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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 September 30, 2003

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 Corp.

(Exact name of registrant as specified in its charter)


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

1130 Rainier Avenue South, Seattle, WA 98144
(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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [   ]     No [X]

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

|        |  |  |  |                                   
|------- |  |  |  | ----------------------------------
|Common  |  |  |  | 56,137,166                        
|        |  |  |  |                                   
|(Class) |  |  |  | (Outstanding at November 10, 2003)





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TABLE OF CONTENTS



|                               |                                                                                               |                                                |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM I FINANCIAL STATEMENTS                                                                  
|                               |                                                                                               | CONSOLIDATED BALANCE SHEETS                   
|                               |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS         
|                               |                                                                                               | CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
|                               |                                                                                               | 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                            
|                               | Item 4 DISCLOSURE CONTROLS AND PROCEDURES                                                    
|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 HOLDERS                                  
|                               | ITEM 5: OTHER INFORMATION                                                                    
|                               | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EXHIBIT 31.1                  
|EXHIBIT 31.2                  
|EXHIBIT 32.1                  
|EXHIBIT 32.2                  



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##### Table of Contents



Loudeye Corp.

Form 10-Q Quarterly Report
For the Quarter Ended September 30, 2003

TABLE OF CONTENTS

|     |      |     |    |                   |  |                                                |                                                                                       |  |   |    |      |  | 
|---- | ---- | --- | -- | ----------------- |  | ---------------------------------------------- | ------------------------------------------------------------------------------------- |  | - | -- | ---- |  | 
|     |      |     |    |                   |  |                                                |                                                                                       |  |   |    | Page
|     |      |     |    |                   |  |                                                |                                                                                       |  |   |    |     
|PART |      |     | I. |                   |  | Financial Information (unaudited)              |                                                                                       |  |   |   
|     | Item |     |    | 1                 |  |                                                | Financial Statements                                                                  |  |   |    |     
|     |      |     |    |                   |  | Consolidated Balance Sheets                    |                                                                                       |  | 3 |   
|     |      |     |    |                   |  | Consolidated Statements of Operations          |                                                                                       |  | 4 |   
|     |      |     |    |                   |  | Consolidated
Statement of Stockholders Equity |                                                                                       |  | 5 |   
|     |      |     |    |                   |  | Consolidated Statements of Cash Flows          |                                                                                       |  | 6 |   
|     |      |     |    |                   |  | Notes to Consolidated Financial Statements     |                                                                                       |  | 7 |   
|     | Item |     |    | 2                 |  |                                                | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |   | 16 |     
|     | Item |     |    | 3                 |  |                                                | Quantitative and Qualitative Disclosures About Market Risk                            |  |   | 36 |     
|     | Item |     |    | 4                 |  |                                                | Disclosure Controls and Procedures                                                    |  |   | 36 |     
|PART |      | II. |    | Other Information |  |                                                |                                                                                       | 
|     | Item |     |    | 1                 |  |                                                | Legal Proceedings                                                                     |  |   | 36 |     
|     | Item |     |    | 2                 |  |                                                | Changes in Securities and Use of Proceeds                                             |  |   | 37 |     
|     | Item |     |    | 3                 |  |                                                | Defaults Upon Senior Securities                                                       |  |   | 37 |     
|     | Item |     |    | 4                 |  |                                                | Submission of Matters to a Vote of Security Holders                                   |  |   | 37 |     
|     | Item |     |    | 5                 |  |                                                | Other Information                                                                     |  |   | 38 |     
|     | Item |     |    | 6                 |  |                                                | Exhibits and Reports on Form 8-K                                                      |  |   | 38 |     

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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM I  FINANCIAL STATEMENTS




LOUDEYE CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)

|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |          |        | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | ------ | ------------ | - | -------- | ------ | 
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   | September 30, |        | December 31,
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   | 2003          |        | 2002        
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |             
|ASSETS                               |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     | Cash and cash equivalents                                                                                                                                                                                                                                                                                  |                                            | $ | 7,898         |        |              | $ | 1,780    |       
|                                     | Restricted cash                                                                                                                                                                                                                                                                                            |                                            |   | 413           |        |              |   |         |       
|                                     | Short-term investments                                                                                                                                                                                                                                                                                     |                                            |   | 11,507        |        |              |   | 9,978    |       
|                                     | Accounts receivable, net of allowances of $227 and $290                                                                                                                                                                                                                                                    |                                            |   | 2,155         |        |              |   | 2,107    |       
|                                     | Notes receivable from related parties                                                                                                                                                                                                                                                                      |                                            |   |              |        |              |   | 1,187    |       
|                                     | Prepaid expenses and other                                                                                                                                                                                                                                                                                 |                                            |   | 488           |        |              |   | 736      |       
|                                     | Media
restoration assets held for sale                                                                                                                                                                                                                                                                     |                                            |   | 1,040         |        |              |   | 2,074    |       
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total current assets                       |   |               | 23,501 |              |   |          | 17,862 | 
|                                     | Restricted investments                                                                                                                                                                                                                                                                                     |                                            |   | 556           |        |              |   | 1,500    |       
|                                     | Property and equipment, net                                                                                                                                                                                                                                                                                |                                            |   | 1,430         |        |              |   | 2,281    |       
|                                     | Goodwill                                                                                                                                                                                                                                                                                                   |                                            |   |              |        |              |   | 5,307    |       
|                                     | Intangible assets, net                                                                                                                                                                                                                                                                                     |                                            |   | 215           |        |              |   | 1,758    |       
|                                     | Other assets                                                                                                                                                                                                                                                                                               |                                            |   | 408           |        |              |   | 821      |       
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total assets                               |   | $             | 26,110 |              |   | $        | 29,529 | 
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     | Accounts payable                                                                                                                                                                                                                                                                                           |                                            | $ | 1,201         |        |              | $ | 1,193    |       
|                                     | Line of credit                                                                                                                                                                                                                                                                                             |                                            |   | 1,227         |        |              |   |         |       
|                                     | Accrued compensation and benefits                                                                                                                                                                                                                                                                          |                                            |   | 856           |        |              |   | 904      |       
|                                     | Other accrued expenses                                                                                                                                                                                                                                                                                     |                                            |   | 1,201         |        |              |   | 1,424    |       
|                                     | Accrued special charges                                                                                                                                                                                                                                                                                    |                                            |   | 1,483         |        |              |   | 2,903    |       
|                                     | Accrued acquisition consideration                                                                                                                                                                                                                                                                          |                                            |   | 1,059         |        |              |   | 1,059    |       
|                                     | Deposits and deferred revenues                                                                                                                                                                                                                                                                             |                                            |   | 1,054         |        |              |   | 305      |       
|                                     | Current portion of long-term debt                                                                                                                                                                                                                                                                          |                                            |   | 442           |        |              |   | 773      |       
|                                     | Media
restoration liabilities held for sale                                                                                                                                                                                                                                                                |                                            |   | 83            |        |              |   | 25       |       
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total current liabilities                  |   |               | 8,606  |              |   |          | 8,586  | 
|                                     | Deposits and deferred revenue                                                                                                                                                                                                                                                                              |                                            |   | 186           |        |              |   |         |       
|                                     | Common stock warrants                                                                                                                                                                                                                                                                                      |                                            |   | 1,678         |        |              |   |         |       
|                                     | Long-term debt, net of current portion                                                                                                                                                                                                                                                                     |                                            |   | 280           |        |              |   | 591      |       
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total liabilities                          |   |               | 10,750 |              |   |          | 9,177  | 
|                                     | Commitments and contingencies                                                                                                                                                                                                                                                                              |                                            |   |               |        |              |   |          |       
|STOCKHOLDERS EQUITY                 |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     | Preferred stock, $0.001 par value, 5,000 shares
authorized, none outstanding                                                                                                                                                                                                                               |                                            |   |              |        |              |   |         |       
|                                     | Common
stock, treasury stock, additional paid-in capital and warrants for
common stock,
$0.001 par value, 100,000 shares authorized; issued
September 30, 2003 - 55,954 shares and December 31, 2002 -
53,871 shares; outstanding September 30, 2003 - 55,954 shares and
December 31, 2002 - 47,176 shares |                                            |   | 206,772       |        |              |   | 194,195  |       
|                                     | Deferred stock compensation                                                                                                                                                                                                                                                                                |                                            |   | (239          | )      |              |   | (130     | )     
|                                     | Accumulated deficit                                                                                                                                                                                                                                                                                        |                                            |   | (191,173      | )      |              |   | (173,713 | )     
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total stockholders equity                 |   |               | 15,360 |              |   |          | 20,352 | 
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |         
|                                     |                                                                                                                                                                                                                                                                                                            | Total liabilities and stockholders equity |   | $             | 26,110 |              |   | $        | 29,529 | 
|                                     |                                                                                                                                                                                                                                                                                                            |                                            |   |               |        |              |   |          |       

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

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LOUDEYE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |       |       |  
|------------------------------------------------------- | ----------------------------------------------- | ---------------------------- | ------ | ------------------ | ----- | ----------------- | ------ | ----- | --- | ---- | ------- | ----- | ----- | - | ------- | ----- | ----- | -
|                                                        |                                                 |                              |        | Three Months Ended |       | Nine Months Ended
|                                                        |                                                 |                              |        | September 30,      |       | September 30,    
|                                                        |                                                 |                              |        |                    |       |                  
|                                                        |                                                 |                              |        | 2003               |       | 2002              |        | 2003  |     | 2002
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |     
|REVENUES                                                |                                                 | $                            | 2,811  |                    |       | $                 | 3,626  |       |     | $    | 9,024   |       |       | $ | 10,103  |      
|COST OF REVENUES                                        |                                                 |                              | 1,524  |                    |       |                   | 3,513  |       |     |      | 5,744   |       |       |   | 10,390  |      
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|                                                        |                                                 | Gross profit (loss)          |        |                    | 1,287 |                   |        |       | 113 |      |         |       | 3,280 |   |         |       | (287  | )
|OPERATING EXPENSES                                      |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|                                                        | Research and development                        |                              |        | 399                |       |                   |        | 425   |     |      |         | 1,368 |       |   |         | 2,689 |      
|                                                        | Sales and marketing                             |                              |        | 485                |       |                   |        | 1,370 |     |      |         | 2,867 |       |   |         | 5,831 |      
|                                                        | General and administrative                      |                              |        | 1,615              |       |                   |        | 2,366 |     |      |         | 6,106 |       |   |         | 8,603 |      
|                                                        | Amortization of intangible and other assets     |                              |        | 157                |       |                   |        | 810   |     |      |         | 943   |       |   |         | 2,219 |      
|                                                        | Stock-based compensation                        |                              |        | 761                |       |                   |        | 91    |     |      |         | 998   |       |   |         | (463  | )    
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|                                                        |                                                 |                              | 3,417  |                    |       |                   | 5,062  |       |     |      | 12,282  |       |       |   | 18,879  |      
|                                                        | Special charges                                 |                              |        |                   |       |                   |        |      |     |      |         | 8,437 |       |   |         | 1,890 |      
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|OPERATING LOSS                                          |                                                 |                              | (2,130 | )                  |       |                   | (4,949 | )     |     |      | (17,439 | )     |       |   | (21,056 | )    
|OTHER INCOME (EXPENSE), net                             |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|                                                        | Interest income                                 |                              |        | 76                 |       |                   |        | 218   |     |      |         | 262   |       |   |         | 860   |      
|                                                        | Interest expense                                |                              |        | (83                | )     |                   |        | (138  | )   |      |         | (180  | )     |   |         | (590  | )    
|                                                        | Increase in fair value of common stock
warrants |                              |        | (222               | )     |                   |        |      |     |      |         | (222  | )     |   |         |      |      
|                                                        | Other                                           |                              |        | 19                 |       |                   |        | 781   |     |      |         | 119   |       |   |         | 781   |      
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|                                                        |                                                 | Total other income (expense) |        |                    | (210  | )                 |        |       | 861 |      |         |       | (21   | ) |         |       | 1,051 |  
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|Net Loss                                                |                                                 | $                            | (2,340 | )                  |       | $                 | (4,088 | )     |     | $    | (17,460 | )     |       | $ | (20,005 | )    
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|Basic and diluted net loss per share                    |                                                 | $                            | (0.05  | )                  |       | $                 | (0.10  | )     |     | $    | (0.37   | )     |       | $ | (0.49   | )    
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      
|Weighted average shares outstanding
 basic and diluted |                                                 |                              | 50,401 |                    |       |                   | 40,664 |       |     |      | 47,659  |       |       |   | 40,442  |      
|                                                        |                                                 |                              |        |                    |       |                   |        |       |     |      |         |       |       |   |         |      

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

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LOUDEYE CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(Unaudited, in thousands)

|                                                       |  |                           |        |                |  |              |         |               |  |        |      |       |  |   |          |   |  |   |         |  
|------------------------------------------------------ |  | ------------------------- | ------ | -------------- |  | ------------ | ------- | ------------- |  | ------ | ---- | ----- |  | - | -------- | - |  | - | ------- | -
|                                                       |  | Common Stock, Treasury    |        |                |  |              |         |               |  |        |      |       |  |  
|                                                       |  | Stock, Additional Paid-in |        |                |  |              |         |               |  |        |      |       |  |  
|                                                       |  | Capital, and Warrants     |        |                |  |              |         |               |  |        |      | Total
|                                                       |  |                           |        | Deferred Stock |  | Accumulated  |         | Stockholders'
|                                                       |  | Shares                    |        | Amount         |  | Compensation |         | Deficit       |  | Equity
|                                                       |  |                           |        |                |  |              |         |               |  |       
|BALANCES, DECEMBER 31, 2002                            |  |                           | 47,176 |                |  | $            | 194,195 |               |  | $      | (130 | )     |  | $ | (173,713 | ) |  | $ | 20,352  |  
|Repurchase of shares                                   |  |                           | (1,469 | )              |  |              | (426    | )             |  |        |     |       |  |   |         |   |  |   | (426    | )
|Stock option and warrant exercises                     |  |                           | 1,700  |                |  |              | 1,838   |               |  |        |     |       |  |   |         |   |  |   | 1,838   |  
|Shares issued in private placement                     |  |                           | 7,839  |                |  |              | 10,005  |               |  |        |     |       |  |   |         |   |  |   | 10,005  |  
|Shares issued for prior
acquisitions and accrued bonus |  |                           | 629    |                |  |              | 25      |               |  |        |     |       |  |   |         |   |  |   | 25      |  
|Deferred stock compensation                            |  |                           |       |                |  |              | 334     |               |  |        | (334 | )     |  |   |         |   |  |   |        |  
|Stock-based compensation                               |  |                           | 79     |                |  |              | 773     |               |  |        | 225  |       |  |   |         |   |  |   | 998     |  
|Issuance of common stock warrant                       |  |                           |       |                |  |              | 28      |               |  |        |     |       |  |   |         |   |  |   | 28      |  
|Net loss                                               |  |                           |       |                |  |              |        |               |  |        |     |       |  |   | (17,460  | ) |  |   | (17,460 | )
|                                                       |  |                           |        |                |  |              |         |               |  |        |      |       |  |   |          |   |  |   |         |  
|BALANCES, SEPTEMBER 30, 2003                           |  |                           | 55,954 |                |  | $            | 206,772 |               |  | $      | (239 | )     |  | $ | (191,173 | ) |  | $ | 15,360  |  
|                                                       |  |                           |        |                |  |              |         |               |  |        |      |       |  |   |          |   |  |   |         |  

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

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LOUDEYE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |         |        |         |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------------------- | ------- | ----------------- | ------ | ------ | ------- | ------ | ------- | -
|                                                                            |                                                                                               |                                                         |                                                      |         | Nine Months Ended
|                                                                            |                                                                                               |                                                         |                                                      |         | September 30,    
|                                                                            |                                                                                               |                                                         |                                                      |         |                  
|                                                                            |                                                                                               |                                                         |                                                      |         | 2003              |        | 2002  
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |       
|Operating Activities                                                        |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            | Net loss                                                                                      |                                                         | $                                                    | (17,460 | )                 |        | $      | (20,005 | )     
|                                                                            | Adjustments to reconcile net loss to net cash used in
operating activities:                   |                                                         |                                                      |         |                   |        |        |         |       
|                                                                            |                                                                                               | Depreciation and amortization                           |                                                      |         | 2,023             |        |        |         | 5,381  |        
|                                                                            |                                                                                               | Special
charges and other non-cash items                |                                                      |         | 6,568             |        |        |         | 25     |        
|                                                                            |                                                                                               | Other income from final settlement of acquisition terms |                                                      |         |                  |        |        |         | (700   | )      
|                                                                            |                                                                                               | Stock-based compensation                                |                                                      |         | 998               |        |        |         | (463   | )      
|                                                                            |                                                                                               | Increase in fair value of common stock warrants         |                                                      |         | 222               |        |        |         |       |        
|                                                                            | Changes in operating assets and liabilities, net of
amounts acquired in purchase of business: |                                                         |                                                      |         |                   |        |        |         |       
|                                                                            |                                                                                               | Accounts receivable                                     |                                                      |         | (48               | )      |        |         | (577   | )      
|                                                                            |                                                                                               | Prepaid expenses and other assets                       |                                                      |         | 1,073             |        |        |         | 691    |        
|                                                                            |                                                                                               | Accounts payable                                        |                                                      |         | 8                 |        |        |         | 479    |        
|                                                                            |                                                                                               | Accrued compensation, benefits and other expenses       |                                                      |         | (266              | )      |        |         | (1,261 | )      
|                                                                            |                                                                                               | Accrued special charges                                 |                                                      |         | (1,420            | )      |        |         | (1,008 | )      
|                                                                            |                                                                                               | Deposits and deferred revenues                          |                                                      |         | 935               |        |        |         | (575   | )      
|                                                                            |                                                                                               | Media
restoration assets and liabilities held for sale  |                                                      |         | 341               |        |        |         |       |        
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            |                                                                                               |                                                         | Net cash used in operating activities                |         |                   | (7,026 | )      |         |        | (18,013 | )
|Investing Activities                                                        |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            | Purchases of property and equipment                                                           |                                                         |                                                      | (53     | )                 |        |        | (1,586  | )     
|                                                                            | Proceeds from sales of property and equipment                                                 |                                                         |                                                      | 183     |                   |        |        |        |       
|                                                                            | Cash paid for acquisition of business and technology, net                                     |                                                         |                                                      | (82     | )                 |        |        | (266    | )     
|                                                                            | Loans made to related party and related interest                                              |                                                         |                                                      |        |                   |        |        | (788    | )     
|                                                                            | Payments received on loans made to related party and
related interest                         |                                                         |                                                      | 1,187   |                   |        |        |        |       
|                                                                            | Purchases of short-term investments                                                           |                                                         |                                                      | (7,850  | )                 |        |        | (11,104 | )     
|                                                                            | Sales of short-term investments                                                               |                                                         |                                                      | 6,321   |                   |        |        | 21,240  |       
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            |                                                                                               |                                                         | Net cash (used in) provided by investing activities  |         |                   | (294   | )      |         |        | 7,496   |  
|Financing Activities                                                        |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            | Proceeds
from sale of stock and exercise of stock options and warrants                        |                                                         |                                                      | 1,838   |                   |        |        | 40      |       
|                                                                            | Proceeds from private equity placement financing, net                                         |                                                         |                                                      | 11,568  |                   |        |        |        |       
|                                                                            | Proceeds from line of credit                                                                  |                                                         |                                                      | 3,727   |                   |        |        |        |       
|                                                                            | Principal payments on line of credit, long-term debt and
capital lease obligations            |                                                         |                                                      | (3,269  | )                 |        |        | (20,128 | )     
|                                                                            | Repurchase of common stock                                                                    |                                                         |                                                      | (426    | )                 |        |        | (216    | )     
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            |                                                                                               |                                                         | Net cash provided by (used in) financing activities  |         |                   | 13,438 |        |         |        | (20,304 | )
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|                                                                            |                                                                                               |                                                         | Net increase (decrease) in cash and cash equivalents |         |                   | 6,118  |        |         |        | (30,821 | )
|Cash and cash equivalents, beginning of period                              |                                                                                               |                                                         | 1,780                                                |         |                   |        | 37,159 |        
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|Cash and cash equivalents, end of period                                    |                                                                                               | $                                                       | 7,898                                                |         |                   | $      | 6,338  |        
|                                                                            |                                                                                               |                                                         |                                                      |         |                   |        |        |         |       
|Supplemental disclosures:                                                   |                                                                                               |                                                         |                                                      |         |                   |        |        |        
|Cash paid for interest                                                      |                                                                                               | $                                                       | 166                                                  |         |                   | $      | 590    |        
|Repayment
of related party note with shares                                 |                                                                                               |                                                         |                                                     |         |                   |        | 584    |        
|Assets acquired under capital lease obligations                             |                                                                                               |                                                         | 112                                                  |         |                   |        |       |        
|Issuance of common stock for acquisition of business and
technology         |                                                                                               |                                                         |                                                     |         |                   |        | 708    |        
|Reversal of deferred stock compensation as a result of
option cancellations |                                                                                               |                                                         |                                                     |         |                   |        | 1,169  |        

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

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LOUDEYE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)



|1. |  | ORGANIZATION, RISKS, and GOING CONCERN
|-- |  | --------------------------------------

The Company

Loudeye Corp. (the Company) provides the business infrastructure and
services for managing, promoting, and distributing digital content for the
entertainment and corporate markets. The Company is headquartered in Seattle,
Washington with offices in New York, NY, Hollywood, CA, and Washington D.C.

Risks

The Company is subject to a number of risks similar to other companies in
a comparable stage of development, including, but not limited to, reliance on
key personnel, successful marketing of its services in an emerging market,

competition from other companies with greater technical, financial, management
and marketing resources, successful development of new services, successful
integration of acquired businesses and technology, the enhancement of existing
services, and the ability to secure adequate financing to support future
operations.

Going Concern

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses since inception, has an
accumulated deficit of $191.2 million at September 30, 2003, has experienced
negative cash flows from operations since inception and the expansion and
development of the Companys business may require additional capital. These
matters raise substantial doubt about the Companys ability to continue as a
going concern.

Management has restructured the Companys operations, reduced its work
force, renegotiated leases, and taken other actions to limit the Companys
expenditures. In addition, as described in note 6, the Company raised $11.5
million in net proceeds from the sale in August, 2003 of common stock and
warrants exercisable for common stock. However, there can be no assurance that
the Companys cash balances will be sufficient to sustain its operations until
profitable operations and positive cash flows are achieved. Consequently, the
Company may require additional capital to fund its operations. There can be no
assurance that capital will be available to the Company on acceptable terms, or
at all.

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

Basis of Consolidation

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

Unaudited Interim Financial Data

The interim 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 consolidated financial statements should be read in
conjunction with the audited consolidated 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 April 15, 2003. 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 three and nine months ended September 30, 2003 and 2002 are not necessarily
indicative of the results to be expected for the full years.

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Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates and
assumptions. The recoverability of long-lived assets, which include property
and equipment of $1.4 million and intangible assets of $215,000
at September 30, 2003, is a sensitive
accounting estimate for which changes could result in additional charges in the
near term. Additional impairment analyses could be required in a number of
circumstances, including if the Companys plans for the assets change, if
operating results decline further or if the price of the Companys stock
declines.



|2. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

Cash and Cash Equivalents

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

Short Term Investments

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

Restricted Cash and Investments

The Company has $969,000 of restricted cash and investments which are
utilized as collateral for certain irrevocable standby letters of credit. Of
this amount, $413,000 is classified as current as they collateralize standby
letters of credit that expire within one year. The remaining $556,000
is
classified as noncurrent. The carrying value of the restricted cash and
investments approximates fair value due to the relatively short
maturities of these investments.

Impairment of Long-lived Assets

The Company assesses the recoverability of long-lived assets whenever
events or changes in business circumstances indicate that the carrying value of
an asset may not be recoverable. An impairment loss is recognized when the sum
of the expected undiscounted future net cash flows over the remaining useful
life is less than the carrying amount of the asset.

Revenue Recognition

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

Digital
media services encompasses encoding services, music sample services,
webcasting services, and the sale of digital media applications. The
Company recognizes encoding services revenues when the
services have been rendered and we have no continuing involvement in the goods
and services delivered, which is generally the date the finished media is
shipped to our customer. Other revenues are generated from our music samples
service business. The Company sells digital media applications in application service
provider arrangements and 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 quantity
of content streamed, and revenue is recognized as the services are delivered.
The Company recognizes enterprise webcasting services revenues as services are rendered.

Media
restoration services consist of services provided to restore and
upgrade old and damaged archives of traditional media. The Company
recognizes revenues as services are rendered and
we have no continuing involvement in the goods and services delivered, which
generally is the date the finished media is shipped to the customer.
As discussed in Note 9, the Company has entered into an agreement to
sell substantially all of the assets of its media restoration
services business.

Stock Based Compensation

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The Company accounts for stock-based employee compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issues to Employees, (APB 25), as interpreted by
Financial Accounting Standards Board Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB 25
(FIN 44), and related interpretations. Under APB 25, compensation expense is
based on the difference between the exercise price of employee stock options
granted and the fair value of the Companys common stock at the date of grant.
Deferred compensation, if any, is amortized over the vesting period of the
related options, which is generally three to four and one-half years.

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

Stock compensation was $761,000 for the quarter ended September 30, 2003,
consisting of the amortization of deferred stock compensation of $139,000 and
variable stock compensation expense of $55,000 accounted for under APB 25, and
stock compensation expense of $567,000 accounted for under FAS 123 related to
options granted to a member of the Companys board of directors for consulting
services. Stock compensation expense was $91,000 for the quarter ended
September 30, 2002, consisting of the amortization of deferred stock
compensation.

Stock compensation was $998,000 for the nine months ended September 30,
2003, consisting of the amortization of deferred stock compensation of $225,000
and variable stock compensation expense of $55,000 accounted for under APB 25,
stock issued to former employees as severance and termination benefits of
$30,000, and stock compensation expense of $688,000 accounted for under FAS 123
related to options granted to a member of the Companys board of directors for
consulting services. Stock compensation expense was a credit of approximately
$463,000 for the nine months ended September 30, 2002, consisting primarily of
the reversal of expense related to accelerated amortization for options that
were cancelled.

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

|                           |  |                    |     |                   |  |      |    |      |  |   |     |  |  |   |      |  
|-------------------------- |  | ------------------ | --- | ----------------- |  | ---- | -- | ---- |  | - | --- |  |  | - | ---- | -
|                           |  | Three Months Ended |     | Nine Months Ended
|                           |  | September 30,      |     | September 30,    
|                           |  |                    |     |                  
|                           |  | 2003               |     | 2002              |  | 2003 |    | 2002
|                           |  |                    |     |                   |  |      |    |     
|Cost of revenues           |  | $                  | 37  |                   |  | $    | 8  |      |  | $ | 44  |  |  | $ | (39  | )
|Research and development   |  |                    | 27  |                   |  |      | 5  |      |  |   | 32  |  |  |   | (25  | )
|Sales and marketing        |  |                    | 26  |                   |  |      | 13 |      |  |   | 38  |  |  |   | (64  | )
|General and administrative |  |                    | 671 |                   |  |      | 65 |      |  |   | 884 |  |  |   | (335 | )
|                           |  |                    |     |                   |  |      |    |      |  |   |     |  |  |   |      |  
|                           |  | $                  | 761 |                   |  | $    | 91 |      |  | $ | 998 |  |  | $ | (463 | )
|                           |  |                    |     |                   |  |      |    |      |  |   |     |  |  |   |      |  

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

|                                                                                                          |                                 |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------- | ------------------------------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                          |                                 |   | Three Months Ended |       | Nine Months Ended
|                                                                                                          |                                 |   | September 30,      |       | September 30,    
|                                                                                                          |                                 |   |                    |       |                  
|                                                                                                          |                                 |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                                                                                          |                                 |   |                    |       |                   |   |        |       |     
|Net loss, as reported                                                                                     |                                 | $ | (2,340             | )     |                   | $ | (4,088 | )     |      | $ | (17,460 | )     |   | $ | (20,005 | )    
|Add: stock-based employee
compensation expense (credit)
under APB 25 included in
reported net loss        |                                 |   | 194                |       |                   |   | 91     |       |      |   | 280     |       |   |   | (463    | )    
|Deduct: total stock-based
employee compensation expense
determined under fair value
method for all awards |                                 |   | (533               | )     |                   |   | (77    | )     |      |   | (548    | )     |   |   | (944    | )    
|                                                                                                          |                                 |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Pro forma net loss                                                                                        |                                 | $ | (2,679             | )     |                   | $ | (4,074 | )     |      | $ | (17.728 | )     |   | $ | (21,412 | )    
|                                                                                                          |                                 |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Net loss per share:                                                                                       |                                 |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                          | Basic and diluted  as reported |   | $                  | (0.05 | )                 |   | $      | (0.10 | )    |   | $       | (0.36 | ) |   | $       | (0.49 | )
|                                                                                                          | Basic and diluted  pro-forma   |   | $                  | (0.05 | )                 |   | $      | (0.10 | )    |   | $       | (0.37 | ) |   | $       | (0.53 | )

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

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

Reclassifications

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

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective
January 1, 2003. This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The adoption of this standard did not have an
impact on the Companys financial statements.

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

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

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

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. First, FIN 46 will require
identification of the Companys participation in variable interests entities
(VIE), which are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit them to operate on a
standalone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as VIEs, FIN 46
sets forth a model to evaluate potential consolidation based on an assessment
of which party to the VIE, if any, bears a majority of the exposure to its
expected losses, or stands to gain from a majority of its expected returns. FIN
46 also sets forth certain disclosures regarding interests in VIE that are
deemed significant, even if consolidation is not required. FIN 46 is
effective as of the first interim period beginning after
June 15, 2003. However, in October 2003, the FASB deferred the
effective date for applying the provisions of FIN 46 for interests
held by public entities in variable interest entities or potential
variable interest entities created before February 1, 2003 and
non-registered investment companies. The adoption of
this standard did not have an impact on the Companys financial statements.

In 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue No. 00-21, Revenue Arrangements With Multiple
Deliverables(EITF 00-21), which provides guidance on the timing and methods of
revenue recognition for sales

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agreements that include delivery of more than one product or service. EITF
00-21 is effective prospectively for arrangements entered into in fiscal
periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have
an impact on the Companys financials statements.



|3. |  | SPECIAL CHARGES
|-- |  | ---------------

The Company has recorded Special Charges related to corporate restructurings,
facilities consolidations and the impairment of assets in accordance with its
long-lived asset policy (see Note 2). The following table summarizes such
charges recorded in the consolidated statements of operations (in thousands):

|                                            |  |                    |   |                   |  |      |   |      |  |   |       |  |  |   |       | 
|------------------------------------------- |  | ------------------ | - | ----------------- |  | ---- | - | ---- |  | - | ----- |  |  | - | ----- | 
|                                            |  | Three Months Ended |   | Nine Months Ended
|                                            |  | September 30,      |   | September 30     
|                                            |  |                    |   |                  
|                                            |  | 2003               |   | 2002              |  | 2003 |   | 2002
|                                            |  |                    |   |                   |  |      |   |     
|Goodwill impairment                         |  | $                  |  |                   |  | $    |  |      |  | $ | 5,307 |  |  | $ |      | 
|Intangible assets impairment                |  |                    |  |                   |  |      |  |      |  |   | 685   |  |  |   |      | 
|Property and equipment impairment           |  |                    |  |                   |  |      |  |      |  |   | 601   |  |  |   |      | 
|Employee severance and termination benefits |  |                    |  |                   |  |      |  |      |  |   | 501   |  |  |   | 1,890 | 
|Facilities related charges                  |  |                    |  |                   |  |      |  |      |  |   | 465   |  |  |   |      | 
|Other restructuring charges                 |  |                    |  |                   |  |      |  |      |  |   | 878   |  |  |   |      | 
|                                            |  |                    |   |                   |  |      |   |      |  |   |       |  |  |   |       | 
|                                            |  | $                  |  |                   |  | $    |  |      |  | $ | 8,437 |  |  | $ | 1,890 | 
|                                            |  |                    |   |                   |  |      |   |      |  |   |       |  |  |   |       | 

The following table summarizes the activity in accrued special charges during
the nine months ended September 30, 2003 (in thousands):

|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 
|--------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ---- |  | ------------- | ------ | - |  | - | ----- | 
|                            |  | December 31, |       | Additional |  |          |       |      |  | September 30,
|                            |  | 2002         |       | Accruals   |  | Payments |       | 2003
|                            |  |              |       |            |  |          |       |     
|Employee severance          |  | $            | 104   |            |  | $        | 501   |      |  | $             | (603   | ) |  | $ | 2     | 
|Facilities related charges  |  |              | 2,799 |            |  |          | 465   |      |  |               | (1,783 | ) |  |   | 1,481 | 
|Other restructuring charges |  |              |      |            |  |          | 878   |      |  |               | (878   | ) |  |   |      | 
|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 
|Total                       |  | $            | 2,903 |            |  | $        | 1,844 |      |  | $             | (3,264 | ) |  | $ | 1,483 | 
|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 

Nine Months Ended September 30, 2003

On February 4, 2003, the Companys Chairman and Chief Executive Officer, John
T. Baker, resigned and the Company engaged Regent Pacific Management
Corporation to provide management services to the Company. On March 7, 2003,
Regent Pacific resigned from the engagement and Jeffrey M. Cavins was elected
President and Chief Executive Officer. These events are described more fully in
the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
During and subsequent to Regent Pacifics engagement, the Company undertook a
strategic and operational analysis of its business and product lines. This
analysis resulted in the development of a new strategic and operational plan,
under which the Company restructured itself to focus on its core competencies
in digital media services and on core strategic customers and markets for its
enterprise communications services. A revised corporate forecast was developed
in connection with this plan. The revised forecast also considered that the
Company had learned that revenue from a significant customer in its Media
Restoration Services segment would be less than originally anticipated.
Utilizing the revised forecast, the Company performed a reassessment of the
carrying value of all of its assets, both tangible and intangible. The revised
forecast demonstrated that certain tangible and intangible assets and goodwill
related to its media restoration services and enterprise communications
services businesses were impaired, as the projected undiscounted discernible
cash flows did not exceed the carrying value of the assets over their estimated
useful lives. The fair values of each of these assets were estimated using
primarily a discounted cash flow method. The fair value of goodwill
was estimated under the two-step process required by
FASB No. 142. The estimated fair values of each of
the assets were then compared to their carrying values to measure the
impairments. As a result of this analysis, the Company recorded impairment
charges for goodwill, intangible assets, and property and equipment related to
its enterprise communication services and media restoration services businesses
of $5.3 million, $685,000, and $601,000, respectively.

In addition to the impairment charges above, the Company recorded severance and
termination benefits of $204,000 associated with a reduction in force announced
on March 14, 2003 of approximately 35% of its consolidated staffing. In
addition, the Company recorded $297,000 of severance and termination benefits
with respect to certain changes in senior management in the first quarter of
2003. The Company incurred costs of approximately $465,000 related to the
termination of certain facilities leases in

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

In March 2003, the Company terminated
a portion of a lease for approximately half the space it occupies
for its principal operating facility on Rainier Avenue, Seattle,
Washington. Rents were reduced from approximately $108,000 per month with a term expiring on
November 30, 2005 to rent for the remainder of the facility of approximately $33,000 per month through
June 30, 2003 with options, that the Company has exercised, to extend the term
through December 31, 2003 at a base rent of $33,000 per month and pre-paid utility
expenses of $60,000 per quarter. As consideration for the lease
termination, the Company allowed its landlord to retain its security deposit
in the amount of $218,500 and made cash payments of $126,700. The Company is
currently negotiating a new lease with the landlord for this
facility, as well as exploring the possibility of securing a new
facility.

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

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

Nine Months Ended September 30, 2002

The Company recorded special charges
totaling $1.9 million in the nine months
ended September 30, 2002. These special charges were for severance and related
termination benefits.



|4. |  | NET LOSS PER SHARE
|-- |  | ------------------

Basic earnings per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed by dividing net loss by the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Common equivalent shares consist of shares of common stock 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. The Company has excluded the following numbers of
shares using this method (in thousands):

|         |  |                                 |       |                                |  |      |       |      |  |  |       |  |  |  |       | 
|-------- |  | ------------------------------- | ----- | ------------------------------ |  | ---- | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|         |  | Three-months ended September 30 |       | Nine-months ended September 30
|         |  |                                 |       |                               
|         |  | 2003                            |       | 2002                           |  | 2003 |       | 2002
|         |  |                                 |       |                                |  |      |       |     
|Options  |  |                                 | 7,221 |                                |  |      | 6,000 |      |  |  | 7,221 |  |  |  | 6,000 | 
|Warrants |  |                                 | 1,100 |                                |  |      | 263   |      |  |  | 1,100 |  |  |  | 263   | 
|         |  |                                 |       |                                |  |      |       |      |  |  |       |  |  |  |       | 
|         |  |                                 | 8,321 |                                |  |      | 6,263 |      |  |  | 8,321 |  |  |  | 6,253 | 
|         |  |                                 |       |                                |  |      |       |      |  |  |       |  |  |  |       | 

The Company had 300 and 1,509 shares outstanding that were subject to
repurchase at September 30, 2003 and 2002, respectively. The impact of these
unvested but exercised options has been removed from the calculation of
weighted average shares outstanding for purposes of determining basic and
diluted net loss per share.

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

|                                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |   |  |  |        |  
|-------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  |  | ------ | - |  |  | ------ | -
|                                                                           |  | Three-months ended September 30, |        | Nine-months ended September 30,
|                                                                           |  |                                  |        |                                
|                                                                           |  | 2003                             |        | 2002                            |  | 2003 |        | 2002
|                                                                           |  |                                  |        |                                 |  |      |        |     
|Weighted average shares outstanding                                        |  |                                  | 50,401 |                                 |  |      | 40,666 |      |  |  | 47,660 |   |  |  | 40,472 |  
|Weighted average shares subject to repurchase                              |  |                                  |       |                                 |  |      | (2     | )    |  |  | (1     | ) |  |  | (30    | )
|                                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |   |  |  |        |  
|Weighted average shares outstanding  basic
and diluted earnings per share |  |                                  | 50,401 |                                 |  |      | 40,664 |      |  |  | 47,659 |   |  |  | 40,442 |  
|                                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |   |  |  |        |  

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|5. |  | LINE OF CREDIT
|-- |  | --------------

In June, 2003, the Company entered into a revolving credit facility (the 2003
Revolving Facility) with a bank under which it may borrow up to $2.5 million
based on a certain percentage of eligible accounts receivable. The 2003
Revolving Facility expires in June, 2004 and is collateralized by substantially
all of the Companys assets. Outstanding borrowings bear interest at the
greater of the prime rate plus 1.75% (5.75% at September 30, 2003) or 5.75%.
The Company also issued a warrant to the lender to purchase 45,700 shares of
its common stock at $0.89 per share. The warrant expires on June 27, 2010. In
addition, the Company has established a lockbox account with the lender to
which all payments from customers will be deposited. The lender applies such
deposits to the outstanding borrowings and transfers any excess funds to the
Companys operating bank account. Fees for the lockbox arrangement are 0.35%
of the average daily outstanding principal balance. On September 30, 2003,
outstanding borrowings under the 2003 Revolving Facility were $1.2 million.



|6. |  | PRIVATE EQUITY FINANCING
|-- |  | ------------------------

On August 28, 2003, the Company issued 7,838,708 shares of common stock to
institutional investors in a private placement transaction for $1.55 per share,
raising gross proceeds of approximately $12.1 million. In connection with the
transaction, the Company also issued warrants to the investors to purchase
783,871 shares of the Companys common stock and warrants to the placement
agent to purchase 195,968 shares of the Companys common stock, representing
total warrant shares of 979,839 shares of common stock. The exercise price of
the warrants is $2.00 per share. The warrants are exercisable beginning
February 27, 2004 and expire February 27, 2007. Net proceeds from the
transactions, after issuance costs and a placement fee of 4% of the gross
proceeds, were approximately $11.5 million.

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

The registration rights agreement provides that if a registration statement is
not filed, or does not become effective, within the defined time period, then
in addition to any other rights the holders may have, the Company would be
required to pay to each holder an amount in cash, as liquidated damages, equal
to 2% per month of the aggregate purchase price, prorated daily. The
registration statement was filed within the allowed time, and was declared
effective by the SEC on October 14, 2003. Accordingly, no liquidated damages
were required to be paid in connection with the initial registration.

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

The fair value of the warrants was estimated using the Black-Scholes
option-pricing model with the following assumptions: no dividends; risk-free
interest rate of 2.71%, the contractual life of 3.5 years and volatility of
136%. The fair value of the warrants was estimated to be $1.5 million on the
closing date of the transaction. The fair value of the warrants was then
re-measured at September 30, 2003 and estimated to be $1.7 million. The
increase in the fair value of $222,000 from the transaction date to September
30, 2003 was recorded as a charge to other expenses in the statement of
operations. The fair value of the warrants increased by approximately $27,000
from September 30, 2003 to October 14, 2003 and such increase will be reflected
as a charge to other expenses in the statement of operations in the fourth
quarter of 2003.



|7. |  | SEGMENT INFORMATION
|-- |  | -------------------

The Company operates in two business segments, Digital Media Services and Media
Restoration Services. The following information summarizes the Companys
segments (in thousands):

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|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|-------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                           |  | Three Months Ended |        | Nine Months Ended
|                           |  | September 30,      |        | September 30,    
|                           |  |                    |        |                  
|                           |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                           |  |                    |        |                   |  |      |        |     
|Revenues                   |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Digital Media Services     |  | $                  | 2,407  |                   |  | $    | 2,510  |      |  | $ | 7,566   |   |  | $ | 7,360   |  
|Media Restoration Services |  |                    | 404    |                   |  |      | 1,116  |      |  |   | 1,458   |   |  |   | 2,743   |  
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                           |  | $                  | 2,811  |                   |  | $    | 3,626  |      |  | $ | 9,024   |   |  | $ | 10,103  |  
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Gross Profit               |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Digital Media Services     |  | $                  | 1,254  |                   |  | $    | (420   | )    |  | $ | 3,119   |   |  | $ | (1,597  | )
|Media Restoration Services |  |                    | 33     |                   |  |      | 533    |      |  |   | 161     |   |  |   | 1,310   |  
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                           |  | $                  | 1,287  |                   |  | $    | 113    |      |  | $ | 3,280   |   |  | $ | (287    | )
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Net Loss                   |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|Digital Media Services     |  | $                  | (2,010 | )                 |  | $    | (4,183 | )    |  | $ | (16,086 | ) |  | $ | (19,973 | )
|Media Restoration Services |  |                    | (330   | )                 |  |      | 95     |      |  |   | (1,374  | ) |  |   | (32     | )
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  
|                           |  | $                  | (2,340 | )                 |  | $    | (4,088 | )    |  | $ | (17,460 | ) |  | $ | (20,005 | )
|                           |  |                    |        |                   |  |      |        |      |  |   |         |   |  |   |         |  

|                           |  |              |        |              |  |   |        | 
|-------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                           |  | September 30 |        | December 31,
|                           |  | 2003         |        | 2002        
|                           |  |              |        |             
|Total Assets               |  |              |        |              |  |   |        | 
|Digital Media Services     |  | $            | 24,859 |              |  | $ | 27,243 | 
|Media Restoration Services |  |              | 1,251  |              |  |   | 2,286  | 
|                           |  |              |        |              |  |   |        | 
|                           |  | $            | 26,110 |              |  | $ | 29,529 | 
|                           |  |              |        |              |  |   |        | 

During the three and nine months ended September 30, 2003 and 2002, the Company
had sales to certain significant customers, as a percentage of revenues, as
follows:

|           |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    |  
|---------- |  | ------------------ | -- | ----------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | -
|           |  | Three Months Ended |    | Nine Months Ended
|           |  | September 30,      |    | September 30,    
|           |  | 2003               |    | 2002              |  | 2003 |    | 2002
|           |  |                    |    |                   |  |      |    |     
|Customer A |  |                    | 12 | %                 |  |      | 17 | %    |  |  | 11 | % |  |  | 14 | %
|Customer B |  |                    | 4  | %                 |  |      | 13 | %    |  |  | 6  | % |  |  | 11 | %
|Customer C |  |                    | 1  | %                 |  |      | 10 | %    |  |  | 3  | % |  |  | 4  | %
|           |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    |  
|           |  |                    | 17 | %                 |  |      | 40 | %    |  |  | 20 | % |  |  | 29 | %
|           |  |                    |    |                   |  |      |    |      |  |  |    |   |  |  |    |  



|8. |  | CONTINGENCIES
|-- |  | -------------

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

On or about January 8, 2003 Dominion Venture Finance, L.L.C. commenced an
action against the Company and John Doe defendants in the Superior Court of
the State of California, County of San Francisco. In its complaint, plaintiff
alleged that pursuant to a loan and security agreement and a master lease
agreement (the Agreements) (the liabilities for which agreement, plaintiff
alleged,

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were acquired by the Company when the Company merged with an entity known
as DiscoverMusic.com, Inc.) the Company failed to make certain required
payments to plaintiff. On August 5, 2003, the Company settled all claims under
the suit for a cash payment of approximately $228,000, which represented the
outstanding principal and interest under the Agreements and was included in
current portion of long-term debt at December 31, 2002.

On February 3, 2003, the Company entered into an agreement (Agreement)
with Regent Pacific Management Corporation (Regent Pacific) pursuant to which
Regent Pacific would provide management services to the Company. The Agreement
was for a term of 26 weeks, with an option to renegotiate certain terms of the
Agreement after 13 weeks, and was terminable by either party under certain
circumstances. Under the Agreement, the Company paid certain fees to Regent
Pacific. In addition, Regent Pacific was to receive stock options to purchase
up to 4,000,000 shares of the Companys common stock based on Regent Pacifics
length of service. These options were to be granted at various times
throughout their engagement at exercise prices based on the closing market
price on each grant date. On March 7, 2003, Regent Pacific resigned from the
engagement. On July 25, 2003, Regent Pacific filed suit against the Company for
breach of the Agreement. In this complaint, Regent Pacific is seeking
unspecified damages and specific performance of the Companys alleged
obligation to grant the stock options due them under the contract. The Company
believes that it has meritorious defenses to the claims made in the suit,
intends to defend vigorously this suit, and intends to bring certain
counterclaims against Regent Pacific. An estimate of the range of possible
loss for this matter can not be made at this time.

In April 2003, the landlord of one of the Companys unoccupied facilities
filed suit against the Company for breach of its lease and is seeking an
unspecified amount of damages. The Company believes that it has meritorious
defenses to the claims made in the suit and intends to vigorously defend this
suit and may also bring certain counterclaims against the landlord. An
estimate of the range of possible losses for this matter can not be made at
this time.

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



|9. |  | SUBSEQUENT EVENT
|-- |  | ----------------

On November 6, 2003, the Companys wholly owned media restoration services
subsidiary, Vidipax, Inc., signed an asset purchase agreement pursuant to which
it will sell substantially all of its assets and certain liabilities to a
company controlled by the current general manager of Vidipax. The total
purchase price is $1.2 million, of which $900,000 will be paid at closing and
$300,000 will be paid upon the satisfaction of certain conditions. In
addition, the Company may receive up to an additional $500,000 based on the
purchaser achieving certain performance targets over a period of two years from
the closing date. Prior to the transaction closing, the Company will also
enter into a co-marketing and reseller agreement with the purchaser pursuant to
which the Company will sell, for a fee, media restoration services on behalf of
the purchaser for a two-year period. The Company intends to use the proceeds
from the sale for working capital and general corporate purposes, and expects
the transaction to close in the fourth quarter of 2003.

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

|                                            |  |                    |       |                   |  |   |       | 
|------------------------------------------- |  | ------------------ | ----- | ----------------- |  | - | ----- | 
|                                            |  | September 30, 2003 |       | December 31, 2002
|                                            |  |                    |       |                  
|Cash                                        |  | $                  | 82    |                   |  | $ | 109   | 
|Accounts receivable, net                    |  |                    | 215   |                   |  |   | 394   | 
|Other current assets                        |  |                    | 115   |                   |  |   | 178   | 
|Property & equipment, net                   |  |                    | 543   |                   |  |   | 1,309 | 
|Other noncurrent assets                     |  |                    | 85    |                   |  |   | 84    | 
|                                            |  |                    |       |                   |  |   |       | 
|Total assets                                |  | $                  | 1,040 |                   |  | $ | 2,074 | 
|                                            |  |                    |       |                   |  |   |       | 
|Accounts payable                            |  | $                  | 83    |                   |  | $ | 10    | 
|Current portion of capital lease obligation |  |                    |      |                   |  |   | 15    | 
|                                            |  |                    |       |                   |  |   |       | 
|Total
liabilities                           |  | $                  | 83    |                   |  | $ | 25    | 
|                                            |  |                    |       |                   |  |   |       | 

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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 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are made under the safe harbor
provisions thereof. In some cases, you can identify forward-looking statements
by terminology such as may, will, should, expect, plan, anticipate,
believe, estimate, predict, potential or continue, the negative of
terms like these or other comparable terminology. These forward-looking
statements are only predictions and actual events or results may differ

materially from those projected. Specific factors that could cause actual
results to differ materially from those projected include, but are not limited
to, uncertainties related to our early stage; uncertainties related to the
effectiveness of our technology and development of our products and services;
dependence on and management of existing and future corporate relationships;
dependence on licensed content and technology; dependence on proprietary
technology and uncertainty of patent protection; management of growth; history
of operating losses; future capital needs and uncertainty of additional
funding; dependence on key personnel; competition; existing governmental
regulations and changes in, or the failure to comply with, government
regulations, and other risks detailed below, including the Risk Factors set for
the below in this Managements Discussion and Analysis of Financial Condition
and Results of Operations, and those included from time to time in the
Companys other reports filed with the SEC and press releases, copies of which
are available from the Company upon request. All forward-looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to publicly release any revisions of the
forward-looking statements contained herein to reflect events or circumstances
after the date hereof. Readers are cautioned not to place undue reliance on
these forward-looking statements, as our business and financial performance are
subject to substantial risks and uncertainties.

Results of Operations

Three Months Ended September 30, 2003 and 2002

Revenues.Revenues totaled $2.8 million and $3.6 million for the third
quarter of 2003 and 2002, respectively.

Revenue from our digital media services segment decreased slightly in the third
quarter of 2003 to $2.4 million from $2.5 million in the third quarter of 2002.
This decrease is due primarily to a decrease in webcasting revenue as we have
reduced our webcasting volume to focus more on digital music offerings and
those webcasting customer relationships that provide higher margins. This has
been offset partially by an increase in the volume of encoding and other
fulfillment services.

Media restoration revenues totaled $404,000 in the third quarter of 2003
compared to $1.1 million in the third quarter of 2002. This decrease was
primarily the result of decreased revenue from a significant customer as well
as decreased customer spending on discretionary projects due to current
economic conditions.

Cost of Revenues.Cost of revenues decreased to $1.5 million for the third
quarter of 2003 from $3.5 million for the third quarter of 2002. Cost of
revenues include the cost of production, including personnel, an allocated
portion of facilities and equipment, and other supporting functions related to
the delivery of digital media services and applications and media restoration
services. Excluding depreciation, cost of revenues decreased to $1.3 million
for the third quarter of 2003 from $2.6 million for the third quarter of 2002.
This decrease is due primarily to cost reduction initiatives implemented in the
second half of 2002 and the first quarter of 2003. Accordingly, we anticipate
that cost of revenues for the balance of 2003 will be lower than 2002.

Depreciation included in cost of revenues decreased to approximately $232,000
in the third quarter of 2003 from $889,000 in the third quarter of 2002. This
decrease is due primarily to impairment charges recorded in the fourth quarter
of 2002 and the first quarter of 2003 for certain assets of our digital media
services and media restoration services segments. These charges decreased the
cost basis of the assets, resulting in lower depreciation charges.

Research and Development.Research and development expenses decreased
slightly to $399,000 for the third quarter of 2003 from $425,000 for the third
quarter of 2002. Research and development expenses include labor and other
related costs of the continued support of our digital media offerings, the
recently announced Quick Clips media player application and the development of
internal operational solutions necessary to fully integrate previous
acquisitions.

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We believe that continued investment in research and development is critical to
attaining our strategic objectives. However, due to our operational
restructurings and a sharper focus on opportunities which we believe will
result in near term results, development headcount was reduced significantly in
2002 and 2003. We expect research and development expenses to increase
moderately in the foreseeable future as we invest in development of future
digital media services offerings.

Sales and Marketing.Sales and marketing expenses totaled $485,000 and
$1.4 million in the third quarters of 2003 and 2002. Sales and marketing
expenses consist primarily of salaries, commissions, product branding costs,
advertising, trade show expenses, and cost of marketing collateral. The
decrease in sales and marketing expenses is due primarily to the decreased
personnel subsequent to our reductions in force in the second half of 2002 and
first quarter of 2003, reduced commissions resulting from a lower level of
revenue, as well as a lower level of marketing activity in 2003. Accordingly,
we anticipate that sales and marketing expenses for the full year 2003 will be
lower than 2002.

General and Administrative.General and administrative expenses decreased
to $1.6 million for the third quarter of 2003 from $2.4 million for the third
quarter of 2002. This decrease is due primarily to the decrease in personnel
subsequent to our reductions in force in the second half of 2002 and first
quarter of 2003 and related cost reduction initiatives. Accordingly, we
anticipate that general and administrative expenses for the full year 2003 will
be lower than 2002. General and administrative expenses consist primarily of
rent, facilities and information technology charges, salaries, legal expenses,
investor relations costs, and other costs associated with being a public
company.

Amortization of Intangible and Other Assets.Amortization of intangible
and other assets totaled $157,000 and $810,000 for the third quarter of 2003
and 2002 and includes amortization of identified intangible assets related to
past acquisitions. The decrease is due primarily to the impairment charges
recorded in the fourth quarter of 2002 and first quarter of 2003, which
resulted in lower amortization charges during the third quarter of 2003.

Stock-Based Compensation.Stock based compensation was $761,000 for the
third quarter of 2003, consisting of the amortization of deferred stock
compensation of $139,000, variable stock compensation expense, accounted for
under APB 25, of $55,000, and stock compensation expense, accounted for under
FAS 123, of $567,000 related to options granted to a member of the Companys
board of directors for consulting services. Stock compensation expense was
$91,000 for the quarter ended September 30, 2002, consisting of the
amortization of deferred stock compensation. Stock based compensation expense
in future periods will, in large part, be influenced by the market price of our
stock.

Interest Income.Interest income totaled $76,000 and $218,000 in the third
quarters of 2003 and 2002. The decrease is due primarily to the lower average
cash and investment balances in 2003 resulting from the voluntary repayment of
our credit facility in the third quarter of 2002, utilization of cash to fund
operations, and lower interest rates in 2003. We expect that our interest
income will increase in future periods due to interest income on the proceeds
from our recently completed private equity financing, which generated
approximately $11.5 million in net proceeds.

Interest Expense.Interest expense consists of interest expense related to
our debt instruments, including capital lease obligations. Interest expense
totaled $83,000 and $138,000 in the third quarters of 2003 and 2002. The
decrease is due primarily to lower average debt balances in 2003 due to the
voluntary repayment of our credit facility in the third quarter of 2002,
payments on our capital lease obligations, and lower interest rates in 2003.

Increase in Fair Value of Common Stock Warrants:This expense represents
the increase in the estimated fair value of the warrants that we issued in
connection with our private equity financing from the transaction date of
August 28, 2003 through September 30, 2003. This transaction is described more
fully in note 6 to the consolidated financial statements.

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

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Nine Months Ended September 30, 2003 and 2002

Revenues.Revenues totaled $9.0 million and $10.1 million for the first
nine months of 2003 and 2002.

Revenue from our digital media services segment increased in the first nine
months of 2003 to $7.6 million from $7.4 million in the first nine months of
2002. This increase is due primarily to an increase in the volume of encoding
and other fulfillment services.

Media restoration revenues totaled
$1.4 million in the first nine months of 2003
compared to $2.7 million in the first nine months of 2002. This decrease was
primarily the result of decreased revenue from a significant customer as well
as decreased customer spending on discretionary projects due to current
economic conditions.

Cost of Revenues.Cost of revenues decreased to $5.7 million for the first
nine months of 2003 from $10.4 million for the first nine months of 2002. Cost
of revenues include the cost of production, including personnel, an allocated
portion of facilities and equipment, and other supporting functions related to
the delivery of digital media services and applications and media restoration
services. Excluding depreciation, cost of revenues decreased to $5.1 million
for the first nine months of 2003 from $7.8 million for the first nine months
of 2002. This decrease is due primarily to cost reduction initiatives
implemented in the second half of 2002 and the first quarter of 2003.
Accordingly, we anticipate that cost of revenues for the balance of 2003 will
be lower than 2002.

Depreciation included in cost of revenues decreased to approximately $688,000
in the first nine months of 2003 from $2.6 million in the first nine months of
2002. This decrease is due primarily to impairment charges recorded in the
fourth quarter of 2002 and the first quarter of 2003 for certain assets of our
digital media services and media restoration services segments. These charges
decreased the cost basis of the assets, resulting in lower depreciation
charges.

Research and Development.Research and development expenses totaled $1.4
and $2.7 million in the first nine months of 2003 and 2002. This decrease is
due primarily to the reduction in the number of development personnel as a
result of the corporate restructurings. Research and development expenses
include labor and other related costs of the continued support of our digital
media offerings such as the recently announced Quick Clips media player
application and the development of internal operational solutions necessary to
fully integrate previous acquisitions.

We believe that continued investment in research and development is critical to
attaining our strategic objectives. However, due to our operational
restructurings and a sharper focus on opportunities which we believe will
result in near term results, development headcount was reduced significantly in
2003 as compared to 2002 and, as a result, research and development expenses
declined in 2003 as compared to 2002. We expect research and development
expenses to increase moderately in the foreseeable future as we invest in the
development of future digital media service offerings. We expect that research
and development expenses for the full year 2003 should be lower than 2002.

Sales and Marketing.Sales and marketing expenses totaled $2.9 million and
$5.8 million in the first nine months of 2003 and 2002. Sales and marketing
expenses consist primarily of salaries, commissions, product branding costs,
advertising, trade show expenses, and cost of marketing collateral. The
decrease in sales and marketing expenses is due primarily to the decreased
personnel subsequent to our reductions in force in the second quarter of 2002
and first quarter of 2003, as well as a lower level of marketing activity in
2003. Accordingly, we anticipate that sales and marketing expenses for the
full year 2003 will be lower than 2002.

General and Administrative.General and administrative expenses decreased
to $6.1 million for the first nine months of 2003 from $8.6 million for the
first nine months of 2002. This decrease was due primarily to the decrease in
personnel subsequent to our reductions in force in the second half of 2002 and
first quarter of 2003, and related cost reduction initiatives. Accordingly, we
anticipate that general and administrative expenses for the full year 2003 will
be lower than 2002. General and administrative expenses consist primarily of
rent, facilities and information technology charges, salaries, legal expenses,
investor relations costs, and other costs associated with being a public
company.

Amortization of Intangible and Other Assets.Amortization of intangible
and other assets totaled $943,000 and $2.2 million for the first nine months of
2003 and 2002, and includes amortization of identified intangible assets
related to past acquisitions. The decrease was due primarily to the impairment
charges recorded in the fourth quarter of 2002 and first quarter of 2003, which
resulted in lower amortization charges during the first nine months of 2003.

Stock-Based Compensation.Stock based compensation was $998,000 for the
first nine months of 2003, consisting of the amortization of deferred stock
compensation of $225,000, stock issued to former employees as severance and
termination benefits of

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$30,000, variable stock compensation expense, accounted for under APB 25,
of $55,000, and stock compensation expense, accounted for under FAS 123, of
$688,000 related to options granted to a member of the Companys board of
directors for consulting services. Stock compensation expense was a credit of
approximately $463,000 for the first nine months of 2002, consisting primarily
of the reversal of expense related to accelerated amortization for options that
were cancelled. Stock based compensation expense in future periods will, in
large part, be influenced by the market price of our stock.

Special Charges.We have recorded special charges related to corporate
restructurings, facilities consolidations and the impairment of assets in
accordance with our long-lived asset policy. Following is a summary of special
charges for the nine months ended September 30, 2003 and 2002:

Nine Months Ended September 30, 2003



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 4, 2003, our Chairman and Chief Executive Officer, John T.
Baker, resigned and we engaged Regent Pacific Management Corporation to
provide management services. On March 7, 2003, Regent Pacific resigned from
the engagement and Jeffrey M. Cavins was elected President and Chief
Executive Officer. These events are described more fully in our Annual Report
on Form 10-K for the year ended December 31, 2002. During and subsequent to
Regent Pacifics engagement, we undertook a strategic and operational
analysis of our business and product lines. This analysis resulted in the
development of a new strategic and operational plan, under which we
restructured our business to focus on our core competencies in digital media
services and on core strategic customers and markets for our enterprise
communications services. We developed a revised corporate forecast in
connection with this plan. The revised forecast also considered that we had
learned that revenue from a significant customer in our media restoration
services segment would be less than originally anticipated. Utilizing the
revised forecast, we performed a reassessment of the carrying value of all of
our assets, both tangible and intangible. The revised forecast demonstrated
that certain tangible and intangible assets and goodwill related to our media
restoration services and enterprise communications services businesses were
impaired, as the projected undiscounted discernible cash flows did not exceed
the carrying value of the assets over their estimated useful lives. The fair
values of each of these assets was estimated using primarily a discounted
cash flow method. The estimated fair values of each of the assets were then
compared to their carrying values to measure the impairments. As a result of
this analysis, we recorded impairment charges for goodwill, intangible
assets, and property and equipment related to our enterprise communication
services and media restoration services businesses of $5.3 million, $685,000,
and $601,000, respectively.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition to the impairments above, we recorded severance and
termination benefits of $204,000 associated with a reduction in force
announced on March 14, 2003 of approximately 35% of our consolidated
staffing. In addition, we recorded $297,000 of severance and termination
benefits with respect to certain changes in senior management in the first
quarter of 2003. We incurred costs of approximately $465,000 related to the
termination or renegotiation of certain facilities leases in connection with
our ongoing facilities consolidation. The other restructuring charges of
$878,000 represent fees and costs paid to Regent Pacific Management
Corporation with respect to interim management services provided to us in
connection with our management and operational restructuring.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2003,
we terminated a portion of a lease for approximately half the space we occupy for
our principal operating facility on Rainier Avenue, Seattle,
Washington. Rents were reduced from approximately $108,000 per month with a term expiring on
November 30, 2005 to rent for the remainder of the facility of approximately $33,000 per month for the
remainder of the term which was shortened to June 30, 2003 with options, that
we exercised, to extend the term through December 31, 2003 at a base rent of
$100,000 and pre-paid utility expenses of $60,000. As consideration for the
reduction of space and lease term, we have allowed our landlord to retain our
security deposit in the amount of $218,500 and made cash payments of
$126,700. We are currently negotiating a new lease with the landlord for
this facility, as well as exploring the possibility of securing a new
facility.



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



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

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



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | The following table summarizes the activity in accrued special charges during
the nine months ended September 30, 2003 (in thousands):

|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 
|--------------------------- |  | ------------ | ----- | ---------- |  | -------- | ----- | ---- |  | ------------- | ------ | - |  | - | ----- | 
|                            |  | December 31, |       | Additional |  |          |       |      |  | September 30,
|                            |  | 2002         |       | Accruals   |  | Payments |       | 2003
|                            |  |              |       |            |  |          |       |     
|Employee severance          |  | $            | 104   |            |  | $        | 501   |      |  | $             | (603   | ) |  | $ | 2     | 
|Facilities related charges  |  |              | 2,799 |            |  |          | 465   |      |  |               | (1,783 | ) |  |   | 1,481 | 
|Other restructuring charges |  |              |      |            |  |          | 878   |      |  |               | (878   | ) |  |   |      | 
|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 
|Total                       |  | $            | 2,903 |            |  | $        | 1,844 |      |  | $             | (3,264 | ) |  | $ | 1,483 | 
|                            |  |              |       |            |  |          |       |      |  |               |        |   |  |   |       | 



| |                                     
| | ------------------------------------
| | Nine months ended September 30, 2002

We recorded special charges in the nine months ended September 30, 2002
associated with reductions in force of approximately 40% of our consolidated
staffing together in March and June, 2002. The special charge of $1.9 million
was for severance and related termination benefits.

Interest Income.Interest income totaled $262,000 and $860,000 in the
first nine months of 2003 and 2002, respectively. The decrease was due
primarily to the lower average cash and investment balances in 2003 resulting
from the voluntary repayment of our credit facility in the third quarter of
2002, utilization of cash to fund operations, and lower interest rates in 2003.

Interest Expense.Interest expense consists of interest expense related to
our debt instruments, including capital lease obligations. Interest expense
totaled $180,000 and $590,000 in the first nine months of 2003 and 2002,
respectively. The decrease was due primarily to lower average debt balances in
2003 due to the voluntary repayment of our credit facility in the third quarter
of 2002 and lower interest rates in 2003.

Increase in Fair Value of Common Stock Warrants:This represents the
increase in the estimated fair value of the warrants that we issued in
connection with our private equity financing. This transaction is described
more fully in note 6 to the consolidated financial statements.

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

Liquidity and Capital Resources

As of September 30, 2003, we had approximately $20.5 million of cash, cash
equivalents, short-term investments, and restricted investments. Of these
funds, $969,000 is held in investment accounts that serve as collateral for
standby letters of credit for certain of our capital lease and other
obligations.

Net cash used in operating activities
was $7.0 million and $18.0 million for
the nine months of 2003 and 2002. For 2003, cash used in operating activities
resulted primarily from a net loss of $17.5 million offset partially by
non-cash charges for depreciation, amortization, special charges, stock-based
compensation, and the increase in the fair value of common stock warrants
aggregating $9.7 million and other working capital changes
totaling $800,000.
For 2002, cash used in operating activities resulted primarily from a net loss
of $20.0 million, working capital changes totaling $2.3, other income from
final settlement of acquisition terms of $700,000, and the reversal of stock
based compensation credit of $463,000 offset partially by non-cash charges
totaling $5.4 million for depreciation and amortization.

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Net cash used in investing activities was $294,000 in the first nine months of
2003, consisting principally of the net purchases of short-term investments of
$1.5 million and payments received on notes receivable from related parties of
$1.2 million. For the first nine months of 2002, net cash provided by investing
activities of $7.5 million was primarily related to purchases of property and
equipment of $1.6 million, net sales of short-term investments of $10.1
million, and loans made to related parties of $788,000.

Net cash provided by financing activities was $13.4 million for the first nine
months of 2003, consisting primarily of proceeds from the private equity
financing in August 2003 of $11.5 million as described below, net borrowings on
the 2003 Revolving Facility $1.2 million, and proceeds from the exercise of
stock options of $1.8 million, offset partially by repurchases of our common
stock and principal payments on our debt and capital lease obligations of $1.2
million. Cash used in financing activities was $20.3 million for the first
nine months of 2002, consisting primarily of payments of our long-term debt and
capital lease obligations.

As more fully described in note 6 to the consolidated financial statements, on
August 28, 2003, we issued 7,838,708 shares of common stock to certain
institutional investors in a private placement transaction for $1.55 per share,
raising gross proceeds of approximately $12.1 million. In connection with the
transaction, we also issued warrants to the investors to purchase 783,871
shares of our common stock and warrants to the placement agent to purchase
195,968 shares of our common stock, representing a total of 979,839 shares of
common stock issuable upon exercise of warrants. The exercise price of the
warrants is $2.00 per share and they are exercisable beginning February 27,
2004 and expire February 27, 2007. Net proceeds from the transactions, after
issuance costs and placement fee of 4% of the gross proceeds, were
approximately $11.5 million.

As of September 30, 2003, our principal commitments consisted of obligations
outstanding under the 2003 Revolving Facility and operating and capital leases.
We have other credit facilities and leasing arrangements that, in general, may
not be prepaid without penalty. Total principal amounts outstanding under these
arrangements were $722,000 at September 30, 2003. These instruments bear
interest ranging from approximately 6.9% to 7.3% and mature at various times
through 2005. Letters of credit of approximately $576,000 collateralize certain
of these capital lease obligations and we have $576,000 of short-term
investments that are utilized as collateral for these letters of credit. These
short-term investments have been classified as restricted investments on the
accompanying balance sheets. In addition, we have notes payable aggregating
approximately $1.1 million with respect to our acquisition of Streampipe in
November, 2002. The notes bear interest at 5% and mature in January, 2004, and
we have the option to satisfy our obligation under the notes by issuing
additional shares of common stock, subject to certain conditions.

On November 6, 2003, our wholly owned media restoration services subsidiary,
Vidipax, Inc., signed an asset purchase agreement pursuant to which it will
sell substantially all of its assets and certain liabilities to a company
controlled by the current general manager of Vidipax. The total purchase price
is $1.2 million, of which $900,000 will be paid at closing and $300,000 will be
paid upon the satisfaction of certain conditions. In addition, we may receive
up to an additional $500,000 based on the purchaser achieving certain
performance targets over a period of two years from the closing date. Prior to
the transaction closing, we will also enter into a co-marketing and reseller
agreement with the purchaser pursuant to which we will sell, for a fee, media
restoration services on behalf of the purchaser for a two-year period. We
intend to use the proceeds for working capital and general corporate purposes,
and expect the transaction to close in the fourth quarter of 2003.

Contractual Obligations and Commercial Commitments

The following table provides aggregated information about our contractual
obligations as of September 30, 2003.

|                                      |  |                        |        |        |  |           |       |           |  |         |       |  |  |   |     |       |  |   |       | 
|------------------------------------- |  | ---------------------- | ------ | ------ |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | --- | ----- |  | - | ----- | 
|                                      |  | Payments Due by Period
|                                      |  |                       
|                                      |  |                        |        |        |  | Less      |       |           |  |         |       |  |  |   |     |       |  |  
|                                      |  |                        |        |        |  | than      |       |           |  |         |       |  |  |   |     | After
|                                      |  | Total                  |        | 1 year |  | 1-3 years |       | 4-5 years |  | 5 years
|                                      |  |                        |        |        |  |           |       |           |  |        
|Line of credit                        |  | $                      | 1,227  |        |  | $         | 1,227 |           |  | $       |      |  |  | $ |    |       |  | $ |      | 
|Capital lease obligations (1)         |  |                        | 736    |        |  |           | 438   |           |  |         | 298   |  |  |   |    |       |  |   |      | 
|Operating leases                      |  |                        | 7,420  |        |  |           | 2,186 |           |  |         | 1,938 |  |  |   | 968 |       |  |   | 2,328 | 
|Other obligations                     |  |                        | 50     |        |  |           | 50    |           |  |         |      |  |  |   |     |       |  |   |       | 
|Accrued acquisition consideration (2) |  |                        | 1,059  |        |  |           | 1,059 |           |  |         |      |  |  |   |    |       |  |   |      | 
|                                      |  |                        |        |        |  |           |       |           |  |         |       |  |  |   |     |       |  |   |       | 
|Total contractual obligations         |  | $                      | 10,492 |        |  | $         | 4,960 |           |  | $       | 2,236 |  |  | $ | 968 |       |  | $ | 2,328 | 
|                                      |  |                        |        |        |  |           |       |           |  |         |       |  |  |   |     |       |  |   |       | 



---

|(1) |  | Capital lease obligations represent the total minimum future obligations,
including interest.
|--- |  | ---------------------------------------------------------------------------------------------

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|(2) |  | Accrued acquisition consideration represents promissory notes related to
the acquisition of Streampipe. The notes contain an equity redemption
option pursuant to which we may, at our option, subject to certain
conditions including the continued listing of our common stock on a
principal securities exchange (excluding the over-the-counter market),
satisfy our obligation under the notes by issuing additional shares of
common stock.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Of the $2.2 million in operating leases due in less than one year,
approximately $1.1 million relates to a facility which we no longer occupy and
$0.4 million relates to a new facility for our media restoration services
operations. We are presently in litigation or negotiating lease termination or
reduction agreements for these leases which we believe will result in a
substantial reduction to future obligations under these leases, although we may
have to make up-front cash payments to do so, we may not be successful in these
negotiations. At September 30, 2003, accrued special charges includes amounts
accrued for rent obligations that meet the criteria for accrual under EITF 94-3
(before December 31, 2002) and FAS 146 (after December 31, 2002). We do not
expect significant capital expenditures for the balance of 2003.

In March 2003, we reduced by approximately half the space we occupy for
our principal operating facility on Rainier Avenue, Seattle, Washington from a
base rent of approximately $108,000 per month with a term expiring on November
30, 2005 to a base rent of approximately $33,000 per month for the remainder of
the term which was shortened to June 30, 2003 with options, that we exercised,
to extend the term through December 31, 2003 at a base rent of $100,000 and
pre-paid utility expenses of $60,000. As consideration for the reduction of
space and lease term, we have allowed our landlord to retain our security
deposit in the amount of $218,500 and made cash payments of $276,000. We are
currently negotiating a new lease with the landlord for this facility.

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

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

We believe that our existing cash, cash equivalents, and short-term
investments, combined with funding available from our line of credit, will be
sufficient to fund our operations and meet our working capital and capital
expenditure requirements for the next year. However, if revenue and cash
receipts do not meet our expectations, we may find it necessary to secure
additional financing, sell assets or reduce expenditures further. In the event
additional financing is required, we may not be able to obtain such financing
on acceptable terms, or at all. In addition, we may choose to secure
additional sources of capital to enhance our financial position and better
position ourselves to take advantage of current and future business
opportunities.

Going Concern

The accompanying consolidated financial statements have been prepared
under the assumption that we will continue to operate as a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have incurred losses since inception, have an
accumulated deficit, and have experienced negative cash flows from operations
since our inception and the expansion and development of our business may
require additional capital. As a result of these issues, our independent
accountants included an explanatory paragraph in their opinion on our audited
consolidated financial statements for the year ended December 31, 2002 raising
substantial doubt about our ability to continue as a going concern.

Management has restructured our operations, reduced our work force,
renegotiated leases, and taken other actions to limit our expenditures. In
addition, we raised $11.5 million in net proceeds from the sale in August 2003
of common stock and warrants exercisable for common stock. Finally, we have
executed an agreement to sell substantially all of the assets and certain
liabilities of our media restoration services subsidiary for $1.2 million, of
which $900,000 will be paid at closing and $300,000 will be paid upon the
satisfaction of certain conditions. However, there can be no assurance that
our cash balances will be sufficient to sustain our operations until profitable
operations and positive cash flows are achieved. Consequently, we may require
additional capital to fund our operations. There can be no assurance that
capital will be available to us on acceptable terms, or at all.

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If we fail to generate positive cash flows or obtain additional capital
when required, we could continue to modify, delay or abandon some or all of our
business and expansion plans.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which is effective
January 1, 2003. This standard addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated retirement costs. The adoption of this standard did not have an
impact on our financial statements.

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

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

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

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. First, FIN 46 will require
identification of the Companys participation in variable interests entities
(VIE), which are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit them to operate on a
standalone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. Then, for entities identified as VIEs, FIN 46
sets forth a model to evaluate potential consolidation based on an assessment
of which party to the VIE, if any, bears a majority of the exposure to its
expected losses, or stands to gain from a majority of its expected returns. FIN
46 also sets forth certain disclosures regarding interests in VIE that are
deemed significant, even if consolidation is not required. The adoption of
this standard did not have an impact on our financial statements. FIN 46 is effective as of the first interim period beginning after
June 15, 2003. However, in October 2003, the FASB deferred the
effective date for applying the provisions of FIN 46 for interests
held by public entities in variable interest entities or potential
variable interest entities created before February 1, 2003 and
non-registered investment companies.

In 2002, the Emerging Issues Task Force (EITF) finalized its tentative
consensus on EITF Issue No. 00-21, Revenue Arrangements With Multiple
Deliverables(EITF 00-21), which provides guidance on the timing and methods of
revenue recognition for sales agreements that include delivery of more than one
product or service. EITF 00-21 is effective prospectively for arrangements
entered into in fiscal periods beginning after June 15, 2003.
The adoption of
EITF 00-21 did not have an impact on our financial statements.

Critical Accounting Policies and Estimates

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

Long-lived assets.Management periodically evaluates the recoverability of
our long-lived assets in accordance with SFAS No. 144. When doing so,
management is required evaluate the recoverability of an assets (or group of
assets) carrying value through

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estimates of undiscounted future cash flows. If the assets are deemed
impaired, the assets are written down to estimated fair value. Estimates of
fair value may differ from the actual amount that could be realized if we were
to sell our assets.

Managements assessments of the impairment of property and equipment,
intangible assets and goodwill are sensitive accounting estimates that could
result in additional impairment charges in the near term. Factors that impact
these estimates include, but are not limited to, possible changes in business
plans, market price of our common stock and declining financial results. Net
long-term assets subject to impairment review in the future totaled $2.2
million at September 30, 2003. We will continue to review the carrying value of
our long-lived assets for impairments. Future adverse developments in our
business may result in additional charges.

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

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

Digital media services: We recognize encoding services revenues when the
services have been rendered and we have no continuing involvement in the goods
and services delivered, which is generally the date the finished media is
shipped to our customer. Other revenues are generated from our music samples
service business. We sell digital media applications in application service
provider arrangements. We are required to host the applications and the
customer does not have the ability to have the application hosted by another
entity without penalty to the customer. Billings are made based upon quantity
of content streamed, and revenue is recognized as the services are delivered.
We recognize enterprise webcasting services revenues as services are rendered.

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

RISK FACTORS

We have incurred losses and negative cash flows since inception and have an
accumulated deficit at September 30, 2003, raising substantial doubt about our
ability to continue as a going concern.

Our consolidated financial statements have been prepared under the assumption
that the we will continue to operate as a going concern. We have incurred
losses from inception, have an accumulated deficit, and have experienced
negative cash flows from operations since our inception. As a result of these
issues, our independent accountants included an explanatory paragraph in their
opinion on our audited consolidated financial statements for the year ended
December 31, 2002 referring to matters raising substantial doubt about our
ability to continue as a going concern.

We have restructured our operations, reduced our work force, renegotiated
leases, and taken other actions to limit our expenditures. In addition, we
recently raised approximately $11.5 million in net proceeds from the sale of
our common stock and warrants exercisable for common stock. Finally, we have
executed an agreement to sell substantially all of the assets and certain
liabilities of our media restoration services subsidiary for $1.2 million, of
which $900,000 will be paid at closing and $300,000 will be paid upon the
satisfaction of certain conditions. However, if revenue and cash receipts do
not meet our expectations, we may find it necessary to secure additional
financing, sell assets or reduce expenditures further. In the event additional
financing is required, we may not be able to obtain such financing on
acceptable terms, or at all.

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

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

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



| |  |  | Our unproven ability to generate profits; 
| | - |  | ------------------------------------------
|
| |  |  | Our limited historical financial data; and

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| |  |  | Our limited experience in addressing emerging trends that may affect our business.
| | - |  | ----------------------------------------------------------------------------------

You should consider our prospects in light of the risk, expenses and
difficulties we may encounter as an early stage company in the new and rapidly
evolving market segments we serve. As a result of such risks, expenses and
difficulties, we may have difficulty:



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

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

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



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

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

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

As of September 30, 2003, we had approximately $20.5 million in cash and cash
equivalents, short-term investments, and restricted investments. We have
however, experienced net losses from operations, and net losses are expected to
continue into future periods. If our existing cash reserves prove insufficient
to fund operating and other expenses, we may find it necessary to secure
additional financing, sell assets or reduce expenditures further. In the event
additional financing is required, we may not be able to obtain such financing
on acceptable terms, or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to pursue our business
objectives. This inability could seriously harm our business, results of
operations and financial condition.

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

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

As of September 30, 2003, we had an accumulated deficit of $191.2 million. We
have incurred net losses from inception, and we expect to continue to incur net
losses in future periods.

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

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

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

Our business and operations are substantially dependent on the performance of
our executive officers and key employees who have worked together for only a
relatively short period of time. We do not maintain key person life insurance
on any of our executive officers. In addition, we have hired or named new
employees in 2003 in key executive positions, including Jeffrey Cavins, our
Chief Executive Officer. The loss of one or several key employees could
seriously harm our business. Any reorganization or reduction in the size of our
employee base could harm our ability to attract and retain other valuable
employees critical to the success of our business.

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

We have acquired businesses in the past and we expect to continue to evaluate
the acquisition of businesses, technologies, services, or products that we
believe are a strategic fit with our existing business. Acquisitions require
integrating the business, personnel, technology and products of the acquired
entity and may result in unforeseen operating difficulties and expenditures. In
addition, acquisitions may absorb significant management attention that would
otherwise be available for ongoing development of our business and may place a
significant strain on our employees, systems and other resources. The
anticipated benefits of any acquisition may not be realized. Acquisitions could
result in potentially dilutive issuances of equity securities, the incurrence
of debt, the assumption of known and unknown liabilities associated with the
acquired business, or amortization expenses related to goodwill and other
intangible assets and the incurrence of large and immediate write-offs, any of
which could seriously harm our business, results of operations and financial
condition. For example, we recorded in our first quarter of fiscal 2003
impairments of $5.3 million, $685,000 and $601,000 to goodwill, intangible
assets, and property and equipment related to our enterprise communication
services and media restoration services business. A significant portion of
those impairments related to assets acquired in our acquisition of TT Holding
Corp. in November 2002. If any of the negative events occur, our operations and
financial position could be harmed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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non-PC devices, we may fail to capture a sufficient share of an increasingly
important portion of the market for digital media services or our costs may
increase significantly.

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

A limited number of customers have accounted for a majority of our revenues and
may continue to do so for the foreseeable future. During each of the first nine
months of 2003 and 2002, one customer accounted for approximately 11% and 14%
of our revenues and another customer accounted for 6% and 11% of our revenues.
We believe that a small number of customers may continue to account for a
significant percentage of our revenues for the foreseeable future. Due to high
revenue concentration among a limited number of customers, the cancellation,
reduction or delay of a large customer order or our failure to timely complete
or deliver a project during a given quarter is likely to significantly reduce
revenues. In addition, if any significant customer fails to pay amounts it owes
us, or does not pay those amounts on time, our revenues and operating results
could suffer. If we are unsuccessful in increasing and broadening our customer
base, our business could be harmed.

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

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

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

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



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

Any alleged liability could harm our business by damaging our reputation,
requiring us to incur legal costs in defense, exposing us to awards of damages
and costs and diverting managements attention which could have an adverse
effect on our business, results of operations and financial condition. Our
customers for encoding services generally agree to hold us harmless from claims
arising from their failure to have the right to encode the content given to us

for that purpose. However, customers may contest this responsibility or not
have sufficient resources to defend claims and we have limited insurance
coverage for claims of this nature.

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

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

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.

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

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

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

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

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

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

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



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

The development of new or enhanced services through technology development
activities is a complex and uncertain process that requires the accurate
anticipation of technological and market trends. We may experience design,
manufacturing, marketing and other difficulties that could delay or prevent the
development, introduction or marketing of new services and enhancements. In
addition, our

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inability to effectively manage the transition from older services to newer
services could cause disruptions to customer orders and harm our business and
prospects.

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

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

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

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



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

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

Our industry is experiencing consolidation that may intensify competition.

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



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

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

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

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



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

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

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

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



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

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

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

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

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network communications. A sudden and significant increase in traffic on our Web
sites could strain the capacity of the software, hardware and
telecommunications systems that we deploy or use. This could lead to slower
response times or system failures.

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

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

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

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

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

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

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

Government regulation could adversely affect our business prospects.

Few existing laws or regulations specifically apply to the internet, other than
laws and regulations generally applicable to businesses. Certain U.S. export
controls and import controls of other countries, including controls on the use
of encryption technologies, may apply to our products. Many laws and
regulations, however, are pending and may be adopted in the United States,
individual states and local jurisdictions and other countries with respect to
the internet. These laws may relate to many areas that impact our business,
including content issues (such as obscenity, indecency and defamation),
copyright and other intellectual property rights, digital rights management,
encryption, caching of content by server products, personal privacy, taxation,
e-mail, sweepstakes, promotions, network and information security and the
convergence of traditional communication services with internet communications,
including the future availability of broadband transmission capability and
wireless networks. These types of regulations are likely to differ between
countries and other political and geographic divisions. Other countries and
political organizations are likely to impose or favor more and different
regulation than that which has been proposed in the United States, thus
furthering the complexity of regulation. In addition, state and local
governments may impose regulations in addition to, inconsistent with, or
stricter than federal regulations. The adoption of such laws or regulations,
and uncertainties associated with their validity, interpretation, applicability
and enforcement, may affect the available distribution channels for and costs
associated with our products and services, and may affect the growth of the
internet. Such laws or regulations may harm our business. Our products and
services may also become subject to investigation and

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regulation of foreign data protection and e-commerce authorities, including
those in the European Union. Such activities could result in additional product
and distribution costs for us in order to comply with such regulation.

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



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

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

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

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

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

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

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

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

We, and various underwriters for our initial public offering are defendants in
a putative shareholder class action. The complaint alleges undisclosed improper
underwriting practices concerning the allocation of IPO

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

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

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



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

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

If we are unable to maintain compliance with Nasdaqs continued listing
requirements, our common stock could be delisted from the Nasdaq SmallCap
Market.

We may not be able to maintain compliance with all requirements for continued
listing of our common stock on the Nasdaq SmallCap Market, including the
minimum bid price requirement and minimum tangible assets or stockholders
equity requirements. If we are unable to maintain compliance with Nasdaq
requirements in the future, our stock will be subject to delisting, which may
have a material adverse effect on the price of our common stock and the levels
of liquidity currently available to our stockholders. Delisting may also make
it more difficult for us to raise capital in the future. If our common stock is
removed from the Nasdaq SmallCap Market, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the market
value of, our common shares. Additionally, our stock may then be subject to
penny stock regulations.

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

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

The 17,358,553 shares subject to our recent prospectus represent 31.0% of our
common shares outstanding on September 30, 2003. The selling stockholders under
this registration statement will be permitted to sell their registered shares
in the open market from time to time without advance notice to us or to the
market and without limitations on volume.

Sales of shares pursuant to exercisable options and warrants could also lead to
subsequent sales of the shares in the public market. These sales, together with
sales of shares by the selling stockholders, could depress the market price of
our stock by creating an excess

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in supply of shares for sale. Availability of these shares for sale in the
public market could also impair our ability to raise capital by selling equity
securities.

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

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

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

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

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

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

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

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

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

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

We have never paid any dividends on our common stock and do not plan to pay
dividends on our common stock for the foreseeable future. We currently intend
to retain future earnings, if any, to finance operations, capital expenditures
and the expansion of 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 is sensitive to changes in
the general level of U.S. interest rates. Based on our invested cash balances
of $20.5 million at September 30, 2003, a one percent change in interest rates
would cause a change in interest income of $205,000 per year. Due to the
limited duration of our short-term investments and their investment grade
level, we anticipate no material market risk exposure. In addition, our 2003
Revolving Facility has a term of one year and bears interest based on the prime
rate. Based on the $1.2 million balance outstanding at September 30, 2003, a
one percent increase in the prime rate would increase our interest expense by
$12,000 per year.

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




Item 4 DISCLOSURE CONTROLS AND PROCEDURES

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

Based upon their evaluation as of the end of the period covered by this
report, the Chief Executive Officer and the Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
information required to be included in our periodic SEC filings is recorded,
processed, summarized, and reported within the time periods specified in the
SEC rules and forms.

There have been no significant changes in our internal during the period
covered by this report.




PART II. OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

Between July 26, 2001 and August 30, 2001, four substantially similar class
action complaints were filed in the Untied States District Court for the
Southern District of New York against us and certain of our former officers and
directors, as well as against certain underwriters who handled our March 15,
2000 initial public offering of common stock. The various complaints were
purportedly filed on behalf of a class of persons who purchased our common
stock during the time period beginning on March 15, 2000 and ending on December
6, 2000. The complaints together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934, primarily based on the allegation
that there was undisclosed compensation received by our underwriters in
connection with our initial public offering and the allegation that the
underwriters entered into undisclosed arrangements with some investors that
were designed to distort and/or inflate the market price for our common stock
in the aftermarket following the initial public offering. These actions have
all been consolidated before the same judge for pretrial purposes. No specific
amount of damages has been claimed. We and the individual defendants have
demanded to be indemnified by the underwriter defendants pursuant to the
underwriting agreement entered into at the time of the initial public offering.
Presently, all claims against the former officers have been withdrawn without
prejudice. We, along with the many other issuer defendants, moved to dismiss
the claims in the complaint. By decision dated February 19, 2003 the court
denied our motion. A proposal has been made for the settlement and release of
claims against the issuer defendants. The

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settlement is subject to a number of conditions, including approval of other
proposed settling parties and the court. If the settlement does not occur, and
litigation against us continues, we believe we have meritorious defenses and we
intend to defend the case vigorously.

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

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

In April 2003, the landlord of one of our unoccupied facilities filed suit
against us in the Superior Court of Washington, King County, for breach of its
lease and is seeking an unspecified amount of damages. We believe that we have
meritorious defenses to the claims made in the suit and intend to vigorously
defend this suit and may also bring certain counterclaims against the landlord.

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




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)  Recent Sales of Unregistered Securities

As discussed in Note 6 to the consolidated financial statements, in
August, 2003, we entered into a Securities Purchase Agreement with certain
institutional investors pursuant to which the we issued and sold 7,838,708
shares of our common stock at a price of $1.55 per share. In connection with
such financing, we also issued warrants to the investors to purchase 783,871
shares of common stock, and a warrant to Roth Capital Partners, LLC, the
placement agent, to purchase 195,968 shares of common stock, all with an
exercise price of $2.00 per share. The warrants are exercisable beginning
February 27, 2004 and expire February 27, 2007. Roth Capital Partners also
received a placement fee of 4% of the gross proceeds. The shares and warrants
were issued without registration under the Securities Act of 1933 to accredited
investors in reliance on the exemption provided by Regulation D, Rule 506 under
the Securities Act. An appropriate legend was placed on the shares and
warrants. The shares purchased and shares which may be purchased upon exercise
of the warrants were registered for resale on a Form S-3 registration statement
which became effective on October 14, 2003.




ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.




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

None.

37



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ITEM 5: OTHER INFORMATION

None.




ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

|         |  |                                                                                                                                                                                                            
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 (1) |  | Securities Purchase Agreement dated August 28, 2003.                                                                                                                                                       
|         |  |                                                                                                                                                                                                            
|10.2 (1) |  | Registration Rights Agreement dated August 28, 2003.                                                                                                                                                       
|         |  |                                                                                                                                                                                                            
|10.3 (1) |  | Form of Common Stock Purchase Warrant dated August 28, 2003.                                                                                                                                               
|         |  |                                                                                                                                                                                                            
|31.1     |  | Certification of Jeffrey M. Cavins, President and Chief Executive
Officer of Loudeye Corp., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002       
|         |  |                                                                                                                                                                                                            
|31.2     |  | Certification of Jerold J. Goade Jr., Vice President and Chief
Financial Officer of Loudeye Corp., Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|         |  |                                                                                                                                                                                                            
|32.1     |  | Certification of Jeffrey M. Cavins, President and Chief Executive
Officer of Loudeye Corp., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002       
|         |  |                                                                                                                                                                                                            
|32.2     |  | Certification of Jerold J. Goade Jr., Vice President and Chief
Financial Officer of Loudeye Corp., Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



---

(1) Incorporated by reference to Loudeye Corp.s Form 8-K filed on September 2, 2003.



| | (b) |  | Reports on Form 8-K                                                                       
| | --- |  | ------------------------------------------------------------------------------------------
|
| |     |  | On July 15, 2003, we filed a Report on Form 8-K containing disclosure in
Items 5 and 7.   
|
| |     |  | On July 15, 2003, we furnished a Report on Form 8-K containing disclosure
for Item 12.    
|
| |     |  | On August 5, 2003, we furnished a Report on Form 8-K containing disclosure
for Item 12.   
|
| |     |  | On September 2, 2003 we filed a Report on Form 8-K containing disclosure
in Items 5 and 7.

38



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report on Form 10-Q/A to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Seattle,
State of Washington, November 13, 2003

| |  |  |  |               |  |                                              |  | 
| |  |  |  | ------------- |  | -------------------------------------------- |  | 
| |  |  |  | LOUDEYE CORP.
| |  |  |  |               |  |                                              |  | 
| |  |  |  | BY:           |  | /s/     JEFFREY M. CAVINS                    |  | 
| |  |  |  |               |  |                                              |  | 
| |  |  |  |               |  | Jeffrey M. Cavins                            |  | 
| |  |  |  |               |  | President and Chief Executive Officer        |  | 
| |  |  |  |               |  | (Principal Executive Officer)                |  | 
| |  |  |  |               |  |                                              |  | 
| |  |  |  | BY:           |  | /s/     JEROLD J. GOADE, JR.                 |  | 
| |  |  |  |               |  |                                              |  | 
| |  |  |  |               |  | Jerold J. Goade Jr.                          |  | 
| |  |  |  |               |  | Vice President and Chief Financial Officer   |  | 
| |  |  |  |               |  | (Principal Financial and Accounting Officer) |  | 

39