##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-Q

(Mark One)

|    |                                                                                         | 
|--- | --------------------------------------------------------------------------------------- | 
|[X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | 

For the quarterly period ended June 30, 2001
 or

|      |                                                                                          | 
|----- | ---------------------------------------------------------------------------------------- | 
|[   ] | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 | 

For the transition period from  to
 Commission File Number:0-29583

Loudeye Technologies, Inc.

(Exact name of registrant as specified in its charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 91-1908833                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|Times Square Building 414 Olive Way, Suite 500, Seattle, WA    |  | 98101                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

206-832-4000
(Registrants telephone number, including area code)

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 [X] No [   ]

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

|        |                                | 
|------- | ------------------------------ | 
|Common  | 44,391,537                     | 
|(Class) | (Outstanding at July 30, 2001) | 



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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM I  FINANCIAL STATEMENTS                                                                
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION    
|                               | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                               | ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                               | ITEM 3: DEFAULTS UPON SENIOR SECURITIES                                                      
|                               | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS                             
|                               | ITEM 5: OTHER INFORMATION                                                                    
|                               | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    

Loudeye Technologies, Inc.
 Form 10-Q Quarterly Report
For the Quarter Ended June 30, 2001
 TABLE OF CONTENTS

|           |                                                                                                 |    |    |  | 
|---------- | ----------------------------------------------------------------------------------------------- | -- | -- |  | 
|           | Page                                                                                           
|           | Number                                                                                         
|           |                                                                                                
|PART I.    | FINANCIAL INFORMATION                                                                          
|          
|          
|          
|          
|Item 1     | Financial Statements                                                                            |    | 1 
|          
|           | Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000                           |    | 1 
|          
|           | Consolidated Statements of Operations for the three and six months ended June 30, 2001 and 2000 |    | 2 
|          
|           | Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000           |    | 3 
|          
|           | Notes to Unaudited Consolidated Financial Statements                                            |    | 4 
|          
|Item 2     | Managements Discussion and Analysis of Financial Condition and Results of Operations           |    | 12
|          
|Item 3     | Quantitative and Qualitative Disclosures About Market Risk                                      |    | 31
|          
|PART II.   | OTHER INFORMATION                                                                              
|          
|          
|          
|          
|Item 1     | Legal Proceedings                                                                               |    | 32
|          
|          
|          
|          
|Item 2     | Changes in Securities and Use of Proceeds                                                       |    | 32
|          
|          
|          
|          
|Item 3     | Defaults Upon Senior Securities                                                                 |    | 33
|          
|          
|          
|          
|Item 4     | Submission of Matters to a Vote of Security Holders                                             |    | 33
|          
|          
|          
|          
|Item 5     | Other Information                                                                               |    | 33
|          
|          
|          
|          
|Item 6     | Exhibits and Reports on Form 8-K                                                                |    | 34
|          
|SIGNATURES |                                                                                                 | 36



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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM I  FINANCIAL STATEMENTS




LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |         |         | 
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ----------- | ------- | ------------ | ----- | ------- | ------- | 
|                                                                     |                                                                                                                                                          |                                            |       | June 30,    |         | December 31,
|                                                                     |                                                                                                                                                          |                                            |       | 2001        |         | 2000        
|                                                                     |                                                                                                                                                          |                                            |       |             |         |             
|                                                                     |                                                                                                                                                          |                                            |       | (Unaudited) |         |              |       |        
|ASSETS                                                               |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Current assets:                                                      |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Cash and cash equivalents                                                                                                                                |                                            | $     | 58,961      |         |              | $     | 51,689  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Short-term investments                                                                                                                                   |                                            |       | 11,179      |         |              |       | 43,300  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accounts receivable, net of allowance of $620 and $709, respectively                                                                                     |                                            |       | 2,454       |         |              |       | 3,241   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Prepaid and other current assets                                                                                                                         |                                            |       | 1,873       |         |              |       | 1,072   |        
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total current assets                       |       |             | 74,467  |              |       |         | 99,302  | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Property and equipment, net                                                                                                                              |                                            |       | 12,838      |         |              |       | 15,955  |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Goodwill, net                                                                                                                                            |                                            |       | 3,514       |         |              |       | 9,785   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Intangibles and other long-term assets, net                                                                                                              |                                            |       | 15,304      |         |              |       | 7,634   |        
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total assets                               |       | $           | 106,123 |              |       | $       | 132,676 | 
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Current liabilities:                                                 |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accounts payable                                                                                                                                         |                                            | $     | 865         |         |              | $     | 1,137   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accrued compensation and benefits                                                                                                                        |                                            |       | 2,208       |         |              |       | 1,554   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Other accrued expenses                                                                                                                                   |                                            |       | 2,349       |         |              |       | 1,368   |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Deposits and deferred revenues                                                                                                                           |                                            |       | 263         |         |              |       | 800     |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Current portion of long-term debt and capital lease obligations                                                                                          |                                            |       | 5,181       |         |              |       | 4,425   |        
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total current liabilities                  |       |             | 10,866  |              |       |         | 9,284   | 
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Long-term debt and capital lease obligations, net of current portion |                                                                                                                                                          |                                            | 5,500 |             |         |              | 7,324 |        
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total liabilities                          |       |             | 16,366  |              |       |         | 16,608  | 
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|Stockholders equity (deficit):                                      |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Common stock, additional paid-in capital and warrants, $0.001
par value, 100,000,000 shares authorized; 42,099,803 and
37,072,442 issued and outstanding |                                            |       | 194,548     |         |              |       | 185,609 |        
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Deferred stock compensation                                                                                                                              |                                            |       | (1,456      | )       |              |       | (3,387  | )      
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Accumulated deficit                                                                                                                                      |                                            |       | (103,335    | )       |              |       | (66,154 | )      
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total stockholders equity                 |       |             | 89,757  |              |       |         | 116,068 | 
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        
|                                                                     |                                                                                                                                                          | Total liabilities and stockholders equity |       | $           | 106,123 |              |       | $       | 132,676 | 
|                                                                     |                                                                                                                                                          |                                            |       |             |         |              |       |        

The accompanying notes are an integral part of these balance sheets



1



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##### Table of Contents






LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share amounts)

|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |       |        |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------ | ---------- | ------------------ | ----- | ---------------- | ---------- | ----- | ----- | ---- | ---------- | ----- | ------ | - | ---------- | ----- | ------ | -
|                                                                                                   |                                              |                          |            | Three Months Ended |       | Six Months Ended
|                                                                                                   |                                              |                          |            | June 30,           |       | June 30,        
|                                                                                                   |                                              |                          |            |                    |       |                 
|                                                                                                   |                                              |                          |            | 2001               |       | 2000             |            | 2001  |       | 2000
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |     
|Revenues:                                                                                          |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Digital media services                       |                          | $          | 1,761              |       |                  | $          | 2,399 |       |      | $          | 3,376 |        |   | $          | 3,950 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Digital media applications and other         |                          |            | 915                |       |                  |            | 153   |       |      |            | 1,229 |        |   |            | 251   |       
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                   |                                              | Total revenues           |            |                    | 2,676 |                  |            |       | 2,552 |      |            |       | 4,605  |   |            |       | 4,201  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cost of revenues: (1)                                                                             
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Digital media services                       |                          |            | 2,011              |       |                  |            | 2,999 |       |      |            | 5,092 |        |   |            | 5,133 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Digital media applications and other         |                          |            | 528                |       |                  |            | 48    |       |      |            | 718   |        |   |            | 84    |       
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                   |                                              | Total cost of revenues   |            |                    | 2,539 |                  |            |       | 3,047 |      |            |       | 5,810  |   |            |       | 5,217  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                              | Gross margin             |            |                    | 137   |                  |            |       | (495  | )    |            |       | (1,205 | ) |            |       | (1,016 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Operating expenses:                                                                                |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Research and development (2)                 |                          |            | 2,739              |       |                  |            | 1,780 |       |      |            | 5,409 |        |   |            | 3,093 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Sales and marketing (3)                      |                          |            | 2,728              |       |                  |            | 4,228 |       |      |            | 5,340 |        |   |            | 7,004 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | General and administrative (4)               |                          |            | 2,452              |       |                  |            | 1,881 |       |      |            | 5,202 |        |   |            | 3,532 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Amortization of intangibles and other assets |                          |            | 1,582              |       |                  |            | 1,826 |       |      |            | 3,810 |        |   |            | 3,529 |       
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Stock-based compensation                     |                          |            | (995               | )     |                  |            | 228   |       |      |            | (102  | )      |   |            | 3,367 |       
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                   |                                              | Total operating expenses |            |                    | 8,506 |                  |            |       | 9,943 |      |            |       | 19,659 |   |            |       | 20,525 |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Special charges                                                                                    |                                              |                          | 3,118      |                    |       |                  |           |       |       |      | 17,741     |       |        |   |           |      
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Operating loss                                                                                     |                                              |                          | (11,487    | )                  |       |                  | (10,438    | )     |       |      | (38,605    | )     |        |   | (21,541    | )    
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Interest income                                                                                    |                                              |                          | 838        |                    |       |                  | 1,725      |       |       |      | 2,100      |       |        |   | 2,416      |      
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Interest expense                                                                                   |                                              |                          | (334       | )                  |       |                  | (166       | )     |       |      | (676       | )     |        |   | (276       | )    
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|                                                                                                   |                                              | Total other income, net  |            |                    | 504   |                  |            |       | 1,559 |      |            |       | 1,424  |   |            |       | 2,140  |  
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Net loss                                                                                           |                                              | $                        | (10,983    | )                  |       | $                | (8,879     | )     |       | $    | (37,181    | )     |        | $ | (19,401    | )    
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Basic and diluted net loss per share                                                               |                                              | $                        | (0.26      | )                  |       | $                | (0.25      | )     |       | $    | (0.93      | )     |        | $ | (0.82      | )    
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Weighted average shares outstanding used to compute
basic and diluted net loss per share           |                                              |                          | 41,516,192 |                    |       |                  | 35,143,171 |       |       |      | 39,902,600 |       |        |   | 23,707,605 |      
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Basic and diluted pro forma net loss per share                                                     |                                              | $                        | (0.26      | )                  |       | $                | (0.25      | )     |       | $    | (0.93      | )     |        | $ | (0.60      | )    
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      
|Weighted average shares outstanding used to compute
basic and diluted pro forma net loss per share |                                              |                          | 41,516,192 |                    |       |                  | 35,143,171 |       |       |      | 39,902,600 |       |        |   | 32,366,935 |      
|                                                                                                   |                                              |                          |            |                    |       |                  |            |       |       |      |            |       |        |   |            |      



---

|(1) |  | Excludes stock-based compensation expense (credit) of ($80) and ($59) in 2001 and $87 and $340 in 2000.   
|--- |  | ----------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes stock-based compensation expense (credit) of ($50) and ($37) in 2001 and $54 and $211 in 2000.   
|   
|   
|   
|   
|(3) |  | Excludes stock-based compensation expense (credit) of ($132) and ($98) in 2001 and $142 and $558 in 2000. 
|   
|   
|   
|   
|(4) |  | Excludes stock-based compensation expense (credit) of ($733) and $92 in 2001 and $(55) and $2,258 in 2000.

The accompanying notes are an integral part of these statements.



2



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##### Table of Contents






LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands, except share and per share amounts)

|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |         |        |         |  
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------- | ---------------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                |                                                                                                                  |                                                   |                                                     |         | Six Months Ended
|                                                                |                                                                                                                  |                                                   |                                                     |         | June 30,        
|                                                                |                                                                                                                  |                                                   |                                                     |         |                 
|                                                                |                                                                                                                  |                                                   |                                                     |         | 2001             |         | 2000   
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |        
|Cash flows from operating activities:                           |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Net loss                                                                                                         |                                                   | $                                                   | (37,181 | )                |         | $       | (19,401 | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Adjustments to reconcile net loss to net cash used in operating activities:                                      |                                                   |                                                     |         |                  |         |         |         |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Depreciation and amortization                     |                                                     |         | 7,730            |         |         |         | 5,017  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Special charges and other                         |                                                     |         | 14,167           |         |         |         | 24     |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Stock-based compensation                          |                                                     |         | (102             | )       |         |         | 3,367  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Changes in operating assets and liabilities, net
of amounts acquired in purchase of business
Accounts receivable |                                                   |                                                     | 1,516   |                  |         |         | (367    | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Prepaid and other assets                          |                                                     |         | (619             | )       |         |         | (1,123 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Accounts payable                                  |                                                     |         | (337             | )       |         |         | (4,124 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Accrued compensation, benefits and other expenses |                                                     |         | 2,056            |         |         |         | 1,438  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                                                                                                  | Deposits and deferred revenue                     |                                                     |         | (537             | )       |         |         | 708    |        
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                                |                                                                                                                  |                                                   | Net cash used in operating activities               |         |                  | (13,307 | )       |         |        | (14,461 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Cash flows from investing activities:                           |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Purchases of property and equipment, net of amounts acquired                                                     |                                                   |                                                     | (2,238  | )                |         |         | (12,665 | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Capitalized software development costs                                                                           |                                                   |                                                     |        |                  |         |         | (506    | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Cash paid for acquisition of business and assets, net                                                            |                                                   |                                                     | (7,199  | )                |         |         | (1,907  | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Sales of short-term investments, net                                                                             |                                                   |                                                     | 32,270  |                  |         |         |        |       
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                                |                                                                                                                  |                                                   | Net cash provided by (used in) investing activities |         |                  | 22,833  |         |         |        | (15,078 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Cash flows from financing activities:                           |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Proceeds from sale of stock and exercise of stock options, net                                                   |                                                   |                                                     | 100     |                  |         |         | 80,902  |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Proceeds from long-term debt and capital lease obligations                                                       |                                                   |                                                     | 131     |                  |         |         | 8,049   |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Principal payments on long-term debt and capital lease obligations                                               |                                                   |                                                     | (2,485  | )                |         |         | (1,116  | )     
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                                |                                                                                                                  |                                                   | Net cash (used in) provided by financing activities |         |                  | (2,254  | )       |         |        | 87,835  |  
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                                |                                                                                                                  |                                                   | Net increase in cash and cash equivalents           |         |                  | 7,272   |         |         |        | 58,296  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Cash and cash equivalents, beginning of period                  |                                                                                                                  |                                                   | 51,689                                              |         |                  |         | 49,273  |        
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|Cash and cash equivalents, end of period                        |                                                                                                                  | $                                                 | 58,961                                              |         |                  | $       | 107,569 |        
|                                                                |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|Supplemental disclosure of cash flow information:               |                                                                                                                  |                                                   |                                                     |         |                  |         |         |        
|                                                               
|                                                               
|                                                               
|                                                               
|Cash paid for interest                                          |                                                                                                                  | $                                                 | 556                                                 |         |                  | $       | 156     |        
|                                                               
|                                                               
|                                                               
|                                                               
|Issuance of common stock for acquisition of business and assets |                                                                                                                  |                                                   | 10,756                                              |         |                  |         | 1,105   |        

The accompanying notes are an integral part of these statements.



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LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(UNAUDITED)

1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:

The Company

Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications including transforming content from
traditional sources into Internet compatible formats and restores audio and
video content. The Company is headquartered in Seattle, Washington and to-date
has conducted business in the United States and Europe in one business segment.

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, the enhancement of existing
services, and the ability to secure adequate financing to support future
operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Unaudited Interim Financial Data

The interim condensed consolidated financial statements are unaudited and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Companys Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on February 27, 2001. The financial information included
herein reflects all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the results for interim periods. The results of operations for
the quarters ended June 30, 2001 and 2000 are not necessarily indicative of the
results to be expected for the full years.

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

Additionally, the Company has approximately $830,000 of short-term
investments which are utilized as collateral for certain irrevocable standby
letters of credit.



4



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##### Table of Contents



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 is less than the
carrying amount of the asset. As described in Note 4, the Company recorded
impairment charges of $625,000, $13.6 million and $637,000 in the quarters
ended June 30, 2001; March 31, 2001 and December 31, 2000, respectively.

Software Development Costs

The Company capitalizes internal costs of developing software products
upon determination that technological feasibility has been established for the
product, if that product is to be sold, leased, or otherwise marketed. Costs
incurred prior to the establishment of technological feasibility are charged to
research and development expense. When the product is available for general
release to customers, capitalization is ceased, and such previously capitalized
costs are amortized on a product-by-product basis computed as the greater of
(a) the ratio that current gross revenues for the product bear to the total of
current and anticipated future gross revenues or (b) the straight-line
amortization over the remaining estimated economic useful life of the product.
The amortization is recorded as a component of digital media applications cost
of revenues.

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.

As of June 30, 2001, the Company has approximately $432,000 of remaining
capitalized software development costs, of which approximately $100,000 has
been amortized. The Company performs ongoing analysis of these assets and
believes them to be fully realizable. As described in Note 4, the Company
recognized an impairment charge of approximately $800,000 in the quarter ended
March 31, 2001, related to previously capitalized software development costs
which were determined to be unrealizable in accordance with FAS121.

Reclassifications

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

3. REVENUE RECOGNITION

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

DIGITAL MEDIA SERVICES

Encoding Services consist of services to convert audio, and to a lesser
extent 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.

Media Restoration and Migration Services consist of services to restore
and upgrade old or damaged archives of traditional media. The Company
recognizes revenues as services are rendered.

Consulting Services consist of services provided by our consulting
services group to enable customers to utilize streaming media within their
intranets, websites and Internet applications. Consulting services are provided
under short-term contracts that are generally time and materials based.
Consulting services revenue generated by time and materials contracts are
recognized as the services are provided if there are no contingencies. In April
2001, the Company discontinued substantially all of its consulting services.



5



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DIGITAL MEDIA APPLICATIONS AND OTHER

Digital Media Applications and 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. Our software
revenue recognition policies are in accordance with Statement of Position (SOP
97-2), Software Revenue Recognition as amended by SOP 98-9. Under SOP 97-2, in
general, license revenues are recognized when a non-cancelable license
agreement has been signed and the customer acknowledges an unconditional
obligation to pay, the software product has been delivered, there are no
uncertainties surrounding customer acceptance, the fees are fixed and
determinable, and collection is considered probable. The Company records
deferred revenue for software arrangements when billings have been made or cash
has been received from the customer and the arrangement does not qualify for
revenue recognition under the Companys revenue recognition policy.

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.

4. SPECIAL CHARGES

In January 2001, the Company announced a cost-savings initiative which
resulted in a $947,000 special charge being incurred in 2000, and a related
charge of $700,000 in the first quarter of 2001 for severance payments to
employees terminated during that quarter.

The Company has experienced decreasing demand for our video services.
Accordingly, in December 2000 our board of directors approved a plan to close
our Santa Monica facility and reduce video production capacity in Seattle,
which 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
closed in the first quarter of 2001. Management decided in the first quarter of
2001 to focus primarily upon audio or music related sources of revenues as that
area currently appears to be more fully developed. As a result of this
decision, the Company will no longer provide and support certain products, and
therefore, certain related assets became impaired.

The Company determined in the first quarter of 2001 that due to the
acquisition of a platform for music samples acquired with DiscoverMusic.com
(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 decided to cease supporting its Media Syndicator and
Alive.com technology platforms in conjunction with the overall efforts to focus
on the music related business opportunities. Additionally, the goodwill
previously recognized associated with the Alive.com acquisition became impaired
as a result of the refocused business. Accordingly, the Company determined that
an impairment analysis was necessary for these assets. As each of these assets
had no determinable cash flows associated with them, they were deemed fully
impaired and remaining unamortized balances totaling $10.9 million, were
adjusted to zero in the first quarter of 2001. This write-off was included in
the Special Charge line item on the statements of operations.

In the second quarter of 2001, another severance related special charge
was made related to employees terminated during the quarter. Payments of
approximately $1.7 million were made in the second quarter of
2001 and at June 30,
2001 there are approximately $53,000 remaining accrued liabilities for
severance related charges associated with the restructuring. The Company began
a facilities consolidation plan, which led to certain restructuring-related
charges being accrued related to facilities closure costs as well as previously
capitalized tenant improvements. Other impairment charges were incurred related
to equipment no longer in use due to the headcount reduction. In accordance
with our accounting policy for long-lived assets, we adjusted certain property,
equipment and intangibles to estimated fair market value as of June 30, 2001.
The impairment charge in the second quarter was approximately $625,000,
primarily related to write-downs of facilities improvements. The components of the special
charges in the quarters ended June 30, 2001 and March 31, 2001 are as follows:

|                                       |  |              |     |               |  |   |      | 
|-------------------------------------- |  | ------------ | --- | ------------- |  | - | ---- | 
|(in millions)                          |  | June 30,2001 |     | March 31,2001
|                                       |  |              |     |              
|Intangible and other asset impairments |  | $            |    |               |  | $ | 11.3 | 
|                                      
|                                      
|                                      
|                                      
|Property and equipment charges         |  |              | 1.4 |               |  |   | 1.5  | 



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|                     |  |              |     |               |  |   |      | 
|-------------------- |  | ------------ | --- | ------------- |  | - | ---- | 
|(in millions)        |  | June 30,2001 |     | March 31,2001
|                     |  |              |     |              
|                    
|                    
|                    
|                    
|Software impairments |  | $            |    |               |  | $ | 0.8  | 
|                    
|                    
|                    
|                    
|Severance costs      |  |              | 1.7 |               |  |   | 0.7  | 
|                    
|                    
|                    
|                    
|Other                |  |              |    |               |  |   | 0.3  | 
|                     |  |              |     |               |  |   |      | 
|                     |  | $            | 3.1 |               |  | $ | 14.6 | 
|                     |  |              |     |               |  |   |      | 

The Companys decision to focus on audio business, the termination of most
of its video production personnel and the continued decline in demand for its
video offerings led to a further review of its video assets. The Company
performed a review of the current market prices for similar used equipment and
adjusted the remaining value of its video assets down to the estimated net
realizable value. The Company sold most of these assets in the second quarter
of 2001.

The Companys accrual for certain special charges was as follows at the
respective balance sheet dates:

|                  |  |              |     |              |  |              |     |  |  |   |     | 
|----------------- |  | ------------ | --- | ------------ |  | ------------ | --- |  |  | - | --- | 
|(In thousands)    |  | June 30,2001 |     | Mar. 31,2001 |  | Dec. 31,2001
|                  |  |              |     |              |  |             
|Severance related |  | $            | 53  |              |  | $            | 100 |  |  | $ | 290 | 
|                 
|                 
|                 
|                 
|Facilities costs  |  |              | 661 |              |  |              | 90  |  |  |   |    | 
|                 
|                 
|                 
|                 
|Other             |  |              | 150 |              |  |              | 75  |  |  |   | 20  | 
|                  |  |              |     |              |  |              |     |  |  |   |     | 
|                  |  | $            | 864 |              |  | $            | 265 |  |  | $ | 310 | 
|                  |  |              |     |              |  |              |     |  |  |   |     | 

The facilities costs accrual primarily relates to estimated lease termination
costs. Cash payments made in 2001 related to restructuring charges were
consistent with the previous estimates.

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.
Diluted net loss per share for all periods shown does not include the effects
of the convertible preferred stock and shares issuable upon the exercise of
stock options and warrants as the effect of their inclusion is antidilutive
during each period presented.

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. As of June 30, 2001, the Company had 7,018,116
options which have been excluded for calculation of Earnings Per share as their
inclusion would be antidilutive.

At June 30, 2001, the Company had 124,417 stock options that had been
exercised but which were subject to repurchase at a weighted average exercise
price of $0.32 per share. Accordingly, the impact of these unvested but
exercised options has been removed from the calculation of weighted average
shares outstanding for purposes of determining net loss per share.

The following table presents shares used to calculate basic and diluted
net loss per share:

|                                                                               |  |                       |            |                       |  |        |            |           |  |  |            |   |  |  |            |  
|------------------------------------------------------------------------------ |  | --------------------- | ---------- | --------------------- |  | ------ | ---------- | --------- |  |  | ---------- | - |  |  | ---------- | -
|                                                                               |  | For the Quarter Ended |            | For the Quarter Ended
|                                                                               |  | June 30, 2001         |            | June 30, 2000        
|                                                                               |  |                       |            |                      
|                                                                               |  | Actual                |            | Pro Forma             |  | Actual |            | Pro Forma
|                                                                               |  |                       |            |                       |  |        |            |          
|Weighted average shares outstanding                                            |  |                       | 41,727,279 |                       |  |        | 41,727,279 |           |  |  | 36,737,983 |   |  |  | 36,737,983 |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Weighting of shares subject to repurchase                                      |  |                       | (211,087   | )                     |  |        | (211,087   | )         |  |  | (1,594,812 | ) |  |  | (1,594,812 | )
|                                                                               |  |                       |            |                       |  |        |            |           |  |  |            |   |  |  |            |  
|Weighted average shares used to
calculate basic and diluted earnings per
share |  |                       | 41,516,192 |                       |  |        | 41,516,192 |           |  |  | 35,143,171 |   |  |  | 35,143,171 |  
|                                                                               |  |                       |            |                       |  |        |            |           |  |  |            |   |  |  |            |  



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|                                                                               |  |                          |            |                          |  |        |            |           |  |  |            |   |  |  |            |  
|------------------------------------------------------------------------------ |  | ------------------------ | ---------- | ------------------------ |  | ------ | ---------- | --------- |  |  | ---------- | - |  |  | ---------- | -
|                                                                               |  | For the Six Months Ended |            | For the Six Months Ended
|                                                                               |  | June 30, 2001            |            | June 30, 2000           
|                                                                               |  |                          |            |                         
|                                                                               |  | Actual                   |            | Pro Forma                |  | Actual |            | Pro Forma
|                                                                               |  |                          |            |                          |  |        |            |          
|Weighted average shares outstanding                                            |  |                          | 40,150,656 |                          |  |        | 40,150,656 |           |  |  | 25,314,818 |   |  |  | 33,974,148 |  
|                                                                              
|                                                                              
|                                                                              
|                                                                              
|Weighting of shares subject to repurchase                                      |  |                          | (248,056   | )                        |  |        | (248,056   | )         |  |  | (1,607,213 | ) |  |  | (1,607,213 | )
|                                                                               |  |                          |            |                          |  |        |            |           |  |  |            |   |  |  |            |  
|Weighted average shares used to
calculate basic and diluted earnings per
share |  |                          | 39,902,600 |                          |  |        | 39,902,600 |           |  |  | 23,707,605 |   |  |  | 32,366,935 |  
|                                                                               |  |                          |            |                          |  |        |            |           |  |  |            |   |  |  |            |  

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 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 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. As of June 30, 2001, two of the
companys customers accounted for 11% and 15% of its outstanding receivables.

During the quarters ended June 30, 2001, and 2000, the Company had sales
to certain significant customers, as a percentage of revenues, as follows:

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2001 |    | 2000
|           |  |      |    |     
|Customer A |  |      | 18 | %    |  |  |   |  
|          
|          
|          
|          
|Customer B |  |      | 11 | %    |  |  |   |  
|          
|          
|          
|          
|Customer C |  |      | 11 | %    |  |  |   |  
|          
|          
|          
|          
|Customer D |  |      |   |      |  |  | 10 | %
|          
|          
|          
|          
|Customer E |  |      |   |      |  |  | 14 | %
|           |  |      |    |      |  |  |    |  
|           |  |      | 40 | %    |  |  | 24 | %
|           |  |      |    |      |  |  |    |  

The Company operates in one business segment, digital media services and
applications, 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) which is comprised of the Companys Chief Executive
Officer, Chief Financial Officer, and its other Senior Vice Presidents. The CET
reviews financial information presented on a consolidated basis accompanied by
disaggregated information about products and services for purposes of making
decisions and assessing financial performance. The Company does not have any
operating units which exceed the threshold required for separate disclosure and
therefore, the Company does not have operating segments required to be
separately disclosed by SFAS 131, Disclosure About Segments of an Enterprise
and Related Information.

7. 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. In the second quarter of 2001, the Company
completed the acquisition of Addition Systems Inc. a developer of ad and
content insertion technology. The purchase price consisted of cash and stock
valued at approximately $2.5 million and was recorded as intangibles and will
be amortized over three years. Addition Systems was at a pre-revenue stage and
accordingly the impact as if operations started at the beginning of the year is
not material to consolidated operating results.

Pursuant to the terms of the acquisition of Vidipax, which closed in June
2000, 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. This



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##### Table of Contents



has been included as additional goodwill on the accompanying balance
sheets and will be amortized over the remaining life of two years.

In March 2001, the Company purchased DiscoverMusic, a Seattle company
which is the largest provider of music samples on the Internet. The Company
paid $4.0 million in cash, net of DiscoverMusics cash, and issued 3,677,013
shares of common stock valued at $6.1 million for cash and stock consideration
of $10.7 million. As part of the purchase price, the Company placed some of the
cash paid into an escrow account to pay for certain legal costs, if any,
assumed. The total purchase price, including costs of the acquisition and
liabilities assumed, totaled $16.3 million was allocated as follows:

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

The customer list and digital samples archive acquired are being amortized
over three years. At March 31, 2001, approximately $1.0 million of the cash
purchase price had not been remitted to the selling shareholders, and
accordingly was presented within accrued expenses on the balance sheet at that
date.

8. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term Debt

The Company has an equipment line of credit for up to $1.0 million secured
by certain of the Companys property and equipment. Advances under the
equipment line are payable over 36 equal monthly installments that commenced on
August 30, 1999. The equipment line bears interest at the banks prime rate
(6.75% at June 30, 2001) and had an outstanding balance of approximately
$361,000 as of June 30, 2001.

The Company also has a credit facility that provides for advances up to
$2.6 million 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 June 30, 2001,
approximately $1.2 million was outstanding under the equipment facility. 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.

The Company has an additional credit facility that provides for a term
loan of up to $10.0 million for the purchase of capital equipment. The facility
bears interest payable monthly during each draw period at the banks prime
rates plus 0.75% (7.50% at June 30, 2001), followed by 36 equal monthly
payments of principal plus interest. Advances under this facility are secured
by substantially all of the Companys assets. At June 30, 2001, approximately
$8.2 million was outstanding under the equipment credit facility. The Company
also had a line of credit that allowed revolving borrowings aggregating up to
$2.0 million, which expired on May 17, 2001 and was not renewed at the election
of the Company. There were no borrowings outstanding under the credit line
during the quarter ended June 30, 2001, although it had been used to back-up a
stand-by letter of credit.

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 9.00% to
9.25% and are collateralized by the assets purchased. As of June 30, 2001,
approximately $745,000 was outstanding under the leases.

The Companys long-term debt and capital lease agreements require that the
Company maintain various financial ratios on a quarterly basis. These financing
arrangements also place restrictions on the amount of cash dividends that the
Company could pay to its stockholders. The Company is in compliance with all
necessary financial requirements.



9



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##### Table of Contents



9. 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 national
market 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.

During the quarters ended June 30, 2001 and 2000, the Company amortized
approximately $425,000 and $1.3 million, respectively, of deferred stock
compensation that is included in stock-based compensation expense in the
accompanying statements of operations. Due to stock option cancellations,
approximately $700,000 and $860,000 of deferred stock compensation was reversed
off of the balance sheets as of June 30, 2001 and 2000, respectively, and
approximately $1.4 million and approximately $260,000 in previously amortized
deferred stock compensation was recorded as a credit to stock-based
compensation expense in the quarters ended June 30, 2001 and 2000,
respectively. In the quarter ended June 30, 2000, a credit of $846,000 was
recognized as an offset to stock-based compensation expense related to marking
options granted to consultants to fair value. These options were canceled in
the third quarter of 2000, and accordingly no such charges were recorded in
2001.

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 value, the
charges for acceleration of options and amounts paid under rescission. In July
2001, the Company completed a stock option exchange whereby employees holding
options with an exercise price greater than $4.30 were allowed to exchange
those options at an exchange ratio of 3 for 4. A total of 1,083,250 options
with a weighted average exercise price of $7.50, were exchanged for options to
purchase 812,443 shares of common stock priced at $1.21 per share. The new
options will be treated as a repricing in accordance with FASB Interpretation
No. 44, and accordingly, will be treated under the variable method of
accounting, which requires the company to mark the options to market until the
date those options are exercised, are forefeited, or expire unexercised. The
new options have a vesting period of three years from the date of issuance.

10. LEGAL PROCEEDINGS

In connection with the acquisition of DiscoverMusic, Loudeye assumed
certain liabilities and contingencies, including a patent infringement lawsuit
filed by InTouch Group, Inc. (InTouch) in which DiscoverMusic is one of the
defendants. We believe that we have meritorious defenses to InTouchs claims
and we intend to vigorously defend against such claims. However, to the extent
that their patent rights are valid and enforceable and cover our activities, we
may be required to pay damages, obtain a license to use such patents or use
non- infringing methods to accomplish our activities with regard to the
acquired interactive music previewing technology. It is possible that a license
from InTouch would not be available on commercially acceptable terms, or at
all, or that we would be unable to use our interactive music samples technology
in a non-infringing manner. If successful, the InTouch claim that we violate
their intellectual property rights could seriously harm our business by forcing
us to cease using important intellectual property or requiring us to pay
monetary damages.

On July 26, 2001, a purported class action lawsuit was 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 the
underwriters who handled our March 15, 2000 initial public offering of common
stock. The complaint was filed allegedly on behalf of 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 based on the assertion
that there was undisclosed compensation received by our underwriters in
connection with the our initial public offering.

Although neither Loudeye nor the individual defendants have filed an
answer in this matter, Loudeye believes that it and the individual defendants
have meritorious defenses to the claims made in the complaint and intends to
contest the lawsuit vigorously. However, there can be no assurance that we
will be successful, and an adverse resolution of the lawsuit would have an
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



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enrichment and promissory estoppel. As of this date, the three-person
arbitration panel had not yet been selected by AAA, and no substantive
proceedings have commenced. No date for the arbitration hearing has been
established. Under AAA rules, arbitration proceedings are confidential and
private. Valley has filed an answer in which it denies liability, and asserts
counterclaims for breach of contract, conversion, and declaratory relief.

11. 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 this 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 its current practices
regarding purchase price allocation are consistent with FAS141, and accordingly
does not believe that its implementation will require reclassification of
intangibles with indefinite lives into goodwill or 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 would 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 which
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 gross goodwill of approximately $3.9 million,
with approximately $418,000 in related amortization as of June 30, 2001. This
goodwill is expected to have related amortization expense of approximately
$867,000 through the remainder of 2001, at which point amortization will cease.
At implementation, the Company expects to have unamortized goodwill of
approximately $2.5 million which will be treated in accordance with FAS142;
accordingly, 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 $2.5 million.



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|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion of our financial condition and results of
operations contains forward-looking statements within the meaning of section
27A of the Securities Act of 1993 and Section 21E of the Securities Exchange
Act of 1934. These statements relate to future events or our future financial
performance. 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 statements are only predictions. Actual
events or results may differ materially. 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 update any such forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under the caption Risk Factors
set forth at the end of this Item 2, the Risk Factors set forth in our Annual
report on Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission and those contained from time to time in our
other filings with the SEC. We caution investors that our business and
financial performance are subject to substantial risks and uncertainties.

Overview

We are a leading provider of authorized digital media solutions that
empower todays top media, entertainment and Fortune 1000 companies to
transform traditional media assets into dynamic digital content. Our digital
media services and applications encompass an end-to-end solution for customers
that includes:



| |  |  | media preservation and restoration;                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | media and metadata capture and digital archive management;                                                  
|
|
|
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| |  |  | encoding, or the transformation of audio and video content into streaming media or digital download formats;
|
|
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| |  |  | distribution through a variety of methods;                                                                  
|
|
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| |  |  | hosted subscription services for music samples; and                                                         
|
|
|
|
| |  |  | online radio.                                                                                               

Loudeyes operations are focused on digital music infrastructure and
distribution because we believe it offers the best market opportunity for us
over the next 12 to 24 months. Our solutions simplify and accelerate the
process of delivering audio and video content on the Internet and other digital
distribution platforms. Our proprietary systems and technology enable scalable
and cost effective archival, retrieval and processing of large inventories of
digital media. Our services and applications are built upon a robust production
and delivery infrastructure. The benefits of our services and applications
include:



| |  |  | an end-to-end solution to reduce complexity for customers and
cost-effectively enable a wide range of digital media strategies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | significant capacity to process and manage large volume projects in a rapid time frame;                                        
|
|
|
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| |  |  | a highly scalable and extensible platform to enable tailored customer solutions;                                               
|
|
|
|
| |  |  | platform agnostic applications, compatible with MS Windows Media
Player, RealPlayer, Apple QuickTime and many others; and      
|
|
|
|
| |  |  | strategic relationships with selected major media companies, content
owners and digital media service providers.               

In the second quarter of 2001, we served over 150 customers, including
AOL, MSN, Napster, Coca Cola, Hutchison 3G, CD Now!, Amazon.com, Sonicnet, BMG
Direct, Universal Music Group, Tower Records, barnesandnoble.com, launch.com,
and Real Networks.

Our objective is to be the leading digital media infrastructure provider
of comprehensive digital media solutions. We seek to achieve this objective
through the following key strategies:



| |  |  | developing and marketing an end-to-end suite of products and services;                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
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|
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| |  |  | leveraging existing management, production and delivery systems to support new products and services;                                                
|
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| |  |  | establishing relationships and obtaining content licensing agreements from content owners;                                                           
|
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| |  |  | expanding into selected international markets; and                                                                                                   
|
|
|
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| |  |  | selectively pursuing strategic acquisitions to strengthen our
market position, expand our proprietary technology and accelerate our
product strategy.



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Despite the serious legal issues raised, the Napster experience in 2000
demonstrated the growing demand for digital music, and we believe that demand
will continue to grow. To address the opportunity in the digital music market,
we intend to focus our efforts on developing and marketing an end-to-end suite
of digital music services and applications that leverage our advanced digital
media infrastructure systems and software applications. This will enable media
and music companies to deliver authorized digital music offerings to this
growing audience. To support these initiatives, we intend to continue executing
our strategy to develop relationships with copyright owners in the music
industry, including major music companies, independent record labels, artists
and publishers, to enable them, and their authorized licensees, to distribute
digital music to their audiences. To this end, in 2000 we announced content
licensing agreements with Universal Music Group, Warner Music Group and BMG
Entertainment. In 2001 we announced licensing agreements with Sony Music
Entertainment, Inc. and EMI Recorded Music.

Substantially all of our revenues to date have been generated from digital
media services. With the acquisition of DiscoverMusic in March 2001, we began
generating recurring digital media applications revenues from Media
Subscription Services provided through an applications service provider model,
whereby we charge our customers for digital media services on either a time and
materials basis or a fixed fee basis that depends on a variety of factors, such
as volume and type of content provided and number and type of output formats
requested. We recognize digital media services revenues as the service is
provided and we have no further involvement. Standard payment terms with
customers require payment within 30 days of the invoice date. Our ongoing
digital media applications strategy consists primarily of the Media
Subscription Services applications obtained in the DiscoverMusic acquisition
and online radio technology acquired through assets purchased from OnAir
Streaming Networks in March 2001, Addition Systems, Inc. in June 2001 and
theDial.com in July 2001.

We have sustained losses on a quarterly basis since inception and we
expect to sustain losses for the foreseeable future. For the three months ended
June 30, 2001, we had a net loss of $11.0 million. As of June 30, 2001, we had
an accumulated deficit of $103.3 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 or write-down of intangibles and other assets
associated with the corporate restructuring. In addition to normal, recurring
charges, we recorded $14.6 million and $3.1 million in special charges in the
first and second quarters of 2001, respectively related to a company-wide
restructuring of operations. These charges related to employee severance,
impairments of assets and facilities consolidation. We expect the restructuring
of operations to generate significant cost savings once fully implemented.

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 throughout the remainder of 2001. We expect to incur
additional losses and continued negative cash flow from operations in the
foreseeable future. We cannot assure you that we will achieve or sustain
profitability.

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
recent 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

Three Months Ended June 30, 2001 compared to 2000

Revenues. Revenues totaled $2.7 million and $2.6 million for the three
months ended June 30, 2001 and 2000, respectively. The increase was primarily
due to the acquisition of DiscoverMusic in March 2001 and the acquisition of
VidiPax in June 2000, offset largely by decreases in revenues associated with
video encoding projects and consulting services. Historically, we have operated
in one segment, Digital Media Services and Applications, although we have
included additional detail to provide insight into our operations and revenues.

We earned approximately $800,000 of revenue from our four largest audio
projects in the second quarter of 2001, as compared with approximately $775,000
for our four largest such projects in 2000. We expect this trend of significant
revenue concentration among large audio customers to continue for the balance
of 2001, however the timing of any revenue realized will continue to be
affected by issues surrounding the rights of our customers to use copyrighted
music and the ultimate survival of



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varied business models.

Media Subscription Services revenues totaled $915,000 in the three months
ended June 30, 2001 and includes revenues related to the offering of music
samples through the platform obtained in the DiscoverMusic acquisition during
the first quarter. We had no subscription services available in the three
months ended June 30, 2000, and accordingly had no revenues. We expect the
quarterly revenues to remain relatively flat or increase modestly as the
customer base evolves. Our Media Subscription Services strategy for the future
is geared towards the online music industry and our Music Samples offerings.
Additional Subscription Services offerings may be available in the future in
areas such as online radio, full song lockers and other music-related
subscription offerings.

Video and other related revenues increased modestly on a comparative
basis. Video encoding projects decreased significantly in the first and second
quarters of 2001 and media restoration revenues, including those from VidiPax
increased due to inclusion in our financial results in 2001 and not in the same
period in 2000. We expect video-related revenues to decrease or remain
relatively flat on a sequential or quarter-over-quarter basis in 2001 as we
continue to focus primarily on digital music opportunities.

Consulting services related primarily to video projects, and the related
revenues, decreased both on a comparative basis and on a sequential quarterly
basis primarily due to fewer projects and our reduction in the number of
consultants we employ. We expect that consulting services revenues will not be
a significant component of our revenues in the future.

In the three months ended June 30, 2000 we generated revenues from the
sale or license of custom applications totaling $153,000. These revenues
related to product offerings that we decided to no longer support in
conjunction with our operational restructuring. In the three months ended June
30, 2001 we generated no revenues from sales or license of such technologies.
We do not expect to generate any revenues from such applications in the
foreseeable future.

Cost of Revenues.Cost of revenues decreased to $2.5 million in the three
months ended June 30, 2001 from $3.0 million in the period ended June 30, 2000.
Cost of revenues includes the cost of production and consulting, personnel and
an allocated portion of facilities and equipment and other supporting functions
related to the delivery of digital media services and applications. A
stock-based compensation credit of $80,000 and stock-based compensation charges
of $87,000 for the quarters ended June 30, 2001 and 2000, respectively, are
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 decreased significantly from the same
period in 2000 primarily due to decreased personnel and facilities costs as a
result of our restructuring; decreased depreciation related to equipment taken
out of service or otherwise disposed of and the inclusion of higher margin
product offerings acquired from DiscoverMusic and VidiPax. We expect margins on
traditional service offerings to remain fairly constant through the remainder
of 2001 and expect future margins to improve as product mix changes towards
Media Subscription Services and offerings based upon our automated production
system.

Operating Expenses.Total operating expenses were $11.6 million and $9.9
million in the three months ended June 30, 2001 and 2000, respectively.

Research and Development Expenses.Research and development expenses
totaled $2.7 million and $1.8 million in the three months ended June 30, 2001
and 2000, respectively. Research and development expenses consist of salaries
and consulting fees paid to support technology development, costs of technology
acquired from third parties to incorporate into applications and other
proprietary technology currently under development, including further
development of our automated production system, continued development of online
radio technology and other unannounced applications. The increase over the same
period in 2000 is primarily due to the acquisition of OnAir on-line radio
technology and personnel in the first quarter of 2001. A stock-based
compensation credit of $50,000 related to stock option cancellations and
stock-based compensation charges of $54,000 for the quarters ended June 30,
2001 and 2000, respectively, are attributable to employees included in research
and development and are presented in the separate operating expense line item
within the statements of operations.

We do not currently have any development projects which meet the criteria
for capitalization. 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,
development headcount was significantly reduced in the second quarter and, as a
result, we expect research and development expenses to continue at sequentially
lower rates in the second half of 2001.

Sales and Marketing Expenses.Sales and marketing expenses totaled $2.7
million and $4.2 million in the three months ended June 30, 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.



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A stock-based compensation credit of $132,000 related to stock option
cancellations and stock-based compensation charges of $142,000 for the quarters
ended June 30, 2001 and 2000, respectively, are attributable to employees
included in sales and marketing and are presented in the separate operating
expense line item within the statements of operations.

General and Administrative Expenses. General and administrative expenses
totaled $2.5 million and $1.9 million in the three months ended June 30, 2001
and 2000, respectively. General and administrative expenses consist primarily
of unallocated rent, facilities and information technology charges, salaries,
legal expenses for general corporate purposes and investor relations and other
costs associated with being a public company. The increase was primarily due to
contractual bonuses paid to employees acquired in the Vidipax transaction and
increased legal expenses related to ongoing corporate initiatives. We believe
that general and administrative expenses will decrease slightly or remain flat
in future periods, although, new initiatives may cause these expenses to
actually increase over time. A stock-based compensation credit of $733,000 and
$55,000 related to stock option cancellations for the quarters ended June 30,
2001 and 2000, respectively, are attributable to employees included in general
and administrative and are presented in the separate operating expense line
item within the statements of operations.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $1.6 million and $1.8 million in the three months
ended June 30, 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 decrease was primarily due to lower amortization on intangibles resulting
from the Alive.com transaction in 1999, which were written down in the
impairment charge in the first quarter of 2001. This decrease was significantly
offset by increased amortization resulting from the Discovermusic and OnAir
transactions in the first quarter of 2001. The closing of the Addition Systems,
Inc. acquisition in June 2001 and theDial.com asset and technology purchase in
July 2001 will increase future amortization. We expect to continue our online
radio strategy and should additional acquisitions occur, amortization expense
will increase accordingly.

Stock-Based Compensation.Stock-based compensation totaled a credit of
$995,000 and expense of $228,000 in the three months ended June 30, 2001 and
2000, respectively. Stock-based compensation in 2001 consisted of approximately
$425,000 in amortization of deferred stock compensation, offset by a credit
related to option cancellations resulting from employee terminations associated
with the Corporate restructuring which had previously amortized deferred stock
compensation of approximately $1.4 million. Stock-based compensation in 2000
consisted of $1.3 million in amortization of deferred stock compensation
related to stock options granted below deemed fair market value through March
31, 2000 offset by a credit of $846,000 related to marking options granted to
consultants to fair market value as of June 30, 2000.

In July 2001, we completed a stock option exchange whereby employees
holding options with an exercise price greater than $4.30 were allowed to
exchange those options at an exchange ratio of 3 for 4. A total of 1,083,250
options with a weighted average exercise price of $7.50, were exchanged for
options to purchase 812,443 shares of common stock priced at $1.21 per share.
The new options will be treated as a re-pricing in accordance with FASB
Interpretation No. 44, and accordingly, will be treated under the variable
method of accounting, which requires the company to mark the intrinsic value of
the options to market until the date those options are exercised, are
forfeited, or expire unexercised. The new options have a vesting period of
three years from the date of issuance. As a result of this tender offer, we
believe that stock-based compensation will fluctuate in future periods as our
stock price continues to fluctuate.

Special Charges.In January 2001, we announced a cost-savings initiative
which resulted in a $3.1 million special charge being incurred in the second
quarter of 2001 for severance payments to employees terminated, facilities
closure costs and certain asset impairments. The significant components of the
special charge in the second quarter are as follows:

|                               |  |               |     | 
|------------------------------ |  | ------------- | --- | 
|(in millions)                  |  | June 30, 2001
|                               |  |              
|Property and equipment charges |  |               | 1.4 | 
|                              
|                              
|                              
|                              
|Severance costs                |  |               | 1.7 | 
|                               |  |               |     | 
|                               |  | $             | 3.1 | 
|                               |  |               |     | 

Included in the property and equipment charges are accrued lease buy-out
fees for closed facilities as well as assets related to the reduction in
headcount which took place as a result of the announced restructuring. We do
not currently anticipate future special charges or impairments; however, we
reevaluate the carrying value of our assets at appropriate times, and future
charges may be necessary if conditions require them.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $838,000 and $1.7 million in the
three months ended June 30, 2001 and 2000, respectively. The decreased income
was due



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primarily to our significantly 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 balances decrease to fund our
operating, investing and financing activities.

Interest Expense.Interest expense and other consists of interest expense
related to our debt instruments as well as amortization of financing charges
related to our debt instruments. This totaled $334,000 and $166,000 in the
three months ended June 30, 2001 and 2000, respectively. The increase was due
primarily to increased levels of borrowings incurred to finance fixed asset
acquisitions, partially offset by decreased interest rates.

Six Months Ended June 30, 2001 compared to 2000

Revenues. Revenues totaled $4.6 million and $4.2 million for the six
months ended June 30, 2001 and 2000, respectively. The increase overall was
primarily due primarily to the acquisition of DiscoverMusic in March 2001 and
the acquisition of VidiPax in June 2000, offset largely by decreases in
revenues associated with video encoding projects and consulting services.

Media Subscription Services revenues totaled $1.2 million in the six
months ended June 30, 2001. We had no subscription services available in the
six months ended June 30, 2000, and accordingly had no revenues. Video and
other related revenues remained relatively flat on a comparative basis.
Revenues from video encoding projects and consulting projects decreased
significantly in the first half of 2001 as a result of our decision to
de-emphasize that portion of our business due to current market conditions.
Media restoration revenues which include those from VidiPax increased due to
the inclusion of six months in our financial results in 2001 and a half month
in the same period in 2000. In the six months ended June 30, 2000 we generated
revenues from the sale or license of custom applications totaling $251,000.
These revenues related to product offerings which we decided are no longer
supported after our operational restructuring. In the six months ended June 30,
2001 we generated no revenues from sales or license of such technologies.

Cost of Revenues.Cost of revenues increased to $5.8 million in the six
months ended June 30, 2001 from $5.2 million in the period ended June 30, 2000.
A stock-based compensation credit of $59,000 related to stock option
cancellations and stock-based compensation charges of $340,000 for the two
quarters ended June 30, 2001 and 2000, respectively, are 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 increased slightly from the same period in
2000 primarily due to the significantly higher personnel levels in the first
quarter of 2001, due in part to the acquisition of DiscoverMusic in the first
quarter of 2001. Additional depreciation in 2001 from significant asset
acquisitions in 2000 also contributed to the increase on a gross basis. These
increases were partially offset by the inclusion of higher margin product
offerings acquired from DiscoverMusic and VidiPax. We expect margins on
traditional service offerings to remain fairly constant through the remainder
of 2001 and expect future margins to improve as product mix changes towards
Media Subscription Services and offerings based upon our automated production
system.

Operating Expenses.Total operating expenses were $37.4 million and $20.5
million in the six months ended June 30, 2001 and 2000, respectively. This
overall increase was primarily due to a $17.7 million special charge in 2001.

Research and Development Expenses.Research and development expenses
totaled $5.4 million and $3.1 million in the six months ended June 30, 2001 and
2000, respectively. The increase over the same period in 2000 is primarily due
to the acquisition of OnAir on-line radio technology and personnel in the first
quarter of 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 completed projects in 2000. We do not currently have any
development projects which meet the criteria for capitalization. Costs of
developing the automated production system, continued development of online
radio technology and other unannounced applications comprised a majority of our
research and development expenses in 2001, while 2000 included a number of
projects which have since been terminated. A stock-based compensation credit of
$37,000 related to stock option cancellations and stock-based compensation
charges of $211,000 for the two quarters ended June 30, 2001 and 2000,
respectively, are attributable to employees included in research and
development and are presented in the separate operating expense line item
within the statements of operations.

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, development headcount
was significantly reduced in the second quarter and, as a result, we expect
research and development expenses to continue sequentially at lower rates in
the second half of 2001.

Sales and Marketing Expenses.Sales and marketing expenses totaled $5.3
million and $7.0 million in the six months ended June 30, 2001 and 2000,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-



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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.
A stock-based compensation credit of $98,000 related to stock option
cancellations and stock-based compensation charges of $558,000 for the two
quarters ended June 30, 2001 and 2000, respectively, are attributable to
employees included in sales and marketing and are presented in the separate
operating expense line item within the statements of operations.

General and Administrative Expenses. General and administrative expenses
totaled $5.2 million and $3.5 million in the six months ended June 30, 2001 and
2000, respectively. The increase was primarily due to full-scale operations in
facilities opened during late 1999 and the first quarter of 2000 and,
subsequent to our March 2000 initial public offering, the significant increase
required to support a larger organization and increased public reporting
requirements. Additional increases were due to contractual bonuses paid to
employees acquired in the Vidipax transaction and increased legal expenses
related to ongoing corporate initiatives. We believe that general and
administrative expenses will decrease slightly or remain flat in future periods
as a result of our restructuring efforts, although, new initiatives may cause
these expenses to actually increase over time. Stock-based compensation charges
of $92,000 and $2.3 million for the two quarters ended June 30, 2001 and 2000,
respectively, are attributable to employees included in general and
administrative and are presented in the separate operating expense line item
within the statements of operations.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $3.8 million and $3.5 million in the six months ended
June 30, 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
and OnAir transactions in the first quarter of 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 in the impairment charge in the
first quarter of 2001. The closing of the Addition Systems, Inc. acquisition in
June 2001 and theDial.com asset and technology purchase in July 2001 will
increase future amortization. We expect to continue our online radio strategy
and should additional acquisitions occur, amortization expense will increase
accordingly.

Stock-Based Compensation.Stock-based compensation totaled a credit of
$102,000 and expense of $3.4 million in the six months ended June 30, 2001 and
2000, respectively. Stock-based compensation in 2001 consisted of approximately
$920,000 in amortization of deferred stock compensation, a charge of $635,000
related to a modification associated with stock options held by a former
employee offset by a credit related to option cancellations resulting from
employee terminations associated with the Corporate restructuring which had
previously amortized deferred stock compensation of approximately $1.7 million.
Stock-based compensation in 2000 consisted of $2.6 million in amortization of
deferred stock compensation related to stock options granted below deemed fair
market value through March 31, 2000, charges of $1.1 million related to marking
options granted to consultants to fair market value as of June 30, 2000 and a
credit resulting from option cancellations which had previously amortized
deferred stock compensation of approximately $262,000.

Special Charges.In January 2001, we announced a cost-savings initiative
which resulted in a $947,000 special charge being incurred in 2000, and
restructuring special charges in the first two quarters of 2001 for severance
payments to employees terminated, facilities closure costs, asset impairments
and intangibles impairments. The significant components of the special charge
are as follows:

|                                       |  |               |     |                |  |               |      |  |  |                  |      | 
|-------------------------------------- |  | ------------- | --- | -------------- |  | ------------- | ---- |  |  | ---------------- | ---- | 
|                                       |  |               |     |                |  |               |      |  |  | Six Months ended
|(in millions)                          |  | June 30, 2001 |     | March 31, 2001 |  | June 30, 2001
|                                       |  |               |     |                |  |              
|Intangible and other asset impairments |  | $             |    |                |  | $             | 11.3 |  |  | $                | 11.3 | 
|                                      
|                                      
|                                      
|                                      
|Property and equipment impairments     |  |               | 1.4 |                |  |               | 1.5  |  |  |                  | 2.9  | 
|                                      
|                                      
|                                      
|                                      
|Software impairments                   |  |               |    |                |  |               | 0.8  |  |  |                  | 0.8  | 
|                                      
|                                      
|                                      
|                                      
|Severance costs                        |  |               | 1.7 |                |  |               | 0.7  |  |  |                  | 2.4  | 
|                                      
|                                      
|                                      
|                                      
|Other                                  |  |               |    |                |  |               | 0.3  |  |  |                  | 0.3  | 
|                                       |  |               |     |                |  |               |      |  |  |                  |      | 
|                                       |  | $             | 3.1 |                |  | $             | 14.6 |  |  | $                | 17.7 | 
|                                       |  |               |     |                |  |               |      |  |  |                  |      | 

The Company determined that due to the acquisition of a platform for music
samples acquired 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.



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The Company also decided to cease supporting its Media Syndicator and
Alive.com technology platforms in conjunction with the overall efforts to focus
on the music related business opportunities. Additionally, the goodwill
previously recognized associated with the Alive.com acquisition became impaired
as a result of the refocused business. Accordingly, the Company determined that
an impairment analysis was necessary for these assets. As each of these assets
had no determinable cash flows associated with them, they were deemed fully
impaired and remaining unamortized balances totaling $10.9 million, were
adjusted to zero. This write-off is included in the Special Charge line item on
the statements of operations.

The Companys decision to focus on the digital audio business, the
termination of most of its video production personnel and the continued decline
in demand for its video offerings led to a further review of its video assets.
The Company performed a review of the current market prices for similar used
equipment and adjusted the remaining value of its video assets down to the
estimated net realizable value.

We do not currently anticipate future special charges or impairments;
however, we reevaluate the carrying value of our assets at appropriate times,
and future charges may be necessary if conditions require them.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $2.1 million and $2.4 million in
the six months ended June 30, 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 balances decrease to fund our operating,
investing and financing activities.

Interest Expense.Interest expense and other consists of interest expense
related to our debt instruments as well as amortization of financing charges
related to our debt instruments. This totaled $676,000 and $276,000 in the six
months ended June 30, 2001 and 2000, respectively. The increase was due
primarily to increased levels of borrowings incurred to finance fixed asset
acquisitions, partially offset by decreased interest rates.

Liquidity and Capital Resources

As of June 30, 2001, we had approximately $70.1 million of cash, cash
equivalents and short-term investments.

Net cash used in operating activities was $13.3 million and $14.5 million
in the six months ended June 30, 2001 and 2000, respectively. For 2001, cash
used in operating activities resulted primarily from a net loss of $37.2
million, partially offset by non-cash charges totaling $21.8 million related to
stock- based compensation, depreciation and amortization, and the non-cash
component of the special charge, a decrease of approximately $1.5 million in
accounts receivable and an increase in accrued compensation, benefits and other
expenses of $2.1 million. Cash used in operating activities in 2000 was due
primarily to a net loss of $19.4 million, a decrease in accounts payable of
$4.1 million, partially offset by an increase in accrued compensation, benefits
and other expenses of $1.4 million and non-cash stock-based compensation,
depreciation and amortization charges totaling $8.4 million.

Net cash provided by investing activities was $22.8 million in the six
months ended June 30, 2001, and net cash used in investing activities was $15.1
million in the six months ended June 30, 2000. For 2001, cash provided by
investing activities was primarily related to the net sales of short-term
investments, partially offset by purchases of property and equipment and cash
paid for the acquisition of DiscoverMusic and certain assets of OnAir in March
2001, and certain assets of Addition Systems in June 2001. Cash used in
investing activities in 2000 was primarily related to purchases of property and
equipment, cash paid for acquisition of businesses and capitalized software
costs.

Net cash used in financing activities was $2.3 million in the six months
ended June 30, 2001 and net cash provided by financing activities was $87.8
million in the six months ended June 30, 2000. The cash used in financing
activities in 2001 primarily resulted from principal payments of our long-term
debt and capital lease obligations. 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 June 30, 2001, our principal commitments consisted of obligations
outstanding under operating leases, as well as notes payable totaling $10.7
million under our credit facilities and capital lease obligations. In addition,
we have certain financial commitments under existing agreements that will
require significant uses of our cash resources. We entered into a strategic
partnership agreement that commits us to purchase at least $625,000 in services
in 2001. As of June 30, 2001, approximately $563,000 is outstanding under this
commitment.

Since our inception, our operating expenses have significantly increased
in order to support our growth. We currently



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anticipate that such expenses will continue to be a material use of our
cash resources. We expect that capital expenditures, excluding acquisitions,
will total approximately $5.0 million in calendar year 2001.

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 2001 and 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.



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RISK FACTORS

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

The Company was formed as a limited liability company in August 1997 and
incorporated in March 1998. We therefore have a very limited operating history
upon which an investor may evaluate our operations and future prospects.
Because of our limited operating history, we have 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 recent
emergence of the Internet media infrastructure industry, our executives have
limited experience in this industry. As a young company, we face risks and
uncertainties relating to our ability to implement our business plan
successfully, particularly due to the relatively early stage of the streaming
media industry. Our potential for future profitability must be considered in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, such as the Internet media
infrastructure industry, using new and unproven business models.

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 net losses from operations of $89.2 million during the
period August 12, 1997 (inception) through June 30, 2001. Given the level of
our planned operating and capital expenditures, we expect to continue to incur
losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:



| |  |  | Incorporate the Companys online radio technology strategy;                                                  
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| |  |  | Achieve customer adoption and acceptance of our products and services;                                       
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| |  |  | Successfully scale our current operations;                                                                   
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| |  |  | Introduce new digital media services and applications;                                                       
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| |  |  | Implement and execute our business and marketing strategies;                                                 
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| |  |  | Address media copyright issues without negatively impacting our business;                                    
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| |  |  | Develop and enhance our brand;                                                                               
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| |  |  | Adapt to meet changes in the marketplace;                                                                    
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| |  |  | Respond to competitive developments in the Internet media infrastructure industry;                           
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| |  |  | Continue to attract, integrate, retain and motivate qualified personnel; and                                 
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| |  |  | Upgrade and enhance our technologies to accommodate expanded digital media service and application offerings.

We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. Additionally, we will
likely increase our operating expenses in the future as we attempt to expand
our digital media service and application offerings; obtain, administer, and
renew financially reasonable music content license agreements with the various
third parties in the fragmented music recording and publishing industries; grow
our customer base; enhance our brand image; improve our technology
infrastructure; and open new offices. We expect the number of our employees may
grow. These higher operating costs will likely increase our quarterly net
losses for the foreseeable future. Accordingly, our ability to operate our
business and implement our business strategy may be hampered and the value of
our stock may decline.



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Our quarterly financial results are subject to fluctuations that may make it
difficult to forecast our future performance and could cause our stock price to
decline

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



| |  |  | Variability in demand for our digital media services and applications;                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| |  |  | Profitability and viability of existing and emerging businesses
focused on distribution of digital media content over the Internet;                                                               
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| |  |  | Willingness of our customers to enter into digital media and
applications services agreements for digital media in light of the
economic and legal uncertainties related to their business models;
|
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| |  |  | Ability of our customers to procure necessary intellectual property
rights in the digital media content they intend to utilize in their
businesses;                                               
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| |  |  | Market acceptance of new digital media services and applications offered by us and our competitors;                                                                                               
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| |  |  | Introduction or enhancement of digital media services and applications offered by us and our competitors;                                                                                         
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| |  |  | The mix of distribution channels through which our products and services are licensed and sold;                                                                                                   
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| |  |  | Changes in the growth rate of Internet usage and adoption of broadband access;                                                                                                                    
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| |  |  | Variability in average order size or product mix;                                                                                                                                                 
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| |  |  | Changes in our pricing policies or the pricing policies of our competitors;                                                                                                                       
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| |  |  | Technical difficulties with respect to the use of our products;                                                                                                                                   
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| |  |  | Governmental regulations affecting use of the Internet, including
regulations concerning intellectual property rights and security
measures;                                                      
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| |  |  | The amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure;                                                             
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| |  |  | General economic conditions such as fluctuating interest rates and
inflation; and                                                                                                                 
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| |  |  | Economic conditions specifically related to the Internet such as
fluctuations in the costs of Internet access, hardware and software.                                                             

As a result of our cost savings initiative, we expect our operating
expenses to decrease in absolute dollars on an annual basis, but over time,
they will likely increase. Our current and future levels of operating expenses
and capital expenditures are based largely on our growth plans and estimates of
expected future revenues. However, future changes in our business model may
require future increases in operating expenses in order to execute our business
plan. These expenditure levels are, to a large extent, fixed in the short term.
Thus, we may not be able to adjust spending 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 our
expectations as well as those of securities analysts and investors in some
future periods, our stock price will likely decline.

Historically, we have priced our digital media services based on the
customers projected service volumes. We generally offer our digital media
services through volume purchase orders with prices determined by customers
committing to specific service volumes and schedules and paying nonrefundable
deposits. We attempt to secure these commitments from customers to enable us to
schedule time in our production facilities, to staff our operations efficiently
and to forecast revenues and cost of revenues. If our customers are not willing
to do business with us on these terms or if they do not fulfill their
commitments under volume purchase orders, our ability to forecast revenues will
be adversely affected and could contribute to increased fluctuation in our
quarterly results, which could seriously harm our business.

Although we have recently achieved significant percentage increases in our
quarter over quarter revenues, we believe future quarters may not show similar
percentage revenue changes and may show declining revenue.



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Our common stock price has been volatile and there is a risk we could be
delisted from the Nasdaq National Market

Our common stock price has been, and may continue to be, extremely
volatile, and there is a risk we could be delisted from the Nasdaq National
Market. The market price of our common stock has declined significantly in
recent months, and we expect that it will continue to be subject to significant
fluctuations as a result of variations in our quarterly operating results and
volatility in the financial markets. On several recent occasions, our stock has
traded below $1.00 and may continue to do so. If our stock continues to trade
below $1.00 per share for 30 consecutive business days, we may receive notice
from the Nasdaq National Market 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 delisted. If our stock is delisted from the Nasdaq
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. If our
common stock were subject to penny stock regulations, which apply to certain
equity securities not traded on the Nasdaq National Market which have a market
price of less than $5.00 per share, subject to limited exceptions, additional
disclosure would be required by broker-dealers in connection with any trades
involving such penny stock.

Substantial sales of our common stock could cause our stock price to decline

Sales of a substantial number of shares of common stock in the public
market, or the perception that these sales may occur, could adversely affect
the market price of the common stock by potentially introducing a large number
of sellers of our common stock into a market in which the common stock price is
already volatile, thus driving the common stock price down. In addition, the
sale of these shares could impair our ability to raise capital through the sale
of additional equity securities.

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

We depend on the development and rate of adoption of digital media and the
delay or failure of this development would seriously harm our business. The
development of commercial applications for digital media content is in its very
early stages. Our success depends on users having access to the necessary
hardware, software and bandwidth, or data transmission capability, to receive
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. In order to receive digital media adequately, users generally must
have multimedia personal computers with certain minimum microprocessor
requirements and data transmission capacities, as well as streaming media
software. The success of digital media over the Internet depends on the
continued rollout of broadband access to consumers on an affordable basis. 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 will not succeed in executing our business
plan. Many factors could inhibit the growth of electronic commerce in general
and the distribution of digital media content in particular, including concerns
about the profitability of Internet-based businesses, uncertainty about
intellectual property rights associated with music and other digital media,
bandwidth constraints, piracy and privacy. Widespread adoption of digital media
technology depends on overcoming these obstacles, identifying viable revenue
models for digital media-based business, improving audio and video quality and
educating customers and users in the use of digital medial technology. If
digital media technology fails to overcome these obstacles, our business could
be seriously harmed.

Commercial failure of Internet-based businesses will reduce demand for our
digital media services and applications

The substantial proportion of customers for our digital media services and
applications have been Internet-based businesses and we expect that in the
future, a majority of our customers will be these types of businesses.

Our business prospects and revenues would be harmed by the commercial
failure or diminished commercial prospects of these or like customers. In
addition, if such customers have difficulty raising additional capital to fund
their operations, our business prospects and revenues would be harmed.



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



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

In addition, we face the risk that our customers might not have all
necessary ownership or license rights in the content for us to perform our
encoding services. 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 audio and video content on 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 Internet 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. 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. 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 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 will continue to do so for the foreseeable future. During the
three months ended June 30, 2001, three of our customers accounted for
approximately 40% of our revenues; while in the three months ended June 30,
2000, two other customers accounted for approximately 24% of our revenues. We
believe that a small number of customers will likely 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 for the quarter. If we were to lose a key customer, our business,
financial condition, and operating results could suffer. In addition, if any
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 our customer base, our business could be harmed.



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We rely on strategic relationships to promote our services and for access to
licensed technology and content; 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
including, among others, Apple Computer, Inc., Microsoft Corporation, and
RealNetworks, Inc. We rely on these relationships for licensed technology to
maintain our ability to service RealNetworks RealMedia, Microsoft Windows Media
and Apple Quicktime platforms and applications. In addition, we 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. 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 growth could be limited if we fail to successfully identify and integrate
potential acquisitions and investments

We expect to evaluate and acquire businesses, technologies, services, or
products that we believe are a strategic fit with our business. Entering into
an acquisition entails many risks of any which could materially harm our
business, including:



| |  |  | Diversion of managements attention from other business concerns;                                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
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| |  |  | Failure to assimilate the acquired company with our pre-existing business;                                                                                            
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| |  |  | Potential loss of key employees from either our pre-existing business or the acquired business;                                                                       
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| |  |  | Dilution of our existing stockholders as a result of issuing equity securities; and                                                                                   
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| |  |  | Assumption of liabilities of the acquired company.                                                                                                                    
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| |  |  | Complementary products and services may not be available on commercially reasonable terms;                                                                            
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| |  |  | We may be unable to compete for acquisitions of products and
services with many of our competitors who have greater financial
resources than we do;                   
|
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| |  |  | Acquired products and services may not meet the needs of our
customers;                                                                                               
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| |  |  | We may incur difficulties associated with the integration of the
personnel and operations of an acquired company with our personnel and
operations;                   
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| |  |  | We may incur difficulties in assimilating products, services or
technologies, with our existing products, services and technologies we
obtained from acquisitions; and
|
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| |  |  | Integration of acquired and existing products and services may
result in decreases in revenue from existing products and services.                                    

In particular, transactions of this sort require the process of
integrating an acquired business, technology, service, or product and may
result in unforeseen operating difficulties and expenditures and 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. For example, we may
not be able to successfully assimilate the personnel, technology, operations
and customers we obtained from acquisitions into our business. In addition, we
may fail to achieve the anticipated synergy from these acquisitions, including
marketing, product development, distribution and other operational synergies.
Acquisitions could also result in material use of cash resources, potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities, 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.



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In addition, the reduced availability of write-offs for in-process
research and development costs under the purchase method of accounting in
connection with an acquisition could make an acquisition more costly for us. We
will incur additional amortization expense in future periods as a result of the
excess purchase price associated with our acquisitions of DiscoverMusic and
Addition Systems, Inc. and certain assets and technology from OnAir and
theDial.com.

The United States music industry is extremely litigious; we may become involved
in litigation and expenses related to litigation could severely impact our
financial condition, and could also result in the discontinuation or
interruption of services to our customers

The music industry in the United States is generally regarded as extremely
litigious in nature compared to other industries. As a result, in the future we
could become engaged in litigation with others in the music industry. Any
litigation could subject us to significant liability for damages and could
result in us having to discontinue or interrupt services to our customers. In
addition, even if we were to prevail, litigation could be time-consuming and
expensive to defend and could result in the diversion of management time and
attention.

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 and 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 would 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.

If we are ineffective in managing our growth, our business may be harmed

Our current or future infrastructure and systems (such as information
technologies and accounting) may prove to be insufficient to indefinitely
accommodate our targeted level of future operations. Effectively managing any
future growth will require, among other things, that we successfully upgrade
and expand our production processes and systems, expand the breadth of products
and services we offer, continue to improve our management reporting
capabilities and accounting systems. We also need to retain our highly skilled
and motivated executives and other employees. We must also maintain close
coordination among our marketing, operations, development, finance and
administrative organizations.

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 which we need to maintain in order to expand
our 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.

Technological advances may cause our services and applications to be
unnecessary

As more audio and video content is originally created in digital media
formats, the need for our encoding services may decrease. In addition, the
advancement of features in streaming media software applications from
Microsoft, RealNetworks and others may incorporate services and applications we
currently offer, or intend to offer, making our services or applications
unnecessary or obsolete. This could seriously harm our business.



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The failure to retain and attract key technical personnel and other highly
qualified employees could harm our business

Because of the complexity of our services, applications and related
technologies, we are substantially dependent upon the continued service of our
existing product development personnel. In addition, we may hire additional
engineers with high levels of experience in designing and developing software
and rich media products in time pressured environments. There is intense
competition in the Puget Sound region for qualified technical personnel in the
software and technology markets. As we continue to introduce additional
applications and services, and as our customer base and revenues grow, we will
need to hire additional qualified personnel in other areas of operations as
well. New personnel will require training and education and take time to reach
full productivity. Our failure to attract, train, and retain these key
technical personnel could seriously harm our business. Further, 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 hired or named new employees in 2000 and 2001 in key executive
positions, including our Chief Executive Officer, Chief Financial Officer, Vice
President of Sales, Vice President of Marketing and General Counsel. The loss
of several key executives could seriously harm our business. Finally, we added
DiscoverMusic and OnAir employees in connection with our acquisition of
DiscoverMusic and our acquisition of online radio application technology and
select infrastructure assets of OnAir. As we complete the integration of those
acquisitions and employees, we are reviewing our organizational structure and
number of employees. 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.

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

Our products and services are divided into digital media services, which
is the encoding of audio and video content for deployment over the Internet,
media migration and restoration services and consulting services; and digital
media applications, which are primarily subscription services focused towards
business models providing music over the Internet.

The market for digital media services and applications is relatively new,
and we face competition from in-house encoding services by potential customers,
other vendors that provide outsourced digital media services and companies that
directly provide digital media applications. 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 Internet media services and applications, the more
competitors are likely to emerge including turnkey Internet media application
and service providers; streaming media platform developers; digital music
infrastructure providers; digital media applications service providers
(including for digital music subscription), and; video post- production houses.
As we continue to develop media subscription applications, we may also over
time begin to compete with some of our historical customers and partners who
could also develop and market business-to-business subscription offerings.

In addition, we may not compete successfully against current or future
competitors, many of whom 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 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 industry is experiencing consolidation that may intensify competition

The Internet and media distribution industries have recently experienced
substantial consolidation and a proliferation of strategic transactions. 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;                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
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|
| |  |  | competitors could obtain exclusive access to desirable multimedia
content and prevent that content from being available in our 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 advertisers to our Web sites and product offerings;



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| |  |  | suppliers of important or emerging technologies could be acquired by
a competitor or other company which could prevent us from being able to
utilize such technologies in our offerings, and disadvantage our
offerings relative to those of competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| |  |  | a competitor could be acquired by a party with significant resources
and experience that could increase the ability of the competitor to
compete with our products and services; and                                                                     
|
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|
| |  |  | 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 which
could cause us to lose customers, revenue and market share. They could also
force us to expend greater resources to meet the competitive threat, which
could also harm our operating results.

Our business model is unproven, making it difficult to forecast our revenues
and operating results

Our business model is based to a certain degree on the premise that
digital media content providers and developers will outsource a large
percentage of their encoding services needs and content management needs. Our
potential customers may rely on internal resources for these needs. In
addition, technological advances may render an outsourced solution unnecessary,
particularly as new media content is created in a digital format. Market
acceptance of our services may depend in part on reductions in the cost of our
services so that we may offer a more cost effective solution than both our
competitors and our customers doing the work internally. Our cost reduction
efforts may not allow us to keep pace with competitive pricing pressures and
may not lead to improved gross margins. In order to remain competitive, we
expect to reduce the cost of our services through design and engineering
changes. We may not be successful in reducing the costs of providing our
services.

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

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

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
standards, our ability to grow our business will suffer

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



| |  |  | Obtain the necessary intellectual property rights from music
companies and other content owners to be able to legally provide our
services;     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| |  |  | Identify and respond to emerging technological trends in the market;                                                                            
|
|
|
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| |  |  | Enhance our products by adding innovative features that
differentiate our digital media services and applications from those of
our competitors;
|
|
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|
| |  |  | Acquire and license leading technologies;                                                                                                       
|
|
|
|
| |  |  | Bring digital media services and applications to market on a timely basis at competitive prices; and                                            
|
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|
| |  |  | 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 and 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



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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 or 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.

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 have
filed six U.S. patent applications and four international patent applications
that claim priority to six previously filed provisional applications. We cannot
assure that measures we take to protect our intellectual property will be
successful or that third parties will not develop alternative solutions that do
not infringe upon our intellectual property.

In connection with the acquisition of DiscoverMusic, the Company assumed
certain liabilities, including a patent infringement lawsuit filed by InTouch
Group, Inc. (InTouch) in which DiscoverMusic is one of the defendants. We
believe that we have meritorious defenses to InTouchs claims and we intend to
vigorously defend against such claims. However, to the extent that their patent
rights are valid and enforceable and cover our activities, we may be required
to pay damages, obtain a license to use such patents or use non-infringing
methods to accomplish our activities with regard to our interactive music
samples preview technology. It is possible that a license from InTouch would
not be available on commercially acceptable terms, or at all, or that we would
be unable to use our interactive music samples preview technology in a non-infringing
manner. If successful, the InTouch claim that we violate their
intellectual property rights could seriously harm our business by forcing us to
cease using important intellectual property or requiring us to pay monetary
damages. Even if unsuccessful, these claims still can harm our business
severely by damaging our reputation, requiring us to incur legal costs,
lowering our stock price and public demand for our stock, and diverting
managements attention away from our primary business activities in general.

Our business might be harmed if challenges against Intellectual Property laws
by new digital music delivery technologies are successful

New music sharing technologies allowing users to locate and download
copies of digital music stored on the hard drives of other users without
payment have been introduced into the market. Because some digital recorded
music formats, such as MP3, do not contain mechanisms for tracking the source
of ownership of digital recordings, users are able to download copies of
copyrighted recorded music over the Internet without being required to
compensate the owners of these copyrights. These downloads are a significant
concern to record companies and artists. The Recording Industry Association of
America has filed a suit seeking a permanent injunction against the use of
these file-sharing technologies for exchange of copyrighted works. Several
recording artists have also taken action against companies providing music
sharing technology. If the injunction is denied, and it is determined that
this file sharing technology is non- infringing, record companies and artists
may limit their use of the Internet to sell and distribute their copyrighted
materials. Even if the technology is determined to be infringing, it may be
difficult to prevent this type of file sharing because of the non-centralized
character of these technologies. As long as free shared copies are available,
legally or illegally, consumers may choose not to pay for downloads from retail
and other music delivery sites, which could harm our business.

If standards for the secure, digital delivery of recorded music are not
adopted, the piracy concerns of record companies and artists might not be
satisfied, and they might not use our platform for digital delivery of their
music

Because other digital recorded music formats, such as MP3, do not 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. The Secure Digital Music Initiative (SDMI) is a committee
formed by the Recording Industry Association of America (RIAA) to propose a
standard format for the secure digital delivery and use of recorded music. If a
standard format is not adopted, however, unsecure copies of recorded music may
continue to be available on the Internet, and record companies and artists
might not permit the digital delivery of their music. Additionally, as long as
pirated recordings are available, many consumers will choose free pirated
recordings rather than paying for legitimate recordings. Accordingly, if a
standard format for the secure digital delivery of music



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is not adopted, our business might be harmed.

We have designed our current products to be adaptable to different music
industry and technology standards. Numerous standards in the marketplace,
however, could cause confusion as to whether our products and services are
compatible. If a competitor were to establish the dominant industry standard,
our business would be harmed.

The length of our sales cycle is uncertain and therefore could cause
significant variations in our operating results

Our customers typically include large corporations that often require long
testing and approval processes before making a purchase decision. Therefore,
the length of our sales cycle, the time between an initial customer contact and
completing a sale, has been and may continue to be unpredictable. The time
between the date of our initial contact with a potential new customer and the
execution of a sales contract with that customer ranges from less than two
weeks to more than six months, depending on the size of the customer, the
application of our solution and other factors. Our sales cycle is also subject
to delays as a result of customer-specific factors over which we have little or
no control, including their procurement of appropriate rights from content
owners, budgetary constraints and internal acceptance procedures. During the
sales cycle, we may expend substantial sales and management resources without
generating corresponding revenues. Our expense levels are relatively fixed in
the short term and are based in part on our expectation of future revenues. As
a result, any delay in our sales cycle could cause significant variations in
our operating results, particularly because a relatively small number of
customer orders represent a large portion of our revenues.

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;                                                 
| | - |  | -----------------------------------------------------------------------
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| |  |  | Cause our customers to initiate product liability suits against us;    
|
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|
| |  |  | Increase our product development resources;                            
|
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| |  |  | Cause us to lose sales; and                                            
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| |  |  | 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 expansion into international markets will require significant resources and
will subject us to new uncertainties that may limit our return from our
international sales efforts

One of our strategies to increase our sales is to selectively add an
international sales force and operations. In March 2000, we opened a sales
office in London, England. Our further expansion will involve a significant use
of management and financial resources, particularly because we have no previous
experience with international operations. We may not be successful in creating
international operations or sales. In addition, international business
activities are subject to a variety of risks, including:



| |  |  | The adoption of laws detrimental to our operations such as
legislation relating to the collection of personal data over the
Internet or laws, regulations or treaties governing the export of
encryption related software;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
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| |  |  | Currency fluctuations;                                                                                                                                                                                                    
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| |  |  | Actions by third parties such as discount pricing and business techniques unique to foreign countries;                                                                                                                    
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| |  |  | Political instability; and .                                                                                                                                                                                              
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| |  |  | Economic conditions including inflation, high tariffs or wage and price controls.                                                                                                                                         

We do not possess political risk insurance, and any of these risks could
restrict or eliminate our ability to do business in foreign jurisdictions.



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The concentration of ownership by our affiliated stockholders and provisions in
our charter documents and provisions of applicable state law may delay or
prevent any merger or takeover of the Company

Certain of our existing stockholders have significant influence over our
management and affairs, which they could exercise against your best interests.
As of June 30, 2001, our officers and directors, together with entities that
may be deemed affiliates of or related to such persons or entities, will
beneficially own approximately 41% of our outstanding common stock. As a
result, these stockholders, acting together, may be able to influence
significantly our management and affairs and matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. 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 acquiror 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 and Washington law could have the effect of delaying,
deferring or preventing an acquisition of the Company, even if an acquisition
would be beneficial to our stockholders.

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

We believe that our existing cash, cash equivalents, short-term
investments, the amounts available under the working capital line and the new
facility will be sufficient to meet our operating expenses working capital,
capital expenditure and business expansion requirements through 2001 and 2002.
Thereafter, we may need to raise additional funds. We may have to 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
stockholders will be reduced. 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 fund our ongoing operations and planned
expansion, take advantage of unanticipated acquisition opportunities, develop
or enhance services and applications or respond to competitive pressures. This
inability could seriously harm our business, results of operations and
financial condition.

Our encoding and data storage and web server systems may stop working or work
improperly due to natural disasters, failure of third-party services, power
outages, fire and other unexpected problems

Since our primary encoding and data storage facilities and network
facilities are located in the state of Washington, a seismic disturbance, or
other natural disaster could affect these primary facilities simultaneously. An
unexpected event like a power or telecommunications failure, fire, flood,
seismic disturbance at or near our encoding and on-site data storage facility
or at any of our Internet service providers facilities could cause the loss of
critical data and prevent us from offering our services to our customers. In
addition, California utility companies are currently experiencing a financial
crisis which have led to brownouts, rolling blackouts and other disruptions
of power services to consumers, and this crisis could spread to the state of
Washington as well. These losses of power could continue or worsen due to
circumstances out of our control and adversely affect our business and other
operations entirely. Our insurance may not adequately compensate us for any
losses that may occur.

Our development of an online radio business may be adversely affected by
interruptions or failures of Internet related services and technologies, lack
of content, and uncertainty involving copyrights and royalty payments

A reduction in the performance, reliability and availability of the
Internet, our network infrastructure, or content delivery networks may harm our
ability to provide online radio to our users, as well as our reputation and
ability to attract and retain users, customers, advertisers and content
providers. Our operations will 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 will also depend on Web browsers,
ISPs and online service providers to provide Internet users access to our
online radio. We also intend to provide rebroadcasting solutions and these will
be dependent on providing customers with efficient and reliable services to
enable such customers to broadcast content to large audiences on an as-needed
basis. Our online radio will also be dependent in part upon transmission
capacity provided by third-party telecommunications network providers. Any
failure of such network



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providers to provide the capacity we require may result in a reduction in, or
interruption of, service to our customers. Our online radio business will also
depend on the availability of reasonably priced quality content and our ability
to produce quality content.
Our online radio business will likely be subject to the uncertainty
related to copyrights and royalty payments discussed above.

Government regulation may require us to change our business

On October 28, 1998, the United States Congress enacted the Digital
Millennium Copyright Act (or DMCA). 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 and
our customers future business activities, we and our customers may be required
to pay licensing fees for digital sound recordings streamed or distributed from
web sites 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 companies and
individuals in the digital music industry 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.

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




|        |                                                           
|------- | ----------------------------------------------------------
|ITEM 3. | 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 and expense is sensitive to
changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we anticipate no material market risk exposure.
Therefore, no quantitative tabular disclosures are presented.



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PART II. OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

On July 26, 2001, class action lawsuit was 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 the
underwriters who handled our March 15, 2000 initial public offering of common
stock. The complaint was filed allegedly on behalf of 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 based on the assertion
that there was undisclosed compensation received by our underwriters in
connection with the our initial public offering.

Although neither the Company nor the individual defendants have filed an
answer in this matter, we believe that we and the individual defendants have
meritorious defenses to the claims made in the complaint and intends to contest
the lawsuit vigorously. However, there can be no assurance that we will be
successful, 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 our 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. As of this
date no substantive proceedings have commenced. No date for the arbitration
hearing has been established. Under AAA rules, arbitration proceedings are
confidential and private. Valley has filed an answer in which it denies
liability, and asserts counterclaims for breach of contract, conversion, and
declaratory relief.

See Item 1 of Part II of our quarterly report on Form 10-Q for the
quarterly period ended March 31, 2001 for a discussion of legal proceedings as
to which there were no material developments in the quarter ended June 30,
2001.




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)       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.



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(d)       Use of Proceeds from Sales of Registered Securities

The net proceeds of our initial public offering and the concurrent sale of
shares to Akamai Technologies, Inc. which both closed on March 15, 2000, as
well as the underwriters over-allotment option exercised on April 14, 2000,
totaled $82.0 million. As of June 30, 2001, we have used approximately $78.6
million of those proceeds for working capital and general corporate purposes,
including increased spending on sales and marketing, customer support, research
and development, expansion of our operational and administrative
infrastructure, and the purchase of capital equipment and businesses. We expect
to use the remaining proceeds of the offering for similar purposes. In
addition, we may use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, product lines or products. However,
specific amounts for any future use of proceeds have not yet been determined
and we have no current plans, agreements or commitments with respect to any
such acquisition. Pending these uses, we intend to invest the net proceeds in
short-term, interest-bearing, investment grade securities with original
maturities of less than one year.




ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.




ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS

On May 17, 2001, we held our 2001 Annual Meeting of Stockholders. At the
meeting the following matters were approved by the vote specified below:

(a). John T. Baker IV and Johan C. Liedgren were elected to serve as
directors of the Company. Mr. Baker received 29,248,190 shares of common stock
voting in favor of his election and 101,538 shares of common stock were
withheld. Mr. Liedgren received 29,287,705 shares of common stock voting in
favor of his election, and 62,023 shares of common stock were withheld. In
addition, the terms of the following directors continued after the annual
meeting of our stockholders: Martin Tobias, Anthony Bay and Chad Waite.

(b). The ratification of Arthur Andersen LLP as our independent public
accountants for the year ended December 31, 2001 was approved. The votes were
cast as follows: 29,299,975 shares of common stock were voted for the
ratification, 38,061 shares of common stock were voted against the ratification
and 11,692 shares of common stock abstained from the vote. There were no
shares of common stock subject to broker non-votes.




ITEM 5: OTHER INFORMATION

None.



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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

|         |  |                                                                                                                                                                                                |  |  |  | 
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit  |  |                                                                                                                                                                                                |  |  |  | 
|Number   |  | Description                                                                                                                                                                                    |  |  |  | 
|         |  |                                                                                                                                                                                                |  |  |  | 
|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 Technology, Inc.                                                                                                           
|        
|        
|        
|        
|3.2(1)   |  | Form of Amended and Restated Certificate of Incorporation of Loudeye.                                                                                                                         
|        
|        
|        
|        
|3.4(4)   |  | Form of Amended and Restated Bylaws of Loudeye Technologies, Inc.,
dated November 21, 2000.                                                                                                   
|        
|        
|        
|        
|4.1(1)   |  | Form of Loudeye Technologies, Inc. common stock certificate                                                                                                                                   
|        
|        
|        
|        
|10.1(1)  |  | Form of Indemnification Agreement between Loudeye Technologies 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.              
|        
|        
|        
|        
|10.13(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.                                   
|        
|        
|        
|        
|10.15(1) |  | Offer Letter to Douglas Schulze dated August 30, 1999.                                                                                                                                        
|        
|        
|        
|        
|10.16(1) |  | Offer Letter to James Van Kerkhove dated November 5, 1999.                                                                                                                                    
|        
|        
|        
|        
|10.17(1) |  | Offer Letter to David Weld dated December 2, 1999.                                                                                                                                            
|        
|        
|        
|        
|10.18(1) |  | Services Agreement between Loudeye Technologies, Inc. and Akamai Technologies,
Inc. dated as of February 15, 2000.                                                                            
|        
|        
|        
|        
|10.19(2) |  | Amended and Restated Loan and Security Agreement between Imperial Bank and Loudeye
Technologies, Inc. dated May 17, 2000.                                                                     
|        
|        
|        
|        
|10.20(2) |  | Amended and Restated Services Agreement between Valley Media, Inc. and Loudeye
Technologies, Inc. dated April 2000.                                                                           



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|          |  |                                                                                                                                                                   |  |  |  | 
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit   |  |                                                                                                                                                                   |  |  |  | 
|Number    |  | Description                                                                                                                                                       |  |  |  | 
|          |  |                                                                                                                                                                   |  |  |  | 
|         
|         
|         
|         
|10.21(2)  |  | Stock Purchase Agreement dated as of June 14, 2000 by and among Loudeye
Technologies, Inc., Vidipax, Inc. and James Lindner.                                     
|         
|         
|         
|         
|10.22(2)  |  | First Amendment of Office Lease Agreement dated April 3, 2000 between Times Square
Building L.L.C. and Loudeye Technologies, Inc.                                
|         
|         
|         
|         
|10.23(2)  |  | Second Amendment of Office Lease Agreement dated May 1, 2000 between Times Square
Building L.L.C. and Loudeye Technologies, Inc.                                 
|         
|         
|         
|         
|10.24(2)  |  | Lease Agreement dated June 14, 2000 between Brown Bear Realty Corporation and
Loudeye Technologies, Inc.                                                         
|         
|         
|         
|         
|10.25+(3) |  | Volume Purchase Order dated July 19, 2000 by and between MusicBank and Loudeye
Technologies, Inc.                                                                
|         
|         
|         
|         
|10.26(6)  |  | Offer Letter to Todd Hinders dated December 15, 2000.                                                                                                            
|         
|         
|         
|         
|10.27(4)  |  | Underlease Agreement and Agreement to Lease dated December 21, 2000 between WCRS
Limited and Loudeye Technologies, Inc.                                          
|         
|         
|         
|         
|10.29+(4) |  | Encoding Services and Compact Disc Purchase Agreement between XM Satellite Radio,
Inc., and Loudeye Technologies, Inc., dated August 25, 2000.                   
|         
|         
|         
|         
|10.30+(4) |  | First Addendum to Encoding Services and Compact Disc Purchase
Agreement between XM Satellite Radio, Inc., and Loudeye Technologies, Inc., dated October 10, 2000.
|         
|         
|         
|         
|10.31(6)  |  | 2000 Employee Stock Option Plan as amended March 5, 2001.                                                                                                        
|         
|         
|         
|         
|10.32(6)  |  | Offer Letter to John Baker dated February 23, 2001.                                                                                                              
|         
|         
|         
|         
|10.33(6)  |  | Offer Letter to Joel McConaughy dated March 14, 2001.                                                                                                            
|         
|         
|         
|         
|10.34(6)  |  | Offer Letter to John Shaw dated April 4, 2001.                                                                                                                   
|         
|         
|         
|         
|10.35(5)  |  | Registration Rights Agreement among Loudeye Technologies, Inc. and the former
stockholders of DiscoverMusic.                                                     
|         
|         
|         
|         
|24.1(4)   |  | Powers of Attorney of Board of Directors.                                                                                                                        



---

|+   |  | 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.         

(b)  Reports on Form 8-K

On April 11, 2001, we filed a report on Form 8-K that announced the Company was
restructuring its operations pursuant to which it was significantly reducing
its workforce in an effort to consolidate its core media services
infrastructure, integrate recent acquisitions and support new business
initiatives under development. Our press release announcing the restructuring
was filed as an exhibit to the report.

On April 18, 2001, we filed a report on Form 8-K which announced that Joel
McConaughy had been hired as the Companys Chief Technical Officer, effective
as of March 26, 2001. Our press release announcing that management change was
filed as an exhibit to the report. In addition, the report disclosed that in
connection with the Companys operational restructuring, the



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following executive officers would be leaving the Company: Peter
Kellogg-Smith,Vice President and General Manager of Hosted Applications, Brent
D. Shepherd, Vice President of Consulting Services, and James L. Van Kerkhove,
Vice President of Production. It also disclosed that the Company had
significantly scaled back its Consulting Services Group and all but two of the
employees in the Consulting Services Group had been terminated.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 10, 2001.

| |                                                                                               |                    
| | --------------------------------------------------------------------------------------------- | -------------------
| | LOUDEYE TECHNOLOGIES, INC                                                                    
|
| | By                                                                                            | /s/ BRADLEY A. BERG
| |                                                                                              
| | Bradley A. Berg
Senior Vice President and Chief
Financial Officer
Principal Financial Officer

| |                                                                                 |                    
| | ------------------------------------------------------------------------------- | -------------------
| | By                                                                              | /s/ JEROLD J. GOADE
| |                                                                                
| | Jerold J. Goade
Vice President Finance, Controller
Principal Accounting Officer



36