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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-Q

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|[X]        |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 
|          
|           |  | For the quarterly period ended June 30, 2002                                            
|           |  | 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
incorporation or organization)                  |  | (I.R.S. Employer
Identification No.)
|                                                                               
|1130 Rainier Avenue South, Seattle, WA
(Address of principal executive offices) |  | 98144
(Zip Code)                    

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.



|    |  |     |  |    |  |      
|--- |  | --- |  | -- |  | -----
|Yes |  | [X] |  | No |  | [   ]

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

|        |  |                                
|------- |  | -------------------------------
|Common  |  | 39,979,719                     
|        |  |                                
|(Class) |  | (Outstanding at August 1, 2002)

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##### Table of Contents



Loudeye Corp.

Form 10-Q Quarterly Report
For the Quarter Ended June 30, 2002

TABLE OF CONTENTS

|     |  |    |  |                                                                                       |  |     
|---- |  | -- |  | ------------------------------------------------------------------------------------- |  | ----
|     |  |    |  |                                                                                       |  | Page
|     |  |    |  |                                                                                       |  |     
|PART |  | I  |  | Financial Information                                                                 |  |     
|    
|Item |  | 1  |  | Financial Statements (unaudited)                                                      |  |     
|    
|     |  |    |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|    
|     |  |    |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|    
|     |  |    |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|    
|     |  |    |  | Notes to Unaudited Condensed Consolidated Financial Statements                        |  | 6   
|    
|Item |  | 2  |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  | 15  
|    
|Item |  | 3  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 32  
|    
|PART |  | II |  | Other Information                                                                     |  |     
|    
|Item |  | 1  |  | Legal Proceedings                                                                     |  | 33  
|    
|Item |  | 2  |  | Changes in Securities and Use of Proceeds                                             |  | 33  
|    
|Item |  | 3  |  | Defaults Upon Senior Securities                                                       |  | 33  
|    
|Item |  | 4  |  | Submission of Matters to a Vote of Security Holders                                   |  | 34  
|    
|Item |  | 5  |  | Other Information                                                                     |  | 34  
|    
|Item |  | 6  |  | Exhibits and Reports on Form 8-K                                                      |  | 34  
|    
|     |  |    |  | Signatures                                                                            |  | 35  





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TABLE OF CONTENTS



|                                |                                                                                                |                                                 |  |  |  |  |  | 
|------------------------------- | ---------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART  I  FINANCIAL INFORMATION
|                                | ITEM I FINANCIAL STATEMENTS                                                                   
|                                |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS          
|                                |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|                                |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                                | ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                | ITEM  3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|PART  II.  OTHER INFORMATION   
|                                | ITEM  1:  LEGAL PROCEEDINGS                                                                   
|                                | ITEM  2:  CHANGES IN SECURITIES AND USE OF PROCEEDS                                           
|                                | ITEM  3:  DEFAULTS UPON SENIOR SECURITIES                                                     
|                                | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS                              
|                                | ITEM  5:  OTHER INFORMATION                                                                   
|                                | ITEM  6:  EXHIBITS AND REPORTS ON FORM 8-K                                                    
|SIGNATURES                     
|EXHIBIT 2.3                    
|EXHIBIT 99.8                   
|EXHIBIT 99.9                   



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##### Table of Contents






PART  I  FINANCIAL INFORMATION




ITEM  I  FINANCIAL STATEMENTS




LOUDEYE CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)
(in thousands except per share amounts)


|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |          |          |   |        | 
|------------------------------------ | ------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------ | -------- | -------- | ------ | -------- | -------- | - | ------ | 
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          | June 30, |        | Dec. 31,
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          | 2002     |        | 2001    
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|ASSETS                               |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     | Cash and cash equivalents                               |                                                                                                                                                                                                  | $                                                               | 13,286                                     |          |          | $      | 37,159   |         
|                                     | Short-term investments                                  |                                                                                                                                                                                                  |                                                                 | 29,356                                     |          |          |        | 23,782   |         
|                                     | Accounts receivable, net of allowances of $307 and $492 |                                                                                                                                                                                                  |                                                                 | 2,599                                      |          |          |        | 2,200    |         
|                                     | Prepaids and other current assets                       |                                                                                                                                                                                                  |                                                                 | 1,461                                      |          |          |        | 1,769    |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total current assets                       |          |          | 46,702 |          |          |   | 64,910 | 
|                                     | Restricted investments                                  |                                                                                                                                                                                                  |                                                                 | 1,391                                      |          |          |        |         |         
|                                     | Property and equipment, net                             |                                                                                                                                                                                                  |                                                                 | 6,765                                      |          |          |        | 7,306    |         
|                                     | Goodwill, net                                           |                                                                                                                                                                                                  |                                                                 | 1,532                                      |          |          |        | 1,310    |         
|                                     | Intangibles and other long-term assets, net             |                                                                                                                                                                                                  |                                                                 | 6,505                                      |          |          |        | 7,357    |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total assets                               |          | $        | 62,895 |          |          | $ | 80,883 | 
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     | Accounts payable                                        |                                                                                                                                                                                                  | $                                                               | 1,336                                      |          |          | $      | 913      |         
|                                     | Accrued compensation and benefits                       |                                                                                                                                                                                                  |                                                                 | 715                                        |          |          |        | 1,439    |         
|                                     | Other accrued expenses                                  |                                                                                                                                                                                                  |                                                                 | 1,213                                      |          |          |        | 1,859    |         
|                                     | Accrued special charges                                 |                                                                                                                                                                                                  |                                                                 | 3,175                                      |          |          |        | 2,939    |         
|                                     | Accrued acquisition consideration                       |                                                                                                                                                                                                  |                                                                 | 3,000                                      |          |          |        | 3,000    |         
|                                     | Deposits and deferred revenues                          |                                                                                                                                                                                                  |                                                                 | 153                                        |          |          |        | 639      |         
|                                     | Current portion of long-term debt                       |                                                                                                                                                                                                  |                                                                 | 19,978                                     |          |          |        | 1,368    |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total current liabilities                  |          |          | 29,570 |          |          |   | 12,157 | 
|                                     | Long-term debt, net of current portion                  |                                                                                                                                                                                                  |                                                                 | 508                                        |          |          |        | 19,532   |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total liabilities                          |          |          | 30,078 |          |          |   | 31,689 | 
|                                     | Commitments and contingencies                           |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |          |         
|STOCKHOLDERS EQUITY                 |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         | Preferred stock, $0.001 par value, 41,000 shares
authorized, none outstanding                                                                                                                    |                                                                 |                                            |         |          |        |          |         |  
|                                     |                                                         | Common stock, additional paid-in capital and warrants,
$0.001 par value, 100,000 shares authorized; 40,481 and
40,475 outstanding in 2002 and 2001; 4,613 and 4,000 in
treasury in 2002 and 2001 |                                                                 |                                            | 191,552  |          |        |          | 192,627  |  
|                                     |                                                         | Deferred stock compensation                                                                                                                                                                      |                                                                 |                                            | (268     | )        |        |          | (883     | )
|                                     |                                                         | Accumulated deficit                                                                                                                                                                              |                                                                 |                                            | (158,467 | )        |        |          | (142,550 | )
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total stockholders equity                 |          |          | 32,817 |          |          |   | 49,194 | 
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 | Total liabilities and stockholders equity |          | $        | 62,895 |          |          | $ | 80,883 | 
|                                     |                                                         |                                                                                                                                                                                                  |                                                                 |                                            |          |          |        |         
|                                     |                                                         |                                                                                                                                                                                                  | The accompanying notes are an integral part of these statements |                                            |          |          |        |          |          |   |       

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LOUDEYE CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)
(in thousands except per share amounts)


|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |       |        |  
|------------------------------------------- | -------------------------------------------- | ----------------------- | ------ | ------------------ | ----- | ---------------- | ------- | ----- | ----- | ---- | ------- | ----- | ----- | - | ------- | ----- | ------ | -
|                                            |                                              |                         |        | Three Months Ended |       | Six Months Ended
|                                            |                                              |                         |        | June 30,           |       | June 30,        
|                                            |                                              |                         |        |                    |       |                 
|                                            |                                              |                         |        | 2002               |       | 2001             |         | 2002  |       | 2001
|                                            |                                              |                         |        |                    |       |                  |         |       |       |     
|REVENUES                                    |                                              | $                       | 3,217  |                    |       | $                | 2,676   |       |       | $    | 6,477   |       |       | $ | 4,605   |      
|COST OF REVENUES                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|Cost of revenues, excluding depreciation    |                                              |                         | 2,820  |                    |       |                  | 1,810   |       |       |      | 5,230   |       |       |   | 4,090   |      
|                                            | Depreciation                                 |                         |        | 812                |       |                  |         | 729   |       |      |         | 1,647 |       |   |         | 1,720 |       
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                            |                                              | Total cost of revenues  |        |                    | 3,632 |                  |         |       | 2,539 |      |         |       | 6,877 |   |         |       | 5,810  |  
|                                           
|                                            |                                              | Gross margin            |        |                    | (415  | )                |         |       | 137   |      |         |       | (400  | ) |         |       | (1,205 | )
|                                           
|OPERATING EXPENSES                          |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                            | Research and development                     |                         |        | 974                |       |                  |         | 2,739 |       |      |         | 2,264 |       |   |         | 5,409 |       
|                                            | Sales and marketing                          |                         |        | 2,245              |       |                  |         | 2,728 |       |      |         | 4,461 |       |   |         | 5,340 |       
|                                            | General and administrative                   |                         |        | 2,762              |       |                  |         | 2,452 |       |      |         | 6,237 |       |   |         | 5,202 |       
|                                            | Amortization of intangibles and other assets |                         |        | 713                |       |                  |         | 1,582 |       |      |         | 1,409 |       |   |         | 3,810 |       
|                                            | Stock-based compensation                     |                         |        | 102                |       |                  |         | (995  | )     |      |         | (554  | )     |   |         | (102  | )     
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                            |                                              |                         | 6,796  |                    |       |                  | 8,506   |       |       |      | 13,817  |       |       |   | 19,659  |      
|                                           
|Special charges                             |                                              |                         | 1,142  |                    |       |                  | 3,118   |       |       |      | 1,890   |       |       |   | 17,741  |      
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                           
|OPERATING LOSS                              |                                              |                         | (8,353 | )                  |       |                  | (11,487 | )     |       |      | (16,107 | )     |       |   | (38,605 | )    
|                                           
|OTHER INCOME (EXPENSE), net                 |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                            | Interest income                              |                         |        | 309                |       |                  |         | 838   |       |      |         | 642   |       |   |         | 2,100 |       
|                                            | Interest expense                             |                         |        | (235               | )     |                  |         | (334  | )     |      |         | (452  | )     |   |         | (676  | )     
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                            |                                              | Total other income, net |        |                    | 74    |                  |         |       | 504   |      |         |       | 190   |   |         |       | 1,424  |  
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|Net loss                                    |                                              | $                       | (8,279 | )                  |       | $                | (10,983 | )     |       | $    | (15,917 | )     |       | $ | (37,181 | )    
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                           
|Basic and diluted net loss per share        |                                              | $                       | (0.21  | )                  |       | $                | (0.26   | )     |       | $    | (0.39   | )     |       | $ | (0.93   | )    
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      
|                                           
|Weighted average shares  basic and diluted |                                              |                         | 40,229 |                    |       |                  | 41,516  |       |       |      | 40,330  |       |       |   | 39,903  |      
|                                            |                                              |                         |        |                    |       |                  |         |       |       |      |         |       |       |   |         |      

The accompanying notes are an integral part of these statements.

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

|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |         |        |         |  
|------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------- | ------- | ---------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                                    |                                                                                               |                                                   |                                         |         | Six Months Ended
|                                                                    |                                                                                               |                                                   |                                         |         | June 30,        
|                                                                    |                                                                                               |                                                   |                                         |         |                 
|                                                                    |                                                                                               |                                                   |                                         |         | 2002             |         | 2001  
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |       
|Operating activities:                                               |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    | Net loss                                                                                      |                                                   | $                                       | (15,917 | )                |         | $      | (37,181 | )     
|                                                                    | Adjustments to reconcile net loss to net cash from
operating activities:                      |                                                   |                                         |         |                  |         |        |         |       
|                                                                    |                                                                                               | Depreciation and amortization                     |                                         |         | 3,450            |         |        |         | 7,730  |        
|                                                                    |                                                                                               | Special charges and other                         |                                         |         | 25               |         |        |         | 14,167 |        
|                                                                    |                                                                                               | Stock-based compensation                          |                                         |         | (554             | )       |        |         | (102   | )      
|                                                                    | Changes in operating assets and liabilities, net
of amounts acquired in purchase of business: |                                                   |                                         |         |                  |         |        |         |       
|                                                                    |                                                                                               | Accounts receivable                               |                                         |         | (245             | )       |        |         | 1,516  |        
|                                                                    |                                                                                               | Prepaid expenses and other                        |                                         |         | 291              |         |        |         | (619   | )      
|                                                                    |                                                                                               | Accounts payable                                  |                                         |         | 423              |         |        |         | (337   | )      
|                                                                    |                                                                                               | Accrued compensation, benefits and other expenses |                                         |         | (1,129           | )       |        |         | 2,056  |        
|                                                                    |                                                                                               | Accrued special charges                           |                                         |         | 236              |         |        |         |       |        
|                                                                    |                                                                                               | Deposits and deferred revenues                    |                                         |         | (486             | )       |        |         | (537   | )      
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    |                                                                                               |                                                   | Net cash from operating activities      |         |                  | (13,906 | )      |         |        | (13,307 | )
|Investing activities:                                               |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    | Purchases of property and equipment and other, net                                            |                                                   |                                         | (1,192  | )                |         |        | (2,238  | )     
|                                                                    | Cash paid for acquisition of business and technology, net                                     |                                                   |                                         | (266    | )                |         |        | (7,199  | )     
|                                                                    | Loans made to related party and related interest                                              |                                                   |                                         | (771    | )                |         |        |        |       
|                                                                    | Sales (purchases) of investments, net                                                         |                                                   |                                         | (6,965  | )                |         |        | 32,270  |       
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    |                                                                                               |                                                   | Net cash from investing activities      |         |                  | (9,194  | )      |         |        | 22,833  |  
|Financing activities:                                               |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    | Proceeds from sale of stock and exercise of stock options, net                                |                                                   |                                         | 40      |                  |         |        | 100     |       
|                                                                    | Proceeds from long-term debt                                                                  |                                                   |                                         |        |                  |         |        | 131     |       
|                                                                    | Principal payments on long-term debt                                                          |                                                   |                                         | (813    | )                |         |        | (2,485  | )     
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |        
|                                                                    |                                                                                               |                                                   | Net cash from financing activities      |         |                  | (773    | )      |         |        | (2,254  | )
|                                                                   
|                                                                    |                                                                                               |                                                   | Net change in cash and cash equivalents |         |                  | (23,873 | )      |         |        | 7,272   |  
|Cash and cash equivalents, beginning of period                      |                                                                                               |                                                   | 37,159                                  |         |                  |         | 51,689 |        
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |        
|Cash and cash equivalents, end of period                            |                                                                                               | $                                                 | 13,286                                  |         |                  | $       | 58,961 |        
|                                                                    |                                                                                               |                                                   |                                         |         |                  |         |        |        
|Supplemental disclosure of cash flow information:                   |                                                                                               |                                                   |                                         |         |                  |         |        |        
|Issuance
of common stock for acquisition of business and technology |                                                                                               | $                                                 | 408                                     |         |                  | $       | 10,756 |        
|Shares
used to repay related party note                             |                                                                                               | $                                                 | 379                                     |         |                  | $       |       |        

The accompanying notes are an integral part of these statements.

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LOUDEYE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)

1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:

The Company

Loudeye Corp. (the Company) provides enterprise webcasting, related digital
media services and media restoration services. The Company is headquartered in
Seattle, Washington and conducts business in the United States and Canada in
two business segments, digital media services and media restoration services.

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Unaudited Interim Financial Data

The interim condensed consolidated financial statements are unaudited and have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in the Companys Annual Report on Form 10-K, as filed with the Securities and
Exchange Commission on March 28, 2002. 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 periods ended June 30, 2002 and 2001 are not necessarily indicative of the
results to be expected for the full years.

Cash and Cash Equivalents

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

Short-term Investments

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

A separate investment account that holds at least $30.0 million of
short-term investments and cash equivalents is required to be utilized as
collateral for the Companys credit facility. At June 30, 2002, short-term
investments and cash equivalents totaling $31.7 million were in this account.

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Restricted Investments

The Company has approximately $1.4 million of short-term investments that are
utilized as collateral for certain irrevocable standby letters of credit.

Long-lived Assets

The Company continually assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
assets carrying value unlikely. An impairment loss is recognized when the sum
of the expected future undiscounted net cash flows over the remaining useful
life is less than the carrying amount of the asset. The Company does
not currently anticipate any impairment charges; however, should
operating results fail to meet certain thresholds, an impairment
charge may be necessary.

New Accounting Policies

The Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142) effective June 30, 2002. The
impact of adopting FAS 142 is discussed in Note 3.

In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144), which is effective for
fiscal years beginning after December 15, 2001. FAS 144 supercedes FAS 121. The
Company adopted FAS 144 as of January 1, 2002. Adoption of FAS 144 did not
effect the Companys consolidated financial position or results of operations.

Reclassifications

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

3. REVENUE RECOGNITION

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

DIGITAL MEDIA SERVICES AND OTHER

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

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

Other revenues are generated from the Companys music samples service business.
The Company sells digital media applications in application service provider
arrangements. The Company is required to host the applications and the customer
does not have the ability to have the application hosted by another entity
without penalty to the customer. Billings are based upon the volume of data
delivered or minutes of content streamed and the related revenue is recognized
as the services are delivered.

MEDIA RESTORATION SERVICES

Media restoration services consist of services provided by our VidiPax
subsidiary to restore and upgrade old or damaged archives of traditional media.
The Company recognizes media restoration revenues as the

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services are rendered
and the Company has no continuing involvement in the goods and services
delivered, which generally is the date the finished media is shipped to the
customer.

4. SPECIAL CHARGES

The Company recorded special charges in each of the six quarters ended June 30,
2002 related to ongoing corporate restructurings, facilities consolidations and
the impairment of assets in accordance with its long-lived asset policy. The
following table summarizes these special charges (in thousands):

|                                           |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |        | 
|------------------------------------------ |  | ------------------ | ----- | ---------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ------ | 
|                                           |  | Three Months Ended |       | Six Months Ended
|                                           |  | June 30,           |       | June 30,        
|                                           |  |                    |       |                 
|                                           |  | 2002               |       | 2001             |  | 2002 |       | 2001
|                                           |  |                    |       |                  |  |      |       |     
|Employee severance                         |  | $                  | 1,142 |                  |  | $    | 1,538 |      |  | $ | 1,890 |  |  | $ | 2,220  | 
|Facilities charges and other               |  |                    |      |                  |  |      | 1,207 |      |  |   |      |  |  |   | 1,631  | 
|Impairment of property and equipment       |  |                    |      |                  |  |      | 373   |      |  |   |      |  |  |   | 2,497  | 
|Impairment of intangibles and other assets |  |                    |      |                  |  |      |      |      |  |   |      |  |  |   | 11,393 | 
|                                           |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |        | 
|                                           |  | $                  | 1,142 |                  |  | $    | 3,118 |      |  | $ | 1,890 |  |  | $ | 17,741 | 
|                                           |  |                    |       |                  |  |      |       |      |  |   |       |  |  |   |        | 

Six Months Ended June 30, 2002

The Company recorded special charges totaling $748,000 and $1.1 million in the
three and six months ended June 30, 2002, respectively, associated with
reductions in force in March and June of approximately 40% of consolidated
staffing. These special charges were primarily related to severance and
related termination benefits and are expected to be paid in cash.

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

|                    |  |               |        |                    |  |                    |        |   |  |   |       |   | 
|------------------- |  | ------------- | ------ | ------------------ |  | ------------------ | ------ | - |  | - | ----- | - | 
|                    |  | Year Ended    |        | Three Months Ended |  | Three Months Ended
|                    |  | Dec. 31, 2001 |        | March 31, 2002     |  | June 30, 2002     
|                    |  |               |        |                    |  |                   
|Beginning Balance   |  | $             | 310    |                    |  | $                  | 2,939  |   |  | $ | 2,415 |  
|Additional accruals |  |               | 3,790  |                    |  |                    | 748    |   |  |   | 1,149 |  
|Paid in cash        |  |               | (1,161 | )                  |  |                    | (1,272 | ) |  |   | (389  | )
|                    |  |               |        |                    |  |                    |        |   |  |   |       |  
|Ending Balance      |  | $             | 2,939  |                    |  | $                  | 2,415  |   |  | $ | 3,175 |  
|                    |  |               |        |                    |  |                    |        |   |  |   |       |  

The Companys accrued special charges consist of the portion of the remaining
term of its obligations related to vacated facilities as well as future
severance payments to terminated employees. To date, the Company has not
recorded the reversal of any previously accrued special charges, and
anticipates paying the remaining accrued special charges in cash over the
course of the related rental leases or severance terms as applicable.

5. NET LOSS PER SHARE

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

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|                     |  |  |           | 
|-------------------- |  |  | --------- | 
|Options outstanding  |  |  | 6,777,327 | 
|Warrants outstanding |  |  | 262,978   | 
|                     |  |  |           | 
|Shares excluded      |  |  | 7,040,305 | 
|                     |  |  |           | 

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

|                                                                               |  |                             |            |                           |  |      |            |      |  |  |            |   |  |  |            |  
|------------------------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | - |  |  | ---------- | -
|                                                                               |  | Three Months Ended June 30, |            | Six Months Ended June 30,
|                                                                               |  |                             |            |                          
|                                                                               |  | 2002                        |            | 2001                      |  | 2002 |            | 2001
|                                                                               |  |                             |            |                           |  |      |            |     
|Weighted average
shares outstanding                                            |  |                             | 40,254,630 |                           |  |      | 41,727,279 |      |  |  | 40,374,789 |   |  |  | 40,150,656 |  
|Weighting of shares
subject to repurchase                                      |  |                             | (25,951    | )                         |  |      | (211,087   | )    |  |  | (44,583    | ) |  |  | (248,056   | )
|                                                                               |  |                             |            |                           |  |      |            |      |  |  |            |   |  |  |            |  
|Weighted average shares
used to calculate basic
and diluted earnings
per share |  |                             | 40,228,679 |                           |  |      | 41,516,192 |      |  |  | 40,330,206 |   |  |  | 39,902,600 |  
|                                                                               |  |                             |            |                           |  |      |            |      |  |  |            |   |  |  |            |  

6. CONCENTRATION OF RISK AND SEGMENT DISCLOSURES

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

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

During the three and six months ended June 30, 2002 and 2001, the Company had
sales to certain significant customers, as a percentage of revenues, as
follows:

|           |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |   |  | 
|---------- |  | ------------------ | -- | ---------------- |  | ---- | -- | ---- |  |  | -- | - |  |  | -- | - |  | 
|           |  | Three Months Ended |    | Six Months Ended
|           |  | June 30,           |    | June 30,        
|           |  |                    |    |                 
|           |  | 2002               |    | 2001             |  | 2002 |    | 2001
|           |  |                    |    |                  |  |      |    |     
|Customer A |  |                    | 14 | %                |  |      | 18 | %    |  |  | 13 | % |  |  | 17 | %
|Customer B |  |                    | 15 | %                |  |      | 2  | %    |  |  | 10 | % |  |  | 2  | %
|Customer C |  |                    |   |                  |  |      | 11 | %    |  |  | 4  | % |  |  | 6  | %
|Customer D |  |                    |   |                  |  |      | 11 | %    |  |  |   |   |  |  | 6  | %
|Customer E |  |                    |   |                  |  |      | 7  | %    |  |  |   |   |  |  | 15 | %
|           |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |  
|           |  |                    | 29 | %                |  |      | 49 | %    |  |  | 27 | % |  |  | 46 | %
|           |  |                    |    |                  |  |      |    |      |  |  |    |   |  |  |    |  

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

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consolidated basis accompanied by disaggregated
information about products and services for purposes of making decisions and
assessing financial performance. The following table provides information about
the Companys segments (in thousands).

|             |  |                                  |  |                                |  |              |        |          |  |               |       |              |  |   |        |   |  |   |         |   |  |   |       |   |  |   |         |  
|------------ |  | -------------------------------- |  | ------------------------------ |  | ------------ | ------ | -------- |  | ------------- | ----- | ------------ |  | - | ------ | - |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|             |  | Three Months Ended June 30, 2002 |  | Six Months Ended June 30, 2002
|             |  |                                  |  |                               
|             |  | Digital Media                    |  | Media                          |  |              |        |          |  | Digital Media |       | Media        |  |   |        |  
|             |  | Services                         |  | Restoration                    |  | Consolidated |        | Services |  | Restoration   |       | Consolidated
|             |  |                                  |  |                                |  |              |        |          |  |               |       |             
|Revenues     |  |                                  |  |                                |  | $            | 2,352  |          |  | $             | 865   |              |  | $ | 3,217  |   |  | $ | 4,850   |   |  | $ | 1,627 |   |  | $ | 6,477   |  
|Gross margin |  |                                  |  |                                |  | $            | (845   | )        |  | $             | 430   |              |  | $ | (415   | ) |  | $ | (1,177  | ) |  | $ | 777   |   |  | $ | (400    | )
|Net loss     |  |                                  |  |                                |  | $            | (8,195 | )        |  | $             | (84   | )            |  | $ | (8,279 | ) |  | $ | (15,790 | ) |  | $ | (127  | ) |  | $ | (15,917 | )
|Total assets |  |                                  |  |                                |  | $            | 60,432 |          |  | $             | 2,463 |              |  | $ | 62,895 |   |  | $ | 60,432  |   |  | $ | 2,463 |   |  | $ | 62,895  |  

|             |  |                                  |         |                                |  |              |       |          |  |               |         |              |  |   |         |   |  |   |       |   |  |   |         |  
|------------ |  | -------------------------------- | ------- | ------------------------------ |  | ------------ | ----- | -------- |  | ------------- | ------- | ------------ |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|             |  | Three Months Ended June 30, 2001 |         | Six Months Ended June 30, 2001
|             |  |                                  |         |                               
|             |  | Digital Media                    |         | Media                          |  |              |       |          |  | Digital Media |         | Media        |  |   |         |  
|             |  | Services                         |         | Restoration                    |  | Consolidated |       | Services |  | Restoration   |         | Consolidated
|             |  |                                  |         |                                |  |              |       |          |  |               |         |             
|Revenues     |  | $                                | 1,971   |                                |  | $            | 705   |          |  | $             | 2,676   |              |  | $ | 3,340   |   |  | $ | 1,265 |   |  | $ | 4,605   |  
|Gross margin |  | $                                | (330    | )                              |  | $            | 467   |          |  | $             | 137     |              |  | $ | (2,060  | ) |  | $ | 855   |   |  | $ | (1,205  | )
|Net loss     |  | $                                | (10,974 | )                              |  | $            | (9    | )        |  | $             | (10,983 | )            |  | $ | (37,175 | ) |  | $ | (6    | ) |  | $ | (37,181 | )
|Total assets |  | $                                | 103,748 |                                |  | $            | 2,375 |          |  | $             | 106,123 |              |  | $ | 103,748 |   |  | $ | 2,375 |   |  | $ | 106,123 |  

7. BUSINESS COMBINATIONS, GOODWILL AND INTANGIBLE ASSETS

In June 2002, the Company purchased certain assets of Digital Media Broadcast,
a California company that provides digital media services similar to that of
the Company. The pro forma impact of this acquisition was immaterial to our
historical results of operations as presented, and accordingly no pro forma
information is presented.

Goodwill amortization and acquisition charges relating to business combinations
completed prior to July 1, 2001, are as follows (in thousands):

|                                              |  |                    |     |                  |  |      |       |      |  |   |       |  |  |   |       | 
|--------------------------------------------- |  | ------------------ | --- | ---------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                              |  | Three Months Ended |     | Six Months Ended
|                                              |  | June 30,           |     | June 30,        
|                                              |  |                    |     |                 
|                                              |  | 2002               |     | 2001             |  | 2002 |       | 2001
|                                              |  |                    |     |                  |  |      |       |     
|Goodwill amortization and
acquisition charges |  | $                  |    |                  |  | $    | 335   |      |  | $ |      |  |  | $ | 1,578 | 
|Intangibles amortization charges              |  |                    | 713 |                  |  |      | 1,247 |      |  |   | 1,409 |  |  |   | 2,232 | 
|                                              |  |                    |     |                  |  |      |       |      |  |   |       |  |  |   |       | 
|                                              |  | $                  | 713 |                  |  | $    | 1,582 |      |  | $ | 1,409 |  |  | $ | 3,810 | 
|                                              |  |                    |     |                  |  |      |       |      |  |   |       |  |  |   |       | 

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, Business Combinations (FAS 141) and FAS 142. FAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. FAS 141 also specifies certain criteria that
intangible assets acquired in a purchase method business combination must meet
in order to be recognized and reported apart from goodwill. FAS 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with FAS 142. FAS 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
121, which was superceded by FAS 144.

The provisions of FAS141 were adopted effective June 30, 2001. We completed two
business acquisitions during the period from July 1, 2001 to December 31, 2001.
The Company recognized no goodwill or assets

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with indefinite useful lives
resulting from these acquisitions, and accordingly this statement had no
impact. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 have been amortized through December 31, 2001.

As of January 1, 2002, the Company had the following intangible assets (in
thousands):

|                                             |  |             |       |              |  |                |        |   |  |   |       | 
|-------------------------------------------- |  | ----------- | ----- | ------------ |  | -------------- | ------ | - |  | - | ----- | 
|                                             |  |             |       |              |  | Accumulated    |        |   |  |  
|                                             |  | Gross Asset |       | Amortization |  | Net Book Value
|                                             |  |             |       |              |  |               
|Identified intangibles  VidiPax acquisition |  | $           | 2,666 |              |  | $              | (1,370 | ) |  | $ | 1,296 | 
|Goodwill  VidiPax acquisition               |  |             | 2,568 |              |  |                | (1,258 | ) |  |   | 1,310 | 
|Intangibles  DiscoverMusic acquisition      |  |             | 2,129 |              |  |                |       |   |  |   | 2,129 | 
|Intangibles  Activate acquisition           |  |             | 1,745 |              |  |                | (218   | ) |  |   | 1,527 | 
|Intangibles  On-line radio acquisitions     |  |             | 421   |              |  |                |       |   |  |   | 421   | 
|                                             |  |             |       |              |  |                |        |   |  |   |       | 
|                                             |  | $           | 9,529 |              |  | $              | (2,846 | ) |  | $ | 6,683 | 
|                                             |  |             |       |              |  |                |        |   |  |   |       | 

As of January 1, 2002, $222,000 in intangibles with indefinite useful lives
were reclassified into goodwill in accordance with FAS142. These intangibles
had a remaining useful life of 18 months as of the reclassification date,
accordingly, in each quarter through the quarter ending June 30, 2003,
amortization will be decreased by approximately $37,000. During the three
months ended June 30, 2002, the Company completed its transitional goodwill
impairment test. Based upon the Companys analysis there was no impairment of
goodwill upon adoption of FAS142 on January 1, 2002. The Company plans to
conduct its annual impairment test during the fourth quarter of each year. The
Company also performed impairment tests for previously acquired intangible
assets during the three months ended June 30, 2002 and determined that these
intangible assets were not impaired.

Net loss and loss per share for the periods ended June 30, 2001 adjusted to
exclude goodwill amortization expense are as follows (in thousands, except per
share data):

|                                      |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |         |         |  
|------------------------------------- | ------------------------------------------------- | --------------------------------------------- | - | ------------------ | ------- | ---------------- | - | ------------- | ------- | - | - | ------- | ------- | -
|                                      |                                                   |                                               |   | Three Months Ended |         | Six Months Ended
|                                      |                                                   |                                               |   |                    |         |                 
|                                      |                                                   |                                               |   | March 31, 2001     |         | June 30, 2001    |   | June 30, 2001
|                                      |                                                   |                                               |   |                    |         |                  |   |              
|Net loss:                             |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |        
|                                      | Reported net loss                                 |                                               | $ | (26,198            | )       |                  | $ | (10,983       | )       |   | $ | (37,181 | )      
|                                      | Goodwill amortization                             |                                               |   | 1,243              |         |                  |   | 335           |         |   |   | 1,578   |        
|                                      | Amortization of intangibles with indefinite lives |                                               |   | 37                 |         |                  |   | 37            |         |   |   | 74      |        
|                                      |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |        
|                                      |                                                   | Adjusted net loss                             |   |                    | (26,161 | )                |   |               | (10,946 | ) |   |         | (37,107 | )
|                                     
|Basic and diluted net loss per share: |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |        
|                                      | Reported basic and diluted net loss per share     |                                               | $ | (0.68              | )       |                  | $ | (0.26         | )       |   | $ | (0.93   | )      
|                                      | Goodwill amortization                             |                                               |   | 0.03               |         |                  |   | 0.01          |         |   |   | 0.04    |        
|                                      | Amortization of intangibles with indefinite lives |                                               |   | 0.00               |         |                  |   | 0.00          |         |   |   | 0.00    |        
|                                      |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |        
|                                      |                                                   | Adjusted basic and diluted net loss per share |   | $                  | (0.65   | )                |   | $             | (0.25   | ) |   | $       | (0.89   | )
|                                      |                                                   |                                               |   |                    |         |                  |   |               |         |   |   |        

8.  LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term Debt

As of June 30, 2002, the Companys principal commitments consisted of
obligations outstanding under operating leases, capital leases and credit
facilities with our banks. Tthe Company has a credit agreement with a bank
providing for a revolving credit facility and letters of credit aggregating up
to $19.0 million to be used for working capital and general corporate needs,
and to refinance existing long-term debt. Obligations under the Credit
Agreement are collateralized by a security interest in an investment account

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that must hold short-term investments and cash equivalents with a value of at
least $30.0 million. The revolving facility requires monthly payments of
interest only until maturity on July 31, 2003. At June 30, 2002, $19.0 million
was outstanding under the revolving facility. The Company intends to
voluntarily repay the outstanding balance in full during the third quarter of
2002 and accordingly has classified the amount as a current liability.

Loans under the revolving facility bear interest at the banks prime rate or
the London Interbank Offered Rate (LIBOR) plus 100 basis points.
The Company has multiple other credit facilities and leasing arrangements that,
in general, are not prepayable without penalty. Total amounts outstanding under
these arrangements are $1.5 million as of June 30, 2002. The interest rates on
these instruments range from 4.75% to 9.65%. The instruments have various
maturity dates through November 2005. Letters of credit of approximately
$800,000 back certain of these notes and capital lease obligations.

As a result of the acquisition of Activate in September 2001, the Company
agreed to pay $3.0 million of the acquisition consideration on the first
anniversary of the closing in a combination of cash and stock. The
Company has negotiated final payment terms that will consist of
$2.0 million in cash payable on October 1, 2002 and
1.0 million shares of restricted stock payable in August 2002.

9.  LEGAL PROCEEDINGS

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

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

On May 8, 2001, the Company filed an arbitration demand with the American
Arbitration Association (AAA) against Valley Media, Inc (Valley). The
Company alleges that Valley is liable for substantial damages for material
breaches of a Services Agreement between the companies dated as of December 17,
1999, in which Valley made representations and warranties and agreed to perform
certain obligations to facilitate the creation of a venture to create and
market an Internet music clip streaming service. The Company provided notice of
its intent to terminate that agreement by letter dated February 6, 2001, and
that

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termination was effective 30 days thereafter. The Company has also alleged
claims for misrepresentation, fraud, unjust enrichment and promissory estoppel.
Valley has filed an answer in which it denies liability, and asserts
counterclaims for breach of contract, conversion, and declaratory relief. The
arbitration was stayed by Valleys filing of a petition in bankruptcy, and the
company intends to pursue a claim in the bankruptcy proceedings.

The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. As of June 30, 2002, management is not aware of
any other asserted or pending litigation or claims against the Company that
would have a material adverse effect on the Companys financial condition,
results of operations or liquidity.

10.  RELATED PARTY TRANSACTIONS

On October 26, 2001, the Company entered into an agreement with the Martin and
Alex Tobias, pursuant to which Loudeye purchased four million shares of Loudeye
common stock from the Tobiass for $2.0 million, or $0.50 per share, and also
entered into a comprehensive agreement with the Tobiass, including the
extension of a $2.0 million secured line of credit to the Tobiass (the
Loan). The Loan is collateralized by liens on certain real property assets
owned by Mr. Tobias, as well as all his remaining 4.1 million Loudeye shares.
Under the terms of the agreement, the collateral shares will be restricted from
public market sale, without Loudeyes consent, until the later of January 31,
2003, or the full repayment of the Loan. The Loan matures June 30, 2003. As of
June 30, 2002, there was $1,750,000 advanced under the credit line, which is
presented in intangibles and other long-term assets in the accompanying balance
sheets. In April 2002 as described below, Mr. Tobias Loan was reduced by $378,552. As of July 31, 2002,
Mr. Tobias could draw an additional $250,000 under this arrangement.

In addition, if Mr. Tobias is unable to sell shares of Loudeye common stock so
that the proceeds from these sales equal the lesser of (a) $500,000 or (b) the
proceed from sales of 150% of the maximum number of shares that could have been
sold by Mr. Tobias under Rule 144 during the calendar quarter multiplied by the
Discounted Share Price (as defined below) (the Minimum Liquidity Commitment),
then Mr. Tobias may require the Company to purchase shares from him at the
Discounted Share Price so that his total proceeds for the quarter equal the
Minimum Liquidity Amount. The Discounted Share Price is the lesser of (x) the
average closing bid price of the Companys common stock for the trailing 30
trading days or (y) 95% of the closing bid price of the Companys common stock
on the last trading day of the quarter. This right expires on the earlier of
(i) three business days following June 30, 2003, (ii) repayment in full of the
Loan or (iii) such time as Mr. Tobias ceases to be the beneficial or record
owner of any shares of the Companys common stock. In April 2002, pursuant to
the Minimum Liquidity Commitment, the Company bought 613,040 shares of its
common stock from Mr. Tobias at a price of $0.6175 per share. As required by
the agreements, Mr. Tobias transferred those shares to the Company and the outstanding balance of the loan was reduced by the $378,552 paid for those shares. In July 2002, pursuant to the Minimum
Liquidity Commitment, the Company bought 599,430 shares of its common stock
from Mr. Tobias at a price of $0.3420 per share. As required by the
agreements, Mr. Tobias transferred those shares to the Company and the outstanding balance of the loan was reduced by the $205,000 paid for those shares.

In March 2001, the Company loaned its former President, David L. Weld Jr.
$90,000 pursuant to a promissory note bearing interest at the prime rate plus
1%. This loan is due in three equal installments of principal plus accrued
interest on each of March 31, 2002, September 3, 2003 and September 3, 2004.
The first installment of $30,000 was paid by Mr. Weld on March 31, 2002.

In April 2001, the Company loaned its former Sr. Vice President of Sales, Todd
A. Hinders $64,000 pursuant to a promissory note bearing interest at the prime
rate plus 4%. This loan must be repaid in annual installments on each
anniversary of the loan equal to the greater of $3,000 or the Alternative
Minimum Tax credit carry forward utilized on Mr. Hinders tax return for that
year.

In May 2001, the Company acquired all of the capital stock of Addition Systems,
Inc. owned by Digital Media Campus Inc. in exchange for a payment of
$1,323,766. In addition, Digital Media Campus assigned

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to us a promissory note
receivable due from eWave Networks which was held by them in the amount of
$248,766. John Baker, our Chief Executive Officer and Chairman of the Board of
Directors, was Chief Operating Officer of Digital Media Campus until he joined
Loudeye in March 2001.

In June 2002, the Company acquired certain assets of Digital Media Broadcast,
Inc., a California digital media company. Subsequent to this acquisition, Mr.
Thomas A. Heymann was appointed a director of the Company. Mr. Heymann is a
managing director and co-founder of Digital Coast Ventures Corp., an investment
fund focused on later-stage opportunities in broadband, wireless services,
digital media, enterprise software, and Web services. Digital Coast Ventures
Corp. was an investor in Digital Media Broadcast, Inc.

11. SUBSEQUENT EVENTS

On August 6, 2002 our Board of Directors approved a
stock repurchase plan that allows for us to repurchase up to
$2.0 million in shares on the open market over the next
12 months.

Subsequent to June 30, the Company negotiated
an agreement with CMGi concerning the final payment terms for the
acquisition of Activate.net. These terms stipulate that the
$3.0 million payment as required by the purchase agreement will
be replaced by a payment that will consist of $2.0 million in
cash payable on October 1, 2002 and 1.0 million shares of
restricted stock payable in August 2002.

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

Forward-Looking Statements

Except for the historical information contained in this Report on Form 10-Q,
the matters discussed herein, including, but not limited to managements
discussion and analysis of financial condition and results of operations in
Item 2 hereof, and statements regarding regulatory approvals, operating results
and capital requirements, are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, and are made under the safe harbor provisions
thereof. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate,
believe, estimate, predict, potential or continue, the negative of
terms like these or other comparable terminology. These forward-looking
statements are only predictions and actual events or results may differ
materially from those projected. Specific factors that could cause actual
results to differ materially from those projected include, but are not limited
to, uncertainties related to our early stage; uncertainties related to the
effectiveness of our technology and the development of our products and
services; dependence on and management of existing and future corporate
relationships; dependence on licensed content and technology; dependence on
proprietary technology and uncertainty of patent protection; management of
growth; history of operating losses; future capital needs and uncertainty of
additional funding; dependence on key personnel; intense competition; existing
government regulations and changes in, or the failure to comply with,
government regulations, and other risks detailed below, including the Risk
Factors in Item 2, the Risk Factors set forth in our Annual Reports on Form
10-K, and those included from time to time in the Companys other reports with
the SEC and press releases, copies of which are available from the Company upon
request. All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no obligation to
publicly release any revisions of the forward-looking statements contained
herein to reflect events or circumstances after the date hereof. Readers are
cautioned not to place undue reliance on these forward-looking statements, as
our business and financial performance are subject to substantial risks and
uncertainties.

Company Overview

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

We provide our services via two primary business segments, digital media
services and media restoration services.

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

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

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

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

We sell our music samples service in application service provider arrangements.
We are required to host the applications and the customer does not have the
ability to have the application hosted by another entity without penalty to the
customer. Billings are made based upon volumes of data delivered or minutes of
content streamed, and revenue is recognized as the services are delivered.

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

One of our key strategies has been to pursue selectively strategic acquisitions
to enter new markets, expand our suite of services and product offering,
increase our customer base and strengthen our market position. During 2000 and
2001 we completed the following acquisitions:



| |  |  | Vidipax Acquisition.In June 2000, we acquired Vidipax, a New
York company which performs audio and video media restoration and
migration services. The acquisition price was $1.9 million in cash,
68,284 shares of common stock and an additional payment in July 2001
of 2,189,111 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | DiscoverMusic Acquisition.In March 2001, we acquired
DiscoverMusic, a Seattle company which is the largest provider of
music samples on the Internet. The acquisition price was $4.6 million
in cash plus acquisition costs and accrued liabilities, net of
DiscoverMusics cash, and 3,677,013 shares of common stock.                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Online Radio Acquisitions.In March and June 2001, we acquired
the assets and technology of two online radio companies, OnAir
Streaming Networks and theDial. The combined acquisition price was
$2.2 million in cash and 645,096 shares of common stock. In June 2001,
we acquired Addition Systems, Inc., a Los Angeles company that
develops proprietary content insertion technology. The acquisition
price was $1.5 million in cash plus acquisition costs and 550,000
shares of common stock.                                                                                                                                                                                  
|
| |  |  | Activate Acquisition.In September 2001, we acquired
Activate.net Corporation, a Seattle company which provides live and
on-demand webcasting services for a variety of enhanced enterprise
communication needs. The acquisition price was $1.0 million in cash,
$2.4 million of assumed liabilities and a deferred payment of $3.0
million in stock or cash one year from the initial close of the
transaction, which is included as accrued acquisition consideration on
our balance sheets. The
Company has negotiated final payment terms that will consist of
$2.0 million in cash payable on October 1, 2002 and
1.0 million shares of restricted stock payable in August 2002.

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| |  |  | Digital Media Broadcast Acquisition.In June 2002, we acquired
Digital Media Broadcast, Inc. a Los Angeles company which provides
digital media services to a similar class of customers as Loudeye
provides services to.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

We estimate that a significant majority of our cost of revenues, general and
administrative expenses and research and development expenses are fixed or
semi-fixed. Sales commissions are variable depending upon orders booked and
when revenue is recognized. We have sustained losses on a quarterly and annual
basis since inception and we expect to sustain losses for the foreseeable
future as we invest in and grow our operations. As of June 30, 2002, we had an
accumulated deficit of $158.7 million. Operating losses resulted from costs
incurred in the development and sale of our products and services as well as
non-cash charges related to stock-based compensation and amortization of
intangibles and other assets. Special charges related to property and equipment
impairments, intangibles impairments and facilities closures have been a
material component of operating losses as well. We expect our gross operating
expenses to decrease on an annual basis as we execute our business plan
post-restructuring.

We anticipate that operating expenses, as well as planned capital expenditures,
debt repayments and any acquisitions, will constitute a material use of our
cash resources in 2002. We expect to incur additional losses and continued
negative cash flow from operations in 2002. We cannot assure you that we will
achieve or sustain profitability or positive operating cash flow.

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

Results of Operations

Three Months Ended June 30, 2002 Compared to 2001

Revenues. Consolidated revenues totaled $3.2 million and $2.7 million for
the three months ended June 30, 2002 and 2001, respectively. The increase was
due primarily to the acquisition of DiscoverMusic in March 2001 and the
acquisition of Activate in September 2001, as well as the continued growth of
our VidiPax subsidiary. We expect the overall modest increase in revenues to
continue throughout 2002.

The primary reason for the increase in revenues was a result of the acquisition
of Activate in September 2001. We had revenues of approximately $1.5 million
from our webcasting services in the second quarter of 2002. The increase in
webcasting revenues resulting from the acquisition of Activate was partially
offset by

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a decrease of approximately $800,000 in audio encoding services,
which generated $77,000 in 2002 as compared to $876,000 in 2001. An additional
offset to the webcasting revenue increase was the result of a decrease of
approximately $137,000 in 2001 related to products and services that were
supported in 2001, but are no longer supported in 2002.

Media restoration revenues totaled $865,000 in the three months ended June 30,
2002, as compared to $706,000 in the three months ended June 30, 2001. This
increase was the result of increased acceptance of these services in the
market, increased operational efficiency, increased pricing and the continuing
work from one of our largest customers, Coca-Cola, which provided approximately
14% of consolidated revenues in the three months ended June 30, 2002. We expect
revenues generated from VidiPax to increase each quarter in 2002.

Cost of Revenues. Cost of revenues increased to $3.6 million in the three
months ended June 30, 2002 from $2.5 million in the period ended June 30, 2001.
Excluding depreciation and amortization costs of revenues increased to $2.8
million in 2002 from $1.8 million in 2001. This was primarily due to the
significantly higher number of personnel involved in digital media services
production (including enterprise communications). This increased headcount
combined with higher levels of fixed costs associated with the acquisition of
our enterprise communications service line and the relatively fixed nature of
our traditional encoding services caused the decrease in margins. Depreciation,
the primary non-cash component of cost of revenues, increased to $812,000 from
$729,000 in 2001 as a result of the higher levels of equipment received in
conjunction with the acquisition of Activate offset by the lower level of
depreciation expense resulting from the property and equipment write-downs
recorded in 2001. We believe that margins should improve as a result of the
consolidation of our production operations from three separate facilities to
the one facility acquired in the Activate transaction and the related
reductions in personnel in both the first and second quarters of 2002. This
integration should result in lower overhead costs in one shared facility. We
expect margins on traditional service offerings to improve as our product mix
changes towards enterprise webcasting, subscription services and offerings
based upon our archival platform. Additionally, our margins should improve on
a quarterly basis as we generate greater revenues without a proportionate
increase in our cost of production for our digital media services. We expect
our capacity to be more fully utilized as our restructured sales force achieves
greater market penetration and our revenues increase.

Media restoration cost of revenues totaled $435,000 in 2002, an increase from
$238,000 in 2001. The increase rose slightly out of proportion to the increased
revenues. This is a result of the variable nature of the restoration business,
which requires adding personnel to generate additional revenues. Additionally,
the facility expansion at VidiPax has led to higher levels of depreciation on a
comparative basis. We expect the margins on media restoration services to
remain relatively unchanged in the foreseeable future.

Research and Development Expenses.Research and development expenses
totaled $1.0 million and $2.7 million in the three months ended June 30, 2002
and 2001, respectively. The decrease is due to the significant reduction in
the number of development personnel as a result of the corporate
restructurings. Costs of enhancing webcasting offerings, the continued support
of our music platform and the development of online radio technology and other
unannounced applications and service offerings comprised a majority of our
research and development expenses in 2002.

We believe that continued investment in research and development is critical to
attaining our strategic objectives. However, due to our operational
restructurings and focus on enterprise webcasting services and digital audio
opportunities, development headcount was significantly reduced and, as a
result, we expect research and development expenses to decline in 2002. We had
approximately $97,000 in media restoration services costs classified as
research and development, as a result of new efforts to integrate certain
acquired equipment into the production process.

Sales and Marketing Expenses.Sales and marketing expenses totaled $2.2
million and $2.7 million in the three months ended June 30, 2002 and 2001,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product branding
costs, advertising and cost of marketing collateral. The decrease in sales and
marketing expenses was due to the decreased personnel subsequent to our
reduction in force.

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Media restoration services sales and marketing expenses totaled $80,000 and
$185,000 in the three months ended June 30, 2002 and 2001, respectively. This
decrease was due to a general change in the compensation structure at VidiPax.

General and Administrative Expenses. General and administrative expenses
totaled $2.8 million and $2.5 million in the three months ended June 30, 2002
and 2001, respectively. General and administrative expenses consist primarily
of unallocated rent, facilities and information technology charges, salaries,
legal expenses for general corporate purposes and investor relations and other
costs associated with being a public company. General and administrative
expenses increased by approximately $700,000 which is offset by a credit to
general and administrative expense of approximately $400,000 related to the
reduction in certain payroll-related and other accrued expenses that are not
expected to be paid as a result of our reduction in force in June. The increase
was due to a greater number of employees performing general and administrative
responsibilities and an increased mix of higher compensated employees as
compared to the previous year. Additional increases in general and
administrative expenses have been a result of increases in insurance premiums
associated with being a public company and continued legal expenses resulting
from general legal matters. Our media restoration segment contributed general
and administrative expenses of approximately $338,000 and $290,000 in the three
months ended June 30, 2002 and 2001, respectively. General and administrative
expenses are expected to decrease as a result of the recent reduction in force,
which included a number of executives.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $713,000 and $1.6 million in the three months ended
June 30, 2002 and 2001, respectively. The decrease was primarily due to the
impairment charges recorded during 2001, which led to lower balances of
intangible assets, and in turn, lower amortization charges. In addition.
effective January 1, 2002, the Company adopted FAS 142, which stipulates that
goodwill can no longer be amortized. Amortization expense decreased by $459,000
as a result of the implementation of FAS 142.

Stock-Based Compensation. Amortization of deferred stock compensation was
$102,000 and $425,000 in 2002 and 2001, respectively. This decrease is a result
of previous reductions in force. These reductions in force have resulted in
reversals of previously recorded deferred stock compensation associated with
the terminated employees. As a result of stock option cancellations, we
recorded a stock-based compensation credit of $1.4 million in the three months
ended June 30, 2001, resulting in a total stock-based compensation credit of
$995,000 for the three months ended June 30, 2001. We expect future
amortization of deferred stock compensation to decline on a monthly basis.
Future stock-based compensation charges may vary as a result of variable
accounting following our option exchange in the third quarter of 2001.

Special Charges.The Company recorded Special Charges in each of the six
quarters ended June 30, 2002 related to ongoing corporate restructuring,
facilities consolidations and the impairment of assets in accordance with our
long-lived asset policy. The following table summarizes those charges (in
thousands):

|                                           |  |                    |       |      |  |   |       | 
|------------------------------------------ |  | ------------------ | ----- | ---- |  | - | ----- | 
|                                           |  | Three Months Ended
|                                           |  | June 30,          
|                                           |  |                   
|                                           |  | 2002               |       | 2001
|                                           |  |                    |       |     
|Employee severance                         |  | $                  | 1,142 |      |  | $ | 1,538 | 
|Facilities charges and other               |  |                    |      |      |  |   | 1,207 | 
|Impairment of property and equipment       |  |                    |      |      |  |   | 373   | 
|Impairment of intangibles and other assets |  |                    |      |      |  |   |      | 
|                                           |  |                    |       |      |  |   |       | 
|                                           |  | $                  | 1,142 |      |  | $ | 3,118 | 
|                                           |  |                    |       |      |  |   |       | 

Three Months Ended June 30, 2002

The Company recorded special charges in the three months ended June 30, 2002
associated with a reduction in force in June of approximately 37% of
consolidated staffing, or 59 employees, including our Chief Financial Officer
and our General Counsel. The special charge of $1.1 million was related to
severance and related termination benefits which will be paid in cash. The
Company does not currently anticipate future special charges.

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Three Months Ended June 30, 2001

We recorded a $3.1 million special charge being incurred in the second quarter
of 2001 for severance payments to employees terminated, facilities closure
costs and certain asset impairments.

Included in the facilities charges and other are accrued lease buy-out fees for
closed facilities, as well as assets related to the reduction in headcount that
took place as a result of the announced restructuring.
The Companys accrual for certain special charges was as follows at the
respective balance sheet dates:

|                    |  |   |        |  
|------------------- |  | - | ------ | -
|(in thousands)      |  |   |        |  
|December 31, 2001   |  | $ | 2,939  |  
|Additional accruals |  |   | 1,897  |  
|Paid in cash        |  |   | (1,661 | )
|                    |  |   |        |  
|June 30, 2002       |  | $ | 3,175  |  
|                    |  |   |        |  

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $309,000 and $838,000 in the
three months ended June 30, 2002 and 2001, respectively. The decrease in income
was due to lower average cash and investment balances in 2002, as well as lower
interest rates in 2002. We expect that our interest income will decrease in the
future as our cash balances decrease to fund our operating, investing and
financing activities.

Interest Expense.Interest expense relating to our debt instruments, as
well as amortization of financing charges related to our debt instruments,
totaled $235,000 and $334,000 in the three months ended June 30, 2002 and 2001,
respectively. The decrease was due to lower interest rates resulting from the
new credit facility signed in October 2001.

Six Months Ended June 30, 2002 Compared to 2001

Revenues. Revenues totaled $6.5 million and $4.6 million for the six
months ended June 30, 2002 and 2001, respectively. The increase overall was
primarily due primarily to the acquisition of DiscoverMusic in March 2001, and
the acquisition of Activate in September 2001.

The primary reason for the increase in revenues was a result of the acquisition
of Activate in September 2001.We had revenues of approximately $2.6 million
from our webcasting services in the second quarter of 2002. The increase was
offset largely by decreases in other revenues. Encoding revenues decreased
from $1.5 million in the six months ended June 30, 2001 to $77,000 in the same
period in 2002 as a result of the changing market conditions and our decision
to de-emphasize this service offering. We recognized revenues of approximately
$565,000 associated with services which were included in 2001 but which are no
longer supported at the level that we supported them in the previous year. The
de-emphasized products and services represented approximately $33,000 in
revenues in the six months ended June 30, 2002 and included video encoding
revenues and consulting revenues.

Media restoration revenues totaled $1.6 million in 2002, as compared to $1.3
million in 2001. This increase was the result of increased orders from a few
significant customers. We expect revenues generated from VidiPax to increase
each quarter in 2002.

Cost of Revenues.Cost of revenues increased to $6.9 million in the six
months ended June 30, 2002 from $5.8 million in the period ended June 30, 2001.
This gross increase was a results of the acquisition of Activate in September
2001. As a percentage of revenues, cost of revenues decreased from 126% to 106%
over the same periods. This decrease was due to the change in revenue mix from
fulfillment and encoding revenues to enterprise communications and media
restoration. This shift from relatively higher fixed cost services to lower
cost services brought about the improvement in margins on a comparative basis.

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Media restoration cost of revenues totaled $850,000 in 2002, as compared to
$410,000 in 2001. This increase was the result of the increased production
capacity and increased depreciation on equipment purchased to generate the
additional revenues at VidiPax.

Research and Development Expenses.Research and development expenses
totaled $2.3 million and $5.4 million in the six months ended June 30, 2002 and
2001, respectively. The decrease over the same period in 2001 is primarily due
to the significantly lower levels of developers in place to support the current
service and product offerings. Costs of developing automated encoding and
ordering systems as well as a more streamlined webcasting offering comprise the
majority of research and development expenses.

We believe that continued investment in research and development is critical to
attaining our strategic objectives. However, as a result of our operational
restructuring, we have shifted our focus to near-term cash generating
offerings, and as a result have reduced our levels of development personnel. We
had approximately $97,000 in media restoration services costs classified as
research and development in 2002. We expect research and development expenses
to continue sequentially at lower rates in the second half of 2002.

Sales and Marketing Expenses.Sales and marketing expenses totaled $4.5
million and $5.3 million in the six months ended June 30, 2002 and 2001,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product branding
costs, advertising and cost of marketing collateral. The significant decrease
in sales and marketing expenses was primarily due to the decreased personnel
subsequent to our corporate restructuring and an overall reduction in marketing
spending.

General and Administrative Expenses. General and administrative expenses
totaled $6.2 million and $5.2 million in the six months ended June 30, 2002 and
2001, respectively. The increase was due to a greater number of employees
performing as general and administrative as compared to the previous year.
Additionally, the mix of employees classified as general and administrative has
moved from lower salaried employees to higher compensated executives.
Additional increases in general and administrative expenses have been a result
of continued increases in insurance premiums associated with being a public
company and continued legal expenses resulting from general legal matters.
General and administrative expenses should decrease as a result of the recent
reduction in force, which included a number of executives classified as
administrative.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $1.4 million and $3.8 million in the six months ended
June 30, 2002 and 2001, respectively. The decrease was primarily due to the
impairment charges recorded during 2001, which led to lower balances of
intangible assets, and in turn, lower amortization charges. In addition.
effective January 1, 2002, the Company adopted FAS 142, which stipulates that
goodwill can no longer be amortized. Amortization expense decreased by $918,000
as a result of the implementation of FAS 142.

Stock-Based Compensation. Stock-based compensation was a credit of
$554,000 and $102,000 in 2002 and 2001, respectively. This increase in the
credit is a result of previous reductions in force and related stock
compensation reversals In June 2001, we recorded a charge of $635,000 related
to a modification associated with stock options held by a former employee,
which contributed to the higher charges in 2001. We expect future amortization
of deferred stock compensation to decline on a monthly basis. Future
stock-based compensation charges may vary as a result of variable accounting
following our option exchange in the third quarter of 2001.

Special Charges.The Company recorded special charges in each of the six
quarters ended June 30, 2002 related to ongoing corporate restructuring,
facilities consolidations and the impairment of assets in accordance with our
long-lived asset policy. The following table summarizes those charges (in
thousands):

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|                                           |  |                  |       |      |  |   |        | 
|------------------------------------------ |  | ---------------- | ----- | ---- |  | - | ------ | 
|                                           |  | Six Months Ended
|                                           |  | June 30,        
|                                           |  |                 
|                                           |  | 2002             |       | 2001
|                                           |  |                  |       |     
|Employee severance                         |  | $                | 1,890 |      |  | $ | 2,220  | 
|Impairment of intangibles and other assets |  |                  |      |      |  |   | 1,631  | 
|Impairment of property and equipment       |  |                  |      |      |  |   | 2,497  | 
|Facilities charges and other               |  |                  |      |      |  |   | 11,393 | 
|                                           |  |                  |       |      |  |   |        | 
|                                           |  | $                | 1,890 |      |  | $ | 17,741 | 
|                                           |  |                  |       |      |  |   |        | 

Six Months Ended June 30, 2002

The Company recorded special charges in the six months ended June 30, 2002
associated with two reductions in force announced March 8, 2002 and June 2002
of approximately 40% of consolidated staffing. The total number of affected
employees was 86, which included our President, Chief Financial Officer and
General Counsel. The special charge of $1.9 million was related to severance
and related termination benefits which will be paid in cash. The Company does
not currently anticipate future special charges.

Six Months Ended June 30, 2001

In the six months ended June 30, 2001, we recorded special charges of $17.7
million as a result of employee reductions, the impairment of intangibles and
other assets and the abandonment of certain facilities. Charges of $2.2 million
were recorded for termination benefits for those employees terminated in the
period. We recorded impairment charges of approximately $10.6 million
associated with the intangibles resulting from the acquisition of Alive.com in
December 1999. Remaining impairment charges recorded were $700,000 related to
warrants issued to a previous strategic partner, $2.5 million related to fixed
assets used in the provision of services which were de-emphasized in 2001 and
approximately $1.6 million related to rent accruals made for abandoned
facilities or tenant improvement writedowns.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $642,000 and $2.1 million in the
six months ended June 30, 2002 and 2001, respectively. The decrease in income
was due to our lower average cash and investment balances in 2002 in addition
to lower interest rates. We expect that our interest income will decrease in
the future as our cash balances decrease to fund our operating, investing and
financing activities.

Interest Expense.Interest expense relating to our debt instruments, as
well as amortization of financing charges related to our debt instruments,
totaled $452,000 and $676,000 in the six months ended June 30, 2002 and 2001,
respectively. The decrease was due to lower interest rates resulting from the
new credit facility signed in October 2001.

Liquidity and Capital Resources

As of June 30, 2002, we had approximately $42.6 million of cash, cash
equivalents and short-term investments. We are required to keep $30.0 million
of this in an investment account that serves as collateral for our $19.0
million credit facility. The Company intends to voluntarily repay the
outstanding balance in full during the third quarter of 2002 and accordingly
has classified the amount as a current liability.

Net cash used in operating activities was $13.9 million and $13.3 million in
the six months ended June 30, 2002 and 2001, respectively. For 2002, cash used
in operating activities resulted primarily from a net loss of $15.9 million, an
cash change of approximately $245,000 in accounts receivable and an increase in
accrued compensation, benefits and other expenses of $1.1 million, partially
offset by non-cash charges totaling $2.9 million related to stock-based
compensation, depreciation and amortization, and the non-cash component of the
special charge. Decreases in prepaid expenses of $291,000 and increases in
accounts payable and accrued special charges totaling $660,000 also partially
offset the other cash operating uses in the period. For 2001, cash used in
operating activities resulted primarily from a net loss of $37.2 million,

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partially offset by non-cash charges totaling $21.8 million related to
stock-based compensation, depreciation and amortization, and the non-cash
component of the special charge, a decrease of approximately $1.5 million in
accounts receivable and an increase in accrued compensation, benefits and other
expenses of $2.1 million.

Net cash from investing activities was a usage of
$9.2 million in the six
months ended June 30, 2002, and a cash increase in $22.8 million in the six
months ended June 30, 2001. For 2002, cash provided by investing activities was
primarily related to the net sales of short-term investments, partially offset
by purchases of property and equipment. We extended loans totaling
$750,000 under a pre-existing arrangement to a related party. These
loans accrued interest totaling $21,000. Additionally, in 2002, we spent
approximately $220,000 for the acquisition of certain assets. For 2001, cash provided by investing activities
was primarily related to the net sales of short-term investments, partially
offset by purchases of property and equipment and cash paid for the acquisition
of DiscoverMusic and certain assets of OnAir in March 2001, and certain assets
of Addition Systems in June 2001.

Net cash used in financing activities was $773,000 and $2.3 million in the
six months ended June 30, 2002 and 2001, respectively. The cash used in financing
activities in 2002 primarily resulted from principal payments of our long-term
debt totaling $813,000. In
2001, cash flows from financing activities resulted from principal payments of
our long-term debt and capital lease obligations.

As of June 30, 2002, our principal commitments consisted of obligations
outstanding under operating leases, capital leases and credit facilities with
our banks. Our current revolving facility requires monthly payments of interest
only until maturity on July 31, 2003. At June 30, 2002, $19.0 million was
outstanding under the revolving facility.

Loans under the revolving facility bear interest, at our option, at the banks
prime rate, or the London Interbank Offered Rate (LIBOR) plus 100 basis
points. Our interest rate on the outstanding principal balance was 2.93% in
the six months ended June 30, 2002. The interest rates will be adjusted after
the LIBOR term to reflect the LIBOR rate in effect at that time.

We have multiple other credit facilities and leasing arrangements that, in
general, are not prepayable without penalty. Total amounts outstanding under
these arrangements are $1.5 million as of June 30, 2002. The interest rates on
these instruments range from 4.75% to 9.65%. The instruments have various
maturity rates through November 2005. Letters of credit of approximately
$800,000 back certain of these notes and capital lease obligations.

The Company has approximately $1.4 million of short-term investments which are
utilized as collateral for certain irrevocable standby letters of credit. These
short-term investments have been classified as restricted investments on the
accompanying balance sheets.

We believe that our existing cash, cash equivalents, and short-term investments
will be sufficient to fund our operations and meet our working capital and
capital expenditure requirements during 2002. Thereafter, if we cannot fund
operating and other expenses, working capital and capital expenditure
requirements from our operations, we may find it necessary to obtain additional
equity or debt financing, sell assets or reduce spending plans. In the event
additional equity or debt financing is required, we may not be able to raise it
on acceptable terms, or at all. In addition, any projections of future cash
needs and cash flows are subject to substantial uncertainty. We may need
additional cash sooner than currently anticipated. The sale of additional
equity or debt securities could result in dilution to our stockholders. Any
debt securities issued could have rights senior to holders of common stock and
could contain covenants that would restrict our operations.

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



| |  |  | We expect to repay our existing outstanding debt of $19 million
during the third quarter in order to forego the related interest
charges we have incurred on the outstanding debt balances.                                                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On August 6, 2002 our Board of
Directors approved a stock repurchase plan that allows for us to
repurchase up to $2.0 million in shares on the open market over
the next 12 months.                                                                        
|
| |  |  | As a result of the acquisition of
Activate.net from CMGi in September 2001, we have negotiated final
payment terms that will consist of $2.0 million in cash payable
on October 1, 2002 and 1.0 million shares of restricted
stock payable in August 2002. 
|
| |  |  | Capital expenditures, excluding acquisitions, are expected to total
approximately $900,000 in the remainder of calendar year 2002 and will
relate primarily to the facilities consolidation and normal operating
asset replacements.                       
|
| |  |  | Our operating lease for our corporate headquarters costs
approximately $110,000 monthly, or $660,000 for the remainder of 2002.                                                                                                                            
|
| |  |  | Additional commitments are outstanding under the existing
facilities leases that have previously been expensed by us in the
special charges. We expect to pay approximately $700,000 in rental
charges in 2002 for the facilities that we no longer occupy.
|
| |  |  | Under our loan agreement with Martin Tobias, we may advance Mr.
Tobias up to an additional $250,000 in 2002.                                                                                                                                               

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RISK FACTORS

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

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

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

Our quarterly operating results have fluctuated in the past and we expect our
revenues and operating results will vary significantly from quarter to quarter
in the future due to a number of factors, including the variability in demand
for our services, their market acceptance, the ability of our customers to
obtain the rights necessary to use our services and our ability to execute in
line with our business plan.

Our current business plan incorporates a level of revenues which may not be
attained. If we fail to reach the planned revenue amounts, our results will
fluctuate accordingly, and we may not be able to address our expenditure levels
in a timely manner. If our operating results fall below the expectations of
securities analysts and investors in some future periods, our stock price will
likely decline significantly.

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

As of June 30, 2002, we had approximately $42.6 million in cash, cash
equivalents and short-term investments, $30.0 million of which is used as
collateral for our credit facility. We believe that our existing and available
funds will be sufficient to meet the anticipated needs for our operations,
working capital, debt service and capital expenditures for the next twelve
months. Thereafter, we may need to raise additional funds. If additional
funds are raised through the issuance of equity or convertible debt securities,
our current stockholders may experience significant dilution in their ownership
percentages and their rights. If we raise capital through debt financing, we
may be forced to accept restrictions affecting our liquidity, including
restrictions on our ability to incur additional indebtedness or pay dividends.
We cannot assure you that additional financing will be available on favorable
terms or at all. Such financings, should they occur might also place further
financial restrictions on us. This uncertainty concerning available financing
should it be necessary could seriously harm our business, results of operations
and financial condition.

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

We have incurred quarterly net losses totaling $144.5 million from August 12,
1997 (inception) through June 30, 2002, and we expect to continue to incur net
losses for the foreseeable future. We may increase our operating expenses and
capital expenditures in the future as we attempt to execute our business plan
and maintain our competitive position. This may increase our quarterly net
losses and negative cash flows. Our ability to execute our business plan may
be hampered by future negative cash flows. Our stock price may decline as a
result.

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To address the risks and uncertainties facing our business plan, we must, among other things:



| |  |  | Achieve broad customer acceptance of our products and services;                                                                                           
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Successfully scale our current operations and expand our sales efforts;                                                                                   
|
| |  |  | Maintain an appropriate level of expenditures;                                                                                                            
|
| |  |  | Complete our facilities consolidation and exit plan;                                                                                                      
|
| |  |  | Successfully integrate past and any potential acquisitions;                                                                                               
|
| |  |  | Enhance our existing services and applications products or
develop and introduce new digital media services, applications and
features in a timely manner;
|
| |  |  | Address copyright issues that affect our business;                                                                                                        
|
| |  |  | Develop and maintain strategic relationships to enhance our products and services;                                                                        
|
| |  |  | Attract and retain key employees;                                                                                                                         
|
| |  |  | Respond to competition.                                                                                                                                   

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

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

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

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

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

We expect to continue to evaluate and acquire businesses, technologies,
services, or products that we believe are a strategic fit with our business.
From inception to date, we have acquired all or parts of nine businesses,
including certain assets of DigitalMediaBroadcast in June 2002. The
integration of these and any future acquisitions into our operations may place
a significant strain on our employees, systems and other resources. If any
acquisition fails to integrate well, our operations and financial position
could be harmed. We cannot assure you that the anticipated benefits of any
acquisition will be realized. Acquisitions could result in potentially
dilutive issuances of equity securities, the incurrence of debt, the

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assumption
of known and unknown liabilities associated with the acquired business, any of
which could seriously harm our business, results of operations and financial
condition.

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

As a result of the acquisition of Activate.net from
CMGi in September 2001, we have negotiated final payment terms that
will consist of $2.0 million in cash payable on October 1,
2002 and 1.0 million shares of restricted stock payable in
August 2002. Our existing stockholders, therefore, could face additional dilution
subsequent to this payment.

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

The development of commercial services and applications for digital media
content is in its relatively early stages. Many factors could inhibit the
growth of the adoption of digital media content, including concerns about the
profitability of digital-media based businesses, uncertainty about intellectual
property rights associated with digital media, bandwidth constraints, piracy
and privacy.

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 cause us to spend significant money and management
time to defend our business and reputation. Such actions could have an adverse
affect 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 and transmit content over the Internet, we face potential
liability or alleged liability for negligence, infringement of copyright,
patent, or trademark rights and other claims based on the nature of the
content. In particular, we stream samples of copyrighted music recordings in
our Samples service offering and provide encoding services. The music industry
has been particularly litigious concerning the protection of these copyrights.
We may have potential infringement claims made against us by these copyright
holders. Claims of the above nature have been brought, and sometimes
successfully pressed, against content distributors. In addition, we could be
exposed to liability with respect to the unauthorized duplication of content or
unauthorized use of other parties proprietary technology. Any imposition of
liability that is not covered by insurance or is in excess of insurance
coverage or any alleged liability could harm our business.

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

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

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

Our music content licenses could make our business more expensive to
conduct

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

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

We face intense and increasing competition to our product and service
offerings. If we do not compete effectively or if we experience reduced market
share from increased competition, our business will be harmed. We believe that
the principal competitive factors in our market include:



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

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

Enterprise Webcasting Competition. Our primary competitors are content
distribution networks, such as Akamai and Internet broadcasters, such as Yahoo!
Broadcast, Streampipe and others. These companies provide services similar to
ours and each has a well-established market presence. We also compete with
providers of traditional communications technologies, such as teleconferencing
and videoconferencing, as well as applications software and tools companies,
such as Centra Software, WebEx, Evoke

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Communications, Lotus (SameTime),
Microsoft (NetMeeting) and Placeware. There are also smaller competitors that
focus on certain of our individual market segments, such as investor relations
webcasts.

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

The market has continued and may continue to evolve and consolidate in certain
areas. This may increase competition as larger combined entities may have
access to a larger customer base than us. Additionally, such larger potential
competitors may be able to sign agreements with vendors on more favorable terms
than us, and in turn provide their competing services at a more affordable
price than us. Such results of consolidation may impact our ability to
successfully execute on our business plan.

Many of our competitors and potential 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.

The technology underlying our services and applications is complex and may
contain unknown defects that could impact the execution of our business plan

The technology underlying our business plan is complex and includes software
that is both internally developed and 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 offerings based upon them until after
our related offerings are sold. Furthermore, because our 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 and therefore adversely affect our
ability to execute our business plan.

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

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

A reduction in the performance, reliability and availability of our systems and
network infrastructure may harm our ability to distribute our products and
services to our customers and other users, as well as harm our reputation and
ability to attract and retain customers and content providers. Our systems and
operations are susceptible to, and could be damaged or interrupted by, outages
caused by fire, flood, power loss, telecommunications failure, Internet
breakdown, earthquake and similar events. We do not have fully redundant
Webcasting facilities and therefore any damage or destruction to these would
significantly harm our Webcasting business. Our systems are also subject to
human error, security breaches, power losses, computer viruses, break-ins,
denial of service attacks, sabotage, intentional acts of vandalism and
tampering designed to disrupt our computer systems, Web sites and network
communications. A sudden and significant increase in traffic on our Web sites
could strain the capacity of the software, hardware and telecommunications
systems that we deploy or use. This could lead to slower response times or
system failures.

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

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

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

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

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

Our officers and directors beneficially own or control the voting of
approximately 23% of our outstanding common stock. Martin Tobias, our former
chief executive officer and former member of the board of directors, has given
the board of directors, an irrevocable proxy to vote all of the approximately
4.1 million shares of our Common Stock that he owns. See our definitive proxy
statement as filed with the Securities and Exchange Commission on April 19,
2002 for a more complete description of the proxy. As a result, these
stockholders, acting together, have the ability to substantially influence all
matters submitted to our stockholders for approval, including:



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

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

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Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could also have the effect of delaying, deferring or
preventing an acquisition of Loudeye, even if an acquisition would be
beneficial to our stockholders.

Government regulation could adversely affect our business prospects

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



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

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

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

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ITEM  3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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PART  II.  OTHER INFORMATION




ITEM  1:  LEGAL PROCEEDINGS

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

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

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




ITEM  2:  CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)  Recent Sales of Unregistered Securities

| |     
| | ----
| | None




ITEM  3:  DEFAULTS UPON SENIOR SECURITIES

None.

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

| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | On May 23, 2002, we held our Annual Meeting of Stockholders. At
the meeting the following matters were approved by the vote
specified below:



| | (a) |  | Anthony J. Bay was elected to serve as a
director of the Company. Mr Bay received 30,054,521 shares of
common stock voting in favor of his election and 76,255
shares of common stock were withheld. In addition, the terms
of the following directors continued after the annual meeting
of our stockholders: John T. Baker IV, Charles P. Waite, Jr.
and Johan C. Liedgren.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | The amendment of our articles of incorporation
to change our name from Loudeye Technoloiges, Inc. to Loudeye
Corp. The votes cast were as follows: 30,056,075 shares of
common stock were voted for this amendment, 51,494 shares of
common stock were voted against the amendment and 21,207
shares of common stock were withheld.                                          




ITEM  5:  OTHER INFORMATION

None.




ITEM  6:  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

| |              |  |                                                                                                                                                                                                                                                                   
| | ------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exhibit
2.3  |  | First Amendment to
Agreement and Plan of Merger dated September 25, 2001 by and
among Loudeye Technologies, Inc., Ignition Acquisition Inc., and
Activate.net Corporation and solely with respect to
Sections 2.1(c), 5.2, 5.3 and 5.5 and Article VII, CMGi, Inc.
| | Exhibit
99.8 |  | Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Certification by
John T. Baker IV, Chairman and Chief Executive
Officer.                                                                  
| | Exhibit
99.9 |  | Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. Certification by
Jerold J. Goade, Jr., Vice President, Finance and Controller.                                                            

(b)  Reports on Form 8-K

On May 29, 2002, we filed a Report on Form 8-K that announced on May 23,
2002, the Board of Directors decided to replace Arthur Andersen LLP, the
Companys independent accountants.

On May 31, 2002, we filed an amended Report on Form 8-K that amended Item
7 of the Report on Form 8-K filed on May 29, 2002 to include a letter addressed
to the Securities and Exchange Commission from Arthur Andersen LLP stating that
they agree with the applicable disclosure in our Form 8-K filed with the
Securities and Exchange Commission on May 29, 2002.

On June 13, 2002, we filed a Report on Form 8-K that on June 6, 2002,
based on the recommendation of the Audit Committee of the Board of Directors,
the Board of Directors appointed PricewaterhouseCoopers LLP as the Companys
independent accountants for the fiscal year ending December 31, 2002.

On June 14, 2002, we filed a Report on Form 8-K that announced the
appointment of Thomas A. Heymann to the Board of Directors.

On June 19, 2002, we filed an amended Report on Form 8-K which amended the
date of the Report on Form 8-K filed with the Securities and Exchange
Commission on May 29, 2002 to May 23, 2002 and amended the Amended Report on
Form 8-K filed with the Securities and Exchange Commission on May 31, 2002 to
May 23, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on August 14, 2002.

| |               |                                                                                        
| | ------------- | ---------------------------------------------------------------------------------------
| | LOUDEYE CORP.
|
| | By            | /s/ JOHN T.
BAKER IV                                                                   
| |               |                                                                                        
| |               | John T. Baker IVChairman, Chief Executive Officer
and Principal Executive Officer      
|
| | By            | /s/ JEROLD J. GOADE, Jr.                                                               
| |               |                                                                                        
| |               | Jerold J. Goade, Jr.Vice President Finance, Controller
and Principal Accounting Officer

35