks. All other brand names, trademarks or service
marks referred to in this report are the property of their
respective owners.

In this annual report on Form 10-K,
Loudeye, we, us, and
our refer to Loudeye Corp.



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PART I

DISCLOSURE REGARDING FORWARD-LOOKING
STATEMENTS

Statements in this annual report on
Form 10-K, including statements in Item 1
Business and Item 7 Managements
Discussion and Analysis of Financial Condition and Results of
Operations, constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. Any statements about our expectations,
beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking.
These statements are often, but not always, made through the use
of words or phrases like anticipate,
estimates, plans, projects,
continuing, ongoing,
expects, management believes,
Loudeye believes, Loudeye intends,
we believe, we intend and similar words
or phrases. Accordingly, these statements involve estimates,
assumptions and uncertainties which could cause actual results
to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by
reference to the factors discussed in this annual report,
including those factors discussed in Risk Factors
beginning on page 12 of this annual report.

Because the factors discussed in this annual
report could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statement
made by us or on behalf of us, you should not place undue
reliance on any such forward-looking statement. Further, any
forward-looking statement speaks only as of the date on which it
is made, and we undertake no obligation to update any
forward-looking statement to reflect events or circumstances
after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time
to time, and it is not possible for us to predict which will
arise. In addition, we cannot assess the impact of each factor
on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ
materially from those contained in any forward-looking
statements.

You should assume that the information appearing
in this annual report is accurate only as of the date of this
annual report. Our business, financial condition, results of
operations and prospects may have changed since that date.






|        |          
|------- | ---------
|Item 1. | Business.

Overview

We are a worldwide leader in business-to-business
digital media services that facilitate the distribution,
promotion and sale of digital media content for media and
entertainment, retail, wireless and enterprise customers. Our
services enable our customers to outsource the management and
distribution of audio and video digital media content over the
Internet and other electronic networks. Our proprietary
consumer-facing e-commerce services, combined with our technical
infrastructure and back-end solutions, comprise an end-to-end
service offering. This service offering ranges from core digital
media services, such as the hosting, storage, encoding,
management and protection of media assets for content owners, to
turn-key, fully-outsourced digital media distribution and
promotional services, such as private-labeled digital media
store services, wireless music services, and streaming Internet
radio and music sample services. Our outsourced solutions can
decrease time-to-market for our customers while reducing the
complexity and cost of digital asset management and distribution
compared with internally developed alternatives, and they enable
our customers to provide branded digital media service offerings
to their users while supporting a variety of digital media
technologies and consumer business models.

In June 2004, we acquired On Demand Distribution
Limited, or OD2, a leading digital music service provider in
Europe, creating what we believe is the worlds largest
business-to-business focused digital media services company. The
acquisition expands our customer base to include customers in
over 20 countries, including the U.S., major European
countries, Australia and South Africa. Some of our combined
customers include Amazon.com, Inc., America Online, Inc., Apple
Computer, Inc., Belgacom Group, Cingular Wireless (formerly
AT&T Wireless Services, Inc.), The Coca-Cola Company, EMI

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Recorded Music Holdings, France Telecom,
Microsoft Corporation and MSN, Nokia Corporation, Siebel
Systems, Inc., Sony BMG Music Entertainment Inc. and Sony
Connect, Tiscali S.p.A. and Yahoo! Inc.


The use of the Internet and wireless networks as
a medium for media distribution has continued to evolve and grow
in recent years. Traditional media and entertainment companies,
such as major recorded music companies, or music labels, have in
recent years faced significant challenges associated with the
digital distribution of music. These companies have now licensed
the rights to some of their digital music content for
distribution and sale online and on wireless networks on a
subscription or individual track or album basis. Additionally,
retailers and advertisers have expanded their use of digital
content in the marketing and selling of their products and
services. As such, traditional distribution channels for media
have expanded as content owners have begun to license and
distribute their content online and over wireless networks
through new and existing retail channels, and consumers have
begun to purchase and consume content using personal computers,
mobile devices and other digital devices. In addition,
traditional media formats have expanded to include a variety of
digital technologies, rich media formats and digital rights
management solutions.

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

The following is a description of our digital
media services segment and our media restoration services
segment.

Digital media services
segment.We currently have three
primary service offerings in our digital media services segment:
digital media store services, core services and content
protection services. Our business model provides for a blend of
higher margin revenue, generated by each of our service lines,
and lower margin, yet scalable, revenue generated by the digital
download and e-commerce services of our digital media store
services. A more detailed description of each of our major
service offerings follows.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media store
    services.Digital media store services
    include our end-to-end digital music store solution provided on
    a white-labeled basis to retailers and brands
    throughout the world. As a business-to-business provider, our
    services enable brands of varying types, including retailers and
    e-tailers, portals, ISPs, and mobile operators, to outsource all
    or part of their digital media retailing activities. By
    leveraging our proprietary technology and infrastructure, we
    provide our customers with a highly scalable consumer-facing
    digital media commerce and delivery solution. Our services
    include hosting, publishing and managing digital media content,
    and delivering such content to end consumers on behalf of our
    customers. Our services support private label user interfaces
    and customized templates, and can readily function across both
    internet and mobile delivery protocols. Our services are
    designed to have the look, feel and branding of the
    retailers existing commerce platform, and support
    integration to a customers website, wireless applications,
    inventory, account management, and commerce and billing systems.
    Additionally, our music store services provide digital rights
    management and licensing; usage reporting; digital content
    royalty settlement; customer support and publishing related
    services. Our services provide for the delivery of digital
    content in various forms, such as full-song download or
    streaming, and rich media ring tunes, for both internet and
    wireless based applications. We offer a variety of consumer
    usage and commerce alternatives for our customers. Our
    end-to-end solution provides fully-integrated payment
    functionality supporting multiple end consumer payment
    alternatives as well as support for multiple languages, offering
    multinational customers a worldwide solution. We expect to
    extend our store services offerings from our established base in
    music stores to other digital media, such as video, music video
    and games.

As part of our end-to-end music store solutions,
we have secured licenses and cultivated relationships with the
four major recorded music companies and hundreds of independent
record labels around the globe. Our rights portfolio currently
available for inclusion in our music store

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solution encompasses licenses in over
20 countries and more than 1.3 million individual
tracks available for sale by our customers to end consumers.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Core services.Core
    services include a suite of digital media services provided to
    both content owners and retailers. We generate the majority of
    our revenue in this area from fees for encoding and fulfillment
    services we perform for EMI Music and various independent label
    catalogs, and from our leading samples service. Within core
    services, we provide a variety of back-end services to most of
    the digital music services that have launched in the last few
    years. Examples of these services include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media supply chain services. Our
    proprietary systems and technology enable the scalable archiving
    and retrieval of large libraries of digital media assets, or
    digital content. Digitized masters of the media assets are
    stored on our high-capacity storage array systems and accessed
    via our proprietary, automated, web-based access tools to
    search, deliver and manage such content. Such storage and access
    capabilities enable digital content to be processed and
    converted into different digital formats pursuant to our
    customers specifications via our proprietary encoding and
    transcoding systems. To transmit digital content over the
    Internet or other advanced digital distribution networks, the
    uncompressed, digitized content must be converted into
    compressed, network-compatible digital formats. Our encoding
    services enable the conversion of such content into a particular
    form, along with the relevant metadata, such that the content
    can be readily and rapidly distributed over various distribution
    networks. Encoding large catalogs of content in an efficient
    manner is a complex process that requires highly scalable
    technology and supporting infrastructures. Digital encoding
    formats and technologies continue to evolve and often conflict
    with one another. As a result, content owners often convert
    their digital assets into multiple formats and codecs (which are
    algorithms that reduce the number of bytes consumed by large
    files and programs) to support their distribution strategies.
    Additionally, the encoding process for a particular item (or for
    an entire library) is often repeated as a result of the
    introduction of new formats or distribution platforms. Our
    innovative digital media supply chain services address these
    challenges by providing an outsourced solution for the
    archiving, management, processing and distribution of our
    customers digital assets. Our digital media supply chain
    services also provide watermarking, encryption, metadata and
    other digital rights management services to enable our customers
    to protect and manage their content digitally. We also provide
    project analysis, as well as consulting and other related
    services to support the digital fulfillment of encoded content
    libraries for content owners and retailers worldwide.
|
| |  | Digital media content services. We provide a
    hosted end-to-end streaming service that delivers high quality
    music samples to customers in the online and mobile
    entertainment sectors. Our music samples service consists of
    streaming digital content, or more specifically selections of
    such content, commonly referred to as samples, clips or
    previews. Digital media samples are used by customers for many
    purposes, including increasing online content sales, user
    traffic and customer retention. We also provide an interactive
    Radio service, or iRadioTM. The Loudeye
    iRadioTM service offers 100 channels
    of CD-quality streaming music delivered through a partners
    own privately branded player interface. It is capable of
    supporting delivery to a range of consumer music devices and
    appliances. The iRadio service can be deployed online for
    web-based retailers and portals, as well as offline for consumer
    electronic devices and appliances, digital home entertainment
    systems and other digital broadcasting outlets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Content protection services.Content protection services include
    our anti-piracy services provided to content owners to protect
    against the unauthorized distribution of content on peer-to-peer
    networks. Our content protection services provide a
    comprehensive solution to combat the proliferation of illegal
    content sharing and downloads typically found on peer-to-peer
    networks on a global basis. The services, which are available
    globally, include Titanium, a service featuring the
    industrys leading anti-piracy service level agreement
    (SLA) guaranteeing up to 99% effectiveness in preventing
    the illegal sharing of digital content over peer-to-peer
    networks. Our services also include providing content owners
    powerful data mining and analytical tools and comprehensive
    information

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | on digital media usage and sharing on
    peer-to-peer networks. We also offer the potential of targeted
    promotional services redirecting potential consumers to
    legitimate services as a means for companies to capitalize on
    previously untapped revenue streams across content sharing
    networks. We currently protect approximately 70,000 digital
    content titles and block hundreds of millions of download
    sessions each month, across all major peer-to-peer protocols.

Media restoration services
segment.In January 2004, we
transferred substantially all of the assets of our media
restoration services subsidiary, VidiPax, Inc., or VidiPax, to a
company controlled by VidiPaxs general manager. In May
2004, we completed the sale of this media restoration services
business. While we will have ongoing rights to co-market and
resell media restoration services for two years after the sale,
media restoration services did not represent a significant
portion of our revenue in 2004, and we anticipate media
restoration services will represent an insignificant portion of
our revenue in the future.

Industry Background

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

During 2004, digital media continued to grow as a
broad-based tool for communications, online media promotions and
the distribution of content, particularly in the media,
entertainment and corporate sectors. This growth has been driven
in large part by an increase in broadband adoption, growth in
the market for portable digital media devices 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 access to streaming content
without buffering. At the same time, content owners such as
major media companies, film studios and record labels are
providing more content in a digital format to capitalize on
these opportunities.

The digital media industry has undergone
significant changes since early 2003, and is rapidly adapting to
satisfy the growing consumer and business demand for digital
media services. Jupiter Research predicts that the market for
full-track downloads in the U.S. will increase to nearly
$1.8 billion in 2009. Key trends in the industry over the
past year have included:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wide proliferation of digital music
    technologies and devices.Digital
    media is no longer confined to personal computers. For example,
    since early 2003 there has been a significant and continuous
    increase in the number of portable digital music players, as
    well as an increase in the usage of digital music on other
    mobile devices. We expect that a large portion of this growth
    will come from multipurpose digital media players such as mobile
    phones, DVD players, gaming devices and digital video recorders,
    or DVRs. Yankee Group estimates that the worldwide ringtone
    market is approximately $3 billion, with the U.S.
    accounting for $159 million of this amount. New
    technologies also enable new ways to purchase and consume music.
    Music subscription services are expected to account for
    approximately $803 million, or 6%, of U.S. music sales
    by 2007, according to Forrester Research.
|
| |  | Major record labels began licensing
    content.Music companies have faced
    stagnation in growth of new CD sales over the past three years,
    which they blame in part on illegal file swapping and other
    illegitimate means of copying and transferring copyrighted
    music. To create a legal means to meet the strong consumer
    demand for digital music, and to compensate for lost revenue as
    a result of peer-to-peer file sharing, the music industry has
    generally supported the launch of new music stores and services
    by licensing their catalogs for digital distribution.                                                                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consumer migration from illegal file sharing
    to legitimate music downloads.There
    are indications that illegal file sharing is declining due to
    factors including:



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increased pressure from the Recording Industry
    Association of America (RIAA) in the U.S. and counterpart
    organizations abroad, such as the Music Industry Piracy
    Investigations (MIPI) in Australia, including litigation
    directed at individual file traders and providers of
    peer-to-peer software.
|
| |  | Corrupted files and other viruses embedded in
    files found on peer-to-peer networks.                                                                                                                                                                                                                                  
|
| |  | The introduction and proliferation of legitimate
    digital music stores. In 2004, consumers could choose from more
    than 230 different legal music Web sites to download music,
    which is up from only 50 in 2003, according to the International
    Federation of the Phonographic Industry, or IFPI.          

Due in large part to the above factors, illegal
music files on the Internet as a whole (including peer-to-peer
networks) declined by 30 million files over the course of
2004, from 900 million in January 2004 to 870 million
in January 2005, according to the IFPI.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increasing consumer broadband
    connectivity.The estimated number of
    U.S. consumers with a broadband Internet connection has
    reached approximately 51% of the American online population, or
    approximately 63 million users, according to Nielsen/ Net
    Ratings. Jupiter Research concludes that a larger Internet
    audience using broadband connections will combine to generate
    approximately $1.6 billion in annual digital music spending
    by 2008.

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

Challenges in Digital Media
Distribution

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



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

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

Metadata, which consists of textual information
in digital form, provides descriptive data to the consumer such
as, in the case of music, titles, artist information, track
level data, title name, and cover art. Metadata may also include
additional information that can be used to facilitate
transactions or establish marketing relationships, such as links
to online sale sites or opt-ins for email marketing campaigns.
In addition, metadata is important to facilitating the
administration of tracking and reporting required in many
licensing arrangements with copyright holders. In many
circumstances, content owners have not compiled all of the
metadata that distributors of digital media content need to
effectively track, sell and distribute the content, such as UPC
information, genre classifications, and label and sublabel
identifiers. Incomplete or inaccurate metadata can result in
delays in delivering content to the marketplace.

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

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


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



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

The Loudeye Solution

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

We believe we have been and remain a pioneer and
industry leader in the rapidly developing digital music market.
Through our turnkey services, such as the Digital
MusicStoreTM and iRadio ServiceTM, we have
expanded our signature services to enable our customers to
launch digital music storefronts under their own private brand
names. We also continue to expand our digital rights portfolio,
the size of which we believe is unparalleled in the industry,
which we make available to our customers via a variety of our
service offerings.

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



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

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

Loudeyes Content Catalog

Our digital music archive includes nearly
five million digital music files and associated metadata.
In 2004, we delivered approximately 14 million digital
music files to content owners and customers and served nearly
one billion song samples to consumers through major online
music retailers and websites, such as America Online,
Amazon.com, Barnesandnoble.com, CDNow, Yahoo!, House of Blues,
Windowsmedia.com and MSN.

Sales and Marketing

We sell our services through a combination of
direct and indirect sales, with all channels and regional
offices managed by two main sites, Seattle and London. Our
digital media services direct sales force markets our services
to customers in a diverse range of markets, such as media and
entertainment, on-line and physical retailers, computer software
and game developers. In the U.S., we currently have a sales
presence in Seattle, Los Angeles and New York. In Europe, we
have sales offices in London, Bristol, Paris, Cologne and Milan.
We also have one sales representative in Australia. Sales
employees are compensated with a salary and commission based
upon business with existing and new clients.

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

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

As of March 1, 2005, we had
34 full-time employees in our sales and marketing
organization worldwide.

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##### Table of Contents



Seasonality

Sales from our music store services are seasonal
in nature. For the year ended December 31, 2004, we derived
approximately 56% of our total annual revenues from our music
store services in the fourth quarter 2004 as compared to 37% in
third quarter 2004. In the recorded music business, purchases
are heavily weighted towards the last three months of the
calendar year. This sales seasonality affects our operating
results from quarter to quarter. Prior to our acquisition of OD2
in June 2004 and the expansion of our music store services, we
did not experience significant seasonality in our business. We
cannot assure you that our music store services sales will
continue at the level experienced in the fourth quarter 2004 or
that they will be higher than such sales for our other quarters.
Seasonality in our business makes it more difficult to prepare
period to period comparisons for our business.

Operations and Technology

We manage our digital media services including
encoding, content preparation, digital rights management,
license verification, reporting and royalty payments, hosting
and distribution to the Internet, and digital music licensing
from our U.S. headquarters in Seattle, Washington, and our
European headquarters in Bristol, United Kingdom. We manage our
Overpeer anti-piracy protection services from our offices in New
York.

Following is a summary of our primary operational
activities and the associated technology.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media storage and
    access.Our proprietary systems and
    technologies enable the scalable archiving, retrieval and
    processing of large catalogs of digital media. Digitized content
    is stored on our high capacity storage array systems and
    accessed through our proprietary, automated web-based access
    tools to search, provision and manage such content. Once
    captured and digitized in uncompressed format, content can be
    stored on our digital music archive system for later uses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Content processing
    services.We process content to
    customer specifications using our proprietary production
    systems. The production system is an automated, scalable
    combination of hardware and software consisting of advanced
    digital archive technology, proprietary file management systems,
    customized user interfaces and a highly distributed encoding
    system. Metadata is also used to track and report information
    required by many licensing arrangements with copyright holders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Encoding
    capabilities.We encode customer
    content in a parallel process and we have developed proprietary
    processes which allow us to encode audio and video content
    across several streaming media and download formats
    simultaneously. Our parallel process supports multiple
    compression and decompression algorithms, or codecs, and
    technologies from third party developers such as Microsoft
    Corporation, RealNetworks, Inc., Audible Magic Corporation and
    others. This format flexibility enables customers to support a
    variety of digital media strategies. Because these formats and
    platforms continue to evolve, we believe that the benefits of
    our multiple platform approach will remain applicable as new
    technologies emerge. Encoded content is reviewed for quality and
    then delivered to the customer as a collection of files or
    routed automatically to our hosting services for direct delivery
    as a hosted stream or available download, over the Internet and
    through Loudeyes Digital MusicStoreTM.
|
| |  | Digital media
    distribution.Digitally formatted
    content can be delivered to customers through a range of
    methods, from secured file delivery to a fully hosted streaming
    or download service published and streamed through our network
    infrastructure and Loudeyes Digital MusicStore.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Content protection
    services.Our content protection and
    distribution services provide an effective means of protecting
    and distributing authorized digital content on various
    peer-to-peer networks. In addition to offering service level
    guarantees for our anti-piracy measures, copyright holders can
    gain market intelligence on the unauthorized digital
    distribution of their content as well as promotional and
    distribution tools to capitalize on previously untapped revenue
    opportunities across distributed peer-to-peer networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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

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 systems engineering support. In addition, we have
a team that supports our network and hosting services. As of
March 1, 2005, we had 11 full-time employees in
engineering, network services and information technology support
and 120 full-time employees in our production and research
and development areas.

Foreign and Domestic Operations and Geographic
Data

Prior to 2004, all of our sales were derived from
selling activities conducted within the United States. In June
2004, we acquired OD2, one of the largest digital music service
providers in Europe. As a result of this acquisition,
approximately 67% of our revenue in 2004 came from customers in
the U.S., while non-U.S. customers, primarily in Europe,
accounted for 33% of our revenue in 2004. Information regarding
financial data by geographic segment is set forth in
Part II, Item 8 of this annual report in the Notes to
the Consolidated Financial Statements at Note 19,
Business Segment Information.

Customers

The target customers for our digital media
services include major consumer electronics companies,
traditional and Internet-based retailers, media and
entertainment companies, wireless carriers and branded consumer
products companies. In 2004, we served over 200 customers. Some
of our customers include Amazon.com, Inc., America Online, Inc.,
Apple Computer, Inc., Belgacom Group, Cingular Wireless
(formerly AT&T Wireless Services Inc.), The Coca-Cola
Company, EMI Recorded Music Holdings, France Telecom, Microsoft
Corporation and MSN, Nokia Corporation, Siebel Systems, Inc.,
Sony Music Entertainment Inc. and Sony Connect, Tiscali S.p.A.
and Yahoo! Inc. In 2004, no customer accounted for 10% or more
of our revenue. In 2003, The Coca-Cola Company accounted for 11%
of our revenue. In 2002, The Coca-Cola Company accounted for 13%
of our revenue and Microsoft Corporation accounted for 10% of
our revenue. A significant portion of our revenue from The
Coca-Cola Company related to media restoration services which we
ceased providing with our sale of that business in early 2004.

Competition

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

For our digital music solutions, we compete in
the U.S. and foreign markets with several companies providing
similar levels of outsourced digital music services including
Groove Mobile (formerly Chaoticom), Liquid Digital, Melodeo,
Inc., MusicNet, Inc., MusicNow LLC, MusiWave, MPO Group, Siemens
AG, Soundbuzz Pte Ltd and Digital World Services AG, as well as
in-house efforts by our potential customers. Our customers face
significant competition from free peer-to-peer
services, such as MetaMachine Inc.s eDonkey, Sharman
Network Inc.s KaZaA, StreamCast Networks, Inc.s
Morpheus, Grokster, Ltd. and a variety of other similar services
that allow computer users to connect with each other and to copy
many types of program files, including music and other media,
from one anothers hard drives,

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all without securing licenses from content
providers. For our music samples services, we compete with
companies including Muze Inc. and AEC One Stop Group,
Inc.s All Music Guide. Competitors for our content
protection services include Macrovision Corporation,
MediaDefender and Media Sentry, Inc. In addition,
well-capitalized, diversified digital media technology companies
such as Microsoft Corporation, Apple Computer Inc. and Real
Networks, Inc. compete with our customers and may compete with
us in the future with their own services. For certain services,
such as encoding and music distribution, the major record labels
have acquired or otherwise invested in digital music services
and technologies that could compete with our services.
Traditional and satellite radio broadcasters have developed
online music and radio services which also compete with our
solutions.


A significant source of competition includes our
potential customers who choose to independently invest in
systems and infrastructure to digitally manage, encode and/or
host and deliver their own media directly, thereby not requiring
a business-to-business provider for such services. In-house
services are 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.

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

|                                                  |  |                               
|------------------------------------------------- |  | ------------------------------
| Ability to offer a private branded
    solution |  |  Customer service and support
| Service functionality                           |  |  Scalability of services     
| Service quality                                 |  |  Security of services        
| Service performance                             |  |  Breadth of content available

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

For additional discussion of the risks associated
with competition in our industry, see  Risk
Factors  Competition may decrease our market share,
revenues and gross margins, and We face competition
from free peer-to-peer services such as eDonkey,
KaZaA and Morpheus, from emerging paid online music services
delivered electronically, and from traditional retail music
distributors.

Operational Segments

During 2004, we operated in two different
business segments: digital media services and media restoration
services. In 2004, we sold our media restoration services
business and we anticipate that media restoration services will
represent an insignificant portion of our revenues in the
future. As discussed above under
 Overview, and elsewhere in this annual
report, digital media services can be further sub-divided into
three categories of services: core services, content protection
services and digital music store services. Further information
regarding our operating segments may be found in Part II,
Item 8 of this annual report in the Notes to Consolidated
Financial Statements at Note 19, Business Segment
Information.

Research and Development

We believe that significant research and
development effort are essential for us to maintain our market
position, to continue to expand our digital media services, in
particular for our digital media store services, and to develop
additional service offerings. Accordingly, we anticipate that we
will continue to

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invest in research and development for the
foreseeable future, and we anticipate that research and
development costs as an absolute dollar amount will fluctuate,
depending primarily upon the level of future revenue, customer
needs, staffing levels, overhead costs and our assessment of
market demands. Our research and development expenditures
totaled approximately $4.0 million in 2004,
$1.7 million in 2003, and $3.2 million in 2002.


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 four issued patents in the U.S., and we have filed seven
U.S. patent applications and twelve international patent
applications that claim priority to six previously filed
provisional applications. Overpeer holds multiple patents in
Asia and Europe, and has four patents pending in the
U.S. for their proprietary technology, systems and
software. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our services and obtain
and use information that we regard as proprietary. In addition,
other parties may breach confidentiality agreements or other
protective contracts we have entered into and we may not be able
to enforce our rights in the event of these breaches.
Furthermore, we expect that we will increase our international
operations in the future and the laws of many foreign countries
do not protect our intellectual property rights to the same
extent as the laws of the United States.

The digital music industry is characterized by
the existence of a large number of patents, licenses and
frequent litigation based on allegations of patent infringement
and the violation of other intellectual property rights. As
discussed above, obtaining the requisite licenses can be
difficult, as separate licenses often must be obtained from a
variety of rights holders for distinct activities related to the
delivery of digital music, such as distribution and performance,
which requires separate licensing arrangements. In addition,
these copyrights may be held by different parties, such as
publishers, artists and record labels. The music industry in the
United States is generally regarded as highly litigious. As a
result, in the future we may be engaged in litigation with
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 development efforts,
we may be subject to legal proceedings and claims for alleged
infringement 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
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 services and competitors in
our industry grow and the scope of services 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 services. Few existing laws or
regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in
the United States and other countries with respect to the
Internet. These laws may relate to areas such as content issues
(such as obscenity, indecency and defamation), encryption
concerns, including export contents, copyright and other
intellectual property rights, caching of content by server
products, electronic authentication or digital
signatures, personal privacy, advertising, taxation,
electronic commerce liability, email, network and information
security and the convergence of traditional communication
services with Internet communications, including the future
availability of broadband transmission capability. Other
countries and political organizations may also impose
regulations, some of which may conflict with
U.S. regulations.

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

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



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | Limit the growth of the Internet;                                                                                    
|
| |  | Create uncertainty in the marketplace that could
    reduce demand for our services;                                 
|
| |  | Increase our cost of doing business;                                                                                 
|
| |  | Expose us to significant liabilities associated
    with content distributed or accessed through our
    services; or
|
| |  | Lead to increased service 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 have
engaged in proceedings before a tribunal of the United States
Copyright Office along with the RIAA 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 March 1, 2005, we had a total of
189 full-time employees, of which 68 were in operations,
52 were in research and development, 34 were in sales and
marketing, 11 were in engineering, network services and
information technology support, and 24 were in general and
administration. Of these, 89 employees were located in our
Seattle, Washington offices, 83 were located across our European
operations (of which 73 were located in Bristol, U.K.), one was
located in Sydney, Australia, one was located in
Los Angeles, California and 15 were located in New York,
New York. None of our employees are subject to a collective
bargaining agreement. We consider our relations with our
employees to be good.

Risk Factors

Loudeye operates in a dynamic and rapidly
changing industry that involves numerous risks and
uncertainties, both in the U.S. and abroad. The risks and
uncertainties described below are not the only risks and
uncertainties we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may
impair our business operations in the future. If any of the
following risks actually occur, our business, operating results
and financial position could be harmed.

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| |                              
| | -----------------------------
| | Risks Related to Our Business

We
have a history of losses on a quarterly and annual basis and we
may experience greater losses from operations than we currently
anticipate.

As of December 31, 2004, we had an
accumulated deficit of $209.3 million. We have incurred net
losses from inception, and we expect to continue to incur net
losses in future periods. To achieve future profitability, we
will need to generate additional revenue or reduce expenditures.
We can give no assurance that we will achieve sufficient revenue
or reduced expenditures to be profitable on either a quarterly
or annual basis in the future. Even if we ultimately do achieve
profitability, we may not be able to sustain or increase
profitability on either a quarterly or annual basis.

Our
quarterly and annual financial results will continue to
fluctuate making it difficult to forecast our operating
results.

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



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market acceptance of our services;                                                                                                                                                                                                     
|
| |  | Variability in demand for our digital media
    services;                                                                                                                                                                              
|
| |  | Competition from other companies entering our
    markets;                                                                                                                                                                             
|
| |  | Ability of our customers and ourselves to procure
    necessary intellectual property rights for digital media content;                                                                                                                
|
| |  | Willingness of our customers to enter into
    longer-term volume or recurring revenue digital media services
    agreements and purchase orders in light of the economic and
    legal uncertainties related to their business models;
|
| |  | Charges related to restructuring of our business,
    including personnel reductions and excess facilities; and                                                                                                                        
|
| |  | Governmental regulations affecting use of the
    Internet, including regulations concerning intellectual property
    rights and security measures.                                                                                   

Our limited operating history, unproven business
model and significant acquisitions and dispositions of
businesses (in particular our acquisition of OD2 in June 2004),
further contribute to the difficulty of making meaningful
quarterly comparisons and forecasts. Our current and future
levels of operating expenses and capital expenditures are based
largely on our growth plans and estimates of expected future
revenue. 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
revenue, and any significant shortfall in revenue relative to
planned expenditures could have an immediate adverse effect on
our business and results of operations. If our operating results
fall below the expectations of securities analysts and investors
in some future periods, our stock price could decline
significantly.

We
have not completed the integration of all our acquisitions, and
we may need to make additional future acquisitions to remain
competitive. The process of identifying, acquiring and
integrating these future acquisitions may have a material
adverse effect on our operating results.

We have completed a number of acquisitions during
the past three fiscal years, and we expect to continue to pursue
strategic acquisitions in the future. In March 2004, we
completed the acquisition of Overpeer and in June 2004 we
completed the acquisition of OD2. Integrating the Overpeer and
OD2 acquisitions and completing any potential future
acquisitions could cause significant diversions of management
time and company resources. In the past, we have divested
acquired assets, partially as a result of failure of an acquired
companys business to integrate fully with ours, as with
the media

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restoration business of our former Vidipax
subsidiary that we acquired in June 2000 and divested in early
2004. Our business, financial condition and results of
operations could be materially and adversely affected if we are
unable to integrate the operations of current or future acquired
companies or joint ventures.


Our ability to integrate operations of acquired
companies will depend, in part, on our ability to overcome or
address:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The difficulties of assimilating the operations
    and personnel of the acquired companies and realizing
    anticipated operational and cost efficiencies without disruption
    to the ongoing business;                  
|
| |  | Impairment of relationships with employees,
    affiliates, advertisers and content providers of our business
    and acquired businesses;                                                                                   
|
| |  | The loss of key management and the difficulties
    in retaining key management or employees of acquired companies;                                                                                                          
|
| |  | Operational difficulties, including the need to
    attract and retain qualified personnel and the need to attract
    customers and advertisers;                                                                            
|
| |  | The cost and challenges of integrating IT and
    financial systems;                                                                                                                                                         
|
| |  | Diversion of managements attention from
    other business concerns and the potential disruption of our
    ongoing business;                                                                                               
|
| |  | The need to incorporate successfully the acquired
    or shared technology or content and rights into our services,
    including maintaining customer satisfaction while migrating to a
    single development platform; and
|
| |  | The difficulties of maintaining uniform
    standards, systems, controls, procedures and policies.                                                                                                                           

In addition, completing acquisitions could
require use of a significant amount of our available cash.
Furthermore, financing for future acquisitions may not be
available on favorable terms, if at all. If we identify an
appropriate acquisition candidate for any of our businesses, we
may not be able to negotiate the terms of the acquisition
successfully, finance the acquisition or integrate the acquired
business, technologies or employees into our existing business
and operations. Future acquisitions may not be well-received by
the investment community, which may cause our stock price to
fall. We cannot ensure that we will be able to identify or
complete any acquisition in the future.

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

We
have restructured our business and if we are unsuccessful in
executing on our revised business strategy, our business,
results of operations and financial condition could be seriously
harmed.

We have shifted our business plan to offering
full-service business-to-business digital media solutions. You
should consider our prospects in executing on our revised
business strategy in light of the risk,

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expenses and difficulties we may encounter as an
early stage company in the new and rapidly evolving market
segments we serve. As a result of such risks, expenses and
difficulties, we may not be successful in:




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

We might not be successful in implementing our
business strategy in a cost-effective manner, if at all, and the
implementation may require significant additional expenditures
on our part. The capital requirements of our business strategy
combined with the expectation that we will incur net losses in
future periods could have a serious adverse impact on our
business, results of operations and financial position. Our
capital requirements may vary materially from those currently
planned if, for example, we incur unforeseen capital
expenditures, unforeseen operating expenses or make investments
to maintain our competitive position. If we lack necessary
capital, we may have to delay or abandon some or all of our
development plans or otherwise forego market opportunities. Our
inability to execute on our strategy could result in increased
expenses and decreased revenue, either or both of which could
seriously harm our business, results of operations and financial
condition.

Our
success is dependent on the performance and integration of our
new CEO and CFO/ COO and the cooperation, performance and
retention of our executive officers and key
employees.

Michael Brochu joined as our chief executive
officer on January 31, 2005. Ronald Stevens joined as our
chief financial officer and chief operating officer on
March 7, 2005. Our business and operations are
substantially dependent on the performance and integration of
our new CEO and COO/ CFO, as well as the performance of our
other executives. Our senior executives have worked together for
only a short period of time. We do not maintain key
person life insurance on any of our executive officers.
The loss of one or several key employees could seriously harm
our business. Any reorganization or reduction in the size of our
employee base could harm our ability to attract and retain other
valuable employees critical to the success of our business.

We
may need to raise additional capital in the future to execute on
our current business plan.

Our existing cash reserves may not be sufficient
to fund operating and other expenses under our current business
plan until projected profitability. As a result, to execute on
our current business plan, we may need to secure additional
financing. In the event additional financing is required, we may
not be able to obtain such financing on acceptable terms, or at
all. If adequate funds are not available or are not available on
acceptable terms, we may need to sell assets or reduce
expenditures, or both, and we may not be able to pursue our
business objectives. This inability could seriously harm our
business, results of operations and financial condition.

We
are subject to exchange rate risk in connection with
approximately £1.6 million (approximately
$3.0 million based on exchange rates as of March 1,
2005) that is payable in cash to former OD2 shareholders in
July 2005, and in connection with our international
operations.

We are obligated to pay approximately
£1.6 million (approximately $3.0 million based on
exchange rates as of March 1, 2005) in cash in July 2005 to
former OD2 shareholders. The payments are payable in

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British pounds, and accordingly, we are exposed
to risks with changes in the prevailing exchange rate. We may
hedge this risk. If we do not hedge against exchange rate risk,
any decrease in the value of the U.S. dollar against the
British pound will cause a proportional increase in the amount
of the future consideration we must pay to the former
OD2 shareholders.


In addition, the results of operations of OD2 are
exposed to foreign exchange rate fluctuations as the financial
results of this subsidiary are translated from the local
currency to U.S. dollars upon consolidation. Because of the
significance of the operations of OD2 to our consolidated
operations, as exchange rates vary, net sales and other
operating results, when translated, may differ materially from
our prior performance and our expectations. In addition, because
of the significance of our overseas operations, we could also be
significantly affected by weak economic conditions in foreign
markets that could reduce demand for our services and further
negatively impact results of operations in a material and
adverse manner. As a result of these market risks, the price of
our stock could decline significantly and rapidly.

We may in the future engage in hedging
activities. As foreign currency exchange rates vary, the
fluctuations in revenue and expenses may materially impact the
financial statements upon consolidation. A weaker
U.S. dollar would result in an increase to revenue and
expenses upon consolidation, and a stronger U.S. dollar
would result in a decrease to revenue and expenses upon
consolidation.

Our
music content licenses are generally for limited terms. If we
are unable to reach agreement with recorded music companies,
especially with the four major recorded music companies, to
renew existing licenses or to grant us expanded license rights,
portions of our services could be interrupted and our business
and results of operations could be harmed.

We have content license agreements with all four
major recorded music companies  EMI Music Marketing,
Sony BMG Music Entertainment, UMG Recordings, and Warner Music
Group  and numerous independent record labels, and in
each case our license grants are for finite terms and require
the consent of the label to renew. In addition, these content
licenses may be terminated by the recorded music companies at
any time upon a specified period of advance notice or under
circumstances such as our breach of these agreements. If we are
unsuccessful in securing renewals of these label license
agreements before expiration of existing agreements, our digital
media services with respect to any one or a number of the
labels content could be interrupted, and our business and
results of operations could be harmed. In addition, if we are
unsuccessful in obtaining additional license rights from the
content owners for emerging distribution methods, such as
subscription services, our business and results of operations
could be harmed.

Our
music content licenses generally require prior approval for us
to distribute content to our customers. If approval is delayed
or withheld, portions of our services could be interrupted and
our business and results of operations could be
harmed.

Our content license agreements from the major
recorded music companies generally require prior approval before
we can distribute content to our customers. If approval is
delayed or withheld, we may not be able to satisfy our
contractual obligations to our customers. As a result, our
reputation within the music industry could be harmed, our
services could be interrupted and our business and results of
operations could be harmed.

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 in the U.S. and in
the foreign markets in which we operate that we need to maintain
in order to operate our music-related services creates
operational difficulties in connection with tracking the rights
that we have acquired and the complex structures under which we
have royalty and reporting obligations. In addition, in some
circumstances, we are responsible for tracking and remitting
royalties to professional rights organizations, both in the U.S.
and abroad, such as The American Society of Composers, Authors
and Publishers, Inc. (ASCAP), Broadcast Music, Inc. (BMI),
SESAC, Inc. (SESAC) or The MCPS-PRS Alliance Limited in the
United Kingdom, which adds to the complexity of

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the royalty structure in which we operate. 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 royalties owed. If we are
unable to accurately track amounts that we must pay to the
numerous parties with whom we have licenses in connection with
each delivery of digital music services or if we do not deliver
the appropriate payment in a timely fashion, we may risk
financial penalties and/or termination of licenses.


We
rely on strategic relationships to promote our services and for
access to licensed technology; if we fail to maintain or enhance
existing relationships or obtain new relationships, our ability
to serve our customers and develop new services 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. Obtaining comprehensive music content licenses is
challenging, as doing so may require us to obtain copyright
licenses with various third parties in the fragmented recorded
music 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.

Competition
may decrease our market share, revenue, and gross
margins.

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



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

Competition in our core business-to-business
digital media services comes from in-house efforts by our
potential customers, and from companies such as Groove Mobile
(formerly Chaoticom), Liquid Digital, Melodeo, MusicNet, Inc.,
MusicNow LLC, MusiWave, MPO Group, Siemens AG, Soundbuzz

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and Digital World Services AG. Competitors for
our anti-piracy services business include Macrovision,
MediaDefender and Media Sentry. In addition, our customers for
digital media distribution services face competition from other
providers of digital distribution services to customers
including Apple Computer Inc.s iTunes, Napster,
RealNetworks Inc.s Rhapsody, MusicNet, Inc. and Sony
Connect Inc. 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 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 services may achieve greater acceptance in the
marketplace than our own, limiting our ability to gain or
maintain market share and customer loyalty and to generate
sufficient revenue to achieve a profitable level of operations.
Our failure to adequately address any of the above factors could
harm our business and results of operations.


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

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

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

We
depend on a limited number of customers for a significant
percentage of our revenue. Accordingly, the loss of, or delay in
payment from, one or a small number of customers could have a
significant impact on our revenue, operating results and cash
flows.

A limited number of customers have accounted for
a significant percentage of our revenue and may continue to do
so for the foreseeable future. During the year ended
December 31, 2004, no customers accounted for 10% or more
of our revenue. During 2003 and 2002, The Coca-Cola Company
accounted for approximately 11% and 13% of our revenue. A
significant portion of our revenue from The Coca-Cola Company
related to media restoration services which we ceased providing
with our sale of that business in early 2004. We believe that a
small number of customers may continue to account for a
significant percentage of our revenue 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 complete or deliver a project
on a timely basis during a given quarter is likely to
significantly reduce revenue. In addition, if any significant
customer fails to pay amounts it owes us, or does not pay those
amounts on time, our financial condition, revenue and operating
results could suffer. If we are unsuccessful in increasing and
broadening our customer base, our business could be harmed.

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

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

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

The market for digital media services is
characterized by rapid technological change, frequent new
service offerings, new device introductions and changes in
customer requirements, some of which are unique or on a customer
by customer basis. We may be unable to respond quickly or
effectively to these developments or requirements. Our future
success will depend to a substantial degree on our ability to
offer services that incorporate leading technology, address the
increasingly sophisticated, varied or individual needs of our
current and prospective customers and respond to technological
advances and emerging industry standards and practices on a
timely and cost-effective basis. You should be aware that:



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

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

Average
selling prices of our services may decrease, which may harm our
gross margins.

The average selling prices of our 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, 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 services will
decrease. We may not be successful in developing and introducing
on a timely basis new services with enhanced features or
improved versions of our existing services that can be sold at
higher gross margins.

Our
music store business has lower gross margins than other lines of
our business.

In June 2004, we acquired OD2 and subsequently
have placed greater focus on growing our music store services.
On a blended basis, costs of our music store services as a
percentage of the revenue generated by those services are higher
than those of our core services and content protection services.
The cost of third party music content, in particular, is a
substantial percentage of revenue we receive from our music
store customers and is unlikely to decrease significantly over
time as a percentage of revenue. A trend towards more music
store services as a percentage of our total revenue will reduce
our overall gross margins.

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Our
music store services operating results fluctuate on a seasonal
and quarterly basis.

Sales of recorded music tend to be seasonal in
nature, with a disproportionate percentage of annual music
purchases occurring in the fourth quarter. We expect
transactional related revenues from our digital media stores
services to be impacted by such seasonality long-term; however,
increasing consumer adoption of digital media services should
largely mitigate the impact of such seasonality in the near
term. This sales seasonality may affect our operating results
from quarter to quarter. Prior to our acquisition of OD2 in June
2004 and the expansion of our music store services, we did not
experience significant seasonality in our business. We cannot
assure you that revenue from our music store services will
continue at the level experienced in the fourth quarter 2004 or
that they will be higher than such revenue for our other
quarters. Seasonality in our business makes it more difficult to
prepare period to period comparisons for our business.

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

We may be liable or alleged to be liable to third
parties, such as the recorded music companies and professional
rights organizations, for the content that we encode,
distribute, archive or make available to our customers:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | If the performance of our services is not
    properly licensed by the content owners or their representatives
    such as the recorded music companies and professional rights
    organizations;
|
| |  | 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;                                            
|
| |  | If the manner of delivery of content is alleged
    to violate terms of use of third party delivery systems, such as
    peer-to-peer networks; 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 indemnify and 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 or no insurance coverage for
claims of this nature.

Because we host, stream and webcast audio and
video content on or from our website and on other websites for
customers and provide services related to digital media content,
we face potential liability or alleged liability for negligence,
infringement of copyright, patent, or trademark rights,
defamation, indecency and other claims based on the nature and
content of the materials we host. Claims of this nature have
been brought, and sometimes successfully prosecuted, against
content distributors. In addition, we could be exposed to
liability with respect to the unauthorized encoding of content
or unauthorized use of other parties proprietary
technology, including third party delivery systems such as
peer-to-peer networks. 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 provide assurance 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

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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.

We could be subject to intellectual property
infringement claims by others. For example, on
September 10, 2004, we were served in a patent infringement
lawsuit brought by Altnet, Inc., and others against Loudeye, our
Overpeer subsidiary, Marc Morgenstern, one of our executive
officers, the Recording Industry Association of America and
others. The complaint, filed in federal district court in Los
Angeles, California, involves two patents that appear to cover
file identifiers for use in accessing, identifying and/or
sharing files over peer-to-peer networks. The complaint alleges
that the anti-piracy solutions offered by our Overpeer
subsidiary infringe the patents in question. The complaint does
not state a specific damage amount.

In addition, potential customers may be deterred
from distributing content over the Internet for fear of
infringement claims. The music industry in particular has
recently been the focus of heightened concern with respect to
copyright infringement and other misappropriation claims, and
the outcome of developing legal standards in that industry is
expected to affect music, video and other content being
distributed over the Internet. If, as a result, potential
customers forego distributing traditional media content over the
Internet, demand for our digital media services could be reduced
which would harm our business. The music industry in the
U.S. is generally regarded as extremely litigious in nature
compared to other industries and we could become engaged in
litigation with others in the music industry. Claims against us,
and any resultant litigation, should they occur in regard to any
of our digital media services, 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 offer
our digital media services to 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, revenue, financial
condition and results of operations.

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

The market for digital media services is
characterized by rapidly changing technologies. This market
characteristic is 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

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could require us to incur substantial
expenditures to modify or adapt our operating practices or
infrastructure. Our future success will depend in large part
upon our ability to:




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

We will not be competitive unless we continually
introduce new services or enhancements to existing services 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 services, 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 or enhancements to services may not be
sufficient to recover the associated development costs.

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

The technology underlying our digital media
services is complex and includes software that is internally
developed and software licensed from third parties, including
open source software. 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 or
enhancements until after they are sold. Furthermore, because our
digital media services are designed to work in conjunction with
various platforms and applications, we are susceptible to errors
or defects in third-party applications that can result in a
lower quality service for our customers. Because our customers
depend on us for digital media management, any interruptions
could:



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

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

We
provide guarantees to some of our customers under service level
agreements and could be liable for service credits for failure
to meet specified performance metrics.

In connection with our content protection
services, we provide our customers with guaranteed service
performance levels. We also provide guaranteed service
performance levels to some of our encoding customers. If we fail
to meet these guaranteed performance metrics, we could be liable
for monetary credits or refunds of service fees previously paid
or owed to us. Our contracts generally provide for credits

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of a portion of the fees otherwise payable to us
for the service in the event of a service level failure. Any
failure could also result in termination of service contracts
and could damage our reputation and ability to attract or retain
customers.


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

Online commerce and communications depend on the
ability to transmit confidential information and licensed
intellectual property securely over private and public networks.
Any compromise of our ability to transmit such information and
data securely or reliably, and any costs associated with
preventing or eliminating such problems, could harm our
business. Our systems and operations are susceptible to, and
could be damaged or interrupted by a number of security and
stability risks, including: outages caused by fire, flood, power
loss, telecommunications failure, Internet breakdown, earthquake
and similar events. Our systems are also subject to human error,
security breaches, power losses, computer viruses, break-ins,
denial of service attacks, sabotage, intentional
acts of vandalism and tampering designed to disrupt our computer
systems, websites and network communications. A sudden and
significant increase in traffic on our websites could strain the
capacity of the software, hardware and telecommunications
systems that we deploy or use. This could lead to slower
response times or system failures.

Our operations also depend on receipt of timely
feeds from our content providers, and any failure or delay in
the transmission or receipt of such feeds could disrupt our
operations. We also depend on web browsers, ISPs and online
service providers to provide access over the Internet to our
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.

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

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

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

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

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

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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.


We
have identified material weaknesses in our internal control over
financial reporting and we have received an adverse opinion on
internal control over financial reporting from our independent
registered public accounting firm in connection with their
annual internal control attestation process.

We have identified material weaknesses in our
internal control over financial reporting as of
December 31, 2004, including the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deficiencies pertaining to insufficiently skilled
    personnel and a lack of human resources within our finance and
    accounting reporting functions.                                                                                                                                                                                                                                                                                                                                     
|
| |  | Insufficient oversight of financially significant
    processes and systems, including deficiencies relating to
    monitoring and oversight of the work performed by our finance
    and accounting personnel.                                                                                                                                                                                                                                                                              
|
| |  | Deficiencies in the design of our internal
    control environment reflected in either a lack of controls or
    ineffectively designed controls.                                                                                                                                                                                                                                                                                                                                            
|
| |  | Deficiencies in our general computer controls
    relating to financially significant applications and business
    processes, including application level design and documentation
    deficiencies. As a result of these deficiencies and our
    inability to rely upon information technology general controls
    to perform as expected over time, we were unable to demonstrate
    through testing that our information technology dependent
    controls were operating effectively.
|
| |  | Deficiencies relating to insufficient analysis,
    review and documentation of the selection and application of
    generally accepted accounting principles, or GAAP, to
    significant non-routine transactions, including the preparation
    of financial statement disclosures relating thereto.                                                                                                                                                                                      
|
| |  | Failure to appropriately assess and monitor the
    effectiveness of controls executed by third party service
    providers, and to adequately implement and/or maintain customer
    level controls related to the provision of services by third
    party service providers.                                                                                                                                                                                                              
|
| |  | Inability to demonstrate through testing that all
    of our key internal controls over financial reporting were
    effective as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                      
|
| |  | Deficiencies related to entity-level controls.                                                                                                                                                                                                                                                                                                                                                                                                                                               

Our independent registered public accounting
firm, Moss Adams LLP, has issued an adverse opinion on our
internal control over financial reporting as of
December 31, 2004.

The existence of a material weakness is an
indication that there is more than a remote likelihood that a
material misstatement of our financial statements will not be
prevented or detected in the current or any future period.

Our
operations could be harmed by factors including political
instability, natural disasters, fluctuations in currency
exchange rates and changes in regulations that govern
international transactions.

As a result of our acquisition of OD2, we have
substantial international operations, including in the United
Kingdom, France, Germany and Italy. The risks inherent in
international trade may reduce our international sales and harm
our business and the businesses of our customers and our
suppliers. These risks include:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | Changes in tariff regulations;                                                     
|
| |  | Political instability, war, terrorism and other
    political risks;               
|
| |  | Foreign currency exchange rate fluctuations;                                       
|
| |  | Establishing and maintaining relationships with
    local distributors and dealers;

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| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Lengthy accounts receivable payment cycles;                                                                                             
|
| |  | Import and export licensing requirements;                                                                                               
|
| |  | Compliance with a variety of foreign laws and
    regulations, including unexpected changes in taxation and
    regulatory requirements;
|
| |  | Greater difficulty in safeguarding intellectual
    property than in the U.S.;                                                          
|
| |  | Challenges caused by distance, language and
    cultural differences;                                                                   
|
| |  | Potentially adverse tax consequences;                                                                                                   
|
| |  | Difficulty in staffing and managing
    geographically diverse operations; and                                                          
|
| |  | Higher costs associated with doing business
    internationally.                                                                        

These and other risks may preclude or curtail
international sales or increase the relative price of our
services compared to those of local competitors in other
countries, reducing the demand for our services.

Our
business and operations may be especially subject to the risks
of earthquakes and other natural catastrophes in the Pacific
Northwest.

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

Risks Related
to Our Industry

Digital
media distribution services in general are new and rapidly
evolving and may not prove to be viable business
models.

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

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

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

The
industries we serve are a focus of attempts at means to
improperly access and share content and avoid digital rights
management and anti-piracy technologies.

We employ content protection and anti-piracy
technologies and systems that are state of the art in the
industry. However, the digital content businesses we serve are a
focus of escalating attempts by third parties to circumvent
these technologies and systems in an apparent effort to
illegally use and share digital

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content, such as digital music, video, films and
commercial software programs. To the extent third parties are
successful in avoiding our content protection technologies and
systems and if it is not feasible for us to modify or enhance
our technologies and systems to avoid that result, our business,
result of operations and reputation could be harmed.


Our
industry is experiencing consolidation that may intensify
competition.

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



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

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

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

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

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

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type of business that is conducted over such
mediums, and may adversely affect our ability to sell our
services and ultimately impact our business results and
prospects.


If usage of the Internet and wireless networks
grows, the respective infrastructure may not be able to support
the demands placed on them by such growth, specifically the
demands of delivering high-quality media content. As a result,
the performance and reliability of such mediums may decline. In
addition, the Internet and wireless networks have experienced
interruptions in service as a result of outages, system attacks
and other delays occurring throughout the relevant network
infrastructure. If these outages, attacks or delays occur
frequently or on a broad scale in the future, overall usage, as
well as the usage of our services could grow more slowly or
decline.

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

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

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

In the coming years, the number of individuals
who access digital content through devices other than a personal
computer, such as portable digital audio players, personal
digital assistants, cellular telephones, television set-top
devices, game consoles and Internet appliances, may increase
dramatically. Manufacturers of these types of products are
increasingly investing in media-related applications, but these
devices are in an early stage of development and business models
are new and unproven. If we are unable to offer our services on
these alternative non-PC devices, we may fail to capture a
sufficient share of an increasingly important portion of the
market for digital media services or our costs may increase
significantly. Our digital music store service is not compatible
with the iPod music player, the current digital audio player
market leader.

Government
regulation could adversely affect our business
prospects.

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

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associated with their validity, interpretation,
applicability and enforcement, may affect the available
distribution channels for and costs associated with our
services, and may affect the growth of the Internet. Such laws
or regulations may harm our business. Our services may also
become subject to investigation and regulation of foreign data
protection and e-commerce authorities, including those in the
European Union. Such activities could result in additional
distribution costs for us in order to comply with such
regulation.


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



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

The Digital Millennium Copyright Act, or DMCA,
includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, we and our
broadcast customers may be required to pay licensing fees for
digital sound recordings we deliver in original and archived
programming and through retransmissions of radio broadcasts. The
DMCA does not specify the rate and terms of the licenses, which
are determined by arbitration proceedings, known as CARP
proceedings, supervised by the U.S. Copyright Office. Past CARP
proceedings have resulted in proposed rates for statutory
webcasting that were significantly in excess of rates requested
by webcasters. CARP proceedings relating to music subscription
and non-subscription services offering music programming that
qualify for various licenses under U.S. copyright law are
pending. With the enactment of the Copyright Royalty and
Distribution Reform Act of 2004 on November 30, 2004, the
CARP system that had been part of the U.S. Copyright Office
since 1993 is being phased out. The Act replaced CARP with a
system of three Copyright Royalty Judges, who will determine
rates and terms for the copyright statutory licenses and make
determinations on distribution of statutory license royalties
collected by the U.S. Copyright Office. We cannot predict the
outcome of continuing CARP proceedings or any proceedings before
the Copyright Royalty Judges and may elect instead to directly
license music content for our subscription and/or
non-subscription services, either alone or in concert with other
affected companies.

Such licenses may apply only to music performed
in the United States, and the availability of corresponding
licenses for international performances is unclear. Therefore,
our ability to find rights holders and negotiate appropriate
licenses is uncertain. Many of our customers may be affected by
these rates, which may negatively affect our revenue. Several
CARP proceedings are pending for subscription music

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services and services that deliver digital
downloads of music, and the outcome of these CARPs or any
proceedings before the Copyright Royalty Judges will also likely
affect our business in ways that we cannot predict. Depending on
the rates and terms adopted for the statutory licenses, our
business could be harmed both by increasing our own cost of
doing business, as well as by increasing the cost of doing
business for our customers. We anticipate future proceedings
before Copyright Royalty Judges relating to music subscription
delivery services, which may also adversely affect the online
distribution of music.


The Child Online Privacy Protection Act imposes
liability on persons collecting personal information from
children under the age of 13. The Child Online Protection Act
imposes civil and criminal penalties on persons distributing
material harmful to minors over the Internet to persons under
the age of 17. The manner in which these Acts may be interpreted
and enforced cannot be fully determined. For example, while the
Supreme Court recently upheld an injunction of the enforcement
of the Child Online Protection Act because it likely violates
the First Amendment of the U.S. Constitution, it is possible
that the courts will ultimately find the act enforceable. If the
Child Online Protection Act is ultimately found to be
unenforceable it is possible that Congress would enact new
legislation aimed at preventing the distribution of materials
that might be harmful to minors. If it is determined that we
fail to conform to any such law we could face fines or civil
penalties.

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

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

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

Risks Related
to Our Common Stock

Our
future capital-raising activities could involve the issuance of
equity securities, which would dilute your investment and could
result in a decline in the trading price of our common
stock.

We may sell securities in the public or private
equity markets if and when conditions are favorable, even if we
do not have an immediate need for additional capital at that
time. Raising funds through the issuance of equity securities
will dilute the ownership of our existing stockholders.
Furthermore, we may enter into financing transactions at prices
that represent a substantial discount to the market price of our
common stock. A negative reaction by investors and securities
analysts to any discounted sale of our equity securities could
result in a decline in the trading price of our common stock.

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

Some of the provisions of our amended and
restated certificate of incorporation and amended bylaws could
make it more difficult for a third party to acquire us, even if
doing so might be beneficial to our stockholders by providing
them with the opportunity to sell their shares possibly at a
premium over the then market price.

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For example, our board of directors is divided
into three classes. At each annual meeting of stockholders, the
terms of approximately one-third of the directors will expire,
and new directors will be elected to serve for three years. It
will take at least two annual meetings to effect a change in
control of our board of directors because a majority of the
directors cannot be elected at a single meeting, which may
discourage hostile takeover bids.

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

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

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

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

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

Market
fluctuations and volatility could cause the trading price of our
common stock to decline and limit our ability to raise
capital.

Our common stock trades on the Nasdaq SmallCap
Market. Our common stock has experienced extreme price and
volume fluctuations to date. To illustrate, during our past two
fiscal years, the highest closing sales price for our common
stock was $3.02, while the lowest closing sales price was $0.18.
In the

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future, the market price and trading volume of
our common stock could be subject to significant fluctuations
due to general market conditions and in response to
quarter-to-quarter variations in:




| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | Our anticipated or actual operating results;                           
|
| |  | Developments concerning our technologies and
    market offerings;     
|
| |  | Technological innovations or setbacks by us or
    our competitors;    
|
| |  | Conditions in the digital media and Internet
    markets;              
|
| |  | Announcements of merger or acquisition
    transactions; and           
|
| |  | Other events or factors and general economic and
    market conditions.

In the past, securities class action litigation
has been brought against companies that experienced volatility
in the trading price of their securities. Market fluctuations in
the price of our common stock could also adversely affect our
ability to sell equity securities at a price we deem appropriate.

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

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

As of March 1, 2005, we had on file with the
SEC effective registration statements for a total of
approximately 44.4 million shares for resale by selling
stockholders representing approximately 41.5% of our common
stock then outstanding. Of these shares registered,
approximately 14.8 million had been resold as of
March 1, 2005, and approximately 29.6 million shares
remained available for resale.

We have on file with the SEC a registration
statement covering the resale of 28,140,224 shares issued
or issuable upon exercise of warrants issued in connection with
our acquisition of OD2 and our December 2004 financing
transactions. We are also obligated to file a registration
statement to cover the resale of 3,554,419 shares of our
common stock issuable by us to former shareholders of OD2.

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

We
are not compliant with listing standards of The Nasdaq Stock
Market requiring a majority of our directors to be independent
and that our audit committee consists of at least three
independent directors.

On February 2, 2005, we received a notice
from The Nasdaq Stock Market that we no longer comply with
Nasdaqs independent director and audit committee
requirements as set forth in Nasdaq Marketplace Rule 4350,
which include that our board must consist of a majority of
independent directors and that we must have at least three
independent directors on our audit committee. Consistent with
Marketplace Rules 4350(c)(1) and 4350(d)(4), we have a cure
period until the earlier of our next annual meeting of
stockholders or January 31, 2006, in order to regain
compliance. In the event we do not regain compliance within this
period, The Nasdaq Stock Market has informed us that the Staff
of The Nasdaq Stock Market will provide us with a written
notification that our shares will be delisted and, at that time,
we may appeal such determination to delist to a Nasdaq Listings
Qualifications Panel. We are currently conducting a search
process to identify qualified individuals to join our board of
directors and certain committees of our board of directors,
including our audit committee, in order to regain compliance
with these requirements.

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If
our stock price trades below $1.00 per share for an
extended period of time we may be delisted from the Nasdaq
SmallCap Market.

In September and October 2004, our common stock
traded at prices below $1.00 per share. If our stock price
trades below $1.00 per share for an extended period, it may
be delisted from the Nasdaq SmallCap Market, which would have an
adverse effect on our business and on the trading of our common
stock. In order to maintain compliance with Nasdaq SmallCap
listing standards, we may consider several strategies. For
example, at our 2005 annual meeting, we intend to submit to a
stockholder vote a proposal to approve a potential reverse stock
split. We cannot predict what effect a reverse stock split would
have on the market price of our common stock or our ability to
maintain compliance with the listing standards of the Nasdaq
SmallCap market. If a delisting of our common stock were to
occur, our common stock would trade on the OTC Bulletin Board or
in the pink sheets maintained by the National
Quotation Bureau, Inc. Such alternatives are generally
considered to be less efficient markets, and our stock price, as
well as the liquidity of our common stock, may be adversely
impacted as a result.

Recently
enacted and proposed changes in securities laws and regulations
have increased and will continue to increase our
costs.

The Sarbanes-Oxley Act of 2002 along with other
recent and proposed rules from the SEC and Nasdaq have required
changes in our corporate governance, public disclosure and
compliance practices. Many of these new requirements have
increased and will continue to increase our legal and financial
compliance costs, and make some corporate actions more
difficult. These developments could make it more difficult and
more expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced coverage or
incur substantially higher costs to obtain coverage. These
developments also could make it more difficult for us to attract
and retain qualified executive officers and members of our board
of directors.

The
large number of holders and lack of concentration of ownership
of our common stock may make it difficult for us to reach a
quorum or obtain an affirmative vote of our stockholders at
future stockholder meetings.

Our stock is held in a large number of individual
accounts with no one registered holder or group of registered
holders individually accounting for more than 6% of our
outstanding common stock. As a result, it may be difficult for
us to reach a quorum or obtain an affirmative vote of a majority
of our stockholders where either of those thresholds are
measured based on the total number of shares of our common stock
outstanding. Difficulty in obtaining a stockholder vote could
impact our ability to complete any strategic transaction
requiring stockholder approval or effect basic corporate
governance changes, such as an increase in the authorized number
of shares of our common stock.

As
a result of accounting regulations which become applicable to us
on July 1, 2005 requiring companies to expense stock
options, our expenses will increase and our stock price may
decline.

A number of publicly-traded companies have
recently announced that they will begin expensing stock option
grants to employees. In addition, the Financial Accounting
Standards Board (FASB) has adopted rule changes with an
effective date beginning July 1, 2005 requiring expensing
of stock options. Currently, we include such expenses on a pro
forma basis in the notes to our annual financial statements in
accordance with accounting principles generally accepted in the
United States, but do not include stock option expense for
employee options in our reported financial statements. This
change in accounting standards will require us to expense stock
options, and as a result our reported expenses may increase
significantly.

Available Information

We were incorporated in the state of Delaware on
March 18, 1998. We are a reporting company and file annual,
quarterly and current reports, proxy statements and other
information with the SEC. You may

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read and copy these reports, proxy statements and
other information at the SECs public reference room at
450 Fifth Street, NW, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information about
the operation of the public reference room. Our SEC filings are
also available at the SECs website at
http://www.sec.gov. Our Internet address is
http://www.loudeye.com. There we make available, free of
charge, our Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and any
amendments to those reports, as soon as reasonably practicable
after we electronically file such material with or furnish it to
the SEC.







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

Following is a summary of our properties and
related lease obligations. We do not own any real property. We
believe our U.S. and international facilities are sufficient to
support our operational, research and development and
administrative needs under our current operating plan.

United States

1130 Rainier Avenue S, Seattle,
WA.Our principal operations are
conducted at this facility where we lease approximately
41,800 square feet. The lease expires on December 31,
2005 and annual base rent was approximately $823,000 for 2004
and will be approximately $921,000 for 2005.

1601 Cloverfield, Santa Monica,
CA.We lease offices for our sales
staff in a shared office space arrangement at this facility. The
annual rent is approximately $43,000 with a lease term expiring
November 30, 2005.

24 West 40th Street, New York,
NY.In December 2004, our subsidiary
Overpeer Inc. entered into a lease for approximately
5,140 square feet. We expect the newly leased space will be
available for occupation in May 2005. Annual base rent in 2005
will be $175,000 subject to annual adjustment ($58,600 in 2005
after landlord credits). The term of the lease expires in
September 2015.

110 East 55th Street, New York,
NY.Overpeer Inc. leases approximately
1,500 square feet at an annual base rent of approximately
$60,000. The lease expires on April 30, 2005.

Europe

72 Prince Street, Bristol,
U.K.OD2 leases approximately
8,000 square feet of space. The current annual rent is
approximately £116,000 (approximately $223,000 based on
exchange rates on March 1, 2005) with the lease term
expiring June 2009, with an option for OD2 to terminate the
lease in June 2007.

290 Boulevard Voltaire, 75011 Paris,
France.OD2 leases approximately
170 square meters for a sales office at an annual rent of
approximately 22,000
(approximately $29,000 based on exchange rates on March 1,
2005). The lease expires in March 2010, with an option to
terminate the lease in March 2007.

Stamstrasse 90, 50823 Cologne,
Germany.OD2 leases approximately
120 square meters for a sales office at an annual rent of
approximately 11,000
(approximately $15,000 based on exchange rates on March 1,
2005). The lease is on a month-to-month basis, provided that six
month advance notice of termination must be provided by either
the landlord or OD2 to terminate the lease.






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

On September 10, 2004, we were served in a
patent infringement lawsuit brought by Altnet, Inc., and others
against Loudeye, our Overpeer subsidiary, Marc Morgenstern, one
of our executive officers, the Recording Industry Association of
America and others. The complaint, filed in federal district
court in Los Angeles, California, involves two patents that
appear to cover file identifiers for use in accessing,
identifying and/or sharing files over peer-to-peer networks. The
complaint alleges that the anti-piracy solutions offered by our
Overpeer subsidiary infringe the patents in question. The
complaint does not state a specific damage amount. On
November 17, 2004, the court dismissed the complaint against

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##### Table of Contents



Mr. Morgenstern with prejudice and dismissed
the complaint against Loudeye and Overpeer without prejudice.
The plaintiffs filed an amended complaint on November 24,
2004 against Loudeye, Overpeer and other entity defendants.
Loudeye and Overpeer filed motions to dismiss this amended
complaint, which the court denied on January 21, 2005. We
intend to file a motion for summary judgment and to otherwise
defend ourselves vigorously against the allegations contained in
the amended complaint. Discovery in this matter commenced in
January 2005. At present, we cannot assess the probability of an
unfavorable outcome or the magnitude of any such outcome.


In February 2003, we entered into an agreement
with Regent Pacific Management Corporation pursuant to which
Regent Pacific would provide management services. The agreement
was for a term of 26 weeks, with an option to renegotiate
certain terms of the agreement after 13 weeks, and was
terminable by either party under certain circumstances. Under
the agreement, we paid certain cash fees to Regent Pacific. In
addition, Regent Pacific was to receive stock options to
purchase up to 4,000,000 shares of Loudeye common stock
based on Regent Pacifics length of service. These options
were to be granted at various times throughout their engagement
at exercise prices based on the closing market price on each
grant date. In March 2003, Regent Pacific resigned from the
engagement. In July 2003, Regent Pacific filed suit against us
in the Superior Court of California in San Francisco County
for breach of the agreement. In this complaint, Regent Pacific
is seeking unspecified damages and specific performance of the
alleged obligation to grant the stock options due to them under
the contract. We answered the complaint in September 2003
denying all allegations and asserting counterclaims. In March
2004, the court granted our motion to transfer the case to the
United States District Court for the Western District of
Washington. Discovery in this case is ongoing, with depositions
scheduled for April and May 2005. We intend to defend vigorously
this action and to pursue vigorously our counterclaims. We do
not consider the likelihood of loss to be probable and the
amount of loss, if any, is not estimable at this time.

Between January 11 and December 6, 2001,
class action complaints were filed in the United States District
Court for the Southern District of New York. These actions were
filed against 310 issuers (including us), 55 underwriters and
numerous individuals including certain of our former officers
and directors. The various complaints were filed purportedly on
behalf of a class of persons who purchased our common stock
during the time period between March 15 and December 6,
2000. The complaints allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934, primarily based on
allegations that our underwriters received undisclosed
compensation in connection with our initial public offering and
that the underwriters entered into undisclosed arrangements with
some investors that were designed to distort and/or inflate the
market price for our common stock in the aftermarket. These
actions were consolidated for pre-trial purposes. No specific
amount of damages has been claimed. We and the individual
defendants have demanded to be indemnified by 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 Court suggested that the parties select six test
cases to determine class-action eligibility. We are not a party
to any of the test cases.

In March 2005, a proposed settlement initially
structured in June 2003 among plaintiffs, issuer defendants,
issuer officers and directors named as defendants, and
issuers insurance companies, was approved by the Court.
This proposed settlement provides, among other matters, that:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issuer defendants and related individual
    defendants will be released from the litigation without any
    liability other than certain expenses incurred to date in
    connection with the litigation;
|
| |  | issuer defendants insurers will guarantee
    $1.0 billion in recoveries by plaintiff class members;                                                                                                     
|
| |  | issuer defendants will assign certain claims
    against underwriter defendants to the plaintiff class
    members; and                                                                                   
|
| |  | issuer defendants will have the opportunity to
    recover certain litigation-related expenses if plaintiffs
    recover more than $5.0 billion from underwriter defendants.                              

The final settlement terms as approved by the
Court differ from the initial settlement proposal in that the
settlement does not bar the defendant underwriters from bringing
contractual indemnity claims against the

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##### Table of Contents



issuer defendants, including Loudeye. Our board
of directors approved the proposed settlement in August 2003 and
is considering whether to approve the final settlement terms in
March 2005. Management does not anticipate that we will be
required to pay any amounts under this settlement; however, we
can give no assurance that the underwriter defendants will not
bring a claim for indemnification against us under the terms of
the underwriting agreement relating to our initial public
offering.


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






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

In December 2004, we held a special meeting of
our stockholders to vote on whether to approve the issuance of
an indeterminate number of shares of common stock to satisfy
future payment obligations that we incurred in connection with
our acquisition of OD2 in June 2004. We were required to seek
approval of our stockholders with respect to the additional
share issuances under the rules of the Nasdaq SmallCap Market.

Of the 81,890,563 shares of our common stock
outstanding as of the record date for the special meeting,
41,447,434 shares were present in person or by proxy (or
51% of our outstanding common stock as of the record date),
which number includes shares held by former shareholders of OD2
that were deemed present at the meeting for purposes of quorum
but not for the vote. The proposal passed with the following
results (which exclude the votes of former OD2 shareholders
as required by the rules of the Nasdaq SmallCap Market):

|           |  |               |           |         |  |          
|---------- |  | ------------- | --------- | ------- |  | ---------
|Votes For  |  | Votes Against |           | Abstain
|           |  |               |           |        
|23,697,308 |  |               | 4,703,047 |         |  | 1,683,331

PART II






|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities.

Market Information

Our common stock trades on The Nasdaq SmallCap
Market under the symbol LOUD. The following table sets forth,
for the periods indicated, the high and low sales prices for our
common stock as reported on The Nasdaq SmallCap Market.

|                             |  |      |      |     |  |   |      | 
|---------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                             |  | High |      | Low
|                             |  |      |      |    
|Year Ended December 31, 2004 |  |      |      |     |  |   |      | 
|First Quarter 2004           |  | $    | 2.57 |     |  | $ | 1.81 | 
|Second Quarter 2004          |  |      | 2.19 |     |  |   | 1.23 | 
|Third Quarter 2004           |  |      | 1.69 |     |  |   | 0.78 | 
|Fourth Quarter 2004          |  |      | 3.02 |     |  |   | 0.90 | 
|Year Ended December 31, 2003 |  |      |      |     |  |   |      | 
|First Quarter 2003           |  | $    | 0.55 |     |  | $ | 0.21 | 
|Second Quarter 2003          |  |      | 1.89 |     |  |   | 0.18 | 
|Third Quarter 2003           |  |      | 3.48 |     |  |   | 0.70 | 
|Fourth Quarter 2003          |  |      | 2.98 |     |  |   | 1.35 | 

35



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Holders

As of March 29, 2005, there were 465 holders
of record of our common stock. Because many of the outstanding
shares of our common stock are held by brokers and other
institutions on behalf of the beneficial stockholders, we are
unable to estimate the total number of beneficial stockholders
represented by the record holders.

Dividends

We have invested in the growth of our business
and have incurred net losses from inception. We expect to
continue to invest in growing our business for the foreseeable
future and may incur net losses in future periods. As a result,
we have not paid any cash dividends to date and do not intend to
pay any cash dividends in the foreseeable future.

Description of Equity Compensation
Plans

The table below sets forth certain information as
of December 31, 2004 regarding the shares of our common
stock available for grant or granted under stock option plans
that (i) were approved by Loudeyes stockholders, and
(ii) were not approved by Loudeyes stockholders.

Equity Compensation Plan Information

|                                                               |       |                  |            |                |  |                           |       |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ---------------- | ---------- | -------------- |  | ------------------------- | ----- | ---- |  |  | --------- | --------- | 
|                                                               |       | Number of        |            |                |  |                          
|                                                               |       | Securities to be |            | Weighted-      |  | Number of Securities     
|                                                               |       | Issued Upon      |            | Average        |  | Remaining Available for  
|                                                               |       | Exercise of      |            | Exercise Price |  | Future Issuance Under    
|                                                               |       | Outstanding      |            | of Outstanding |  | Equity Compensation Plans
|                                                               |       | Options,         |            | Options,       |  | (Excluding Outstanding   
|                                                               |       | Warrants and     |            | Warrants and   |  | Options, Warrants and    
|                                                               |       | Rights           |            | Rights         |  | Rights)(1)               
|                                                               |       |                  |            |                |  |                          
|Equity compensation plans approved by security
    holders     |       |                  | 13,784,149 |                |  | $                         | 1.15  |      |  |  | 1,820,555 |          
|Equity compensation plans not approved by
    security holders |       |                  | 2,202,291  | (2)            |  | $                         | 0.001 |      |  |  |          |          
|                                                               |       |                  |            |                |  |                           |       |      |  |  |           |          
|                                                               | Total |                  |            | 15,986,440     |  |                           | $     | 0.99 |  |  |           | 1,820,555 | 



---



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes securities reflected in the first column
    of the table.                                                                          
|   
|(2) | Represents options to purchase common stock
    issued to former OD2 shareholders in connection with our
    acquisition of OD2 in June 2004.

Stock Plans



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

Under our various stock option plans, the board
and its stock option committee may grant to employees,
consultants, and directors both incentive and nonstatutory
options to purchase our common stock. At December 31, 2004,
the plans provided for options to purchase up to
15,604,704 shares of our common stock. Our 2000 Stock
Option Plan provides for an automatic annual increase on the
first day of each of the fiscal years beginning in 2005, 2006,
2007, 2008 and 2009 equal to the lesser of 2.5 million
shares or 5% of our outstanding common stock on the last day of
the immediately preceding fiscal year or a lesser number of
shares as our board determines. As a result, on January 1,
2005, the number of shares reserved under our 2000 Stock Option
Plan automatically increased by 2.5 million shares of our
common stock. Option grants under the plans have terms of ten
years and generally vest over three to four and one half years.

An aggregate of 2,202,291 shares of common
stock are issuable upon the exercise of stock options held by
former OD2 shareholders. These stock options were initially
issued under the On Demand

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##### Table of Contents



Distribution Limited Employee Share Option Plan
and were assumed by Loudeye as part of our acquisition of OD2.
All of the options are immediately exercisable at an exercise
price of $0.001 per share. The option grants have terms of
ten years from the date of original grant.




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

In December 1999, the board approved the creation
of the 2000 Employee Stock Purchase Plan (ESPP). A total of
200,000 shares of our common stock were reserved for
issuance under the ESPP, with the number of shares reserved for
issuance under the ESPP subject to an automatic annual increase
on the first day of each of the fiscal years beginning in 2001,
2002, 2003, 2004 and 2005 equal to the lesser of
300,000 shares or 0.75% of our outstanding common stock on
the last day of the immediately preceding fiscal year or a
lesser number of shares as the board determines. At
December 31, 2004, the total number of shares reserved for
issuance was 1,375,175, and a total of 427,120 shares have
been issued under the ESPP. On January 27, 2005, our board
of directors terminated the ESPP. As a result, the
948,055 shares previously reserved for issuance under the
ESPP will revert to our authorized but unissued capital stock.

Recent Sales of Unregistered
Securities

February 2004 private placement
transaction.In February 2004, Loudeye
sold 10,810,811 shares of common stock at $1.85 per
share to a limited number of accredited investors. The gross
proceeds received from the financing were $20.0 million.
Loudeye paid a placement fee equal to 5% of the gross proceeds.
The net proceeds of the offering, after commissions and
expenses, will be used for working capital and general corporate
purposes, including expansion of Loudeyes
business-to-business digital music solutions in the U.S. and
internationally. Loudeye filed a registration statement in March
2004 covering the resale of the shares sold in the financing and
the registration statement was declared effective by the SEC on
May 26, 2004. The sale of the shares was made in reliance
on the exemption from the registration requirements provided by
Section 4(2) of the Securities Act and Rule 506 of
Regulation D promulgated thereunder.

OD2 acquisition.In
connection with our acquisition of OD2, we issued the following
shares of our common stock and options to purchase shares of our
common stock and each former OD2 shareholder and option
holder agreed to exchange its OD2 shares (or options to
purchase OD2 shares) for shares of our common stock (or
options to purchase shares of our common stock).



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In June and August 2004, we issued
    11,747,558 shares of our common stock to existing
    OD2 shareholders and we issued options to
    purchase 2,212,302 shares of our common stock to OD2
    option holders in exchange for their OD2 options. Of the options
    assumed, options to purchase 10,011 shares of our
    common stock had been exercised as of December 31, 2004.
    The resale of these shares and the shares issuable upon exercise
    of these options are registered on a registration statement
    previously filed by us on behalf of former
    OD2 shareholders. Each of the former OD2 shareholders
    or option holders acquired the shares of common stock (or, if
    applicable, the options to purchase such shares of our common
    stock) in connection with our acquisition of all of the
    outstanding share capital of OD2. We acquired 93% of the
    outstanding share capital of OD2 on June 22, 2004, and we
    acquired the remaining share capital of OD2 on August 17,
    2004. We are currently holding 2,072,369 of these shares in
    escrow pursuant to the terms of the OD2 transaction.
|
| |  | We agreed to pay the former shareholders of OD2
    future deferred consideration and, subject to satisfying certain
    performance targets, contingent consideration. In December 2004,
    we issued 1,638,490 shares of our common stock to former
    OD2 shareholders, 243,407 of which shares are being held in
    escrow by us pursuant to the terms of the OD2 transaction, to
    satisfy the first of these deferred consideration obligations,
    and we are obligated to register the resale of such shares. We
    have filed a registration statement on Form S-1 to cover
    the resale of these shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | We issued 4,667,608 shares of our common
    stock to former OD2 shareholders in January 2005, 693,402
    of which are being held in escrow pursuant to the terms of the
    OD2 transaction to satisfy the second of these deferred
    consideration payment obligations, and we are obligated to
    register the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | resale of such shares. We have filed a
    registration statement on Form S-1 to cover the resale of
    these shares.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On February 25, 2005, we reached agreement
    with certain former OD2 shareholders to restructure the
    remaining deferred consideration obligations. As a result, in
    March 2005, we issued 3,554,419 shares of our common stock,
    528,014 of which are being held in escrow by us pursuant to the
    terms of the OD2 transaction to the former OD2 shareholders
    in satisfaction of all remaining deferred consideration
    obligations. We are obligated to file a registration statement
    on Form S-1 to cover the resale of these shares.

Our issuances of shares of our common stock (and
options to purchase shares of our common stock) to the selling
stockholders were made in reliance on the exemptions from
registration provided by Regulation S and Section 4(2)
under the Securities Act of 1933, as amended. In connection with
the acquisition, all selling stockholders certified to Loudeye
that they were either non-U.S. persons within the meaning of
Regulation S or accredited investors within the meaning of
Regulation D promulgated under the Securities Act, agreed
not to transfer their securities except pursuant to a
registration statement or an exemption from the registration
requirements of the Securities Act and made certain other
certifications and agreements upon which we relied for purposes
of issuing securities under such exemptions.

Consultant warrant.On November 5, 2004, we issued a warrant to
purchase 180,000 shares of our common stock to an
individual for services rendered. The exercise price per share
is $1.13. The warrant has a two year term and expires on
November 5, 2006. This warrant was offered in reliance upon
the exemption from the registration requirements of the
Securities Act provided by Section 4(2) under the
Securities Act and Regulation D promulgated thereunder.

December 2004 private placement
transaction.In December 2004, we
entered into a Subscription Agreement with a limited number of
accredited investors pursuant to which we agreed to sell and
issue to such investors 16,800,007 shares of our common
stock, together with warrants to
purchase 5,040,002 shares of common stock at an
exercise price of $2.25 per share, for an aggregate
purchase price of $25.2 million. The warrants are not
exercisable until six months after the December 23, 2004
closing date and are then exercisable until the fifth
anniversary of the closing date, or December 23, 2009. We
also granted the investors a one year right to purchase 30%
of any securities sold by us in future financings, subject to
exceptions. The transaction resulted in net proceeds to us of
approximately $23.5 million. The offering was made only to
accredited investors, as such term is defined in
Regulation D under the Securities Act of 1933, as amended.
We have filed a registration statement on Form S-1 to
register the shares of common stock and the warrants issued to
the investors in this transaction. In issuing the shares and the
warrants, Loudeye relied on the exemption from the registration
requirements of the Securities Act provided by Section 4(2)
of the Securities Act and Rule 506 of Regulation D
promulgated thereunder.

38



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|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The following selected financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our consolidated financial statements and the notes thereto
included elsewhere in this annual report. The selected
consolidated statements of operations data for the years ended
December 31, 2004, 2003 and 2002 and balance sheet data as
of December 31, 2004 and 2003 have been derived from our
audited financial statements appearing elsewhere in this annual
report. The selected consolidated statements of operations data
for the years ended December 31, 2001 and 2000 and selected
consolidated balance sheet data as of December 31, 2002,
2001 and 2000 have been derived from our audited consolidated
financial statements that are not included in this annual
report. The selected consolidated balance sheet data and
selected consolidated statements of operations data for each of
the years ended December 31, 2001 and 2000 have been
derived from consolidated financial statements that were audited
by independent auditors who have ceased operations. The
historical results are not necessarily indicative of results to
be expected for any future period. During the preparation of our
financial statements for the year ended December 31, 2004,
we made revisions of classification with regard to expenses
incurred during the years ended December 31, 2003 and 2002.
Such revisions of classification had no impact on net loss,
stockholders equity or cash flows as previously reported.
These revisions related to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regent Fees.We
    revised our classification of $878,000 relating to service fees
    paid to Regent Pacific Management Corporation (Regent) during
    the year ended December 31, 2003, from special
    charges  other to general and administrative expense
    in the current presentation as we determined that these expenses
    were more appropriately classified as general and administrative.                          
|
| |  | Amortization of Intangible
    Assets.We revised our classification
    of amortization of acquired technology and capitalized software
    costs totaling approximately $269,000 in 2003 and
    $1.3 million in 2002 from operating expenses 
    amortization of intangibles to cost of revenue in the current
    presentation as we determined that these expenses were more
    appropriately classified as cost of revenue.   
|
| |  | Impairment of Intangible
    Assets.We revised our classification
    of impairment charges related to acquired technology and
    capitalized software costs totaling approximately $601,000 in
    2003 and $694,000 in 2002 from operating expenses 
    special charges  other to cost of revenue in the
    current presentation as we determined that these charges were
    more appropriately classified as cost of revenue.

All amounts are presented in the table below in
thousands except for per share amounts.

|                                           |                                               |                          |         |        |        |      |         |       |        |         |         |        |        |   |         |        |        |   |         |        |        |  
|------------------------------------------ | --------------------------------------------- | ------------------------ | ------- | ------ | ------ | ---- | ------- | ----- | ------ | ------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | -
|                                           |                                               |                         
|                                           |                                               | Years Ended December 31,
|                                           |                                               |                         
|Consolidated Statements of Operations Data |                                               | 2004(1)                  |         | 2003   |        | 2002 |         | 2001  |        | 2000(1)
|                                           |                                               |                          |         |        |        |      |         |       |        |        
|REVENUE                                    |                                               | $                        | 16,821  |        |        | $    | 11,948  |       |        | $       | 12,681  |        |        | $ | 10,388  |        |        | $ | 11,537  |       
|COST OF REVENUE(2)                         |                                               |                          | 12,063  |        |        |      | 8,076   |       |        |         | 15,260  |        |        |   | 12,737  |        |        |   | 12,388  |       
|                                           |                                               |                          |         |        |        |      |         |       |        |         |         |        |        |   |         |        |        |   |         |       
|                                           |                                               | Gross profit (loss)      |         |        | 4,758  |      |         |       | 3,872  |         |         |        | (2,579 | ) |         |        | (2,349 | ) |         |        | (851   | )
|OPERATING EXPENSES:                        |                                               |                          |         |        |        |      |         |       |        |         |         |        |        |   |         |        |        |   |         |       
|                                           | Sales and marketing(2)                        |                          |         | 4,456  |        |      |         | 3,286 |        |         |         | 7,667  |        |   |         | 9,409  |        |   |         | 14,621 |       
|                                           | Research and development(2)                   |                          |         | 4,017  |        |      |         | 1,688 |        |         |         | 3,159  |        |   |         | 9,719  |        |   |         | 6,784  |       
|                                           | General and administrative(2)                 |                          |         | 11,323 |        |      |         | 8,656 |        |         |         | 11,375 |        |   |         | 11,102 |        |   |         | 8,079  |       
|                                           | Amortization of intangibles                   |                          |         | 234    |        |      |         | 831   |        |         |         | 1,790  |        |   |         | 8,173  |        |   |         | 7,693  |       
|                                           | Stock-based compensation(2)                   |                          |         | 306    |        |      |         | 1,298 |        |         |         | (383   | )      |   |         | 359    |        |   |         | 5,409  |       
|                                           | Special charges  goodwill
    impairments(3) |                          |         |       |        |      |         | 5,307 |        |         |         |       |        |   |         | 9,418  |        |   |         |       |       
|                                           | Special charges  other(3)                    |                          |         | 312    |        |      |         | 1,913 |        |         |         | 6,152  |        |   |         | 27,843 |        |   |         | 947    |       
|                                           |                                               |                          |         |        |        |      |         |       |        |         |         |        |        |   |         |        |        |   |         |       
|                                           |                                               | Total operating expenses |         |        | 20,648 |      |         |       | 22,979 |         |         |        | 29,760 |   |         |        | 76,023 |   |         |        | 43,533 |  
|                                           |                                               |                          |         |        |        |      |         |       |        |         |         |        |        |   |         |        |        |   |         |       
|LOSS FROM OPERATIONS                       |                                               |                          | (15,890 | )      |        |      | (19,107 | )     |        |         | (32,339 | )      |        |   | (78,372 | )      |        |   | (44,384 | )     

39



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|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |       |       | 
|-------------------------------------------------------------- | ----------------------------------------------- | ---------------------------- | ------- | ---- | ---- | ---- | ------- | ---- | --- | ------- | ------- | ----- | ----- | - | ------- | ------ | ----- | - | ------- | ----- | ----- | 
|                                                               |                                                 |                             
|                                                               |                                                 | Years Ended December 31,    
|                                                               |                                                 |                             
|Consolidated Statements of Operations Data                     |                                                 | 2004(1)                      |         | 2003 |      | 2002 |         | 2001 |     | 2000(1)
|                                                               |                                                 |                              |         |      |      |      |         |      |     |        
|OTHER INCOME (EXPENSE):                                        |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      
|                                                               | Interest income                                 |                              |         | 377  |      |      |         | 347  |     |         |         | 1,149 |       |   |         | 3,157  |       |   |         | 5,767 |      
|                                                               | Interest expense                                |                              |         | (201 | )    |      |         | (286 | )   |         |         | (631  | )     |   |         | (1,181 | )     |   |         | (907  | )    
|                                                               | Increase in fair value of common stock warrants |                              |         |     |      |      |         | (248 | )   |         |         |      |       |   |         |       |       |   |         |      |      
|                                                               | Gain on sale of media restoration assets        |                              |         | 156  |      |      |         |     |     |         |         |      |       |   |         |       |       |   |         |      |      
|                                                               | Other income (expense), net                     |                              |         | (839 | )    |      |         | 120  |     |         |         | 659   |       |   |         |       |       |   |         |      |      
|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      
|                                                               |                                                 | Total other income (expense) |         |      | (507 | )    |         |      | (67 | )       |         |       | 1,177 |   |         |        | 1,976 |   |         |       | 4,860 | 
|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      
|NET LOSS                                                       |                                                 | $                            | (16,397 | )    |      | $    | (19,174 | )    |     | $       | (31,162 | )     |       | $ | (76,396 | )      |       | $ | (39,524 | )    
|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      
|Net loss per share  basic and
    diluted(4)                  |                                                 | $                            | (0.22   | )    |      | $    | (0.39   | )    |     | $       | (0.75   | )     |       | $ | (1.84   | )      |       | $ | (1.33   | )    
|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      
|Weighted average shares outstanding 
    basic and diluted(4) |                                                 |                              | 73,845  |      |      |      | 49,797  |      |     |         | 41,393  |       |       |   | 41,429  |        |       |   | 29,774  |      
|                                                               |                                                 |                              |         |      |      |      |         |      |     |         |         |       |       |   |         |        |       |   |         |      

|                                                 |  |                 |         |      |  |      |        |      |  |         |        |  |  |   |        |  |  |   |         | 
|------------------------------------------------ |  | --------------- | ------- | ---- |  | ---- | ------ | ---- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                                 |  |                
|                                                 |  | at December 31,
|                                                 |  |                
|Consolidated Balance Sheet Data                  |  | 2004            |         | 2003 |  | 2002 |        | 2001 |  | 2000(1)
|                                                 |  |                 |         |      |  |      |        |      |  |        
|Cash, cash equivalents and marketable securities |  | $               | 41,168  |      |  | $    | 21,940 |      |  | $       | 11,758 |  |  | $ | 60,941 |  |  | $ | 94,989  | 
|Restricted cash                                  |  |                 | 2,568   |      |  |      | 316    |      |  |         | 1,500  |  |  |   |       |  |  |   |        | 
|Working capital                                  |  |                 | 13,789  |      |  |      | 16,781 |      |  |         | 7,883  |  |  |   | 55,753 |  |  |   | 90,018  | 
|Total assets                                     |  |                 | 103,708 |      |  |      | 27,044 |      |  |         | 29,529 |  |  |   | 80,883 |  |  |   | 132,676 | 
|Accrued acquisition consideration                |  |                 | 15,924  |      |  |      |       |      |  |         | 1,059  |  |  |   | 3,000  |  |  |   |        | 
|Long-term obligations, less current portion      |  |                 | 1,000   |      |  |      | 2,135  |      |  |         | 591    |  |  |   | 22,532 |  |  |   | 7,324   | 
|Total stockholders equity                       |  |                 | 66,450  |      |  |      | 17,033 |      |  |         | 20,352 |  |  |   | 49,194 |  |  |   | 116,068 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Data for 2000 includes six months of the results
    of Vidipax, which was acquired in June 2000. We completed the
    sale of this media restoration business in May 2004. Data for
    2004 includes the results of On Demand Distribution Limited,
    which we acquired in June 2004, and Overpeer Inc., which we
    acquired in March 2004. Acquisition and disposition activity
    reduces the reliability of period to period comparisons based
    off this and other periods.
|   
|(2) | Stock-based compensation, consisting of
    amortization of deferred stock-based compensation and the fair
    value of options issued to non-employees for services rendered,
    is allocated as follows:                                                                                                                                                                                                                                                                             

|                           |  |                          |     |      |  |      |       |      |  |         |      |   |  |   |     |  |  |   |       | 
|-------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- | ---- |  | ------- | ---- | - |  | - | --- |  |  | - | ----- | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2004                     |     | 2003 |  | 2002 |       | 2001 |  | 2000(1)
|                           |  |                          |     |      |  |      |       |      |  |        
|Cost of revenue            |  | $                        | 117 |      |  | $    | 62    |      |  | $       | (34  | ) |  | $ | 30  |  |  | $ | 456   | 
|Sales and marketing        |  |                          | 156 |      |  |      | 47    |      |  |         | (55  | ) |  |   | 50  |  |  |   | 749   | 
|Research and development   |  |                          | 83  |      |  |      | 57    |      |  |         | (21  | ) |  |   | 19  |  |  |   | 283   | 
|General and administrative |  |                          | 67  |      |  |      | 1,194 |      |  |         | (307 | ) |  |   | 260 |  |  |   | 3,921 | 



|    |                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | See Note 4 of Notes to Consolidated
    Financial Statements for an explanation of the special charges
    for the years ended December 31, 2004, 2003 and 2002.                                  
|   
|(4) | See Note 16 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.

40



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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|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 Financial
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 this
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

The following managements discussion and
analysis is intended to provide information necessary to
understand our audited historical consolidated financial
statements and highlight certain other information which, in the
opinion of management, will enhance a readers
understanding of our financial condition, changes in financial
condition and results of operations. It is organized as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The section entitled Loudeye
    Background briefly describes our principal operational
    activities, summarizes significant trends and development in our
    industry and discusses the financial accounting impact of our
    acquisition of OD2.                                                                                                                                                                                                                             
|
| |  | Critical Accounting Policies and
    Estimates discusses each of our most critical accounting
    policies including policies relating to revenue recognition,
    research and development costs, marketable securities, accounts
    receivable, long-lived assets including goodwill and other
    acquired intangible assets, purchase price allocation, stock
    based compensation, music publishing rights and music royalty
    accruals, contingencies, and income taxes.
|
| |  | Recently Issued Accounting Policies
    discusses new accounting standards regarding stock-based
    compensation which will require us to expense the value of stock
    option grants to employees and accounting and disclosure
    guidance for the foreign earnings repatriation provision within
    the American Jobs Creation Act of 2004.                                                                                                                                 
|
| |  | Consolidated Results of Operations
    discusses the primary factors that are likely to contribute to
    significant variability of our results of operations from period
    to period and then provides a detailed narrative regarding
    significant changes in our results of operations for the
    following periods:                                                                                                                                                      



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | the year ended December 31, 2004 compared to
    the year ended December 31, 2003; and
|
| |  | the year ended December 31, 2003 compared to
    the year ended December 31, 2002.    



| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Liquidity and Capital Resources
    discusses our liquidity and cash flows, factors that may
    influence our future cash requirements and the status of certain
    contractual obligations, in particular with respect to our
    acquisition of OD2.
|
| |  | Contractual Obligations discusses our
    contractual obligations as of December 31, 2004.                                                                                                                                                              
|
| |  | Off-Balance Sheet Arrangements
    discusses certain indemnification and other obligations.                                                                                                                                                             

In addition, Item 7A Quantitative and
Qualitative Disclosures About Market Risk discusses
factors that could affect our financial results, in particular
foreign exchange rate fluctuations. Furthermore, Item 9
Change in and Disagreements with Accountants on Accounting
and Financial Disclosure addresses our engagement of Moss
Adams LLP and the resignation of PricewaterhouseCoopers LLP, or
PwC, in August 2004, as well as certain material weaknesses in
our internal controls over financial reporting identified by PwC
in connection with their review of our quarterly report for the
period ended June 30, 2004. Finally, Item 9A
Controls and Procedures contains managements
assessment of Loudeyes internal control over financial
reporting as of December 31, 2004, and includes disclosure
of eight material weaknesses in our internal control over
financial reporting assessed by us as of that date.

41



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##### Table of Contents



Loudeye Background

We are a worldwide leader in business-to-business
digital media services that facilitate the distribution,
promotion and sale of digital media content for media and
entertainment, retail, wireless and enterprise customers. Our
services enable our customers to outsource the management and
distribution of audio and video digital media content over the
Internet and other electronic networks. Our proprietary
consumer-facing e-commerce services, combined with our technical
infrastructure and back-end solutions, comprise an end-to-end
service offering. This service offering ranges from core digital
media services, such as the hosting, storage, encoding,
management and protection of media assets for content owners, to
turn-key, fully-outsourced digital media distribution and
promotional services, such as private-labeled digital media
store services, wireless music services, and streaming Internet
radio and music sample services. Our outsourced solutions can
decrease time-to-market for our customers while reducing the
complexity and cost of digital asset management and distribution
compared with internally developed alternatives, and they enable
our customers to provide branded digital media service offerings
to their users while supporting a variety of digital media
technologies and consumer business models.



| |                   
| | ------------------
| | Acquisition of OD2

In June 2004, we acquired OD2, a leading digital
music service provider in Europe, creating what we believe is
the worlds largest business-to-business focused digital
media services company, providing outsourced digital media
solutions to many of the worlds digital media businesses.
The combined company now serves more than 200 customers in over
20 countries, including the U.S., major European countries,
Australia and South Africa. Our customers include Amazon.com,
Inc., America Online, Inc., Apple Computer, Inc., Belgacom
Group, Cingular Wireless (formerly AT&T Wireless Services,
Inc.), The Coca-Cola Company, EMI Recorded Music Holdings,
France Telecom, Microsoft Corporation and MSN, Nokia
Corporation, Siebel Systems, Inc., Sony BMG Music Entertainment
Inc. and Sony Connect, Tiscali S.p.A. and Yahoo! Inc. and other
retailers, Internet portals and Internet service providers,
telecommunications companies and commercial radio stations. The
acquisition of OD2 supports our commitment to providing global
services by broadening our reach and capabilities into key
geographic regions including Europe, the second largest music
market in the world, and Australia. In addition, this
acquisition extends our content management and anti-piracy
content protection services into Europe and will enable us to
leverage OD2s reach to expand our business into new
markets. More information on the terms of the acquisition is
provided below under  Acquisition of On Demand
Distribution Limited.



| |                     
| | --------------------
| | The Loudeye Solution

The use of the Internet and wireless networks as
a medium for media distribution has continued to evolve and grow
in recent years. Traditional media and entertainment companies,
such as major record labels, have in recent years faced
significant challenges associated with the digital distribution
of music. These companies have now licensed the rights to some
of their digital music content for distribution and sale online
and on wireless networks on a subscription or individual track
or album basis. Additionally, retailers and advertisers have
expanded their use of digital content in the marketing and
selling of their products and services. As such, traditional
distribution channels for media have expanded as content owners
have begun to license and distribute their content online and
over wireless networks through new and existing retail channels,
and consumers have begun to purchase and consume content using
personal computers, mobile devices and other digital devices. In
addition, traditional media formats have expanded to include a
variety of digital technologies, rich media formats and digital
rights management solutions.

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

42



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##### Table of Contents



The following is a description of our digital
media services segment and our media restoration services
segment.

Digital media services
segment.We currently have three
primary service offerings in our digital media services segment:
digital media store services, core services and content
protection services. Our business model provides for a blend of
higher margin revenue, generated by each of our service lines,
and lower margin, yet scalable, revenue generated by the digital
download and e-commerce of our digital media store services. A
more detailed description of each of our major service offerings
follows.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media store
    services.Digital media store services
    include our end-to-end digital music store solution provided on
    a white-labeled basis to retailers and brands
    throughout the world. As a business-to-business provider, our
    services enable brands of varying types, including retailers and
    e-tailers, portals, ISPs, and mobile operators, to outsource all
    or part of their digital media retailing activities. By
    leveraging our proprietary technology and infrastructure, we
    provide our customers with a highly scalable consumer-facing
    digital media commerce and delivery solution. Our services
    include hosting, publishing and managing digital media content,
    and delivering such content to end consumers on behalf of our
    customers. Our services support private label user interfaces
    and customized templates, and can readily function across both
    internet and mobile delivery protocols. Our services are
    designed to have the look, feel and branding of the
    retailers existing commerce platform, and our services
    support integration to a customers website, wireless
    applications, inventory, account management, and commerce and
    billing systems. Additionally, our music store services provide
    digital rights management and licensing; usage reporting;
    digital content royalty settlement; customer support and
    publishing related services. Our services provide for the
    delivery of digital content in various forms, such as full-song
    download or streaming, and rich media ring tunes, for both
    internet and wireless based applications. We offer a variety of
    consumer usage and commerce alternatives for our customers. Our
    end-to-end solution provides fully-integrated payment
    functionality supporting multiple end consumer payment
    alternatives as well as support for multiple languages, offering
    multinational customers a worldwide solution. We expect to
    extend our store services offerings from our established base in
    music stores to other digital media, such as video, music video
    and games.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We derive revenue from our music store services
    through platform service fees and transaction related
    distribution or revenue sharing fees. Platform service fees
    represent charges in connection with enabling the service and
    maintaining its overall functionality during the term of the
    customer contract, including customer support, merchandising,
    publishing and other content management related services that we
    provide during the contract term. We also receive a percentage
    of our customers retailing revenues generated from the
    sale of content to the end consumer, which provides for a
    scaleable revenue stream and enables us to share directly in the
    success of our customers music store services that we
    enable and manage.
|
| | As part of our end-to-end music store solutions,
    we have secured licenses and cultivated relationships with the
    four major recorded music companies and hundreds of independent
    record labels around the globe. Our rights portfolio currently
    available for inclusion in our music store solution encompasses
    licenses in over 20 countries and more than 1.3 million
    individual tracks available for sale by our customers to end
    consumers.                                                                                                                                                                                                                                                                                                                             



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Core services.Core
    services include a suite of digital media services provided to
    both content owners and retailers. We generate the majority of
    our revenue in this area from fees for encoding and fulfillment
    services we perform for EMI Music and various independent label
    catalogs, and from our leading samples service. Within core
    services, we provide a variety of back-end services to most of
    the digital music services that have launched in the last few
    years. Examples of these services include:



| |   |                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media supply chain services. Our
    proprietary systems and technology enable the scalable archiving
    and retrieval of large libraries of digital media assets, or
    digital content. Digitized masters of the media assets are
    stored on our high-capacity storage array systems and accessed

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | via our proprietary, automated, web-based access
    tools to search, deliver and manage such content. Such storage
    and access capabilities enable digital content to be processed
    and converted into different digital formats pursuant to our
    customers specifications via our proprietary encoding and
    transcoding systems. To transmit digital content over the
    Internet or other advanced digital distribution networks, the
    uncompressed, digitized content must be converted into
    compressed, network-compatible digital formats. Our encoding
    services enable the conversion of such content into a particular
    form, along with the relevant metadata, such that the content
    can be readily and rapidly distributed over various distribution
    networks. Encoding large catalogs of content in an efficient
    manner is a complex process that requires highly scalable
    technology and supporting infrastructures. Digital encoding
    formats and technologies continue to evolve and often conflict
    with one another. As a result, content owners often convert
    their digital assets into multiple formats and codecs (which are
    algorithms that reduce the number of bytes consumed by large
    files and programs) to support their distribution strategies.
    Additionally, the encoding process for a particular item (or for
    an entire library) is often repeated as a result of the
    introduction of new formats or distribution platforms. Our
    innovative digital media supply chain services address these
    challenges by providing an outsourced solution for the
    archiving, management, processing and distribution of our
    customers digital assets. Our digital media supply chain
    services also provide watermarking, encryption, metadata and
    other digital rights management services to enable our customers
    to protect and manage their content digitally. We also provide
    project analysis, as well as consulting and other related
    services to support the digital fulfillment of encoded content
    libraries for content owners and retailers worldwide.
|
| |  | Digital media content services. We provide a
    hosted end-to-end streaming service that delivers high quality
    music samples to customers in the online and mobile
    entertainment sectors. Our music samples service consists of
    streaming digital content, or more specifically selections of
    such content, commonly referred to as samples, clips or
    previews. Digital media samples are used by customers for many
    purposes, including increasing online content sales, user
    traffic and customer retention. We also provide an interactive
    Radio service, or iRadio. The Loudeye
    iRadio service offers 100 channels of
    CD-quality streaming music delivered through a partners
    own privately branded player interface. It is capable of
    supporting delivery to a range of consumer music devices and
    appliances. The iRadio service can be deployed online for
    web-based retailers and portals, as well as offline for consumer
    electronic devices and appliances, digital home entertainment
    systems and other digital broadcasting outlets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Content protection services.Content Protection Services include
    our anti-piracy services provided to content owners to protect
    against the unauthorized distribution of content on peer-to-peer
    networks. Our content protection services provide a
    comprehensive solution to combat the proliferation of illegal
    content sharing and download typically found on peer-to-peer
    networks on a global basis. The services, which are available
    globally, include Titanium, a service featuring the
    industrys leading anti-piracy service level agreement
    (SLA) guaranteeing up to 99% effectiveness in preventing
    the illegal sharing of digital content over peer-to-peer
    networks. Our services also include providing content owners
    powerful data mining and analytical tools and comprehensive
    information on digital media usage and sharing on peer-to-peer
    networks. We also offer the potential of targeted promotional
    services redirecting potential consumers to legitimate services
    as a means for companies to capitalize on previously untapped
    revenue streams across content sharing networks. We currently
    protect approximately 70,000 digital content titles and block
    hundreds of millions of download sessions each month, across all
    major peer-to-peer protocols.

Media Restoration Services
Segment.In January 2004, we
transferred substantially all of the assets of our media
restoration services subsidiary, VidiPax, Inc., or VidiPax, to a
company controlled by VidiPaxs general manager. In May
2004, we completed the sale of this media restoration services
business which involved restoring and migrating legacy media
archives to current digital media formats. While we will have
ongoing rights to co-market and resell media restoration
services for two years after the sale,

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media restoration services did not represent a
significant portion of our revenue in 2004, and we anticipate
media restoration services will represent an insignificant
portion of our revenue in the future.




| |                                                        
| | -------------------------------------------------------
| | Significant Trends and Developments in our
    Industry

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

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



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



| |                                                        
| | -------------------------------------------------------
| | Acquisition of On Demand Distribution
    Limited (OD2)

In June 2004, we commenced a tender offer to
acquire 100% of the outstanding shares of OD2, a privately held
digital music service provider based in Europe. We acquired 93%
of the shares of OD2 upon commencement of the tender offer. As
of August 17, 2004, we had acquired the remaining 7% of
OD2s shares on the same terms from the remaining
shareholders of OD2. In March 2005, we completed a restructuring
of future deferred and contingent consideration payment
obligations to the former OD2 shareholders. The
restructuring is discussed further below.

The discussion below includes information that is
not based on accounting principles generally accepted in the
United States, or GAAP. To supplement our consolidated financial
statements and information below that is presented on a GAAP
basis, we have included this non-GAAP information, including the
table below indicating the allocation of the purchase price we
paid for OD2, including all shares and cash consideration held
or to be held in escrow. Reconciliations of the non-GAAP
information are included below. We believe these non-GAAP
presentations enhance overall understanding of the total

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consideration we paid to acquire OD2, in
particular with respect to the cash and stock consideration that
has been or will be placed in escrow and is not reflected from
an accounting perspective.


Although management believes such non-GAAP
information enhances a readers understanding of the OD2
acquisition, this non-GAAP information does not reflect GAAP
accounting for the acquisition as of December 31, 2004.
Accordingly, readers should consider this non-GAAP information
together with the GAAP information set forth below, rather than
as an alternative to GAAP basis financial measures.



| |                                                          
| | ---------------------------------------------------------
| | OD2 Transaction Consideration as of
    December 31, 2004

The consideration for the transaction, prior to
the restructuring which occurred in March 2005, consisted of the
following elements:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | From a financial accounting perspective, we
    issued 9,065,919 shares of our common stock on
    June 22, 2004 and 599,259 shares of our common stock
    on August 25, 2004 to existing OD2 shareholders and
    option holders. On a non-GAAP basis, we issued a total of
    11,737,547 shares of our common stock in June and August
    2004, which includes 2,072,369 shares held in escrow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | We expect to issue up to 2,212,302 additional
    shares of our common stock, representing shares to be issued to
    OD2 option holders upon exercise of OD2 options that were
    assumed. Of such amount, options to
    purchase 10,011 shares of our common stock had been
    exercised as of December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | From a financial accounting perspective, we
    issued 1,395,083 shares of our common stock in December
    2004 to former OD2 shareholders to satisfy the initial
    deferred consideration payment obligations totaling
    £1.1 million (approximately $2.1 million based on
    exchange rates as of December 31, 2004). On a non-GAAP
    basis, we issued a total of 1,638,490 shares our common
    stock in December 2004, which includes 243,407 shares held
    in escrow. These payments included satisfaction of the initial
    promissory note installments discussed further below.                                                                                                                                                                                                                                                                                                                                
|
| |  | Certain of OD2s principal shareholders
    agreed to have an aggregate of 15% of the total consideration
    payable in the transaction held in escrow by us for
    18 months to satisfy claims we may have with respect to
    breaches of representations, warranties and covenants and
    indemnification claims. As of December 31, 2004, we had
    issued and placed in escrow 2,315,776 shares of our common
    stock to 17 former OD2 shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | During 2004, we paid approximately
    $1.9 million in cash to retire certain liabilities that
    were assumed as of June 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | From a financial accounting perspective, as of
    December 31, 2004 (and prior to the March 2005
    restructuring discussed below), we were obligated to pay to
    former OD2 shareholders an additional
    £7.2 million (approximately $13.9 million based
    on exchange rates as of December 31, 2004), through
    November 30, 2005. On a non-GAAP basis, the full amount of
    the additional consideration we were obligated to pay as of
    December 31, 2004 (which includes consideration to be
    placed in escrow), totaled £8.4 million (approximately
    $16.2 million based on exchange rates as of
    December 31, 2004). The table below compares additional
    consideration to be paid to OD2 shareholders as reflected
    in our financial statements as of December 31, 2004, to the
    amount of full consideration we were actually required to pay as
    of December 31, 2004 which amount is

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| |  |                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------
| |  | presented on a non-GAAP basis because it includes
    the 15% additional consideration to be placed into escrow.

|                  |       |                              |            |                       |  |            |            |      | 
|----------------- | ----- | ---------------------------- | ---------- | --------------------- |  | ---------- | ---------- | ---- | 
|                  |       | Amounts Reflected in         |            |                      
|                  |       | Financial Statements, which  |            |                      
|                  |       | Excludes Amounts to be       |            | Full Consideration   
|                  |       | Held in Escrow (approximate, |            | Payable (approximate,
|Payment Date      |       | amounts in millions)         |            | amounts in millions) 
|                  |       |                              |            |                      
|January 31, 2005  |       | £4.0, or $                   | 7.7        |                       |  | £4.7, or $ | 9.1        |     
|May 31, 2005      |       | £1.1, or $                   | 2.2        |                       |  | £1.2, or $ | 2.3        |     
|November 30, 2005 |       | £2.1, or $                   | 4.0        |                       |  | £2.5, or $ | 4.8        |     
|                  | Total |                              | £7.2, or $ | 13.9                  |  |            | £8.4, or $ | 16.2 | 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 15% of the total accrued acquisition
    consideration that we were required to pay to the
    OD2 shareholders through November 30, 2005, or
    approximately $2.1 million, was required to be placed into
    escrow along with the escrow shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Prior to the restructuring discussed below, we
    were obligated to pay additional contingent consideration of up
    to £10.0 million (approximately $19.3 million
    based on exchange rates as of December 31, 2004) if OD2
    achieved certain financial performance targets during the period
    through November 30, 2006. From a financial accounting
    perspective, we would have been required to pay up to
    approximately £1.2 million (approximately
    $2.3 million based on exchange rates as of
    December 31, 2004) with respect to the initial payment of
    contingent consideration for the period ended November 30,
    2004. Of this contingent consideration, we had accrued
    approximately £1.1 million (approximately
    $2.1 million based on exchange rates as of
    December 31, 2004), net of amounts to be held in escrow, in
    our consolidated financial statements due to our assessment that
    the outcome of the contingency was determinable beyond a
    reasonable doubt.

We issued promissory notes in original aggregate
principal amount of £1.9 million (approximately
$3.7 million based on exchange rates as of
December 31, 2004) to ten of OD2s former
shareholders. Our remaining obligations under these notes are
included within the £7.2 million (approximately
$13.9 million based on exchange rates as of
December 31, 2004) of accrued acquisition consideration and
within the approximately $2.1 million of additional
consideration to be paid into escrow described above. The notes
bore interest at 5% per annum and are repayable in unequal
installments on December 30, 2004 and on January 31,
May 31 and November 30, 2005 (which installments are
proportional to the amounts of deferred consideration we are
required to pay on November 30, 2004 and on
January 31, May 31 and November 30, 2005).
Interest expense for the year ended December 31, 2004 in
connection with the promissory notes was approximately $55,000.
We had the right to satisfy our payment obligations under the
notes in cash or by issuing shares of our common stock to the
note holders. We satisfied the first installment obligation on
December 30, 2004, by issuing 328,922 shares of our
common stock, 59,463 of which are being held in escrow by us
pursuant to the terms of the OD2 transaction. These shares are
included in the total 1,638,490 shares we issued in
December 2004 in respect of the initial deferred payment
obligations.

From a financial accounting perspective, the
escrow shares, including the $2.1 million to be held in
escrow in connection with the deferred consideration that had
not been paid as of December 31, 2004 described above, are
not recorded as liabilities and the value of the shares held in
escrow and the consideration to be placed in escrow upon payment
of the deferred consideration was not included in determining
the cost of acquiring OD2 as of December 31, 2004, since
the resolution of the escrow shares and the additional
consideration to be held in escrow upon payment of the deferred
consideration is still pending. We will reflect the escrow
shares as outstanding and record the value of such shares (and
any additional consideration to be held in escrow) as additional
costs of acquiring OD2 upon the earlier of the expiration of the
18 month escrow period (to the extent such shares and
additional consideration are released from escrow) or when
management believes beyond a reasonable doubt that we will not
state a claim pursuant to the terms of the escrow.

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Excluding the impact of the escrow shares and the
additional consideration to be held in escrow upon payment of
the deferred consideration discussed above, as of
December 31, 2004, we recorded $38.1 million of net
assets in connection with the transaction consisting of upfront
stock consideration, including the assumption of OD2 options,
deferred consideration, cash obligations to retire certain
liabilities, and our transaction related costs. As of
June 22, 2004, the preliminary initial purchase price
recorded excluded the 7% minority interest that we had not yet
acquired and included preliminary estimates of certain
transaction consideration. As of August 17, 2004, we
subsequently acquired the remaining 7% of OD2s shares and
adjusted certain transaction consideration based upon current
information. The initial purchase price can be summarized at
June 22, 2004 and December 31, 2004 (based on exchange
rates as of June 22, 2004) as follows (amounts in
thousands):

|                                                   |  |                     |        |              |  |   |        | 
|-------------------------------------------------- |  | ------------------- | ------ | ------------ |  | - | ------ | 
|                                                   |  |                    
|                                                   |  | As of June 22, 2004
|                                                   |  |                    
|                                                   |  | June 22,            |        | December 31,
|                                                   |  | 2004                |        | 2004        
|                                                   |  |                     |        |             
|Transaction related costs                          |  | $                   | 1,527  |              |  | $ | 1,993  | 
|Cash paid and due on certain liabilities assumed   |  |                     | 2,778  |              |  |   | 1,878  | 
|Accrued acquisition consideration                  |  |                     | 13,654 |              |  |   | 17,033 | 
|Common stock payable related to acquisition        |  |                     | 2,596  |              |  |   | 3,208  | 
|Common stock issued in connection with acquisition |  |                     | 13,146 |              |  |   | 14,015 | 
|                                                   |  |                     |        |              |  |   |        | 
|                                                   |  | $                   | 33,701 |              |  | $ | 38,127 | 
|                                                   |  |                     |        |              |  |   |        | 

In accordance with FAS No. 52,
Foreign Currency Translation, and as a result of
currency fluctuation between the U.S. dollar and British
pound since the June 22, 2004 acquisition date, we adjusted
the accrued acquisition consideration recorded in our
consolidated balance sheet and recorded a foreign currency
transaction loss of approximately $833,000 in other income
(expense) in the accompanying consolidated statement of
operations for the year ended December 31, 2004.

In addition to the $38.1 million purchase
price recorded at December 31, 2004, if



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the 2,315,776 shares of common stock held in
    escrow by us as of December 31, 2004 were treated as
    outstanding,                               
|
| |  | the consideration to be held in escrow in
    connection with the deferred consideration were treated as a
    liability, and                        
|
| |  | OD2s deficit in net tangible assets at
    closing of the acquisition of $3.5 million was reflected as
    an additional component of consideration,

then the acquisition price would have been
approximately $45.0 million, including the shares and
additional consideration paid into escrow. The initial purchase
consideration would be summarized as follows (amounts in
thousands):

|                                                |  |   |        | 
|----------------------------------------------- |  | - | ------ | 
|Assumption of certain liabilities               |  | $ | 1,878  | 
|Deficit in net tangible assets                  |  |   | 3,501  | 
|Upfront stock consideration                     |  |   | 14,015 | 
|Common stock payable related to the acquisition |  |   | 3,208  | 
|Stock consideration placed in escrow            |  |   | 3,005  | 
|Accrued acquisition consideration               |  |   | 17,033 | 
|Accrued acquisition consideration in escrow     |  |   | 352    | 
|Transaction related costs                       |  |   | 1,993  | 
|                                                |  |   |        | 
|                                                |  | $ | 44,985 | 
|                                                |  |   |        | 

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| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Payments Subsequent to December 31, 2004
    and March 2005 Restructuring of Future OD2 Payment
    Obligations

From a financial accounting perspective, we
issued 3,974,206 shares of our common stock in January 2005
to former OD2 shareholders to satisfy the second deferred
consideration payment obligations totaling
£4.0 million (approximately $7.7 million based on
exchange rates as of December 31, 2004). On a non-GAAP
basis, we issued a total of 4,667,608 shares our common
stock in January 2005, which includes 693,402 shares held
in escrow. These payments included satisfaction of the second
promissory note installments discussed above.

In March 2005, we completed a restructuring of
our remaining deferred and contingent payment obligations to
former OD2 shareholders as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, from a financial accounting
    perspective, we issued 3,026,405 shares (valued at
    approximately £3.2 million or $6.2 million based
    on the December 31, 2004 closing share price and exchange
    rates) as settlement for the remaining deferred consideration
    obligations of approximately £3.2 million (or
    approximately $6.2 million based on December 31, 2004
    exchange rates). On a non-GAAP basis, we issued a total of
    3,554,419 shares our common stock in March 2005, which
    includes 528,014 shares held in escrow, in full
    satisfaction of the remaining deferred consideration obligations
    of approximately £3.7 million (or approximately
    $7.1 million based on December 31, 2004 exchange
    rates). This share issuance also satisfied the remaining
    installment payments on the promissory notes discussed above.                                                                                                                                                                                                                                                                                            
|
| |  | From a financial accounting perspective, we will
    pay £2.6 million (or approximately $5.0 million
    based on December 31, 2004 exchange rates) in cash in two
    installments in full satisfaction of the maximum potential
    contingent payment obligations of up to £10.0 million
    (or approximately $19.3 million based on December 31,
    2004 exchange rates). Of this amount, we had accrued
    approximately £1.1 million (approximately
    $2.1 million based on December 31, 2004 exchange
    rates) in our consolidated financial statements at
    December 31, 2004 based on our assessment that the outcome
    of the underlying contingency was determinable beyond a
    reasonable doubt as of December 31, 2004. The first of
    these payments was made in March 2005 and the second payment
    will be made in July 2005. On a non-GAAP basis, we will pay a
    total of £3.1 million, which includes £465,000
    (approximately $896,000 based on December 31, 2004 exchange
    rates) to be held in escrow (of which £233,000, or
    approximately $449,000 based on December 31, 2004 exchange
    rates, is currently being held in escrow).

This restructuring was agreed to by all of the
former OD2 shareholders entitled to receive additional
deferred and contingent payment consideration and it satisfies
in full those obligations.

Critical Accounting Policies and
Estimates

Our financial statements and accompanying notes
are prepared in accordance with GAAP. The preparation of
financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. These
estimates and assumptions are affected by managements
application of accounting policies. Actual results could differ
from those estimates.



| |                    
| | -------------------
| | Revenue Recognition

Substantially all of our revenue is derived from
our digital media service offerings including digital media
store services (which include music store services), encoding
services, content protection services, samples services,
Internet radio services, and live and on-demand webcasting
services. In 2004, we experienced a significant increase in
deferred revenue which arises from payments received in advance
of the culmination of the earnings process. Deferred revenue
expected to be realized within the next twelve months is
classified as current. Revenue from software license sales
accounted for less than 1% of our revenue in 2004 and less than
3% of our revenues in 2003. We do not anticipate that software
license sales

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will constitute a significant portion of our
revenue in the future. Also, we recognized service revenue from
media restoration services prior to our sale of that business in
the first quarter 2004.


Our basis for revenue recognition is
substantially governed by Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) 101, as
superseded by SAB 104, Revenue Recognition, the
FASBs Emerging Issues Task Force Issue No. 00-21
Revenue Arrangements with Multiple Deliverables
(EITF 00-21), and in very limited cases as it relates to
sales of software products Statement of Position No. 97-2
Software Revenue Recognition, as amended by
Statement of Position No. 98-4, 98-9, and related
interpretations and Technical Practice Aids (SOP 97-2). We
exercise judgment and use estimates in connection with the
determination of the amount of revenue and software license
sales revenue to be recognized in each accounting period. The
adoption of SAB 104 in December 2003 did not materially
affect our revenue recognition policies, results of operations,
financial position or cash flows.

The following is a summary of the areas where we
exercise judgment and use estimates in connection with the
determination of the amount of revenue to be recognized in each
accounting period:

Determining Separate Elements and Allocating
Value to Those Elements.If sufficient
evidence of the fair values of the delivered and undelivered
elements of an arrangement does not exist, revenue is deferred
using revenue recognition principles applicable to the entire
arrangement as if it were a single element arrangement under
EITF 00-21, and is recognized on a straight-line basis over
the term of the contract.

For arrangements with multiple deliverables which
are determined to have separate units of accounting, revenue is
recognized upon the delivery of the separate units in accordance
with EITF 00-21. Consideration from multiple element
arrangements is allocated among the separate elements based on
their relative fair values. In the event that there is no
objective and reliable evidence of fair value for the delivered
item, the revenue recognized upon delivery is the total
arrangement consideration less the fair value of the undelivered
items. The maximum revenue recognized on a delivered element is
limited to the amount that is not contingent upon the delivery
of additional items. Management applies significant judgment in
establishing the fair value of multiple elements within revenue
arrangements. Estimates of fair value represent our best
estimate, but changes in circumstances relating to the services
sold in these arrangements may result in one-time revenue
charges as future elements of the arrangements are delivered.

In the limited circumstances where we sell
software products, we recognize revenue associated with the
license of software in accordance with, SOP 97-2. Under the
provisions of SOP 97-2, in software arrangements that
involve rights to multiple services, we allocate the total
arrangement consideration among each of the deliverables using
the residual method, under which revenue is allocated to the
undelivered elements based on vendor-specific objective evidence
of the fair value of such undelivered elements. Vendor-specific
objective evidence is based on the price charged when an element
is sold separately or, in the case of an element not sold
separately, the price established by management, if it is
probable that the price, once established, will not change
before market introduction.

Some of our arrangements may include consulting
services sold separately under professional services contracts.
Professional services arrangements are billed on a time and
materials basis and accordingly, revenue is recognized as the
services are performed.

Digital media store services
revenue.Digital media store services,
including music store services, are our newest service offerings
and grew significantly following our acquisition of OD2 in June
2004. We charge our digital media store customers fixed platform
fees which generally consist of enabling and hosting the service
and maintenance of the services overall functionality
during the term of the customer contract. Platform services may
include fees related to integration to a customers
website, wireless sites, inventory, account management, and
commerce and billing systems. Additionally, platform fees
associated with our digital media store services include digital
rights management, editorial services, usage reporting, and
digital content royalty settlement. We charge platform fees to
our customers in a variety of manners, including initial set-up
fees, monthly only fees, or a combination of initial set-up and
monthly fees. In addition, we provide a number of transactional
services, including cover art and metadata publishing, rich

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media ring tunes (for wireless applications)
delivery, varied commerce and content consumption alternatives
for digital media content, including pay-as-you-go, permanent
download, or à la carte.


We follow the guidance in EITF 00-21 for
purposes of allocating the total consideration to the individual
deliverables in our digital media store services arrangements.
We evaluate whether each of the elements in these arrangements
represent a separate unit of accounting, as defined by
EITF 00-21, using all applicable facts and circumstances,
including whether (i) the delivered item(s) has value to
the customer on a standalone basis, (ii) there is objective
and reliable evidence of the fair value of the undelivered
item(s) and (iii) if there is a general right of return
relative to the delivered item(s), performance of the
undelivered item(s) is considered probable and substantially in
our control.

If we determine there are separate units of
accounting, we allocate the arrangement consideration to the
separate units of accounting based on their relative fair
values, as determined by the price of the undelivered items when
sold separately. Assuming all other criteria are met (i.e.,
evidence of an arrangement exists, collectibility is probable,
and fees are fixed or determinable), revenue is recognized as
follows:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Platform fees are recognized ratably over the
    term of the contract.                                                                                      
|
| |  | Revenues from permanent download, or à la
    carte, are recognized at the time the content is delivered,
    digitally, to the consumer.                    
|
| |  | Revenues from pay-as-you-go are deferred and then
    recognized as tracks are downloaded by the consumer or as
    credits expire, whichever occurs earlier.

If evidence of fair value cannot be established
for the undelivered elements of an agreement, the revenue from
the arrangement is recognized ratably over the period that these
elements are delivered or, if appropriate, under the percentage
of completion method based on the ratio of direct labor hours
incurred to date to total projected labor hours.

Encoding services
revenue.Encoding services consist of
(i) processing and conversion of digital content into
different digital formats pursuant to customers
specifications via the Companys proprietary encoding and
transcoding systems and (ii) the delivery of such processed
content to the customer. The encoded content is either delivered
electronically to a file transfer protocol (FTP) site that
our customers access via a previously provided password or we
physically ship the content to our customers. In accordance with
SAB 104 and EITF 00-21, we recognize revenue when
persuasive evidence of an arrangement exists and the service has
been rendered, provided the fee is fixed or determinable and
collection is deemed probable. We evaluate each of these
criteria as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an arrangement: We consider a
    non-cancelable agreement signed by us and the customer to be
    evidence of an arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Services have been rendered: We consider this
    criteria to be satisfied when the content has been delivered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Fixed or determinable fee: We assess whether fees
    are fixed or determinable at the time of sale and recognize
    revenue if all other revenue recognition requirements are met.
    We consider these criteria to be satisfied when the payment
    terms associated with the transaction are within our normal
    payment terms. If a significant portion of a fee is due after
    the date that fees would customarily be due under our normal
    payment terms, we consider the fee to not be fixed and
    determinable, and in such cases, we would defer revenue and
    recognize it when the fees become due and payable.
|
| |  | Collection is deemed probable: We initially
    assess the probability of collection to determine whether this
    criterion is satisfied based on a number of factors, including
    past transaction history with the customer and the current
    financial condition of the customer. If we determine that
    collection of a fee is not reasonably assured, we defer revenue
    until the time collection becomes reasonably assured, which is
    generally upon the receipt of cash.                                                                                                                                            

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Content protection services
revenue.Content protection services
consist primarily of anti-piracy, data mining and content
promotion solutions related to peer-to-peer file sharing
networks. Customer billings for content protection services are
generally based on a fixed monthly fee, but may also contain a
volume-based component and, for content promotion services, a
fee based on monthly customer sales volume. Under the provisions
of SAB 104 and EITF 00-21, we recognize revenue in the
period in which the services are provided.

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

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

Webcasting services
revenue.Webcasting services are
provided to customers using our proprietary streaming media
software, tools and processes. Services for live webcast events
and services for on-demand webcasting services are generally
sold separately. For live webcasting events, we charge a fixed
fee. On demand webcasting service fees are based on a contract
with either set monthly minimum fees which entitle the customer
to a monthly volume of stored and streamed data that is
specified in the contract or a contract with charges based upon
actual monthly volume of stored and streamed data with no
monthly minimum fees. Additional fees are required to be paid
under the contract if the volume of data streamed in a
particular month exceeds the specified monthly volume threshold,
and the per unit charges for the additional volume approximate
the per unit charges for the minimum volumes. Any unused volume
of streamed or stored data expires at each month end.

Because we separately sell services for live
webcast events and services for on-demand webcasting, we have
verifiable and objective evidence of the fair value for both the
live and on-demand services. Under the provisions of
SAB 104 and EITF 00-21, we recognize revenue for live
webcasting and on-demand webcasting services which are not
subject to monthly minimums in the period in which the webcast
event, data storage or data streaming occurs. Revenue for
on-demand webcasting services subject to monthly minimums is
recognized monthly on a straight line basis over the contract
period, based upon contracted monthly rates for the specified
volume thresholds. Revenue for additional usage fees is
recognized in the period that the additional usage occurs.

Software license
revenue.In the limited circumstances
in which we sell software products, we recognize revenue
associated with the license of software in accordance with
SOP 97-2. Revenue from software license sales accounted for
less than 1% of our revenues in 2004 and less than 3% of our
revenues in 2003. Under the provisions of SOP 97-2, in
software arrangements that involve rights to multiple services,
we allocate the total arrangement consideration among each of
the deliverables using the residual method, under which revenue
is allocated to the undelivered elements based on
vendor-specific objective evidence of the fair value of such
undelivered elements. Elements included in multiple element
arrangements consist of software, intellectual property,
implementation services, maintenance and consulting services.
Vendor-specific objective evidence is based on the price charged
when an element is sold separately or, in the case of an element
not sold separately, the price established by management, if it
is probable that the price, once established, will not change
before market introduction.

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

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provisions of SAB 104 and EITF 00-21,
we recognize revenue as these 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. As discussed in Note 5 to our consolidated
financial statements, we completed the sale of our VidiPax
business in May 2004 pursuant to an agreement dated
October 31, 2003.


Research and
Development Costs

We account for research and development costs in
accordance with several accounting pronouncements, including
Statement of Financial Accounting Standards (FAS) No. 2,
Accounting for Research and Development Costs, and
FAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed
(FAS 86). FAS 86 specifies that costs incurred
internally in researching and developing computer software
should be charged to expense until technological feasibility has
been established. Once technological feasibility has been
established, all software costs should be capitalized until the
software is available for general release to customers. Judgment
is required in determining when technological feasibility is
established.

Marketable
Securities

We account for marketable securities in
accordance with FAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and
SAB 59, Accounting for Noncurrent Marketable Equity
Securities, which provide guidance on determining when an
investment is other-than-temporarily impaired. Investments are
reviewed quarterly for indicators of other-than-temporary
impairment. This determination requires significant judgment. In
making this judgment, we evaluate, among other factors, the
duration and extent to which the fair value of an investment is
less than its cost; the financial health of and near-term
business outlook for the investee, including factors such as
industry and sector performance, changes in technology, and
operational and financing cash flow; and our intent and ability
to hold the investment. Investments with an indicator would be
further evaluated to determine the likelihood of a significant
adverse effect on the fair value and amount of the impairment as
necessary. To date, we have not recognized any impairment
related to our long-term marketable securities portfolio. If
market, industry and/or investee conditions deteriorate, we may
incur future impairments.

Accounts
Receivable

The allowance for doubtful accounts represents
our best estimate of the amount of probable credit losses in our
existing accounts receivable. We perform a periodic analysis to
determine the appropriate allowance for doubtful accounts. This
analysis includes various analytical procedures and a review of
factors, including individual review of past due balances over
90 days and greater than a specified amount, our history of
collections, as well as the overall economic environment.

Long-lived
Assets Including Goodwill and Other Acquired Intangible
Assets

In connection with Loudeyes acquisitions of
Overpeer and OD2 during 2004, management has allocated the
respective purchase prices and transaction costs to the
estimated fair values of assets acquired and liabilities assumed
in accordance with FAS No. 141, Business
Combinations. These purchase price estimates were based on
managements estimates of fair value and estimates from
third party consultants. These determinations require
significant judgment.

Management periodically evaluates the
recoverability of our long-lived assets in accordance with
FAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. When doing so, management
is required to 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.

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At December 31, 2004, net property and
equipment totaling $5.7 million, intangible assets totaling
$3.7 million and goodwill totaling $43.5 million were
subject to an impairment review.

We account for goodwill and intangible assets in
accordance with FAS No. 142, Goodwill and Other
Intangible Assets (FAS 142). Under FAS 142,
goodwill and intangible assets deemed to have indefinite lives
are not amortized, but are subject to, at a minimum, annual
impairment tests. We assess the impairment of long-lived assets,
including goodwill and intangibles on an annual basis or
whenever events or changes in circumstances indicate that the
fair value is less than its carrying value. Factors we consider
important which could trigger an impairment review include the
following:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Poor economic performance relative to historical
    or projected future operating results;
|
| |  | Significant negative industry, economic or
    company specific trends;                    
|
| |  | Changes in the manner of our use of the assets or
    the plans for our business;          
|
| |  | Market price of our common stock; and                                                      
|
| |  | Loss of key personnel.                                                                     

These charges are discussed in greater detail in
Note 4 to our consolidated financial statements. As
disclosed in Note 3 to the consolidated financial
statements, we have recorded goodwill and intangible assets in
connection with our acquisitions of Overpeer in March 2004 and
OD2 in June 2004. We performed our annual impairment tests for
2004 and did not record an impairment charge. We performed our
annual impairment tests for 2003 and 2002 and recorded resulting
impairment charges.

Purchase
Price Allocation

We account for acquisitions under the purchase
method of accounting. Accordingly, any assets acquired and
liabilities assumed are recorded at their respective fair
values. The recorded values of assets and liabilities are based
on third party estimates and independent valuations. The
remaining values are based on managements judgments and
estimates. Accordingly, our financial position or results of
operations may be affected by changes in estimates and judgments
used to value these assets and liabilities.

Accounting
for Stock-based Compensation

We account for employee stock and stock-based
compensation plans through the intrinsic value method in
accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) as permitted by
FAS No. 123, Accounting for Stock-Based
Compensation (FAS 123) and as such, generally
recognize no compensation expense for employee stock options.

Music
Publishing Rights and Music Royalty Accruals

We must make estimates of our music publishing
rights and music royalties owed for our domestic and
international music services. Differences in judgments or
estimates could result in material differences in the amount and
timing of our music publishing and royalty expense for any
period. Under U.S. and foreign copyright laws, we may be
required to pay licensing fees for digital sound recordings and
compositions we deliver. Copyright law generally does not
specify the rate and terms of the licenses, which are determined
by voluntary negotiations among the parties or, for certain
compulsory licenses where voluntary negotiations are
unsuccessful, by arbitration. There are certain geographies and
agencies for which we have not yet completed negotiations with
regard to the royalty rate to be applied to our current or
historic sales of our digital music offerings. Our estimates are
based on contracted or statutory rates, when established, or
managements best estimates based on facts and
circumstances regarding the specific music services and
agreements in similar geographies or with similar agencies.
While we base our estimates on historical experience and on
various other assumptions that management believes to be
reasonable under the circumstances, actual results may differ
materially from these estimates under different assumptions or
conditions.

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Contingencies

We become involved from time to time in various
claims and lawsuits incidental to the ordinary course of our
operations, including such matters as contract and lease
disputes and complaints alleging employment discrimination. The
outcomes of legal proceedings and claims brought against us are
subject to significant uncertainty. FAS No. 5,
Accounting for Contingencies, requires that an
estimated loss from a loss contingency such as a legal
proceeding or claim should be accrued by a charge to income if
it is probable that an asset has been impaired or a liability
has been incurred and the amount of the loss can be reasonably
estimated. Disclosure of a contingency is required if there is
at least a reasonable possibility that a loss has been incurred.
In determining whether a loss should be accrued, we evaluate,
among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of loss.
Changes in these factors could materially impact our financial
position or our results of operations.

Income
Taxes

FAS No. 109, Accounting for
Income Taxes, establishes financial accounting and
reporting standards for the effect of income taxes. Deferred tax
assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and
liabilities using the enacted tax rates in effect for the
periods in which the differences are expected to reverse. Our
net deferred tax asset has been reduced by a full valuation
allowance based upon managements determination that the
criteria for recognition have not been met. Judgment is required
in assessing the future tax consequences of events that have
been recognized in our financial statements or tax returns.
Variations in the actual outcome of these future tax
consequences could materially impact our financial position or
our results of operations.

Recently
Issued Accounting Standards

In December 2004, the FASB issued Statement
No. 123R, Share-Based Payment, that amends
FAS 123 and FAS No. 95, and supersedes APB 25. This
statement requires a company to measure the cost of employee
services received in exchange for an award of equity
instruments, such as stock options, based on the grant-date fair
value of the award and to recognize such cost over the requisite
period during which an employee provides service. The grant-date
fair value will be determined using option-pricing models
adjusted for unique characteristics of the equity instruments.
The statement also addresses the accounting for transactions in
which a company incurs liabilities in exchange for goods or
services that are based on the fair value of the companys
equity instruments or that may be settled through the issuance
of such equity instruments. The statement does not change the
accounting for transactions in which a company issues equity
instruments for services to non-employees or the accounting for
employee stock ownership plans. This statement is effective
beginning in the third quarter of 2005, and requires Loudeye to
recognize compensation costs on outstanding awards for which the
requisite service has not yet been rendered. While Loudeye
expects the implementation of this standard to have a material
impact on its consolidated financial statements, Loudeye is
currently unable to quantify this impact as it has not
implemented the necessary option expensing software.

In December 2004, the FASB issued Staff
Position No. 109-2, Accounting and Disclosure Guidance for
the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 (FAS 109-2). The American
Jobs Creation Act of 2004 introduces a special one-time
dividends received deduction on the repatriation of certain
foreign earnings to a U.S. taxpayer, provided certain criteria
are met. FAS 109-2 provides accounting and disclosure
guidance for the repatriation provision, and was effective
immediately upon issuance. As we do not currently have any
foreign earnings, we do not believe that the adoption of
FAS 109-2 will have a significant effect on our
consolidated financial statements.

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Consolidated Results of Operations

Percentage comparisons have been omitted within
the following table where they are not considered meaningful.
Certain information reported in previous periods has been
reclassified to conform to current presentation. All amounts,
except amounts expressed as a percentage, are presented in the
following table in thousands.

During the preparation of our financial
statements for the year ended December 31, 2004, we made
revisions of classification with regard to expenses incurred
during the years ended December 31, 2003 and 2002. Such
revisions of classification had no impact on net loss,
stockholders equity or cash flows as previously reported.
These revisions related to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regent Fees.We
    revised our classification of $878,000 relating to service fees
    paid to Regent Pacific Management Corporation (Regent) during
    the year ended December 31, 2003, from special
    charges  other to general and administrative expense
    in the current presentation as we determined that these expenses
    were more appropriately classified as general and administrative.                          
|
| |  | Amortization of Intangible
    Assets.We revised our classification
    of amortization of acquired technology and capitalized software
    costs totaling approximately $269,000 in 2003 and
    $1.3 million in 2002 from operating expenses 
    amortization of intangibles to cost of revenue in the current
    presentation as we determined that these expenses were more
    appropriately classified as cost of revenue.   
|
| |  | Impairment of Intangible
    Assets.We revised our classification
    of impairment charges related to acquired technology and
    capitalized software costs totaling approximately $601,000 in
    2003 and $694,000 in 2002 from operating expenses 
    special charges  other to cost of revenue in the
    current presentation as we determined that these charges were
    more appropriately classified as cost of revenue.

|        |                            |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |     |     |    |        |       |       |        |       |       |       |        |     |        |        |      |   |     |     |    |   
|------- | -------------------------- | ----------------------------------- | ------------- | -------- | ----- | ------------ | ------ | -------- | ----- | ------ | ----- | ------ | ------ | ----- | -- | --- | --- | -- | ------ | ----- | ----- | ------ | ----- | ----- | ----- | ------ | --- | ------ | ------ | ---- | - | --- | --- | -- | --
|        |                            |                                     |               |          |       |              |        |          |       |        |       |       
|        |                            | Years Ended                         |               |          |       | Years Ended  |        |         
|        |                            | December 31,                        |               | Variance |       | December 31, |        | Variance
|        |                            |                                     |               |          |       |              |        |         
|        |                            | 2004                                |               | 2003     |       | $            |        | %        |       | 2003   |       | 2002   |        | $     |    | %  
|        |                            |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |    
|Revenue |                            |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |     |     |    |        |       |       |        |       |       |       |        |     |        |        |      |   |    
|        | Digital media services     |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |     |     |    |        |       |       |        |       |       |       |        |     |        |        |      |   |     |    
|        |                            | Digital media store services        |               | $        | 5,932 |              |        | $        | 171   |        |       | $      | 5,761  |       |    |     |     |    |        | $     | 171   |        |       | $     |      |        |     | $      | 171    |      |   |     |     |   
|        |                            | Encoding services                   |               |          | 3,829 |              |        |          | 2,377 |        |       |        | 1,452  |       |    |     | 61  | %  |        |       | 2,377 |        |       |       | 1,477 |        |     |        | 900    |      |   |     | 61  | % 
|        |                            | Content protection services         |               |          | 2,788 |              |        |          |      |        |       |        | 2,788  |       |    |     |     |    |        |       |      |        |       |       |      |        |     |        |       |      |   |     |     |   
|        |                            | Samples services                    |               |          | 1,589 |              |        |          | 1,685 |        |       |        | (96    | )     |    |     | (6  | )% |        |       | 1,685 |        |       |       | 2,027 |        |     |        | (342   | )    |   |     | (17 | )%
|        |                            | Internet radio and hosting services |               |          | 1,064 |              |        |          | 2,065 |        |       |        | (1,001 | )     |    |     | (48 | )% |        |       | 2,065 |        |       |       | 1,053 |        |     |        | 1,012  |      |   |     | 96  | % 
|        |                            | Webcasting                          |               |          | 1,322 |              |        |          | 3,767 |        |       |        | (2,445 | )     |    |     | (65 | )% |        |       | 3,767 |        |       |       | 4,971 |        |     |        | (1,204 | )    |   |     | (24 | )%
|        |                            |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |     |     |    |        |       |       |        |       |       |       |        |     |        |        |      |   |    
|        |                            |                                     | 16,524        |          |       |              | 10,065 |          |       |        | 6,459 |        |        |       | 64 | %   |     |    | 10,065 |       |       |        | 9,528 |       |       |        | 537 |        |        |      | 6 | %  
|        | Media restoration services |                                     |               | 297      |       |              |        | 1,883    |       |        |       | (1,586 | )      |       |    | (84 | )%  |    |        | 1,883 |       |        |       | 3,153 |       |        |     | (1,270 | )      |      |   | (40 | )% 
|        |                            |                                     |               |          |       |              |        |          |       |        |       |        |        |       |    |     |     |    |        |       |       |        |       |       |       |        |     |        |        |      |   |    
|        |                            |                                     | Total revenue |          |       | 16,821       |        |          |       | 11,948 |       |        |        | 4,873 |    |     |     | 41 | %      |       |       | 11,948 |       |       |       | 12,681 |     |        |        | (733 | ) |     |     | (6 | )%

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|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |      |     |   
|----------------------------------------------- | -------------------------------------- | ------------------------ | ---- | -------- | ------- | ------------ | ---- | -------- | ------- | ---- | ---- | ------ | ------ | - | ---- | ---- | --- | -- | ---- | ------- | ------- | - | ----- | ------- | ------- | - | ---- | ------ | ------ | - | --- | ---- | --- | --
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |       
|                                                |                                        | Years Ended              |      |          |         | Years Ended  |      |         
|                                                |                                        | December 31,             |      | Variance |         | December 31, |      | Variance
|                                                |                                        |                          |      |          |         |              |      |         
|                                                |                                        | 2004                     |      | 2003     |         | $            |      | %        |         | 2003 |      | 2002   |        | $ |      | %   
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |     
|Cost of revenue                                 |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                | Digital media services                 |                          |      | 11,778   |         |              |      | 6,483    |         |      |      | 5,295  |        |   |      | 82   | %   |    |      | 6,483   |         |   |       | 13,362  |         |   |      | (6,879 | )      |   |     | (51  | )% 
|                                                | Media restoration services             |                          |      | 285      |         |              |      | 1,593    |         |      |      | (1,308 | )      |   |      | (82  | )%  |    |      | 1,593   |         |   |       | 1,898   |         |   |      | (305   | )      |   |     | (16  | )% 
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                |                                        | Total cost of revenue    |      |          | 12,063  |              |      |          | 8,076   |      |      |        | 3,987  |   |      |      | 49  | %  |      |         | 8,076   |   |       |         | 15,260  |   |      |        | (7,184 | ) |     |      | (47 | )%
|Operating expenses                              |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                | Sales and marketing                    |                          |      | 4,456    |         |              |      | 3,286    |         |      |      | 1,170  |        |   |      | 36   | %   |    |      | 3,286   |         |   |       | 7,667   |         |   |      | (4,381 | )      |   |     | (57  | )% 
|                                                | Research and development               |                          |      | 4,017    |         |              |      | 1,688    |         |      |      | 2,329  |        |   |      | 138  | %   |    |      | 1,688   |         |   |       | 3,159   |         |   |      | (1,471 | )      |   |     | (47  | )% 
|                                                | General and administrative             |                          |      | 11,323   |         |              |      | 8,656    |         |      |      | 2,667  |        |   |      | 31   | %   |    |      | 8,656   |         |   |       | 11,375  |         |   |      | (2,719 | )      |   |     | (24  | )% 
|                                                | Amortization of intangibles            |                          |      | 234      |         |              |      | 831      |         |      |      | (597   | )      |   |      | (72  | )%  |    |      | 831     |         |   |       | 1,790   |         |   |      | (959   | )      |   |     | (54  | )% 
|                                                | Stock-based compensation               |                          |      | 306      |         |              |      | 1,298    |         |      |      | (992   | )      |   |      | (76  | )%  |    |      | 1,298   |         |   |       | (383    | )       |   |      | 1,681  |        |   |     | (439 | )% 
|                                                | Special charges  goodwill impairments |                          |      |         |         |              |      | 5,307    |         |      |      | (5,307 | )      |   |      |      |     |    |      | 5,307   |         |   |       |        |         |   |      | 5,307  |        |   |     |      |    
|                                                | Special charges  other                |                          |      | 312      |         |              |      | 1,913    |         |      |      | (1,601 | )      |   |      | (84  | )%  |    |      | 1,913   |         |   |       | 6,152   |         |   |      | (4,239 | )      |   |     | (69  | )% 
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                |                                        | Total operating expenses |      |          | 20,648  |              |      |          | 22,979  |      |      |        | (2,331 | ) |      |      | (10 | )% |      |         | 22,979  |   |       |         | 29,760  |   |      |        | (6,781 | ) |     |      | (23 | )%
|Interest income                                 |                                        |                          | 377  |          |         |              | 347  |          |         |      | 30   |        |        |   | 9    | %    |     |    | 347  |         |         |   | 1,149 |         |         |   | (802 | )      |        |   | (70 | )%  
|Interest expense                                |                                        |                          | (201 | )        |         |              | (286 | )        |         |      | 85   |        |        |   | (30  | )%   |     |    | (286 | )       |         |   | (631  | )       |         |   | 345  |        |        |   | (55 | )%  
|Increase in fair value of common stock warrants |                                        |                          |     |          |         |              | (248 | )        |         |      | 248  |        |        |   | (100 | )%   |     |    | (248 | )       |         |   |      |         |         |   | (248 | )      |        |   |     |     
|Gain on sale of media restoration assets        |                                        |                          | 156  |          |         |              |     |          |         |      | 156  |        |        |   |      |      |     |    |     |         |         |   |      |         |         |   |     |        |        |   |     |     
|Other income (expense), net                     |                                        |                          | (839 | )        |         |              | 120  |          |         |      | (959 | )      |        |   | (799 | )%   |     |    | 120  |         |         |   | 659   |         |         |   | (539 | )      |        |   | (82 | )%  
|Net income (loss)                               |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                | Digital media services                 |                          | $    | (16,502  | )       |              | $    | (17,635  | )       |      | $    | 1,133  |        |   |      | (6   | )%  |    | $    | (17,635 | )       |   | $     | (30,614 | )       |   | $    | 12,979 |        |   |     | (42  | )% 
|                                                | Media restoration services             |                          | $    | 105      |         |              | $    | (1,539   | )       |      | $    | 1,644  |        |   |      | (107 | )%  |    | $    | (1,539  | )       |   | $     | (548    | )       |   | $    | (991   | )      |   |     | 181  | %  
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     
|                                                |                                        | Net loss                 |      | $        | (16,397 | )            |      | $        | (19,174 | )    |      | $      | 2,777  |   |      |      | (14 | )% |      | $       | (19,174 | ) |       | $       | (31,162 | ) |      | $      | 11,988 |   |     |      | (38 | )%
|                                                |                                        |                          |      |          |         |              |      |          |         |      |      |        |        |   |      |      |     |    |      |         |         |   |       |         |         |   |      |        |        |   |     |     



| |                                           
| | ------------------------------------------
| | Years ended December 31, 2004 and
    2003

Revenue.Revenue
increased in 2004 to $16.8 million from $11.9 million
in 2003 due primarily to the acquisitions of OD2 (which
generated a substantial majority of our 2004 music store
services revenue) and Overpeer (which generated all of our 2004
content protection services revenue) acquisitions as well as
increased encoding revenue, offset by declining revenue in our
internet radio and hosting and webcasting service offerings, and
declining revenue following sale of our media restoration
services segment.

During the year ended December 31, 2004, no
single customer accounted for 10% or more of total revenue.
During the year ended December 31, 2003, revenue from two
customers represented 16% of total revenue. Revenue generated
from our international operations was $5.5 million in 2004
compared to zero in 2003, due to our acquisition of OD2 in June
2004.

During 2004, our service mix changed
significantly. We acquired Overpeer in March 2004, which
resulted in a new revenue stream from content protection
services, and OD2 in late June 2004, which resulted in a
significant increase in digital media store services revenue. In
May 2004, we completed the sale of all of the assets of our
media restoration services business pursuant to an agreement
dated October 31, 2003.

Digital media store services
revenue.Revenue from digital media
store services increased to $5.9 million in 2004 from
$171,000 in 2003 primarily as a result of our acquisition of OD2
in June 2004. Revenue from digital media store services consist
principally of platform service fees and transaction related
distribution or revenue sharing fees which are summarized below.



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Platform service fees are generally recognized as
    revenue over the term of the customer contract and represent
    charges in connection with enabling the service and maintaining
    its overall

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| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | functionality during the term of the customer
    contract, which is generally one to three years. We charge
    platform fee to our customers in a variety of manners, including
    initial set-up fees, monthly only fees, or a combination of
    initial set-up and monthly fees.
|
| |  | We also receive a percentage of consumer
    transactions (digital downloads pay-as-you-go, or à la
    carte). This scaleable revenue stream enables us to share
    directly in the success of our customers music store
    services that we enable and manage.                   

In June 2004, we acquired OD2, and our
consolidated financial statements include the results of their
operations since the June 22, 2004 closing date of the
acquisition. We also launched a music store customer in the U.S.
on the Loudeye-developed platform in September 2004. Digital
media store services revenue, both in the U.S. and abroad, was
approximately $5.9 million in 2004. In 2003, we generated
approximately $171,000 of digital media store services revenue
from fulfillment of ringtunes and rights clearing services.
Digital media store services revenue as a percentage of total
revenue was 35% in 2004 and 1% in 2003. In the fourth quarter
2004, digital media store services revenue increased
significantly from $1.9 million in the third quarter of
2004 to $3.7 million in the fourth quarter 2004, an 95%
increase primarily attributable to increased transactional
volume from our music store services. This revenue accounted for
approximately 56% of total revenue in the fourth quarter 2004 as
compared to 37% in the third quarter 2004. We expect that our
digital media distribution services will demonstrate a faster
growth rate than any of our other revenue lines as we continue
to deploy these services globally and consumer adoption
increases. In addition, although in 2004 our digital media store
services revenue consisted exclusively of music store services
revenue, we plan to extend our store services offerings to other
media, such as video, music video and games.

Encoding revenue.Revenue from encoding services increased to $3.8 million in
2004 from $2.4 million in 2003. Revenue from encoding
services generally fluctuates based on the volume of the content
delivered to our customers and the price charged for the
services provided. In 2004, there was increased demand from our
customers for encoding services, primarily for the delivery of
digital music, as our customers focused on launching digital
music services, which drove volume up from 2003. Growth in the
encoding services line is driven by several key factors,
including the number of new digital retailer launches, the
addition of new content partners as customers, and the inclusion
of large one-off encoding projects, including those driven by
the introduction of new digital file formats. Our revenue from
encoding services may fluctuate in the future based on these
factors, among others.

Content protection services
revenue.Content protection services
are provided by our Overpeer subsidiary, which we acquired in
March 2004. Accordingly, we reported no revenue from such
services during 2003. Content protection services revenue as a
percentage of total revenue was 17% in 2004. Revenue for content
protection services is generated from service fees based on the
number of titles protected and the level of protection
requested. We provide our content protection services customers
with guaranteed service performance levels. If we fail to meet
these service level guarantees, we could be liable for monetary
credits or refunds of service fees previously paid or owed to
us. Content protection services are typically provided under
renewable contracts that range in length from one to two years.
Content protection services revenue from three customers
accounted for 69% of total content protection services revenue
in 2004. There can be no assurances that these customers will
renew their agreements as they expire and we expect content
protection services revenue to fluctuate in future periods.

Samples services
revenue.Revenue from samples services
generally fluctuates based on the volume of content streamed for
our customers, which is primarily driven by their needs and the
level of activity on their websites. Samples services revenue
declined approximately 6% for the year ended December 31,
2004 compared to 2003 from $1.7 million to
$1.6 million. This decrease was attributable to a
combination of pricing pressures and changes in the volume of
paid content streamed. We expect that this amount will continue
to fluctuate in the future.

Internet radio and hosting services
revenue.Revenue from internet radio
and hosting services decreased to $1.1 million in 2004 from
$2.1 million in 2003. Revenue from internet radio and
hosting services generally fluctuates based on the volume of
content streamed for our customers, which is primarily driven by
their needs and the level of activity on their websites. During
the fourth quarter 2003, we had a

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license sale of approximately $300,000 for
hosting services. The decrease in internet radio and hosting
services revenue for 2004 as compared to 2003 primarily relates
to a decreased volume of content streamed and the fact that we
had no license sales in 2004 similar to the 2003 transaction.
Due to the fact that this revenue stream is dependent upon the
volume of content streamed as well as the dollar amount of
license sales, we expect that revenue from these services will
continue to fluctuate in the future.


Webcasting revenue.In late 2003, we refocused our webcasting services on customer
relationships that provide higher margins. As a result, revenue
from webcasting services volume decreased significantly for the
year ended December 31, 2004 compared to 2003 from
$3.8 million to $1.3 million. Due to the fact that
this revenue stream is volume dependent, we expect that revenue
from these services will continue to fluctuate in the future.

Media restoration services
revenue.As discussed in Note 5
to the consolidated financial statements, pursuant to an
agreement dated October 31, 2003 we sold all of the assets
of our media restoration business on January 30, 2004 and
completed the sale in May 2004. At closing, we also entered into
a co-marketing and reseller agreement with the purchaser
pursuant to which we will sell, for a fee, media restoration
services on behalf of the purchaser for a two-year period. The
co-marketing and reseller agreement and earn-out provisions of
the transaction constitute continuing involvement under
FAS 144. Consequently, our media restoration business has
not been reported as a discontinued operation. Because our media
restoration subsidiary continued to be the primary obligor under
certain contracts with the U.S. General Services
Administrative (GSA) until their assignment on May 17,
2004, revenue and cost of revenue in the consolidated statement
of operations of Loudeye include the revenue from services
provided under the GSA Contracts, totaling $213,000 for the year
ended December 31, 2004. This revenue is entirely offset by
the associated cost of revenue. We do not expect media
restoration services to be an integral portion of our revenue in
future periods.

Deferred revenue.Deferred revenue is comprised of the unrecognized revenue
related to unearned platform fees and other prepayments for
which the earnings process has not been completed. Deferred
revenue at December 31, 2004 was $5.7 million compared
to approximately $0.7 million at December 31, 2003. As
discussed above, in June 2004, we acquired OD2 and our
consolidated financial statements include the results of their
operations since the date of acquisition. Deferred revenue at
December 31, 2004 includes $5.2 million relating to
OD2s music store services which are a part of our digital
media store services. The remaining increase in deferred revenue
during 2004 is primarily due to recognition of revenue on
existing contracts occurring at a slower rate than revenue
deferrals under new contracts.

Cost of digital media services
revenue.Cost of revenue for our
digital media services segment includes the cost of production,
including personnel, cost of royalties to content providers and
publishers, technical support, transaction processing fees,
bandwidth and hosting costs, depreciation and amortization of
infrastructure assets related to our service offerings,
amortization of acquired technology resulting from acquisitions,
impairment charges related to acquired technology, and an
allocated portion of facilities and equipment. Cost of revenue
for digital media services increased to $11.8 million in 2004
from $6.5 million in 2003. We implemented cost reduction
initiatives related to our restructuring in March 2003; however,
in 2004 we began to expand our digital media services work force
in order to meet the demands of anticipated growth and new
initiatives particularly in relation to our music store
services. In addition, costs associated with the delivery of
digital media store services revenue from our acquisition of OD2
in late June 2004 contributed to the increase in digital media
store services cost of revenue compared to 2003. Cost of digital
media revenue related to Overpeer Inc. and OD2 were
approximately $6.6 million in 2004, and included payroll
and related expenses of approximately $547,000. Gross profit
margins are generally lower for our music store services as
compared to our other services, principally as a result of the
significant royalties payable to the content providers and
publishers on each transaction. As music store services grow, we
expect a decline in our overall gross profit margin percentage
in the future. However, since this is a digital business with
lower incremental fixed costs, as transaction volumes increase
we expect that the future growth in transactional volumes will
contribute significantly to a reduction in our net loss. We
expect cost of revenue related to our digital media services to
increase in 2005 as compared to 2004.

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Depreciation included in cost of digital media
services revenue increased to approximately $1.6 million
from $597,000 in 2003. This increase is due primarily to our
acquisition of OD2 and Overpeer. In addition, we purchased
$1.5 million in equipment in the first quarter 2004 to
upgrade the storage and access systems for our digital music
archive, as well as additional equipment expenditures in the
second quarter 2004 related to our content protection services
offering. Amortization expense included in cost of digital media
services revenue was $553,000 in 2004 and $269,000 in 2003 and
is primarily the result of the amortization of acquired
technology. In 2003, cost of digital media services revenue also
included $601,000 related to impairment of acquired intangible
assets.

Cost of media restoration services
revenue.As discussed above, we sold
all of the assets of our media restoration business on
January 30, 2004 and completed the sale in May 2004.
Because our media restoration subsidiary continued to be the
primary obligor under certain contracts with the GSA until their
assignment on May 17, 2004, revenue and costs of revenue in
the consolidated statement of operations of Loudeye include the
cost of revenue from services provided under the GSA Contracts,
totaling $213,000 for the year ended December 31, 2004. The
cost of revenue entirely offset the associated revenue.
Depreciation and amortization expense included in cost of media
restoration services revenue decreased from $252,000 in 2003 to
zero in 2004 due to the sale of this business.

Sales and marketing.Sales and marketing expenses consist primarily of salaries,
bonuses, commissions and benefits earned by sales and marketing
personnel, direct expenditures such as travel and communication,
and marketing expenditures such as advertising, public relations
costs and trade show expenses. Sales and marketing expenses for
2004 increased to approximately $4.5 million from
approximately $3.3 million in 2003, primarily due to
increases resulting from our acquisitions of Overpeer and OD2.
These expenses were offset in part by cost reduction initiatives
implemented in 2003 and 2004. Sales and marketing expenses
related to the acquired companies were approximately
$1.9 million and included payroll and related expenses of
approximately $548,000. Sales and marketing expenses as a
percentage of total revenue were 26% in 2004 and 28% in 2003. We
expect that we will continue to invest significantly in sales
and marketing in 2005, as we believe that a substantial sales
and marketing effort is essential for us to maintain market
position and further increase market acceptance of our digital
media services, in particular our digital media store services.

Research and
development.Research and development
expenses include labor and other related costs of the continued
development and support of our digital media services. To date,
the majority of research and development costs have been
expensed as incurred. Research and development expenses
increased to approximately $4.0 million in 2004 from
approximately $1.7 million in 2003 primarily as a result of
the inclusion of research and development expenses related to
the acquired companies. Research and development costs related
to the acquired companies totaled approximately
$1.5 million in 2004 and included payroll and related
expenses of approximately $1.2 million. We believe that a
significant research and development investment is essential for
us to maintain our market position, to continue to expand our
digital media services offerings, in particular our digital
media store services, and to develop additional applications.
Accordingly, we anticipate that we will continue to invest in
research and development for the foreseeable future, and we
anticipate research and development costs as an absolute dollar
amount will fluctuate, depending primarily upon the volume of
future revenue, customer needs, staffing levels, overhead costs
and our assessment of market demands.

General and
administrative.General and
administrative expenses consist primarily of salaries, benefits
and related costs for executive, finance, legal, administrative
and information services personnel, occupancy costs, legal
expenses, and costs associated with being a public company,
including but not limited to, consulting and audit fees related
to the Sarbanes-Oxley internal control certification
requirements, annual and other public-reporting costs,
directors and officers liability insurance, investor
relations, and professional services fees. General and
administrative expenses increased to approximately
$11.3 million from approximately $8.7 million in 2003,
primarily as a result of our acquisition of Overpeer and OD2.
Costs related to the acquired companies were approximately
$3.1 million, and included payroll and related expenses of
approximately $2.3 million. We incurred costs associated
with our first annual Sarbanes-Oxley internal control assessment
and certification. We also incurred costs associated with

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turnover in our accounting and finance department
during the second half 2004. We expect that general and
administrative expenses will increase in the first quarter 2005
as compared to the fourth quarter 2004 as we increase our
personnel and other resources to support our growth, and as we
continue to incur additional professional fees in order to
comply with the requirements under the Sarbanes-Oxley Act of
2002.


Amortization of
intangibles.Amortization of
intangibles includes amortization of identified intangible
assets related to acquisitions other than acquired technology,
which is included in cost of revenue. We recorded impairment
charges in the first quarter 2003 relating to our restructuring,
and our remaining intangibles, other than those related to the
Overpeer and OD2 acquisitions, were either written off or fully
amortized by the first quarter of 2004. Beginning in the first
quarter 2004 we incurred additional amortization expense related
to our acquisitions of Overpeer and OD2. We expect amortization
expense on an annual basis for 2005 to be approximately
comparable to 2004 levels.

Stock-based
compensation.Stock-based compensation
totaled $423,000 in 2004, of which $117,000 is included in cost
of revenue, consisting primarily of the amortization of deferred
stock compensation of $276,000, and stock-based compensation
expense of $132,000 related to warrants granted to consultants
for services. Stock-based compensation for 2003 totaled
$1.3 million, consisting of the amortization of deferred
stock compensation of $398,000, stock-based compensation expense
of $730,000 related to stock options granted to a member of our
board of directors for consulting services provided through
September 30, 2003, variable stock compensation expense of
$64,000 related to stock options that were repriced in 2001,
stock and options issued to former employees as severance and
termination benefits of $99,000, and stock options issued to a
consultant of $7,000.

Special charges.We
recorded special charges related to corporate restructurings,
facilities consolidations and the impairment of assets in
accordance with our long-lived asset policy. Following is a
summary of special charges for 2004 and 2003 (in thousands):

|                                                          |  |              |     |      |  |   |       | 
|--------------------------------------------------------- |  | ------------ | --- | ---- |  | - | ----- | 
|                                                          |  |             
|                                                          |  | Years Ended 
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2004         |     | 2003
|                                                          |  |              |     |     
|Goodwill impairment                                       |  | $            |    |      |  | $ | 5,307 | 
|Customer lists and other intangible assets
    impairment |  |              |    |      |  |   | 84    | 
|Property and equipment impairment                         |  |              |    |      |  |   | 670   | 
|Employee severance and termination benefits               |  |              |    |      |  |   | 501   | 
|Facilities related charges                                |  |              | 312 |      |  |   | 658   | 
|                                                          |  |              |     |      |  |   |       | 
|                                                          |  | $            | 312 |      |  | $ | 7,220 | 
|                                                          |  |              |     |      |  |   |       | 

For certain lease terminations, the settlement
amounts were less than we had accrued initially due to favorable
negotiations with landlords and improvements in real estate
markets. In other cases, we increased our accruals as a result
of our ongoing evaluations of our lease obligations. The
adjustments resulting from these settlements and additional
accruals were recorded in special charges in the consolidated
statements of operations. In 2004, as discussed in Note 4
to the consolidated financial statements, we increased our
estimate of the settlement amount and facilities related charges
we would ultimately be required to pay related to Loudeyes
unoccupied facility at 414 Olive Way, Seattle, Washington by
approximately $362,000. This increase was offset by a $50,000
decrease in the accrual related to Loudeyes VidiPax
facility in New York, New York which was recognized as a credit
to special charges in first quarter 2004.

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The following table summarizes the activity in
accrued special charges during the year ended December 31,
2004 (in thousands). The majority of these accrued charges,
which primarily represent rent settlement obligations, were paid
in January 2005.

|                           |  |                    |        |  
|-------------------------- |  | ------------------ | ------ | -
|                           |  | Facilities-related
|                           |  | Charges           
|                           |  |                   
|Balance, December 31, 2003 |  | $                  | 1,670  |  
|Additional accruals        |  |                    | 362    |  
|Payments                   |  |                    | (1,459 | )
|Adjustments                |  |                    | (170   | )
|                           |  |                    |        |  
|Balance, December 31, 2004 |  | $                  | 403    |  
|                           |  |                    |        |  

Interest income.Interest income totaled $377,000 in 2004 compared to $347,000 in
2003. Interest income consists of interest income and realized
gains and losses on sales of our marketable securities. The
increase was due primarily to higher average investment balance
resulting from the proceeds received from the private equity
financings completed in August 2003, February 2004 and December
2004. We expect interest income will fluctuate during 2005
depending upon our average investment balances and yield rates
throughout the year.

Interest expense.Interest expense totaled $201,000 in 2004 compared to $286,000
in 2003, due to lower average debt balances and lower interest
rates during 2004 and the voluntary repayment in full of our
line of credit in March 2004. We expect that interest expense
will continue to decline in 2005 as we continue to make
principal payments against our term loan balance.

Increase in fair value of common stock
warrants.The increase in fair value
of common stock warrants of $248,000 in 2003 represented the
increase in the estimated fair value of the warrants that we
issued in connection with our private equity financing in August
2003. This transaction is described more fully in Note 6 to
the consolidated financial statements.

Gain on sale of media restoration
assets.As discussed above, we sold
our media restoration business on January 30, 2004 and
completed the sale in May 2004. The gain on sale of media
restoration assets in 2004 represents the net gain on the sale
of net assets transferred under contractual arrangement and
release of certain escrow claims. This transaction is described
more fully in Note 5 to the consolidated financial
statements.

Other income (expense),
net.Other expense for 2004 consists
principally of net foreign exchange translation loss of
$833,000. This loss was primarily the result of the impact of
the weakened U.S. dollar on U.K. pound denominated liabilities
incurred in connection with our acquisition of OD2. Other income
for 2003 of $120,000 consisted principally of gains on sales of
excess equipment.

Income taxes.We
have not recorded income tax benefits related to our net
operating losses in 2004 or 2003 as a result of the
uncertainties regarding the realization of such net operating
losses. Our foreign operations also have net operating losses.
At December 31, 2004, Loudeye had U.S. operating net
operating loss carryforwards of approximately
$210.0 million and foreign net operating loss carryforwards
of approximately $5.0 million. We also had research and
development tax credit carryforwards of approximately $160,000
as of December 31, 2004. Certain of our net operating loss
carryforwards were acquired in business combinations. If these
acquired net operating loss carryforwards become recoverable in
the future, they will be used to first reduce to zero any
goodwill, and then reduce to zero any other non-current
intangible assets associated with the business combinations, and
then any remaining net operating loss carryforwards recovered
will be recognized as a reduction in income tax expense. Under
the provisions of Section 382 of the Internal Revenue Code,
the Tax Reform Act of 1986 limits the use of net operating loss
and tax credit carryforwards in certain situations where changes
occur in the stock ownership of a company. Loudeye has
experienced such ownership changes as a result of its various
stock offerings, and the utilization of the carry forwards could
be limited such that a portion of the net operating losses may
never be utilizable. The U.S. net operating loss
carryforwards increased during 2004 by approximately $119,000
due to the acquisition of Overpeer. The foreign net operating
loss carryforwards increased by

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approximately $5.0 million due to the
acquisition of OD2. However, these losses will be subject to
limitation under the provisions of Section 382 discussed
above. Approximately $2.7 million of the net operating loss
carryforwards and a portion of the valuation allowance at
December 31, 2004 resulted from deductions associated with
the exercise of non-qualified employee stock options, the
realization of which would result in a credit to
stockholders equity.




| |                                           
| | ------------------------------------------
| | Years ended December 31, 2003 and
    2002

Digital media services
revenue.Revenue from our digital
media services segment increased to $10.1 million in 2003
from $9.5 million in 2002, due primarily to an increase in
the volume of encoding and other fulfillment and related
services, offset by a decrease in webcasting revenue. Our
service mix changed significantly over the course of 2003, as we
shifted marketing emphasis away from webcasting and more toward
digital media store services.

Digital media store services
revenue.Our digital media store
services were in the early stage of development in 2003. In
2003, we generated approximately $171,000 in revenue from
fulfillment of ringtunes and rights clearing services. We
generated no revenues from digital media store services in 2002.

Encoding services revenue.Revenue from encoding services
increased to $2.4 million in 2003 from $1.5 million in 2002,
primarily as the result of the significant expansion of a
relationship with an existing major label customer. In addition,
our acquisition of EncodeThis! in June 2002 contributed to the
increase in encoding services revenue.

Samples services
revenue.Revenue from samples services
decreased to $1.7 million in 2003 from $2.0 million in 2002.
This decrease was attributable to a combination of pricing
pressures and changes in the volume of paid content streamed.

Internet radio and hosting services
revenue.Revenue from internet radio
and hosting services increased to $2.1 million in 2003 from $1.1
million in 2002. The increase in internet radio and hosting
revenue was attributed to an approximately $300,000 license sale
and the expansion of a relationship with an existing customer,
both during the fourth quarter of 2003, as well as an increase
in the volume of iRadio transactions during 2003.

Webcasting revenue.Revenue from webcasting services decreased to $3.8 million in
2003 from $5.0 million in 2002. The decrease in webcasting
revenue was primarily the result of continued pricing pressure,
as well as a reduction in our webcasting volume as we focused
more on digital music offerings and those webcasting customer
relationships that provide higher margins.

Media restoration services
revenue.Media restoration revenue
totaled $1.9 million in 2003 compared to $3.2 million
in 2002. This decrease was primarily the result of a significant
decrease in the volume of services being provided to a
significant customer, as well as decreased volume and spending
by other customers spending on discretionary projects due to
economic conditions. We entered into an agreement in October
2003, which was completed in May 2004, to sell all of the assets
of our media restoration services business.

Deferred revenue.Deferred revenue is comprised of unrecognized revenue related to
unearned service fees and other prepayments for which the
earnings process has not been completed. Deferred revenue at
December 31, 2003 was $0.7 million compared to $0.3 at
December 31, 2002. The increase in deferred revenue during
2003 is primarily due to recognition of revenue on existing
contracts occurring at a slower rate than prepayments received
under new contracts.

Cost of revenue.Cost of revenue includes the cost of production, including
personnel, cost of royalties to content providers and
publishers, technical support, transaction processing fees,
bandwidth and hosting costs, depreciation and amortization of
infrastructure assets related to our service offerings,
amortization of acquired technology resulting from acquisitions,
impairment charges related to acquired technology, an allocated
portion of facilities and equipment, and other supporting
functions related to the delivery of our digital media and media
restoration services. Depreciation included in cost of revenue

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decreased to approximately $849,000 in 2003 from
$3.4 million in 2002. This decrease was due primarily to
impairment charges recorded in the fourth quarter 2002 and the
first quarter 2003 for certain assets of our digital media
services and media restoration services segments. Amortization
of acquired technology and related impairment charges included
in cost of revenue decreased to approximately $870,000 in 2003
from $1.9 million in 2002. These impairment charges
decreased the cost basis of the assets, resulting in lower
depreciation and amortization charges. The remainder of the
decrease in cost of revenue was due to cost reduction
initiatives, primarily reductions in our work force, implemented
in the second half 2002 and the first quarter 2003.


Sales and marketing.Sales and marketing expenses totaled $3.3 million in 2003
and $7.7 million in 2002. The decrease in sales and
marketing expenses was due to the decreased personnel related to
our reductions in force in the second half 2002 and first
quarter 2003.

Research and
development.Research and development
expenses decreased from $3.2 million in 2002 to
$1.7 million in 2003 due to the reduction in the number of
development personnel as a result of the corporate
restructurings.

General and
administrative.General and
administrative expenses decreased to $8.7 million for 2003
from $11.4 million for 2002 due to the decrease in
personnel related to our reductions in force in the second half
2002 and first quarter 2003, and other related cost reduction
initiatives.

Amortization of
intangibles.Amortization of
intangibles totaled $831,000 in 2003 and $1.8 million in
2002, and primarily included amortization of customer lists,
trade names and noncompetes related to past acquisitions.

Stock-based
compensation.Stock-based compensation
for 2003 totaled $1.3 million, consisting of the
amortization of deferred stock compensation of $398,000,
stock-based compensation expense of $730,000 related to stock
options granted to a member of our board of directors for
consulting services provided through September 30, 2003,
variable stock compensation expense of $64,000 related to stock
options that were repriced in 2001, stock and options issued to
former employees as severance and termination benefits of
$99,000, and stock options issued to a consultant of $7,000.
Stock-based compensation was a credit of $383,000 for the year
ended December 31, 2002, consisting of the amortization of
deferred stock compensation and the reversal of expense related
to accelerated amortization for options that were cancelled.

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

|                                                          |  |              |       |      |  |   |       | 
|--------------------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                                          |  |             
|                                                          |  | Years Ended 
|                                                          |  | December 31,
|                                                          |  |             
|                                                          |  | 2003         |       | 2002
|                                                          |  |              |       |     
|Goodwill impairment                                       |  | $            | 5,307 |      |  | $ |      | 
|Customer lists and other intangible assets
    impairment |  |              | 84    |      |  |   | 743   | 
|Property and equipment impairment                         |  |              | 670   |      |  |   | 2,029 | 
|Employee severance and termination benefits               |  |              | 501   |      |  |   | 1,890 | 
|Facilities related charges                                |  |              | 658   |      |  |   | 1,490 | 
|                                                          |  |              |       |      |  |   |       | 
|                                                          |  | $            | 7,220 |      |  | $ | 6,152 | 
|                                                          |  |              |       |      |  |   |       | 

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The following table reflects the activity in
accrued special charges for the year ended December 31,
2003 (in thousands).

|                           |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|-------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ----------- |  | ------------ | ------ | - |  | - | ---- | - |  | - | ----- | 
|                           |  | December 31, |       | Additional |  |          |       |             |  | December 31,
|                           |  | 2002         |       | Accruals   |  | Payments |       | Adjustments |  | 2003        
|                           |  |              |       |            |  |          |       |             |  |             
|Employee severance         |  | $            | 104   |            |  | $        | 501   |             |  | $            | (409   | ) |  | $ | (196 | ) |  | $ |      | 
|Facilities related charges |  |              | 2,799 |            |  |          | 1,220 |             |  |              | (1,787 | ) |  |   | (562 | ) |  |   | 1,670 | 
|                           |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 
|Total                      |  | $            | 2,903 |            |  | $        | 1,721 |             |  | $            | (2,196 | ) |  | $ | (758 | ) |  | $ | 1,670 | 
|                           |  |              |       |            |  |          |       |             |  |              |        |   |  |   |      |   |  |   |       | 

We recorded special charges totaling
$6.2 million in 2002 related to 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
FAS No. 142, Goodwill and Intangible
Assets, and FAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. As a
result of this analysis, during the year ended December 31,
2003, we recorded impairment charges of $5.3 million for
goodwill, and $670,000 for property and equipment related to our
enterprise communication services and media restoration services
businesses.

Interest income.Interest income totaled $347,000 in 2003 and $1.1 million
in 2002. The decrease was due to the lower average cash and
investment balances in 2003 resulting from the voluntary
repayment of our credit facility in the third quarter of 2002
and utilization of cash to fund operations, and lower interest
rates in 2003.

Interest expense.Interest expense totaled $286,000 in 2003 and $631,000 in 2002.
The decrease was due primarily to lower average debt balances in
2003 due to the voluntary repayment of our credit facility in
the third quarter of 2002 and lower interest rates in 2003.

Increase in fair value of common stock
warrants.The increase in fair value
of common stock warrants of $248,000 represents the increase in
the estimated fair value of the warrants that we issued in
connection with our private equity financing. The warrants were
reclassified to equity in October 2003. This transaction is
described more fully in Note 6 to the consolidated
financial statements.

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

Liquidity and Capital Resources

We have financed our operations primarily through
proceeds from public and private sales of our equity securities.
To a lesser extent, we have financed our operations through
equipment financing and traditional lending arrangements. As of
December 31, 2004, our working capital was
$13.8 million compared with $16.8 million at
December 31, 2003. Our principal source of liquidity at
December 31, 2004 was our cash, cash equivalents and
marketable securities.

As of December 31, 2004, we had
approximately $41.2 million of cash and cash equivalents
and marketable securities. We received net proceeds of
$18.9 million from our sale of common stock in a private
placement in February 2004 and $23.5 million from our sale
of common stock in a private placement in December 2004. In
December 2004, we entered into a subscription agreement with a
limited number of accredited investors pursuant to which we sold
and issued to such investors 16,800,007 shares of our
common stock, together with warrants to
purchase 5,040,002 shares of common stock at an
exercise

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price of $2.25 per share, for an aggregate
purchase price of $25.2 million. The warrants are not
exercisable until six months after the December 23, 2004
closing date and are then exercisable until the fifth
anniversary of the closing date. We also granted the investors a
one year right to purchase 30% of any securities sold by
Loudeye in future financings, subject to exceptions. The
transaction resulted in net proceeds to Loudeye of approximately
$23.5 million. We filed a registration statement in
February 2005 covering the resale of the shares of common stock
issued in this transaction and the shares of common stock
underlying the warrants. The registration statement was not
filed within the required time period, and as a result we are
required to pay liquidated damages of approximately $33,600. The
registration statement is not yet effective. We are required to
use our commercially reasonable efforts to obtain effectiveness
of the registration statement before the earlier of (a) the
120th calendar day following the closing date or (b) the
fifth trading day following notification by the SEC that the
registration statement is no longer subject to further review
and comments. The registration rights provisions in the
subscription agreement provide that if a registration statement
does not become effective, within the specified time period,
then in addition to any other rights the holders may have, we
would be required to pay to each holder an amount in cash, as
liquidated damages, equal to 1% per month of the aggregate
purchase price, prorated daily.


In March 2005, we completed a restructuring of
our remaining deferred and contingent payment obligations to
former OD2 shareholders. From a financial accounting
perspective, we will pay £2.6 million (or
approximately $5.0 million based on December 31, 2004
exchange rates) in cash in two installments in full satisfaction
of the maximum potential contingent payment obligations to
former OD2 shareholders of up to £10.0 million
(or approximately $19.3 million based on December 31,
2004 exchange rates). The first of these payments was made in
March 2005 and the second payment will be made in July 2005. Of
this amount, we had accrued approximately £1.1 million
(approximately $2.1 million based on December 31, 2004
exchange rates) in our consolidated financial statements at
December 31, 2004 based on our assessment that the outcome
of the underlying contingency was determinable beyond a
reasonable doubt as of December 31, 2004. On a non-GAAP
basis, we will pay a total of £3.1 million (in two
equal installments), which includes £465,000 (or
approximately $896,000 based on December 31, 2004 exchange
rates) to be held in escrow, £233,000 (or approximately
$449,000 based on December 31, 2004 exchange rates) of
which are currently being held in escrow. In addition, pursuant
to the restructuring we issued 3,026,405 shares of our
common stock (excluding 528,014 shares held in escrow) to
satisfy the remaining deferred payment obligations to former OD2
shareholders. As of December 31, 2004, we had accrued
£7.2 million (approximately $13.9 million based
on December 31, 2004 exchange rates) in our financial
statements to reflect our remaining deferred payment obligations
to former OD2 shareholders. These obligations have been
satisfied in full as a result of our March 2005 stock issuance
related to the restructuring and our issuance of
3,974,206 shares of common stock in January 2005 (which
excludes 693,402 shares held in escrow).

Net cash used in operating activities was
$13.8 million and $7.3 million for the year ended
December 31, 2004 and 2003. For 2004, cash used in
operating activities resulted primarily from a net loss of
$16.4 million, partially offset by non-cash charges for
depreciation and amortization of approximately
$2.9 million, stock-based compensation charges and other
non cash items aggregating $260,000, and net foreign currency
transaction losses of $833,000. For 2003, cash used in operating
activities resulted primarily from net losses of
$19.2 million, offset partially by charges, depreciation
and amortization and increased by other adjustments and working
capital charges. Cash used in operations is dependent upon our
ability to achieve positive earnings and the timing of our
payments and collections and we expect that it will continue to
fluctuate from period to period.

Net cash used in investing activities was
$9.4 million for the year ended December 31, 2004. Net
cash provided by investing activities was $1.7 million in
2003. For 2004, cash provided by investing activities consisted
principally of the net purchases of short-term marketable
securities of $4.2 million and purchases of property and
equipment of $5.7 million, consisting principally of
equipment to upgrade the storage and access systems for our
digital music archive and investments in capital equipment for
our Overpeer anti-piracy service offering. In addition, net cash
of approximately $555,000 was used related to our acquisitions
of OD2 and Overpeer. This was partially offset by proceeds of
approximately $1.0 million

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from assets held for sale. For 2003, cash
provided by investing activities was related primarily to net
sales of short-term investments of $518,000 and payments
received on loans made to related parties of $1.2 million.


Cash provided by financing activities in 2004 was
$41.0 million, consisting primarily of net proceeds from
the private equity financing in February 2004 of
$18.9 million, net proceeds from the private equity
financing in December 2004 of $23.5 million and proceeds
from the exercise of stock options and warrants of
$1.2 million. This was partially offset by principal
payments on our debt and capital lease obligations of
$1.3 million and the repayment in full of our line of
credit for $1.3 million. Cash provided by financing
activities was $16.3 million in 2003 and consisted
primarily of net proceeds from a private equity placement
financing transaction of $11.4 million in August 2003, net
borrowings under our line of credit and term loan facilities of
$3.3 million and proceeds from the exercise of stock
options and warrants of $2.0 million, offset partially by
repurchases of stock of $425,000.

In March 2004, we acquired Overpeer though a
merger and issued 1,752,772 shares of our common stock as
consideration in the transaction. Of the shares issued in the
transaction, initially 262,916 were held in escrow through
March 1, 2005 under the terms of an escrow agreement to
satisfy indemnity claims under the merger agreement. In January
2005, one of the former Overpeer shareholders substituted
$425,004 in cash for 186,234 of the shares held in escrow,
resulting in a remaining escrow balance of $425,004 in cash and
76,682 shares of common stock. In February 2005, we
delivered notice to the escrow agent and representative of the
former Overpeer stockholders of claims for breach of
representations and warranties under the merger agreement. As a
result, the escrow cash and shares will remain in escrow until
Loudeye and the representative of the former Overpeer
stockholders resolve the claims against escrow in accordance
with the terms of the escrow agreement.

We are subject to various debt covenants and
other restrictions, including the requirement for early
repayment upon the occurrence of certain events, including a
sale or transfer of ownership or control. If we violate these
covenants or restrictions, our lenders could require repayment
of outstanding borrowings and our credit rating and access to
other financing could be adversely affected.

We were notified by Silicon Valley Bank on
October 7, 2004 that we were not in compliance with two
restrictive financial covenants that require us to maintain a
certain quick ratio and a minimum tangible net worth, each as
defined in the loan agreement. We subsequently established a
certificate of deposit in the amount of approximately
$2.2 million, which was equal to the then outstanding loan
balance. As a result, we were notified by Silicon Valley Bank on
October 11, 2004 that we had cured the default within the
cure period. The restricted balance declines as we make payments
under the term loan agreement. As a result, we have reflected
restricted cash of $2.0 million on our December 31,
2004 balance sheet. As of March 2005, we were not in compliance
with both of these restrictive financial covenants and, as such,
continue to maintain the balance of restricted cash as
collateral for our term loan balance with Silicon Valley Bank in
accordance with the terms of the loan agreement. In addition, at
December 31, 2004, approximately $568,000 of other
restricted cash is held in investment accounts that serve as
collateral for standby letters of credit for certain of our
capital and operating lease obligations.

We have incurred net losses and negative cash
flows from operations since inception and had an accumulated
deficit of approximately $209.3 million at
December 31, 2004. Historically, we have funded our
operations through sales of equity securities, borrowings under
our credit facilities and proceeds from exercises of stock
options and warrants. However, there can be no assurance that
our cash balances after December 31, 2004 will be
sufficient to sustain our operations until profitable operations
and positive cash flows are achieved.

We currently anticipate that we will continue to
experience fluctuations in results of operations for the
foreseeable future as we:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enter new markets for our services, including
    through potential acquisitions of complementary businesses,
    technology or other assets;
|
| |  | Increase or decrease research and development
    spending;                                                                                  

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| |   |                                                         
| | - | --------------------------------------------------------
| |  | Increase or decrease sales and marketing
    activities;
|
| |  | Improve our operational and financial
    systems; and  
|
| |  | Integrate acquired businesses.                          

During 2003 and 2002, we implemented cost
containment efforts and recorded special charges related to
corporate restructurings and facilities consolidation. We
continue to focus on maximizing the performance of our business
and controlling costs to respond to the economic environment and
will continue to evaluate our underlying cost structure to
improve our operating results and better position ourselves for
growth. As such, we may incur further facility consolidations or
restructuring charges, including severance, benefits and related
costs due to a reduction in workforce and/or charges for assets
disposed of or removed from operations as a direct result of a
reduction in workforce.

By the end of 2005, we anticipate that our costs
and operating expenses, excluding restructuring-related charges,
will track to a level that is close to our expected revenue
while allowing us to continue to invest in accordance with our
strategic priorities. However, we may be unable to achieve these
expense levels without adversely affecting our business and
results of operations. We may continue to experience losses and
negative cash flows in the near term, even if sales of our
services grow.

While we will continue to implement cost
containment efforts across our business, our operating expenses
will consume a material amount of our cash resources. We believe
that the total amount of our cash and cash equivalents along
with our commercial credit facilities will be sufficient to meet
our anticipated cash needs for working capital or other purposes
for at least the next twelve months. Thereafter, depending on
the development of our business, we will likely require
additional funds to support our working capital requirements,
unanticipated expenses, opportunities for acquisitions or other
business initiatives we encounter and we may seek to raise such
additional working capital through public or private equity or
debt financing (including debt convertible into equity) or from
other sources. We may not be able to obtain adequate or
favorable financing at that time. Our history of declining
market valuation and volatility in our stock price could make it
difficult for us to raise capital on favorable terms. Any
financing we obtain may dilute or otherwise impair the ownership
interest of our current stockholders.

We do not hold derivative financial instruments
or equity securities in our short-term investment portfolio. Our
cash equivalents and marketable securities consist primarily of
highly liquid money market funds, as specified in our investment
policy guidelines. As a result, we would not expect our
operating results or cash flows to be significantly affected by
a sudden change in market interest rates in our securities
portfolio.

We conduct our operations in two primary
functional currencies: the United States dollar and the British
pound. Since our acquisition of OD2 in June 2004, fluctuations
in foreign exchange rates have had a significant impact on our
financial condition and results of operations. We currently do
not hedge our foreign currency exposures and are therefore
subject to the risk of exchange rate fluctuations. We invoice
our international customers primarily in British pounds, except
outside of the UK, where we invoice our customers primarily in
euros. We are exposed to foreign exchange rate fluctuations as
the financial results of foreign subsidiaries are translated
into U.S. dollars in consolidation. Our exposure to foreign
exchange rate fluctuations also arises from intercompany
payables and receivables to and from our foreign subsidiaries
and accrued acquisition consideration relating to the OD2
transaction. For the year ended December 31, 2004, we
recognized an $833,000 transaction loss on accrued acquisition
consideration related to the OD2 transaction. Foreign exchange
rate fluctuations and changes in foreign economic conditions did
not have a material impact on our financial results in 2003 and
2002.

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

The following table provides aggregated
information about our contractual obligations as of
December 31, 2004 (in thousands):

|                              |                                                   |                        |       |           |  |           |       |           |  |         |       |       |  |   |     |     |  |   |       |       | 
|----------------------------- | ------------------------------------------------- | ---------------------- | ----- | --------- |  | --------- | ----- | --------- |  | ------- | ----- | ----- |  | - | --- | --- |  | - | ----- | ----- | 
|                              |                                                   |                       
|                              |                                                   | Payments Due by Period
|                              |                                                   |                       
|                              |                                                   |                        |       | Less Than |  |           |       | After    
|                              |                                                   | Total                  |       | 1 Year    |  | 1-3 Years |       | 4-5 Years |  | 5 Years
|                              |                                                   |                        |       |           |  |           |       |           |  |        
|Contractual Obligations       |                                                   |                        |       |           |  |           |       |           |  |         |       |       |  |   |     |     |  |   |       |      
|                              | Long-term debt and capital leases                 |                        | $     | 2,135     |  |           | $     | 1,135     |  |         | $     | 1,000 |  |   | $   |    |  |   | $     |      | 
|                              | Operating leases(1)                               |                        |       | 4,199     |  |           |       | 1,779     |  |         |       | 717   |  |   |     | 398 |  |   |       | 1,305 | 
|                              | Bandwidth and co-location purchase obligations(2) |                        |       | 569       |  |           |       | 510       |  |         |       | 59    |  |   |     |    |  |   |       |      | 
|                              |                                                   |                        |       |           |  |           |       |           |  |         |       |       |  |   |     |     |  |   |       |      
|Total contractual obligations |                                                   | $                      | 6,903 |           |  | $         | 3,424 |           |  | $       | 1,776 |       |  | $ | 398 |     |  | $ | 1,305 |      
|                              |                                                   |                        |       |           |  |           |       |           |  |         |       |       |  |   |     |     |  |   |       |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our future minimum rental commitments under
    noncancellable leases comprise the majority of the operating
    lease obligations presented above. We expect to fund these
    commitments with existing cash and cash flows from operations.                                                                                                                                                                                                                                                                                                                                                           
|   
|(2) | Many of the contracts underlying these
    obligations contain renewal provisions, generally for a period
    of one year. In addition, amounts payable under these contracts
    may vary based on the volume of data transferred. The amounts in
    the table represent the base fee amount. We also have contracts
    for bandwidth and collocation services that run on a
    month-to-month basis and for which there are no unconditional
    obligations. Monthly amounts due under the month-to-month
    contracts are approximately $235,000 and have been excluded from
    the table above.

Excluded from the table above are the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have excluded the $15.9 million of
    accrued acquisition consideration recorded at December 31,
    2004, net of escrow of approximately $2.4 million, which is
    unrecorded, related to our acquisition of OD2. In addition, we
    have not reflected an additional unrecorded
    £8.8 million ($17.0 million based on exchange
    rates as of December 31, 2004) in contingent consideration
    related to our acquisition of OD2 which would have been payable
    upon the achievement of certain performance targets during the
    period ending November 30, 2006. These obligations have
    been satisfied as of March 2005 as described in
     Acquisition of On Demand Distribution Limited
    (OD2)  Payments Subsequent to December 31, 2004
    and March 2005 Restructuring of Future OD2 Payment
    Obligations, except that we are required under the terms
    of the March 2005 restructuring to make a remaining cash payment
    of approximately £1.6 million (approximately
    $3.1 million based on December 31, 2004 exchange
    rates) in July 2005.
|
| |  | Deferred revenue of $5.7 million has been
    excluded from the table above as the related liabilities will
    not be settled in cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Loudeye expects to issue up to 2,202,291
    additional shares of its common stock, representing shares to be
    issued to OD2 option holders issuable upon exercise of OD2
    options assumed by Loudeye in connection with the OD2
    acquisition in June 2004. The associated common stock payable of
    $3.2 million has been excluded as the related liability
    will not be settled in cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Purchase commitments represent obligations under
    agreements which are not unilaterally cancelable by us, are
    legally enforceable, and specifically fixed or minimum
    quantities of goods or services at fixed or minimum prices. We
    generally require purchase orders for vendor and third party
    spending. There were no known contracts or purchase orders
    exceeding $100,000 in the aggregate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Since inception, we have sustained substantial
net losses to sustain our growth and establish our business. For
2005, we will continue to focus on managing costs and increasing
revenue. We expect the following items may represent significant
uses of capital resources in the foreseeable future:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We have certain commitments under existing
    arrangements with certain licensors of copyrighted materials
    that may require payments estimated to be approximately
    $2.4 million in 2005. These

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| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | amounts are included in accrued and other
    liabilities in the accompanying consolidated balance sheets.                                              
|
| |  | We may enter into future transactions where we
    acquire complementary businesses. Such acquisitions may require
    the use of our capital resources.

We believe that our existing cash, cash
equivalents, and marketable securities will be sufficient to
fund our operations and meet our working capital and capital
expenditure requirements for 2005.

Off-Balance Sheet Arrangements

Indemnification
Obligations.In the normal course of
business, we indemnify other parties, including business
partners, lessors and parties to other transactions with us. We
have agreed to hold the other parties harmless against losses
arising from a breach of representation or covenants, or out of
intellectual property infringement or other claims made by third
parties. These agreements may limit the time within which an
indemnification claim can be made. In addition, we have entered
into indemnification agreements with certain of our officers and
directors and our amended and restated certificate of
incorporation and amended bylaws contain similar indemnification
obligations to our officers and directors. For all agreements
entered into after December 31, 2002, the fair value of
potential claims has not been recorded in our financial
statements because they are not material.

Other.During
February 2005, we entered into a twelve month agreement in the
ordinary course of business with an internet service provider
(ISP) in Europe, under which we will provide the ISPs
customers with promotional credits that may be redeemed for a
range of digital media download services through February 2006.
We will receive a fixed fee
of 1.8 million
(approximately $2.6 million based on December 31, 2004
exchange rates) under the agreement. Depending upon the actual
redemption rate with respect to such promotional credits
provided to the ISPs customers during the term of the
agreement, our cost of revenue associated with this agreement
could vary significantly. At a zero redemption rate, our
incremental cost of revenue is nominal and we would generate
gross margins approximating the
1.8 million
fee. Conversely, if significantly more credits are redeemed than
expected, we could experience negative gross margins from this
agreement of up to
715,000
(approximately $975,000 based on December 31, 2004 exchange
rates). Our expectation is that actual redemption rate will fall
somewhere within that range, and as such, we expect to generate
positive gross margin from this agreement. If the number of
credits redeemed during the twelve month term of the agreement
does not reach certain minimum levels, the term of the credits
may be extended for an additional twelve months. In addition, we
expect to defer revenue under this agreement until the volume of
digital downloads is reasonably determinable, which could result
in deferral of all revenue under the agreement until February
2007. Further, as the transaction is denominated in Euros, if we
do not hedge the arrangement, we could be subject to foreign
currency gains or losses. As of the date of this filing, no
losses had been incurred or estimated under this agreement.






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

We are exposed to the impact of interest rate
changes and foreign currency exchange risk.

Interest Rate Risk.We typically invest our excess cash in high quality corporate
and municipal debt instruments. As a result, our related
investment portfolio is exposed to the impact of short-term
changes in interest rates. Investments in both fixed rate and
floating rate interest earning instruments carries a degree of
interest rate risk. Fixed rate securities may have their fair
market value adversely impacted by a rise in interest rates,
while floating rate securities may produce less income than
expected if interest rates fall. As a result, changes in
interest rates may cause us to suffer losses in principal if
forced to sell securities that have declined in market value or
may cause our future investment income to fall short of
expectations. Our investment portfolio is designated as
available-for-sale, and accordingly is presented at fair value
in the consolidated balance sheet.

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We protect and preserve our invested funds with
investment policies and procedures that limit default, market
and reinvestment risk. We have not utilized derivative financial
instruments in our investment portfolio.

During the year ended December 31, 2004, the
impact of changes in interest rates on the fair market value of
our cash and cash equivalents and marketable securities caused
an insignificant change in our net loss. Based on our invested
cash and cash equivalents, marketable securities and restricted
cash balances of approximately $43.7 million at
December 31, 2004, a one percent change in interest rates
would cause a change in interest income of approximately
$437,000 per year. Due to the investment grade level of our
investments, we anticipate no material market risk exposure. In
addition, our term loan is based on the prime rate. Based on the
$2.0 million balance outstanding at December 31, 2004,
a one percent increase in the prime rate would increase our
interest expense by $20,000 per year. We believe that the
impact on the fair market value of our securities and on our
operating results for 2005 from a hypothetical 1% increase or
decrease in interest rates would not be material.

Foreign Currency Exchange
Risk.We develop services in the
United States and the United Kingdom and sell them in North
America and throughout Europe, and to a much lesser degree, in
Australia and Africa. As a result, our financial results could
be affected by factors such as changes in foreign currency
exchange rates or weak economic conditions in foreign markets.
Our foreign subsidiaries expenses are incurred in their
local currency, principally British Pounds (£) or Euros
(). As exchange
rates vary, their expenses, when translated, may vary from
expectations and adversely impact overall expected results.

As foreign currency exchange rates vary, the
fluctuations in revenue and expenses may materially impact the
financial statements upon consolidation. A weaker
U.S. dollar would result in an increase to revenue and
expenses upon consolidation, and a stronger U.S. dollar
would result in a decrease to revenue and expenses upon
consolidation.

At December 31, 2004 and from a financial
accounting perspective, we were obligated to pay approximately
£7.2 million (approximately $13.9 million based
on exchange rates as of December 31, 2004) to former
OD2 shareholders, in cash or common stock, at our election.
Additionally, we could have been required to pay up to an
additional £10.0 million (approximately
$19.3 million based on exchange rates as of
December 31, 2005) of contingent acquisition consideration
to the former OD2 shareholders if certain performance
measurements were met. Based upon the accrued acquisition
consideration balance of approximately $15.9 million at
December 31, 2004, if during the first quarter 2005 the
U.S. dollar uniformly increases or decreases in strength by
1% relative to British pound, we would record a transaction gain
or loss of approximately $160,000.

As part of our restructuring of the remaining
payment obligations to the former OD2 shareholders, the
amount of the remaining obligations is £1.6 million
(approximately $3.0 million based on exchange rates as of
December 31, 2004) after giving effect to our cash payment
of approximately £1.6 million (approximately
$3.0 million based on exchange rates as of
December 31, 2004) in March 2005 and the issuance of
3,554,419 shares of our common stock in March 2005 to
former OD2 shareholders. Based on the estimated amount we
will accrue with respect to our restructured payment obligation
of £1.6 million, if the U.S. dollar uniformly
increases or decreases in strength by 1% relative to British
pound, we would record a transaction gain or loss of
approximately $7,000.

During 2004, we recorded a net foreign exchange
transaction loss of approximately $833,000. Our operating
results were not significantly affected by exchange rate
fluctuations in 2002 and 2003. In addition, the results of
operations of OD2 are exposed to foreign exchange rate
fluctuations as the financial results of this subsidiary are
translated from the local currency to U.S. dollars upon
consolidation. Because of the significance of the operations of
OD2 to our consolidated operations, as exchange rates vary, net
sales and other operating results, when translated, may differ
materially from our prior performance and our expectations. In
addition, because of the significance of our overseas
operations, we could also be significantly affected by weak
economic conditions in foreign markets that could reduce demand
for our

71



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services and further negatively impact the
results of our operations in a material and adverse manner. As a
result of these market risks, the price of our stock could
decline significantly and rapidly.


72



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|        |                      
|------- | ---------------------
|Item 8. | Financial Statements.

LOUDEYE CORP. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                             |  |        |    | 
|-------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                             |  | Page  
|                                                                                             |  | Number
|                                                                                             |  |       
|Report of Independent
    Registered Public Accounting Firm on Internal Control              |  |        | 74 | 
|Report of Independent
    Registered Public Accounting Firm (Moss Adams LLP)                 |  |        | 77 | 
|Report of Independent
    Registered Public Accounting Firm (PricewaterhouseCoopers
    LLP) |  |        | 78 | 
|Consolidated Balance
    Sheets                                                              |  |        | 79 | 
|Consolidated Statements of
    Operations                                                    |  |        | 80 | 
|Consolidated Statements of
    Stockholders Equity                                          |  |        | 81 | 
|Consolidated Statements of
    Cash Flows                                                    |  |        | 82 | 
|Notes to Consolidated
    Financial Statements                                               |  |        | 83 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON

INTERNAL CONTROL


To the Board of Directors and Stockholders of

Loudeye Corp.


We have audited managements assessment,
included in the accompanying Managements Annual Report on
Internal Control over Financial Reporting appearing under
Item 9A, that Loudeye Corp. and subsidiaries (the Company)
did not maintain effective internal control over financial
reporting as of December 31, 2004, because of the effect of the
eight material weaknesses identified in managements
assessment, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was
maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.

Managements report on internal control over
financial reporting as of December 31, 2004, and our audit
thereof, excludes consideration of internal control over
financial reporting for Overpeer, Inc. and On Demand
Distribution, Ltd., two subsidiaries acquired by the Company
during the year ended December 31, 2004. Overpeer, Inc. and
On Demand Distribution, Ltd. represented 12% of the
Companys total consolidated assets as of December 31,
2004, and 49% of the Companys total consolidated revenue
for the year ended December 31, 2004.

A companys internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A
companys internal control over financial reporting
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.

A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected.
The following material weaknesses have been identified and
included in managements assessment.

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1. Inadequate personnel in finance and
accounting The Company has insufficiently
skilled personnel and a lack of human resources within the
Companys finance, accounting, and reporting functions. The
lack of appropriately skilled personnel could result in material
misstatements to financial statements not being detected in a
timely manner.

2. Inadequate oversight and monitoring of
financial processes and financial and accounting
personnel The Company has insufficient oversight
of financially significant processes and systems, including
monitoring and oversight of the work performed by the
Companys finance and accounting personnel. The processes
and systems with insufficient oversight and monitoring include
the review and approval, and documentation of the review and
approval, of journal entries; periodic reconciliations of
subsidiary ledgers, balance sheet and income statement accounts;
payroll and employee benefit related processing and reporting;
royalty related tracking, reporting, and accounting; invoicing
of customers and the processing of customer credits; purchasing
of and payment for goods and services received; accrual of
expenses; general ledger closing; and the monthly, quarterly,
and annual consolidation and financial reporting process. As a
result, the Company does not have sufficient internal control
over financial reporting to ensure underlying transactions are
being appropriately and timely accounted for, which could lead
to material misstatements in the financial statements not being
detected in a timely manner.

3. Inadequate or ineffectively designed
controls The Company has an insufficient number
of effectively designed controls or ineffectively designed
controls to ensure that revenue and royalty transactions are
calculated, processed, and accurately reflected in the proper
period in the general ledger. As a result, adjustments in the
Companys revenue and royalty accounts and financial
statements could occur.

4. Inadequate information technology and
general computer controls The Company does not
have adequate information technology and general computer
controls over its information systems control environment,
including application level design and documentation controls.
As a result, the Company is unable to rely upon information
technology general controls to perform as expected over time.
The processes with inadequate controls include the integration
of internally developed software into financially significant
business applications; password management and sharing; and
physical access to information technology systems. In addition,
the Company has insufficient documentation of their general
computer controls and was unable to demonstrate through testing
that their information technology dependent controls were
operating effectively. As a result, errors in the Companys
financial statements that have not been prevented or detected by
the Companys information technology and general computer
controls could occur.

5. Inadequate analysis, documentation,
and review of significant non-routine transactions The Company does not have adequate controls relating to the
analysis, documentation, and review of the selection and
application of generally accepted accounting principles, to the
classification of amortization and impairment charges related to
certain intangible assets, business acquisitions, and other
non-routine transactions, and the preparation of financial
statement disclosures relating thereto. As a result, the Company
does not have sufficient procedures to ensure significant
underlying non-routine transactions are appropriately and timely
accounted for in the general ledger.

6. Inadequate monitoring of controls for
third-party service providers The Company has
inadequate controls over the assessment and monitoring of the
effectiveness of controls executed by third party service
providers related to the implementation and/or maintenance of
customer level controls. As a result, the information and
reports from third-party service providers received and utilized
by the Company may contain errors.

7. Inadequate entity-level
controls  The Company does not have effective
entity level controls with respect to the overall control
environment and monitoring. There are inadequacies in the
process for systematic communication of company-wide policies
and procedures to all employees, including a lack of uniform and
consistent communication of the importance of controls. The
pervasive nature of the material weaknesses in the
Companys internal control over financial reporting in
itself constitutes a material weakness. There are also
inadequacies in the Companys process to ensure periodic
monitoring of internal

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control activities. As a result, errors in the
Companys financial statements that have not been prevented
or detected by the Companys entity level controls could
occur.


8. Inadequate demonstration of control
effectiveness through testing The Company was
unable to demonstrate through testing that the Companys
internal control over financial reporting was effective for
certain processes as required by the COSO criteria. The controls
that the Company was unable to test included the quarterly and
annual general close procedures and financial reporting.

These material weaknesses were considered in
determining the nature, timing, and extent of audit tests
applied in our audit of the 2004 financial statements, and this
report does not affect our report on financial statements dated
March 25, 2005 on those financial statements.

In our opinion, managements assessment that
Loudeye Corp. did not maintain effective internal control over
financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on criteria established
in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway
Commission. Also, in our opinion, because of the effects of the
material weaknesses described above on the achievement of the
control criteria, Loudeye Corp. has not maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.

We do not express an opinion or any other form of
assurance on managements statements referring to
remediation or timing in managements assessment, included
in the accompanying Managements Annual Report on Internal
Control over Financial Reporting appearing in Item 9A.



| |                   
| | ------------------
| | /s/ Moss Adams LLP

Seattle, Washington

March 25, 2005


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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON

FINANCIAL STATEMENTS


To the Board of Directors and Stockholders of

Loudeye Corp.


We have audited the accompanying consolidated
balance sheet of Loudeye Corp. and subsidiaries as of
December 31, 2004 and the related consolidated statements
of operations, stockholders equity and cash flows for the
year then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board
(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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Loudeye Corp. and
subsidiaries as of December 31, 2004, and the consolidated
results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally
accepted in the United States of America.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of Loudeye Corp.s
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated March 25, 2005 expressed
an unqualified opinion on managements assessment and an
adverse opinion on the effectiveness of internal control over
financial reporting.



| |                       
| | ----------------------
| | /s/     Moss Adams LLP

Seattle, Washington

March 25, 2005


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REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the Board of Directors

and Stockholders of Loudeye Corp.


In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of
operations, of stockholders equity, and cash flows present
fairly, in all material respects, the financial position of
Loudeye Corp. (formerly Loudeye Technologies, Inc.) and
subsidiaries (the Company) at December 31,
2003, and the results of their operations and of their cash
flows for each of the two years in the period ended
December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(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,
assessing the accounting principles used and significant
estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In June 2004, the Company acquired On Demand
Distribution Limited (OD2). The terms of this
acquisition require the payment of £9.6 million
(approximately $17.3 million based on exchange rates as of
September 30, 2004, including approximately
$2.6 million to be held in escrow and not yet accounted
for) through November 30, 2005, to OD2 shareholders, plus
additional contingent consideration of up to
£10.0 million (approximately $18.0 million based
on exchange rates as of September 30, 2004) if OD2 achieves
certain financial performance targets during the period through
November 30, 2006. The payments are to be made in British
pounds, and accordingly, the Company is exposed to risks with
changes in the prevailing exchange rate. Any decrease in the
value of the U.S. dollar against the British pound will cause a
proportional increase in the amount of the future consideration
the Company must pay to the former OD2 shareholders. The Company
may elect to pay the amounts due to OD2s shareholders in
shares of the Companys common stock. As a result of the
Companys acquisition of OD2, the Company will be required
to provide additional funding to support OD2s ongoing
operations. There can be no assurance that the Companys
cash balances after December 31, 2004 will be sufficient to
sustain its operations in 2005 and to fund the ongoing
operations of OD2.



| |                               
| | ------------------------------
| | /s/ PricewaterhouseCoopers LLP

Seattle, Washington

March 18, 2004, except for the second, third
and fourth paragraphs of Note 1, which appear in the
consolidated financial statements in the Companys
Form S-1 dated February 9, 2005 and are not presented
herein as to which the date is December 13, 2004; and
except for the revisions of classifications disclosed in
Note 2 of this Form 10-K, as to which the date is
March 30, 2005.


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LOUDEYE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------- | -------- | ------- |  | - | -------- | ------ | 
|                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                  |                                            | December 31,             
|                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                  |                                            | 2004                      |          | 2003   
|                                                                                                                                                                                                  |                                            |                           |          |        
|                                                                                                                                                                                                  |                                            |                          
|                                                                                                                                                                                                  |                                            | (In thousands, except per
|                                                                                                                                                                                                  |                                            | share amounts)           
|ASSETS                                                                                                                                                                                           
|Cash and cash equivalents                                                                                                                                                                         |                                            | $                         | 29,864   |         |  | $ | 12,480   |       
|Marketable securities                                                                                                                                                                             |                                            |                           | 9,016    |         |  |   | 9,460    |       
|Accounts receivable, net of allowance for
    doubtful accounts of $241 and $235                                                                                                                  |                                            |                           | 5,333    |         |  |   | 1,781    |       
|Prepaid expenses and other current assets                                                                                                                                                         |                                            |                           | 1,298    |         |  |   | 345      |       
|Assets held for sale                                                                                                                                                                              |                                            |                           |         |         |  |   | 363      |       
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total current assets                       |                           |          | 45,511  |  |   |          | 24,429 | 
|Long-term marketable securities                                                                                                                                                                   |                                            |                           | 2,288    |         |  |   |         |       
|Restricted cash                                                                                                                                                                                   |                                            |                           | 2,568    |         |  |   | 316      |       
|Property and equipment, net                                                                                                                                                                       |                                            |                           | 5,661    |         |  |   | 1,123    |       
|Goodwill                                                                                                                                                                                          |                                            |                           | 43,549   |         |  |   |         |       
|Intangible assets, net                                                                                                                                                                            |                                            |                           | 3,700    |         |  |   | 86       |       
|Assets held for sale                                                                                                                                                                              |                                            |                           |         |         |  |   | 730      |       
|Other assets, net                                                                                                                                                                                 |                                            |                           | 431      |         |  |   | 360      |       
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total assets                               |                           | $        | 103,708 |  |   | $        | 27,044 | 
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                         
|Accounts payable                                                                                                                                                                                  |                                            | $                         | 4,012    |         |  | $ | 1,229    |       
|Accrued compensation and benefits                                                                                                                                                                 |                                            |                           | 929      |         |  |   | 378      |       
|Accrued and other liabilities                                                                                                                                                                     |                                            |                           | 4,966    |         |  |   | 1,155    |       
|Accrued special charges                                                                                                                                                                           |                                            |                           | 403      |         |  |   | 1,670    |       
|Accrued acquisition consideration                                                                                                                                                                 |                                            |                           | 15,924   |         |  |   |         |       
|Deferred revenue                                                                                                                                                                                  |                                            |                           | 4,353    |         |  |   | 485      |       
|Current portion of long-term debt and capital
    lease obligations                                                                                                                               |                                            |                           | 1,135    |         |  |   | 1,348    |       
|Line of credit                                                                                                                                                                                    |                                            |                           |         |         |  |   | 1,285    |       
|Liabilities related to assets held for sale                                                                                                                                                       |                                            |                           |         |         |  |   | 98       |       
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total current liabilities                  |                           |          | 31,722  |  |   |          | 7,648  | 
|Deferred revenue, net of current portion                                                                                                                                                          |                                            |                           | 1,343    |         |  |   | 228      |       
|Common stock payable related to acquisition                                                                                                                                                       |                                            |                           | 3,193    |         |  |   |         |       
|Long-term debt and capital lease obligations, net
    of current portion                                                                                                                          |                                            |                           | 1,000    |         |  |   | 2,135    |       
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total liabilities                          |                           |          | 37,258  |  |   |          | 10,011 | 
|Commitments and contingencies                                                                                                                                                                     |                                            |                           |          |         |  |   |          |       
|STOCKHOLDERS EQUITY                                                                                                                                                                              |                                            |                           |          |         |  |   |          |       
|Preferred stock, $0.001 par value,
    5,000 shares authorized, none outstanding                                                                                                                  |                                            |                           |         |         |  |   |         |       
|Common stock, warrants and additional paid-in
    capital; for common stock $0.001 par value,
    150,000 shares authorized; 99,021 and 56,974 shares
    issued and outstanding in 2004 and 2003 |                                            |                           | 273,958  |         |  |   | 210,134  |       
|Deferred stock compensation                                                                                                                                                                       |                                            |                           | (111     | )       |  |   | (214     | )     
|Accumulated deficit                                                                                                                                                                               |                                            |                           | (209,284 | )       |  |   | (192,887 | )     
|Accumulated other comprehensive income                                                                                                                                                            |                                            |                           | 1,887    |         |  |   |         |       
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total stockholders equity                 |                           |          | 66,450  |  |   |          | 17,033 | 
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       
|                                                                                                                                                                                                  | Total liabilities and stockholders equity |                           | $        | 103,708 |  |   | $        | 27,044 | 
|                                                                                                                                                                                                  |                                            |                           |          |         |  |   |          |       

See notes to consolidated financial statements

79



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##### Table of Contents






LOUDEYE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |        |        |  
|----------------------------------------------------------- | ----------------------------------------------- | ------------------------------- | ------- | ------ | ------ | ---- | ------- | ----- | ------ | - | ------- | ------ | ------ | -
|                                                            |                                                 |                                
|                                                            |                                                 | Years Ended December 31,       
|                                                            |                                                 |                                
|                                                            |                                                 | 2004                            |         | 2003   |        | 2002
|                                                            |                                                 |                                 |         |        |        |     
|                                                            |                                                 |                                
|                                                            |                                                 | (In thousands, except per share
|                                                            |                                                 | amounts)                       
|REVENUE                                                     |                                                 | $                               | 16,821  |        |        | $    | 11,948  |       |        | $ | 12,681  |       
|COST OF REVENUE(1)                                          |                                                 |                                 | 12,063  |        |        |      | 8,076   |       |        |   | 15,260  |       
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|                                                            |                                                 | Gross profit (loss)             |         |        | 4,758  |      |         |       | 3,872  |   |         |        | (2,579 | )
|OPERATING EXPENSES:                                         |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|                                                            | Sales and marketing(1)                          |                                 |         | 4,456  |        |      |         | 3,286 |        |   |         | 7,667  |       
|                                                            | Research and development(1)                     |                                 |         | 4,017  |        |      |         | 1,688 |        |   |         | 3,159  |       
|                                                            | General and administrative(1)                   |                                 |         | 11,323 |        |      |         | 8,656 |        |   |         | 11,375 |       
|                                                            | Amortization of intangible assets               |                                 |         | 234    |        |      |         | 831   |        |   |         | 1,790  |       
|                                                            | Stock-based compensation(1)                     |                                 |         | 306    |        |      |         | 1,298 |        |   |         | (383   | )     
|                                                            | Special charges  goodwill impairments          |                                 |         |       |        |      |         | 5,307 |        |   |         |       |       
|                                                            | Special charges  other                         |                                 |         | 312    |        |      |         | 1,913 |        |   |         | 6,152  |       
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|                                                            |                                                 | Total operating expenses        |         |        | 20,648 |      |         |       | 22,979 |   |         |        | 29,760 |  
|LOSS FROM OPERATIONS                                        |                                                 |                                 | (15,890 | )      |        |      | (19,107 | )     |        |   | (32,339 | )     
|OTHER INCOME (EXPENSE):                                     |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|                                                            | Interest income                                 |                                 |         | 377    |        |      |         | 347   |        |   |         | 1,149  |       
|                                                            | Interest expense                                |                                 |         | (201   | )      |      |         | (286  | )      |   |         | (631   | )     
|                                                            | Gain on sale of media restoration assets        |                                 |         | 156    |        |      |         |      |        |   |         |       |       
|                                                            | Increase in fair value of common stock warrants |                                 |         |       |        |      |         | (248  | )      |   |         |       |       
|                                                            | Other income (expense), net                     |                                 |         | (839   | )      |      |         | 120   |        |   |         | 659    |       
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|                                                            |                                                 | Total other income (expense)    |         |        | (507   | )    |         |       | (67    | ) |         |        | 1,177  |  
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|NET LOSS                                                    |                                                 | $                               | (16,397 | )      |        | $    | (19,174 | )     |        | $ | (31,162 | )     
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|Net loss per share  basic and diluted                      |                                                 | $                               | (0.22   | )      |        | $    | (0.39   | )     |        | $ | (0.75   | )     
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       
|Weighted average shares outstanding 
    basic and diluted |                                                 |                                 | 73,845  |        |        |      | 49,797  |       |        |   | 41,393  |       
|                                                            |                                                 |                                 |         |        |        |      |         |       |        |   |         |       



---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Stock-based compensation, consisting of
    amortization of deferred stock-based compensation and the fair
    value of options issued to non-employees for services rendered,
    is allocated as follows:

|                           |  |                          |     |      |  |      |       |  |  |   |      |  
|-------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- |  |  | - | ---- | -
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2004                     |     | 2003 |  | 2002
|                           |  |                          |     |      |  |     
|Cost of revenue            |  | $                        | 117 |      |  | $    | 62    |  |  | $ | (34  | )
|Sales and marketing        |  |                          | 156 |      |  |      | 47    |  |  |   | (55  | )
|Research and development   |  |                          | 83  |      |  |      | 57    |  |  |   | (21  | )
|General and administrative |  |                          | 67  |      |  |      | 1,194 |  |  |   | (307 | )

See notes to consolidated financial statements

80



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##### Table of Contents






LOUDEYE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |         |  
|--------------------------------------------------------------------------- | ---------------------------------------- | ------------------ | ------ | -------- |  | ------------ | ------- | ------------- |  | ------------- | ---- | ------ |  | - | -------- | ------- | - | - | ----- | ----- | - | - | ------- | ------- | -
|                                                                            |                                          |                    |        |          |  |              |         |               |  |              
|                                                                            |                                          | Common Stock,      |        |          |  |              |         |               |  |              
|                                                                            |                                          | Warrants and       |        |          |  |              |         |               |  |              
|                                                                            |                                          | Additional Paid-In |        |          |  |              |         | Accumulated   |  |              
|                                                                            |                                          | Capital            |        | Deferred |  |              |         | Other         |  | Total        
|                                                                            |                                          |                    |        | Stock    |  | Accumulated  |         | Comprehensive |  | Stockholders
|                                                                            |                                          | Shares             |        | Amount   |  | Compensation |         | Deficit       |  | Income        |      | Equity
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |       
|                                                                            |                                          |                   
|                                                                            |                                          | (In thousands)    
|BALANCES, January 1, 2002                                                   |                                          |                    | 40,475 |          |  | $            | 192,627 |               |  | $             | (883 | )      |  | $ | (142,550 | )       |   | $ |      |       |   | $ | 49,194  |        
|Issuance of shares for acquisitions                                         |                                          |                    | 9,228  |          |  |              | 3,786   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 3,786   |        
|Repurchase of shares                                                        |                                          |                    | (2,696 | )        |  |              | (1,105  | )             |  |               |     |        |  |   |         |         |   |   |      |       |   |   | (1,105  | )      
|Stock option exercises and shares issued under
    ESPP                     |                                          |                    | 169    |          |  |              | 57      |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 57      |        
|Amortization of deferred stock-based
    compensation, net of cancellations |                                          |                    |       |          |  |              | (1,170  | )             |  |               | 753  |        |  |   |         |         |   |   |      |       |   |   | (417    | )      
|Net loss                                                                    |                                          |                    |       |          |  |              |        |               |  |               |     |        |  |   | (31,162  | )       |   |   |      |       |   |   | (31,162 | )      
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        
|BALANCES, December 31, 2002                                                 |                                          |                    | 47,176 |          |  |              | 194,195 |               |  |               | (130 | )      |  |   | (173,713 | )       |   |   |      |       |   |   | 20,352  |        
|Repurchase of common stock                                                  |                                          |                    | (1,469 | )        |  |              | (425    | )             |  |               |     |        |  |   |         |         |   |   |      |       |   |   | (425    | )      
|Stock option and warrant exercises and shares
    issued under ESPP         |                                          |                    | 2,084  |          |  |              | 2,023   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 2,023   |        
|Shares issued in private placement                                          |                                          |                    | 7,839  |          |  |              | 9,975   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 9,975   |        
|Conversion of common stock warrants from a
    liability to equity          |                                          |                    |       |          |  |              | 1,704   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 1,704   |        
|Shares issued to pay accrued acquisition
    consideration                  |                                          |                    | 636    |          |  |              | 1,118   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 1,118   |        
|Shares issued for prior acquisitions and accrued
    bonus                  |                                          |                    | 629    |          |  |              | 25      |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 25      |        
|Deferred stock-based compensation                                           |                                          |                    |       |          |  |              | 544     |               |  |               | (544 | )      |  |   |         |         |   |   |      |       |   |   |        |        
|Amortization of deferred stock-based
    compensation, net of cancellations |                                          |                    |       |          |  |              |        |               |  |               | 460  |        |  |   |         |         |   |   |      |       |   |   | 460     |        
|Stock-based compensation                                                    |                                          |                    | 79     |          |  |              | 900     |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 900     |        
|Issuance of common stock warrants                                           |                                          |                    |       |          |  |              | 75      |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 75      |        
|Net loss                                                                    |                                          |                    |       |          |  |              |        |               |  |               |     |        |  |   | (19,174  | )       |   |   |      |       |   |   | (19,174 | )      
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        
|BALANCES, December 31, 2003                                                 |                                          |                    | 56,974 |          |  |              | 210,134 |               |  |               | (214 | )      |  |   | (192,887 | )       |   |   |      |       |   |   | 17,033  |        
|Stock option and warrant exercises and shares
    issued under ESPP         |                                          |                    | 1,623  |          |  |              | 1,202   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 1,202   |        
|Shares issued in private placements                                         |                                          |                    | 27,611 |          |  |              | 42,308  |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 42,308  |        
|Shares issued for acquisitions                                              |                                          |                    | 11,418 |          |  |              | 17,975  |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 17,975  |        
|Shares issued in payment of accrued acquisition
    consideration           |                                          |                    | 1,395  |          |  |              | 2,044   |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 2,044   |        
|Deferred stock-based compensation                                           |                                          |                    |       |          |  |              | 380     |               |  |               | (380 | )      |  |   |         |         |   |   |      |       |   |   |        |        
|Amortization of deferred stock-based
    compensation, net of cancellations |                                          |                    |       |          |  |              | (207    | )             |  |               | 483  |        |  |   |         |         |   |   |      |       |   |   | 276     |        
|Stock-based compensation                                                    |                                          |                    |       |          |  |              | (10     | )             |  |               |     |        |  |   |         |         |   |   |      |       |   |   | (10     | )      
|Issuance of common stock warrants                                           |                                          |                    |       |          |  |              | 132     |               |  |               |     |        |  |   |         |         |   |   |      |       |   |   | 132     |        
|Comprehensive loss:                                                         |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        
|                                                                            | Unrealized loss on marketable securities |                    |        |         |  |              |         |              |  |               |      |       |  |   |          |        |   |   |       | (85   | ) |   |         | (85     | )
|                                                                            | Foreign currency translation adjustment  |                    |        |         |  |              |         |              |  |               |      |       |  |   |          |        |   |   |       | 1,972 |   |   |         | 1,972   |  
|                                                                            | Net loss                                 |                    |        |         |  |              |         |              |  |               |      |       |  |   |          | (16,397 | ) |   |       |      |   |   |         | (16,397 | )
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        
|                                                                            | Total comprehensive loss                 |                    |        |         |  |              |         |              |  |               |      |       |  |   |          |        |   |   |       |      |   |   |         | (14,510 | )
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        
|BALANCES, December 31, 2004                                                 |                                          |                    | 99,021 |          |  | $            | 273,958 |               |  | $             | (111 | )      |  | $ | (209,284 | )       |   | $ | 1,887 |       |   | $ | 66,450  |        
|                                                                            |                                          |                    |        |          |  |              |         |               |  |               |      |        |  |   |          |         |   |   |       |       |   |   |         |        

See notes to consolidated financial statements

81



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##### Table of Contents






LOUDEYE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |         |        |         |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------- | -
|                                                                                           |                                                                                                      |                                                                 
|                                                                                           |                                                                                                      | Years Ended December 31,                                        
|                                                                                           |                                                                                                      |                                                                 
|                                                                                           |                                                                                                      | 2004                                                             |                                                         | 2003    |        | 2002   
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |        
|                                                                                           |                                                                                                      |                                                                 
|                                                                                           |                                                                                                      | (In thousands)                                                  
|OPERATING ACTIVITIES                                                                       |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           | Net loss                                                                                             |                                                                  | $                                                       | (16,397 | )      |         | $      | (19,174 | )      |        | $      | (31,162 | )     
|                                                                                           | Adjustments to reconcile net loss to net cash
    used in operating activities:                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |         |       
|                                                                                           |                                                                                                      | Depreciation and amortization                                    |                                                         |         | 2,919  |         |        |         | 2,378  |        |        |         | 7,223  |        
|                                                                                           |                                                                                                      | Special charges and other non cash items                         |                                                         |         | (164   | )       |        |         | 6,744  |        |        |         | 3,575  |        
|                                                                                           |                                                                                                      | Other income from settlement of acquisition terms                |                                                         |         |       |         |        |         |       |        |        |         | (700   | )      
|                                                                                           |                                                                                                      | Stock-based compensation                                         |                                                         |         | 423    |         |        |         | 1,360  |        |        |         | (417   | )      
|                                                                                           |                                                                                                      | Foreign currency transaction loss                                |                                                         |         | 833    |         |        |         |       |        |        |         |       |        
|                                                                                           |                                                                                                      | Increase in fair value of common stock warrants                  |                                                         |         |       |         |        |         | 248    |        |        |         |       |        
|                                                                                           | Changes in operating assets and liabilities, net
    of amounts acquired in purchases of businesses: |                                                                  |                                                         |         |        |         |        |         |        |        |        |         |       
|                                                                                           |                                                                                                      | Accounts receivable                                              |                                                         |         | (1,823 | )       |        |         | 326    |        |        |         | 358    |        
|                                                                                           |                                                                                                      | Prepaid expenses and other assets                                |                                                         |         | (363   | )       |        |         | 1,889  |        |        |         | 464    |        
|                                                                                           |                                                                                                      | Accounts payable                                                 |                                                         |         | (1,203 | )       |        |         | 36     |        |        |         | 24     |        
|                                                                                           |                                                                                                      | Accrued compensation and benefits and other
    accrued expenses |                                                         |         | 447    |         |        |         | (1,916 | )      |        |         | (1,226 | )      
|                                                                                           |                                                                                                      | Accrued special charges                                          |                                                         |         | (1,024 | )       |        |         |       |        |        |         |       |        
|                                                                                           |                                                                                                      | Deferred revenue                                                 |                                                         |         | 2,505  |         |        |         | 408    |        |        |         | (306   | )      
|                                                                                           |                                                                                                      | Assets and liabilities held for sale                             |                                                         |         |       |         |        |         | 402    |        |        |         | (109   | )      
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           |                                                                                                      |                                                                  | Net cash used in operating activities                   |         |        | (13,847 | )      |         |        | (7,299 | )      |         |        | (22,276 | )
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|INVESTING ACTIVITIES                                                                       |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           | Purchases of property and equipment                                                                  |                                                                  |                                                         | (5,697  | )      |         |        | (115    | )      |        |        | (1,676  | )     
|                                                                                           | Proceeds from sales of property and equipment                                                        |                                                                  |                                                         |        |        |         |        | 185     |        |        |        | 109     |       
|                                                                                           | Cash paid for acquisition of businesses and
    technology, net                                      |                                                                  |                                                         | (555    | )      |         |        | (82     | )      |        |        | (2,361  | )     
|                                                                                           | Assets and liabilities held for sale                                                                 |                                                                  |                                                         | 996     |        |         |        |        |        |        |        | (801    | )     
|                                                                                           | Payments received on loans made to related party
    and related interest                            |                                                                  |                                                         |        |        |         |        | 1,187   |        |        |        | 734     |       
|                                                                                           | Purchases of marketable securities                                                                   |                                                                  |                                                         | (20,015 | )      |         |        | (11,750 | )      |        |        | (11,105 | )     
|                                                                                           | Sales of marketable securities                                                                       |                                                                  |                                                         | 15,834  |        |         |        | 12,268  |        |        |        | 23,563  |       
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           |                                                                                                      |                                                                  | Net cash provided by (used in) investing
    activities |         |        | (9,437  | )      |         |        | 1,693  |        |         |        | 8,463   |  
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|FINANCING ACTIVITIES                                                                       |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           | Proceeds from sale of stock and exercise of stock
    options and warrants                           |                                                                  |                                                         | 1,202   |        |         |        | 2,023   |        |        |        | 47      |       
|                                                                                           | Proceeds from private equity financings, net                                                         |                                                                  |                                                         | 42,403  |        |         |        | 11,431  |        |        |        |        |       
|                                                                                           | Proceeds from line of credit and debt                                                                |                                                                  |                                                         |        |        |         |        | 8,320   |        |        |        |        |       
|                                                                                           | Principal payments on debt, line of credit and
    capital lease obligations                         |                                                                  |                                                         | (2,644  | )      |         |        | (5,043  | )      |        |        | (20,495 | )     
|                                                                                           | Repurchase of common stock from related party                                                        |                                                                  |                                                         |        |        |         |        | (425    | )      |        |        | (1,118  | )     
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           |                                                                                                      |                                                                  | Net cash provided by (used in) financing
    activities |         |        | 40,961  |        |         |        | 16,306 |        |         |        | (21,566 | )
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           | Effect of foreign currency translation on cash                                                       |                                                                  |                                                         | (293    | )      |         |        |        |        |        |        |        |       
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                           | Net increase (decrease) in cash and cash
    equivalents                                             |                                                                  |                                                         | 17,384  |        |         |        | 10,700  |        |        |        | (35,379 | )     
|Cash and cash equivalents, beginning of period                                             |                                                                                                      |                                                                  | 12,480                                                  |         |        |         | 1,780  |         |        |        | 37,159 |        
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|Cash and cash equivalents, end of period                                                   |                                                                                                      | $                                                                | 29,864                                                  |         |        | $       | 12,480 |         |        | $      | 1,780  |        
|                                                                                           |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|Supplemental disclosures:                                                                  |                                                                                                      |                                                                  |                                                         |         |        |         |        |         |        |        |        |        
|Cash paid for interest                                                                     |                                                                                                      | $                                                                | 216                                                     |         |        | $       | 200    |         |        | $      | 623    |        
|Issuance of common stock for acquisition of
    businesses                                 |                                                                                                      |                                                                  | 17,975                                                  |         |        |         |       |         |        |        | 3,786  |        
|Issuance of common stock to pay accrued
    acquisition consideration and accrued interest |                                                                                                      |                                                                  | 2,044                                                   |         |        |         | 1,118  |         |        |        |       |        
|Repayment of related party note with shares                                                |                                                                                                      |                                                                  |                                                        |         |        |         |       |         |        |        | 777    |        
|Assets acquired under capital leases                                                       |                                                                                                      |                                                                  |                                                        |         |        |         | 112    |         |        |        | 467    |        
|Reversal of deferred stock compensation as a
    result of option cancellations            |                                                                                                      |                                                                  |                                                        |         |        |         |       |         |        |        | 1,170  |        
|Conversion of common stock warrants from a
    liability to equity                         |                                                                                                      |                                                                  |                                                        |         |        |         | 1,704  |         |        |        |       |        

See notes to consolidated financial statements

82



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                        
|-- | -----------------------
|1. | Description of Business



| |        
| | -------
| | Loudeye

Loudeye is a worldwide leader in
business-to-business digital media services that facilitate the
distribution, promotion and sale of digital media content for
media and entertainment, retail, wireless and enterprise
customers. Loudeyes services enable its customers to
outsource the management and distribution of audio and video
digital media content over the Internet and other electronic
networks. Loudeyes proprietary consumer-facing e-commerce
services, combined with our technical infrastructure and
back-end solutions, comprise an end-to-end service offering,
from core digital media services, such as the hosting, storage,
encoding, management and protection of media assets for content
owners, to turn-key, fully-outsourced digital media distribution
and promotional services, such as private-labeled digital music
services, wireless music services, and streaming Internet radio
and music sample services. Loudeyes outsourced solutions
can decrease time-to-market while reducing the complexity and
cost of digital asset management and distribution compared with
internally developed alternatives, and they enable
Loudeyes customers to provide branded digital media
service offerings to their users while supporting a variety of
digital media technologies and consumer business models. In June
2004, Loudeye acquired On Demand Distribution Limited
(OD2), a privately held digital music provider based
in Europe (see Note 3). In March 2004, Loudeye acquired
Overpeer, Inc. (Overpeer), a privately held provider
of digital media data mining, anti-piracy and promotional
solutions based in New York (see Note 3).

Loudeye segregates its business in two business
segments, the digital media services segment and the media
restoration services segment. As discussed in Note 5,
Loudeye completed the sale of its media restoration services
business in May 2004.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                      
| | ---------------------
| | Accounting Principles

The financial statements and accompanying notes
are prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP).



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

The consolidated financial statements include the
accounts of Loudeye Corp. and its wholly owned domestic and
foreign subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation. Loudeye has
included the results of operations of acquired entities from the
dates of acquisition (see Note 3).



| |                          
| | -------------------------
| | Estimates and Assumptions

The preparation of financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting period. These estimates and assumptions are
affected by managements application of accounting
policies. Examples include estimates of loss contingencies, when
technological feasibility is achieved, purchase accounting,
music publishing rights and music royalty accruals, the
potential outcome of future tax consequences of events that have
been recognized in our financial statements or tax returns, and
determining when investment impairments are
other-than-temporary. Actual results could differ from those
estimates.

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

83



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

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



| |                      
| | ---------------------
| | Marketable Securities

Loudeye has classified as available-for-sale all
marketable debt and equity securities for which there is a
determinable fair market value and no restrictions on
Loudeyes ability to sell within the next 24 months.
Available-for-sale securities are carried at fair value, with
unrealized gains and losses reported as a separate component of
stockholders equity. Realized gains and losses and
declines in value judged to be other-than-temporary on
available-for-sale securities are included in other income
(expense). Loudeye has classified securities with a remaining
contractual maturity of greater than one year as long term
marketable securities. All securities have a remaining
contractual maturity of two years or less. The cost basis for
determining realized gains and losses on available-for-sale
securities is determined on the specific identification method.

The following table summarizes the composition of
Loudeyes cash, cash equivalents, and available-for-sale
marketable securities at December 31, 2004 and 2003 (in
thousands):

|                                 |                                   |                                                            |   |        |        |  |   |       |        | 
|-------------------------------- | --------------------------------- | ---------------------------------------------------------- | - | ------ | ------ |  | - | ----- | ------ | 
|                                 |                                   |                                                           
|                                 |                                   | December 31,                                              
|                                 |                                   |                                                           
|                                 |                                   | 2004                                                       |   | 2003  
|                                 |                                   |                                                            |   |       
|Cash and cash equivalents:       |                                   |                                                            |   |        |        |  |   |      
|                                 | Cash                              |                                                            | $ | 6,607  |        |  | $ | 7,451 |       
|                                 | Money market mutual funds         |                                                            |   | 23,257 |        |  |   | 5,029 |       
|                                 |                                   |                                                            |   |        |        |  |   |      
|                                 |                                   | Total cash and cash equivalents                            |   |        | 29,864 |  |   |       | 12,480 | 
|                                 |                                   |                                                            |   |        |        |  |   |      
|Marketable securities:           |                                   |                                                            |   |        |        |  |   |      
|                                 | Corporate notes & bonds           |                                                            |   | 5,738  |        |  |   | 1,210 |       
|                                 | Commercial paper & CDs            |                                                            |   | 1,289  |        |  |   |      |       
|                                 | U.S. Government agency securities |                                                            |   | 1,989  |        |  |   | 8,250 |       
|                                 |                                   |                                                            |   |        |        |  |   |      
|                                 |                                   | Total marketable securities                                |   |        | 9,016  |  |   |       | 9,460  | 
|                                 |                                   |                                                            |   |        |        |  |   |      
|Long-term marketable securities: |                                   |                                                            |   |        |        |  |   |      
|                                 | Corporate notes & bonds           |                                                            | $ | 2,288  |        |  | $ |      |       
|                                 |                                   |                                                            |   |        |        |  |   |      
|                                 |                                   | Total long-term marketable securities                      |   |        | 2,288  |  |   |       |       | 
|                                 |                                   |                                                            |   |        |        |  |   |      
|                                 |                                   | Total cash, cash equivalents and marketable
    securities |   | $      | 41,168 |  |   | $     | 21,940 | 
|                                 |                                   |                                                            |   |        |        |  |   |      

The fair value of the available-for-sale
marketable securities by contractual maturity at
December 31, 2004 is as follows:

|                 |                             |            |       |        | 
|---------------- | --------------------------- | ---------- | ----- | ------ | 
|                 |                             | Fair Value
|                 |                             |           
|Within one year  |                             | $          | 9,016 |       
|One to two years |                             |            | 2,288 |       
|                 |                             |            |       |       
|                 | Total marketable securities |            | $     | 11,304 | 
|                 |                             |            |       |       

The gross unrealized gains or losses on
available-for-sale securities at December 31, 2004 and 2003
and the gross realized gains or losses on the sale of
available-for-sale securities for the years ended

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


December 31, 2004, 2003 and 2002 were
immaterial and are therefore not shown. Loudeye has concluded
that unrealized losses are temporary due to Loudeyes
ability to realize its investments at maturity.



| |                
| | ---------------
| | Restricted Cash

At December 31, 2004, restricted cash
represents approximately $2.0 million of cash equivalents
pledged as collateral against a term loan and approximately
$568,000 of cash equivalents pledged as collateral in connection
with standby letter of credit agreements with certain financial
institutions and leasing companies. Accordingly, the restricted
cash has been classified as long-term in the accompanying
consolidated balance sheets.



| |                    
| | -------------------
| | Accounts Receivable

Accounts receivable are recorded at the invoiced
amount and do not bear interest. The allowance for doubtful
accounts represents Loudeyes best estimate of the amount
of probable credit losses in Loudeyes existing accounts
receivable. Loudeye performs a periodic analysis to determine
the appropriate allowance for doubtful accounts. This analysis
includes various analytical procedures and a review of factors,
including individual review of past due balances over
90 days and greater than a specified amount, Loudeyes
history of collections, as well as the overall economic
environment. Account balances are charged off against the
allowance after the potential for recovery is considered remote.



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

Property and equipment is stated at cost less
accumulated depreciation and impairment write-downs.
Expenditures that extend the life, increase the capacity, or
improve the efficiency of property and equipment are
capitalized, while expenditures for repairs and maintenance are
expensed as incurred. Depreciation and amortization are
calculated on the straight-line method over the estimated useful
lives of the assets, 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.



| |         
| | --------
| | Goodwill

Loudeye accounts for goodwill in accordance with
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142).
Under FAS 142, goodwill deemed to have indefinite life is
not amortized, but is subject to, at a minimum, annual
impairment tests. Loudeye assesses the impairment of goodwill on
an annual basis or whenever events or changes in circumstances
indicate that the fair value is less than its carrying value.
Factors Loudeye considers important which could trigger an
impairment review include the following:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | poor economic performance relative to historical
    or projected future operating results;
|
| |  | significant negative industry, economic or
    company specific trends;                    
|
| |  | changes in the manner of our use of the assets or
    the plans for our business;          
|
| |  | market price of our common stock; or                                                       
|
| |  | loss of key personnel                                                                      

Goodwill represents the excess of cost over the
estimated fair value of net assets acquired, primarily from
Loudeyes recent acquisitions of Overpeer and OD2, which in
accordance with FAS 142, is not being amortized. Also in
accordance with FAS 142, Loudeye tests goodwill for
impairment at the reporting unit level on an annual basis or as
determined necessary. FAS 142 requires a two-step goodwill
impairment test whereby the first step, used to identify
potential impairment, compares the fair value of a reporting
unit with its carrying amount including goodwill. If the fair
value of a reporting unit exceeds its carrying amount, goodwill
of the reporting unit is considered not impaired and the second
test is not performed.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The second step of the impairment test is
performed when required and compares the implied fair value of
the reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment
loss shall be recognized in an amount equal to that excess.
Based on the annual goodwill test for impairment that Loudeye
performed during the quarter ended December 31, 2004, it
was determined that there is no impairment of goodwill.

Loudeye performed its annual impairment tests for
2003 and 2002 and recorded resulting impairment charges. These
charges are discussed in greater detail in Note 4.

The changes in the carrying amount of goodwill
for the years ended December 31, 2004 and 2003 are as
follows (in thousands):

|                                                   |  |              |        |      |  |   |        |  
|-------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                   |  |             
|                                                   |  | Years Ending
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2004         |        | 2003
|                                                   |  |              |        |     
|Beginning balance                                  |  | $            |       |      |  | $ | 5,307  |  
|Impairment of goodwill from Streampipe acquisition |  |              |       |      |  |   | (3,775 | )
|Impairment of goodwill from VidiPax acquisition    |  |              |       |      |  |   | (1,532 | )
|Goodwill from Overpeer acquisition                 |  |              | 2,478  |      |  |   |       |  
|Goodwill from OD2 acquisition                      |  |              | 41,071 |      |  |   |       |  
|                                                   |  |              |        |      |  |   |        |  
|                                                   |  | $            | 43,549 |      |  | $ |       |  
|                                                   |  |              |        |      |  |   |        |  

The OD2 and Overpeer acquisitions are components
of Loudeyes digital media services segment. The Streampipe
acquisition was a component of Loudeyes digital media
services segment and the Vidipax acquisition was a component of
Loudeyes media restoration services segment.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Long lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the
asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale
would be presented separately in the appropriate asset and
liability sections of the balance sheet.



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

Financial instruments that potentially subject
Loudeye to concentrations of credit risk consist of cash and
cash equivalents, marketable securities, restricted cash,
accounts receivable, accounts payable, accrued liabilities and
debt and capital lease obligations. The fair values of these
financial instruments approximate their carrying value based on
their liquidity or short-term nature. The carrying value of
Loudeyes long-term obligations approximate fair value due
to the variable nature of the interest.

Loudeye is exposed to credit risk due to its
extension of credit to its customers. Loudeyes customer
base is dispersed across different geographic areas throughout
North America and Europe and consists of customers in numerous
industries. Loudeye performs initial and ongoing evaluations of
its customers financial condition and generally extends
credit on open account, requiring collateral as deemed
necessary. One customer accounted for approximately 16% of
accounts receivable at December 31, 2004.

86



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


During the year ended December 31, 2004, no
customers accounted for 10% or more of Loudeyes revenue.
During 2003 and 2002, The Coca-Cola Company accounted for
approximately 11% and 13% of our revenue. A significant portion
of Loudeyes revenue from The Coca-Cola Company during
those periods related to media restoration services which
Loudeye ceased providing with its sale of that business in early
2004.



| |                    
| | -------------------
| | Revenue Recognition

Substantially all of Loudeyes revenue is
derived from Loudeyes digital media service offerings
including digital media store services (which include music
store services), encoding services, content protection services,
samples services, Internet radio services, live and on-demand
webcasting services and media restoration services.

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

Our basis for revenue recognition is
substantially governed by Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) 101, as
superseded by SAB 104, Revenue Recognition, the
FASBs Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21), and in very limited cases as it relates to
sales of software products Statement of Position No. 97-2,
Software Revenue Recognition, as amended by
Statement of Position No. 98-4, 98-9, and related
interpretations and Technical Practice Aids (SOP 97-2).

Determining Separate Elements and Allocating
Value to Those Elements.If sufficient
evidence of the fair values of the delivered and undelivered
elements of an arrangement does not exist, revenue is deferred
using revenue recognition principles applicable to the entire
arrangement as if it were a single element arrangement under
EITF 00-21 and is recognized on a straight-line basis over
the term of the contract. For arrangements with multiple
deliverables which are determined to have separate units of
accounting, revenue is recognized upon the delivery of the
separate units in accordance with EITF No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF 00-21). Consideration from multiple element
arrangements is allocated among the separate elements based on
their relative fair values. In the event that there is no
objective and reliable evidence of fair value for the delivered
item, the revenue recognized upon delivery is the total
arrangement consideration less the fair value of the undelivered
items. The maximum revenue recognized on a delivered element is
limited to the amount that is not contingent upon the delivery
of additional items.

In the limited circumstances where Loudeye sells
software products, Loudeye recognizes revenue associated with
the license of software in accordance with SOP 97-2. Under
the provisions of SOP 97-2, in software arrangements that
involve rights to multiple services, Loudeye allocates the total
arrangement consideration among each of the deliverables using
the residual method, under which revenue is allocated to the
undelivered elements based on vendor-specific objective evidence
of the fair value of such undelivered elements. Vendor-specific
objective evidence is based on the price charged when an element
is sold separately or, in the case of an element not sold
separately, the price established by management, if it is
probable that the price, once established, will not change
before market introduction.

Some of Loudeyes arrangements may include
consulting services sold separately under professional services
contracts. Professional services arrangements are billed on a
time and materials basis and accordingly, revenue is recognized
as the services are performed.

Digital media store services
revenue.Digital media store services,
including music store services, are our newest service offerings
and grew significantly following our acquisition of OD2 in June
2004. Loudeye charges its digital media store customers fixed
platform fees, which generally consist of enabling and hosting
the service and maintenance of the services overall
functionality during the term of the customer contract. Platform
services may include fees related to integration to a
customers website, wireless sites,

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


inventory, account management, and commerce and
billing systems. Additionally, platform fees associated with our
digital media store services include digital rights management,
editorial services, usage reporting, and digital content royalty
settlement. Loudeye charges platform fees to its customers in a
variety of manners, including initial set-up fees, monthly only
fees, or a combination of initial set-up and monthly fees. In
addition, Loudeye provides a number of transactional services,
including cover art and metadata publishing, rich media ring
tunes (for wireless applications) delivery, varied commerce and
content consumption alternatives for digital media content,
including pay-as-you-go, permanent download, or à la carte.

Loudeye follows the guidance in EITF 00-21
for purposes of allocating the total consideration to the
individual deliverables in its digital media store services
arrangements. Loudeye evaluates whether each of the elements in
these arrangements represent a separate unit of accounting, as
defined by EITF 00-21, using all applicable facts and
circumstances, including whether (i) the delivered item(s)
has value to the customer on a standalone basis, (ii) there
is objective and reliable evidence of the fair value of the
undelivered item(s) and (iii) if there is a general right
of return relative to the delivered item(s), performance of the
undelivered item(s) is considered probable and substantially in
Loudeyes control.

If Loudeye determines there are separate units of
accounting, Loudeye allocates the arrangement consideration to
the separate units of accounting based on their relative fair
values, as determined by the price of the undelivered items when
sold separately. Assuming all other criteria are met (i.e.,
evidence of an arrangement exists, collectibility is probable,
and fees are fixed or determinable), revenue is recognized as
follows:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Platform fees are recognized ratably over the
    term of the contract.                                                                                      
|
| |  | Revenues from permanent download, or à la
    carte, are recognized at the time the content is delivered,
    digitally, to the consumer.                    
|
| |  | Revenues from pay-as-you-go are deferred and then
    recognized as tracks are downloaded by the consumer or as
    credits expire, whichever occurs earlier.

If evidence of fair value cannot be established
for the undelivered elements of an agreement, the revenue from
the arrangement is recognized ratably over the period that these
elements are delivered or, if appropriate, under the percentage
of completion method based on the ratio of direct labor hours
incurred to date to total projected labor hours.

Encoding services
revenue.Encoding services consist of
(i) processing and conversion of digital content into
different digital formats pursuant to customers
specifications via Loudeyes proprietary encoding and
transcoding systems and (ii) the delivery of such processed
content to the customer. The encoded content is either delivered
electronically to a file transfer protocol (FTP) site that
our customers access via a previously provided password or
Loudeye physically ships the content to its customers. In
accordance with SAB 104, Loudeye recognizes revenue when
persuasive evidence of an arrangement exists and the service has
been rendered, provided the fee is fixed or determinable and
collection is deemed probable. Loudeye evaluates each of these
criteria as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Evidence of an arrangement: Loudeye considers a
    non-cancelable agreement signed by Loudeye and the customer to
    be evidence of an arrangement.                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Services have been rendered: Loudeye considers
    this criteria to be satisfied when the content has been
    delivered.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Fixed or determinable fee: Loudeye assesses
    whether fees are fixed or determinable at the time of sale and
    recognize revenue if all other revenue recognition requirements
    are met. Loudeye considers these criteria to be satisfied when
    the payment terms associated with the transaction are within
    Loudeyes normal payment terms. If a significant portion of
    a fee is due after the date that fees would customarily be due
    under Loudeyes normal payment terms, Loudeye considers the
    fee to not

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | be fixed and determinable, and in such cases,
    Loudeye would defer revenue and recognize it when the fees
    become due and payable.                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Collection is deemed probable: Loudeye initially
    assesses the probability of collection to determine whether this
    criterion is satisfied based on a number of factors, including
    past transaction history with the customer and the current
    financial condition of the customer. If Loudeye determines that
    collection of a fee is not reasonably assured, Loudeye defers
    revenue until the time collection becomes reasonably assured,
    which is generally upon the receipt of cash.

Content protection services
revenue.Content protection services
consist primarily of anti-piracy, data mining and content
promotion solutions related to peer-to-peer file sharing
networks. Customer billings for content protection services are
generally based on a fixed monthly fee, but may also contain a
volume-based component and, for content promotion services, a
fee based on monthly customer sales volume. Under the provisions
of SAB 104 and EITF 00-21, Loudeye recognizes revenue
in the period in which the services are provided.

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

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

Webcasting services
revenue.Webcasting services are
provided to customers using Loudeyes proprietary streaming
media software, tools and processes. Services for live webcast
events and services for on-demand webcasting services are
generally sold separately. For live webcasting events, Loudeye
charges a fixed fee. On demand webcasting service fees are based
on a contract with either set monthly minimum fees which entitle
the customer to a monthly volume of stored and streamed data
that is specified in the contract or a contract with charges
based upon actual monthly volume of stored and streamed data
with no monthly minimum fees. Additional fees are required to be
paid under the contract if the volume of data streamed in a
particular month exceeds the specified monthly volume threshold,
and the per unit charges for the additional volume approximate
the per unit charges for the minimum volumes. Any unused volume
of streamed or stored data expires at each month end.

Because Loudeye separately sells services for
live webcast events and services for on-demand webcasting, the
Company has verifiable and objective evidence of the fair value
for both the live and on-demand services. Under the provisions
of SAB 101, as amended by SAB 104, and
EITF 00-21, Loudeye recognizes revenue for live webcasting
and on-demand webcasting services which are not subject to
monthly minimums in the period in which the webcast event, data
storage or data streaming occurs. Revenue for on-demand
webcasting services subject to monthly minimums is recognized
monthly on a straight line basis over the contract period, based
upon contracted monthly rates for the specified volume
thresholds. Revenue for additional usage fees is recognized in
the period that the additional usage occurs.

Software license
revenue.In the limited circumstances
in which Loudeye sells software products, the Company recognizes
revenue associated with the license of software in accordance
with SOP 97-2. Revenue from software license sales
accounted for less than 1% of Loudeyes revenues in 2004
and less

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


than 3% of Loudeyes revenues in 2003. Under
the provisions of SOP 97-2, in software arrangements that
involve rights to multiple services, Loudeye allocates the total
arrangement consideration among each of the deliverables using
the residual method, under which revenue is allocated to the
undelivered elements based on vendor-specific objective evidence
of the fair value of such undelivered elements. Elements
included in multiple element arrangements consist of software,
intellectual property, implementation services, maintenance and
consulting services. Vendor-specific objective evidence is based
on the price charged when an element is sold separately or, in
the case of an element not sold separately, the price
established by management, if it is probable that the price,
once established, will not change before market introduction.

Media restoration services
revenue.Media restoration services
consisted of services provided by Loudeyes VidiPax
subsidiary to restore and upgrade old or damaged archives of
traditional media. Under the provisions of SAB 104 and
EITF 00-21, Loudeye recognizes revenue as these services
are rendered and Loudeye has no continuing involvement in the
goods and services delivered, which generally is the date the
finished media is shipped to the customer. As discussed in
Note 5, Loudeye completed the sale of the VidiPax business
in May 2004 pursuant to an agreement dated October 31, 2003.



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

Research and development costs associated with
software development consist primarily of salaries, wages and
benefits for development personnel and are generally charged to
expense until technological feasibility has been established for
the services. Once technological feasibility has been
established, all software costs are capitalized until the
services are available for general release to customers.
Capitalized costs are then amortized on a straight-line basis
over the term of the applicable contract, or based on the ratio
of current revenue to total projected service revenue, whichever
is greater. Technology acquired in business combinations is
recorded in intangible assets and purchased software is recorded
in property, plant and equipment.



| |                         
| | ------------------------
| | Stock-Based Compensation

Loudeye accounts for stock-based employee
compensation plans by applying the intrinsic value based method
of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
interpretations including Financial Accounting Standards Board
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation an Interpretation of
APB Opinion No. 25 (FIN 44). Under this method,
compensation expense is recorded based on the difference between
the exercise price of employee stock options granted and the
fair value of Loudeyes common stock at the date of grant.
Deferred compensation, if any, is amortized over the vesting
period of the related options, which is three to four years.

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

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table illustrates the effect on net
loss and net loss per share if Loudeye had applied the fair
value recognition provisions of FAS 123 to stock-based
employee compensation awards (in thousands except per share
amounts):

|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ------------------------------- | ------------------------ | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |                                 |                         
|                                                                                                              |                                 | Years Ended December 31,
|                                                                                                              |                                 |                         
|                                                                                                              |                                 | 2004                     |         | 2003  |   | 2002
|                                                                                                              |                                 |                          |         |       |   |     
|Net loss, as reported                                                                                         |                                 | $                        | (16,397 | )     |   | $    | (19,174 | )     |   | $ | (31,162 | )    
|Add: stock-based employee compensation expense
    under APB 25 included in reported net loss                 |                                 |                          | 239     |       |   |      | 593     |       |   |   | (417    | )    
|Deduct: total stock-based employee compensation
    expense determined under fair value method for all awards |                                 |                          | (4,231  | )     |   |      | (929    | )     |   |   | (1,114  | )    
|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                            |                                 | $                        | (20,389 | )     |   | $    | (19,510 | )     |   | $ | (32,693 | )    
|                                                                                                              |                                 |                          |         |       |   |      |         |       |   |   |         |      
|Net loss per share:                                                                                           |                                 |                          |         |       |   |      |         |       |   |   |         |      
|                                                                                                              | Basic and diluted  as reported |                          | $       | (0.22 | ) |      | $       | (0.39 | ) |   | $       | (0.75 | )
|                                                                                                              | Basic and diluted  pro forma   |                          | $       | (0.28 | ) |      | $       | (0.39 | ) |   | $       | (0.79 | )

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

|                         |  |      |           |      |  |      |            |   |  |  |            |  
|------------------------ |  | ---- | --------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                         |  | 2004 |           | 2003 |  | 2002
|                         |  |      |           |      |  |     
|Risk-free interest rates |  |      | 2.33-5.71 | %    |  |      | 2.68- 5.71 | % |  |  | 3.93- 5.71 | %
|Expected lives           |  |      | 3 years   |      |  |      | 5 years    |   |  |  | 5 years    |  
|Expected dividend yields |  |      | 0         | %    |  |      | 0          | % |  |  | 0          | %
|Expected volatility      |  |      | 115-120   | %    |  |      | 135- 136   | % |  |  | 75         | %



| |            
| | -----------
| | Advertising

Advertising costs are expensed as incurred.
Advertising expense is included in sales and marketing expenses
in the accompanying consolidated statements of operations and
was approximately $99,000 in 2004, $85,000 in 2003, and $787,000
in 2002.



| |                   
| | ------------------
| | Comprehensive Loss

Comprehensive loss is comprised of net loss,
foreign currency translation adjustments and net unrealized
gains (losses)on available-for-sale marketable securities and is
presented in the accompanying consolidated statements of
stockholders equity.



| |                   
| | ------------------
| | Foreign Currencies

Loudeye considers the functional currency of its
foreign subsidiaries to be the local currency of the country in
which the subsidiary operates. Assets and liabilities of foreign
operations are translated into U.S. dollars using rates of
exchange in effect at the end of the reporting period. Income
and expense accounts are translated into U.S. dollars using
average rates of exchange. The net gain or loss resulting from
translation is shown as translation adjustment and included in
accumulated other comprehensive income (loss) in
stockholders equity. Gains and losses from foreign
currency transactions, which were a net loss of approximately
$833,000 during 2004, are included in the consolidated
statements of operations. There were no significant gains or
losses on foreign currency transactions in 2003 or 2002.



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

Loudeye accounts for income taxes under the asset
and liability method as set forth in FAS No. 109,
Accounting for Income Taxes, under which deferred
income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of our assets
and liabilities and operating

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


loss and tax credit carry forwards. A valuation
allowance is established when necessary to reduce deferred tax
assets to the amount expected to be realized. Deferred tax
assets and liabilities and operating loss and tax credit carry
forwards are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary
differences and operating loss and tax credit carry forwards are
expected to be recovered or settled.



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

Loudeye has adopted FAS No. 131,
Disclosure about Segments of an Enterprise and Related
Information, which establishes annual and interim
reporting standards for an enterprises operating segments
and related disclosures about its services, geographic areas and
major customers. Management has determined that during the
fiscal year ended December 31, 2004, Loudeye operated in
two segments, digital media services and media restoration
services.



| |                                                
| | -----------------------------------------------
| | Guarantees, Warranties, and
    Indemnification

In the ordinary course of business, Loudeye is
not subject to potential obligations under guarantees that fall
within the scope of FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees and Indebtedness
of Others (FIN 45) an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB
interpretation No. 34, except for standard indemnification
and warranty provisions that are contained within many of
Loudeyes customer license and service agreements, and give
rise only to the disclosure requirements prescribed by
FIN 45.

Indemnification and warranty provisions contained
within Loudeyes customer license and service agreements
are generally consistent with those prevalent in Loudeyes
industry. The duration of Loudeyes service warranties
generally does not exceed 90 days following delivery of
Loudeyes services. In the case of encoding services, our
service agreements generally provide that we will replace a
defective deliverable free of charge during a specified time
period not exceeding the term of the applicable agreement.
Loudeye has not incurred significant obligations under customer
indemnification or warranty provisions historically and does not
expect to incur significant obligations in the future.
Accordingly, Loudeye does not maintain accruals for potential
customer indemnification or warranty-related obligations.



| |                             
| | ----------------------------
| | Revisions of Classifications

During the preparation of our financial
statements for the year ended December 31, 2004, we made
revisions of classification with regard to expenses incurred
during the years ended December 31, 2003 and 2002. Such
revisions of classification had no impact on net loss,
stockholders equity or cash flows as previously reported.
These revisions related to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regent Fees.We
    revised our classification of $878,000 relating to service fees
    paid to Regent Pacific Management Corporation (Regent) during
    the year ended December 31, 2003, from special
    charges  other to general and administrative expense
    in the current presentation as we determined that these expenses
    were not restructuring charges in accordance with FAS 146,
    Accounting for Costs Association with Exit or Disposal
    Activities and were more appropriately classified as
    general and administrative expense.
|
| |  | Amortization of Intangible
    Assets.We revised our classification
    of amortization of acquired technology and capitalized software
    costs totaling approximately $269,000 in 2003 and
    $1.3 million in 2002 from operating expenses 
    amortization of intangibles to cost of revenue in the current
    presentation as we determined that these expenses were more
    appropriately classified as cost of revenue in accordance with
    FAS 86 and related accounting literature.                                                                
|
| |  | Impairment of Intangible
    Assets.We revised our classification
    of impairment charges related to acquired technology and
    capitalized software costs totaling approximately $601,000 in
    2003 and $694,000 in 2002 from operating expenses 
    special charges  other to cost of revenue in the                                                                                                                                                                                                                                                     

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | current presentation as we determined that these
    charges were more appropriately classified as cost of revenue in
    accordance with FAS 86 and related accounting literature.



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

In December 2004, the FASB issued Statement
No. 123R, Share-Based Payment,that
amends FASB Statements No. 123 and 95, and supersedes
APB 25. This statement requires a company to measure the
cost of employee services received in exchange for an award of
equity instruments, such as stock options, based on the
grant-date fair value of the award and to recognize such cost
over the requisite period during which an employee provides
service. The grant-date fair value will be determined using
option-pricing models adjusted for unique characteristics of the
equity instruments. The statement also addresses the accounting
for transactions in which a company incurs liabilities in
exchange for goods or services that are based on the fair value
of the Companys equity instruments or that may be settled
through the issuance of such equity instruments. The statement
does not change the accounting for transactions in which a
company issues equity instruments for services to non-employees
or the accounting for employee stock ownership plans. This
statement is effective beginning in the third quarter of 2005,
and requires Loudeye to recognize compensation costs on
outstanding awards for which the requisite service has not yet
been rendered. While Loudeye expects the implementation of this
standard to have a material impact on its consolidated financial
statements, Loudeye is currently unable to quantify this impact
as it has not implemented the necessary option expensing
software.

In December 2004, the FASB issued Staff Position
No. 109-2, Accounting and Disclosure Guidance for the
Foreign Earnings Repatriation Provision within the American Jobs
Creation Act of 2004 (FAS 109-2). The American Jobs
Creation Act of 2004 introduces a special one-time dividends
received deduction on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are
met. FAS 109-2 provides accounting and disclosure guidance
for the repatriation provision, and was effective immediately
upon issuance. As Loudeye does not currently have any foreign
earnings, Loudeye does not believe that the adoption of
FAS 109-2 will have a significant effect on its
consolidated financial statements.



|   |             
|-- | ------------
|3. | Acquisitions



| |                                   
| | ----------------------------------
| | On Demand Distribution
    Limited

On June 22, 2004, Loudeye commenced a tender
offer to acquire 100% of the outstanding shares of On Demand
Distribution Limited (OD2), a privately held digital
music provider based in Europe. Loudeye acquired 93% of the
shares of OD2 upon commencement of the tender offer. As of
August 17, 2004 Loudeye acquired the remaining 7% of
OD2s shares on the same terms from the remaining
shareholders of OD2. In March 2005, Loudeye completed a
restructuring of its future deferred and contingent payment
obligations to the former OD2 shareholders, which is
discussed further below. This acquisition supports
Loudeyes commitment to providing global services by
broadening its reach and capabilities into key geographic
regions including Europe, the second largest music market in the
world, and Australia. In addition, the acquisition expands
Loudeyes content management and anti-piracy content
protection services into Europe and will enable Loudeye to
leverage OD2s reach to expand its business into new
markets. The consolidated statement of operations of Loudeye for
the year ended December 31, 2004, includes the results of
operations of OD2 since the closing date of the acquisition,
June 22, 2004.



| |                                                          
| | ---------------------------------------------------------
| | OD2 Transaction Consideration as of
    December 31, 2004

The consideration for the transaction consisted
of the following elements:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Loudeye issued 9,065,919 shares of its
    common stock on June 22, 2004, and 599,259 shares of
    its common stock on August 25, 2004 to existing
    OD2 shareholders and option holders.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Loudeye expects to issue up to 2,212,302
    additional shares of its common stock, representing shares to be
    issued to OD2 option holders issuable upon exercise of OD2
    options assumed by Loudeye. Of these options, options to
    purchase 10,011 shares of Loudeyes common stock
    have been exercised as of December 31, 2004.                                                                                                                                                                                              
|
| |  | Loudeye issued 395,083 shares of its common
    stock in December 2004 to former OD2 shareholders to
    satisfy the initial deferred consideration payment obligations
    totaling £1.1 million (approximately $2.1 million
    based on exchange rates as of December 31, 2004).                                                                                                                                                                                                                                                          
|
| |  | Certain of OD2s principal shareholders
    agreed to have an aggregate of 15% of the total consideration
    payable in the transaction held in escrow by Loudeye for
    18 months to satisfy claims Loudeye may have with respect
    to breaches of representations, warranties and covenants and
    indemnification claims. As of December 31, 2004, Loudeye
    had issued and placed in escrow 2,315,775 shares of its
    common stock to 17 former OD2 shareholders who had tendered
    their shares of OD2 stock as of that date.
|
| |  | During 2004, Loudeye paid approximately
    $1.9 million to retire certain liabilities that were
    assumed as of June 22, 2004.                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | As of December 31, 2004, Loudeye was
    obligated to pay an additional £7.2 million
    (approximately $13.9 million based on exchange rates as of
    December 31, 2004), excluding the 15% additional
    consideration to be held in escrow (as discussed below), through
    November 30, 2005, to OD2s shareholders, as follows:                                                                                                                                                                                                      



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | January 31, 2005, approximately
    £4.0 million or $7.8 million;    
|
| |  | On May 31, 2005, approximately
    £1.1 million or $2.0 million; and 
|
| |  | On November 30, 2005, approximately
    £2.1 million or $4.1 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 15% of the total additional consideration that
    Loudeye was required to pay to the OD2 shareholders through
    November 30, 2005, or approximately $2.1 million, will
    be placed into escrow along with the escrow shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | As of December 31, 2004 Loudeye was
    obligated to pay additional contingent consideration of up to
    £10.0 million (approximately $19.3 million based
    on exchange rates as of December 31, 2004), which amount
    has not been adjusted for the 15% holdback in escrow, if OD2
    achieves certain financial performance targets during the period
    through November 30, 2006. Of this contingent
    consideration, Loudeye had accrued approximately
    £1.1 million (approximately $2.1 million based on
    exchange rates as of December 31, 2004, net of amounts to
    be held in escrow) in its consolidated financial statements
    based on managements determination that the contingency
    related to this payment obligation had been resolved beyond a
    reasonable doubt.

Loudeye had issued promissory notes in aggregate
principal amount of £1.9 million to ten of OD2s
former shareholders. As of December 31, 2004, approximately
£1.7 million in principal was still outstanding under
these notes (approximately $3.3 million based on exchange
rates as of December 31, 2004). Loudeyes obligations
under these notes were included within the
£7.2 million (approximately $13.9 million based
on exchange rates as of December 31, 2004) of accrued
acquisition consideration and within the approximately
$2.1 million of additional consideration to be paid into
escrow described above. The notes bear interest at 5% per
annum and are repayable in unequal installments on May 31
and November 30, 2005 (which installments are proportional
to the amounts of deferred consideration we are required to pay
on May 31 and November 30, 2005). Interest expense for
2004 was approximately $55,000. Aggregate interest expense over
the terms of the notes will be included in interest expense and
will be approximately £60,000 (approximately $116,000 based
on exchange rates as of December 31, 2004).

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The escrow shares and the 15%, or approximately
$2.1 million, of additional consideration described above
are not recorded as liabilities and the value of the shares held
in escrow and the 15% additional consideration was not included
in determining the cost of acquiring OD2 as of December 31,
2004, since the resolution of the escrow shares and 15%
additional consideration is still pending. Loudeye will reflect
the escrow shares as outstanding and the liability relating to
the 15% additional consideration as accrued and record the value
of both as additional costs of acquiring OD2 upon the earlier of
the expiration of the 18 month escrow period (to the extent
such shares and additional consideration are released from
escrow) or when Loudeye believes beyond a reasonable doubt that
it will not state a claim pursuant to the terms of the escrow.

The total number of shares issued, to be issued
upon exercise of options and held in escrow of 13,949,849
constituted approximately 19.9% of Loudeyes outstanding
shares of common stock at the commencement of the tender offer.

Excluding the impact of the escrow shares and 15%
additional consideration discussed above, as of
December 31, 2004 Loudeye has recorded $38.1 million
of net assets in connection with the transaction consisting of
upfront stock consideration, including the assumption of OD2
options, deferred consideration, cash obligations to retire
certain liabilities, and Loudeyes transaction related
costs. As of June 22, 2004, the initial purchase price
excluded minority interest related to the acquisition and
included preliminary estimates of certain transaction
consideration. Because OD2 had a deficit in net worth at
acquisition, the 7% minority interest that Loudeye had not yet
acquired was not reflected in Loudeyes consolidated
balance sheet at June 30, 2004. As of August 17, 2004,
Loudeye subsequently acquired the remaining 7% of OD2s
shares and adjusted certain transaction consideration based upon
current information. The initial purchase price can be
summarized at June 22, 2004 and December 31, 2004
(based on exchange rates as of June 22, 2004) as follows
(amounts in thousands):

|                                                   |  |                     |        |              |  |   |        | 
|-------------------------------------------------- |  | ------------------- | ------ | ------------ |  | - | ------ | 
|                                                   |  |                    
|                                                   |  | As of June 22, 2004
|                                                   |  |                    
|                                                   |  | June 22,            |        | December 31,
|                                                   |  | 2004                |        | 2004        
|                                                   |  |                     |        |             
|Transaction related costs                          |  | $                   | 1,527  |              |  | $ | 1,993  | 
|Cash paid and due on certain liabilities assumed   |  |                     | 2,778  |              |  |   | 1,878  | 
|Accrued acquisition consideration                  |  |                     | 13,654 |              |  |   | 17,033 | 
|Common stock payable related to acquisition        |  |                     | 2,596  |              |  |   | 3,208  | 
|Common stock issued in connection with acquisition |  |                     | 13,146 |              |  |   | 14,015 | 
|                                                   |  |                     |        |              |  |   |        | 
|                                                   |  | $                   | 33,701 |              |  | $ | 38,127 | 
|                                                   |  |                     |        |              |  |   |        | 

The accrued acquisition consideration recorded in
Loudeyes financial statements as of December 31,
2004, has been adjusted to reflect the foreign currency exchange
rate at December 31, 2004, and a net foreign currency
transaction loss of $833,000 was recorded in other income in the
accompanying consolidated statement of operations for the year
ended year December 31, 2004.

Under the terms of the offer, future cash
consideration is payable in British currency (pounds), and
accordingly the corresponding U.S. dollar amounts set forth
above may vary with fluctuations in the prevailing exchange
rate. All future payments are payable in cash or, at
Loudeyes election, in shares of Loudeye common stock, the
number of which will be determined based on Loudeyes
volume weighted average share price for a specified period prior
to issuance. OD2 shareholders may also elect to receive
promissory notes in lieu of any cash payments that Loudeye may
be required to make. Loudeye has also reserved approximately
2.0 million shares for stock option grants under its 2000
Stock Option Plan to employees of OD2 for future services.

Loudeye accounted for the acquisition in
accordance with FAS 141. In accordance with EITF Issue
No. 99-12, Determination of the Measurement Date for
the Market Price of Acquirer Securities Issued

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


in a Purchase Business Combination,
(EITF 99-12) for purposes of estimating the value of the
OD2 purchase consideration, the fair value of the Loudeye common
stock issued for the acquisition of OD2 was determined to be
$1.45 per share based on the average closing price of
Loudeyes common stock over the two day periods before and
after June 22, 2004, the date the acquisition was
announced, multiplied by the Loudeye shares issued based upon
the exchange ratio set forth in the merger agreement. The fair
value of options assumed is deemed to be equivalent to the value
of the underlying Loudeye shares into which such options are
exercisable given the nominal strike price of such options. In
accordance with FAS No. 52, Foreign Currency
Translation, and as a result of currency fluctuation
between the U.S. dollar and British pound since the
June 22, 2004 acquisition date, Loudeye adjusted the
accrued acquisition consideration recorded in Loudeyes
consolidated balance sheet and recorded a net foreign currency
transaction loss of $833,000 in other income(expense) in the
accompanying condensed consolidated statement of operations for
year ended December 31, 2004.

The following table summarizes as of
June 22, 2004 and December 31, 2004 (based on exchange
rates as of June 22, 2004), the fair values of the assets
acquired and liabilities assumed, along with the estimated
useful lives of property and equipment and intangible assets,
based upon managements internal analysis and the results
of an independent valuation of the intangible assets acquired,
which have been recorded in Loudeyes digital media
services segment (in thousands):

|                                     |  |                           |        |              |  |   |        |   |  |  |            | 
|------------------------------------ |  | ------------------------- | ------ | ------------ |  | - | ------ | - |  |  | ---------- | 
|                                     |  |                           |        |             
|                                     |  | Purchase Price Allocation |        |             
|                                     |  |                           |        |             
|                                     |  | June 22,                  |        | December 31, |  |  
|                                     |  | 2004                      |        | 2004         |  |  
|                                     |  |                           |        |              |  |  
|Current assets                       |  | $                         | 2,700  |              |  | $ | 2,700  |   |  |  |            | 
|Property and equipment               |  |                           | 629    |              |  |   | 629    |   |  |  | 1-3  years | 
|Goodwill                             |  |                           | 33,598 |              |  |   | 38,873 |   |  |  |            | 
|Customer contracts and relationships |  |                           |       |              |  |   | 1,062  |   |  |  | 5 years    | 
|Acquired technology                  |  |                           | 2,970  |              |  |   | 1,692  |   |  |  | 5 years    | 
|Current liabilities                  |  |                           | (6,196 | )            |  |   | (6,829 | ) |  |  |            | 
|                                     |  |                           |        |              |  |   |        |   |  |  |            | 
|Total purchase price allocation      |  | $                         | 33,701 |              |  | $ | 38,127 |   |  |  |            | 
|                                     |  |                           |        |              |  |   |        |   |  |  |            | 

The weighted average amortization period of
amortizable intangibles acquired is approximately five
(5) years. The goodwill recorded is not amortizable for
income tax purposes. The goodwill associated with OD2 was
included in Loudeyes digital media services segment.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Payments Subsequent to December 31, 2004
    and March 2005 Restructuring of Future OD2 Payment
    Obligations

From a financial accounting perspective, Loudeye
issued 3,974,206 shares of its common stock in January 2005
to former OD2 shareholders to satisfy the second deferred
consideration payment obligations totaling
£4.0 million (approximately $7.7 million based on
exchange rates as of December 31, 2004). Loudeye issued a
total of 4,667,608 shares its common stock in January 2005,
which includes 693,402 shares held in escrow. These
payments included satisfaction of the second promissory note
installments discussed further above.

In March 2005, Loudeye completed a restructuring
of remaining deferred and contingent payment obligations under
the terms of the OD2 Acquisition Amendment Agreement as
follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, from a financial accounting
    perspective Loudeye issued 3,026,405 shares (valued at
    approximately £3.2 million or $6.2 million based
    on December 31, 2004 closing share price and exchange
    rates) as settlement for the remaining deferred consideration
    obligations of approximately £3.2 million (or
    approximately $6.2 million based on December 31, 2004
    exchange rates). This amount excludes 528,014 shares issued but
    held in escrow.

96



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | From a financial accounting perspective, Loudeye
    will pay £2.6 million (or approximately
    $5.0 million based on December 31, 2004 exchange
    rates) in cash in full satisfaction of the maximum potential
    contingent payment obligations of up to £10.0 million
    (or approximately $19.3 million based on December 31,
    2004 exchange rates). Of this amount, approximately
    £1.1 million (approximately $2.1 million based on
    December 31, 2004 exchange rates) had been accrued in the
    accompanying consolidated financial statements at
    December 31, 2004 based on managements assessment
    that the outcome of the underlying contingency was determinable
    beyond a reasonable doubt. The first of these payments was made
    in March 2005 and the second payment will be made in July 2005.
    This amount excludes £465,000 (approximately $896,000 based
    on December 31, 2004 exchange rates) held in escrow.

This restructuring was agreed to by all of the
former OD2 shareholders entitled to receive additional
deferred and contingent payment consideration and it satisfies
in full those obligations.



| |               
| | --------------
| | Overpeer, Inc.

In March 2004, Loudeye completed the acquisition
of Overpeer, Inc. (Overpeer), a privately held
company based in New York. Pursuant to the Agreement and Plan of
Merger and Reorganization (Merger Agreement), among
Loudeye, Privateer Acquisition Corp., a wholly owned subsidiary
of Loudeye, Overpeer and certain of Overpeers
stockholders. Privateer Acquisition Corp. was merged with and
into Overpeer, with Overpeer continuing as the surviving company
and a wholly-owned subsidiary of Loudeye (the
Merger). As a result of the Merger, all of the
outstanding capital stock of Overpeer was exchanged for a total
of 1,752,772 shares of Loudeyes common stock. The
number of shares issued in the Merger was calculated by dividing
$4.0 million by the volume weighted average closing share
price of Loudeyes common stock on each of the thirty
consecutive trading days preceding the closing of the Merger, or
$2.2821 per share. Of the shares issued in the Merger,
262,916 will be held in escrow for one year and will be
available during that time to satisfy indemnity claims under the
Merger Agreement. Loudeye filed a registration statement in
March 2004 for the resale of the securities issued to the
Overpeer shareholders, which registration statement was declared
effective on May 26, 2004. In January 2005, one of the
former Overpeer stockholders substituted $425,004 in cash for
186,234 of the shares held in escrow, resulting in a remaining
escrow balance of $425,004 in cash and 76,682 shares of common
stock. In February 2005, Loudeye delivered notice to the escrow
agent and representative of the former Overpeer stockholders of
claims for breach of representations and warranties under the
merger agreement. As a result, the escrow cash and shares will
remain in escrow until Loudeye and the representative of the
former Overpeer stockholders resolve the claims against escrow
in accordance with the terms of the escrow agreement.

Overpeer is a provider of digital media data
mining, anti-piracy and promotional solutions, which are
complimentary to Loudeyes current and planned future
digital media solutions. The acquisition is intended to allow
Loudeye to provide a more complete suite of digital media
solutions to its customers.

Loudeye accounted for the acquisition in
accordance with FAS 141. In accordance with EITF 99-12
the fair value of the shares issued was determined to be
$2.26 per share based on the closing price of
Loudeyes common stock on February 29, 2004, which was
the date on which the number of shares issued could be
determined. Overpeers operating results have been included
in the accompanying consolidated statements of operations
effective beginning in March 2004.

97



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed, along
with the estimated useful lives of property and equipment and
intangible assets, which have been recorded in Loudeyes
digital media services segment (in thousands):

|                       |                                 |            |       |             |  |  |            |  | 
|---------------------- | ------------------------------- | ---------- | ----- | ----------- |  |  | ---------- |  | 
|                       |                                 | Purchase   |       |            
|                       |                                 | Price      |       |            
|                       |                                 | Allocation |       | Useful life
|                       |                                 |            |       |            
|Current assets         |                                 | $          | 277   |             |  |  |            | 
|Property and equipment |                                 |            | 278   |             |  |  | 1-3 years  | 
|Goodwill               |                                 |            | 2,478 |             |  |  |            | 
|Trademark              |                                 |            | 42    |             |  |  | Indefinite | 
|Acquired technology    |                                 |            | 682   |             |  |  | 5 years    | 
|Customer relationships |                                 |            | 317   |             |  |  | 7 years    | 
|Non-compete agreements |                                 |            | 373   |             |  |  | 3 years    | 
|Other long-term assets |                                 |            | 8     |             |  |  |            | 
|Current liabilities    |                                 |            | (365  | )           |  |  |            | 
|                       |                                 |            |       |             |  |  |            | 
|                       | Total purchase price allocation |            | $     | 4,090       |  |  |            |  | 
|                       |                                 |            |       |             |  |  |            | 

The weighted average amortization period of
amortizable intangibles acquired is approximately five (5)
years. The goodwill recorded is not amortizable for tax
purposes, and was included in Loudeyes digital media
services segment.

The purchase price allocation set forth above
includes acquisition costs of $129,000.



| |                                    
| | -----------------------------------
| | Pro forma financial
    information

The following table presents the unaudited pro
forma results of Loudeye for the years ended December 31,
2004 and 2003 assuming Loudeye had acquired OD2 and Overpeer on
January 1, 2003 (in thousands):

|                                     |  |             |         |      |  |   |         |  
|------------------------------------ |  | ----------- | ------- | ---- |  | - | ------- | -
|                                     |  |            
|                                     |  | Years Ended
|                                     |  |            
|                                     |  | 2004        |         | 2003
|                                     |  |             |         |     
|Total revenues                       |  | $           | 20,769  |      |  | $ | 16,200  |  
|Net loss                             |  |             | (27,568 | )    |  |   | (26,431 | )
|Basic and diluted net loss per share |  | $           | (0.37   | )    |  | $ | (0.53   | )



|   |                
|-- | ---------------
|4. | Special Charges

Special charges for the year ended
December 31, 2004 were $312,000. During 2004, Loudeye
settled a suit for breach of lease related to its unoccupied
facility at 414 Olive Way, Seattle, Washington. Loudeye had
recorded the estimated lease termination costs in accrued
special charges. Due to the settlement, Loudeye increased the
amount in accrued special charges by $362,000 during the year
ended December 31, 2004. In addition, in February 2004,
Loudeye entered into a lease settlement agreement with the
landlord of its unoccupied facility in New York, New York
pursuant to which Loudeye paid the landlord $450,000 and allowed
the landlord to retain its security deposit of $212,000, for a
total settlement of $662,000. The $50,000 difference between the
amount recorded in accrued special charges and the final
settlement amount was reflected as a credit to special charges
during the first quarter 2004 in the consolidated statement of
operations.

Beginning in the fourth quarter of 2000 through
the first quarter of 2003, Loudeye commenced a series of
operational restructurings and facilities consolidations. As a
result of these activities, Loudeye has recorded special charges
in the years ended December 31, 2004, 2003 and 2002.

98



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The facilities related charges and goodwill, and
property and equipment impairment charges recorded in 2002 and
2003 were the result of Loudeyes decision to exit certain
domestic facilities and were estimated based on the
companys evaluation of then current market conditions
relative to the companys existing special charges accrual.
The estimated facilities related charges are based on current
comparable rates for leases and subleases of a comparable term
or termination fees. Certain property and equipment and goodwill
related to Loudeyes media restoration services and
enterprise communications services businesses were impaired, as
the projected undiscounted discernible cash flows did not exceed
the carrying value of the assets over their estimated useful
lives. The fair values of each of these assets were estimated
using primarily a probability weighted discounted cash flow
method. The fair value of goodwill was estimated under the
two-step process required by FAS 142.

The components of the special charges are
summarized as follows (in thousands):

|                                                          |  |                          |     |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                          |  |                         
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2004                     |     | 2003 |  | 2002
|                                                          |  |                          |     |      |  |     
|Goodwill impairment                                       |  | $                        |    |      |  | $    | 5,307 |  |  | $ |      | 
|Customer lists and other intangible assets
    impairment |  |                          |    |      |  |      | 84    |  |  |   | 743   | 
|Property and equipment impairment                         |  |                          |    |      |  |      | 670   |  |  |   | 2,029 | 
|Employee severance and termination benefits               |  |                          |    |      |  |      | 501   |  |  |   | 1,890 | 
|Facilities related charges                                |  |                          | 312 |      |  |      | 658   |  |  |   | 1,490 | 
|                                                          |  |                          |     |      |  |      |       |  |  |   |       | 
|                                                          |  | $                        | 312 |      |  | $    | 7,220 |  |  | $ | 6,152 | 
|                                                          |  |                          |     |      |  |      |       |  |  |   |       | 

The following table reflects the activity in
accrued special charges for the year ended December 31,
2004 (in thousands):

|                           |  |                    |        |  
|-------------------------- |  | ------------------ | ------ | -
|                           |  | Facilities-related
|                           |  | Charges           
|                           |  |                   
|Balance, December 31, 2003 |  | $                  | 1,670  |  
|Additional accruals        |  |                    | 362    |  
|Payments                   |  |                    | (1,459 | )
|Adjustments                |  |                    | (170   | )
|                           |  |                    |        |  
|Balance, December 31, 2004 |  | $                  | 403    |  
|                           |  |                    |        |  

In January 2005, Loudeye paid $360,000 of the
$403,000 then remaining accrued special charge balance, as a
final payment related to Loudeyes former facility at
414 Olive Way, Seattle, Washington.



|   |                                   
|-- | ----------------------------------
|5. | Sale of Media Restoration Business

On January 30, 2004 (Transfer
Date), Loudeyes wholly-owned media restoration
services subsidiary, VMRLE Co., Inc. (formerly VidiPax, Inc.),
transferred substantially all of its assets and certain
liabilities to a company controlled by the former general
manager of VMRLE Co., Inc. pursuant to an asset purchase
agreement signed on October 31, 2003 and amended on
January 30, 2004. The total purchase price of
$1.2 million was placed in escrow when the asset purchase
agreement was signed. Based on the January 30, 2004
amendment, $900,000 of the $1.2 million purchase price was
to be released from escrow upon the assignment to the purchaser
of contracts with the General Services Administration of the
United States (GSA Contracts). If the GSA Contracts
were not assigned within a certain time period after the
Transfer Date, the purchaser had the option to unwind the
transfer and reclaim the $1.2 million held in escrow.
Accordingly, the assets and liabilities transferred were
recorded on the consolidated balance sheet as assets and
liabilities transferred under contractual arrangement at their
carrying value as of the Transfer Date. As of December 31,
2003, these assets and liabilities were classified as held for
sale. On May 17, 2004, (Accounting Closing
Date), the GSA Contracts were assigned to the purchaser,
resulting in the subsequent release of the $900,000 from escrow
to VMRLE Co., Inc. For the period from the

99



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Transfer Date to the Accounting Closing Date,
VMRLE Co., Inc. continued to be the contracting party with the
GSA. The media restoration services provided under the GSA
Contracts during that period were provided by the purchaser as
agent for VMRLE Co., Inc. and the purchaser retained the profits
or losses earned from such services. Because VMRLE Co., Inc.
continued to be the primary obligor under the GSA Contracts
until their assignment, revenue and costs of revenue in the
consolidated statement of operations of Loudeye reflect the
revenue and cost of revenue from services provided under the GSA
Contracts totaling $213,000 for the period from the Transfer
Date through the Accounting Closing Date, of which $95,000 was
recorded as revenue and cost of revenue in the first quarter
2004 and $118,000 was recorded as revenue and cost of revenue in
the second quarter 2004. All other revenue and costs of VMRLE
Co., Inc.s operations have been appropriately excluded
from Loudeyes statement of operations subsequent to the
Transfer Date. The difference between the $900,000 proceeds
received from escrow and the carrying value of the assets and
liabilities transferred as of the Accounting Closing Date is
$160,000 and was recorded as a loss on the sale of net assets
transferred under contractual arrangement in the second quarter
2004.

With the GSA Contracts assigned to the purchaser,
the remaining $300,000 of the $1.2 million originally held
in escrow was released during third quarter 2004 upon the
execution of an agreement relating to certain rights associated
with certain equipment owned by a third party and a net gain of
$273,000 was recorded during the third quarter 2004.

Loudeye may receive up to an additional $500,000
based on the purchaser achieving certain performance targets
over a period of two years from the Transfer Date. At transfer,
Loudeye also entered into a co-marketing and reseller agreement
with the purchaser pursuant to which Loudeye will sell, for a
fee, media restoration services on behalf of the purchaser for a
two-year period. The co-marketing and earn-out provisions
constitute continuing involvement by Loudeye under FAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Consequently, VMRLE Co., Inc. has not
been reported as a discontinued operation.



|   |                         
|-- | ------------------------
|6. | Private Equity Financing

December 2004
private placement transaction

In December 2004, Loudeye entered into a
subscription agreement with a limited number of accredited
investors pursuant to which Loudeye sold and issued to such
investors 16,800,007 shares of its common stock, together
with warrants to purchase 5,040,002 shares of common
stock at an exercise price of $2.25 per share, for an
aggregate purchase price of $25.2 million. The warrants are
not exercisable until six months after the December 23,
2004 closing date and are then exercisable until the fifth
anniversary of the closing date. Loudeye also granted the
investors a one year right to purchase 30% of any
securities sold by Loudeye in future financings, subject to
exceptions. The transaction resulted in net proceeds to Loudeye
of approximately $23.5 million.

Loudeye filed a registration statement in
February 2005 covering the resale of the shares of common stock
issued in this transaction and the shares of common stock
underlying the warrants. The registration statement was not
filed within the required time, and as a result we are required
to pay liquidated damages of approximately $33,600. The
registration statement is not yet effective. Loudeye is required
to use its commercially reasonable efforts to cause the
registration statement to be declared effective prior to
April 22, 2005, or if earlier, the fifth trading day
following notification by the SEC that the registration
statement is no longer subject to review and comments. The
registration rights provisions in the subscription agreement
provide that if a registration statement does not become
effective, within the defined time period, then in addition to
any other rights the holders may have, Loudeye would be required
to pay to each holder an amount in cash, as liquidated damages,
equal to 1% per month of the aggregate purchase price,
prorated daily.

100



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


February 2004
private placement transaction

In February 2004, Loudeye sold
10,810,811 shares of common stock at $1.85 per share
to a limited number of accredited investors. The gross proceeds
received from the financing were $20.0 million. Loudeye
paid a placement fee equal to 5% of the gross proceeds. The net
proceeds of the offering, after commissions and expenses, will
be used for working capital and general corporate purposes,
including expansion of Loudeyes business-to-business
digital music solutions in the U.S. and internationally. Loudeye
filed a registration statement in March 2004 covering the resale
of the shares sold in the financing and the registration
statement was declared effective by the SEC on May 26, 2004.

August 2003
private placement transaction

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

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

The fair value of the warrants was estimated
using the Black-Scholes option-pricing model with the following
assumptions: no dividends; risk-free interest rate of 2.71%, the
contractual life of 3.5 years and volatility of 136%. The
fair value of the warrants was estimated to be $1.5 million
on the closing date of the transaction. The fair value of the
warrants was re-measured at September 30, 2003 and
estimated to be $1.7 million. The increase in the fair
value of $248,000 from the transaction date to October 14,
2003 was reflected as a charge to other expenses in the
statement of operations in 2003.



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

Activity in the allowance for doubtful accounts
is as follows (in thousands):

|                        |  |              |     |            |  |        |     |         |  |   |      |   |  |   |     | 
|----------------------- |  | ------------ | --- | ---------- |  | ------ | --- | ------- |  | - | ---- | - |  | - | --- | 
|                        |  | Balance      |     | Charged    |  |        |     | Balance
|                        |  | at           |     | (Credited) |  |        |     | at     
|                        |  | Beginning of |     | to         |  | Write- |     | End of 
|Year ended December 31, |  | Year         |     | Expense    |  | Offs   |     | Year   
|                        |  |              |     |            |  |        |     |        
|2004                    |  | $            | 235 |            |  | $      | 9   |         |  | $ | (123 | ) |  | $ | 241 | 
|2003                    |  |              | 254 |            |  |        | 129 |         |  |   | (148 | ) |  |   | 235 | 
|2002                    |  |              | 474 |            |  |        | 121 |         |  |   | (341 | ) |  |   | 254 | 

101



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

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

|                                          |          |              |        |        |  |                   |        |       |  |           | 
|----------------------------------------- | -------- | ------------ | ------ | ------ |  | ----------------- | ------ | ----- |  | --------- | 
|                                          |          |              |        |       
|                                          |          | December 31, |        |       
|                                          |          |              |        |       
|                                          |          | 2004         |        | 2003   |  | Depreciable Lives
|                                          |          |              |        |        |  |                  
|Production and computer equipment         |          | $            | 11,207 |        |  | $                 | 5,201  |       |  | 3 years  
|Furniture, fixtures and equipment         |          |              | 356    |        |  |                   | 5      |       |  | 5 years  
|Leasehold improvements                    |          |              | 355    |        |  |                   | 355    |       |  | 3-5 years
|Software                                  |          |              | 697    |        |  |                   | 376    |       |  | 3 years  
|                                          |          |              |        |        |  |                   |        |       |  |          
|                                          | Subtotal |              |        | 12,615 |  |                   |        | 5,937 |  |           | 
|Accumulated depreciation and amortization |          |              | (6,954 | )      |  |                   | (4,814 | )     |  |          
|                                          |          |              |        |        |  |                   |        |       |  |          
|Property and equipment, net               |          | $            | 5,661  |        |  | $                 | 1,123  |       |  |          
|                                          |          |              |        |        |  |                   |        |       |  |          

Depreciation and amortization expense related to
property and equipment was approximately $2.1 million in
2004, $1.3 million in 2003 and $4.3 million in 2002.



|   |                  
|-- | -----------------
|9. | Intangible Assets

Loudeyes intangible assets at
December 31, 2004 and 2003 were as follows (in thousands):

|                                 |  |                |       |              |  |                |     |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 
|-------------------------------- |  | -------------- | ----- | ------------ |  | -------------- | --- | ---- |  | ---- | --- | ---- |  | - | --- |  |  | - | ----- |  |  | - | -- | 
|                                 |  |                |       |              |  |                |     |     
|                                 |  | Gross Carrying |       | Accumulated  |  |               
|                                 |  | Amount         |       | Amortization |  | Net Book Value
|                                 |  |                |       |              |  |               
|                                 |  |                |       |              |  |               
|                                 |  | December 31,   |       | December 31, |  | December 31,  
|                                 |  |                |       |              |  |               
|                                 |  | 2004           |       | 2003         |  | 2004           |     | 2003 |  | 2004 |     | 2003
|                                 |  |                |       |              |  |                |     |      |  |      |     |     
|Trade name                       |  | $              |      |              |  | $              |    |      |  | $    |    |      |  | $ |    |  |  | $ |      |  |  | $ |   | 
|Customer lists and relationships |  |                | 1,434 |              |  |                | 748 |      |  |      | 193 |      |  |   | 662 |  |  |   | 1,241 |  |  |   | 86 | 
|Acquired technology              |  |                | 2,460 |              |  |                |    |      |  |      | 360 |      |  |   |    |  |  |   | 2,100 |  |  |   |   | 
|Non-competes                     |  |                | 373   |              |  |                |    |      |  |      | 104 |      |  |   |    |  |  |   | 269   |  |  |   |   | 
|Trademark                        |  |                | 90    |              |  |                |    |      |  |      |    |      |  |   |    |  |  |   | 90    |  |  |   |   | 
|                                 |  |                |       |              |  |                |     |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 
|                                 |  | $              | 4,357 |              |  | $              | 748 |      |  | $    | 657 |      |  | $ | 662 |  |  | $ | 3,700 |  |  | $ | 86 | 
|                                 |  |                |       |              |  |                |     |      |  |      |     |      |  |   |     |  |  |   |       |  |  |   |    | 

The Company recorded impairment charges related
to certain intangible assets in 2003 and 2002.

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

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

In 2002, in connection with Loudeyes annual
impairment test for goodwill and as a result of declining
revenue, Loudeye 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 Loudeyes reporting

102



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


units and their respective intangible assets were
estimated using primarily a discounted cash flow method. As a
result of this analysis, Loudeye determined that certain of the
intangible assets in its digital media services and enterprise
communication services reporting units were impaired as the cash
flows did not support the carrying value of the assets.
Accordingly, Loudeye recorded the impairment of these intangible
assets as follows (in thousands):

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

Amortization of intangible assets totaled
approximately $787,000, $1.1 million, and $3.0 million
for the years ending December 31, 2004, 2003 and 2002,
respectively.

At December 31, 2004, the net book value of
intangible assets related to the OD2 acquisition totaled
approximately $2.4 million amortized over their estimated
useful lives of 5 years. At December 31, 2004, the net
book value of intangible assets recorded in connection with the
acquisition of Overpeer totaled approximately $1.2 million
amortized over their estimated useful lives ranging from 3 to
7 years. Amortization expense related to these acquired
intangible assets for the year ended December 31, 2004 was
approximately $657,000. Based on identified acquired intangible
assets recorded as of December 31, 2004, and assuming no
subsequent impairment of the underlying assets, the related
annual amortization expense is expected to be as follows (in
thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2005 |  | $ | 885   | 
|2006 |  |   | 885   | 
|2007 |  |   | 802   | 
|2008 |  |   | 761   | 
|2009 |  |   | 268   | 
|2010 |  |   | 45    | 
|2011 |  |   | 6     | 
|     |  |   |       | 
|     |  | $ | 3,652 | 
|     |  |   |       | 



|    |                              
|--- | -----------------------------
|10. | Accrued and Other Liabilities

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

|                                  |  |              |       |      |  |   |       | 
|--------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2004         |       | 2003
|                                  |  |              |       |     
|Accrued royalties                 |  | $            | 2,407 |      |  | $ | 600   | 
|Accrued retailer commissions      |  |              | 553   |      |  |   |      | 
|Accrued legal and accounting fees |  |              | 458   |      |  |   | 277   | 
|Accrued taxes                     |  |              | 150   |      |  |   | 170   | 
|Accrued professional services     |  |              | 255   |      |  |   |      | 
|Accrued rent and utilities        |  |              | 108   |      |  |   |      | 
|Accrued bandwidth                 |  |              | 197   |      |  |   |      | 
|Other accrued liabilities         |  |              | 838   |      |  |   | 108   | 
|                                  |  |              |       |      |  |   |       | 
|                                  |  | $            | 4,966 |      |  | $ | 1,155 | 
|                                  |  |              |       |      |  |   |       | 

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                  
|--- | ---------------------------------
|11. | Accrued Acquisition Consideration

Accrued acquisition consideration consisted of
the following (in thousands):

|                                  |  |              |        |      |  |   |   | 
|--------------------------------- |  | ------------ | ------ | ---- |  | - | - | 
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2004         |        | 2003
|                                  |  |              |        |     
|Accrued acquisition consideration |  | $            | 13,877 |      |  | $ |  | 
|Accrued contingent consideration  |  |              | 2,047  |      |  |   |  | 
|                                  |  |              |        |      |  |   |   | 
|                                  |  | $            | 15,924 |      |  | $ |  | 
|                                  |  |              |        |      |  |   |   | 

In connection with the OD2 transaction described
in Note 3, as of December 31, 2004 Loudeye was
obligated to pay to former OD2 shareholders an additional
£7.2 million (approximately $13.9 million based
on exchange rates as of December 31, 2004), in deferred
payments through November 30, 2005. In January 2005,
Loudeye issued 4,667,608 shares of its common stock to
former OD2 shareholders to satisfy the second deferred
consideration payment obligation totaling approximately
£4.0 million (approximately $7.7 million based on
exchange rates as of December 31, 2004). Of the
4,667,608 shares issued, 693,402 are being held in escrow
pursuant to the terms of the OD2 transaction. The remaining
£3.7 million (approximately $7.1 million based on
exchange rates as of December 31, 2004) deferred payment
obligations were settled in March 2005 under the terms of the
OD2 Acquisition Amendment Agreement as described in Note 3.

In addition to the deferred payment obligations,
Loudeye could have become obligated to pay to former
OD2 shareholders contingent consideration of up to
£10.0 million (approximately $19.3 million based
on exchange rates as of December 31, 2004) if OD2 achieved
certain financial performance targets during the period through
November 30, 2006. As of December 31, 2004, Loudeye
had accrued £1.1 million (approximately
$2.1 million based on exchange rates as of
December 31, 2004 and excluding escrow relating to the
payment) with respect to the initial payment of contingent
consideration for the period ended November 30, 2004, based
on managements determination that the contingency related
to this payment obligation had been resolved beyond a reasonable
doubt. In March 2005, Loudeye reached an agreement to satisfy
the maximum potential amount of contingent consideration amount
of £2.6 million for an aggregate of
£3.1 million (approximately $5.0 based on exchange
rates as of December 31, 2004), in cash, payable in two
equal installments, the first in March 2005 and the second in
July 2005. See discussion of the terms of the OD2 Acquisition
Amendment Agreement in Note 3.



|    |               
|--- | --------------
|12. | Line of Credit

In June 2003, Loudeye entered into a revolving
credit facility (the Revolver) with a bank under
which it could borrow up to $2.5 million based on a certain
percentage of eligible accounts receivable. The Revolver was
repaid in full and the credit facility was closed during 2004.

During 2003 Loudeye issued a warrant to the
lender to purchase 47,500 shares of its common stock
at $0.89 per share. The warrant expires in June 2010. The
fair value of the warrants was estimated using the Black-Scholes
option-pricing model with the following assumptions: no
dividends; risk-free interest rate of 2.0%, contractual life of
seven years and volatility of 136%. The fair value of the
warrant was estimated to be $28,000 and was recorded in interest
expense.



|    |                                                 
|--- | ------------------------------------------------
|13. | Long-Term Debt and Capital Lease
    Obligations



| |               
| | --------------
| | Long-Term Debt

On December 31, 2003, Loudeye entered into a
Loan and Security Agreement (the Term Loan) with a
bank under which it borrowed $3.0 million. The Term Loan
also provided for up to $500,000 to collateralize standby
letters of credit, which expired during 2004. Borrowings under
the Term Loan are collateralized by substantially all of
Loudeyes assets and bear interest at the Prime Rate plus
1.25 percent

104



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(6.5% at December 31, 2004). Principal and
interest payments are due in equal monthly installments,
totaling $1.0 million in each of 2005 and 2006. In
addition, the Term Loan restricts, among other things,
Loudeyes borrowings, dividend payments, stock repurchases,
and sales or transfers of ownership or control, and contains
certain other restrictive covenants that Loudeye to maintain a
certain quick ratio and tangible net worth, as defined in the
Term Loan. Loudeye was notified by Silicon Valley Bank on
October 7, 2004 that the company was not in compliance with
two restrictive financial covenants that require Loudeye to
maintain a certain quick ratio and a minimum tangible net worth,
each as defined in the loan agreement. Loudeye subsequently
established a certificate of deposit in the amount of
approximately $2.2 million, which was equal to the then
outstanding loan balance. As a result, Loudeye was notified by
Silicon Valley Bank on October 11, 2004 that the company
had cured the default within the cure period. The restricted
balance declines as Loudeye makes payments under the term loan
agreement. As a result, restricted cash of $2.0 million is
reflected on our December 31, 2004 balance sheet related to
the certificate deposit held as collateral under this obligation.

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



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

Loudeye has financed the acquisition of certain
equipment with capital lease arrangements. These leases are
collateralized by the equipment as well as by standby letters of
credit totaling approximately $305,000. The leases bear interest
at rates ranging from 5.01% to 7.52% with outstanding balances
totaling approximately $481,000 at December 31, 2003. At
December 31, 2004, future minimum lease payments under
capital lease obligations totaled $135,000, all of which is due
in 2005.

The carrying value of assets held under capital
lease obligations at December 31, 2004 was approximately
$167,000.



|    |                     
|--- | --------------------
|14. | 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.



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

105



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

Under the Companys various stock option
plans, the board of directors and its stock option committee may
grant to employees, consultants, and directors both incentive
and nonstatutory options to purchase the Companys common
stock. At December 31, 2004, the plans provided for options
to purchase up to 15,604,704 of the Companys common stock.
One of the option plans provides for an automatic annual
increase on the first day of each of the fiscal years beginning
in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of
2.5 million shares or 5% of our outstanding common stock on
the last day of the immediately preceding fiscal year or a
lesser number of shares as our Board determines. Option grants
under the plans have terms of ten years and generally vest over
three to four years.

Option activity under the plans was as follows:

|                               |                             |           |            |                  |   |                |   |      |  |   |      |      | 
|------------------------------ | --------------------------- | --------- | ---------- | ---------------- | - | -------------- | - | ---- |  | - | ---- | ---- | 
|                               |                             |           |            |                 
|                               |                             |           |            | Weighted Average
|                               |                             |           |            |                 
|                               |                             |           |            | Grant Date       |   |               
|                               |                             | Number of |            | Fair Value       |   | Exercise Price
|                               |                             | Shares    |            | per Share        |   | per Share     
|                               |                             |           |            |                  |   |               
|Outstanding, January 1, 2002   |                             |           | 8,206,103  |                  |   |                |   |      |  | $ | 1.51 |     
|                               | Granted                     |           |            | 4,422,225        |   |                | $ | 0.42 |  |   |      | 0.42 | 
|                               | Exercised                   |           |            | (91,621          | ) |                |   |      |  |   |      | 0.28 | 
|                               | Cancelled                   |           |            | (4,477,349       | ) |                |   |      |  |   |      | 1.41 | 
|                               |                             |           |            |                  |   |                |   |      |  |   |      |     
|Outstanding, December 31, 2002 |                             |           | 8,059,358  |                  |   |                |   |      |  |   | 0.98 |     
|                               | Granted at below fair value |           |            | 473,300          |   |                | $ | 1.12 |  |   |      | 0.29 | 
|                               | Granted at fair value       |           |            | 4,867,490        |   |                | $ | 0.52 |  |   |      | 0.52 | 
|                               | Exercised                   |           |            | (1,998,452       | ) |                |   |      |  |   |      | 0.80 | 
|                               | Cancelled                   |           |            | (4,717,989       | ) |                |   |      |  |   |      | 0.96 | 
|                               |                             |           |            |                  |   |                |   |      |  |   |      |     
|Outstanding, December 31, 2003 |                             |           | 6,683,707  |                  |   |                |   |      |  |   | 0.67 |     
|                               | Granted at below fair value |           |            | 168,048          |   |                | $ | 1.97 |  |   |      | 0.29 | 
|                               | Granted at fair value       |           |            | 11,172,700       |   |                | $ | 1.27 |  |   |      | 1.51 | 
|                               | Exercised                   |           |            | (1,465,505       | ) |                |   |      |  |   |      | 0.63 | 
|                               | Cancelled                   |           |            | (2,774,801       | ) |                |   |      |  |   |      | 1.66 | 
|                               |                             |           |            |                  |   |                |   |      |  |   |      |     
|Outstanding, December 31, 2004 |                             |           | 13,784,149 | (1)              |   |                |   |      |  | $ | 1.15 |     
|                               |                             |           |            |                  |   |                |   |      |  |   |      |     

The following information is provided for options
outstanding and exercisable at December 31, 2004:

|                         |  |                     |            |                     |  |                 |      |           |  |          |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | ------------------- | ---------- | ------------------- |  | --------------- | ---- | --------- |  | -------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |                     |            |                    
|                         |  | Options Outstanding |            | Options Exercisable
|                         |  |                     |            |                    
|                         |  |                     |            |                     |  |                
|                         |  |                     |            | Weighted Average    |  |                
|                         |  |                     |            |                     |  |                 |      | Weighted 
|                         |  |                     |            | Exercise            |  | Remaining       |      |           |  | Average 
|                         |  | Number of           |            | Price per           |  | Contractual     |      | Number of |  | Exercise
|Range of Exercise Prices |  | Shares              |            | Share               |  | Life (in Years) |      | Shares    |  | Price   
|                         |  |                     |            |                     |  |                 |      |           |  |         
|$0.26 - $0.36            |  |                     | 3,635,432  |                     |  | $               | 0.29 |           |  |          | 8.21 |  |  |  | 2,976,846 |  |  | $ | 0.28 | 
|$0.39 - $1.07            |  |                     | 4,703,844  |                     |  | $               | 0.99 |           |  |          | 8.71 |  |  |  | 198,757   |  |  | $ | 0.66 | 
|$1.08 - $2.00            |  |                     | 4,227,123  |                     |  | $               | 1.74 |           |  |          | 8.56 |  |  |  | 314,898   |  |  | $ | 1.71 | 
|$2.07 - $3.00            |  |                     | 1,217,750  |                     |  | $               | 2.35 |           |  |          | 8.73 |  |  |  | 385,556   |  |  | $ | 2.48 | 
|                         |  |                     |            |                     |  |                 |      |           |  |          |      |  |  |  |           |  |  |   |      | 
|December 31, 2004        |  |                     | 13,784,149 | (1)                 |  | $               | 1.15 |           |  |          | 8.53 |  |  |  | 3,876,057 |  |  | $ | 0.64 | 
|                         |  |                     |            |                     |  |                 |      |           |  |          |      |  |  |  |           |  |  |   |      | 
|December 31, 2003        |  |                     | 6,683,707  |                     |  | $               | 0.67 |           |  |          | 8.99 |  |  |  | 3,085,362 |  |  | $ | 0.72 | 
|                         |  |                     |            |                     |  |                 |      |           |  |          |      |  |  |  |           |  |  |   |      | 
|December 31, 2002        |  |                     | 8,059,358  |                     |  | $               | 0.98 |           |  |          | 8.83 |  |  |  | 2,808,823 |  |  | $ | 1.56 | 
|                         |  |                     |            |                     |  |                 |      |           |  |          |      |  |  |  |           |  |  |   |      | 



---



|    |                                                                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | An aggregate of 2,202,291 shares of common
    stock are issuable upon the exercise of stock options held by
    former OD2 shareholders. These stock options were initially
    issued under the On Demand Distribution Limited Employee Share
    Option Plan and were assumed by Loudeye as part of our

106



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | acquisition of OD2. All of the options are
    immediately exercisable at an exercise price of $0.001 per
    share. The option grants have terms of ten years from the date
    of original grant.



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

In December 1999, the board approved the creation
of the 2000 Employee Stock Purchase Plan (ESPP). A total of
200,000 shares of our common stock were reserved for
issuance under the ESPP, with the number of shares reserved for
issuance under the ESPP subject to an automatic annual increase
on the first day of each of the fiscal years beginning in 2001,
2002, 2003, 2004 and 2005 equal to the lesser of
300,000 shares or 0.75% of our outstanding common stock on
the last day of the immediately preceding fiscal year or a
lesser number of shares as the board determines. At
December 31, 2004, the total number of shares reserved for
issuance was 1,375,175, and a total of 427,120 shares have
been issued under the ESPP. On January 27, 2005, our board
of directors terminated the ESPP. As a result, the
948,055 shares previously reserved for issuance under the
ESPP will revert to our authorized but unissued capital stock.



| |         
| | --------
| | Warrants

At December 31, 2004, there were
6,131,606 shares of common stock issuable upon the exercise
of outstanding warrants, with exercise prices ranging from $1.75
to $9.55 and a weighted average exercise price of $2.19 per
share. Of these outstanding warrants, warrants to
purchase 5,040,002 shares of our common stock were
issued on December 23, 2004, in connection with our private
placement transaction to 14 accredited investors. These warrants
have an exercise price of $2.25 per share and are not
exercisable until six months after the date of issuance and are
then exercisable until the fifth anniversary of the date of
issuance.



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

The following shares of common stock have been
reserved for future issuance as of December 31, 2004:

|                                  |  |  |            | 
|--------------------------------- |  |  | ---------- | 
|Loudeye stock option plans        |  |  | 13,784,149 | 
|OD2 options assumed               |  |  | 2,202,291  | 
|2000 employee stock purchase plan |  |  | 948,055    | 
|Common stock warrants             |  |  | 6,131,606  | 
|                                  |  |  |            | 
|                                  |  |  | 23,066,101 | 
|                                  |  |  |            | 



|    |             
|--- | ------------
|15. | Income Taxes

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Loudeye has placed a 100%
valuation allowance against its deferred tax assets due to the
uncertainty surrounding the ultimate realization of such assets.
The valuation allowance increased by approximately
$5.6 million in 2004, $5.5 million in 2003 and
$29.1 million in 2002. The increase in the valuation
allowance in 2004 and 2003 differs from the expected income tax
benefit computed by applying the U.S. federal statutory rate of
34% to net loss before income taxes due primarily to adjustments
related to goodwill, stock-based compensation, and changes in
the valuation allowance.

At December 31, 2004, Loudeye had
U.S. net operating loss carryforwards of approximately
$210.0 million and foreign net operating loss carryforwards
of approximately $5.0 million which will begin to expire in
2018 through 2024. Certain of Loudeyes net operating loss
carryforwards were acquired in business combinations. If these
acquired net operating loss carryforwards become recoverable in
the future, they will be used to first reduce to zero any
goodwill, and then reduce to zero any other non-current
intangible assets associated with the business combinations, and
then any remaining net operating loss carryforwards recovered
will be recognized as a reduction in income tax expense. The
Internal Revenue Code places certain limitations on the annual
amount of net operating loss carryforwards that can be

107



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


utilized if certain changes in the Companys
ownership occur. Loudeye has experienced such ownership changes
as a result of its various stock offerings, and the utilization
of the carryforwards could be limited such that a portion for
the net operating losses may never be utilizable.

At December 31, 2004, Loudeye had research
and experimentation credit carryforwards of approximately
$160,000, which will expire beginning in 2024.

Approximately $2.7 million of net operating
loss carryforwards and a portion of the valuation allowance at
December 31, 2004 resulted from deductions associated with
the exercise of non-qualified employee stock options, the
realization of which could result in a credit to
stockholders equity.

The effects of temporary differences and
carryforwards that give rise to deferred tax assets and
liabilities are as follows (in thousands):

|                     |                                          |                           |         |        |        |   |         |        |        | 
|-------------------- | ---------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                     |                                          |                          
|                     |                                          | December 31,             
|                     |                                          |                          
|                     |                                          | 2004                      |         | 2003  
|                     |                                          |                           |         |       
|Deferred tax assets: |                                          |                           |         |        |        |   |         |       
|                     | U.S. net operating loss carryforwards    |                           | $       | 73,452 |        |   | $       | 67,732 |       
|                     | Foreign net operating loss carryforwards |                           |         | 1,588  |        |   |         |       |       
|                     | Basis difference in depreciable assets   |                           |         | 3,639  |        |   |         | 4,819  |       
|                     | Accrued special charges                  |                           |         | 141    |        |   |         | 585    |       
|                     | Stock options and warrants               |                           |         | 421    |        |   |         | 477    |       
|                     | Other                                    |                           |         | 622    |        |   |         | 609    |       
|                     |                                          |                           |         |        |        |   |         |       
|                     |                                          | Total deferred tax assets |         |        | 79,863 |   |         |        | 74,222 | 
|Valuation allowance  |                                          |                           | (79,863 | )      |        |   | (74,222 | )     
|                     |                                          |                           |         |        |        |   |         |       
|Total                |                                          | $                         |        |        |        | $ |        |       
|                     |                                          |                           |         |        |        |   |         |       



|    |                   
|--- | ------------------
|16. | Net Loss Per Share

Basic loss per share is computed by dividing net
loss by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is
computed by dividing net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during
the year. Common equivalent shares consist of shares issuable
upon the exercise of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded
from the calculation if their effect is antidilutive, which is
the case for all periods presented. Loudeye has excluded the
following numbers of shares using this method (in thousands):

|                                                         |  |                          |        |      |  |      |       |  |  |  |       | 
|-------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                         |  |                         
|                                                         |  | Years Ended December 31,
|                                                         |  |                         
|                                                         |  | 2004                     |        | 2003 |  | 2002
|                                                         |  |                          |        |      |  |     
|Options outstanding under Loudeye stock option
    plans |  |                          | 13,784 |      |  |      | 6,684 |  |  |  | 8,059 | 
|OD2 options assumed                                      |  |                          | 2,202  |      |  |      |      |  |  |  |      | 
|Warrants outstanding                                     |  |                          | 6,132  |      |  |      | 1,028 |  |  |  | 263   | 
|                                                         |  |                          |        |      |  |      |       |  |  |  |       | 
|Shares excluded                                          |  |                          | 22,118 |      |  |      | 7,712 |  |  |  | 8,322 | 
|                                                         |  |                          |        |      |  |      |       |  |  |  |       | 

Loudeye had 1,207 shares outstanding that
had been issued through stock option exercises but which were
subject to repurchase at December 31, 2002, with weighted
average purchase price of $0.17. There were no shares subject to
repurchase at December 31, 2004 or 2003. The impact of
these unvested shares has been removed from the calculation of
weighted average shares outstanding for purposes of determining
basic and diluted earnings per share and basic and diluted pro
forma earnings per share.

108



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                                                                   |  |                          |        |      |  |      |        |   |  |  |        |  
|---------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                                                   |  |                         
|                                                                                   |  | Years Ended December 31,
|                                                                                   |  |                         
|                                                                                   |  | 2004                     |        | 2003 |  | 2002
|                                                                                   |  |                          |        |      |  |     
|Weighted average shares outstanding                                                |  |                          | 73,845 |      |  |      | 49,798 |   |  |  | 41,416 |  
|Weighting of shares subject to repurchase                                          |  |                          |       |      |  |      | (1     | ) |  |  | (23    | )
|                                                                                   |  |                          |        |      |  |      |        |   |  |  |        |  
|Weighted average shares used to calculate basic
    and diluted earnings per share |  |                          | 73,845 |      |  |      | 49,797 |   |  |  | 41,393 |  
|                                                                                   |  |                          |        |      |  |      |        |   |  |  |        |  



|    |                          
|--- | -------------------------
|17. | Defined Contribution Plan

Loudeye maintains a defined contribution
retirement plan for eligible employees under the provisions of
Internal Revenue Code Section 401(k). Participants may
defer up to a portion of their annual compensation on a pretax
basis, subject to maximum limits on contributions. Contributions
by Loudeye are at the discretion of the Board of Directors. No
discretionary contributions have been made by Loudeye to date.

Loudeyes wholly owned subsidiary, OD2,
maintains a defined contribution UK pension plan which provides
for individual accounts which are for the benefit of directors
and certain employees. The assets of the individual accounts are
administered by trustees in funds independent from those of OD2
or Loudeye. OD2 pension plan contributions from date of
acquisition (June 22, 2004) through December 31, 2004
were approximately $112,000.



|    |                              
|--- | -----------------------------
|18. | Commitments and Contingencies



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

Loudeye leases its facilities under
non-cancelable operating leases with various expiration dates
through September 2015.

Future minimum rental payments under operating
leases that have initial or remaining noncancelable lease terms
in excess of one year as of December 31, 2004 are as
follows (in thousands):

|           |  |           |       | 
|---------- |  | --------- | ----- | 
|           |  | Operating
|           |  | Leases   
|           |  |          
|2005       |  | $         | 1,779 | 
|2006       |  |           | 464   | 
|2007       |  |           | 253   | 
|2008       |  |           | 196   | 
|2009       |  |           | 202   | 
|Thereafter |  |           | 1,305 | 
|           |  |           |       | 
|           |  | $         | 4,199 | 
|           |  |           |       | 

Rent expense under operating leases totaled
approximately $1.0 million, $1.6 million and
$2.0 million during 2004, 2003 and 2002, respectively. In
addition, Loudeye 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.

In December 2004, Loudeye established a
certificate of deposit with Silicon Valley Bank in the amount of
$175,000 to collateralize a standby letter of credit required by
a facility lease for Loudeyes subsidiary, Overpeer. As a
result, we have reflected this certificate of deposit in
restricted cash in the accompanying consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                    
| | -------------------
| | Royalty Obligations

Loudeye has entered into various agreements that
allow for incorporation of licensed or copyrighted material into
its services. Under these agreements, Loudeye is required to
make royalty payments to the music companies and other various
rights holders. Some of these agreements require quarterly or
annual minimum payments which are not recoupable based upon
actual usage. Other royalty agreements require royalty payments
based upon a percentage of revenue received from the licensed
service. Royalty costs incurred under these agreements are
recognized over the periods that the related revenue are
recognized and are included in cost of revenue. These amounts
totaled approximately $3.0 million, $628,000, and $551,000
for the years ended December 31, 2004, 2003 and 2002.



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

On September 10, 2004, Loudeye was served in
a patent infringement lawsuit brought by Altnet, Inc., and
others against Loudeye, its Overpeer subsidiary, Marc
Morgenstern, one of Loudeye executive officers, the
Recording Industry Association of America and others. The
complaint, filed in federal district court in Los Angeles,
California, involves two patents that appear to cover file
identifiers for use in accessing, identifying and/or sharing
files over peer-to-peer networks. The complaint alleges that the
anti-piracy solutions offered by Loudeyes Overpeer
subsidiary infringe the patents in question. The complaint does
not state a specific damage amount. On November 17, 2004,
the court dismissed the complaint against Mr. Morgenstern
with prejudice and dismissed the complaint against Loudeye and
Overpeer. The plaintiffs filed an amended complaint on
November 24, 2004 against Loudeye, Overpeer and other
entity defendants. Loudeye and Overpeer filed motions to dismiss
this amended complaint which the court denied on
January 21, 2005. Loudeye intends to file a motion for
summary judgment and to otherwise defend itself vigorously
against the allegations contained in the amended complaint.
Discovery in this matter commenced in January 2005. At present,
Loudeye cannot assess the probability of an unfavorable outcome
or the magnitude of any such outcome.

In February 2003, Loudeye entered into an
agreement with Regent Pacific Management Corporation pursuant to
which Regent Pacific would provide management services. The
agreement was for a term of 26 weeks, with an option to
renegotiate certain terms of the agreement after 13 weeks,
and was terminable by either party under certain circumstances.
Under the agreement, Loudeye paid certain cash fees to Regent
Pacific. In addition, Regent Pacific was to receive stock
options to purchase up to 4,000,000 shares of Loudeye
common stock based on Regent Pacifics length of service.
These options were to be granted at various times throughout
their engagement at exercise prices based on the closing market
price on each grant date. In March 2003, Regent Pacific resigned
from the engagement. In July 2003, Regent Pacific filed suit
against Loudeye in the Superior Court of California in
San Francisco County for breach of the agreement. In this
complaint, Regent Pacific is seeking unspecified damages and
specific performance of the alleged obligation to grant the
stock options due to them under the contract. Loudeye answered
the complaint in September 2003 denying all allegations and
asserting counterclaims. In March 2004, the court granted
Loudeyes motion to transfer the case to the United States
District Court for the Western District of Washington. Discovery
in this case is ongoing, with depositions scheduled for April
and May 2005. Loudeye intends to defend vigorously this action
and to pursue vigorously its counterclaims. Loudeye does not
consider the likelihood of loss to be probable and the amount of
loss, if any, is not estimable at this time.

Between January 11 and December 6,
2001, class action complaints were filed in the United States
District Court for the Southern District of New York. These
actions were filed against 310 issuers (including us), 55
underwriters and numerous individuals including certain of our
former officers and directors. The various complaints were filed
purportedly on behalf of a class of persons who purchased our
common stock during the time period between March 15 and
December 6, 2000. The complaints allege violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934,
primarily based on allegations that our underwriters received
undisclosed compensation in connection with our initial public

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


offering and that the underwriters entered into
undisclosed arrangements with some investors that were designed
to distort and/or inflate the market price for our common stock
in the aftermarket. These actions were consolidated for
pre-trial purposes. No specific amount of damages has been
claimed. We and the individual defendants have demanded to be
indemnified by 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 Court
suggested that the parties select six test cases to determine
class-action eligibility. We are not a party to any of the test
cases.

In March 2005, a proposed settlement initially
structured in June 2003 among plaintiffs, issuer defendants,
issuer officers and directors named as defendants, and
issuers insurance companies, was approved by the Court.
This proposed settlement provides, among other matters, that:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | issuer defendants and related individual
    defendants will be released from the litigation without any
    liability other than certain expenses incurred to date in
    connection with the litigation;
|
| |  | issuer defendants insurers will guarantee
    $1.0 billion in recoveries by plaintiff class members;                                                                                                     
|
| |  | issuer defendants will assign certain claims
    against underwriter defendants to the plaintiff class
    members; and                                                                                   
|
| |  | issuer defendants will have the opportunity to
    recover certain litigation-related expenses if plaintiffs
    recover more than $5.0 billion from underwriter defendants.                              

The final settlement terms as approved by the
Court differ from the initial settlement proposal in that the
settlement does not bar the defendant underwriters from bringing
contractual indemnity claims against the issuer defendants,
including Loudeye. Our board of directors approved the proposed
settlement in August 2003 and is considering whether to approve
the final settlement terms in March 2005. Management does not
anticipate that we will be required to pay any amounts under
this settlement; however, we can give no assurance that the
underwriter defendants will not bring a claim for
indemnification against us under the terms of the underwriting
agreement relating to our initial public offering.

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



|    |                             
|--- | ----------------------------
|19. | Business Segment Information

FAS No. 131, Disclosure about
Segments of an Enterprise and Related Information,
requires that companies report separately in the financial
statements certain financial and descriptive information about
operating segments profit or loss, certain specific revenue and
expense items and segment assets. The method for determining
what information is reported is based on the way that management
organizes the operating segments for making operational
decisions and assessments of financial performance. Loudeye
operates in two business segments, digital media services and
media restoration services, for which Loudeye generates revenue
from its customers. Loudeyes chief operating decision
maker is considered to be its Chief Executive Officer and staff,
or Senior Leadership Team (SLT). Members of the SLT review
financial information presented on both a consolidated basis and
on a business segment basis, accompanied by disaggregated
information about services for purposes of making decisions and
assessing financial performance. For 2004 and 2003, the SLT
reviewed discrete financial information regarding profitability
of Loudeyes digital media services and media restoration
services, and therefore Loudeye reports these as operating
segments as defined by FAS No. 131.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In 2004, the majority of Loudeyes revenue
was derived from customers in the U.S. Loudeyes
international sales are principally in Europe and are
attributable to Loudeyes acquisition of OD2 in June 2004.
The following table provides information about revenue by
geographic region (in thousands):

|                             |               |                          |        |        |  |      |        |        |  |   |        |        | 
|---------------------------- | ------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                             |               |                         
|                             |               | Years Ended December 31,
|                             |               |                         
|Revenues by Geographic Areas |               | 2004                     |        | 2003   |  | 2002
|                             |               |                          |        |        |  |     
|United States                |               | $                        | 11,300 |        |  | $    | 11,948 |        |  | $ | 12,681 |       
|Other countries              |               |                          | 5,521  |        |  |      |       |        |  |   |       |       
|                             |               |                          |        |        |  |      |        |        |  |   |        |       
|                             | Total revenue |                          | $      | 16,821 |  |      | $      | 11,948 |  |   | $      | 12,681 | 
|                             |               |                          |        |        |  |      |        |        |  |   |        |       

Long-lived assets are comprised of property and
equipment and intangible assets, net of related accumulated
depreciation and amortization. The following table presents
information about Loudeyes long-lived assets by geographic
location (in thousands):

|                  |                         |                 |       |       |  |   |       |       | 
|----------------- | ----------------------- | --------------- | ----- | ----- |  | - | ----- | ----- | 
|                  |                         |                
|                  |                         | at December 31,
|                  |                         |                
|Long-lived Assets |                         | 2004            |       | 2003 
|                  |                         |                 |       |      
|United States     |                         | $               | 5,618 |       |  | $ | 1,209 |      
|United Kingdom    |                         |                 | 3,723 |       |  |   |      |      
|Other countries   |                         |                 | 20    |       |  |   |      |      
|                  |                         |                 |       |       |  |   |       |      
|                  | Total long-lived assets |                 | $     | 9,361 |  |   | $     | 1,209 | 
|                  |                         |                 |       |       |  |   |       |      

Loudeyes segments are defined as follows:

Digital Media Services
Segment.Loudeye currently has three
primary service offerings in its Digital Media Services segment:
Core Services, Content Protection Services and Music Store
Services. Loudeyes business model provides for a blend of
higher margin revenue, generated by each of its service lines,
and lower margin, yet highly scalable revenue generated by the
e-commerce and subscription services of our Music Store
Services. A more detailed description of each of Loudeyes
major service lines follows.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Core Services.Core
    Services include a suite of digital media services provided to
    both content owners and retailers. We generate the majority of
    our revenue in this area from fees for encoding and fulfillment
    services in connection with EMI and other independent label
    catalogs, and from our leading samples service. Within Core
    Services, Loudeye provides a variety of back-end services to
    most of the digital music services that have launched in the
    last few years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Content Protection Services.Content Protection Services include
    Loudeyes anti-piracy services provided to content owners
    to protect against the unauthorized distribution of content on
    peer-to-peer networks. Loudeyes Content Protection
    Services provide a comprehensive solution to combat the
    proliferation of peer-to-peer networks on a global basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Music Store
    Services.Music Store Services include
    our end-to-end digital music store solution provided on a
    white-labeled basis to retailers and brands
    throughout the world. As a business-to-business provider, our
    services enable brands of all types, including retailers and
    e-tailers, portals, ISPs, and mobile operators, to outsource
    all, or part of their digital media retailing activities. By
    leveraging our proprietary technology and infrastructure, we
    provide our customers with a highly scalable consumer-facing
    digital media commerce and delivery solution. Our services
    include hosting, publishing and managing digital media content,
    and delivering such content to end consumers on behalf of our
    customers. Our services support private label user interfaces
    and customized templates, and can readily function across both
    internet and mobile delivery protocols. Our services are
    designed to have the look, feel and branding of the
    retailers existing commerce platform, and support
    integration to a customers website, wireless applications,
    inventory, account management, and commerce and billing systems.
    Additionally, our Music Store Services provide

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | digital rights management and licensing; usage
    reporting; digital content royalty settlement; customer support
    and publishing related services. Our services provide for the
    delivery of digital content in various forms, such as full-song
    download or streaming, and rich media ring tunes, for both
    internet and wireless based applications.. We offer varied
    consumption and commerce alternatives for our customers,
    including both subscription based services and usage based
    commerce models. Our end-to-end solution provides
    fully-integrated payment functionality supporting multiple end
    consumer payment alternatives; and support for multiple
    languages, offering multinational customers a worldwide solution.

As part of our end-to-end music store solutions,
we have secured licenses and cultivated relationships with the
four major recorded music companies and hundreds of independent
record labels around the globe. Our rights portfolio currently
available for inclusion in our music store solution encompasses
licenses in over 20 countries and more than 1.3 million
individual tracks available for sale by our customers to
end consumers.

Media Restoration Services
Segment.In January 2004, we
transferred substantially all of the assets of our media
restoration services subsidiary, VidiPax, Inc., or VidiPax, to a
company controlled by VidiPaxs general manager. In May
2004, we completed the sale of this media restoration services
business. While we will have ongoing rights to co-market and
resell media restoration services for two years after the sale,
media restoration services did not represent a significant
portion of our revenue in 2004 and we anticipate media
restoration services will represent an insignificant portion of
our revenue in the future. Revenue from external customers by
segment are as follows (in thousands):

|                           |                                     |                          |        |        |  |      |        |        |  |  |       |        | 
|-------------------------- | ----------------------------------- | ------------------------ | ------ | ------ |  | ---- | ------ | ------ |  |  | ----- | ------ | 
|                           |                                     |                         
|                           |                                     | Years Ended December 31,
|                           |                                     |                         
|Revenues:                  |                                     | 2004                     |        | 2003   |  | 2002
|                           |                                     |                          |        |        |  |     
|Digital media services     |                                     |                          |        |        |  |      |        |        |  |  |       |       
|                           | Digital media store services        |                          | $      | 5,932  |  |      | $      | 171    |  |  | $     |       | 
|                           | Encoding services                   |                          |        | 3,829  |  |      |        | 2,377  |  |  |       | 1,477  | 
|                           | Content protection services         |                          |        | 2,788  |  |      |        |       |  |  |       |       | 
|                           | Samples services                    |                          |        | 1,589  |  |      |        | 1,685  |  |  |       | 2,027  | 
|                           | Internet radio and hosting services |                          |        | 1,064  |  |      |        | 2,065  |  |  |       | 1,053  | 
|                           | Webcasting                          |                          |        | 1,322  |  |      |        | 3,767  |  |  |       | 4,971  | 
|                           |                                     |                          |        |        |  |      |        |        |  |  |       |       
|                           |                                     |                          | 16,524 |        |  |      | 10,065 |        |  |  | 9,528 |       
|Media restoration services |                                     |                          | 297    |        |  |      | 1,883  |        |  |  | 3,153 |       
|                           |                                     |                          |        |        |  |      |        |        |  |  |       |       
|                           | Total revenue                       |                          | $      | 16,821 |  |      | $      | 11,948 |  |  | $     | 12,681 | 
|                           |                                     |                          |        |        |  |      |        |        |  |  |       |       

|                              |                                     |                          |       |       |  |      |       |       |  |   |       |       | 
|----------------------------- | ----------------------------------- | ------------------------ | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                              |                                     |                         
|                              |                                     | Years Ended December 31,
|                              |                                     |                         
|Depreciation and amortization |                                     | 2004                     |       | 2003  |  | 2002
|                              |                                     |                          |       |       |  |     
|Digital media services        |                                     | $                        | 2,919 |       |  | $    | 2,126 |       |  | $ | 6,884 |      
|Media restoration services    |                                     |                          |      |       |  |      | 252   |       |  |   | 339   |      
|                              |                                     |                          |       |       |  |      |       |       |  |   |       |      
|                              | Total depreciation and amortization |                          | $     | 2,919 |  |      | $     | 2,378 |  |   | $     | 7,223 | 
|                              |                                     |                          |       |       |  |      |       |       |  |   |       |      

|                           |                       |                          |     |      |  |      |     |     |  |   |       |       | 
|-------------------------- | --------------------- | ------------------------ | --- | ---- |  | ---- | --- | --- |  | - | ----- | ----- | 
|                           |                       |                         
|                           |                       | Years Ended December 31,
|                           |                       |                         
|Interest income            |                       | 2004                     |     | 2003 |  | 2002
|                           |                       |                          |     |      |  |     
|Digital media services     |                       | $                        | 377 |      |  | $    | 346 |     |  | $ | 1,147 |      
|Media restoration services |                       |                          |    |      |  |      | 1   |     |  |   | 2     |      
|                           |                       |                          |     |      |  |      |     |     |  |   |       |      
|                           | Total interest income |                          | $   | 377  |  |      | $   | 347 |  |   | $     | 1,149 | 
|                           |                       |                          |     |      |  |      |     |     |  |   |       |      

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |                        |                          |     |      |  |      |     |     |  |   |     |     | 
|-------------------------- | ---------------------- | ------------------------ | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|                           |                        |                         
|                           |                        | Years Ended December 31,
|                           |                        |                         
|Interest expense           |                        | 2004                     |     | 2003 |  | 2002
|                           |                        |                          |     |      |  |     
|Digital media services     |                        | $                        | 201 |      |  | $    | 286 |     |  | $ | 631 |    
|Media restoration services |                        |                          |    |      |  |      |    |     |  |   |    |    
|                           |                        |                          |     |      |  |      |     |     |  |   |     |    
|                           | Total interest expense |                          | $   | 201  |  |      | $   | 286 |  |   | $   | 631 | 
|                           |                        |                          |     |      |  |      |     |     |  |   |     |    

|                           |          |                          |         |         |   |      |         |         |   |   |         |         |  
|-------------------------- | -------- | ------------------------ | ------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                           |          |                         
|                           |          | Years Ended December 31,
|                           |          |                         
|Net income (loss)          |          | 2004                     |         | 2003    |   | 2002
|                           |          |                          |         |         |   |     
|Digital media services     |          | $                        | (16,502 | )       |   | $    | (17,635 | )       |   | $ | (30,615 | )      
|Media restoration services |          |                          | 105     |         |   |      | (1,539  | )       |   |   | (547    | )      
|                           |          |                          |         |         |   |      |         |         |   |   |         |        
|                           | Net loss |                          | $       | (16,397 | ) |      | $       | (19,174 | ) |   | $       | (31,162 | )
|                           |          |                          |         |         |   |      |         |         |   |   |         |        

Assets by segment are as follows (in thousands):

|                           |              |                 |         |         |  |   |        |        | 
|-------------------------- | ------------ | --------------- | ------- | ------- |  | - | ------ | ------ | 
|                           |              |                
|                           |              | At December 31,
|                           |              |                
|Total assets               |              | 2004            |         | 2003   
|                           |              |                 |         |        
|Digital media services     |              | $               | 103,708 |         |  | $ | 25,829 |       
|Media restoration services |              |                 |        |         |  |   | 1,215  |       
|                           |              |                 |         |         |  |   |        |       
|                           | Total assets |                 | $       | 103,708 |  |   | $      | 27,044 | 
|                           |              |                 |         |         |  |   |        |       



|    |                      
|--- | ---------------------
|20. | Quarterly Information

|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |       |        | 
|------------------------------------------------------- | ------------------------------ | --------------------------------------------------- | ------ | -------- | ----- | -------- | ------ | --------- | ----- | -------- | ------ | -------- | ----- | -------- | ------ | --------- | ----- | - | ------ | ----- | ----- | - | ------ | ----- | ----- | - | ------ | ----- | ----- | - | ------- | ----- | ------ | 
|                                                        |                                |                                                    
|                                                        |                                | Three-Month Periods Ended                          
|                                                        |                                |                                                    
|                                                        |                                | Dec. 31,                                            |        | Sep. 30, |       | June 30, |        | March 31, |       | Dec. 31, |        | Sep. 30, |       | June 30, |        | March 31,
|                                                        |                                | 2004                                                |        | 2004     |       | 2004     |        | 2004      |       | 2003     |        | 2003     |       | 2003     |        | 2003(3)  
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |          
|                                                        |                                |                                                    
|                                                        |                                | (In thousands, except per share amounts, unaudited)
|Condensed Consolidated Statement of Operations
    Data |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|REVENUE                                                 |                                | $                                                   | 6,619  |          |       | $        | 5,080  |           |       | $        | 3,131  |          |       | $        | 1,991  |           |       | $ | 2,924  |       |       | $ | 2,811  |       |       | $ | 2,903  |       |       | $ | 3,310   |      
|COST OF REVENUE(1)(4)(5)                                |                                |                                                     | 4,939  |          |       |          | 3,763  |           |       |          | 1,900  |          |       |          | 1,461  |           |       |   | 1,246  |       |       |   | 1,483  |       |       |   | 1,809  |       |       |   | 3,538   |      
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|GROSS PROFIT (LOSS)                                     |                                |                                                     | 1,680  |          |       |          | 1,317  |           |       |          | 1,231  |          |       |          | 530    |           |       |   | 1,678  |       |       |   | 1,328  |       |       |   | 1,094  |       |       |   | (228    | )    
|OPERATING EXPENSES:                                     |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|                                                        | Sales and marketing(1)         |                                                     |        | 1,507    |       |          |        | 1,478     |       |          |        | 836      |       |          |        | 635       |       |   |        | 418   |       |   |        | 486   |       |   |        | 835   |       |   |         | 1,547 |       
|                                                        | Research and development(1)    |                                                     |        | 1,349    |       |          |        | 1,325     |       |          |        | 753      |       |          |        | 590       |       |   |        | 320   |       |   |        | 399   |       |   |        | 392   |       |   |         | 577   |       
|                                                        | General and administrative(1)  |                                                     |        | 3,333    |       |          |        | 3,798     |       |          |        | 2,232    |       |          |        | 1,960     |       |   |        | 1,671 |       |   |        | 1,614 |       |   |        | 1,740 |       |   |         | 3,631 |       
|                                                        | Amortization of intangibles(4) |                                                     |        | 42       |       |          |        | 42        |       |          |        | 45       |       |          |        | 105       |       |   |        | 329   |       |   |        | 236   |       |   |        | 133   |       |   |         | 133   |       
|                                                        | Stock-based compensation(1)    |                                                     |        | 120      |       |          |        | 21        |       |          |        | 43       |       |          |        | 122       |       |   |        | 346   |       |   |        | 723   |       |   |        | 191   |       |   |         | 38    |       
|                                                        | Special charges  other(3)(5)  |                                                     |        | 12       |       |          |        | 350       |       |          |        |         |       |          |        | (50       | )     |   |        | 262   |       |   |        |      |       |   |        |      |       |   |         | 6,958 |       
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|                                                        |                                | Total operating expenses                            |        |          | 6,363 |          |        |           | 7,014 |          |        |          | 3,909 |          |        |           | 3,362 |   |        |       | 3,346 |   |        |       | 3,458 |   |        |       | 3,291 |   |         |       | 12,884 | 
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|LOSS FROM OPERATIONS                                    |                                |                                                     | (4,683 | )        |       |          | (5,697 | )         |       |          | (2,678 | )        |       |          | (2,832 | )         |       |   | (1,668 | )     |       |   | (2,130 | )     |       |   | (2,197 | )     |       |   | (13,112 | )    
|Interest income                                         |                                |                                                     | 52     |          |       |          | 139    |           |       |          | 107    |          |       |          | 79     |           |       |   | 86     |       |       |   | 75     |       |       |   | 101    |       |       |   | 85      |      
|Interest expense                                        |                                |                                                     | (25    | )        |       |          | (46    | )         |       |          | (59    | )        |       |          | (71    | )         |       |   | (105   | )     |       |   | (83    | )     |       |   | (48    | )     |       |   | (50     | )    
|Gain (loss) on sale of media restoration assets         |                                |                                                     | 43     |          |       |          | 273    |           |       |          | (160   | )        |       |          |       |           |       |   |       |       |       |   |       |       |       |   |       |       |       |   |        |      
|Increase in fair value of common stock warrants         |                                |                                                     |       |          |       |          |       |           |       |          |       |          |       |          |       |           |       |   | (26    | )     |       |   | (222   | )     |       |   |       |       |       |   |        |      
|Other income (expense), net                             |                                |                                                     | (1,025 | )        |       |          |       |           |       |          | 183    |          |       |          | 3      |           |       |   |       |       |       |   | 20     |       |       |   | 82     |       |       |   | 18      |      
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|NET LOSS                                                |                                | $                                                   | (5,638 | )        |       | $        | (5,331 | )         |       | $        | (2,607 | )        |       | $        | (2,821 | )         |       | $ | (1,713 | )     |       | $ | (2,340 | )     |       | $ | (2,062 | )     |       | $ | (13,059 | )    
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      
|EARNINGS PER SHARE  BASIC AND
    DILUTED(2)           |                                | $                                                   | (0.07  | )        |       | $        | (0.07  | )         |       | $        | (0.04  | )        |       | $        | (0.04  | )         |       | $ | (0.03  | )     |       | $ | (0.05  | )     |       | $ | (0.04  | )     |       | $ | (0.28   | )    
|                                                        |                                |                                                     |        |          |       |          |        |           |       |          |        |          |       |          |        |           |       |   |        |       |       |   |        |       |       |   |        |       |       |   |         |      

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




---



|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Stock-based compensation, consisting of
    amortization of deferred stock-based compensation and the fair
    value of options issued to non-employees for services rendered,
    is allocated as follows:

|                           |  |          |     |          |  |          |    |           |  |          |    |          |  |          |    |           |  |   |     |  |  |   |     |  |  |   |     |  |  |   |    | 
|-------------------------- |  | -------- | --- | -------- |  | -------- | -- | --------- |  | -------- | -- | -------- |  | -------- | -- | --------- |  | - | --- |  |  | - | --- |  |  | - | --- |  |  | - | -- | 
|                           |  | Dec. 31, |     | Sep. 30, |  | June 30, |    | March 31, |  | Dec. 31, |    | Sep. 30, |  | June 30, |    | March 31,
|                           |  | 2004     |     | 2004     |  | 2004     |    | 2004      |  | 2003     |    | 2003     |  | 2003     |    | 2003     
|                           |  |          |     |          |  |          |    |           |  |          |    |          |  |          |    |          
|Cost of revenue            |  | $        | 35  |          |  | $        | 44 |           |  | $        | 19 |          |  | $        | 19 |           |  | $ | 17  |  |  | $ | 37  |  |  | $ | 4   |  |  | $ | 4  | 
|Sales and marketing        |  |          | 111 |          |  |          | (5 | )         |  |          | 18 |          |  |          | 32 |           |  |   | 9   |  |  |   | 26  |  |  |   | 6   |  |  |   | 6  | 
|Research and development   |  |          | 13  |          |  |          | 19 |           |  |          | 24 |          |  |          | 27 |           |  |   | 26  |  |  |   | 27  |  |  |   | 2   |  |  |   | 2  | 
|General and administrative |  |          | (4  | )        |  |          | 7  |           |  |          | 1  |          |  |          | 63 |           |  |   | 310 |  |  |   | 671 |  |  |   | 183 |  |  |   | 30 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Loss per share is computed independently for each
    of the periods presented. Therefore, the sum of the quarterly
    per share amounts will not necessarily equal the total amount
    for the year.                                                                                                                                                                                         
|   
|(3) | Loudeye revised its classification of $878,000
    relating to service fees paid to Regent Pacific Management
    Corporation during the quarter ended March 31, 2003 from special
    charges  other to general and administrative expense
    in the current presentation as Loudeye determined that these
    expenses were more appropriately classified as general and
    administrative.
|   
|(4) | Loudeye revised its classification of
    amortization of acquired technology and capitalized software
    costs from operating expenses  amortization of
    intangibles to cost of revenue in all quarterly periods
    presented as Loudeye determined that these expenses were more
    appropriately classified as cost of revenue.                                                       
|   
|(5) | Loudeye revised its classification of impairment
    charges related to acquired technology and capitalized software
    costs from operating expenses  special
    charges  other to cost of revenue in all quarterly
    periods presented as Loudeye determined that these charges were
    more appropriately classified as cost of revenue.                                              



|    |                  
|--- | -----------------
|21. | Subsequent Events

During February 2005, Loudeye entered into a
twelve month agreement in the ordinary course of business with
an internet service provider (ISP) in Europe, under which
it will provide the ISPs customers with promotional
credits that may be redeemed for a range of digital media
download services through February 2006. Loudeye will receive a
fixed fee
of 1.8 million
(approximately $2.6 million based on December 31, 2004
exchange rates) under the agreement. Depending upon the volume
of digital downloads provided to the ISPs customers during
the term of the agreement, Loudeye may experience gross margins
associated with the agreement ranging from a profit
of 1.8 million
to a loss
of 715,000
(approximately $975,000 based on December 31, 2004 exchange
rates). If the number of credits redeemed during the twelve
month term of the agreement does not reach certain minimum
levels, the term may be extended for an additional twelve
months. In addition, Loudeye expects to defer revenue under this
agreement until the volume of digital downloads is reasonably
determinable, which could result in deferral of all revenue
under the agreement until February 2007. Further, as the
transaction is denominated in Euros, if Loudeye does not hedge
the arrangement, Loudeye could be subject to foreign currency
gains or losses. As of the date of this filing, no losses had
been incurred or estimated under this agreement.



| |    
| | ---
| | OD2



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Payments Subsequent to December 31, 2004
    and March 2005 Restructuring of Future OD2 Payment
    Obligations

From a financial accounting perspective, Loudeye
issued 3,974,206 shares of its common stock in January 2005
to former OD2 shareholders to satisfy the second deferred
consideration payment obligations totaling
£4.0 million (approximately $7.7 million based on
exchange rates as of December 31, 2004). On a non-GAAP
basis, Loudeye issued a total of 4,667,608 shares our
common stock in January 2005, which

115



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


includes 693,402 shares held in escrow.
These payments included satisfaction of the second promissory
note installments discussed further above in Note 3.

On February 25, 2005, Loudeye completed a
restructuring of its remaining deferred and contingent payment
obligations as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2005, from a financial accounting
    perspective Loudeye issued 3,026,405 shares (valued at
    approximately £3.2 million or $6.2 million based
    on December 31, 2004 closing share price and exchange
    rates) in full satisfaction of the remaining deferred
    consideration obligations of approximately
    £3.2 million (or approximately $6.2 million based
    on December 31, 2004 exchange rates). This share issuance
    will also satisfies the remaining installment payments on the
    promissory notes discussed above in Note 3. This amount
    excludes 528,014 shares issued but held in escrow.
|
| |  | From a financial accounting perspective, Loudeye
    will pay £2.6 million (or approximately
    $5.0 million based on December 31, 2004 exchange
    rates) in cash in full satisfaction of the maximum potential
    contingent payment obligations of up to £10.0 million
    (or approximately $19.3 million based on December 31,
    2004 exchange rates). The first of these payments was made in
    March 2005 and the second payment will be made in July 2005.
    This amount excludes £465,000 (approximately $896,000 based
    on December 31, 2004 exchange rates) to be held in escrow.                              

This restructuring was agreed to by all of the
former OD2 shareholders entitled to receive additional
deferred and contingent payment consideration and it satisfies
in full those obligations.



| |                          
| | -------------------------
| | Nasdaq Listing Compliance

Effective January 31, 2005, Michael A.
Brochu became president and chief executive officer of Loudeye.
Mr. Brochu remains on Loudeyes board of directors;
however, as a result of his change of status to an employee, he
is no longer considered an independent director for purposes of
applicable listing standards of The Nasdaq Stock Market. As a
result, Mr. Brochu is no longer a member of any committees
of Loudeyes board of directors, including its audit
committee. On February 2, 2005, Loudeye received a notice
from The Nasdaq Stock Market that it no longer complies with
Nasdaqs independent director and audit committee
requirements as set forth in Nasdaq Marketplace Rule 4350,
which includes that the Loudeyes board must consist of a
majority of independent directors and Loudeye must have at least
three independent directors on its audit committee. Consistent
with Marketplace Rules 4350(c)(1) and 4350(d)(4), Loudeye
has a cure period until the earlier of our next annual meeting
of stockholders or January 31, 2006, in order to regain
compliance. In the event Loudeye does not regain compliance
within this period, the Nasdaq Stock Market has informed Loudeye
that the Staff of the Nasdaq Stock Market will provide it with a
written notification that Loudeyes shares will be delisted
and, at that time, Loudeye may appeal such determination to
delist to a Nasdaq Listings Qualifications Panel. Loudeye is
currently conducting a search process to identify a qualified
individual to join its board of directors and certain committees
of its board of directors, including its audit committee, in
order to regain compliance with these requirements.

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

Arthur Andersen LLP

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

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

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

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

Change in Accountants

On August 31, 2004, we engaged Moss Adams
LLP as our independent registered public accounting firm for our
fiscal year ending December 31, 2004. The decision to
engage Moss Adams was approved by our audit committee.

The engagement of Moss Adams followed our receipt
of notice on June 30, 2004 from PwC of its resignation as
our independent registered public accounting firm pending
completion of services related to the review of our interim
financial statements for the quarter ended June 30, 2004.
PwCs resignation notice was disclosed on a Form 8-K
filed July 8, 2004. PwC completed its services on
August 31, 2004, and Loudeyes relationship with PwC
as our independent registered accounting firm ceased on that
date.

The reports of PwC on Loudeyes financial
statements for the years ended December 31, 2002 and 2003
did not contain an adverse opinion or disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or
accounting principle, except as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The report for the year ended December 31,
    2002 expressed substantial doubt regarding Loudeyes
    ability to continue as a going concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | The report for the year ended December 31,
    2003 contains the following emphasis of a matter paragraph:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |   | In June 2004, the Company acquired On Demand
    Distribution Limited (OD2). The terms of this
    acquisition require the payment of £9.6 million
    (approximately $17.3 million based on exchange rates as of
    September 30, 2004, including approximately
    $2.6 million to be held in escrow and not yet accounted
    for) through November 30, 2005, to OD2s shareholders,
    plus additional contingent consideration of up to
    £10.0 million (approximately $18.0 million based
    on exchange rates as of September 30, 2004) if OD2 achieves
    certain financial performance targets during the period through
    November 30, 2006. The payments are to be made in British
    pounds, and accordingly, the Company is exposed to risks with
    changes in the prevailing exchange rate. Any

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | decrease in the value of the U.S. dollar
    against the British pound will cause a proportional increase in
    the amount of the future consideration the Company must pay to
    the former OD2 shareholders. The Company may elect to pay
    amounts due to OD2s shareholders in shares of the
    Companys common stock. As a result of the Companys
    acquisition of OD2, the Company will be required to provide
    additional funding to support OD2s ongoing operations.
    There can be no assurance that the Companys cash balances
    after December 31, 2004 will be sufficient to sustain its
    operations in 2005 and to fund the ongoing operations of OD2.

For the period from June 6, 2002, the date
PwC was engaged as Loudeyes independent registered public
accounting firm, through August 31, 2004, there were no
disagreements between Loudeye and PwC on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which if not resolved
to the satisfaction of PwC, would have caused PwC to make
reference to the subject matter of the disagreement in its
report on the financial statements for such year, except as
follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with Loudeyes common stock
    and warrant financing completed in August 2003, PwC concluded
    that the warrants issued in such financing must be recorded as a
    liability due to the investors rights to receive
    liquidated damages in the event that a registration statement
    was not filed and declared effective within specified time
    periods. PwC further concluded that until the registration
    statement was declared effective the warrant liability must be
    marked to market with a corresponding entry in Loudeyes
    statement of operations. Loudeye initially disagreed with these
    conclusions, but subsequently agreed to account for the warrants
    pursuant to PwCs conclusions. The recommended accounting
    treatment is reflected in Loudeyes financial statements
    for the quarter ended September 30, 2003, and further
    explained in Note 7 thereto. In accordance with PwCs
    conclusion, the warrant liability was reclassified to equity
    during the fourth quarter of 2003 when the registration
    statement was filed and declared effective timely such that
    liquidated damages were not triggered. PwC has been authorized
    to respond fully to the inquiries of any successor independent
    registered public accounting firm regarding the initial
    disagreement.

Other than the two material weaknesses discussed
below, during the period from June 6, 2002, the date PwC
was engaged as Loudeyes independent registered public
accounting firm, through August 31, 2004, there were no
reportable events (as defined in Item 304(a)(1)(v) of
Regulation S-K).

As disclosed in our quarterly report on
Form 10-Q for the period ended June 30, 2004, our
audit committee was advised by PwC in August 2004 that during
their performance of review procedures related to Loudeyes
unaudited interim financial statements for the quarter ended
June 30, 2004, PwC identified two material
weaknesses in our internal controls over financial
reporting, as defined in Public Company Accounting Oversight
Board, or PCAOB, Standard No. 2. As used by the PCAOB, a
material weakness is a significant deficiency, or a
combination of significant deficiencies, that results in more
than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected. The material weaknesses identified by PwC were
as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Insufficiently skilled personnel compounded by a
    lack of human resources and expected near-term significant
    turnover within our accounting and financial reporting
    functions. Also, we must improve controls surrounding adequate
    monitoring and oversight of the work performed by accounting and
    financial reporting personnel.
|
| |  | Insufficient analysis, documentation and review
    of the selection and application of generally accepted
    accounting principles to significant non-routine transactions,
    including the preparation of financial statement disclosures
    relating thereto.                                                                                 

These material weaknesses resulted in
deficiencies in the processes, procedures and competencies
within our accounting and financial reporting functions which
contributed to post-closing adjustments and delays in the
completion and filing of our June 30, 2004 Form 10-Q.

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

Disclosure Controls and Procedures

Our principal executive and principal financial
officers, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act) as of the end of the period
covered by this annual report, have concluded that, based on
such evaluation, our disclosure controls and procedures were not
effective due to the material weaknesses in our internal control
over financial reporting as of December 31, 2004, described
below.

Managements Annual Report on Internal
Control Over Financial Reporting



| |         
| | --------
| | Overview

Internal control over financial reporting refers
to the process designed by, or under the supervision of, our
principal executive officer and principal financial officer, and
effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles, and includes those
policies and procedures that:

(1) Pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect the
transactions and dispositions of Loudeyes assets;

(2) Provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that Loudeyes receipts and
expenditures are being made only in accordance with
authorizations of Loudeyes directors and management; and

(3) Provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use
or disposition of Loudeyes assets that could have a
material effect on the financial statements.

Internal control over financial reporting cannot
provide absolute assurance of achieving financial reporting
objectives because of its inherent limitations. Internal control
over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment
and breakdowns resulting from human failures. Internal control
over financial reporting also can be circumvented by collusion
or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented
or detected on a timely basis by internal control over financial
reporting. However, these inherent limitations are known
features of the financial reporting process. Therefore, it is
possible to design into the process safeguards to reduce, though
not eliminate, this risk. Management is responsible for
establishing and maintaining adequate internal control over
financial reporting for Loudeye.

Management has used the framework set forth in
the report entitled Internal Control 
Integrated Framework published by the Committee of
Sponsoring Organizations (COSO) of the Treadway
Commission to evaluate the effectiveness of Loudeyes
internal control over financial reporting. As a result of the
material weaknesses described below, management has concluded
that the Companys internal control over financial
reporting was not effective as of the end of the most recent
fiscal year. Moss Adams LLP has issued an attestation report on
managements assessment of Loudeyes internal control
over financial reporting which appears in this annual report in
Item 8 Financial Statements.

For the year ended December 31, 2004,
managements assessment of our internal control over
financial reporting has been limited to our operations excluding
Overpeer and OD2 since we are permitted to exclude subsidiaries
which we acquired during fiscal year 2004 from our internal
control assessment at that date pursuant to the guidance from
the Division of Corporation Finance and Office of the Chief
Accountant of the Commission contained in the release captioned
Frequently Asked Questions (revised October 6, 2004)
regarding Managements Report on Internal Control Over
Financial Reporting and Certification of Disclosure in Exchange
Act Periodic Reports. Overpeer and OD2 represented 12% of

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Loudeyes total consolidated assets as of
December 31, 2004, and 49% of total consolidated revenue
for the year ended December 31, 2004.




| |                                                                       
| | ----------------------------------------------------------------------
| | Terms Used in Discussing Internal Control
    over Financial Reporting

There are a number of accounting terms that are
used by companies, their independent registered public
accounting firms and regulators to describe the effectiveness of
a companys internal control over financial reporting. To
facilitate a readers understanding of our disclosures, we
have included definitions of several of the key terms below as
defined under standards established by the Public Company
Accounting Oversight Board or PCAOB:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The term material weakness is defined
    by the PCAOB as a significant deficiency, or a combination of
    significant deficiencies, that results in more than a remote
    likelihood that a material misstatement of the annual or interim
    financial statements will not be prevented or detected in a
    future period.                                                                                                                                                                                    
|
| |  | The PCAOB defines a significant
    deficiency as a control deficiency or combination of
    control deficiencies that adversely affects our ability to
    initiate, authorize, record, process, or report external
    financial data reliably in accordance with generally accepted
    accounting principles such that there is a more-than-remote
    likelihood that a misstatement of our annual or interim
    financial statements that is more than inconsequential will not
    be prevented or detected.

Summary of Actions Relating to Review and
Assessment of Loudeyes Internal Control over Financial
Reporting

Set forth below is a summary of actions that we
have taken and that we plan to take with respect to our review
and assessment of our internal control over financial reporting.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Risk assessment and
    planning.In May and June 2004, we
    performed a risk assessment to guide our overall internal
    control review process to focus on critical areas. We continued
    the risk assessment and planning procedures into 2005 as part of
    our integration of our expanded finance and accounting team. We
    anticipate conducting similar risk assessment and planning
    procedures at our Overpeer and OD2 subsidiaries beginning in
    March 2005 with a target completion date of May 2005.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Review and supplementation of existing
    documentation of internal control over financial
    reporting.In June and July 2004, we
    conducted an initial review of our significant financial
    accounting processes to identify existing controls and
    procedures and, together with our outside consultants, in July
    2004 we began the process of documenting these controls and
    procedures. We had not completed documenting all of our controls
    and procedures at the process, transaction and application level
    as of December 31, 2004. Documentation continued in 2005
    and we completed documentation of our revised controls and
    procedures in February 2005 for our operations excluding
    Overpeer and OD2. We anticipate beginning the documentation
    phase at our Overpeer and OD2 subsidiaries in March 2005 with a
    target completion date of June 2005.
|
| |  | Review of financially significant general
    computing controls.Beginning in
    November 2004, we engaged outside consultants to assist us with
    our review and risk assessment of internal control over
    financial reporting relating to our financially significant
    general computer controls. Through March 2005, we defined
    several objectives with respect to our review of financially
    significant general computer controls, including:                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identification of computer control activities,
    which are the policies and procedures we implement such as
    approvals, authorizations, verifications, reconciliations and
    security of assets;

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| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Review, revision and supplementation of control
    information generated by our computer systems that is used in
    identifying and capturing data; and
|
| |  | Developing process documentation, such as policy
    manuals, accounting memoranda and flowcharts.                                                       

We completed our review in March 2005 for our
operations excluding Overpeer and OD2. We began review of
financially significant computer controls at our Overpeer and
OD2 subsidiaries in February 2005, and we have established a
target completion date for this review of June 2005.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation of control deficiencies (including
    significant deficiencies and material
    weaknesses).As discussed further
    below, we have identified material weaknesses in our internal
    control over financial reporting as of December 31, 2004.
    We intend to take a proactive approach to remediate these
    weaknesses. Our remediation efforts with respect to each if the
    material weaknesses that we have identified are discussed below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Internal test plan development and
    testing.We had not developed an
    internal test plan as of December 31, 2004. During the
    first quarter 2005 we developed an internal test plan and
    together with our outside consultants performed tests of our
    internal control over financial reporting as of
    December 31, 2004 for our operations excluding Overpeer and
    OD2. However, because our remediation efforts of the material
    weaknesses we identified prior to December 31, 2004 were
    not complete as of the December 31, 2004 measurement date,
    management has concluded that it was not able to demonstrate
    through testing that our internal control over financial
    reporting was effective as of December 31, 2004. We
    anticipate that we will begin our testing of our internal
    control over financial reporting with respect to fiscal 2005 in
    April 2005. We may conclude following our testing that there are
    further significant deficiencies or material weaknesses in the
    design or operating effectiveness of our internal control over
    financial reporting.
|
| |  | External testing.Following the completion of our 2004 internal testing, Moss
    Adams performed its own testing of our internal controls in
    order to complete the review required by Section 404 of the
    Sarbanes-Oxley Act of 2002. Moss Adams LLP has issued an
    attestation report on managements assessment of
    Loudeyes internal control over financial reporting which
    appears in this annual report in Item 8 Financial
    Statements and Supplementary Data.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Development of a monitoring
    plan.In March 2005, we began
    developing an ongoing monitoring system to facilitate continuous
    monitoring of our internal control over financial reporting. We
    anticipate that this plan will include the regular and periodic
    refreshing of documentation, reassessment of controls and their
    effectiveness, reporting of any significant changes or control
    deficiencies, corrective action and testing as necessary and
    regular management updates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Material
Weaknesses Identified Prior to December 31, 2004

As discussed above in this annual report under
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  Change in
Accountants, we identified two material weaknesses in our
quarterly report on Form 10-Q for the quarter ended
June 30, 2004. In managements opinion, our assessment
in August 2004 that we had the above-referenced material
weaknesses in our internal controls over financial reporting
resulted from the following circumstances. In March 2004, we
hired a new executive vice president and chief financial
officer. In May 2004, based on an evaluation of our existing
accounting and finance resources, management developed a plan to
restructure our accounting and financial reporting functions.
This plan included both the addition of new personnel and the
replacement of certain personnel. In July 2004, after details of
the restructuring plan became known to our accounting and
finance staff and following consummation of our acquisition of
OD2, four of the five members of our accounting and finance
departments announced their intention to leave. These included
our senior vice president of finance, our financial reporting
specialist, our assistant controller, and our accounts payable
and payroll benefits manager. Our financial reporting specialist
terminated his employment in July 2004. Although the other three
individuals agreed to remain with Loudeye on an

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interim basis, the limited personnel within our
accounting and finance departments during the period that we
were preparing our financial statements for the second quarter
of 2004 and their relative lack of experience and expertise in
accounting for significant non-routine transactions, such as our
acquisition of OD2, resulted in our inability to properly
account for our acquisition of OD2 in the initial closing
financial statements that were reviewed by PwC. In particular,
our accounting and finance staff initially made the closing
entries described below relating to our acquisition of OD2 in
the accounts that were reviewed by PwC, which entries were
ultimately adjusted prior to filing our quarterly report on
Form 10-Q for the period ended June 30, 2004. These
entries and adjustments consisted of the following:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accounting for OD2 minority interest. We acquired
    92.68% of the shares of OD2 on June 22, 2004. As of
    June 30, 2004, we had not yet acquired the remaining 7.32%
    of OD2s capital stock. In our initial closing financial
    statements reviewed by PwC, we recorded the following entries
    relating to the 7.32% of OD2s shares that we had not
    acquired as of June 30, 2004:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We recorded approximately $1.5 million of both
    goodwill and minority interest relating to the fair value of the
    7.32% of OD2s shares which we had not acquired as of
    June 30, 2004. Following review by PwC, it was determined
    that the minority interest should have been recorded at its
    historical basis and, further, in accordance with Accounting
    Research Bulletin No. 51, paragraph 15, it was
    determined that because the accounts of OD2 at the date of
    acquisition reflected an accumulated deficit, no amount should
    have been recorded for minority interest. Accordingly, we
    eliminated the minority interest entry from the balance sheet
    and reduced goodwill by a corresponding $1.5 million.                                                                                                     
|
| |  | We recorded a credit in our statement of
    operations for the period ended June 30, 2004 of $22,660
    which represented the minority interest in OD2s loss for
    the period from June 22, 2004 through June 30, 2004.
    Following review by PwC and in accordance with Accounting
    Research Bulletin No. 51, paragraph 15, it was determined
    that this credit relating to minority interest was not
    appropriate because the accounts of OD2 at the date of
    acquisition reflected an accumulated deficit. Accordingly, we
    reversed this credit and recorded 100% of the operating loss
    from OD2s operations for the period from June 22,
    2004 through June 30, 2004 in our statement of operations
    for the period ended June 30, 2004.                                                                                  
|
| |  | We recorded approximately $17.5 million of
    additional deferred consideration payable to the former OD2
    shareholders through November 30, 2005 in our balance sheet
    as of June 30, 2004, which included approximately
    $1.2 million associated with the 7.32% minority interest
    that we did not own as of that date. Following review by PwC, it
    was determined that including the portion of this additional
    consideration relating to the minority interest that we had not
    yet acquired was not appropriate. Accordingly, we reduced the
    current and long term portion of accrued acquisition
    consideration initially recorded on the June 30, 2004
    balance sheet by $921,000 and $324,000 respectively, and reduced
    goodwill on the balance sheet by a corresponding amount of
    approximately $1.2 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Accounting for OD2 escrow consideration. In our
    initial closing financial statements delivered to PwC, the
    stockholders equity portion of Loudeyes balance
    sheet as of June 30, 2004 included 2,072,369 shares of
    common stock issued to certain of OD2s principal
    shareholders which are being held in escrow by us for 18 months
    to satisfy claims we may have with respect to breaches of
    representations, warranties and covenants, indemnification
    claims and working capital adjustments. In the aggregate, these
    shares represented 15% of the total stock consideration
    initially payable in the transaction. In addition, the
    additional accrued acquisition consideration payable in
    connection with the transaction set forth in our initial closing
    financial statements delivered to PwC was approximately
    $17.5 million, and included approximately $2.6 million
    of consideration payable to these principal shareholders which,
    when payable, would also be placed in escrow to satisfy any of
    the aforementioned claims that may be made.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Following review of these entries by PwC and
    after further review of applicable accounting literature, we
    determined that these escrowed shares and the approximately
    $2.6 million of accrued acquisition consideration to be
    issued into escrow should be excluded from our financial
    statements as of June 30, 2004, because the outcome of the
    contingency related to the escrow amounts was not determinable
    beyond a reasonable doubt as of June 30, 2004. We adjusted
    these entries accordingly.                                                                                                                                                 
|
| |  | Accounting for OD2 foreign exchange transaction
    gain. The deferred acquisition consideration was denominated in
    U.K. pounds. Our initial closing financial statements delivered
    to PwC did not account for any foreign currency exchange rate
    fluctuation related to our deferred payment obligations during
    the period from June 22, 2004 to June 30, 2004.
    Following review of these entries by PwC, we adjusted downward
    the amount of the deferred consideration payable to the OD2
    shareholders and recorded $183,000 of foreign currency
    transaction gain in other income to account for
    exchange rate fluctuations during this period.

Each of the above-referenced adjustments to our
second quarter financial statements was made prior to the filing
of our quarterly report on Form 10-Q for the period ended
June 30, 2004, which we filed with the SEC on
August 31, 2004, and each such adjustment is reflected in
the financial statements included in such Form 10-Q. The
material weaknesses described above resulted in deficiencies in
the processes, procedures and competencies within our accounting
and financial reporting functions which contributed to
post-closing adjustments and delays in the completion and filing
of our quarterly report on Form 10-Q for the period ended
June 30, 2004. We delayed the filing of our quarterly
report on Form 10-Q for the period ended June 30, 2004
to resolve the accounting issues relating to the OD2 acquisition
and to ensure that our second quarter financial statements
properly accounted for the transaction.

Managements
Assessment

Management has determined that, as of the
December 31, 2004 measurement date, there were deficiencies
in both the design and the effectiveness of our internal control
over financial reporting. Management has assessed these
deficiencies and determined that there were eight material
weaknesses in Loudeyes internal control over financial
reporting. As a result of our assessment that material
weaknesses in our internal control over financial reporting
existed as of December 31, 2004, management has concluded
that our internal control over financial reporting was not
effective as of December 31, 2004. The existence of a
material weakness or weaknesses is an indication that there is a
more than remote likelihood that a material misstatement of our
financial statements will not be prevented or detected in a
future period. Moss Adams LLP has issued an attestation report
concurring with managements assessment of Loudeyes
internal control over financial reporting which appears in this
annual report in Item 8 Financial Statements.

We first reported material weaknesses in our
internal control over financial reporting in August 2004. We
have included in the disclosure below all material weaknesses we
have identified to date.

Management and our audit committee have assigned
a high priority to the short- and long-term improvement of our
internal control over financial reporting.

We have listed below the nature of the material
weaknesses we have identified, the steps we are taking to
remediate these material weaknesses and when we expect to have
the material weaknesses remediated.

Deficiencies pertaining to insufficiently
skilled personnel and a lack of human resources within our
finance and accounting reporting
functions.As described above, we
first identified this material weakness in August 2004. During
2004 we experienced complete turnover of the personnel in our
finance and accounting department. The lack of appropriately
skilled personnel could result in material mistatements to
financial statements not being detected in a timely manner.



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.During
    the fourth quarter of 2004, we filled four of five (two with
    temporary personnel) then existing positions within our
    accounting and finance department and created and

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | filled three new positions in our accounting and
    finance departments. As a result, our accounting and finance
    staff consists of significantly more personnel with more
    accounting experience than was the case during the second and
    third quarters of 2004. However, as all planned personnel were
    not hired as of December 31, 2004, our remediation efforts
    were not complete as of the December 31, 2004 measurement
    date.



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the first quarter of 2005, we hired two
    permanent employees to replace the temporary personnel and
    filled the fifth existing position.                                                                                                                                                           
|
| | Although our Overpeer and OD2 subsidiaries were
    outside the scope of our assessment of our internal control over
    financial reporting as of December 31, 2004, we have
    already identified a potential need to hire additional qualified
    personnel for our finance and accounting function at OD2.



| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Timing.With the
    completion of our hiring efforts during the first quarter of
    2005, we believe as of the date of this report that we have
    remediated this material weakness.

Insufficient oversight of financially
significant processes and systems, including deficiencies
relating to monitoring and oversight of the work performed by
our finance and accounting personnel.As described above, we first identified this material weakness
in August 2004. Due primarily to the lack of human resources in
our accounting and finance department during most of 2004, we
noted deficiencies related to insufficient review and approval
and documentation of the review and approval of the work being
performed by employees within our accounting and finance
department relating to the following matters:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | All journal entries.                                                                                        
|
|
| |  | Periodic reconciliations of sub ledgers, balance
    sheet and income statement accounts.                   
|
|
| |  | Payroll and employee benefit related processing
    and accounting.                                         
|
|
| |  | Royalty related tracking, reporting and
    accounting.                                                     
|
|
| |  | Processes related to the invoicing of customers
    and the processing of credits to customers.             
|
|
| |  | Processes related to the purchasing of and the
    payment for goods and services received.                 
|
|
| |  | Accrual of expenses.                                                                                        
|
|
| |  | Documents supporting the monthly, quarterly and
    annual consolidation and general ledger closing process.
|
| |  | Periodic financial reporting.                                                                               

As a result, Loudeye does not have sufficient
internal control over financial reporting to ensure underlying
transactions are being appropriately and timely accounted for,
which could lead to material misstatements in the financial
statements not being detected in a timely manner.



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.In the
    fourth quarter 2004, we began to implement new controls and
    procedures designed to ensure proper oversight of work performed
    by employees in our accounting and finance functions. As of
    December 31, 2004, these efforts were not complete or
    sufficiently integrated into our existing control environment.



| |                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the first quarter 2005, our remediation
    efforts have continued, aided by the additional staff we have
    hired within our accounting and finance department. For example,
    we have established new reconciliation, review and documentation
    requirements for finance and accounting employees to ensure that:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Journal entries, including the appropriate
    supporting documentation, are reviewed, approved and documented
    prior to being posted to the general ledger.

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| |   |                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Sub ledgers, balance sheet and income statement
    accounts are periodically reconciled, including the clearing of
    any reconciling items, and reviewed and approved in a timely
    manner.                                                                                                                                                                             
|
| |  | Payroll and employee benefit calculations,
    payments and related journal entries are reviewed, approved and
    documented prior to posting in the general ledger.                                                                                                                                                                                                        
|
| |  | Royalty related tracking, reporting and
    accounting is reviewed, approved and documented in a timely
    manner.                                                                                                                                                                                                                                                          
|
| |  | System generated reports, invoicing support, and
    credit requests are reviewed, approved and documented prior to
    posting to the general ledger.                                                                                                                                                                                                                       
|
| |  | Invoices received for goods and services are
    properly approved and invoice coding is reviewed, approved and
    documented prior to posting to the general ledger.                                                                                                                                                                                                       
|
| |  | Open purchase orders are periodically reviewed,
    investigated as necessary and documented. Support and the basis
    for accruals of amounts in the general ledger is reviewed,
    approved and documented prior to posting to the general ledger.                                                                                                                       
|
| |  | Documents supporting the monthly, quarterly and
    annual consolidation and general ledger closing process are
    reviewed, approved and documented as part of the periodic
    closing process. Income statement and balance sheet accounts are
    reviewed approved and documented monthly using actual to budget
    and/ or actual to prior period actual comparisons.
|
| |  | Supporting working papers and documentation for
    financial data included in all financial reports are reviewed,
    approved and documented. Final signed copies of SEC filings are
    retained.                                                                                                                                                                         



| |   |                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Timing.We are
    continuing to remediate these deficiencies and anticipate
    completing our remediation efforts during the second and third
    quarters of 2005.

Deficiencies pertaining to the lack of
controls or ineffectively designed
controls.We noted that there are an
insufficient number of effectively designed controls or there
are ineffectively designed controls to ensure that:



| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | All revenue transactions occurred, are accurately
    calculated in accordance with the terms of the applicable
    contract, are processed properly and are accurately reflected in
    the proper period in the general ledger.
|
| |  | All royalty transactions occurred, are accurately
    calculated in accordance with the terms of the applicable
    contract, are processed properly and are accurately reflected in
    the proper period in the general ledger.
|
| |  | All revenue transactions are properly authorized
    before entry into the general ledger.                                                                                                                                       

As a result, adjustments to our revenue and
royalty accounts and financial statements could occur.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.We did
    not complete any significant remediation efforts with respect to
    this material weakness during the year ended December 31,
    2004. Beginning in March 2005, we focused our remediation
    efforts with respect to these deficiencies on designing
    automated systems for tracking, reporting and recording revenue
    generating transactions and associated royalty obligations.
|
| |  | Timing.We are
    continuing to remediate these deficiencies and anticipate
    completing our remediation efforts during the second and third
    quarters of 2005.                                                                                                                                                                                                                                               

Deficiencies in our general computer controls
relating to financially significant applications and business
processes, including application level design and documentation
deficiencies. As a result of these

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deficiencies, we were unable to rely upon
general computer controls to perform as expected over time and
we were unable to demonstrate through testing that our internal
controls that depend upon general computer controls were
operating effectively.


We identified design deficiencies in our general
computer controls including:



|  |                                                                                                                                                  
|- | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Insufficient approval and testing processes for
    internally developed software integrated into financially
    significant business processes.
| 
| 
| | Insufficient password management and unauthorized
    sharing of passwords.                                                                      
| 
| 
| | Insufficient physical access controls that could
    allow unauthorized access to our general computer controls.                                 

We also identified deficiencies relating to
documentation of our general computer controls including:



|  |                                                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Insufficient formal documentation of the approval
    and testing process of internally developed software integrated
    into financially significant business processes and changes to
    those programs.                                                            
| 
| 
| | Insufficient formal documentation to support
    system usage and maintenance.                                                                                                                                                                                          
| 
| 
| | Insufficient formal documentation to support the
    design effectiveness of financially significant general computer
    controls, such as the controls surrounding the capturing and
    reporting of data from our music sample service or our encoding
    services.

Examples of the control objectives with respect
to which we were not able to demonstrate that our existing
control activities were operating effectively as a result of
deficiencies in our information technology general controls
include:



|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The proper capture, input, validation and
    processing of all data related to customer invoicing and revenue
    recognition.                     
| 
| 
| | The proper capture, input, validation and
    processing of all data related to the calculation, tracking,
    reporting and recording of royalties.
| 
| 
| | The proper processing of data related to fixed
    asset additions and deletions and the calculation of periodic
    depreciation expense.          

As a result, errors in our financial statements
that have not been prevented or detected by our information
technology and general computer controls could occur.



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.In the
    fourth quarter 2004, we began to document controls and
    procedures designed to ensure proper oversight of work performed
    by employees in our information technology operations and
    program and development functions. We began work to ensure that:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A software development lifecycle (SDLC)
    methodology is documented and controls relevant to testing and
    approvals are implemented as designed.
|
|
| |  | A change management process is
    documented and controls relating to approvals are implemented as
    designed.                                  
|
|
| |  | Controls are implemented for managing security
    and physical access to systems, data, and applications that
    support financial reporting.      
|
|
| |  | Access policy and controls include a periodic
    review by management of access privileges.                                                         

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Transaction flows for applications that capture
    and report financial data are properly documented.



| |   |                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Timing.As of
    December 31, 2004, our remediation efforts were not
    complete, and during the first quarter of 2005 we continued to
    document controls and procedures designed to ensure proper
    oversight of work performed by employees in our information
    technology operations and program and development functions.

We are continuing to remediate these deficiencies
and anticipate completing our remediation efforts during the
second quarter and third quarter of 2005.

Deficiencies relating to insufficient
analysis, documentation and review of the selection and
application of generally accepted accounting principles, or
GAAP, to significant non-routine transactions, including the
preparation of financial statement disclosures relating
thereto.We first identified this
material weakness as it relates to significant non-routine
transactions in August 2004 in connection with completing our
quarterly report on Form 10-Q for the quarter ended
June 30, 2004 and the accounting treatment relating to our
acquisition of or OD2. See the discussion above under the
heading  Material Weaknesses Identified Prior
to December 31, 2004.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, during the preparation of our
    financial statements for the year ended December 31, 2004,
    we made revisions of classification with regard to expenses
    incurred during the years ended December 31, 2003 and 2002.
    Such revisions of classification had no impact on net loss,
    stockholders equity or cash flows as previously reported.
    These revisions of classification are consistent with this
    material weakness and related to the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regent Fees.We
    revised our classification of $878,000 relating to service fees
    paid to Regent Pacific Management Corporation during the year
    ended December 31, 2003, from special charges 
    other to general and administrative expense in the current
    presentation as we determined that these expenses were not
    restructuring charges in accordance with FAS 146 and were
    more appropriately classified as general and administrative
    expense.                     
|
| |  | Amortization of Intangible
    Assets.We revised our classification
    of amortization of acquired technology and capitalized software
    costs totaling approximately $269,000 in 2003 and
    $1.3 million in 2002 from operating expenses 
    amortization of intangibles to cost of revenue in the current
    presentation as we determined that these expenses were more
    appropriately classified as cost of revenue in accordance with
    FAS 86 and related accounting literature.   
|
| |  | Impairment of Intangible
    Assets.We revised our classification
    of impairment charges related to acquired technology and
    capitalized software costs totaling approximately $601,000 in
    2003 and $694,000 in 2002 from operating expenses 
    special charges  other to cost of revenue in the
    current presentation as we determined that these charges were
    more appropriately classified as cost of revenue in accordance
    with FAS 86 and related accounting literature.



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a result, Loudeye does not have sufficient
    internal control over financial reporting to ensure that
    underlying non-routine transactions are appropriately and timely
    accounted for in the general ledger.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.During
    the fourth quarter 2004, we filled four of five (two with
    temporary personnel) then existing positions within our
    accounting and finance department and created and filled three
    new positions in our accounting and finance departments. During
    the first quarter 2005, we hired two permanent employees to
    replace the temporary personnel and filled the fifth position.
    As a result, our accounting and finance staff consists of
    significantly more personnel with more accounting experience
    than was the case during the second and third quarters of 2004.



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have also implemented processes by which the
    classification of expenses, significant revenue related and
    non-routine transactions are reviewed for application of GAAP by
    accounting and finance personnel with appropriate subject matter
    expertise, by members of

127



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | senior management, and, where appropriate by our
    audit committee or our board of directors. However, because we
    had not filled all of the vacancies in our accounting and
    finance department as of December 31, 2004, our remediation
    efforts with respect to this material weakness were not complete
    as of the December 31, 2004 measurement date.



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Timing.We completed
    our hiring efforts during the first quarter 2005. We will
    continue to monitor our remediation efforts with respect to this
    material weakness.

Failure to appropriately assess and monitor
the effectiveness of controls executed by third party service
providers, and to adequately implement and/or maintain customer
level controls related to the provision of services by third
party service providers.We identified
design deficiencies in our customer level controls including:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Failure to provide timely written notification to
    third party service providers of changes in Loudeye authorized
    personnel that result from Loudeye employee terminations.                                            
|
|
| |  | Insufficient review and approval, and
    insufficient documentation of review and approval, of input
    reports prior to their submission to the service provider and of
    output reports received from service providers.

As a result, the information and reports from
third-party service providers received and utilized by us may
contain errors.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.In the
    fourth quarter 2004, we began to implement new controls and
    procedures designed to ensure proper oversight of work performed
    by employees in our accounting and finance functions. As of
    December 31, 2004, these efforts were not complete.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
|
| |   | In the first quarter 2005, our remediation
    efforts have continued, aided by the additional staff we have
    hired within our accounting and finance department. For example,
    we have established new reconciliation, review and documentation
    requirements for finance and accounting employees to ensure
    that, among other things, payroll and benefit related reports
    are reviewed and approved prior to submission to the third party
    provider and that output reports received from the service
    provider are also reviewed and approved. Additionally, we expect
    to put controls in place to ensure we provide timely written
    notification to third party service providers of changes in
    authorized Loudeye personnel.
|
| |  | Timing.We are
    continuing to remediate these deficiencies and anticipate
    completing our remediation efforts during the second and third
    quarters of 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Inadequate entity-level
controls.As of December 31,
2004, we did not have effective entity level controls with
respect to our overall control environment and monitoring
efforts as defined in the COSO framework. The pervasive nature
of the material weaknesses in our internal control over
financial reporting in itself constitutes a material weakness.
We failed to systematically communicate company-wide policies
and procedures and to uniformly and consistently communicate the
importance of controls. We also had failed to implement
processes to ensure periodic monitoring of our internal control
activities. As a result, management concluded that there are
deficiencies in the design and execution of our entity-level
controls that constitute a material weakness in our internal
control over financial reporting and errors in our financial
statements that have not been prevented by our entity level
controls could occur.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.In the
    fourth quarter 2004, we began to implement new controls and
    procedures designed to ensure that company-wide policies and
    procedures are systematically communicated and that
    documentation evidencing employees receipt thereof is
    retained. In the first quarter 2005, we also began developing an
    ongoing monitoring system to facilitate continuous monitoring of
    our internal control over financial reporting.

128



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##### Table of Contents





| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Timing.As of
    December 31, 2004, these efforts were not complete and we
    are continuing to remediate these deficiencies and anticipate
    completing our remediation efforts during the second and third
    quarter 2005.

Inability to demonstrate through testing that
our internal control over financial reporting was effective as
of December 31, 2004.We were
unable to demonstrate through testing the effectiveness of our
remediation efforts with respect to the material weaknesses
described above. Our processes with respect to quarterly and
annual controls, such as our control processes relating to
general ledger close procedures and periodic financial
reporting, were not fully implemented until the fourth quarter
2004. Although we believe these processes were designed
effectively as of December 31, 2004, there was an
insufficient sample base to enable us to demonstrate through
testing that these controls were operating effectively as of
December 31, 2004.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Remediation.We have
    dedicated significant internal and external resources to our
    remediation efforts with respect to material weaknesses in our
    internal control over financial reporting as noted above. We
    expect to have a sufficient sampling base to enable us to test
    the effectiveness of our remediation efforts at future
    measurement dates and testing periods for our internal control
    over financial reporting.
|
| |  | Timing.We are
    continuing to remediate these deficiencies and anticipate
    completing our remediation efforts during the third quarter 2005.                                                                                                                                                                                                                                                                                                      

The steps described above, including the hiring
of additional qualified accounting and finance personnel, are
designed to ensure that managements evaluation of our
internal control over financial reporting is thorough and
complete and that a timely and appropriate remediation plan is
implemented. Our audit committee is overseeing managements
assessment and its implementation of a remediation plan and is
prepared to take additional measures, where necessary, to ensure
that management has the required resources in place to address
known and not yet identified material weaknesses, significant
control deficiencies and other control deficiencies. The
effectiveness of the steps we have taken to date and the steps
we are still in the process of completing is subject to
continued management review, as well as audit committee
oversight, and we may make additional changes to our internal
controls and procedures. Although we have undertaken the
foregoing initiatives, we cannot assure you that we will not in
the future identify further material weaknesses or significant
deficiencies in our internal control over financial reporting
that have not previously been identified.

Management estimates that we will incur
additional costs in connection with our remediation efforts
including outside advisor fees and incremental personnel costs.
Management estimates that these costs will aggregate
approximately $1 million for the fiscal year ended
December 31, 2005.

Except as disclosed above regarding remediation
efforts we conducted in the fourth quarter 2004 with respect to
known material weaknesses and deficiencies in our internal
control over financial reporting, there were not any changes in
our disclosure controls and procedures, including our internal
control over financial reporting, during the quarter ended
December 31, 2004, that had materially affected, or are
reasonably likely to materially affect, our disclosure controls
and procedures, including our internal control over financial
reporting.






|         |                   
|-------- | ------------------
|Item 9B. | Other Information.

None.

PART III






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

Information required by this Item 10
relating to our directors is incorporated herein by reference to
the section entitled ELECTION OF DIRECTORS in the
proxy statement for our 2005 annual meeting

129



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##### Table of Contents



which will be filed no later than 120 days
after December 31, 2004. The information required by this
Item 10 relating to our audit committee and the audit
committee financial expert is incorporated herein by reference
to the section entitled CORPORATE GOVERNANCE 
Committees, Charters and Policies in the proxy statement
for our 2005 annual meeting. The information required by this
Item 10 relating to our executive officers is incorporated
herein by reference to the section entitled COMPENSATION
AND OTHER INFORMATION REGARDING DIRECTORS AND
OFFICERS  Information on Executive Officers in
the proxy statement for our 2005 annual meeting. The information
required by this Item 10 relating to compliance with
Section 16(a) of the Exchange Act is incorporated herein by
reference to the section entitled BENEFICIAL OWNERSHIP OF
COMMON STOCK  Section 16(a) Beneficial Ownership
Compliance in the proxy statement for our 2005 annual
meeting.


We have adopted a code of ethics that applies to
our directors, officers and employees. We have posted a copy of
the code on our website at the Internet address
http://www.loudeye.com. Copies of the code may be obtained free
of charge from our website at the above Internet address. We
intend to satisfy the disclosure requirement under
Item 5.05 of Form 8-K regarding an amendment to, or
waiver from, a provision of this code by posting such
information on our website, at the Internet address specified
above.






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

Information required by this Item 11 is
incorporated herein by reference to the sections entitled
COMPENSATION AND OTHER INFORMATION REGARDING DIRECTORS AND
OFFICERS, COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION and PERFORMANCE GRAPH in the
proxy statement for our 2005 annual meeting.






|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters.

Information related to security ownership
required by this Item 12 is incorporated herein by
reference to the sections entitled COMPENSATION AND OTHER
INFORMATION REGARDING DIRECTORS AND OFFICERS 
Description of Equity Compensation Plans and
BENEFICIAL OWNERSHIP OF COMMON STOCK in the proxy
statement for our 2005 annual meeting.






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

Information required by this Item 13 is
incorporated herein by reference to the section entitled
CERTAIN TRANSACTIONS in the proxy statement for our
2005 annual meeting.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services.

Information required by this Item 14 is
incorporated herein by reference to the section entitled
AUDIT MATTERS  Independent Registered Public
Accountants Fees of the proxy statement for our 2005
annual meeting.

PART IV






|         |                                                
|-------- | -----------------------------------------------
|Item 15. | Exhibits and Financial Statement
    Schedules.

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

1. Financial Statements:

130



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##### Table of Contents



The following financial statements of Loudeye are
filed as a part of this report under Item 8 Financial
Statements.:

|                                                                                         |  |     
|---------------------------------------------------------------------------------------- |  | ----
|                                                                                         |  | Page
|                                                                                         |  |     
|Index to Consolidated Financial Statements                                               |  | 73  
|Report of Registered Public Accounting Firm on
    Internal Control                      |  | 74  
|Report of Independent Registered Public
    Accounting Firm (Moss Adams LLP)             |  | 77  
|Report of Independent Registered Public
    Accounting Firm (PricewaterhouseCoopers LLP) |  | 78  
|Consolidated Balance Sheets                                                              |  | 79  
|Consolidated Statements of Operations                                                    |  | 80  
|Consolidated Statements of Stockholders
    Equity                                      |  | 81  
|Consolidated Statements of Cash Flows                                                    |  | 82  
|Notes to Consolidated Financial Statements                                               |  | 83  



| |    |                                                                                       
| | -- | --------------------------------------------------------------------------------------
| | 2. | Financial Statement Schedules for the years
    ended December 31, 2004, 2003 and 2002

All other Financial Statement Schedules are
omitted because they are not applicable or the required
information is shown in the consolidated financial statements or
notes thereto. See Item 8 Financial Statements.

131



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##### Table of Contents






3. Exhibits:

|            |    |             |  |                                                                                                                                                                                                   
|----------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 2  | .1(12)      |  | Agreement and Plan of Merger and Reorganization
    dated March 1, 2004 for Overpeer Inc.                                                                                                         
|            | 2  | .2          |  | Escrow Agreement between Loudeye Corp. SK
    Energy & Chemical, Inc., and LaSalle Bank National
    Association dated March 1, 2004 for Overpeer Inc.                                            
|            | 2  | .3(13)      |  | Recommended Offer by Loudeye Corp. for On Demand
    Distribution Ltd. dated June 22, 2004 (including form of
    Registration Rights Agreement)                                                  
|            | 2  | .4(13)      |  | Deed Poll of Warranty and Indemnity dated
    June 22, 2004                                                                                                                                       
|            | 2  | .5(17)      |  | Form of Promissory Note issued to certain former
    shareholders of On Demand Distribution Limited                                                                                               
|            | 2  | .6(20)      |  | Agreement to Amend Certain Terms of the
    Acquisition of On Demand Distribution Limited dated
    February 25, 2005                                                                             
|            | 2  | .7(20)      |  | Agreement to Amend Certain Terms of the Deed Poll
    of Warranty and Indemnity dated February 25, 2005                                                                                           
|            | 3  | .1(1)       |  | Amended and Restated Certificate of Incorporation
    of Loudeye Corp.                                                                                                                            
|            | 3  | .2(17)      |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation of Loudeye Corp. as filed
    with the Secretary of State of the State of Delaware on
    May 29, 2002      
|            | 3  | .3(16)      |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation of Loudeye Corp. as filed
    with the Secretary of State of the State of Delaware on
    September 30, 2004
|            | 3  | .4(2)       |  | Amended Bylaws of Loudeye Corp. dated
    January 18, 2002                                                                                                                                        
|            | 4  | .1          |  | Form of Loudeye Corp. common stock certificate                                                                                                                                                    
|            | 10 | .1(3)       |  | Form of Indemnification Agreement between Loudeye
    Corp. and each of directors, executive officers and certain
    other officers                                                              
|            | 10 | .2(1)       |  | 1998 Stock Option Plan, as amended                                                                                                                                                                
|            | 10 | .3          |  | 2000 Stock Option Plan, as amended June 9,
    2004                                                                                                                                               
|            | 10 | .4(1)       |  | 2000 Director Stock Option Plan                                                                                                                                                                   
|            | 10 | .5(1)       |  | 2000 Employee Stock Purchase Plan                                                                                                                                                                 
|            | 10 | .6(1)       |  | 2000 Employee Stock Option Plan                                                                                                                                                                   
|            | 10 | .7(17)      |  | On Demand Distribution Limited Employee Share
    Option Plan                                                                                                                                     
|            | 10 | .8(17)      |  | Form of Option Exchange Agreement for executive
    former optionees of On Demand Distribution Limited                                                                                            
|            | 10 | .9(17)      |  | Form of Option Exchange Agreement for
    non-executive former optionees of On Demand Distribution Limited                                                                                        
|            | 10 | .10(1)      |  | Amended and Restated Investors Rights
    Agreement dated December 14, 1999 among Loudeye Corp. and
    certain holders of our preferred stock                                                   
|            | 10 | .11(4)      |  | Consulting Agreement dated April 1, 2003
    between Anthony J. Bay and Loudeye Corp.                                                                                                             
|            | 10 | .12(11)     |  | Employment Agreement dated December 5, 2003
    between Anthony J. Bay and Loudeye Corp.                                                                                                          
|            | 10 | .13(3)      |  | First Amendment dated October 29, 2004, to
    Employment Agreement between Anthony Bay and Loudeye Corp. dated
    December 5, 2003                                                              
|            | 10 | .14         |  | Amended and Restated Executive Employment
    Agreement dated January 31, 2005, between Michael A. Brochu
    and Loudeye Corp.                                                                   
|            | 10 | .15(19)     |  | Executive Employment Agreement dated
    March 7, 2005, between Lawrence J. Madden and Loudeye Corp.                                                                                              
|            | 10 | .16(19)     |  | Executive Employment Agreement dated
    March 7, 2005, between Ronald M. Stevens and Loudeye Corp.                                                                                               
|            | 10 | .17(5)      |  | Securities Purchase Agreement dated
    August 28, 2003                                                                                                                                           
|            | 10 | .18(5)      |  | Registration Rights Agreement dated
    August 28, 2003                                                                                                                                           
|            | 10 | .19(5)      |  | Form of Common Stock Purchase Warrant dated
    August 28, 2003                                                                                                                                   

132



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##### Table of Contents



|            |    |             |  |                                                                                                                                                                                                                                     
|----------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .20(6)      |  | Accounts Receivable Financing Agreement dated
    June 27, 2003 between Silicon Valley Bank and Loudeye Corp.
    and related modification agreement and warrant agreement                                                          
|            | 10 | .21(10)     |  | Loan and Security Agreement dated
    December 31, 2003 between Silicon Valley Bank and Loudeye
    Corp.                                                                                                                           
|            | 10 | .22(7)      |  | Fifth Amendment and Assignment of Lease dated
    April 1, 2003 among 1130 Rainier, LLC, Activate.Net
    Corporation, and Loudeye Enterprise Communications, Inc. for
    offices at 1130 Rainier Avenue South, Seattle, Washington
|            | 10 | .23(7)      |  | Lease Termination Agreement dated April 28,
    2003 between Westlake Park Associates and Loudeye Corp. with
    respect to offices at 1904 Fourth Avenue, Seattle, Washington                                                      
|            | 10 | .24(11)     |  | Lease agreement dated December 20, 2003 for
    offices at 1130 Rainier Avenue South, Seattle, Washington                                                                                                                           
|            | 10 | .25(11)     |  | Asset Purchase agreement dated October 31,
    2003 between Gail Clarke Acquisition Corp. and Vidipax, Inc.                                                                                                                         
|            | 10 | .26(8)      |  | Agreement and Plan of Reorganization with TT
    Holding Corp.                                                                                                                                                                      
|            | 10 | .27(9)      |  | Retainer Agreement with Regent Pacific Management
    Corporation                                                                                                                                                                   
|            | 10 | .28(14)     |  | Form of Subscription Agreement with certain
    investors                                                                                                                                                                           
|            | 10 | .29(18)     |  | Subscription Agreement dated December 21,
    2004, by and among Loudeye and the investors named therein                                                                                                                            
|            | 10 | .30(18)     |  | Form of common stock purchase warrant issued to
    investors who are parties to a Subscription Agreement dated
    December 21, 2004                                                                                               
|            | 16 | .1          |  | Letter re: Change in Certifying Accountant                                                                                                                                                                                          
|            | 21 | .1(21)      |  | Subsidiaries of Loudeye Corp.                                                                                                                                                                                                       
|            | 23 | .1          |  | Consent of Moss Adams LLP, Independent Registered
    Public Accounting Firm                                                                                                                                                        
|            | 23 | .2          |  | Consent of PricewaterhouseCoopers LLP,
    Independent Registered Public Accounting Firm                                                                                                                                            
|            | 24 | .1          |  | Power of Attorney of Board of Directors (included
    on signature page hereto)                                                                                                                                                     
|            | 31 | .1          |  | Rule 13a-14(a) Certification of Principal
    Executive Officer of the Company in accordance with
    Section 302 of the Sarbanes-Oxley Act of 2002                                                                                 
|            | 31 | .2          |  | Rule 13a-14(a) Certification of Principal
    Financial and Accounting Officer of the Company in accordance
    with Section 302 of the Sarbanes-Oxley Act of 2002                                                                  
|            | 32 | .1          |  | Certification of Principal Executive Officer of
    the Company Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002*                                                   
|            | 32 | .2          |  | Certification of Principal Financial and
    Accounting Officer of the Company Pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002*                                    



---



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | A signed original of this written statement
    required by Section 906 has been provided to the Company
    and will be retained by the Company and furnished to the
    Securities and Exchange Commission or its staff upon request.



|    |                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Loudeye Corp.s
    registration statement on Form S-1 file
    number 333-93361.
|   
|(2) | Incorporated by reference to Loudeye Corp.s
    Form 10-K for the year ended December 31, 2001.              
|   
|(3) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on November 1, 2004.                          
|   
|(4) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q/A filed on September 2, 2003.                      
|   
|(5) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on September 2, 2003.                         
|   
|(6) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated July 15, 2003.                                
|   
|(7) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q dated May 20, 2003.                                
|   
|(8) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated November 19, 2002.                            
|   
|(9) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated February 3, 2003.                             

133



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|     |                                                                                                                 
|---- | ----------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated January 9, 2004.                                
|    
|(11) | Incorporated by reference to Loudeye Corp.s
    Form 10-K for the year ended December 31, 2003.                
|    
|(12) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on March 5, 2004.                               
|    
|(13) | Incorporated by reference to Loudeye Corp.s
    Form 8-K dated June 22, 2004.                                  
|    
|(14) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on February 17, 2004.                           
|    
|(15) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q, filed May 17, 2004.                                 
|    
|(16) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on October 7, 2004.                             
|    
|(17) | Incorporated by reference to Loudeye Corp.s
    Form 10-Q filed on November 15, 2004.                          
|    
|(18) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on December 22, 2004.                           
|    
|(19) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on March 7, 2005.                               
|    
|(20) | Incorporated by reference to Loudeye Corp.s
    Form 8-K filed on February 28, 2005.                           
|    
|(21) | Incorporated by reference to Loudeye Corp.s
    registration statement on Form S-1, file
    number 333-120700.

134



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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,
March 31, 2005.



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



| |     |                      
| | --- | ---------------------
| | By: | /s/ Michael A. Brochu

| |                        
| | -----------------------
| |                        
| | Michael A. Brochu      
| | Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby
constitutes and appoints Michael A. Brochu and Lawrence J.
Madden, 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/ Michael A. BrochuMichael A. Brochu   |  | Chief Executive Officer, President
    and Director
    (Principal Executive Officer)   |  | March 31, 2005
|                                        
|/s/ Lawrence J. MaddenLawrence J. Madden |  | President, Digital Media Solutions
    (Principal Financial and
    Accounting Officer) |  | March 31, 2005
|                                        
|/s/ Anthony J. BayAnthony J. Bay         |  | Chairman of the Board                                                                   |  | March 31, 2005
|                                        
|/s/ Kurt R. KraussKurt R. Krauss         |  | Director                                                                                |  | March 31, 2005
|                                        
|/s/ Johan C. LiedgrenJohan C. Liedgren   |  | Director                                                                                |  | March 31, 2005

135