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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, DC 20549




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Form 10-K

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

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2001


Commission File Number: 0-29583




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Loudeye Technologies, Inc.

(Exact name of registrant as specified in its
charter)


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

1130 Rainier Avenue South, Seattle, WA
98144

(Address of principal executive
offices)    (Zip Code)


206-832-4000

(Registrants telephone number, including
area code)




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

None


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


Common Stock, $0.001 Par Value Per
Share




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

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

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$22,587,000 as of March 12, 2002, based upon the closing
sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

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

|        |  |                                
|------- |  | -------------------------------
|Common  |  | 40,506,170                     
|(Class) |  | (Outstanding at March 12, 2002)

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement
relating to the registrants 2002 Annual Meeting of
Shareholders scheduled to be held on May 23, 2002 are
incorporated by reference into Part III of this Report.



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TABLE OF CONTENTS



|              |                                                                                              |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1 Business                                                                             
|              | Item 2 Properties                                                                           
|              | Item 3 Legal Proceedings                                                                    
|              | Item 4 Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5 Market for Registrants Common Equity and Related Stockholder Matters                
|              | Item 6 Selected Consolidated Financial Data                                                 
|              | Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7a Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8 Financial Statements and Supplementary Data                                          
|              | Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10 Directors and Executive Officers of the Registrant                                  
|              | Item 11 Executive Compensation                                                              
|              | Item 12 Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13 Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|Exhibit 3.4  
|Exhibit 10.35
|Exhibit 21.1 
|Exhibit 23.1 



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31,
2001


TABLE OF CONTENTS

|              |  |                                                                                                         |    |        |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|              |  |                                                                                                         |    | Page  
|              |  |                                                                                                         |    | Number
|              |  |                                                                                                         |    |       
|PART I       
|Item 1        |  | Business                                                                                                |    |        | 2  | 
|Item 2        |  | Properties                                                                                              |    |        | 17 | 
|Item 3        |  | Legal Proceedings                                                                                       |    |        | 17 | 
|Item 4        |  | Submission of Matters to a Vote of Security
	Holders                                                    |    |        | 18 | 
|PART II      
|Item 5        |  | Market for Registrants Common Equity and
	Related Stockholder Matters                                  |    |        | 18 | 
|Item 6        |  | Selected Consolidated Financial Data                                                                    |    |        | 19 | 
|Item 7        |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations and Risk Factors |    |        | 21 | 
|Item 7A       |  | Quantitative and Qualitative Disclosures about
	Market Risk                                             |    |        | 44 | 
|Item 8        |  | Financial Statements and Supplementary Data                                                             |    |        | 45 | 
|Item 9        |  | Changes In and Disagreements with Accountants on
	Accounting and Financial Disclosure                   |    |        | 74 | 
|PART III     
|Item 10       |  | Directors and Executive Officers of the Registrant                                                      |    |        | 74 | 
|Item 11       |  | Executive Compensation                                                                                  |    |        | 74 | 
|Item 12       |  | Security Ownership of Certain Beneficial Owners
	and Management                                         |    |        | 74 | 
|Item 13       |  | Certain Relationships and Related Transactions                                                          |    |        | 74 | 
|PART IV      
|Item 14       |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                                       |    |        | 74 | 
|Exhibit Index |  |                                                                                                         | 75 |       

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PART I




Item
1     Business

Forward Looking Statements

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

Company Overview

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

In 2001 we served over 300 customers directly
including The Coca Cola Company, Microsoft, XM Satellite
Radio, CDNow, Amazon, America Online, Robertson Stephens,
Universal Music Group, barnesandnoble.com, the Metropolitan
Opera and the New York City Ballet.

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

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We developed our solutions to address the new
methods of communication, media distribution and content
management that have emerged over recent years. We provide our
services via two primary business segments, Digital Media
Services and Media Restoration Services.



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

Our enhanced enterprise communication services
include highly scalable, live and on-demand audio
and video Webcasting services, supported by proprietary
applications such as synchronized streaming slide presentation
capabilities. Using our services, enterprises can offer large
and small audiences access to Webcasts of a variety of corporate
events, such as product launches, investor earnings calls,
conferences and distance learning seminars. The target customers
for these solutions include large and medium-sized enterprises
across a range of industry segments.

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



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

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



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Comprehensive digital media services to address
	enterprise communication, marketing and entertainment markets;
|
| |  | End-to-end outsourced solutions to reduce
	complexity and cost of in-house implementations;                    
|
| |  | High degree of flexibility to enable tailored
	customer solutions;                                             
|
| |  | Scalable systems and network infrastructure to
	provide significant capacity and reliability; and              
|
| |  | Strategic relationships to facilitate authorized
	digital media strategies.                                    

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



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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital media storage and access.Our proprietary systems and technology
	enable the scalable archiving, retrieval and processing of large
	inventories of digital media. Digitized content is stored on our
	high capacity storage array systems and accessed via our
	proprietary, automated, web-based access tools to search,
	provision and manage such content; and               
|
| |  | Traditional source media ingest and capture.Source content is captured live via
	our extensive signal ingress capabilities, including satellite
	downlinks, video fiber, frame relay, ISDN, automated
	telephony-to-IP switches and teleconferencing equipment, as well
	as on-demand via processing of archived source audio and video
	in a wide range of legacy and digital formats.

Our digital media services and infrastructure are
robust and highly scalable. In 2001 our Activate subsidiary
webcast approximately 6,000 events. In 2001 Loudeye encoded and
delivered millions of digital music and audio fingerprint files
and streamed approximately 620 million music samples.

Our objective is to leverage our existing
customer base and investments in infrastructure and applications
to grow revenues and achieve profitability. We seek to achieve
these objectives through the following key strategies:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expanding our direct and indirect sales channels;                                                                                                                                     
|
| |  | Lowering our cost of delivery and increasing
	customer integration via automation and strategic relationships;                                                                        
|
| |  | Developing and marketing an end-to-end suite of
	products and services; and                                                                                                           
|
| |  | Selectively pursuing strategic acquisitions to
	enter new markets, expand our suite of services and product
	offering, increase our customer base and strengthen our market
	position.

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

Industry Background

A variety of trends are affecting the traditional
methods that companies communicate as well as distribute and
market media and other goods. The Internet has developed into a
very efficient and cost effective medium to communicate and
conduct commerce with millions of users worldwide. The increase
in broadband access and average Internet connection speeds, as
well as continued development of digital media technologies, has
increased the quality and reliability of digital media delivery
over the Internet and other digital distribution platforms. The
consumption of digital media by Internet users has increased,
driving companies to consider it as a medium for enterprise
communication, media and entertainment, marketing and
advertising.

Internet Usage and Broadband Access Have
Increased.Internet usage and access
speeds increased in 2001, thus expanding the potential audience
for digital media applications. According to Jupiter Media
Metrix, as of December 2001, more than 141 million people
in the United States used the Internet, up from approximately
126 million in 2000. In addition, average Internet access
speeds in the home continue to increase. In January 2002,
Jupiter estimated that at the end of 2001 approximately
10 million U.S. households, or 15% of the total, had high
speed access, an increase of 90% from 2000 levels. According to
those estimates, broadband users, including those at work,
totaled approximately 38 million or 32% of at-home and at-work
Internet users at the end of 2001.

Digital Media Technologies Are Being Adopted
and Refined Creating Large Potential Audiences and User Bases.Technology that enables the
consumption of digital media using personal computers and other
connected devices was widely adopted by users in the United
States in 2001. For example, Jupiter Media Metrix estimates that
already by the beginning of 2001 media player applications were
installed on approximately 99 percent of home personal
computers in the United States, enabling the consumption of
streaming and downloadable digital audio and video content. When
combined with increased Internet usage

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and the growing penetration of broadband
connections, the proliferation of digital media technologies
have led to a large potential audience and user base for digital
media. Nielsen NetRatings estimates that approximately
41 million people accessed some form of streaming content
at home in November 2001, and that approximately three out of
every five broadband Internet users at home accessed some form
of online audio and video. Additionally, they estimate that in
the month of September 2001, 56% of office workers consumed
streaming media. Companies such as Microsoft and RealNetworks
and others continue to develop and release new versions of their
digital media technologies, which serve to make digital media
distribution faster, more efficient and at higher quality
levels, enabling improved experience of the end-users.


Companies Have Begun to Use Digital Media
Technologies for a Variety of Applications.Companies in a range of industries are
beginning to utilize audio and video on the Internet to
communicate, market products, increase customer awareness and
sales. In a June 2001 survey of leading executives in a wide
range of industries, Jupiter Media Metrix found that over 35% of
the executives companies were offering some sort of
streaming video or audio experience, and over 40% of those who
did not currently do so expected to deploy streaming video and
audio within the next year. For example, companies are utilizing
digital media technologies to enable such activities as enhanced
enterprise communication, digital music distribution and rich
media marketing programs.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhanced Enterprise Communication.The Internet has proven to be a highly
	effective medium for enterprise communication, with a wide range
	of businesses seeking to utilize applications such as e-mail and
	corporate and intranet websites to increase the efficiency of
	operations and enhance business interactions. The demand for
	Internet communication services is driven in part by
	globalization of operations, geographically-dispersed work
	teams, workforce training, disclosure requirements and desire to
	reduce operating costs. Companies are beginning to utilize the
	Internet for additional advanced communication applications,
	including web collaboration, web conferencing, event webcasting
	and application demonstration. In March 2001, Jupiter Media
	Metrix estimated that enterprise streaming in North America was
	an approximately $140 million market in 2000, growing to
	over $2.8 billion by 2005.                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Digital Music Distribution.In 2001 many consumers used the
	Internet to search, acquire and listen to music, prompting
	companies in the music industry, including the major music
	companies, music retailers, media portals and music distribution
	companies to closely investigate the use of these new
	distribution methods in their businesses. Music was a popular
	category for online users in 2001, as Jupiter Media Metrix
	estimated that music websites reached approximately
	41 million, or over one third, of online users in 2001, and
	Jupiter Research estimated that 46% of all online buyers
	purchased music goods, second only to books in their ranking of
	categories of goods purchased online. The online music market in
	2001 was primarily comprised of the online sale of compact discs
	and related music merchandise. In November 2001, Jupiter
	Research estimated that the domestic online music market in
	2001, which includes both the domestic sale of compact discs
	online as well as digital distribution of music, equaled
	approximately $1.0 billion and will increase to
	approximately $5.5 billion in 2006, with sales of digitally
	distributed music, including the sale of digital downloads and
	digital music subscription services, increasing over time to
	represent approximately 30% of the market by 2006.
|
| |  | Rich Media Marketing and Advertising.Rich media marketing and advertising
	is a small part of the overall online market, but may grow in
	the future. In August 2001, Jupiter Research estimated that
	the online advertising market equaled approximately
	$5.7 billion or approximately 3% of the overall advertising
	market, in 2001 and will grow to $15.4 billion or 7% of the
	overall market, by 2006. Jupiter estimates that rich media
	advertising, including streaming media advertising, represented
	7% of the online advertising market in 2001 but will increase to
	32% of that market by 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Challenges of Digital Media Distribution.We believe that as the Internet
continues to evolve as a mass communication medium, companies
will spend an increasing amount of resources to offer
high-quality video and audio content for various applications
including corporate communications, distance learning, customer
acquisition and retention, and developing alternative revenue
streams from digital media distribution. However, the
technologies and standards that form the basis of traditional
audio and video distribution are not

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compatible with the infrastructure supporting the
Internet and other data networks. For example, audio and video
content from satellite feeds, teleconference lines, compact
discs, tapes and film, cannot be played to an Internet audience
without significant manipulation, processing and new technology.
In order to utilize the Internet and data networks as a medium
for audio and video distribution and communication, while
protecting, tracking, controlling and administering intellectual
property rights around content, enterprises and content owners
must utilize new methods that transfer the consistent formats
and delivery methods of traditional media into the multi-faceted
and changing technologies of the new digital distribution
methods.


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



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

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

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

The Loudeye Solution

We are a leading provider of services which
facilitate the use of digital media for live and on-demand
applications in enterprise communication, marketing and
entertainment. Our services enable our customers to outsource
the management and delivery of audio, video and other visual
content on the Internet and other digital distribution
platforms. Our solutions reduce complexity and cost of internal
solutions, while supporting a variety of digital media
strategies and customer business models.

Our technical infrastructure, proprietary
applications and digital media services comprise an end-to-end
outsourced solution for enhanced communication and digital media
distribution, including:



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

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Our solutions offer customers the following key
benefits:

Comprehensive digital media services to
address enterprise communication, marketing and entertainment
markets.Customers in a range of
industries are beginning to deploy digital media to communicate,
market products and distribute media and entertainment. Our
proprietary suite of Webcasting applications and services,
coupled with our scalable network and production infrastructure
technologies, provide a simple, cost-effective way for
corporations to communicate with large and small online
audiences. Using our services, large and medium-sized
enterprises can offer their target audiences access to Webcasts
of a variety of corporate events, such as product launches,
investor earnings calls, conferences and distance learning
seminars. In addition, we support online marketing initiatives
of our customers through our other digital media services,
including our leading music samples service, online radio
services, advertisement insertion solutions, music download
services and advertisement sales. Finally we provide outsourced
services to support the management and distribution of our
customers digital media libraries, including scalable
encoding and delivery services.

End-to-end outsourced solutions to reduce
complexity and cost of in-house implementations.Large and medium-sized enterprises and
content owners that want to encode and distribute their video
and audio content can do so either from their own production
capabilities and network servers or through third-party service
providers. Our services and applications provide a comprehensive
solution through a single outsourced solution provider. Our
solutions reduce complexity and allow our customers to avoid
development and ongoing maintenance costs of establishing
internal capabilities. Our end-to-end capabilities address a
series of highly complex process steps required to deploy
digital media effectively and reliably to large audiences.
Because our customers can leverage our significant investments
in these processes and avoid purchasing capital equipment,
developing system expertise, training personnel and managing
evolving technology platforms, we can deliver quality and
reliable services for lower cost than the development and
maintenance of comparable internal solution. In addition, in
certain of our digital music services, we have obtained
copyright licenses which are transferable to our customers,
enabling them to avoid the cost and effort to negotiate and
obtain such licenses for themselves.

High degree of flexibility to enable tailored
customer solutions.Because our
customers require flexibility in the manner which their content
is captured, as well as in the formats and manner their digital
media is distributed, we offer a wide range of media ingest and
capture methods and support a wide range digital media formats
and other third-party technologies with our digital media
services. In addition, our hosting services and proprietary
applications provide additional support to customers, enabling
clients access to advanced reporting and management tools and
offering value-added services like digital rights management,
advertisement insertion and advertisement sales, to enable a
variety of our customers business model and strategies.

Scalable systems and network infrastructure to
provide significant capacity and
reliability.Corporations and content
owners may encounter capacity and technological limitations if
they attempt to deliver digital media to large numbers of
end-users using in-house production capabilities and network
servers. Our solution is highly scalable, allowing us to process
a large number of simultaneous audio or video events and to
seamlessly add additional capacity, if necessary. We have
developed proprietary products and services based upon an
automated and distributed architecture of encoding, conversion
and media enhancement systems. We have one of the most extensive
signal ingress capacities in the industry allowing us to acquire
hundreds of simultaneous audio and video signals. Additionally,
we can handle a wide range of other traditional and legacy media
formats. The content is then encoded by hundreds of distributed
video/audio encoding servers. The content can be delivered back
to customers in raw digital formats on a variety of methods, or
hosted and served by our proprietary cell-based streaming
network architecture. Our facilitys design is modular and
scalable to accommodate growth and changes in technology.

Strategic relationships to facilitate
authorized digital media strategies.From our inception we have positioned our products and services
as the enabling infrastructure to support content owners in the
authorized distribution of digital media over the Internet and
new digital distribution platforms. At times, obtaining the
requisite copyright licenses can prove challenging to customers,
as they must often obtain copyright licenses from a variety of
rights holders. For example, these copyrights often address
differing activities related to the

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delivery of digital media, such as reproduction
and performance, which may require separate licensing
arrangements. In addition, these copyrights may be held by
different parties, such as publishers, artists and record
labels. We have developed relationships and signed content
licensing agreements with all five the major music companies,
Universal Music, Sony Music Group, Warner Music Group, EMI Group
and BMG Entertainment, and hundreds of independent record
labels, and we have developed working relationships with other
music companies.


Company Strategy

Our objective is to leverage our existing
investment in infrastructure and applications to grow revenues
and achieve profitability. We seek to achieve these objectives
through the following key strategies:

Expanding our direct and indirect sales
channels.We plan to expand our direct
sales force and indirect reseller and referral partnership
channel. The majority of these efforts will focus on our
enterprise communication divisions direct salesforce,
which targets large and medium-sized businesses in diverse
vertical markets, such as computer software, business services,
manufacturing and financial services. Our indirect sales
strategy includes entering into agreements with companies, such
as traditional communication service providers, to leverage
their established customer bases. These indirect channel
partners resell our services, provide referrals, or embed our
services in their products. We see a significant opportunity to
improve the revenue derived from these channels through
co-marketing, training and other channel management programs.

Lowering our cost of delivery and increasing
customer integration via automation and strategic relationships.We continue to focus on developing new
and enhancing existing proprietary solutions to enable us to
address customer needs more effectively and efficiently.
Currently we have research and development initiatives to
increase levels to automation of our internal systems as well as
customer interfaces. We are also investigating strategic
relationships with technology providers to accelerate this
process. We feel that if we are successful in these areas we may
be able to improve our customer integration, increasing sales
opportunities, and lower our cost of delivery, improving
profitability.

Developing and marketing an end-to-end suite
of products and services.We intend to
leverage our existing capabilities to support new products and
value-added services in existing and new markets. We will
continue to add or enhance the features and functions of our
application platform and services based on feature requests from
customers, competitive analysis and assessment of business
opportunities. By offering an end-to-end solution for customers,
we are able to satisfy wide-ranging client needs and, as a
result, cross-sell a variety of our services to our customers.
In addition, we provide a more compelling alternative to
in-house solutions.

Selectively pursuing strategic acquisitions to
enter new markets, expand our suite of services and product
offering, increase our customer base and strengthen our market
position.In 2000 we completed one
acquisition and 2001 we completed five acquisitions. We intend
to selectively pursue strategic acquisitions to enter new
markets, expand our suite of services and product offering,
increase our customer base and strengthen our market position.
In addition, we continuously look for components and
technologies to augment our solutions through partnering with
industry leaders outside of our core area of expertise.

Products and Services

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



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

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

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Our enhanced enterprise communication services
include highly scalable, live and on-demand audio and video
Webcasting services, supported by proprietary applications such
as synchronized streaming slide presentation capabilities. Using
our services, enterprises can offer small and large audiences
access to Webcasts of a variety of corporate events, such as
product launches, investor earnings calls, conferences and
distance learning seminars. The target customers for these
solutions include medium and large-sized enterprises across a
range of industry segments.

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

We combine three layers of rich media value chain
expertise  application services, hosting and
streaming services and encoding services  in multiple
ways to provide services to our customers. Services are priced
based on several criteria, including the extent and volume of
infrastructure usage, particularly of network and storage; the
means used to capture the content; the applications used; and
the extent of additional value-added services provided across
the entire value chain.

Application Services.We have built an application layer of
proprietary products to facilitate and improve the end user
experience, provide the client with reporting and management
tools, and allow the client to implement new business models or
expand current initiatives. These applications are deployed on
an application services provider, or ASP, basis whereby the
software runs on equipment managed and monitored by us. Our
customers have flexibility and options to choose their
individual level of customization or integration.

Our Webcasting applications provide customers
with sophisticated yet easy to use tools for producing, managing
and measuring live and on-demand webcasts. These applications
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our Active Conference Center application, which
	allows clients to manage multiple aspects of corporate events,
	from initial reservations and specification of details to
	reporting of audience registration;                                                                                                                                                 
|
| |  | Our Presenter Controlled Slides application which
	enables further control features to streaming presentations by
	allowing the presenter to control the flow of the streaming
	slide presentation during a webcast. Further, the application
	quickly indexes, synchronizes, and archives these webcasts for
	viewers that were unable to attend the event; and
|
| |  | Our Active Report Generator supports all of our
	webcasting products. This application is a web-based, real-time
	reporting system that provides instantaneous audience
	measurement. It gives content providers valuable and immediate
	information and statistics regarding their content streams.                                                            

We have additional proprietary applications that
support a variety of business models and customer strategies.
Our advertisement insertion solutions support dynamic content
insertion that enable digital media advertising and marketing
campaigns. Other applications we have developed include a
syndicated online radio streaming platform as well as a digital
download platform that includes rights management clearing.
These applications can enable customers to promote, manage,
monetize the digital media offerings.

Hosting and Streaming
Services.Our hosting services allow
content to be packaged and converted into a variety of streaming
media and digital download formats via our encoding services and
hosted in a central media repository.

We provide comprehensive webcasting solutions
that enable enterprises to broadcast audio, video, and visually
oriented communications over the Internet. Our proprietary suite
of webcast applications and services, coupled with our scalable
network and production infrastructure technologies provide a
simple, cost-effective

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way for corporations to communicate with large,
online groups. We provide our services to large and medium sized
enterprises as well as traditional media and broadcast companies.


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

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

Our web broadcasting capabilities allow clients
to significantly extend the reach of traditional conferencing
services or live events to enable one-to-many communications to
be broadcast conveniently and economically to the widest
possible audience. Companies are able to leverage the creation
of content over a mass medium, reduce communication costs,
maintain brand identity through a controlled user experience,
and in many instances, generate additional revenue streams from
the distribution of content to previously untapped audiences and
markets. In 2001 our Activate subsidiary webcast approximately
6,000 events.

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

Our catalog includes more than 3 million
songs from approximately 220,000 CDs. Formats supported include
Microsoft Windows Media and RealAudio formats at multiple bit
rates. In addition to hosting the music samples, our
subscription solution includes metadata associated with the
music samples. For example, this may include front cover art
scans of the music title from which the song has been captured.

In 2001, we served over 620 million song
samples to consumers through major online music retailers and
websites, such as America Online, BMG Direct,
barnesandnoble.com, CDNow and MSN. We offer the service
primarily under long-term contracts.

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

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

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as part of the overall encoding process. We also
provide project analysis, as well as consulting, integration and
custom application development.




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

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

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

Sales and Marketing

We sell our services through a combination of
direct and indirect sales, with all channels and regional
offices managed by a single sales organization. Our sales focus
is built on maintaining long-term relationships with clients,
and our reseller and referral partners.

Our Digital Media Services direct sales force
targets our services primarily to customers in a diverse range
of markets, such as media & entertainment, retail, computer
software, business services, financial services, pharmaceutical
and manufacturing. We currently have sales presence in Atlanta,
Dallas, Los Angeles, New York, San Francisco, Seattle and
Toronto. Sales employees are compensated with a salary and
commissions based upon business with existing and new clients.

Our indirect sales objective is to develop
alternative distribution channels for the sale of our services.
The efforts of our indirect sales group focus on partnering with
resellers, such as conferencing and communications providers, to
leverage their large and established customer bases. We private
label or co-brand our services for these partners depending on
their requirements. We also partner with companies to resell our
services through their Web sites, co-branded Web sites or to
include our services in their product offerings. These indirect
sales channels allow us to extend our reach to businesses of all
sizes. We offer our reseller partners our services at a discount
to our traditional retail pricing model and our referral
partners a percentage of revenue pursuant to terms of the
agreements.

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

As of March 19, 2002, we had
43 permanent employees in our sales and marketing
organization, substantially all of which were located in the
United States.

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Customers

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

In 2001 we served over 300 customers directly
including The Coca Cola Company, Microsoft, XM Satellite
Radio, CDNow, Amazon, America Online, Robertson Stephens,
Universal Music Group, barnesandnoble.com, the Metropolitan
Opera and the New York City Ballet. In 2001 The Coca-Cola
Company accounted for 17% of our revenues. In 2000 musicbank and
Microsoft accounted for 19% and 10% of our revenues,
respectively.

Content Licensing Agreements

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

Operations and Technology

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

Our media restoration services are offered from a
comprehensive magnetic tape restoration facility in New York,
which features rare and one-of-a-kind equipment to address a
wide range of audio or video formats, current or obsolete, that
require restoration and repair. Some examples of these media
formats include 35mm and 16mm film, 2 quad high band and
low band, 2 Helical, 1 Types A, B and C, Digital
Betacam, Betacam SP,VHS/ SVHS, 8mm/ Hi8, Betamax/ SuperBeta,
among many others.

Our digital media services and infrastructure are
robust and highly scalable, featuring significant capacity to
manage customer requirements and a flexible and extensible
platform to enable tailored solutions and serve a diverse range
of market opportunities.

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

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

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

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

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

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

Digital media storage and access.Our proprietary systems and technology
enable the scalable archiving, retrieval and processing of large
inventories of digital media. Digitized content is stored on our
high capacity storage array systems and accessed via our
proprietary, automated, web-based access tools to search,
provision and manage such content. Once captured and digitized
in uncompressed format, content can be stored on our advanced
digital media archive system for later uses.

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

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

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

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

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

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

We have invested in a network distribution
infrastructure built around a highly-scalable, highly-redundant,
cell-based network architecture. This approach
provides us with redundancy in the event of system failure,
scalability for future expansion, and allows us to optimize each
cell for the unique needs of

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each type of client. Depending on the streaming
format and the bit rate, we are able to currently stream
thousands of simultaneous outbound streams. We can expand our
capacity by adding additional servers within cells.


This network is backed by high-capacity, online
storage that uses mirroring and other techniques to provide a
high degree of redundancy and scalability. Our hosting and
distribution operation includes hundreds of streaming media
servers and supports load balancing and other network management
techniques that have been optimized for streaming. We can also
stream across networks of other providers, if we exceed our
capacity or if we are requested to do so.

Our operations and production personnel are
organized into functional teams which include project
management, quality control, logistics operations, data
measurement, audio capture and encoding, video capture and
encoding, and production systems engineering support. In
addition, we have a team that supports our network and hosting
services. As of March 19, 2002, we had 25 permanent
employees in engineering, network services and information
technology support and 71 permanent employees in our production
areas.

Research and Development

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

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

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

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



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

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

As of March 19, 2002, approximately
26 permanent employees were engaged in ongoing research and
development work for our services, solutions and applications.

Competition

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

Our primary competitors for our Webcasting
services are content distribution networks, such as Akamai and
divisions of Williams Communication and Cable & Wireless,
and Internet broadcasters, such as Yahoo!Broadcast. Each of
these competitors provides services similar to ours and each has
a well-established market presence. Certain companies focused on
other enhanced communication services such as web collaboration,
web conferencing and application demonstration, like WebEx and
Raindance, may in the future

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become more competitive to our services. In
addition, some of our current partners, telecom carriers,
teleconference companies, or other infrastructure companies
have, or in the future may choose to, enter our market. We
compete with providers of traditional communications
technologies such as teleconferencing and videoconferencing as
well as applications software and tools companies, such as
Centra Software, Lotus (SameTime), Microsoft (NetMeeting) and
Placeware.


For our other digital media services, there
several companies who are providing some level of outsourced
digital media services today. We compete with companies such as
Sonic Foundry, EncodeThis, Muze, All Music Guide, Liquid Audio,
RioPort, HiWire and Lightningcast that provide encoding
services, music samples services, music download services,
advertising insertion solutions and advertising sales. In
addition, well capitalized, diversified digital media technology
companies such as Microsoft and Real Networks may in the future
compete with us in any of these markets with their own services
or applications. In certain markets, such as music distribution,
the major recording labels have acquired and invested in digital
music service providers such as MP3.com (acquired by Vivendi
Universal), PressPlay and MusicNet and developed in-house
services which could compete with our digital music services.
Traditional radio broadcasters could also develop online music
and radio services which could compete with our solutions.

A significant source of competition includes our
potential customers who choose to invest in the resources and
equipment to digitally manage, encode and/or host and deliver
their media themselves on an in-house basis. In-house service is
expected to remain a significant competitor to our services,
although we believe that as digital media strategies expand and
the scale of infrastructure and applications require to support
the strategies increases, companies that currently manage these
processes internally will see a significant economic advantage
to outsourcing to a third-party expert.

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



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | service functionality, quality and performance;                         
|
| |  | ease of use, reliability, scalability and
	security of services;        
|
| |  | establishing a significant base of customers and
	distribution partners;
|
| |  | ability to introduce new services to the market
	in a timely manner;    
|
| |  | customer service and support; and                                       
|
| |  | pricing.                                                                

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

Proprietary Rights and Intellectual
Property

We rely primarily on a combination of copyrights,
trademarks, trade secret laws and contractual obligations with
employees and third parties to protect our proprietary rights.
We have one issued patent, and we have filed eight U.S. patent
applications and twelve international patent applications that
claim priority to six previously filed provisional applications.
Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our products and obtain
and use information that we regard as proprietary. In addition,
other parties may breach confidentiality agreements or other
protective contracts we have entered into and we may not be able
to enforce our rights in the event of these breaches.
Furthermore, we expect that

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we will increase our international operations in
the future and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws
of the United States.


The streaming media, digital media and software
industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent
infringement and the violation of other intellectual property
rights. As discussed above, at times obtaining the requisite
licenses can be difficult for customers, as they must obtain
copyright licenses from a variety of rights holders to grant
rights to distinct activities related to the delivery of digital
media, such as reproduction and performance, which require
separate licensing arrangements. In addition, these copyrights
may be held by different parties, such as publishers, artists
and record labels. The music industry in the United States also
is generally regarded as extremely litigious in nature compared
to other industries. As a result, in the future we may be
engaged in litigation with others in the music industry,
including those entities with whom we have ongoing content
license arrangements. Although we attempt to avoid infringing
known proprietary rights of third parties in our product
development efforts, we expect that we may be subject to legal
proceedings and claims for alleged infringement by us or our
licensees of third party proprietary rights, such as patents,
trademarks or copyrights, by us or our licensees from time to
time in the ordinary course of business. Any claims relating to
the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert
managements attention and resources or require us to enter
into royalty or license agreements which are not advantageous to
us. In addition, parties making these claims may be able to
obtain an injunction, which could prevent us from providing our
products or services in the United States or abroad. Any of
these results could harm our business. We may increasingly be
subject to infringement claims if the number of products and
competitors in our industry grow and the functionalities of
products overlap.

Government Regulation

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

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

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



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | limit the growth of the Internet;                                                             
|
| |  | create uncertainty in the marketplace that could
	reduce demand for our products and services;
|
| |  | increase our cost of doing business;                                                          

16



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| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | expose us to significant liabilities associated
	with content distributed or accessed through our products or
	services; or
|
| |  | lead to increased product and applications
	development costs, or otherwise harm our business.                             

Specifically with respect to one aspect of
copyright law, on October 28, 1998, the Digital Millennium
Copyright Act (or DMCA) was enacted. The DMCA
includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, depending on our
future business activities, we and our customers may be required
to pay licensing fees for digital sound recordings we deliver or
our customers provide on their web site and through
retransmissions of radio broadcasts and/or other audio content.
The DMCA does not specify the rate and terms of such licenses,
which will be determined either through voluntary inter-industry
negotiations or arbitration. Moreover, with respect to digital
publishing, sound recording and other music licenses not
directly covered by the DMCA, various parties interested in
distribution of digital music plan to engage in a proceeding
before a tribunal of the United States Copyright Office along
with the Recording Industry Association of America during 2001
to determine what, if any, licensee fees should be paid to
various rights holders.

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

Employees

As of March 19, 2002, we had a total of 192
permanent employees, of which 26 were in research and
development, 25 were in engineering, network services and
information technology support, 43 were in sales and
marketing, 71 were in production and 27 were in
general and administration. None of our employees are subject to
a collective bargaining agreement. We consider our relations
with our employees to be good.




Item
2     Properties

We are headquartered in Seattle, Washington where
we lease 62,200 square feet under a lease that expires on
August 31, 2005. In addition, we have three other Seattle,
Washington locations: a 46,755 square feet under a lease that
expires on May 31, 2005, a 6,000 square foot facility under
a lease that expires on February 28, 2002, and a 12,697
square foot space under a lease that expires November 15,
2004. We lease an additional facility in New York, New York of
approximately 12,200 square feet under a lease that expires
May 14, 2005. We also have a 4,050 square foot facility in
London, England under a lease that expires on December 21,
2003. Certain of the leased facilities are not currently
occupied as a result of the facilities consolidation that took
place throughout 2001 and was completed in March 2002.




Item 3     Legal
Proceedings

In connection with the acquisition of
DiscoverMusic.com, Inc. we assumed certain liabilities and
contingencies, including a patent infringement lawsuit filed on
March 31, 2000 by Intouch Group, Inc.
(InTouch), a California corporation, against
Amazon.com, Inc., a Delaware corporation, Liquid Audio, Inc., a
Delaware corporation, Listen.com, Inc., a California
corporation, Entertaindom LLC, a Delaware corporation, and
DiscoverMusic.com, Inc. in case No. C00-1156 pending before
the United States District Court for the Northern District of
California. The complaint sought that each of the
defendants use, offer for sale and/or sale of interactive
music previewing technology on their respective web sites
infringed U.S. patents #5,237,157 (the
157 Patent) and #5,963,916 (the
916 Patent) held by Intouch. By its suit,
Intouch sought an injunction preventing the defendants from
infringing the 157 Patent and 916 Patent, a
declaratory judgment that both the 157 Patent and the
916 Patent are valid, and an order requiring each defendant
to pay to InTouch up to three times the amount of damages
sustained by Intouch, attorneys fees and any pre-judgment
interest. DiscoverMusic.com, Inc. filed counterclaims against
Intouch, seeking declaratory judgment that the patents were not
infringed, invalid, and unenforceable. DiscoverMusic.com, Inc.
currently operates as Loudeye Sample Services, Inc., our
wholly-owned subsidiary.

17



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On February 6, 2002, we executed an
agreement with Intouch to settle all disputes. Pursuant to this
agreement, Intouch released all claims against Loudeye
Technologies, Loudeye Samples Services, Inc., and
DiscoverMusic.com, and granted a license under Intouchs
patents that extends to all customers of Loudeyes sample
services customers to the extent that the customers are
operating in connection with Loudeye. Through their attorneys,
Loudeye and Intouch have stipulated to a dismissal of their
claims in the action.

Between July 26, 2001 and August 30,
2001, several substantially similar class action complaints were
filed in the United States District Court for the Southern
District of New York against us and certain of our present and
former officers and directors, as well as against certain
underwriters who handled our March 15, 2000 initial public
offering of common stock. The various complaints were
purportedly filed on behalf of a class of persons who purchased
our common stock during the time period beginning on
March 15, 2000 and ending on December 6, 2000. The
complaints together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934, primarily based on
the allegation that there was undisclosed compensation received
by our underwriters in connection with the our initial public
offering and the allegation that the underwriters entered into
undisclosed arrangements with some investors that were designed
to distort and/or inflate the market price for our common stock
in the aftermarket following the initial public offering. The
allegations set forth in these complaints are substantially
similar to those made in class actions filed against over 300
other companies that issued securities within the past three
years. These actions have all been consolidated before the same
judge for pretrial purposes. No specific amount of damages has
been claimed. The individual defendants and we have demanded to
be indemnified by the underwriter defendants pursuant to the
underwriting agreement entered into at the time of the initial
public offering. We believe that the individual defendants and
we have meritorious defenses to the claims made in the foregoing
complaint and we intend to defend the actions vigorously.
However, there can be no assurance that we will be successful on
our defenses or in our assertion of indemnification, and an
adverse resolution of the lawsuit could have a material adverse
affect on our financial position and results of operation in the
period in which the lawsuit is resolved. We are not presently
able to reasonably estimate potential losses, if any, related to
the lawsuit, although we do not believe it will have a material
adverse impact on our financial condition or results of
operations.

On May 8, 2001, we filed an arbitration
demand with the American Arbitration Association
(AAA) against Valley Media, Inc.
(Valley). We alleged that Valley is liable for
substantial damages for material breaches of a Services
Agreement between the companies dated as of December 17,
1999, in which Valley made representations and warranties and
agreed to perform certain obligations to facilitate the creation
of a venture to create and market an Internet music clip
streaming service. We provided notice of its intent to terminate
that agreement by letter dated February 6, 2001, and that
termination was effective 30 days thereafter. We have also
alleged claims for misrepresentation, fraud, unjust enrichment
and promissory estoppel. Valley has filed an answer in which it
denies liability, and asserts counterclaims for breach of
contract, conversion, and declaratory relief. The arbitration
was stayed by Valleys filing of a petition in bankruptcy,
and the company intends to pursue a claim in the bankruptcy
proceedings.




Item
4     Submission of Matters to a
Vote of Security Holders

None.




PART II




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

Our common stock has been traded on the Nasdaq
National Market under the symbol LOUD since our
initial public offering in March 2000. There is currently only a
limited trading market for the shares of our common stock and
accordingly there is no assurance that any quantity of the
common stock could be sold at or near reported trading prices.

18



---



##### Table of Contents



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

|                                                 |  |      |        |     |  |   |        | 
|------------------------------------------------ |  | ---- | ------ | --- |  | - | ------ | 
|                                                 |  | High |        | Low
|                                                 |  |      |        |    
|Year Ended December 31, 2001                     |  |      |        |     |  |   |        | 
|First Quarter 2001                               |  | $    | 2.313  |     |  | $ | 0.750  | 
|Second Quarter 2001                              |  |      | 1.970  |     |  |   | 0.500  | 
|Third Quarter 2001                               |  |      | 1.460  |     |  |   | 0.480  | 
|Fourth Quarter 2001                              |  |      | 0.760  |     |  |   | 0.430  | 
|                                                
|Year Ended December 31, 2000                     |  |      |        |     |  |   |        | 
|First Quarter 2000 commencing on March 15,
	2000 |  | $    | 44.563 |     |  | $ | 31.875 | 
|Second Quarter 2000                              |  |      | 32.563 |     |  |   | 12.938 | 
|Third Quarter 2000                               |  |      | 19.125 |     |  |   | 6.813  | 
|Fourth Quarter 2000                              |  |      | 6.688  |     |  |   | 1.188  | 

As of March 12, 2002, there were
approximately 537 holders of record of our common stock. Most
shares of our common stock are held by brokers and other
institutions on behalf of shareholders.

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

Recent Sales of Unregistered
Securities

(a) Recent Sales of Unregistered
Securities

On July 10, 2001, pursuant to the June 2000
acquisition agreement for VidiPax, Inc., we issued
2,189,111 shares of Loudeye Common Stock to the sole
stockholder of VidiPax, Inc. and to two consultants in
connection with the transaction. The shares issued pursuant to
the acquisition were issued in reliance on the exemption from
registration provided by Section 4(2) under the Act. The
investors made certain representations to us as to investment
intent, their receipt of all information they considered
necessary or appropriate in deciding whether to purchase the
securities, their knowledge and experience in financial or
business matters such that they were capable of evaluating the
risks and merits of the investment in the securities, and their
ability to bear the economic risk of the investment in the
securities, that they possessed a sufficient level of financial
sophistication and that they received information about us. The
shares issued in the transactions were subject to restrictions
on transfer absent registration under the Securities Act, and no
offers to sell the securities were made by any form of general
solicitation or general advertisement.

On June 8, 2001, we issued 550,000 shares of
Loudeye Common Stock to eWave Networks, Inc., and provided other
consideration, in exchange for eWaves interest in the
capital stock of Addition Systems, Inc., a Delaware company, and
Monstar Labs Limited, a New Zealand company. In issuing these
securities, we relied on Section 4(2) of the Securities
Act, on the basis that the transaction did not involve a public
offering. No underwriter or placement agent was used. eWave made
certain representations to us as to its investment intent, its
receipt of all information it considered necessary or
appropriate in deciding whether to purchase the securities, its
knowledge and experience in financial or business matters such
that it was capable of evaluating the risks and merits of the
investment in the securities, and its ability to bear the
economic risk of the investment in the securities. The
securities issued in the transaction are subject to restrictions
on transfer absent registration under the Securities Act, and no
offers to sell the securities were made in the form of general
solicitation or general advertisement.




Item
6     Selected Consolidated
Financial Data

The selected financial data set forth below
should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our financial statements and the notes

19



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##### Table of Contents



thereto included elsewhere in this
Form 10-K. The statement of operations data set forth below
for the period from August, 1997 (inception) to
December 31, 2001 and the selected balance sheet data as of
December 31, 2001 have been derived from our audited
financial statements included elsewhere in this Form 10-K
or previously filed Form 10-Ks, which have been audited by
Arthur Andersen LLP, Independent Public Accountants. The
historical results are not necessarily indicative of results to
be expected for any future period. Amounts are presented in
thousands except for shares outstanding and per share amounts.


|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |    |    |  
|---------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ---------- | ------------ | ------ | ---- | ---------- | ------ | ------ | ---- | ---------- | ----- | ------ | - | --------- | --- | ----- | - | --- | -- | -- | -
|                                                                                         |                                              |                          |            | Period from 
|                                                                                         |                                              | Year Ended December 31,  |            | Aug. 12,1997
|                                                                                         |                                              |                          |            | to Dec. 31, 
|                                                                                         |                                              | 2001                     |            | 2000         |        | 1999 |            | 1998   |        | 1997
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |     
|REVENUES                                                                                 |                                              | $                        | 10,388     |              |        | $    | 11,537     |        |        | $    | 2,645      |       |        | $ | 286       |     |       | $ | 10  |   
|COST OF REVENUES                                                                         |                                              |                          | 12,737     |              |        |      | 12,388     |        |        |      | 2,870      |       |        |   | 504       |     |       |   | 17  |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|                                                                                         |                                              | Gross margin             |            |              | (2,349 | )    |            |        | (851   | )    |            |       | (225   | ) |           |     | (218  | ) |     |    | (7 | )
|OPERATING EXPENSES                                                                       |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|                                                                                         | Research and development                     |                          |            | 9,719        |        |      |            | 6,784  |        |      |            | 1,248 |        |   |           | 204 |       |   |     | 12 |   
|                                                                                         | Sales and marketing                          |                          |            | 9,409        |        |      |            | 14,621 |        |      |            | 3,982 |        |   |           | 588 |       |   |     | 39 |   
|                                                                                         | General and administrative                   |                          |            | 11,102       |        |      |            | 8,079  |        |      |            | 3,612 |        |   |           | 674 |       |   |     | 37 |   
|                                                                                         | Amortization of intangibles and other assets |                          |            | 8,173        |        |      |            | 7,693  |        |      |            | 302   |        |   |           |    |       |   |     |   |   
|                                                                                         | Stock-based compensation                     |                          |            | 359          |        |      |            | 5,409  |        |      |            | 1,554 |        |   |           |    |       |   |     |   |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|                                                                                         |                                              | Total operating expenses |            |              | 38,762 |      |            |        | 42,586 |      |            |       | 10,698 |   |           |     | 1,466 |   |     |    | 88 |  
|Special charges(1)                                                                       |                                              |                          | 37,261     |              |        |      | 947        |        |        |      |           |       |        |   |          |     |       |   |    |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|OPERATING LOSS                                                                           |                                              |                          | (78,372    | )            |        |      | (44,384    | )      |        |      | (10,923    | )     |        |   | (1,684    | )   |       |   | (95 | ) 
|Other, net                                                                               |                                              |                          | 1,976      |              |        |      | 4,860      |        |        |      | 21         |       |        |   | 34        |     |       |   |    |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|NET LOSS                                                                                 |                                              | $                        | (76,396    | )            |        | $    | (39,524    | )      |        | $    | (10,902    | )     |        | $ | (1,650    | )   |       | $ | (95 | ) 
|Beneficial conversion feature(2)                                                         |                                              |                          |           |              |        |      |           |        |        |      | (14,121    | )     |        |   |          |     |       |   |    |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|NET LOSS TO COMMON STOCKHOLDERS                                                          |                                              | $                        | (76,396    | )            |        | $    | (39,524    | )      |        | $    | (25,023    | )     |        | $ | (1,650    | )   |       | $ | (95 | ) 
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|Basic and diluted net loss per share                                                     |                                              | $                        | (1.84      | )            |        | $    | (1.33      | )      |        | $    | (4.62      | )     |        | $ | (0.41     | )   |       |   | n/a |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|Weighted average shares
	outstanding  basic and diluted net loss per
	share(3)          |                                              |                          | 41,429,104 |              |        |      | 29,773,886 |        |        |      | 5,410,507  |       |        |   | 4,039,444 |     |       |   | n/a |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|Basic and diluted pro forma net loss per share                                           |                                              |                          |            |              |        | $    | (1.16      | )      |        | $    | (1.50      | )     |        | $ | (0.17     | )   |       |   | n/a |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   
|Weighted average shares outstanding 
	basic and diluted pro forma net loss per share(3) |                                              |                          |            |              |        |      | 34,103,551 |        |        |      | 16,659,800 |       |        |   | 9,585,049 |     |       |   | n/a |   
|                                                                                         |                                              |                          |            |              |        |      |            |        |        |      |            |       |        |   |           |     |       |   |     |   

20



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



---

(1) See Note 4 of Notes to Consolidated
Financial Statements



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | See Note 11 of Notes to Consolidated
	Financial Statements                                                                                                                                       
|   
|(3) | See Note 5 of Notes to Consolidated
	Financial Statements for an explanation of the determination of
	the number of weighted average shares used to compute pro forma
	net loss per share amounts




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

Overview

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

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

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

Our enhanced enterprise communication services
include highly scalable, live and on-demand audio
and video Webcasting services, supported by proprietary
applications such as synchronized streaming slide presentation
capabilities. Using our services, enterprises can offer small
and large audiences access to Webcasts of a variety of corporate
events, such as product launches, investor earnings calls,
conferences and distance learning seminars. The target customers
for these solutions include medium and large-sized enterprises
across a range of industry segments. We recognize revenues as
services are rendered.

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

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

We sell our music samples service and in 2000,
our other digital media applications, in application service
provider arrangements. We are required to host the applications
and the customer does not have the ability to have the
application hosted by another entity without penalty to the
customer. Billings are made based upon

21



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##### Table of Contents



volumes of data delivered or minutes of content
streamed, and revenue is recognized as the services are
delivered.


Media Restoration Services.Our Media Restoration Services
solutions address the need to restore and migrate legacy media
archives to current media formats. The target customers for
these services include many of the customers for our Digital
Media Services as well as large legacy media archives,
specifically including those found at major libraries,
universities and enterprises. We recognize revenues as services
are rendered and we have no continuing involvement in the goods
and services delivered, which generally is the date the finished
media is shipped to the customer.

One of our key strategies is to pursue
selectively strategic acquisitions to enter new markets, expand
our suite of services and product offering, increase our
customer base and strengthen our market position. In 2000 we
completed one acquisition and 2001 we completed five
acquisitions.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Vidipax Acquisition.In June 2000 we acquired Vidipax, a
	New York company which performs audio and video media
	restoration and migration services. The acquisition price was
	$1.9 million in cash, 68,284 shares of common stock and an
	additional contingent payment in July 2001 of 2,189,111 shares.                                                                                                          
|
| |  | DiscoverMusic Acquisition.In March 2001, we acquired
	DiscoverMusic, a Seattle company which was the largest provider
	of music samples on the Internet. The acquisition price was
	$4.6 million in cash including acquisition costs and
	accrued liabilities, net of DiscoverMusics cash, and
	3,677,013 shares of common stock.                                                                                  
|
| |  | Online Radio Acquisitions.In March and June 2001, we acquired
	the assets and technology of two online radio companies, OnAir
	Streaming Networks and theDial. The acquisition price was
	$2.2 million in cash and 645,096 shares of common stock.                                                                                                                                                                  
|
| |  | Addition Systems Acquisition.In June 2001 we acquired Addition
	Systems, Inc., a Los Angeles company which develops proprietary
	content insertion technology. The acquisition price was
	$1.5 million in cash plus acquisition costs and 550,000
	shares of common stock.                                                                                                                                          
|
| |  | Activate Acquisition.In September 2001 we acquired
	Activate.net Corporation, a Seattle company which provides live
	and on-demand webcasting services for a variety of enhanced
	enterprise communication needs. The acquisition price was
	$1.0 million in cash, $2.4 million of assumed
	liabilities and a deferred payment of $3.0 million in stock
	or cash one year from the initial close of the transaction.

In 2001 we implemented operational consolidation
and cost saving initiatives, which included the integration and
realignment processes related to our acquisition activity. As a
result of these initiatives, we consolidated our production
operations from three separate facilities to the one facility
acquired in the Activate transaction, and implemented a
reduction in personnel. Details related to these initiatives are
described in more detail below under Special Charges. We believe
that as a result of these actions in 2001 and additional
operational and management realignment actions taken in March
2002, gross margins and operating margins should improve.

We estimate that a significant majority of our
cost of sales, general and administrative expenses and research
and development expenses are fixed or semi-fixed. Sales
commissions are variable depending upon orders booked and when
revenue is recognized. We have sustained losses on a quarterly
and annual basis since inception and we expect to sustain losses
for the foreseeable future as we invest in and grow our
operations. As of December 31, 2001, we had an accumulated
deficit of $143 million. Operating losses resulted from
significant costs incurred in the development and sale of our
products and services as well as significant non-cash charges
related to stock-based compensation and amortization of
intangibles and other assets. Special charges related to
property and equipment impairments, intangibles impairments and
facilities shut-downs have been a material component of
operating losses as well. We expect our operating expenses to
decrease on an annual basis as we execute our business plan.

We anticipate that operating expenses, as well as
planned capital expenditures, debt repayments and any
acquisitions, will constitute a material use of our cash
resources in 2002. We expect to incur additional losses

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and continued negative cash flow from operations
in 2002. We cannot assure you that we will achieve or sustain
profitability or positive operating cash flow.


Our limited operating history makes the
prediction of future operating results difficult. In view of our
limited operating history and the early and rapidly evolving
nature of our business, we believe that interim and annual
period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as an indication of
future performance. Our business prospects must be considered in
light of the risks and uncertainties often encountered by
early-stage companies in the Internet-related products and
services market. We may not be successful in addressing these
risks and uncertainties. We have experienced significant
percentage growth in revenues in certain previous periods;
however, we do not believe that prior growth rates or possibly
even sequential quarterly growth are sustainable or indicative
of future growth rates (see Forward-Looking
Statements). In some future quarter our operating results
may fall below our expectations as well as those of securities
analysts and investors. In this event, the trading price of our
common stock may fall significantly.

Results of
Operations

Year
Ended December 31, 2001 compared to 2000

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

Digital media services revenue decreased to
$7.6 million in 2001 from $10.5 million in 2000 due to
fewer large encoding projects in 2001, and the decision in early
2001 to discontinue our digital media consulting services. This
decrease was partially offset by the inclusion of music samples
revenues from the acquisition of DiscoverMusic in March 2001 and
enterprise webcasting revenues from the acquisition of Activate
in September 2001. Music samples revenues totaled
$2.8 million in 2001. We had no such services available in
2000, and accordingly had no such revenues. We believe that
revenues derived from our music samples service will not
fluctuate significantly in 2002. Enterprise webcasting services
contributed $1.6 million in revenues since our acquisition
of Activate on September 26, 2001. We believe the demand
for such services will grow significantly in 2002, contributing
to higher revenues on a consolidated basis and we expect that
webcasting revenues will comprise a significant percentage of
our consolidated revenues in 2002. In 2000 we generated revenues
from consulting services and the sale or license of custom
applications and other totaling $2.6 million. These
revenues related to product and service offerings that we
decided to no longer support after our operational
restructurings. In 2001 we generated approximately $250,000 from
such offerings before their discontinuation.

Media restoration revenues totaled
$2.7 million in 2001, as compared to $850,000 in 2000. This
increase was the result of the inclusion of a full year of
results in 2001 as compared to six months in 2000, and increased
orders from customers, notably Coca-Cola, which provided
approximately 17% of consolidated revenues in 2001. We expect
revenues generated from VidiPax to increase in 2002.
Additionally, we believe that as a percentage of consolidated
revenues, VidiPax will continue to be significant, although we
expect that percentage to decline.

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

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expense in 2001 from significant asset
acquisitions in 2000. These increases were partially offset by
the inclusion of higher margin product offerings acquired from
DiscoverMusic and VidiPax. We believe that margins should
improve as a result of the consolidation of our production
operations from three separate facilities to the one facility
acquired in the Activate transaction and the related reduction
in personnel. This integration should result in lower overhead
costs in one shared facility. We expect margins on traditional
service offerings to improve as product mix changes towards
enterprise webcasting, subscription services and offerings based
upon our archival platform.


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

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

We believe that continued investment in research
and development is critical to attaining our strategic
objectives. However, due to our operational restructuring and
focus on digital audio opportunities and enterprise webcasting
services, development headcount was significantly reduced and,
as a result, we expect research and development expenses to
decline in 2002. We had no media restoration services costs
classified as research and development, and accordingly this had
no impact on the consolidated results.

Sales and Marketing Expenses.Sales and marketing expenses totaled
$9.4 million and $14.6 million in 2001 and 2000,
respectively. Sales and marketing expenses consist primarily of
salaries, commissions, co-marketing expenses, trade show
expenses, product branding costs, advertising and cost of
marketing collateral. The significant decrease in sales and
marketing expenses was primarily due to the decreased personnel
subsequent to our corporate restructuring and an overall
reduction in marketing spending.

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

General and Administrative
Expenses.General and administrative
expenses totaled $11.1 million and $8.1 million in
2001 and 2000, respectively. The increase was primarily due to
the higher average headcount in 2001 compared to 2000, an
increase in unallocated facilities charges in 2001, contractual
bonuses paid to employees acquired in the Vidipax transaction
and increased legal expenses related to ongoing corporate
initiatives. General and administrative expenses also increased
as a result of the acquisition of Activate. We believe that
general and administrative expenses will decrease in future
periods as a result of our restructuring.

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

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

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

Stock-Based Compensation.Stock-based compensation totaled
$359,000 and $5.4 million in 2001 and 2000, respectively.
Stock-based compensation in 2001 was insignificant. Stock-based
compensation in 2000 consisted of $4.5 million in
amortization of deferred stock compensation, related to stock
options previously granted below deemed fair market value,
$1.3 million in compensation expense related to the
variable accounting treatment and the subsequent termination in
the third quarter of 2000 of our consultant options, a charge of
$400,000 related to the acceleration of options and $820,000 in
credits related to the reversal of previously amortized deferred
stock compensation due to option cancellations. In the fourth
quarter of 2000, we accelerated the vesting of approximately
660,000 options that resulted in a charge of approximately
$400,000 to stock-based compensation. Amortization of deferred
stock compensation will continue to decrease as the remaining
amortization period expires. As of December 31, 2001,
approximately $883,000 remains in unamortized deferred stock
compensation, of which approximately $600,000 is expected to be
amortized in 2002. There was no stock-based compensation
recorded at VidiPax in 2001 or 2000.

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

Special Charges.In
2001, we undertook a series of operational restructurings and
facilities consolidations. We assessed each product and service
offering and the costs related to each in making the
determination to cease providing, or otherwise change the level
of support we provide for these offerings. We determined that it
was not feasible to continue to provide or support digital media
consulting services, certain digital media applications and the
Alive e-show platform in 2001. Additionally, the decision was
made to decrease the level of emphasis placed on video encoding
activities. This decision was made as a response to the
decreased demand for such services, which started in the third
quarter of 2000 and continued into the first quarter of 2001, at
which time we determined that no further resources would be
provided to support video encoding in our Seattle facility. In
the second quarter of 2001 we terminated approximately 45% of
our workforce. That reduction in force created excess
facilities, resulting in the development of facilities
consolidation plans. These plans of consolidation generated
additional special charges for rent accruals as well as tenant
improvement impairments throughout the remainder of 2001. The
continued economic conditions surrounding our digital media
services led to other impairment charges related to the
valuation of our assets acquired from DiscoverMusic, in the
third quarter of 2001. In the fourth quarter of 2001, we
performed an analysis of all long-lived assets in accordance
with our accounting policies, and determined that certain of
these assets were impaired. Impairment charges were then
recorded as appropriate. As a result of these actions and other

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economic conditions, we recorded special charges
of $37.3 million in 2001. These charges are summarized in
the table following:


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

Intangible and other
impairments.We recorded impairments
of $21.4 million in 2001 related to intangibles and other
long-term assets. There were no such charges recorded in 2000.
We decided in 2001 to focus on areas of business that we
believed had a near-term opportunity to drive increases in
revenue. This decision led us to make the acquisitions described
in the business overview.

This refocusing of our business led to the
decision to cease supporting certain digital media applications
and the Alive technology platform in the first quarter of 2001.
The goodwill previously recognized associated with the Alive.com
acquisition and certain other digital applications were impaired
and, as each of these assets had no determinable cash flows
associated with them, and no discernible fair market value, the
remaining unamortized balances, totaling $10.6 million were
written off. In the third and fourth quarters of 2001, we
reassessed the remaining Alive intangibles and recorded
additional impairment charges of $180,000 and $117,000,
respectively. We had previously capitalized the cost of warrants
issued to a strategic partner. In the first quarter of 2001, we
terminated this relationship, and accordingly, recorded a charge
of $708,000 related to the unamortized portion of the warrants.

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

Accordingly, in the fourth quarter of 2001, we
recorded a charge totaling $5.0 million related to
intangible assets acquired from DiscoverMusic in March 2001.
Increased competition, including pricing pressures and the
continued economic downturn caused us to revise our initial
projections for the business and subsequently write-down the
value originally assigned to the acquired customer list and
other acquired intangibles. While we currently project that the
music samples application will generate positive cash flow, the
projected cash flows do not fully recover the current carrying
value of the assets in the near term, resulting in the
impairment. The assets were written down to estimated current
cost to replace, which the Company believes is a reliable
estimate of the fair market value.

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

We also recorded a charge totaling
$1.2 million in the fourth quarter of 2001 related to the
impairment of VidiPax goodwill. VidiPax currently generates net
cash flows from operations, however, the current projected
undiscounted cash flows did not fully support the current
carrying value of the related goodwill. We estimated

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the fair market value of VidiPaxs
long-lived assets and charged the $1.2 million difference
between the current carrying value and the estimated fair market
value to special charges.


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

As we had previously disclosed, our decision in
early 2001 to focus on the audio business led to a further
review of our video assets. We performed a review of the current
market prices for similar used equipment and adjusted the
remaining value of our video assets down to the estimated net
realizable value. We sold a significant amount of these assets
at auction during the quarter ended June 30, 2001, at
amounts approximately equal to their adjusted values. Prior to
the sale, we had ceased depreciation until such time as they
were actually disposed. We also recorded third quarter of 2001
charges of $607,000 related to assets acquired from
DiscoverMusic that were abandoned due to obsolescence or
otherwise unusable in our restructured business. In conjunction
with the consolidated forecast for 2002 and beyond, it became
apparent that the projected undiscounted cash flows were not
enough to fully recover the carrying value of our remaining
property and equipment (excluding those recently acquired from
Activate). We then performed an analysis of all remaining
property and equipment that had not been recently purchased, to
determine the current fair value of the assets, in other than a
forced liquidation sale. This analysis, which was substantially
generated from valuations provided by used equipment resellers
led to charges of $1.3 million, $373,000, $264,000 and
$3.2 million in the first through fourth quarters of 2001,
respectively. We do not currently expect to record any future
fixed asset impairments, as substantially all property and
equipment of the Company are now carried at current fair market
value. We expect annual depreciation expense to decrease by
approximately $2.4 million as a result of these write-downs

Facilities related charges and
other.As a result of acquisition
activity, the de-emphasis of our video encoding operations and
the reductions in force that led to excess facilities, our board
of directors approved plans of facilities consolidation during
the course of 2001. These plans resulted in the closure of the
Santa Monica and London offices in early 2001 and the migration
from four facilities in Seattle into one facility in late 2001
and early 2002. Accordingly, all unamortized leasehold
improvements related to the vacated facilities, totaling
$2.1 million, were charged to special charges in 2001. We
also have accrued for the rental payments we believe will be
paid on these abandoned facilities while we seek a suitable
sublessor or negotiate a termination of the lease. Related rent
charges of $3.6 million were recorded in 2001, including
$2.3 million in the fourth quarter of 2001, reflecting
current local real-estate market conditions. As of
December 31, 2001, we have accrued $2.9 million in
accrued liabilities related to estimated future rental payments.
Other charges of approximately $416,000 have been recorded
related to outplacement services, impaired investments and
other. We believe that the current reserve on all facilities is
adequate to cover rents for the period of time until they are
sublet or we negotiate an effective termination. We therefore do
not foresee additional special charges related to facilities
closures.

Employee Severance.We have paid severance costs of $3.2 million in 2001
related to the termination of a significant number of employees.
On a quarterly basis these amounts were $682,000,
$1.5 million, $104,000 and $854,000 in the first through
fourth quarters of 2001, respectively. We announced a 12%
reduction in force on March 8, 2002 and currently expect
compensation costs savings to total approximately
$2.1 million in the remainder of 2002. The severance costs
associated with that reduction in force total approximately
$1.0 million and will be recorded in the first quarter of
2002.

We expect annual amortization expense in 2002 to
decrease by approximately $11.5 million as a result of the
impairment charges recorded in 2001.

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Interest Income.Interest income representing earnings
on our cash, cash equivalents and short-term investments totaled
$3.2 million and $5.8 million in 2001 and 2000,
respectively. The decreased income was due primarily to our
lower average cash and investment balances in 2001 in addition
to lower interest rates. We expect that our interest income will
decrease in the future as our cash and investment balances
decrease to fund our operating, investing and financing
activities.

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

Year Ended
December 31, 2000 compared to 1999

Revenues.Revenues
totaled $11.5 million and $2.6 million for 2000 and
1999, respectively. The increase was due primarily to
significant large-scale orders from our digital media audio
customers, the benefit of our previously announced acquisition
of VidiPax, revenues related to our consulting services group,
the initial sales of certain digital media application, and
certain contractual revenues associated with forfeited deposits
and contractually guaranteed minimum revenues, and the
recognition of deferred revenue upon satisfaction of certain
terms or the removal of our continuing obligation under such
contracts.

Media restoration revenues generated by our
VidiPax subsidiary totaled $850,000 in revenues in 2000, as
compared to none in 1999. This increase was the result of
acquisition of VidiPax in June 2000.

We earned approximately $3.9 million in
revenue from the performance of the four largest audio digital
media services projects in 2000, as compared with approximately
$400,000 for the four largest such projects in 1999. The
increase in large audio projects was primarily driven by trends
driving the demand for online music, the rapid expansion of
companies and business models focused on addressing that demand,
as well as the build-out of our capacity in late 1999 and early
2000 to be able to handle consumer volumes. In addition, our
consulting services contributed to the increase in revenues,
substantially all of which occurred in the second and third
quarters of 2000. The decreasing consulting services revenue
trend in late 2000 was directly related to the slowing of the
development of the market for digital video media offerings of
our customers. Revenues included sales or licenses totaling
$355,000 of certain digital media applications during 2000. We
had no software applications ready for sale in 1999, and
accordingly had no revenues. Other application-related
contractual revenues totaling approximately $650,000 were
recognized in 2000 when contractual obligations and any
uncertainties related to performance were resolved. Such
arrangements have revenue guarantees based upon either our
performance or the end of the particular contractual period.

Cost of Revenues.Cost of revenues increased to
$12.4 million in 2000 from $2.9 million in 1999.
Stock-based compensation charges of $456,000 and $202,000 for
the years ended December 31, 2000 and 1999, respectively
were attributable to employees included in cost of revenues and
are presented in the separate operating expense line item within
the statements of operations. Cost of revenues as a percent of
revenues remained relatively constant from year to year. This
consistent margin was primarily due to the significant increase
in the amount of fixed expenses within cost of revenues. The
increase in depreciation and amortization expense was consistent
with increased capital expenditures, which totaled
$15.8 million in 2000. The increase in depreciation and
amortization expense was significantly offset by the lower costs
associated with higher margin services, contracts and
applications, as well as increased efficiencies and utilization
of employees and facilities. Media restoration cost of sales
totaled $376,000 in 2000 as a result of our acquisition of
VidiPax in June 2000.

Operating Expenses.Total operating expenses were
$42.6 million and $10.7 million in the years ended
December 31, 2000 and 1999, respectively. Without the
effect of $5.4 million of stock-based compensation charges
and $7.7 million in amortization of intangible and other
long-term assets, operating expenses for the year ended
December 31, 2000 would have been $29.5 million, an
increase of $20.7 million over the comparable amount in the
same period in 1999.

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Research and Development Expenses.Research and development expenses
totaled $6.8 million and $1.2 million in the years
ended December 31, 2000 and 1999, respectively. Costs of
developing our music sampling service, the digital media
production system and certain other digital media applications
for sale or license to third parties and continued work on
enhancing our proprietary automated encoding processes comprised
a significant portion of research and development expenses.
Stock-based compensation charges of approximately $283,000 and
$126,000 for the years ended December 31, 2000 and 1999,
respectively, are attributable to employees categorized within
research and development and are presented in the separate
operating expense line item in the statements of operations.

As of December 31, 2000, we had capitalized
approximately $1.3 million in software development costs.
Through December 31, 2000, $119,000 of these capitalized
amounts had been amortized into expense. All other research and
development costs had been expensed as incurred.

Sales and Marketing Expenses.Sales and marketing expenses totaled
$14.6 million and $4.0 million in the years ended
December 31, 2000 and 1999, respectively. The increase in
sales and marketing expenses was primarily due to an increase in
the direct sales force in 2000, commissions paid on the
increased sales over the same period in 1999, marketing related
to the launch of our music sampling service and certain digital
media applications, expanded advertising and trade-show related
expenses as well as costs associated with negotiating rights
agreements with recording companies. Stock-based compensation
charges of approximately $749,000 and $333,000 for the years
ended December 31, 2000 and 1999, respectively, were
attributable to employees categorized within sales and marketing
and are presented in the separate operating expense line item in
the statements of operations.

General and Administrative
Expenses.General and administrative expenses
totaled $8.1 million and $3.6 million in the years
ended December 31, 2000 and 1999, respectively. The
increase was primarily due to new facilities opened during late
1999 and the first quarter of 2000 and the significant increase
in employees in the finance, information technology, legal,
investor relations and executive areas required to support a
larger organization, and increased public company reporting
obligations. Stock-based compensation charges totaling
$3.9 million and $893,000 for the years ended
December 31, 2000 and 1999, respectively, are attributable
to employees categorized within general and administrative and
are presented in the separate operating expense line item in the
statements of operations.

Amortization of Intangibles and Other
Assets.Amortization of intangibles and other
assets totaled $7.7 million and $302,000 in the years ended
December 31, 2000 and 1999, respectively, and includes
amortization of the goodwill and identified intangible assets
related to past acquisitions, amortization related to the fair
value of warrants granted to certain partners and the discount
on the sale of common stock to Akamai Technologies, Inc. in
early 2000. The increase was primarily due to the timing of the
Alive.com acquisition in December 1999 and VidiPax in June 2000.

Stock-Based
Compensation.Stock-based compensation totaled
$5.4 million and $1.6 million in the years ended
December 31, 2000 and 1999, respectively, and consisted of
$4.5 million in amortization of deferred stock
compensation, through December 31, 2000, related to stock
options previously granted below deemed fair market value,
$1.3 million in compensation expense related to the
variable accounting treatment and the subsequent termination in
the third quarter of 2000 of our consultant options, a charge of
$400,000 related to the acceleration of options and $820,000 in
credits related to the reversal of previously amortized deferred
stock compensation due to option cancellations. In the fourth
quarter of 2000, we accelerated the vesting of approximately
660,000 options that resulted in a charge of approximately
$400,000 to stock-based compensation. There was
$1.6 million in stock-based compensation charges during the
year ended December 31, 1999, composed of $982,000 in
amortization of deferred stock compensation and $572,000 of
compensation expense related to marking certain consultant
options to fair value.

Special Charges.In
January 2001, we announced a cost-savings initiative that
resulted in a $947,000 special charge being incurred in 2000.
Consistent with the overall market trends, we experienced
decreasing demand for video services. Accordingly, in December
2000 our board of directors approved a plan to close our Santa
Monica, California facility and reduce video production that
resulted in an impairment in the value of our video encoding
equipment as well as existing tenant improvements at our Santa
Monica facility which was

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closed in the first quarter of 2001. This
combined non-cash impairment charge of $637,000 was included as
a component of operating loss in the special charge line item
within the financial statements. The fourth quarter of 2000
charge also included $300,000 related to employee termination
payments of which approximately $200,000 were paid in the first
quarter of 2001. The remaining amounts of the 2000 employee
termination costs were paid in cash throughout 2001.


Interest Income.Interest income, representing earnings
on our cash, cash equivalents and short-term investments,
totaled $5.8 million and $204,000 in the years ended
December 31, 2000 and 1999, respectively. The increased
income was due primarily to interest earned on our significantly
higher cash and investment balances in 2000.

Interest Expense.Interest expense consists of interest
expense related to our debt instruments as well as amortization
of financing charges related to our debt instruments. This
totaled $907,000 and $183,000 in the years ended
December 31, 2000 and 1999, respectively. The increase was
due primarily to interest on increased levels of borrowings
incurred to finance property and equipment expenditures.

Liquidity and Capital Resources

As of December 31, 2001, we had
approximately $60.9 million of cash, cash equivalents and
short-term investments. A portion of these funds is held in an
investment account that serves as collateral for our credit
facility.

Net cash used in operating activities was
$26.3 million and $25.4 million in 2001 and 2000,
respectively. For 2001, cash used in operating activities
resulted primarily from a net loss of $76.4 million;
partially offset by non-cash charges totaling $45.5 million
related to depreciation and amortization, the non-cash
components of the special charges and stock- based compensation.
Additional impacts on the cash flows from operations related to
a decrease of $2.9 million in accounts receivable, an
increase in accrued compensation, benefits and other expenses of
$2.6 million and a decrease of approximately
$1.2 million in accounts payable. All changes in operating
assets and liabilities are net of amounts acquired in purchases
of businesses. Cash used in operating activities in 2000 was due
primarily to a net loss of $39.5 million, a decrease in
accounts payable of $3.8 million, an increase in accounts
receivable of $2.1 million, partially offset by an increase
in accrued compensation, benefits and other expenses of
$1.8 million and non-cash stock-based compensation,
depreciation and amortization charges totaling
$18.6 million.

Net cash provided by investing activities was
$7.4 million in 2001, and net cash used in investing
activities was $61.6 million in 2000. For 2001, cash
provided by investing activities was primarily related to the
net sales of short-term investments of $19.7 million,
partially offset by purchases of property and equipment of
$2.7 million and cash paid for the transactions that closed
in 2001 of $9.6 million. Cash used in investing activities
in 2000 was primarily related to purchases of investments,
property and equipment; cash paid for acquisition of businesses
and capitalized software costs.

Net cash provided by financing activities was
$4.4 million and $89.4 million in 2001 and 2000,
respectively. The cash provided by financing activities in 2001
primarily resulted from the funds received from our new credit
facility of $19.0 million, offset by principal payments of
our long-term debt and capital lease obligations of
$11.8 million. We repurchased 4.0 million shares from
our founder for $2.0 million and also made a secured loan
of $1.0 million to him in 2001. The details of these
arrangements are provided in the footnotes to financial
statements in Item 8. Net cash provided by financing
activities in 2000 primarily resulted from the net proceeds of
our initial public offering, the concurrent sale of common
shares to a strategic investor, and the underwriters
exercise of their over-allotment option.

As of December 31, 2001, our principal
commitments consisted of obligations outstanding under operating
leases, capital leases and credit facilities with our banks. On
August 22, 2001, we entered into a credit agreement with a
bank providing for a revolving credit facility and letters of
credit aggregating up to $15.0 million to be used for
working capital and general corporate needs, and to refinance
existing long-term debt. On October 25, 2001, the Credit
Agreement was amended to increase the principal sum to
$19.0 million. Obligations under the Credit Agreement are
collateralized by a security interest in an investment account
that

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must hold short-term investments and cash
equivalents with a value of at least $30.0 million. The
revolving facility requires monthly payments of interest only
until maturity on July 31, 2003. On July 31, 2002, we
have an option to extend the maturity date to July 31,
2004, provided that we are not in default at that time. At
December 31, 2001, $19.0 million was outstanding under
the revolving facility. Approximately $8.0 million of the
proceeds were utilized to pay off an existing line of credit and
term loan facility with another bank.


Loans under the revolving facility bear interest,
at our option, at the banks prime rate, or the London
Interbank Offered Rate (LIBOR) plus 100 basis
points. Our interest rate on the outstanding principal balance
was 2.93% in 2001. The interest rates will be adjusted after the
LIBOR term to reflect the LIBOR rate in effect at that time.

We have multiple other credit facilities and
leasing arrangements that, in general, are not prepayable
without penalty. Total amounts outstanding under these
arrangements are $1.9 million as of December 31, 2001.
The interest rates on these instruments range from 4.75% to
9.65%. The instruments have various maturity rates through
November 2005. Letters of credit of approximately $653,000 back
certain of these notes and capital lease obligations.

On March 8, 2002, we announced a realignment
of management and operations following the completion of the
Activate consolidation. This approximately 12% reduction in
force is expected to result in estimated total savings of
$2.7 million annually and cost an additional $750,000 to
$1.0 million in related severance and outplacement services.

Since our inception, our operating expenses have
significantly increased in order to support our growth. We
currently anticipate that such expenses will continue to be a
material use of our cash resources. We expect that the following
items may be a significant use of our capital resources in 2002:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Capital expenditures, excluding acquisitions, are
	expected to total approximately $1.7 million in the
	remainder of calendar year 2002 and will relate primarily to the
	facilities consolidation and normal operating asset replacements                         
|
| |  | Acquisition consideration resulting from the
	Activate.net acquisition in September 2001, totaling
	$3.0 million is due in September 2002. This can be settled
	in a combination of stock and cash (see note 8 to the financial
	statements).                      
|
| |  | Additional commitments are outstanding under the
	existing facilities leases that have previously been expensed by
	us in the special charges. We expect to pay approximately
	$1.7 million in 2002 in rental charges for the facilities
	that we no longer occupy.
|
| |  | Under our loan agreement with Martin Tobias, we
	extended $350,000 in loans during the first quarter of 2002, and
	may extend up to an additional $650,000 in 2002.                                                                                                

We believe that our existing cash, cash
equivalents, and short-term investments will be sufficient to
fund our operations and meet our working capital and capital
expenditure requirements during 2002. Thereafter, if we cannot
fund operating and other expenses, working capital and capital
expenditure requirements from our operations, we may find it
necessary to obtain additional equity or debt financing, sell
assets or reduce spending plans. In the event additional equity
or debt financing is required, we may not be able to raise it on
acceptable terms, or at all.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 Business
Combinations and SFAS No. 142 Goodwill and
Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be
evaluated against the new criteria and may result in certain
intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. The Company
believes that the implementation of SFAS No. 141 and will
require reclassification of approximately $200,000 of
intangibles with indefinite lives into goodwill and there will
be no reclassification

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from goodwill into identified intangibles. SFAS
No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a
non-amortization approach, goodwill and certain intangibles will
not be amortized into results of operations, but instead will be
reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its estimated fair
value. The provisions of each statement that apply to goodwill
and intangible assets acquired prior to June 30, 2001 will
be adopted by the Company on January 1, 2002. The adoption
of SFAS No. 142 will result in the Companys
discontinuation of amortization of its goodwill; however, the
Company will be required to test its goodwill for impairment
under the new standard beginning in the first quarter of 2002,
which could have an adverse effect on the Companys future
results of operations if an impairment occurs. The Company
currently has net goodwill of approximately $1.3 million at
December 31, 2001. The Company expects the impact of
implementation of these two standards to have a positive net
future impact resulting from the decrease in amortization by
approximately $1.0 million in 2002.


In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective for the Company on
January 1, 2002. This Statement supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and
other related accounting guidance. The Company believes this
will have no impact.

Critical Accounting Policies

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

Long-lived assets.Management periodically evaluates the
recoverability of its long-lived assets in accordance with SFAS
No. 121, as amended by SFAS No. 144. When doing so,
management is required evaluate the recoverability of an
assets (or group of assets) carrying value through
estimates of undiscounted future cash flows. If the asset or
asset is deemed impaired, the assets are written down to
estimated fair value. There is a risk that projected cash flows
may be different than actual cash flows, particularly in light
of the rapidly changing environment in which the company
operates, or that the estimates of fair value differ from the
actual amount that could be realized if the Company were to sell
its assets.

Exit costs.The
company follows the provisions of EITF 94-3 to record the
costs associated with exit activities. Management is required to
make its best estimates of exit costs such as remaining lease
obligations and/or termination fees, these estimates may be
different than the actual amounts that will be paid under
existing lease arrangements.

Revenue recognition.The Company generates revenues
primarily from two sources: (1) digital media services,
licensing and selling digital media applications and
(2) media restoration services.

Digital media services and
other.The Company recognizes
Enterprise Webcasting Services revenues as services are
rendered. We recognize encoding services revenues when the
services have been rendered and the Company has no continuing
involvement in the goods and services delivered, which generally
is the date the finished media is shipped to the customer. Other
revenues are generated from our music samples service business
and in the prior year from licensing and selling of software and
through application service provider arrangements. We sell
services in application service provider arrangements. We are
required to host the applications and the customer does not have
the ability to have the application hosted by another entity
without penalty to the customer. Billings are made based upon
quantity of content streamed, and revenue is recognized as the
services are delivered.

Media restoration
services.We recognize revenues as
services are rendered and we have no continuing involvement in
the goods and services delivered, which generally is the date
the finished media is shipped to the customer.

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

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RISK FACTORS

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

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

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

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



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

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

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

As of December 31, 2001, we had
approximately $60.9 million in cash, cash equivalents and
short-term investments, $30.0 million of which is used as
collateral for our credit facility. We believe that our existing
and available funds will be sufficient to meet our anticipated
needs for our operations, working capital, debt service and
capital expenditures through 2002. Thereafter, we may need to
raise additional funds. We may have to

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raise funds even sooner in order to fund more
rapid expansion, to develop new or enhanced services or
products, to respond to competitive pressures, to acquire
complementary products, businesses or technologies or otherwise
to respond to unanticipated requirements. If additional funds
are raised through the issuance of equity or convertible debt
securities, the percentage ownership of our current stockholders
will be reduced and these securities may have rights and
preferences superior to that of our current stockholders. If we
raise capital through debt financing, we may be forced to accept
restrictions affecting our liquidity, including restrictions on
our ability to incur additional indebtedness or pay dividends.
We cannot assure you that additional financing will be available
on favorable terms or at all. If adequate funds are not
available or are not available on acceptable terms, we may not
be able to pursue our business objectives. This inability could
seriously harm our business, results of operations and financial
condition.


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

We have incurred quarterly net losses totaling
$128.5 million from August 12, 1997 (inception)
through December 31, 2001, and we expect to continue to
incur net losses for the foreseeable future. As of
December 31, 2001, we had an accumulated deficit of
$142.6 million. We may increase our operating expenses and
capital expenditures in the future as we attempt to expand our
Webcasting services, digital media service and application
offerings, enter into licensing agreements with copyright
holders, grow our customer base, enhance our brand image and
improve our technology infrastructure. This would likely
increase our quarterly net losses and negative cash flows.

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



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

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

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Our stock price has been and may continue to
be volatile and is likely to be subject to National Market
listing compliance proceedings with Nasdaq

The trading price of our common stock has been
and is likely to continue to be highly volatile. For example,
during the 52-week period ended March 15, 2002, the price
of our common stock ranged from $0.43 to $1.97 per share. Our
stock price could be subject to wide fluctuations in response a
variety of factors, including, but not limited to, to actual or
anticipated variations in quarterly operating results,
competitors announcements, changes in recommendations by
securities analysts, and conditions in the digital media
services markets.

If our stock price falls below $1.00 per share
for 30 consecutive trading days or certain other conditions are
met, we may receive notice from Nasdaq that we need to comply
with the requirements for continued listing on the Nasdaq
National Market within 90 calendar days from such notification
or be moved to and be traded on the Nasdaq Smallcap Market. If
our stock is delisted from the National Market, an investor
could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our common stock.
Additionally, our stock may be subject to penny
stock regulations.

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

Our business and operations are substantially
dependent on the performance of our executive officers and key
employees, all of whom are employed on an at-will basis and have
worked together for only a relatively short period of time. We
do not maintain key person life insurance on any of
our executive officers. In addition, we have hired or named new
employees in 2001 in key executive positions, including our John
Baker, our Chief Executive Officer, and Joel McConaughy, our
Senior Vice President and Chief Technical Officer. The loss of
one or several key executives could seriously harm our business.
Any reorganization or reduction in the size of our employee base
could harm our ability to attract and retain other valuable
employees critical to the success of our business.

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

We expect to continue to evaluate and acquire
businesses, technologies, services, or products that we believe
are a strategic fit with our business. In December 1999, we
acquired Alive.com, Inc., in June 2000 we acquired VidiPax,
Inc., in June 2001 we acquired Addition Systems, Inc., in March
2001 we acquired DiscoverMusic, and in September 2001 we
acquired Activate. We have also acquired certain assets and
technology from OnAir and theDial.com. We have limited operating
history as a combined company and therefore limited experience
in addressing emerging trends that may affect our combined
business. The integration of these and any future acquisitions
into our operations may place a significant strain on our
employees, systems and other resources. If any acquisition fails
to integrate well, our operations and financial position could
be harmed.

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

Our acquisition of Activate could cause
significant dilution to existing stockholders which could
decrease the trading price of our common stock

As a result of the Activate acquisition, we will
be required to make payments totaling $3.0 million on or
about September 25, 2002. Pursuant to the merger agreement,
we can make this payment in either cash or stock or a
combination of the two; provided, however, we may not issue more
than 15% of our outstanding capital stock in payment of such
obligation, calculated post-issuance. Our existing stockholders,
therefore,

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could face significant dilution if we elect to
issue the maximum permissible amount of stock in making such
payment.


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

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

Our success depends on users having access to the
necessary hardware, software and bandwidth, or data transmission
capability, to receive and broadcast high quality digital media
over the Internet. Congestion over the Internet and data loss
may interrupt audio and video streams, resulting in unsatisfying
user experiences. The success of digital media distribution over
the Internet depends on the continued rollout of broadband
access to consumers on an affordable basis. Widespread adoption
of digital media technology depends on overcoming obstacles to
the deployment and use of digital media software, identifying
additional viable revenue models for digital media-based
businesses, improving audio and video quality and educating
customers and users in the use of digital media technology. If
digital media technology fails to overcome these obstacles, our
business could be seriously harmed.

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

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

A limited number of customers have accounted for
a majority of our revenues and may continue to do so for the
foreseeable future. During the year ended December 31,
2001, one of our customers accounted for 17% of our revenues and
during the year ended December 31, 2000, two of our
customers accounted for approximately 29% of our revenues. We
believe that a small number of customers may continue to account
for a significant percentage of our revenues for the foreseeable
future. Due to high revenue concentration among a limited number
of customers, the cancellation, reduction or delay of a large
customer order or our failure to timely complete or deliver a
project during a given quarter is likely to significantly reduce
revenues. In addition, if any significant customer fails to pay
amounts it owes us, or does not pay those amounts on time, our
revenues and operating results could suffer. If we are
unsuccessful in increasing and broadening our customer base, our
business could be harmed.

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

The average selling prices of our products and
services may be lower than expected as a result of competitive
pricing pressures, promotional programs and customers who
negotiate price reductions in exchange for longer term purchase
commitments or otherwise. The pricing of services sold to our
customers depends on the duration of the agreement, the specific
requirements of the order, purchase volumes, the sales

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and service support and other contractual
agreements. We have experienced and expect to continue to
experience pricing pressure and anticipate that the average
selling prices and gross margins for our products will decrease
over product life cycles. We may not be successful in developing
and introducing on a timely basis new products with enhanced
features that can be sold at higher gross margins.


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

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



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

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

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

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

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

Our intellectual property is important to our
business, and we seek to protect our intellectual property
through copyrights, trademarks, patents, trade secrets,
confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with
third parties, and invention assignment agreements with our
employees and contractors. We cannot assure you that measures we
take to protect our intellectual property will be successful or
that third parties will not develop alternative solutions that
do not infringe upon our intellectual property.

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

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

We and certain of our current or former officers
and directors are named as defendants in a purported class
action complaint which has been filed allegedly on behalf of
certain persons who purchased our common stock during the time
period beginning on March 15, 1999 and ending on
December 6, 2000. The complaint alleges violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934.

Primarily it alleges that there was undisclosed
compensation received by our underwriters in connection with our
initial public offering. We can provide no assurance as to the
outcome of this matter. Any resolution of this matter in a
manner adverse to us could have a material adverse affect on our
financial position and results of operation. In addition, the
costs to us of defending any litigation or other proceeding,
even if resolved in our favor, could be substantial. Such
litigation could also substantially divert the attention of our
management and our resources in general. Uncertainties resulting
from the initiation and continuation of any litigation or other
proceedings could harm our ability to compete in the
marketplace. In addition, because class action litigation has
often been brought against companies following periods of
volatility in their stock prices, we could become involved in
additional litigation.

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

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

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

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

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

Competition may decrease our market share,
revenues, and gross margins

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



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

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

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

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

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

Our industry is experiencing consolidation
that may intensify competition

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



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

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

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

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



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

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

We will not be competitive unless we continually
introduce new services and applications or enhancements to
existing services and applications that meet evolving industry
standards and customer needs. In the future, we may not be able
to address effectively the compatibility and interoperability
issues that arise as a result of technological changes and
evolving industry standards. The technical innovations required
for us to remain competitive are inherently complex, require
long development schedules and are dependent in some cases on
sole source suppliers. We will be required to continue to invest
in research and development in order to attempt to maintain and
enhance our existing technologies and products, but we may not
have the funds available to do so. Even if we have sufficient
funds, these investments may not serve the needs of customers or
be compatible with changing technological requirements or
standards. Most development expenses must be incurred before the
technical feasibility or commercial viability of new or enhanced
services and applications can be ascertained. Revenue from
future services and applications or enhancements to services and
applications may not be sufficient to recover the associated
development costs.

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

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



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

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

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

A reduction in the performance, reliability and
availability of our systems and network infrastructure may harm
our ability to distribute our products and services to our
customers and other users, as well as harm our reputation and
ability to attract and retain customers and content providers.
Our systems and operations are susceptible to, and could be
damaged or interrupted by, outages caused by fire, flood, power
loss, telecommunications failure, Internet breakdown, earthquake
and similar events. We do not have any redundancy in our
Webcasting facilities and therefore any damage or destruction to
these would significantly

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harm our Webcasting business. Our systems are
also subject to human error, security breaches, power losses,
computer viruses, break-ins, denial of service
attacks, sabotage, intentional acts of vandalism and tampering
designed to disrupt our computer systems, Web sites and network
communications. A sudden and significant increase in traffic on
our Web sites could strain the capacity of the software,
hardware and telecommunications systems that we deploy or use.
This could lead to slower response times or system failures.


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

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

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

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

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

Our officers and directors beneficially own or
control the voting of approximately 24% of our outstanding
common stock. Martin Tobias, our former chief executive officer
and former member of the board of directors, has given the board
of directors, an irrevocable proxy to vote all of the
approximately 4.6 million shares of our Common Stock that
he owns. See Note 11 to the Notes to Consolidated Financial
Statements and our Report on Form 8-K as filed with the
Securities and Exchange Commission on October 30, 2001 for
a more complete description of the proxy. As a result, these
stockholders, acting together, have the ability to substantially
influence all matters submitted to our stockholders for
approval, including:



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

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

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

Government regulation could adversely affect
our business prospects

We do not know with certainty how existing laws
governing issues such as property ownership, copyright and other
intellectual property issues, taxation, illegal or obscene
content, retransmission of media, personal privacy and data
protection will apply to the Internet or to the distribution of
music and other proprietary content over the Internet. Most of
these laws were adopted before the advent of the Internet and
related technologies and therefore do not address the unique
issues associated with the Internet and related technologies.
Depending on how these laws developed and are interpreted by the
judicial system, they could have the effect of:



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

Specifically with respect to one aspect of
copyright law, on October 28, 1998, the Digital Millennium
Copyright Act (or DMCA) was enacted. The DMCA
includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate
transmissions. Under these statutory licenses, depending on our
future business activities, we and our customers may be required
to pay licensing fees in connection with digital sound
recordings we deliver or our customers provide on their web site
and through retransmissions of radio broadcasts and/or other
audio content. A Copyright Arbitration Royalty Panel has
determined that, for eligible non-subscription services, sound
recording performance rates should be $0.0014 per performance
for the period October 1998-2000, with a surcharge of 9% of the
total performance fee for the ephemeral copies used to
facilitate such performances. However, that decision is subject
to review and revision by the U.S. Copyright Office, and several
appeal petitions have been filed. Furthermore, the Copyright
Offices review is subject to an appeal to a Federal Court
of Appeals. The fees for the same types of transmissions offered
on a subscription basis have not been determined and will be the
subject of another Copyright Arbitration Royalty Panel
proceeding, as will fees for digital phono-record deliveries
pursuant to the mechanical license provisions of the
U.S. Copyright Act. Depending on the rates and terms adopted for
the statutory licenses, our business could be harmed both by
increasing our own cost of doing business, and by increasing the
cost of doing business for our customers.

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

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Item
7a     Quantitative and Qualitative
Disclosures About Market Risk

We provide Internet media infrastructure services
and applications. Our financial results could be affected by
factors such as changes in interest rates and fluctuations in
the stock market. As substantially all sales are currently made
in U.S. dollars, a strengthening of the dollar could make our
services less competitive in foreign markets. We do not use
derivative instruments to hedge our risks. Our interest income
is sensitive to changes in the general level of U.S. interest
rates, particularly since substantially all of our investments
are in short-term instruments with original maturities of less
than six months. Due to the limited duration of our short-term
investments and their investment grade level, we anticipate no
material market risk exposure. Therefore, no quantitative
tabular disclosures are presented.

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

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Item
8     Financial Statements and
Supplementary Data

LOUDEYE TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                       |  |        |    | 
|------------------------------------------------------------------------------------------------------ |  | ------ | -- | 
|                                                                                                       |  | Page  
|                                                                                                       |  | Number
|                                                                                                       |  |       
|Report of Independent Public Accountants                                                               |  |        | 46 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                          |  |        | 47 | 
|Consolidated Statements of Operations for the
	three years ended December 31, 2001                     |  |        | 48 | 
|Consolidated Statements of Stockholders
	Equity (Deficit) for the three years ended December 31, 2001 |  |        | 49 | 
|Consolidated Statements of Cash Flows for the
	three years ended December 31, 2001                     |  |        | 50 | 
|Notes to Consolidated Financial Statements                                                             |  |        | 51 | 

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REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To Loudeye Technologies, Inc.:

We have audited the accompanying consolidated
balance sheets of Loudeye Technologies, Inc. and subsidiaries
(Loudeye) as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders equity
(deficit) and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements
are the responsibility of Loudeyes management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Loudeye Technologies, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States.



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

February 14, 2002

Seattle, Washington


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LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |         |         | 
|----------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | -------- | ------ |  | - | ------- | ------- | 
|                                                |                                                                                                                                                                                                                   |                                           
|                                                |                                                                                                                                                                                                                   | December 31,                              
|                                                |                                                                                                                                                                                                                   |                                           
|                                                |                                                                                                                                                                                                                   | 2001                                       |   | 2000    
|                                                |                                                                                                                                                                                                                   |                                            |   |         
|                                                |                                                                                                                                                                                                                   |                                           
|                                                |                                                                                                                                                                                                                   | (Amounts in thousands                     
|                                                |                                                                                                                                                                                                                   | except share and per share                
|                                                |                                                                                                                                                                                                                   | amounts)                                  
|ASSETS                                          |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                | Cash and cash equivalents (Note 9)                                                                                                                                                                                |                                            | $ | 37,159   |        |  | $ | 51,689  |        
|                                                | Short-term investments (Note 9)                                                                                                                                                                                   |                                            |   | 23,782   |        |  |   | 43,300  |        
|                                                | Accounts receivable, net of allowances of $492
	and $709                                                                                                                                                          |                                            |   | 2,200    |        |  |   | 3,241   |        
|                                                | Prepaids and other current assets                                                                                                                                                                                 |                                            |   | 1,769    |        |  |   | 1,072   |        
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total current assets                       |   |          | 64,910 |  |   |         | 99,302  | 
|                                                | Property and equipment, net                                                                                                                                                                                       |                                            |   | 7,306    |        |  |   | 15,955  |        
|                                                | Goodwill, net                                                                                                                                                                                                     |                                            |   | 1,310    |        |  |   | 9,785   |        
|                                                | Intangibles and other long-term assets, net                                                                                                                                                                       |                                            |   | 7,357    |        |  |   | 7,634   |        
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total assets                               |   | $        | 80,883 |  |   | $       | 132,676 | 
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY
	(DEFICIT) |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                | Accounts payable                                                                                                                                                                                                  |                                            | $ | 913      |        |  | $ | 1,137   |        
|                                                | Accrued compensation and benefits                                                                                                                                                                                 |                                            |   | 1,439    |        |  |   | 1,554   |        
|                                                | Other accrued expenses                                                                                                                                                                                            |                                            |   | 1,859    |        |  |   | 1,058   |        
|                                                | Accrued special charges                                                                                                                                                                                           |                                            |   | 2,939    |        |  |   | 310     |        
|                                                | Deposits and deferred revenues                                                                                                                                                                                    |                                            |   | 639      |        |  |   | 800     |        
|                                                | Current portion of long-term debt                                                                                                                                                                                 |                                            |   | 1,368    |        |  |   | 4,425   |        
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total current liabilities                  |   |          | 9,157  |  |   |         | 9,284   | 
|                                                | Accrued acquisition consideration                                                                                                                                                                                 |                                            |   | 3,000    |        |  |   |        |        
|                                                | Long-term debt, net of current portion                                                                                                                                                                            |                                            |   | 19,532   |        |  |   | 7,324   |        
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total liabilities                          |   |          | 31,689 |  |   |         | 16,608  | 
|                                                | Commitments and contingencies (Note 9)                                                                                                                                                                            |                                            |   |          |        |  |   |         |        
|STOCKHOLDERS EQUITY (DEFICIT)                  |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                | Preferred stock, $0.001 par value, 41,000,000
	shares authorized, none outstanding                                                                                                                                |                                            |   |         |        |  |   |        |        
|                                                | Common stock, additional paid-in capital and
	warrants, $0.001 par value, 100,000,000 shares authorized;
	44,475,174 and 40,475,174 issued and outstanding in 2001 and
	37,072,442 issued and outstanding in 2000 |                                            |   | 192,627  |        |  |   | 185,609 |        
|                                                | Deferred stock compensation                                                                                                                                                                                       |                                            |   | (883     | )      |  |   | (3,387  | )      
|                                                | Accumulated deficit                                                                                                                                                                                               |                                            |   | (142,550 | )      |  |   | (66,154 | )      
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total stockholders equity                 |   |          | 49,194 |  |   |         | 116,068 | 
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        
|                                                |                                                                                                                                                                                                                   | Total liabilities and stockholders equity |   | $        | 80,883 |  |   | $       | 132,676 | 
|                                                |                                                                                                                                                                                                                   |                                            |   |          |        |  |   |        

The accompanying notes are an integral part of
these financial statements

47



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |            |        |  
|---------------------------------------------- | ------------------------------------------------- | -------------------------------------- | ------- | ---------- | ------ | ---- | ------- | ---------- | ------ | - | ------- | ---------- | ------ | -
|                                               |                                                   |                                       
|                                               |                                                   | Year Ended December 31,               
|                                               |                                                   |                                       
|                                               |                                                   | 2001                                   |         | 2000       |        | 1999
|                                               |                                                   |                                        |         |            |        |     
|                                               |                                                   |                                       
|                                               |                                                   | (Amounts in thousands except share and
|                                               |                                                   | per share amounts)                    
|REVENUES                                       |                                                   | $                                      | 10,388  |            |        | $    | 11,537  |            |        | $ | 2,645   |           
|COST OF REVENUES:                              |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               | Cost of revenues, excluding depreciation          |                                        |         | 8,667      |        |      |         | 9,684      |        |   |         | 1,946      |       
|                                               | Depreciation                                      |                                        |         | 4,070      |        |      |         | 2,704      |        |   |         | 924        |       
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               |                                                   | Total cost of revenues                 |         |            | 12,737 |      |         |            | 12,388 |   |         |            | 2,870  |  
|                                               |                                                   | Gross margin                           |         |            | (2,349 | )    |         |            | (851   | ) |         |            | (225   | )
|OPERATING EXPENSES:                            |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               | Research and development                          |                                        |         | 9,719      |        |      |         | 6,784      |        |   |         | 1,248      |       
|                                               | Sales and marketing                               |                                        |         | 9,409      |        |      |         | 14,621     |        |   |         | 3,982      |       
|                                               | General and administrative                        |                                        |         | 11,102     |        |      |         | 8,079      |        |   |         | 3,612      |       
|                                               | Amortization of intangibles and other assets      |                                        |         | 8,173      |        |      |         | 7,693      |        |   |         | 302        |       
|                                               | Stock-based compensation                          |                                        |         | 359        |        |      |         | 5,409      |        |   |         | 1,554      |       
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               |                                                   | Total operating expenses               |         |            | 38,762 |      |         |            | 42,586 |   |         |            | 10,698 |  
|Special charges                                |                                                   |                                        | 37,261  |            |        |      | 947     |            |        |   |        |           
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|OPERATING LOSS                                 |                                                   |                                        | (78,372 | )          |        |      | (44,384 | )          |        |   | (10,923 | )         
|Interest income                                |                                                   |                                        | 3,157   |            |        |      | 5,767   |            |        |   | 204     |           
|Interest expense                               |                                                   |                                        | (1,181  | )          |        |      | (907    | )          |        |   | (183    | )         
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               |                                                   | Total other, net                       |         |            | 1,976  |      |         |            | 4,860  |   |         |            | 21     |  
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|NET LOSS                                       |                                                   | $                                      | (76,396 | )          |        | $    | (39,524 | )          |        | $ | (10,902 | )         
|Beneficial conversion feature                  |                                                   |                                        |        |            |        |      |        |            |        |   | (14,121 | )         
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|NET LOSS TO COMMON STOCKHOLDERS                |                                                   | $                                      | (76,396 | )          |        | $    | (39,524 | )          |        | $ | (25,023 | )         
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|Basic and diluted net loss per share           |                                                   | $                                      | (1.84   | )          |        | $    | (1.33   | )          |        | $ | (4.62   | )         
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|Weighted average shares outstanding            |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               |  basic and diluted net loss per share            |                                        |         | 41,429,104 |        |      |         | 29,773,886 |        |   |         | 5,410,507  |       
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|Basic and diluted pro forma net loss per share |                                                   |                                        |         |            |        | $    | (1.16   | )          |        | $ | (1.50   | )         
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|Weighted average shares outstanding            |                                                   |                                        |         |            |        |      |         |            |        |   |         |           
|                                               |  basic and diluted pro forma net loss
	per share |                                        |         |            |        |      |         | 34,103,551 |        |   |         | 16,659,800 |       
|                                               |                                                   |                                        |         |            |        |      |         |            |        |   |         |           

The accompanying notes are an integral part of
these statements.

48



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |           |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------------------------------------------ | ----------- | ---------------- |  | -------------- | ------- | ---------- |  | -------- | ---------- | ----------- |  | ------------- | ------- | ------------ |  | ------- | -------- | --------- |  | - | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | -------- | - |  | - | ------- | -
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |        
|                                                                       |  |                                                  |             | Common Stock and |  |                |         |            |  |          |            |             |  |               |         |             
|                                                                       |  | Convertible Preferred                            |             | Additional       |  |                |         |            |  |          |            |             |  | Total        
|                                                                       |  | Stock                                            |             | Paid-in Capital  |  | Stock Warrants |         | Beneficial |  | Deferred |            |             |  | Stockholders
|                                                                       |  |                                                  |             |                  |  |                |         | Conversion |  | Stock    |            | Accumulated |  | Equity       
|                                                                       |  | Shares                                           |             | Amount           |  | Shares         |         | Amount     |  | Shares   |            | Amount      |  | Feature       |         | Compensation |  | Deficit |          | (Deficit)
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |          
|                                                                       |  |                                                 
|                                                                       |  | (Amounts in thousands, except for share amounts)
|BALANCES, DECEMBER 31, 1998                                            |  |                                                  | 8,242,981   |                  |  | $              | 2,982   |            |  |          | 5,288,000  |             |  | $             | (133    | )            |  |         |         |           |  | $ |       |   |  | $ |        |   |  | $ |       |   |  | $ | (1,607   | ) |  | $ | 1,242   |  
|Issuance of Preferred Stock                                            |  |                                                  | 12,425,518  |                  |  |                | 54,804  |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 54,804  |  
|Conversion of debt into pfd stock                                      |  |                                                  | 394,737     |                  |  |                | 750     |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 750     |  
|Deferred stock compensation                                            |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 7,825   |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | (7,825 | ) |  |   |         |   |  |   |        |  
|Issuance of shares for acquisitions                                    |  |                                                  |            |                  |  |                |        |            |  |          | 2,528,848  |             |  |               | 18,693  |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 18,693  |  
|Stock-based compensation                                               |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 572     |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 982    |   |  |   |         |   |  |   | 1,554   |  
|Issuance of warrants                                                   |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         | 691,053  |           |  |   | 1,159  |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 1,159   |  
|Stock option exercises                                                 |  |                                                  |            |                  |  |                |        |            |  |          | 879,409    |             |  |               | 189     |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 189     |  
|Beneficial conversion feature                                          |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   | 14,121  |   |  |   |       |   |  |   | (14,121  | ) |  |   |        |  
|Net loss                                                               |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (10,902  | ) |  |   | (10,902 | )
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |           |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCES, DECEMBER 31, 1999                                            |  |                                                  | 21,063,236  |                  |  | $              | 58,536  |            |  |          | 8,696,257  |             |  | $             | 27,146  |              |  |         | 691,053  |           |  | $ | 1,159  |   |  | $ | 14,121  |   |  | $ | (6,843 | ) |  | $ | (26,630  | ) |  | $ | 67,489  |  
|Conversion of preferred stock                                          |  |                                                  | (21,063,236 | )                |  |                | (58,536 | )          |  |          | 21,063,236 |             |  |               | 58,536  |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   |        |  
|Beneficial conversion reclass                                          |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 14,121  |              |  |         |         |           |  |   |       |   |  |   | (14,121 | ) |  |   |       |   |  |   |         |   |  |   |        |  
|Initial Public Offering and sale of shares to
	strategic partner       |  |                                                  |            |                  |  |                |        |            |  |          | 5,511,022  |             |  |               | 80,748  |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 80,748  |  
|Exercise and conversion of warrants                                    |  |                                                  |            |                  |  |                |        |            |  |          | 526,528    |             |  |               | 1,159   |              |  |         | (691,053 | )         |  |   | (1,159 | ) |  |   |        |   |  |   |       |   |  |   |         |   |  |   |        |  
|Stock option exercises, repurchases and shares
	issued under ESPP      |  |                                                  |            |                  |  |                |        |            |  |          | 1,207,115  |             |  |               | 727     |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 46     |   |  |   |         |   |  |   | 773     |  
|Deferred stock compensation                                            |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 3,100   |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | (3,100 | ) |  |   |         |   |  |   |        |  
|Issuance of shares for acquisition and warrants
	to strategic partners |  |                                                  |            |                  |  |                |        |            |  |          | 68,284     |             |  |               | 1,105   |              |  |         | 140,000  |           |  |   | 159    |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 1,264   |  
|Cancellation and acceleration of common stock
	options                 |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | (2,459  | )            |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 1,997  |   |  |   |         |   |  |   | (462    | )
|Stock-based compensation                                               |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 1,267   |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 4,513  |   |  |   |         |   |  |   | 5,780   |  
|Net loss                                                               |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (39,524  | ) |  |   | (39,524 | )
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |           |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCES, DECEMBER 31, 2000                                            |  |                                                  |            |                  |  | $              |        |            |  |          | 37,072,442 |             |  | $             | 185,450 |              |  |         | 140,000  |           |  | $ | 159    |   |  | $ |        |   |  | $ | (3,387 | ) |  | $ | (66,154  | ) |  | $ | 116,068 |  
|Issuance of shares for acquisition and strategic
	partnerships         |  |                                                  |            |                  |  |                |        |            |  |          | 7,152,887  |             |  |               | 10,832  |              |  |         |         |           |  |   | 4      |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 10,836  |  
|Repurchase of shares                                                   |  |                                                  |            |                  |  |                |        |            |  |          | (4,000,000 | )           |  |               | (2,000  | )            |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | (2,000  | )
|comp income                                                            |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | 61      |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 61      |  
|Stock option exercises, repurchases and shares
	issued under ESPP      |  |                                                  |            |                  |  |                |        |            |  |          | 249,845    |             |  |               | 266     |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   |         |   |  |   | 266     |  
|Modification of common stock options                                   |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               | (2,145  | )            |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 943    |   |  |   |         |   |  |   | (1,202  | )
|Amortization of deferred stock                                         |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   | 1,561  |   |  |   |         |   |  |   | 1,561   |  
|Net loss                                                               |  |                                                  |            |                  |  |                |        |            |  |          |           |             |  |               |        |              |  |         |         |           |  |   |       |   |  |   |        |   |  |   |       |   |  |   | (76,396  | ) |  |   | (76,396 | )
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |           |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  
|BALANCES, DECEMBER 31, 2001                                            |  |                                                  |            |                  |  | $              |        |            |  |          | 40,475,174 |             |  | $             | 192,464 |              |  |         | 140,000  |           |  | $ | 163    |   |  | $ |        |   |  | $ | (883   | ) |  | $ | (142,550 | ) |  | $ | 49,194  |  
|                                                                       |  |                                                  |             |                  |  |                |         |            |  |          |            |             |  |               |         |              |  |         |          |           |  |   |        |   |  |   |         |   |  |   |        |   |  |   |          |   |  |   |         |  

The accompanying notes are an integral part of
these statements.

49



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |         |       |        |  
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------- | --------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------ | ------- | ----- | ------ | -
|                                                                             |                                                                        |                                       
|                                                                             |                                                                        | Year Ended December 31,               
|                                                                             |                                                                        |                                       
|                                                                             |                                                                        | 2001                                   |                                         | 2000    |        | 1999   
|                                                                             |                                                                        |                                        |                                         |         |        |        
|                                                                             |                                                                        |                                       
|                                                                             |                                                                        | (Amounts in thousands)                
|OPERATING ACTIVITIES:                                                        |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             | Net Loss                                                               |                                        | $                                       | (76,396 | )      |         | $       | (39,524 | )      |         | $      | (10,902 | )    
|Adjustments to reconcile net loss to net cash
	used in operating activities: |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             | Depreciation and amortization                                          |                                        |                                         | 15,422  |        |         |         | 12,494  |        |         |        | 1,226   |      
|                                                                             | Special charges and other non-cash items                               |                                        |                                         | 29,736  |        |         |         | 661     |        |         |        |        |      
|                                                                             | Stock-based compensation                                               |                                        |                                         | 359     |        |         |         | 5,409   |        |         |        | 1,554   |      
|                                                                             | Changes in operating assets and liabilities, net
	of amounts acquired: |                                        |                                         |         |        |         |         |         |        |         |        |         |      
|                                                                             |                                                                        | Accounts receivable                    |                                         |         | 2,902  |         |         |         | (2,121 | )       |        |         | (856  | )     
|                                                                             |                                                                        | Prepaid and other assets               |                                         |         | 396    |         |         |         | (701   | )       |        |         | (753  | )     
|                                                                             |                                                                        | Accounts payable                       |                                         |         | (1,162 | )       |         |         | (3,758 | )       |        |         | 4,204 |       
|                                                                             |                                                                        | Accrued compensation and benefits      |                                         |         | 2,610  |         |         |         | 1,801  |         |        |         | 501   |       
|                                                                             |                                                                        | Customer deposits and deferred revenue |                                         |         | (161   | )       |         |         | 362    |         |        |         | 146   |       
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             |                                                                        |                                        | Net cash from operating activities      |         |        | (26,294 | )       |         |        | (25,377 | )      |         |       | (4,880 | )
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|INVESTING ACTIVITIES:                                                        |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|Purchases of property and equipment                                          |                                                                        |                                        | (2,696                                  | )       |        |         | (15,814 | )       |        |         | (4,423 | )      
|Capitalized software development costs                                       |                                                                        |                                        |                                        |         |        |         | (1,304  | )       |        |         |       |        
|Cash paid for acquisition of business, net                                   |                                                                        |                                        | (9,580                                  | )       |        |         | (1,907  | )       |        |         |       |        
|Purchases/sales of short-term investments, net                               |                                                                        |                                        | 19,689                                  |         |        |         | (42,605 | )       |        |         | (530   | )      
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             |                                                                        |                                        | Net cash from investing activities      |         |        | 7,413   |         |         |        | (61,630 | )      |         |       | (4,953 | )
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|FINANCING ACTIVITIES:                                                        |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|Proceeds from sale of stock and exercise of
	options                         |                                                                        |                                        | 270                                     |         |        |         | 81,100  |         |        |         | 54,994 |        
|Proceeds from long-term debt                                                 |                                                                        |                                        | 18,908                                  |         |        |         | 10,205  |         |        |         | 3,104  |        
|Principal payments on long-term obligations                                  |                                                                        |                                        | (11,827                                 | )       |        |         | (1,882  | )       |        |         | (434   | )      
|Repurchase of shares outstanding                                             |                                                                        |                                        | (2,000                                  | )       |        |         |        |         |        |         |       |        
|Loans made to related party                                                  |                                                                        |                                        | (1,000                                  | )       |        |         |        |         |        |         |       |        
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             |                                                                        |                                        | Net cash from financing activities      |         |        | 4,351   |         |         |        | 89,423  |        |         |       | 57,664 |  
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|                                                                             |                                                                        |                                        | Net change in cash and cash equivalents |         |        | (14,530 | )       |         |        | 2,416   |        |         |       | 47,831 |  
|Cash and cash equivalents, beginning of period                               |                                                                        |                                        | 51,689                                  |         |        |         | 49,273  |         |        |         | 1,442  |        
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|Cash and cash equivalents, end of period                                     |                                                                        | $                                      | 37,159                                  |         |        | $       | 51,689  |         |        | $       | 49,273 |        
|                                                                             |                                                                        |                                        |                                         |         |        |         |         |         |        |         |        |        
|Cash paid for interest                                                       |                                                                        | $                                      | 970                                     |         |        | $       | 683     |         |        | $       | 183    |        
|Issuance of common stock for acquisition of
	business                        |                                                                        |                                        | 10,756                                  |         |        |         | 1,105   |         |        |         | 18,693 |        
|Assets acquired under capital lease                                          |                                                                        |                                        | 368                                     |         |        |         |        |         |        |         |       |        
|Issuance of common stock warrants                                            |                                                                        |                                        | 76                                      |         |        |         | 159     |         |        |         | 1,159  |        
|Conversion of debt into preferred stock                                      |                                                                        |                                        |                                        |         |        |         |        |         |        |         | 750    |        

The accompanying notes are an integral part of
these statements.

50



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2001


1.     Organization
and Development Stage Risks:

The
Company

Loudeye Technologies, Inc. (the Company) provides
primarily enterprise webcasting, related digital media services
and media restoration services. The Company is headquartered in
Seattle, Washington and to-date has conducted business in the
United States, Canada and Europe in two business segments,
digital media services and media restoration services.

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

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

2.     Summary of
Significant Accounting Policies:

Cash and Cash
Equivalents

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

Short-term
Investments

The Company has invested amounts in
investment-grade government obligations, institutional money
market funds and other obligations with FDIC insured U.S. banks.
Concentration is limited to 10% in any one instrument or issuer.
The Companys primary focus is to preserve capital and earn
a market rate of return on its investments. The Company does not
speculate or invest in publicly traded equity securities and,
therefore, does not believe that its capital is subject to
significant market risk. Short-term investments are generally
held to maturity. These securities all mature within one year.

As described further in Note 9, an
investment account that holds at least $30.0 million of
short-term investments and cash equivalents is utilized as
collateral for the Companys credit facility, Additionally,
the Company has approximately $1.3 million of short-term
investments which are utilized as collateral for certain
irrevocable standby letters of credit.

Long-lived
Assets

The Company assesses potential impairments to its
long-lived assets when there is evidence that events or changes
in circumstances have made recovery of the assets carrying
value unlikely. An impairment loss is recognized when the sum of
the expected future undiscounted net cash flows over the
remaining useful life is less than the carrying amount of the
asset. As described in Note 4, the Company recorded impairment
charges of $30.2 million and $637,000 in 2001 and 2000,
respectively. These amounts are included in Special Charges on
the accompanying statements of operations

51



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Advertising
Costs

Advertising costs are expensed as incurred. The
Company incurred $122,000, $1.1 million and $636,000 in
advertising costs for the years ended December 31, 2001,
2000 and 1999, respectively.



| |                  
| | -----------------
| | Deferred Revenues

The Company records deferred revenues when cash
has been received but the criteria for revenue recognition have
not been met. Deferred revenues are recognized in accordance
with the Companys revenue recognition policy.



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

Research and development costs are expensed as
incurred. Software developed for internal use is capitalized
once the preliminary project stage has been completed and
management has committed to funding the continuation of the
development project. Capitalization is ceased when the software
project is substantially complete and ready for its intended use.

At December 31, 2000, $1.3 million in
software development costs had been capitalized and included in
other long-term assets, of which approximately $260,000 and
$119,000 was amortized during 2001 and 2000, respectively. In
2001, the company recorded impairment charges associated with
previously capitalized software of approximately $820,000. In
2001, the Company did not capitalize any software development
costs. At December 31, 2001, no capitalized software
development costs remain in long-term assets.



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

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



| |                                                             
| | ------------------------------------------------------------
| | Use of Estimates in the Preparation of
	Financial Statements

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



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

In July 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141 Business
Combinations and SFAS No. 142 Goodwill and
Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting and
broadens the criteria for recording intangible assets separate
from goodwill. Recorded goodwill and intangibles will be
evaluated against the new criteria and may result in certain
intangibles being classified into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. The Company
believes that the implementation of SFAS No. 141 will
require reclassification of approximately $200,000 of
intangibles with indefinite lives into goodwill and there will
be no reclassification from goodwill into identified
intangibles. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and
certain intangibles. Under a nonamortization approach, goodwill
and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment and
written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain
intangibles is more than its estimated fair value. The
provisions of each statement will be adopted by the Company on
January 1, 2002. The adoption of SFAS No. 142 will
result in the Companys

52



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

discontinuation of amortization of its goodwill;
however, the Company will be required to test its goodwill for
impairment under the new standard beginning in the first quarter
of 2002, which could have an adverse effect on the
Companys future results of operations if an impairment
occurs. The Company currently has net goodwill of approximately
$1.3 million at December 31, 2001. The Company expects
the impact of implementation of these two standards to have a
positive net future impact resulting from the decrease in
amortization by approximately $1.0 million in 2002.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, effective for the Company on
January 1, 2002. This Statement supersedes FASB Statement
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and
other related accounting guidance. The Company adopted this
standard in 2001 and it had no impact.

3.     Revenue
Recognition

The Company generates revenues primarily from two
sources: (1) digital media services, licensing and selling
digital media applications and (2) media restoration
services.



| |                                  
| | ---------------------------------
| | Digital Media Services and
	Other

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

Encoding Services consist of encoding services to
convert audio and video content into Internet media formats.
Sales of digital media services are generally under
nonrefundable time and materials or per unit contracts. Under
these contracts, the Company recognizes revenues as services are
rendered and the Company has no continuing involvement in the
goods and services delivered, which generally is the date the
finished media is shipped to the customer.

Other revenues are generated from our music
samples service business and in 2000 from licensing and selling
of software and through application service provider
arrangements. The Company sells digital media applications in
application service provider arrangements. The Company is
required to host the applications and the customer does not have
the ability to have the application hosted by another entity
without penalty to the customer. Billings are made based upon
minutes of content streamed, and revenue is recognized as the
services are delivered. In 2000, we recognized applications and
other revenues in accordance with Statement of Financial
Position 97-2 (SOP 97-2), which requires revenues to
be recognized when the following criteria are met:



| |   |                                             
| | - | --------------------------------------------
| |  | Persuasive evidence of an arrangement exists
|
| |  | Delivery has occurred                       
|
| |  | Price is fixed or determinable              
|
| |  | Collectibility is probable.                 

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

In 2000, other revenues also included consulting
revenues; certain contractual revenues associated with forfeited
deposits; and the recognition of deferred revenue upon either
the completion of the earn-out period, the removal of our
continuing obligation under such agreements, maintenance
revenues related to our

53



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

applications or the recognition of contractually
guaranteed minimum revenues. Contractual revenues were
recognized in 2000 when our further contractual obligations and
all uncertainties related to performance were resolved.
Consulting revenues were generally short-term contracts under
which revenue was recognized on a time and materials basis.



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

Media Restoration and Migration Services consist
of services provided by our VidiPax subsidiary to restore and
upgrade old or damaged archives of traditional media. The
Company recognizes revenues as services are rendered and the
Company has no continuing involvement in the goods and services
delivered, which generally is the date the finished media is
shipped to the customer.

4.     Special
Charges

In 2001, the Company undertook a series of
operational restructurings and facilities consolidations. The
Company assessed each product and service offering and the costs
related to each in making the determination to cease providing,
or otherwise change the level of support the Company would
provide for these offerings. The Company determined that it was
not feasible to continue to provide or support digital media
consulting services, certain digital media applications and the
Alive e-show platform in 2001. Additionally, the decision was
made to decrease the level of emphasis placed on video encoding
activities. This decision was made as a response to the
decreased demand for such services, which started in the third
quarter of 2000 and continued into the first quarter of 2001, at
which time the Company determined that no further resources
would be provided to support video encoding in our Seattle
facility. In the second quarter of 2001, the Company terminated
approximately 45% of its workforce. That reduction in force
created excess facilities, resulting in the development of
facilities consolidation plans. These plans of consolidation
generated additional special charges for rent accruals as well
as tenant improvement impairments throughout the remainder of
2001. The continued economic conditions surrounding our digital
media services led to other impairment charges related to the
valuation of our assets acquired from DiscoverMusic, in the
third quarter of 2001. In the fourth quarter of 2001, the
Company performed an analysis of all long-lived assets in
accordance with its accounting policies (See Note 2), and
determined that certain of these assets were impaired.
Impairment charges were then recorded as appropriate. As a
result of these actions and other economic conditions, the
Company recorded special charges of $37.3 million in 2001.
These charges are summarized in the table following:

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

Intangible and other
impairments.The Company recorded
impairments of $21.4 million in 2001 related to intangibles
and other long-term assets. There were no such charges recorded
in 2000. The Company decided in 2001 to focus on areas of
business that it believed had a near-term opportunity to drive
increases in revenue. This decision led to certain acquisitions
described in Note 8.

This refocusing of the business led to the
decision to cease supporting certain digital media applications
and the Alive technology platform in the first quarter of 2001.
The goodwill previously recognized associated with the Alive.com
acquisition and certain other digital applications were impaired
and, as each of these assets had no determinable cash flows
associated with them, and no discernible fair market value, the
remaining

54



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

unamortized balances, totaling $10.6 million
were written off. In the third and fourth quarters of 2001, the
Company reassessed the remaining Alive intangibles and recorded
additional impairment charges of $180,000 and $117,000,
respectively. The Company previously had capitalized the cost of
warrants issued to a strategic partner. In the first quarter of
2001, the Company terminated this relationship and, accordingly,
the Company recorded a charge of $708,000 related to the
unamortized portion of the warrants.

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

In the fourth quarter of 2001, the Company
recorded a charge totaling $5.0 million related to intangible
assets acquired from DiscoverMusic in March 2001. Increased
competition, including pricing pressures and the continued
economic downturn caused the Company to lower its initial
projections for the business and subsequently write-down the
value originally assigned to the acquired customer list and
other acquired intangibles. The Company does not expect to fully
recover the current carrying value of the assets in the near
term, resulting in the impairment. The assets were written down
to estimated current cost to replace, which the Company believes
is a reliable estimate of the fair market value.

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

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

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

As the Company had previously disclosed, its
decision in early 2001 to focus on the audio business led to a
further review of its video assets. The Company performed a
review of the current market prices for similar used equipment
and adjusted the remaining value of its video assets down to the
estimated net realizable

55



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value. The Company sold a significant amount of
these assets at auction during the quarter ended June 30,
2001, at amounts approximately equal to their adjusted values.
Prior to the sale, the Company had ceased depreciation until
such time as the assets were actually disposed. The Company also
recorded third quarter of 2001 charges of $607,000 related to
assets acquired from DiscoverMusic that were abandoned due to
obsolescence or otherwise unusable in our restructured business.
In conjunction with the consolidated forecast for 2002 and
beyond, it became apparent that the projected undiscounted cash
flows were not enough to fully-recover the carrying value of our
remaining property and equipment (excluding those recently
acquired from Activate). The Company then performed an analysis
of all remaining property and equipment that had not been
recently purchased, to determine the current fair value of those
assets, in other than a forced liquidation sale. These analyses,
which was substantially generated from valuations provided by
used equipment resellers led to charges of $5.1 million in
2001. The Company does not currently expect to record any future
property and equipment impairments, as substantially all
property and equipment of the Company are now carried at current
fair market value. We expect annual depreciation expense to
decrease by approximately $2.4 million as a result of these
write-downs.

Facilities related charges and
other.As a result of acquisition
activity, the de-emphasis of our video encoding operations and
the reductions in force that led to excess facilities, our board
of directors approved plans of facilities consolidation during
the course of 2001. These plans resulted in the closure of the
Santa Monica and London offices in early 2001 and the migration
from four facilities in Seattle into one facility in late 2001
and early 2002. Accordingly, all unamortized leasehold
improvements related to the vacated facilities, totaling
$2.1 million, were charged to special charges in 2001. The
Company also has accrued for the rental payments it believes
will be paid on these abandoned facilities while it seeks a
suitable sublessor or negotiate a termination of the lease.
Related rent charges of $3.6 million were recorded in 2001,
including $2.3 million in the fourth quarter of 2001,
reflecting current local real-estate market conditions. As of
December 31, 2001, the Company has accrued a liability of
$2.9 million in accrued liabilities related to estimated
future rental payments. Other charges of approximately $416,000
have been recorded related to impaired investments and other
costs. The Company believes that the current reserve on all
facilities is adequate to cover rents for the period of time
until they are sublet or it negotiates an effective termination.
The Company therefore does not foresee additional special
charges related to facilities closures.

The Company expects annual amortization expense
in 2002 to decrease by approximately $11.5 million as a
result of the impairment charges recorded in 2001.

Employee severance.The Company paid severance costs of $3.2 million in 2001
related to the termination of a significant number of employees.
On a quarterly basis these amounts were $682,000,
$1.5 million, $104,000 and $854,000 in the first through
fourth quarters of 2001, respectively. The Company announced a
12% reduction in force on March 8, 2002 and currently
expects compensation costs savings to total approximately
$2.1 million in the remainder of 2002. The severance costs
associated with that reduction in force total approximately
$1.0 million and will be recorded in the first quarter of
2002.

Accrued special
charges.The following table
represents a rollforward of the accrued special charges account.
The Company believes that it will ultimately pay all of these
accrued charges in cash. There were no significant adjustments
to amounts recorded in 2000.

|                    |  |                |        |  
|------------------- |  | -------------- | ------ | -
|                    |  | (In thousands)
|                    |  |               
|December 31, 2000   |  | $              | 310    |  
|Additional accruals |  |                | 3,790  |  
|Paid in cash        |  |                | (1,161 | )
|                    |  |                |        |  
|December 31, 2001   |  | $              | 2,939  |  
|                    |  |                |        |  

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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In January 2001, the Company announced a
cost-savings initiative that resulted in a $947,000 charge in
the fourth quarter of 2000. In December 2000, our board of
directors approved a plan to shut-down our Santa Monica office
and reduce video encoding services which resulted in an
impairment to our video encoding equipment as well as existing
tenant improvements at our Santa Monica facility which was
closed in the first quarter of 2001. This combined non-cash
impairment charge of $637,000 was included within the Special
Charge line item in the financial statements. The 2000 charge
also included approximately $300,000 related to payments to
employees terminated in November and December 2000 of which
$200,000 were paid in the first quarter of 2001.

5.     Net Loss Per
Share

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings
Per Share, basic earnings per share is computed by
dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per
share is computed by dividing net loss by the weighted average
number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist
of shares of common stock issuable upon the conversion of the
convertible preferred stock (using the if-converted method) and
shares issuable upon the exercise of stock options and warrants
(using the treasury stock method); common equivalent shares are
excluded from the calculation if their effect is antidilutive,
which is the case in all periods presented. The Company has
excluded the following numbers of shares using this method:

|                     |  |      |           |      |  |      |           |  |  |  |           | 
|-------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                     |  | 2001 |           | 2000 |  | 1999
|                     |  |      |           |      |  |     
|Options outstanding  |  |      | 8,206,103 |      |  |      | 5,603,023 |  |  |  | 4,223,209 | 
|Warrants outstanding |  |      | 140,000   |      |  |      | 140,000   |  |  |  | 691,053   | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 
|Shares excluded      |  |      | 8,346,103 |      |  |      | 5,743,023 |  |  |  | 4,914,262 | 
|                     |  |      |           |      |  |      |           |  |  |  |           | 

Basic and diluted pro forma net loss per share is
computed based on the weighted average number of shares of
common stock outstanding giving effect to the conversion of
convertible preferred stock into common stock upon the
completion of the Companys initial public offering on
March 15, 2000 (using the if-converted method from the
original issue date) as if the conversion and IPO had occurred
on January 1, 2000. Diluted pro forma net loss per share
excludes the impact of stock options and warrants, as the effect
of their inclusion would be antidilutive.

The Company had 87,291 and 267,748 stock options
outstanding that had been exercised but which were subject to
repurchase at December 31, 2001 and 2000, respectively. The
weighted average repurchase price of these options subject to
repurchase was $0.31 and $0.33, at December 31, 2001 and
2000, respectively. The impact of these unvested but exercised
options has been removed from the calculation of weighted
average shares outstanding for purposes of determining basic and
diluted earnings per share and basic and diluted pro forma
earnings per share.

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                |  |                                 |            |        |  |           |            |        |  |           |            |   |  |  |           |   |  |  |            |  
|------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------ |  | --------- | ---------- | ------ |  | --------- | ---------- | - |  |  | --------- | - |  |  | ---------- | -
|                                                                                |  |                                
|                                                                                |  | For the Year Ended December 31,
|                                                                                |  |                                
|                                                                                |  |                                 |            |        |  |          
|                                                                                |  | 2001                            |            | 2000   |  | 1999     
|                                                                                |  |                                 |            |        |  |          
|                                                                                |  | Actual                          |            | Actual |  | Pro Forma |            | Actual |  | Pro Forma
|                                                                                |  |                                 |            |        |  |           |            |        |  |          
|Weighted average shares outstanding                                             |  |                                 | 41,606,726 |        |  |           | 31,143,841 |        |  |           | 35,473,506 |   |  |  | 5,703,655 |   |  |  | 16,952,948 |  
|Weighting of shares subject to repurchase                                       |  |                                 | (177,622   | )      |  |           | (1,369,955 | )      |  |           | (1,369,955 | ) |  |  | (293,148  | ) |  |  | (293,148   | )
|                                                                                |  |                                 |            |        |  |           |            |        |  |           |            |   |  |  |           |   |  |  |            |  
|Weighted average shares used to calculate basic
	and diluted earnings per share |  |                                 | 41,429,104 |        |  |           | 29,773,886 |        |  |           | 34,103,551 |   |  |  | 5,410,507 |   |  |  | 16,659,800 |  
|                                                                                |  |                                 |            |        |  |           |            |        |  |           |            |   |  |  |           |   |  |  |            |  

6.     Concentration
of Risk and Segment Disclosures

Financial instruments that potentially subject
the Company to concentrations of market risk consist of cash and
cash equivalents, short-term investments, and long-term
obligations. Fair values of cash and cash equivalents and
short-term investments approximate cost due to the short period
of time to maturity. The fair values of financial instruments
that are short-term and/or that have little or no market risk
are considered to have a fair value equal to book value. The
Company maintains cash and cash equivalents on deposit at
various institutions that at times exceed the insured limits by
the Federal Deposit Insurance Corporation. This exposes the
Company to potential risk of loss in the event the institutions
become insolvent. The Company does not use derivative financial
instruments; accordingly SFAS No. 133 has no impact on
results.

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

During the three years ended December 31,
2001, the company had sales to certain significant customers, as
a percentage of revenues, as follows:

|           |  |      |    |      |  |      |    |   |  |  |    |  
|---------- |  | ---- | -- | ---- |  | ---- | -- | - |  |  | -- | -
|           |  | 2001 |    | 2000 |  | 1999
|           |  |      |    |      |  |     
|Customer A |  |      |   |      |  |      | 19 | % |  |  |   |  
|Customer B |  |      |   |      |  |      | 10 | % |  |  | 11 | %
|Customer C |  |      |   |      |  |      |   |   |  |  | 13 | %
|Customer D |  |      | 17 | %    |  |      |   |   |  |  |   |  
|           |  |      |    |      |  |      |    |   |  |  |    |  
|           |  |      | 17 | %    |  |      | 29 | % |  |  | 24 | %
|           |  |      |    |      |  |      |    |   |  |  |    |  

At December 31, 2001, one customer
represented approximately 10.5% of outstanding accounts
receivable.

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

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

services for purposes of making decisions and
assessing financial performance. The following table provides
information about the Companys segments. There were no
segments in 1999.

|             |  |                              |         |                              |  |              |       |          |  |             |         |              |  |   |         |   |  |   |       |   |  |   |         |  
|------------ |  | ---------------------------- | ------- | ---------------------------- |  | ------------ | ----- | -------- |  | ----------- | ------- | ------------ |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|             |  |                              |         |                             
|             |  | Year Ended December 31, 2001 |         | Year Ended December 31, 2000
|             |  |                              |         |                             
|             |  | Digital                      |         |                              |  | Digital      |       |         
|             |  | Media                        |         | Media                        |  |              |       | Media    |  | Media       |         |             
|             |  | Services                     |         | Restoration                  |  | Consolidated |       | Services |  | Restoration |         | Consolidated
|             |  |                              |         |                              |  |              |       |          |  |             |         |             
|             |  |                             
|             |  | (In thousands)              
|Revenues     |  | $                            | 7,713   |                              |  | $            | 2,675 |          |  | $           | 10,388  |              |  | $ | 10,688  |   |  | $ | 849   |   |  | $ | 11,537  |  
|Gross margin |  |                              | (3,872  | )                            |  |              | 1,523 |          |  |             | (2,349  | )            |  |   | (1,294  | ) |  |   | 443   |   |  |   | (851    | )
|Net loss     |  |                              | (76,235 | )                            |  |              | (161  | )        |  |             | (76,396 | )            |  |   | (39,291 | ) |  |   | (233  | ) |  |   | (39,524 | )
|Total assets |  | $                            | 78,781  |                              |  | $            | 2,102 |          |  | $           | 80,883  |              |  | $ | 131,110 |   |  | $ | 1,566 |   |  | $ | 132,676 |  

7.     Property and
Equipment

Property and equipment are stated at historical
cost less accumulated depreciation and any impairment
write-downs. Depreciation is computed using the straight-line
method over the estimated useful lives of the property and
equipment that is generally three to five years. Property and
equipment under construction is capitalized and depreciation
commences when the asset is placed in service. Property and
equipment consists of the following:

|                                   |  |                |        |      |  |   |        |  
|---------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                   |  | 2001           |        | 2000
|                                   |  |                |        |     
|                                   |  |               
|                                   |  | (In thousands)
|Production and computer equipment  |  | $              | 14,710 |      |  | $ | 17,103 |  
|Furniture, fixtures and equipment  |  |                | 692    |      |  |   | 729    |  
|Leasehold improvements             |  |                | 109    |      |  |   | 2,668  |  
|Software                           |  |                | 1,773  |      |  |   | 1,232  |  
|Acc. depreciation and amortization |  |                | (9,978 | )    |  |   | (5,777 | )
|                                   |  |                |        |      |  |   |        |  
|Property and equipment, net        |  | $              | 7,306  |      |  | $ | 15,955 |  
|                                   |  |                |        |      |  |   |        |  

Depreciation and amortization expense related to
property and equipment was $7.2 million, $4.6 million
and $924,000 for the years ended December 31, 2001, 2000
and 1999, respectively. See Note 4 for the impact of the special
charge on future depreciation expense.

8.     Acquisitions,
Goodwill, Intangibles and Other Long-Term Assets

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

Activate.netThe
Company acquired 100% of the voting interests of Activate.net
Corporation (Activate) on September 25, 2001.
Activate is a Seattle-based company which provides live and
on-demand webcasting services for a variety of enterprise
business communication needs in all major industry standard
formats. Activate had been operated as a majority-owned
operating company of CMGi, Inc. The acquisition is expected to
provide positive gross margin and operating efficiencies after
the facilities consolidation is completed. Activates
historical operations incorporate many of the services the
Company has previously provided either internally or through
outsourcing, therefore, the Company does not believe that this
results in a segment as defined by SFAS No. 131, rather the
results are presented as digital media services in the
statements of operations.

59



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Total purchase consideration was
$6.6 million, $1.0 million was paid in cash at closing
and the Company assumed $2.4 million of liabilities as a
part of its working capital. The remaining $3.0 million of
the purchase price will be paid in stock or cash in September
2002. The Company may determine the composition of the second
closing payment subject to a number of factors, including the
market price of Loudeyes common stock and the ownership
level the stock would represent to CMGi. This obligation is
presented in the accompanying balance sheet as accrued
acquisition consideration. The purchase consideration was as
follows:

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

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

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

The purchase price allocation set forth above is
tentative and preliminary and is subject to change in future
periods. Amounts allocated to unpatented technology will be
amortized over two years, while the amounts allocated to
acquired contracts will be amortized over one year.

DiscoverMusicIn
March 2001, the Company purchased DiscoverMusic, a Seattle
company that is the largest provider of music samples on the
Internet. The Company paid $4.6 million in cash,
acquisition costs and certain assumed liabilities, net of
DiscoverMusics cash, and issued 3,677,013 shares of common
stock valued at $6.1 million for cash and stock
consideration of $10.7 million. As part of the purchase
price, the Company placed $1.0 million in cash into an
escrow account to pay for certain legal exposures assumed. In
conjunction with the settlement of the Intouch litigation
described in Note 15, the Company released the remaining portion
of the legal escrow fund in March 2002. The total purchase
price, including costs of the acquisition and liabilities
assumed, of $16.3 million was allocated as follows:

|                        |  |               |      | 
|----------------------- |  | ------------- | ---- | 
|                        |  | (In millions)
|                        |  |              
|Current assets acquired |  | $             | 5.2  | 
|Property and equipment  |  |               | 1.1  | 
|Customer list           |  |               | 7.9  | 
|Digital samples archive |  |               | 2.1  | 
|                        |  |               |      | 
|                        |  | $             | 16.3 | 
|                        |  |               |      | 

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

See Note 4 for the impact of the special charge
impairment on these assets acquired.

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

The total purchase price, including costs of the
acquisition, of $6.3 million was allocated as follows:

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

All goodwill and identified intangibles
associated with the acquisition are being amortized over three
years, while the second closing payment was recorded as
additional goodwill and is being amortized over the remaining
two years. The amortization of goodwill ceased at
December 31, 2001 due to the implementation of SFAS
No. 142. At December 31, 2001, the Company performed
an analysis of the carrying value of all of its long-lived
assets, and determined that a portion of the above assets were
impaired. Accordingly, an impairment charge of $1.2 million
was recorded in 2001.

Alive.comOn
December 14, 1999, the Company issued 2,508,848 shares of
common stock and 91,181 options to purchase all of the shares of
Alive.com, Inc. common stock. The deemed fair value of the
common stock and options issued in the acquisition was
approximately $18.7 million. The Company also incurred
acquisition costs and assumed net liabilities totaling $374,000,
for a total purchase price of approximately

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$19.0 million. Substantially all of the
purchase price was allocated to goodwill, work force in-place
and acquired technology, all of which are being amortized on a
straight-line basis over estimated useful lives of three years.

The following table presents the purchase price
and excess purchase price associated with the acquisition of
Alive.com.

|                                                       |  |                |        | 
|------------------------------------------------------ |  | -------------- | ------ | 
|                                                       |  | (In thousands)
|                                                       |  |               
|Value of common stock and common stock options
	issued |  | $              | 18,664 | 
|Net liabilities assumed and transaction costs          |  |                | 390    | 
|                                                       |  |                |        | 
|Excess purchase price                                  |  | $              | 19,054 | 
|                                                       |  |                |        | 

The following table presents the unaudited pro
forma results assuming that the Company had acquired Alive and
Activate at the beginning of fiscal year 1999.

|                                     |  |                |         |      |  |   |         |  
|------------------------------------ |  | -------------- | ------- | ---- |  | - | ------- | -
|                                     |  | 2000           |         | 1999
|                                     |  |                |         |     
|                                     |  |               
|                                     |  | (In thousands)
|                                     |  | [unaudited]   
|Total revenues                       |  | $              | 19,252  |      |  | $ | 4,696   |  
|Net loss to common stockholders      |  |                | (86,731 | )    |  |   | (45,092 | )
|Basic and diluted net loss per share |  | $              | (2.54   | )    |  | $ | (5.76   | )

Subsequent to the impairment charges in 2001 (see
Note 4) the Company had the following goodwill, intangibles and
other long-term assets at December 31, 2001.

|                                              |  |                |        |              |  |          |        |             |  |   |       |  |  |  |             | 
|--------------------------------------------- |  | -------------- | ------ | ------------ |  | -------- | ------ | ----------- |  | - | ----- |  |  |  | ----------- | 
|                                              |  |                |        | Accumulated  |  | Net Book |        | Estimated  
|                                              |  | Gross Asset    |        | Amortization |  | Value    |        | Useful Life
|                                              |  |                |        |              |  |          |        |            
|                                              |  |               
|                                              |  | (In thousands)
|Identified intangibles  VidiPax
	acquisition |  | $              | 2,666  |              |  | $        | (1,370 | )           |  | $ | 1,296 |  |  |  | 3 years     | 
|Goodwill  VidiPax acquisition                |  |                | 2,568  |              |  |          | (1,258 | )           |  |   | 1,310 |  |  |  | 3 years     | 
|Intangibles  DiscoverMusic acquisition       |  |                | 2,129  |              |  |          |       |             |  |   | 2,129 |  |  |  | 1 - 3 years | 
|Intangibles  Activate acquisition            |  |                | 1,745  |              |  |          | (218   | )           |  |   | 1,527 |  |  |  | 1 - 2 years | 
|Other long-term assets                        |  |                | 1,061  |              |  |          | (77    | )           |  |   | 984   |  |  |  | various     | 
|Note receivable  related party               |  |                | 1,000  |              |  |          |       |             |  |   | 1,000 |  |  |  |             | 
|Intangibles  Online radio acquisitions       |  |                | 421    |              |  |          |       |             |  |   | 421   |  |  |  | 3 years     | 
|                                              |  |                |        |              |  |          |        |             |  |   |       |  |  |  |             | 
|                                              |  | $              | 11,590 |              |  | $        | (2,923 | )           |  | $ | 8,667 |  |  |  |             | 
|                                              |  |                |        |              |  |          |        |             |  |   |       |  |  |  |             | 

62



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth information
related to the Companys intangibles and other assets at
December 31, 2000:

|                                         |  |                |        |              |  |          |        |   |  |   |        | 
|---------------------------------------- |  | -------------- | ------ | ------------ |  | -------- | ------ | - |  | - | ------ | 
|                                         |  |                |        | Accumulated  |  | Net Book
|                                         |  | Gross Asset    |        | Amortization |  | Value   
|                                         |  |                |        |              |  |         
|                                         |  |               
|                                         |  | (In thousands)
|Goodwill  acquisition of Alive.com      |  | $              | 14,424 |              |  | $        | (5,013 | ) |  | $ | 9,411  | 
|Other identified intangibles  Alive.com |  |                | 4,630  |              |  |          | (1,637 | ) |  |   | 2,993  | 
|Other identified intangibles  VidiPax   |  |                | 2,666  |              |  |          | (481   | ) |  |   | 2,185  | 
|Acquisition goodwill  VidiPax           |  |                | 457    |              |  |          | (83    | ) |  |   | 374    | 
|Capitalized software development costs   |  |                | 1,304  |              |  |          | (119   | ) |  |   | 1,185  | 
|Partner acquisition costs  warrants     |  |                | 1,146  |              |  |          | (375   | ) |  |   | 771    | 
|Other long-term assets                   |  |                | 561    |              |  |          | (61    | ) |  |   | 500    | 
|                                         |  |                |        |              |  |          |        |   |  |   |        | 
|                                         |  | $              | 25,188 |              |  | $        | (7,769 | ) |  | $ | 17,419 | 
|                                         |  |                |        |              |  |          |        |   |  |   |        | 

9.     Long-Term
Debt, Commitments and Contingencies

On August 22, 2001, the Company entered into
a credit agreement (the Credit Agreement) with a
bank providing for a revolving credit facility (Revolving
Facility) and letters of credit aggregating up to
$15.0 million to be used for working capital and general
corporate needs, and to refinance existing long-term debt. On
October 25, 2001, the Credit Agreement was amended to
increase the principal sum to $19.0 million. Obligations
under the Credit Agreement are collateralized by a security
interest in short-term investments and cash equivalents with a
value of at least $30.0 million. The Revolving Facility
requires monthly payments of interest only until maturity on
July 31, 2003. On July 31, 2002, the Company has an
option to extend the maturity date to July 31, 2004,
provided that the Company is not in default under the Credit
Agreement. At December 31, 2001, $19.0 million was
outstanding under the Revolving Facility. Approximately
$8.0 million of the proceeds were utilized to pay off an
existing line of credit and term loan facility with another bank.

Loans under the Revolving Facility bear interest,
at the Companys option, at the banks prime rate, or
the London Interbank Offered Rate (LIBOR) plus 100
basis points. The interest rates were 2.93% in 2001. The
interest rates will be adjusted after the LIBOR term to reflect
the LIBOR rate in effect at that time.

The Company also has a credit facility that
provided advances for the purchase of capital equipment.
Advances under the equipment loan are payable in 36 equal
monthly installments from inception date and are secured by
assets financed under the agreement. As of December 31,
2001, approximately $753,000 was outstanding under this
equipment facility, which does not allow for prepayment without
penalty. The notes payable bear interest at rates ranging from
8.57% to 9.65%, with various maturity dates through February
2003. A fee equal to 15% of the principal balance is due with
the final payment of each advance. That additional fee is
accrued on a monthly basis and is included in other accrued
expenses and interest expense over the term of the loan.

In connection with the acquisition of Activate in
September 2001, the Company assumed the balance of a promissory
note between Activate and the landlord of the Companys
primary office facility. As of December 31, 2001,
approximately $272,000 was outstanding under the promissory
note. The promissory note bears interest at Prime rate (4.75% at
December 31, 2001), and is secured by a letter of credit in
the amount of $285,000. Principal and interest is payable
monthly and the remaining principal is due on November 30,
2005.

63



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2001, maturities of
long-term debt are as follows:

|                         |       |                |        |        | 
|------------------------ | ----- | -------------- | ------ | ------ | 
|                         |       | (In thousands)
|                         |       |               
|2002                     |       | $              | 804    |       
|2003                     |       |                | 19,084 |       
|2004                     |       |                | 68     |       
|2005                     |       |                | 69     |       
|                         |       |                |        |       
|                         |       |                | 20,025 |       
|Less: current maturities |       |                | (804   | )     
|                         |       |                |        |       
|                         | Total |                | $      | 19,221 | 
|                         |       |                |        |       

Capital Lease
Obligations

In March 2001, in connection with the acquisition
of DiscoverMusic, the Company assumed master lease agreements
with two finance companies for the lease of certain property and
equipment. Borrowings under the lease agreements have individual
terms of 36 months and bear interest ranging from 7.56% to
9.25% and are collateralized by the assets purchased. The leases
expire at various dates ranging from April 2002 through February
2004. As of December 31, 2001, approximately $476,000 was
outstanding under the leases. These leases do not allow for
prepayment without penalty.

In December 2001, the Company entered into a
master lease agreement for the lease of certain equipment and
costs associated with the relocation of our data centers into
one facility. The lease agreement is for a period of
24 months, bears interest at 7.25% and is collateralized by
a letter of credit in the amount of approximately $368,000. As
of December 31, 2001, approximately $368,000 was
outstanding under the lease.

The Company also maintains other various capital
leases with outstanding balances totaling approximately $31,000
at December 31, 2001.

As of December 31, 2001, future minimum
payments under capital leases are as follows:

|                             |  |                |      |  
|---------------------------- |  | -------------- | ---- | -
|                             |  |               
|                             |  | (In thousands)
|                             |  |               
|2002                         |  | $              | 608  |  
|2003                         |  |                | 319  |  
|                             |  |                |      |  
|                             |  |                | 927  |  
|Amount representing interest |  |                | (52  | )
|                             |  |                |      |  
|                             |  |                | 875  |  
|Less: current portion        |  |                | (564 | )
|                             |  |                |      |  
|Total                        |  | $              | 311  |  
|                             |  |                |      |  



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

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

64



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum lease payments under operating
leases as of December 31, 2001 are as follows:

|      |  |                |        | 
|----- |  | -------------- | ------ | 
|      |  |               
|      |  | (In thousands)
|      |  |               
|2002  |  | $              | 3,791  | 
|2003  |  |                | 3,784  | 
|2004  |  |                | 3,593  | 
|2005  |  |                | 2,022  | 
|      |  |                |        | 
|Total |  | $              | 13,190 | 
|      |  |                |        | 

Rent expense under operating leases totaled
approximately $2.8 million, $1.8 million and $267,000
during 2001, 2000 and 1999, respectively. Approximately $600,000
of the 2001 rent expense is included within the special charge,
as it related to that portion of rent for facilities which had
been vacated under the Companys plans of consolidation.
The Company is also required to make royalty payments to the
music companies based upon the amount of revenues the Company
generates from the music samples service. Amounts paid under
such agreements are included in cost of revenues and to date
have not been material.



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

Between July 26, 2001 and August 30,
2001, several substantially similar class action complaints were
filed in the United States District Court for the Southern
District of New York against us and certain of our present and
former officers and directors, as well as against certain
underwriters who handled our March 15, 2000 initial public
offering of common stock. The various complaints were
purportedly filed on behalf of a class of persons who purchased
our common stock during the time period beginning on
March 15, 2000 and ending on December 6, 2000. The
complaints together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934, primarily based on
the allegation that there was undisclosed compensation received
by our underwriters in connection with the our initial public
offering and the allegation that the underwriters entered into
undisclosed arrangements with some investors that were designed
to distort and/or inflate the market price for our common stock
in the aftermarket following the initial public offering. The
allegations set forth in these complaints are substantially
similar to those made in class actions filed against over 300
other companies that issued securities within the past three
years. These actions have all been consolidated before the same
judge for pretrial purposes. No specific amount of damages has
been claimed. The individual defendants and we have demanded to
be indemnified by the underwriter defendants pursuant to the
underwriting agreement entered into at the time of the initial
public offering.

The Company believes that the individual
defendants and we have meritorious defenses to the claims made
in the complaint and we intend to defend the actions vigorously.
However, there can be no assurance that we will be successful on
our defenses or in our assertion of indemnification, and an
adverse resolution of the lawsuit could have a material adverse
affect on our financial position and results of operation in the
period in which the lawsuit is resolved. We are not presently
able to reasonably estimate potential losses, if any, related to
the lawsuit, although we do not believe it will have a material
adverse impact on our financial condition or results of
operations.

On May 8, 2001, the Company filed an
arbitration demand with the American Arbitration Association
(AAA) against Valley Media, Inc
(Valley). The Company alleges that Valley is liable
for substantial damages for material breaches of a Services
Agreement between the companies dated as of December 17,
1999, in which Valley made representations and warranties and
agreed to perform certain obligations to facilitate the creation
of a venture to create and market an Internet music clip
streaming service. The Company provided notice of its intent to
terminate that agreement by letter dated February 6, 2001,
and that termination was effective 30 days thereafter. The
Company has also alleged claims for misrepresentation, fraud,
unjust enrichment and promissory estoppel. Valley has filed an
answer in which it denies liability, and

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

asserts counterclaims for breach of contract,
conversion, and declaratory relief. The arbitration was stayed
by Valleys filing of a petition in bankruptcy, and the
company intends to pursue a claim in the bankruptcy proceedings.

The Company is subject to legal proceedings and
claims that arise in the ordinary course of business. As of
December 31, 2001, management is not aware of any asserted
or pending litigation or claims against the Company that would
have a material adverse effect on the Companys financial
condition, results of operations or liquidity.

10.     Income
Taxes

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

At December 31, 2001, the Company had net
operating loss carryforwards of approximately $99.2 million
related to Federal and state jurisdictions. Utilization of net
operating loss carryforwards are subject to certain limitations
under Section 382 of the Internal Revenue Code of 1986, as
amended. These carryforwards will begin to expire in 2018. The
Company did not provide any current or deferred Federal or state
income tax provision or benefit for any of the periods presented
because it has experienced operating losses since inception, and
has provided full valuation allowances on deferred tax assets
because of uncertainty regarding their realizability. The
valuation allowance increased by $24.3 million,
$11.2 million and $3.7 million in 2001, 2000 and 1999,
respectively. Deferred taxes consist primarily of net operating
loss carryforwards and timing differences for customer deposits,
allowances, stock-compensation expense and the difference
between book and tax depreciation.

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

The components of the deferred tax assets and
liabilities were as follows:

|                     |                                  |                               |         |        |        |      |         |        |        |  |        |       |       | 
|-------------------- | -------------------------------- | ----------------------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------ |  | ------ | ----- | ----- | 
|                     |                                  |                              
|                     |                                  | December 31,                 
|                     |                                  |                              
|                     |                                  | 2001                          |         | 2000   |        | 1999
|                     |                                  |                               |         |        |        |     
|                     |                                  |                              
|                     |                                  | (In thousands)               
|Deferred tax assets: |                                  |                               |         |        |        |      |         |        |        |  |        |      
|                     | Net operating loss carryforwards |                               | $       | 34,731 |        |      | $       | 11,784 |        |  | $      | 3,724 |      
|                     | Other                            |                               |         | 4,871  |        |      |         | 3,562  |        |  |        | 439   |      
|                     |                                  |                               |         |        |        |      |         |        |        |  |        |      
|                     |                                  | Total net deferred tax assets |         |        | 39,602 |      |         |        | 15,346 |  |        |       | 4,163 | 
|Valuation allowance  |                                  |                               | (39,602 | )      |        |      | (15,346 | )      |        |  | (4,163 | )    
|                     |                                  |                               |         |        |        |      |         |        |        |  |        |      
|                     |                                  | Total                         |         | $      |       |      |         | $      |       |  |        | $     |      | 
|                     |                                  |                               |         |        |        |      |         |        |        |  |        |      

11.     Stockholders
Equity

The Company is authorized to issue 100,000,000
shares of common stock, $0.001 par value, and 5,000,000 shares
of undesignated preferred stock, $0.001 par value.

66



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |             
| | ------------
| | 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. At
December 31, 2001, the Company had approximately 140,000
warrants outstanding with exercise prices ranging from $3.50 to
$10.00.



| |                
| | ---------------
| | Preferred Stock

The board of directors has the authority, without
action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to
designate the rights, preferences and privileges of each series,
any or all of which may be greater than the rights of the common
stock. The Company has no present plans to issue any shares of
preferred stock.



| |                              
| | -----------------------------
| | Beneficial Conversion Feature

In December 1999, the Company issued 7,510,989
shares of Series D convertible preferred stock at a
purchase price of $6.37 per share. Such shares are convertible
into shares of common stock on a one-for-one basis. The deemed
fair value of the common stock was based on the low-point of the
anticipated filing range for the initial public offering.
Consequently, the transaction resulted in a beneficial
conversion feature of $14,120,659. The beneficial conversion
feature has been reflected as a preferred stock dividend for the
year ended December 31, 1999 in the accompanying financial
statements.



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

The following shares of common stock have been
reserved for future issuance as of December 31, 2001:

|                                  |  |  |            | 
|--------------------------------- |  |  | ---------- | 
|Employee stock option plans       |  |  | 10,606,569 | 
|2000 Director stock option plan   |  |  | 250,000    | 
|2000 Employee stock purchase plan |  |  | 131,081    | 
|Common stock warrants             |  |  | 140,000    | 
|                                  |  |  |            | 
|                                  |  |  | 11,127,650 | 
|                                  |  |  |            | 

12.     Employee
Benefit Plans



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

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

67



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

In December 1999 the board of directors approved
the creation of the 2000 Stock Option Plan. This plan provides
for the grant of incentive stock options to employees, including
employee directors, and of nonstatutory stock options to
employees, directors and consultants. The 2000 plan provides for
the issuance of options to purchase up to 2,500,000 shares of
the Companys common stock, plus an automatic annual
increase on the first day of each of the fiscal years beginning
in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 5% of
our outstanding common stock on the last day of the immediately
preceding fiscal year or a lesser number of shares as our Board
determines. Options granted prior to the March 2000 initial
public offering may be exercised whether or not fully vested.
Unvested shares issued are subject to repurchase upon
termination of service at the original exercise price.



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

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



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

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



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

In December 1999, the board of directors approved
the creation of the 2000 Employee Stock Purchase Plan (ESPP). A
total of 200,000 shares of common stock have been reserved for
issuance under the ESPP, with the number of shares reserved for
issuance under the ESPP subject to an automatic annual increase
on the first day of each of the fiscal years beginning in 2001,
2002, 2003, 2004 and 2005 equal to the lesser of 0.75% of the
Companys outstanding common stock on the last day of the
immediately preceding fiscal year or a lesser number of shares
as the board of directors determines. The increase for 2001 was
275,175 shares, and a total of 344,094 shares have been issued
under the Plan.



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

The Company has a 401(k) plan covering our
full-time employees over age twenty-one. Employees are eligible
after three months employment. Under the 401(k) plan,
employees may elect to reduce their current compensation by up
to 20% up to the statutorily prescribed annual limit ($11,000 in
2002) and to have the amount of such reduction contributed to
the 401(k) plan. The 401(k) plan permits, but does not
require, Company matching contributions to our 401(k) plan
on behalf of all participants in the 401(k) plan. The
Company expensed a contribution of $94,000 in 2001 that was
contributed to the plan participants accounts in March
2002. No expense was incurred in 2000 or 1999.

The Company accounts for stock options in
accordance with APB No. 25. Under APB No. 25, the
Company records compensation expense over the vesting period for
the difference between the exercise price and the deemed fair
market value for financial reporting purposes of stock options
granted. The Company has adopted the disclosure-only provisions
of SFAS No. 123. Had compensation expense been recognized
on stock options issuance based on the fair value of the options
at the date of grant and recognized over the vesting period, the
Companys net loss would have been increased to the pro
forma amounts indicated below.

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                      |             |                |   |         |   |      |   |         |   |  |   |         |  
|------------------------------------- | ----------- | -------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                      |             |               
|                                      |             | December 31,  
|                                      |             |               
|                                      |             | 2001           |   | 2000    |   | 1999
|                                      |             |                |   |         |   |     
|                                      |             |               
|                                      |             | (In thousands)
|Net loss to common shareholders:      |             |                |   |         |   |      |   |         |   |  |   |        
|                                      | As reported |                | $ | (76,396 | ) |      | $ | (39,524 | ) |  | $ | (25,023 | )
|                                      | Pro forma   |                |   | (77,260 | ) |      |   | (44,672 | ) |  |   | (25,396 | )
|Basic and diluted net loss per share: |             |                |   |         |   |      |   |         |   |  |   |        
|                                      | As reported |                | $ | (1.84   | ) |      | $ | (1.33   | ) |  | $ | (4.62   | )
|                                      | Pro forma   |                | $ | (1.86   | ) |      | $ | (1.50   | ) |  | $ | (4.69   | )

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

 Risk-free interest rates of 4.0% to
5.71%

 Expected lives of 5 years

 Expected dividend yields of 0%

 Expected volatility of 0% to 75%

Option activity under the plans was as follows:

|             |  |                                |  |        |            |                  |  |                  |      |  |  |  |      | 
|------------ |  | ------------------------------ |  | ------ | ---------- | ---------------- |  | ---------------- | ---- |  |  |  | ---- | 
|             |  |                                |  |        |            | Weighted Average |  |                 
|             |  |                                |  |        |            | Grant Date       |  | Weighted Average
|             |  |                                |  | Number |            | Fair Value       |  | Exercise Price  
|             |  |                                |  |        |            |                  |  |                 
|Outstanding, |  | December 31, 1998              |  |        | 1,295,500  |                  |  |                  |      |  |  |  | 0.07 | 
|             |  | Granted                        |  |        | 4,387,431  |                  |  |                  | 2.15 |  |  |  | 0.98 | 
|             |  | Exercised                      |  |        | (879,409   | )                |  |                  |      |  |  |  | 0.22 | 
|             |  | Cancelled                      |  |        | (580,313   | )                |  |                  |      |  |  |  | 0.16 | 
|             |  |                                |  |        |            |                  |  |                  |      |  |  |  |      | 
|Outstanding, |  | December 31, 1999              |  |        | 4,223,209  |                  |  |                  |      |  |  |  | 0.97 | 
|             |  | Granted equal to market value  |  |        | 4,127,847  |                  |  |                  | 5.46 |  |  |  | 7.28 | 
|             |  | Granted less than market value |  |        | 140,000    |                  |  |                  | 6.60 |  |  |  | 7.03 | 
|             |  | Exercised                      |  |        | (1,031,869 | )                |  |                  |      |  |  |  | 0.32 | 
|             |  | Cancelled                      |  |        | (1,856,164 | )                |  |                  |      |  |  |  | 4.79 | 
|             |  |                                |  |        |            |                  |  |                  |      |  |  |  |      | 
|Outstanding, |  | December 31, 2000              |  |        | 5,603,023  |                  |  |                  |      |  |  |  | 4.64 | 
|             |  | Granted                        |  |        | 7,996,606  |                  |  |                  | 0.97 |  |  |  | 1.11 | 
|             |  | Exercised                      |  |        | (257,093   | )                |  |                  |      |  |  |  | 0.48 | 
|             |  | Cancelled                      |  |        | (5,136,433 | )                |  |                  |      |  |  |  | 4.36 | 
|             |  |                                |  |        |            |                  |  |                  |      |  |  |  |      | 
|Outstanding, |  | December 31, 2001              |  |        | 8,206,103  |                  |  |                  |      |  |  |  | 1.51 | 
|             |  |                                |  |        |            |                  |  |                  |      |  |  |  |      | 

69



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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following information is provided for options
outstanding and exercisable at December 31, 2001:

|      |                 |             |  |                  |           |                  |  |        |       |                  |  |  |      |  |  |  |           |  |  |   |       | 
|----- | --------------- | ----------- |  | ---------------- | --------- | ---------------- |  | ------ | ----- | ---------------- |  |  | ---- |  |  |  | --------- |  |  | - | ----- | 
|      |                 |             |  |                 
|      |                 | Outstanding |  | Exercisable     
|      |                 |             |  |                 
|      |                 |             |  | Weighted Average |           |                 
|      |                 |             |  | Weighted Average |           | Remaining        |  |        |       | Weighted Average
|Range |                 | Number      |  | Exercise Price   |           | Contractual Life |  | Number |       | Exercise Price  
|      |                 |             |  |                  |           |                  |  |        |       |                 
|      | $ 0.06  $ 0.50 |             |  |                  | 1,938,934 |                  |  | $      | 0.43  |                  |  |  | 9.14 |  |  |  | 1,332,434 |  |  | $ | 0.40  | 
|      | $ 0.51  $ 1.06 |             |  |                  | 1,775,524 |                  |  |        | 0.87  |                  |  |  | 8.86 |  |  |  | 418,944   |  |  |   | 0.77  | 
|      | $1.094  $ 1.20 |             |  |                  | 1,895,536 |                  |  |        | 1.13  |                  |  |  | 9.25 |  |  |  | 318,251   |  |  |   | 1.13  | 
|      | $ 1.21  $ 3.00 |             |  |                  | 2,419,776 |                  |  |        | 2.17  |                  |  |  | 9.10 |  |  |  | 1,115,460 |  |  |   | 2.58  | 
|      | $3.875  $19.75 |             |  |                  | 176,333   |                  |  |        | 14.85 |                  |  |  | 8.45 |  |  |  | 44,853    |  |  |   | 14.87 | 
|      |                 |             |  |                  |           |                  |  |        |       |                  |  |  |      |  |  |  |           |  |  |   |       | 
|      |                 |             |  |                  | 8,206,103 |                  |  | $      | 1.51  |                  |  |  | 9.08 |  |  |  | 3,229,942 |  |  | $ | 1.47  | 

Included in the exercised options outstanding are
87,291 shares subject to repurchase under provisions of the
stock option plans at a weighted average exercise price of $0.31.

13.     Stock-Based
Compensation

The Company records deferred stock compensation
for the difference between the exercise price of stock options
granted and the deemed fair market value or the price of the
Companys common shares as traded on the NASDAQ exchange at
the date of grant. The deferred compensation is amortized over
the vesting period of the related options, which is generally
four and one-half years. Through December 31, 2001,
$10.9 million had been recorded as deferred stock
compensation.

During the year ended December 31, 2001, the
Company recorded $359,000 of stock-based compensation.
Stock-based compensation for the year ended December 31,
2000 consisted of $4.5 million in amortization of deferred
stock compensation, related to stock options previously granted
below deemed fair market value, $1.3 million in
compensation expense related to the variable accounting
treatment and the subsequent termination in the third quarter of
2000 of our consultant options, a charge of $400,000 related to
the acceleration of options and $820,000 in credits related to
the reversal of previously amortized deferred stock compensation
due to option cancellations. In the fourth quarter of 2000, we
accelerated the vesting of approximately 660,000 options that
resulted in a charge of approximately $400,000 to stock-based
compensation. Approximately $883,000 remains in unamortized
deferred stock compensation, of which approximately $600,000 is
expected to be amortized in 2002. Stock based compensation in
1999 of $1.6 million was related to the amortization of
stock options granted below the deemed fair market value of our
common stock at the time of grant.

In July 2001, the Company exchanged 1,083,250
employee options with an exercise price greater than $4.30 for
812,443 new options with an exercise price of $1.21. These new
options are accounted for as variable options; however since the
exchange, the Companys stock price has declined in value,
and no stock-based compensation charges have been generated.

The Company records stock-based compensation
charges as a separate component of operating expenses. That
amount represents the consulting expenses, amortization of stock
options granted below fair market

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LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value, the charges for acceleration of options
and amounts paid under rescission. These amounts can be
allocated to the other expense categories in the accompanying
statements of operations as follows:

|                           |  |                |     |      |  |      |       |  |  |   |       | 
|-------------------------- |  | -------------- | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  | 2001           |     | 2000 |  | 1999
|                           |  |                |     |      |  |     
|                           |  |               
|                           |  | (In thousands)
|Production (cost of sales) |  | $              | 30  |      |  | $    | 456   |  |  | $ | 202   | 
|Research and development   |  |                | 19  |      |  |      | 283   |  |  |   | 126   | 
|Sales and marketing        |  |                | 50  |      |  |      | 749   |  |  |   | 333   | 
|General and administrative |  |                | 260 |      |  |      | 3,921 |  |  |   | 893   | 
|                           |  |                |     |      |  |      |       |  |  |   |       | 
|                           |  | $              | 359 |      |  | $    | 5,409 |  |  | $ | 1,554 | 
|                           |  |                |     |      |  |      |       |  |  |   |       | 

14.     Related Party
Transactions

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

On October 26, 2001, the Company entered
into an agreement with the Tobiass, pursuant to which
Loudeye purchased four million shares of Loudeye common stock
from the Tobiass for $2.0 million, or $0.50 per
share, and also entered into a comprehensive agreement with the
Tobiass, including the extension of a $2.0 million
secured line of credit to the Tobiass (the
Loan). The Tobiass had previously entered into a
loan agreement with City National Bank to borrow a principal
amount of $3.0 million. The Company secured
$2.5 million of the principal amount with a letter of
credit. The $2.0 million payment due to Mr. Tobias
from the Company for the common stock was paid directly to City
National Bank to reduce the current outstanding principal
balance to $500,000. The new credit line is collateralized by
liens on certain real property assets owned by Mr. Tobias,
as well as all his remaining 4.6 million Loudeye shares.
Under the terms of the agreement, the collateral shares will be
restricted from public market sale, without Loudeyes
consent, until the later of January 31, 2003, or the full
repayment of the credit facility. The credit line matures
June 30, 2003. As of December 31, 2001, the Company
had extended loans of $1.0 million under the credit line,
which is presented in intangibles and other long-term assets in
the accompanying balance sheets. The Company extended an
additional $350,000 under the credit facility in 2002. As part
of the agreement, Mr. Tobias granted the Board of Directors
of the Company an irrevocable proxy to vote the remaining shares
of Common Stock owned by Mr. Tobias at any
stockholders meeting. The proxy terminates on the later of
January 31, 2003 or the repayment of the Loan. In addition,
as part of the agreement, Mr. Tobias resigned from the
Companys Board of Directors. The agreement also permits
Mr. Tobias to establish a program for sales of his shares
consistent with Rule 10b5-1 under the Securities Exchange
Act of 1934 and with Rule 144 under the Securities Act of
1933, so long as the minimum per share sales price of the shares
under such plan equals or exceeds $1.25. The Company has also
agreed to exercise reasonable efforts to identify and to assist
Mr. Tobias in identifying a private buyer for some or all
of Mr. Tobiass shares, on terms acceptable to
Mr. Tobias.

In addition, if under the Rule 10b5-1
program described above, Mr. Tobias is unable to sell
shares of Loudeye common stock so that the proceeds from these
sales equal the lesser of (a) $500,000 or (b) the proceed
from sales of 150% of the maximum number of shares that could
have been sold by Mr. Tobias under Rule 144 during the
calendar quarter multiplied by the Discounted Share Price (as
defined below) (the Minimum Liquidity Commitment),
then Mr. Tobias may require the Company to purchase shares
from him at the Discounted Share Price so that his total
proceeds for the quarter equal the Minimum Liquidity Amount. The
Discounted Share Price is the lesser of (x) the average
closing bid price of the Companys

71



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

common stock for the trailing 30 trading days or
(y) 95% of the closing bid price of the Companys
common stock on the last trading day of the quarter. This right
expires on the earlier of (i) three business days following
June 30, 2003, (ii) repayment in full of the Loan or
(iii) such time as Mr. Tobias ceases to be the
beneficial or record owner of any shares of the Companys
common stock.

On June 14, 2000, the Company entered into a
five-year lease agreement with a company whose president and
sole shareholder was a vice president of the Company. The
monthly rental payments are approximately $25,000 per month,
with scheduled annual increases throughout the term of the
lease. Total payments during the years ended December 31,
2001 and 2000 were approximately $362,000 and $163,000, respectively. This
vice president resigned in June 2001.

15.     Subsequent
Events

In connection with the acquisition of
DiscoverMusic.com, Inc. Loudeye assumed certain liabilities and
contingencies, including a patent infringement law suit filed on
March 31, 2000 by Intouch Group, Inc.
(InTouch), a California corporation, against
Amazon.com, Inc., a Delaware corporation, Liquid Audio, Inc., a
Delaware corporation, Listen.com, Inc., a California
corporation, Entertaindom LLC, a Delaware corporation, and
DiscoverMusic.com, Inc. On February 6, 2002, the Company
executed an agreement with Intouch to settle all disputes, the
settlement amount was immaterial to the financial statements
presented herein. Pursuant to this agreement, Intouch released
all claims against Loudeye Technologies, Loudeye Samples
Services, Inc., and DiscoverMusic.com, and granted a license
under Intouchs patents that extends to all customers of
Loudeyes sample services customers to the extent that the
customers are operating in connection with Loudeye. Through
their attorneys, Loudeye and Intouch have stipulated to a
dismissal of their claims in the action.

(Unaudited)

On March 8, 2002, the Company announced a
realignment of management and operations following the
completion of the Activate consolidation. This reduction in
force of approximately 12% is expected to result in salaries and
benefits savings of $2.7 million annually and cost an
additional $750,000 to $1.0 million in related severance
and outplacement services.

16.     Quarterly
Financial Information (Unaudited)

The following table sets forth certain unaudited
quarterly statement of operations data for the eight quarters
ended December 31, 2001. In the opinion of management, this
information has been prepared substantially on the same basis as
the audited consolidated financial statements and all necessary
adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly
data should be read in conjunction with our

72



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##### Table of Contents



LOUDEYE TECHNOLOGIES, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

audited consolidated financial statements and the
notes thereto. The operating results for any quarter are not
necessarily indicative of the operating results for any future
period.

|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |       | 
|-------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------- | -------- |  | -------- | ------- | --------- |  | -------- | ------- | -------- | - | -------- | ------- | --------- |  | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- |  | - | ------- | ----- | 
|                                       |                                              |                                         
|                                       |                                              | Three-Month Periods Ended               
|                                       |                                              |                                         
|                                       |                                              | Dec. 31,                                 |         | Sep. 30, |  | June 30, |         | March 31, |  | Dec. 31, |         | Sep. 30, |   | June 30, |         | March 31,
|                                       |                                              | 2001                                     |         | 2001     |  | 2001     |         | 2001      |  | 2000     |         | 2000     |   | 2000     |         | 2000     
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |          
|                                       |                                              |                                         
|                                       |                                              | (In thousands, except per share amounts)
|REVENUES                               |                                              | $                                        | 3,285   |          |  | $        | 2,498   |           |  | $        | 2,676   |          |   | $        | 1,929   |           |  | $ | 3,918   |       |  | $ | 3,418   |       |  | $ | 2,552   |       |  | $ | 1,649   |      
|COST OF REVENUES                       |                                              |                                          | 4,189   |          |  |          | 2,738   |           |  |          | 2,539   |          |   |          | 3,271   |           |  |   | 3,775   |       |  |   | 3,396   |       |  |   | 3,047   |       |  |   | 2,170   |      
|OPERATING EXPENSES:                    |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      
|                                       | Research and development                     |                                          |         | 1,851    |  |          |         | 2,459     |  |          |         | 2,739    |   |          |         | 2,670     |  |   |         | 1,875 |  |   |         | 1,816 |  |   |         | 1,780 |  |   |         | 1,313 | 
|                                       | Sales and marketing                          |                                          |         | 2,068    |  |          |         | 2,001     |  |          |         | 2,728    |   |          |         | 2,612     |  |   |         | 3,697 |  |   |         | 3,920 |  |   |         | 4,228 |  |   |         | 2,776 | 
|                                       | General and administrative                   |                                          |         | 3,392    |  |          |         | 2,508     |  |          |         | 2,452    |   |          |         | 2,750     |  |   |         | 2,531 |  |   |         | 2,016 |  |   |         | 1,881 |  |   |         | 1,651 | 
|                                       | Amortization of intangibles and other assets |                                          |         | 2,232    |  |          |         | 2,131     |  |          |         | 1,582    |   |          |         | 2,228     |  |   |         | 2,113 |  |   |         | 2,051 |  |   |         | 1,826 |  |   |         | 1,703 | 
|                                       | Stock-based compensation                     |                                          |         | 148      |  |          |         | 313       |  |          |         | (995     | ) |          |         | 893       |  |   |         | 1,007 |  |   |         | 1,035 |  |   |         | 228   |  |   |         | 3,139 | 
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      
|                                       |                                              |                                          | 9,691   |          |  |          | 9,412   |           |  |          | 8,506   |          |   |          | 11,153  |           |  |   | 11,223  |       |  |   | 10,838  |       |  |   | 9,943   |       |  |   | 10,582  |      
|                                       | Special Charges                              |                                          |         | 16,799   |  |          |         | 2,721     |  |          |         | 3,118    |   |          |         | 14,623    |  |   |         | 947   |  |   |         |      |  |   |         |      |  |   |         |      | 
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      
|OPERATING LOSS                         |                                              |                                          | (27,394 | )        |  |          | (12,373 | )         |  |          | (11,487 | )        |   |          | (27,118 | )         |  |   | (12,027 | )     |  |   | (10,816 | )     |  |   | (10,438 | )     |  |   | (11,103 | )    
|OTHER, NET                             |                                              |                                          | 188     |          |  |          | 364     |           |  |          | 504     |          |   |          | 920     |           |  |   | 1,359   |       |  |   | 1,361   |       |  |   | 1,559   |       |  |   | 581     |      
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      
|NET LOSS                               |                                              | $                                        | (27,206 | )        |  | $        | (12,009 | )         |  | $        | (10,983 | )        |   | $        | (26,198 | )         |  | $ | (10,668 | )     |  | $ | (9,455  | )     |  | $ | (8,879  | )     |  | $ | (10,522 | )    
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      
|EARNINGS PER SHARE  BASIC AND DILUTED |                                              | $                                        | (0.65   | )        |  | $        | (0.27   | )         |  | $        | (0.26   | )        |   | $        | (0.68   | )         |  | $ | (0.30   | )     |  | $ | (0.27   | )     |  | $ | (0.25   | )     |  | $ | (0.84   | )    
|                                       |                                              |                                          |         |          |  |          |         |           |  |          |         |          |   |          |         |           |  |   |         |       |  |   |         |       |  |   |         |       |  |   |         |      



---



|    |                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per share is computed independently for
	each of the periods presented. Therefore, the sum of the
	quarterly per share amounts will not necessarily equal the total
	amount for the year. See Note 5 for an explanation of the
	determination of the number of weighted average shares used to
	compute pro forma net loss per share amounts.

73



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##### Table of Contents






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

None.




PART III




Item
10     Directors and Executive
Officers of the Registrant

The information required by this Item is
contained in part in the sections captioned Board of
Directors-Nominees for Director, Board of
Directors  Continuing Directors Not Standing for
Election This Year, Board of Directors 
Contractual Arrangements, Executive Officers
and Voting Securities and Principal
Holders-Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement for Loudeyes
Annual Meeting of Shareholders scheduled to be held on
May 23, 2002 and such information is incorporated herein by
reference.




Item
11     Executive
Compensation

The information required by this Item is
incorporated by reference to the information contained in the
section captioned Compensation and Benefits of the
Proxy Statement for Loudeyes Annual Meeting of
Shareholders scheduled to be held on May 23, 2002.




Item
12     Security Ownership of Certain
Beneficial Owners and Management

The information required by this Item is
incorporated by reference to the information contained in the
sections captioned Voting Securities and Principal
Holders of the Proxy Statement for Loudeyes Annual
Meeting of Shareholders scheduled to be held on May 23,
2002.




Item
13     Certain Relationships and
Related Transactions

The information required by this Item is
incorporated by reference to the information contained in the
section captioned Voting Securities and Principal
Holders  Certain Transactions of the Proxy
Statement for Loudeyes Annual Meeting of Shareholders
scheduled to be held on May 23, 2002.




PART IV




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

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

1.     Financial
Statements:

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



| |                                                                  
| | -----------------------------------------------------------------
| | Index to Consolidated Financial Statements                       
| | Report of Independent Public Accountants                         
| | Consolidated Balance Sheets                                      
| | Consolidated Statements of Operations                            
| | Consolidated Statements of Stockholders
        Equity (Deficit)
| | Consolidated Statements of Cash Flows                            
| | Notes to Consolidated Financial Statements                       



| |                                                          
| | ---------------------------------------------------------
| | 2.     Schedules
        Supporting Financial Statements:

Report of Independent Public Accountants on
Schedule

Schedule II  Valuation and Qualifying
Accounts


74



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##### Table of Contents



3.     Exhibits:

| |          |      |  |                                                                                                                                                                                                  
| | -------- | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1(1)   |      |  | Agreement and Plan of Reorganization dated
	November 19, 1999 between Loudeye Technologies, Inc. and
	Alive.com, Inc.                                                                            
| | 2.2(5)   |      |  | Agreement and Plan of Merger among Loudeye
	Technologies, Inc., DiscoverMusic.com, Inc. and Santa
	Acquisition, Inc. dated January 30, 2001.                                                     
| | 3.1(1)   |      |  | Fifth Amended and Restated Certificate of
	Incorporation of Loudeye Technologies, Inc.                                                                                                           
| | 3.2(1)   |      |  | Form of Amended and Restated Certificate of
	Incorporation of Loudeye Technologies, Inc.                                                                                                         
| | 3.4      |      |  | Amended Bylaws of Loudeye Technologies, Inc.
	dated January 18, 2002 (filed herewith).                                                                                                           
| | 4.1(1)   |      |  | Form of Loudeye Technologies, Inc. common stock
	certificate.                                                                                                                                    
| | 10.1(1)  |      |  | Form of Indemnification Agreement between Loudeye
	Technologies, Inc. and each of its officers and directors.                                                                                    
| | 10.2(1)  |      |  | 1998 Stock Option Plan, as amended.                                                                                                                                                              
| | 10.3(1)  |      |  | Alive.com, Inc. 1998 Stock Option Plan.                                                                                                                                                          
| | 10.4(1)  |      |  | 2000 Stock Option Plan.                                                                                                                                                                          
| | 10.5(1)  |      |  | 2000 Director Stock Option Plan.                                                                                                                                                                 
| | 10.6(1)  |      |  | 2000 Employee Stock Purchase Plan.                                                                                                                                                               
| | 10.7(1)  |      |  | Amended and Restated Investors Rights
	Agreement dated December 14, 1999 among Loudeye
	Technologies, Inc. and certain holders of our preferred stock.                                          
| | 10.8(1)  |      |  | Lease Agreement dated August 10, 1999
	between Loudeye Technologies, Inc. and Times Square Building
	L.L.C. for offices at Times Square Building, 414 Olive Way,
	Suite 300, Seattle, Washington.
| | 10.9(1)  |      |  | Lease Agreement dated September 1, 1998
	between Loudeye Technologies, Inc. and Martin Tobias for offices
	at 3406 E. Union Street, Seattle, Washington.                                         
| | 10.10(1) |      |  | Lease Agreement dated October 28, 1999
	between Loudeye Technologies, Inc. and Westlake Park Associates
	for offices at Centennial Building, 1904 Fourth Avenue, Seattle,
	Washington.           
| | 10.11(1) |      |  | Lease Agreement dated November 9, 1999
	between Loudeye Technologies, Inc. and Downtown Entertainment
	Associates, LP for offices at 1424 Second Street, Santa Monica,
	California.              
| | 10.12(1) |      |  | Loan and Security Agreement with Dominion Venture
	Finance L.L.C. dated June 15, 1999 between Loudeye
	Technologies, Inc. and Dominion Venture Finance L.L.C.                                    
| | 10.13(1) |      |  | Offer Letter to Douglas Schulze dated
	August 30, 1999.                                                                                                                                          
| | 10.14(1) |      |  | Offer Letter to James Van Kerkhove dated
	November 5, 1999.                                                                                                                                      
| | 10.15(1) |      |  | Offer Letter to David Weld dated December 2,
	1999.                                                                                                                                              
| | 10.16(1) |      |  | Services Agreement between Loudeye Technologies,
	Inc. and Akamai Technologies, Inc. dated as of February 15,
	2000.                                                                             
| | 10.17(2) |      |  | Amended and Restated Loan and Security Agreement
	between Imperial Bank and Loudeye Technologies, Inc. dated
	May 17, 2000.                                                                      
| | 10.18(2) |      |  | Amended and Restated Services Agreement between
	Valley Media, Inc. and Loudeye Technologies, Inc. dated April
	2000.                                                                            
| | 10.19(2) |      |  | Stock Purchase Agreement dated as of
	June 14, 2000 by and among Loudeye Technologies, Inc.,
	Vidipax, Inc. and James Lindner.                                                                   
| | 10.20(2) |      |  | First Amendment of Office Lease Agreement dated
	April 3, 2000 between Times Square Building L.L.C. and
	Loudeye Technologies, Inc.                                                              
| | 10.21(2) |      |  | Second Amendment of Office Lease Agreement dated
	May 1, 2000 between Times Square Building L.L.C. and
	Loudeye Technologies, Inc.                                                               
| | 10.22(2) |      |  | Lease Agreement dated June 14, 2000 between
	Brown Bear Realty Corporation and Loudeye Technologies, Inc.                                                                                        
| | 10.23    | (3) |  | Volume Purchase Order dated July 19, 2000 by
	and between MusicBank and Loudeye Technologies, Inc.                                                                                               
| | 10.24(6) |      |  | Offer Letter to Todd Hinders dated
	December 15, 2000.                                                                                                                                           

75



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##### Table of Contents



| |          |      |  |                                                                                                                                                                                                                                                                                                               
| | -------- | ---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.25(4) |      |  | Underlease Agreement and Agreement to Lease dated
        December 21, 2000 between WCRS Limited and Loudeye
        Technologies, Inc.                                                                                                                                                                       
| | 10.26    | (4) |  | Encoding Services and Compact Disc Purchase
        Agreement between XM Satellite Radio, Inc., and Loudeye
        Technologies, Inc., dated August 25, 2000.                                                                                                                                                
| | 10.27    | (4) |  | First Addendum to Encoding Services and Compact
        Disc Purchase Agreement between XM Satellite Radio, Inc., and
        Loudeye Technologies, Inc., dated October 10, 2000.                                                                                                                             
| | 10.28(6) |      |  | 2000 Employee Stock Option Plan as amended
        March 5, 2001.                                                                                                                                                                                                                                             
| | 10.29(6) |      |  | Offer Letter to John Baker dated
        February 23, 2001.                                                                                                                                                                                                                                                   
| | 10.30(6) |      |  | Offer Letter to Joel McConaughy dated
        March 14, 2001.                                                                                                                                                                                                                                                 
| | 10.31(6) |      |  | Offer Letter to John Shaw dated April 4,
        2001.                                                                                                                                                                                                                                                        
| | 10.32(5) |      |  | Registration Rights Agreement among Loudeye
        Technologies, Inc. and the former stockholders of DiscoverMusic.                                                                                                                                                                                          
| | 10.33(7) |      |  | Credit Agreement between US Bank National
        Association and Loudeye Technologies, Inc., dated as of
        August 22, 2001.                                                                                                                                                                            
| | 10.34(7) |      |  | First Amendment to Credit Agreement between US
        Bank National Association and Loudeye Technologies, Inc., dated
        as of October 25, 2001.                                                                                                                                                        
| | 10.35    |      |  | Amended and Restated Credit Agreement between
        Loudeye Technologies, Inc. as Lender, Martin Tobias as Borrower
        and Alex Tobias and 55 Bell Street Properties, LLC, a Washington
        limited liability company as Additional Parties dated as of
        November 30, 2001 (filed herewith).
| | 21.1     |      |  | Subsidiaries of Loudeye Technologies, Inc. (filed
        herewith).                                                                                                                                                                                                                                          
| | 23.1     |      |  | Consent of Arthur Andersen LLP (filed herewith).                                                                                                                                                                                                                                                              
| | 24.1     |      |  | Powers of Attorney of Board of Directors (see
        Form 10-K).                                                                                                                                                                                                                                             



---



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



|    |                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Loudeye
        Technologies, Inc.s registration statement on
        Form S-1 file number 333-93361.
|   
|(2) | Incorporated by reference to Loudeye
        Technologies, Inc.s Form 10-Q, for the period ending
        June 30, 2000.          
|   
|(3) | Incorporated by reference to Loudeye
        Technologies, Inc.s Form 10-Q, for the period ending
        September 30, 2000.     
|   
|(4) | Incorporated by reference to Loudeye
        Technologies, Inc.s Form 10-K, for the period ending
        December 31, 2000.      
|   
|(5) | Incorporated by reference to Loudeye
        Technologies, Inc.s Report on Form 8- K dated
        March 13, 2001.                
|   
|(6) | Incorporated by reference to Loudeye
        Technologies, Inc.s Form 10-Q, for the period ending
        March 31, 2001.         
|   
|(7) | Incorporated by reference to Loudeye
        Technologies, Inc.s Form 10-Q, for the period ending
        September 30, 2001.     

(b) Reports on Form 8-K

On October 30, 2001, we filed a Report on
Form 8-K that announced that on October 26, 2001, we
closed the purchase of 4,000,000 shares of Loudeye common stock
from Martin Tobias and Alex Tobias. Our press release announcing
the purchase as well as the purchase agreement were filed as
exhibits to the report.

On December 10, 2001, we filed a Report on
Form 8-K/ A that provided the financial statements of
Activate.net Corporation required by Item 7(a) of
Form 8-K and the pro forma financial information required
by Item 7(b) of Form 8-K, which information was
excluded from the original filing in reliance upon
item 7(a)(4) of Form 8-K.

76



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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, on
March 26, 2001.



| |                           
| | --------------------------
| | LOUDEYE TECHNOLOGIES, INC.



| |     |                     
| | --- | --------------------
| | BY: | /s/ JOHN T. BAKER IV

| |                        
| | -----------------------
| |                        
| | John T. Baker IV       
| | Chief Executive Officer

POWER OF ATTORNEY

Each person whose signature appears below hereby
constitutes and appoints John T. Baker IV and
Bradley A. Berg, 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/ JOHN T. BAKER IV John T. Baker IV         |  | Chief Executive Officer
	(Principal Executive Officer)
	Chairman and Director |  | March 26, 2002
|                                             
|/s/ BRADLEY A. BERG Bradley A. Berg           |  | Chief Financial Officer
	(Principal Financial Officer)                        |  | March 26, 2002
|                                             
|/s/ JEROLD J. GOADE, JR. Jerold J. Goade, Jr. |  | Vice President and Controller
	(Principal Accounting Officer)                 |  | March 26, 2002
|                                             
|/s/ JOHAN LIEDGREN Johan Liedgren             |  | Director                                                                      |  | March 26, 2002
|                                             
|/s/ CHARLES P. WAITE Charles P. Waite         |  | Director                                                                      |  | March 26, 2002
|                                             
|/s/ ANTHONY J. BAY Anthony J. Bay             |  | Director                                                                      |  | March 26, 2002

77



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
SCHEDULE

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



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

Seattle, Washington

March 26, 2002


78



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##### Table of Contents



SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(Amounts in thousands)


|                                   |                              |            |  |            |  |            |  |            |  |  |  |        |   |  |  |       | 
|---------------------------------- | ---------------------------- | ---------- |  | ---------- |  | ---------- |  | ---------- |  |  |  | ------ | - |  |  | ----- | 
|                                   |                              | Balance at |  | Charged to |  |            |  | Balance at
|                                   |                              | Beginning  |  | Costs and  |  |            |  | End of    
|                                   |                              | of Period  |  | Expenses   |  | Deductions |  | Period    
|                                   |                              |            |  |            |  |            |  |           
|Allowance for Doubtful Accounts(1) |                              |            |  |            |  |            |  |            |  |  |  |        |   |  |  |      
|                                   | Year Ended December 31, 1999 |            |  | 20         |  |            |  | 183        |  |  |  | (16    | ) |  |  | 187   | 
|                                   | Year Ended December 31, 2000 |            |  | 187        |  |            |  | 662        |  |  |  | (140   | ) |  |  | 709   | 
|                                   | Year Ended December 31, 2001 |            |  | 709        |  |            |  |           |  |  |  | (217   | ) |  |  | 492   | 
|Accrued Special Charges(2)         |                              |            |  |            |  |            |  |            |  |  |  |        |   |  |  |      
|                                   | Year Ended December 31, 2000 |            |  |           |  |            |  | 310        |  |  |  |       |   |  |  | 310   | 
|                                   | Year Ended December 31, 2001 |            |  | 310        |  |            |  | 3,790      |  |  |  | (1,161 | ) |  |  | 2,939 | 




(1) Deductions represent writeoffs of
specifically identified uncollectible accounts.


(2) Deductions represent amounts paid in
cash during the period.

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