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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended March 31, 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 Technologies, Inc.
(Exact name of registrant as specified in its charter)

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

1130 Rainier Avenue South, Seattle, WA 98144
(Address of principal executive offices) (Zip Code)

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

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  |  | 39,962,219                     
|        |  |                                
|(Class) |  | (Outstanding at April 30, 2002)

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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 10-Q                                                    
|SIGNATURES                    



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##### Table of Contents



Loudeye Technologies, Inc.

Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2002

TABLE OF CONTENTS

|         |  |                                                                                       |  |                                                                                                    |    |        |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- | -- | ------ | -- | 
|         |  |                                                                                       |  |                                                                                                    |    | Page  
|         |  |                                                                                       |  |                                                                                                    |    | Number
|         |  |                                                                                       |  |                                                                                                    |    |       
|PART I.  |  | Financial Information                                                                 |  |                                                                                                    |    |       
|Item 1   |  | Financial Statements                                                                  |  |                                                                                                    | 3  |       
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets as of March 31, 2002 and December
31, 2001                   |    |        | 3  | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 |    |        | 4  | 
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 |    |        | 5  | 
|         |  |                                                                                       |  | Notes to Unaudited Condensed Consolidated Financial
Statements                                     |    |        | 6  | 
|Item 2   |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations |  |                                                                                                    | 13 |       
|Item 3   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                    | 33 |       
|PART II. |  | Other Information                                                                     |  |                                                                                                    |    |       
|Item 1   |  | Legal Proceedings                                                                     |  |                                                                                                    | 34 |       
|Item 2   |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                    | 34 |       
|Item 3   |  | Defaults Upon Senior Securities                                                       |  |                                                                                                    | 34 |       
|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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PART I  FINANCIAL INFORMATION




ITEM I FINANCIAL STATEMENTS




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

|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |          |        | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ----------- | ------ | -------- | - | -------- | ------ | 
|                                               |                                                                                                                                                                                                                           |                                            |   | Mar. 31,    |        | Dec. 31,
|                                               |                                                                                                                                                                                                                           |                                            |   | 2002        |        | 2001    
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |         
|                                               |                                                                                                                                                                                                                           |                                            |   | (Unaudited) |        |          |   |         
|ASSETS                                         |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               | Cash and cash equivalents                                                                                                                                                                                                 |                                            | $ | 28,546      |        |          | $ | 37,159   |       
|                                               | Short-term investments                                                                                                                                                                                                    |                                            |   | 23,754      |        |          |   | 23,782   |       
|                                               | Accounts receivable, net of allowances of $259 and $492                                                                                                                                                                   |                                            |   | 2,335       |        |          |   | 2,200    |       
|                                               | Prepaid and other current assets                                                                                                                                                                                          |                                            |   | 1,141       |        |          |   | 1,769    |       
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total current assets                       |   |             | 55,776 |          |   |          | 64,910 | 
|                                               | Property and equipment, net                                                                                                                                                                                               |                                            |   | 7,412       |        |          |   | 7,306    |       
|                                               | Goodwill, net                                                                                                                                                                                                             |                                            |   | 1,532       |        |          |   | 1,310    |       
|                                               | Intangibles and other long-term assets, net                                                                                                                                                                               |                                            |   | 6,478       |        |          |   | 7,357    |       
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total assets                               |   | $           | 71,198 |          |   | $        | 80,883 | 
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               | Accounts payable                                                                                                                                                                                                          |                                            | $ | 1,229       |        |          | $ | 913      |       
|                                               | Accrued compensation and benefits                                                                                                                                                                                         |                                            |   | 997         |        |          |   | 1,439    |       
|                                               | Other accrued expenses                                                                                                                                                                                                    |                                            |   | 1,269       |        |          |   | 1,859    |       
|                                               | Accrued special charges                                                                                                                                                                                                   |                                            |   | 2,415       |        |          |   | 2,939    |       
|                                               | Deposits and deferred revenues                                                                                                                                                                                            |                                            |   | 334         |        |          |   | 639      |       
|                                               | Current portion of long-term debt                                                                                                                                                                                         |                                            |   | 1,446       |        |          |   | 1,368    |       
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total current liabilities                  |   |             | 7,690  |          |   |          | 9,157  | 
|                                               | Accrued acquisition consideration                                                                                                                                                                                         |                                            |   | 3,000       |        |          |   | 3,000    |       
|                                               | Long-term debt, net of current portion                                                                                                                                                                                    |                                            |   | 19,582      |        |          |   | 19,532   |       
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total liabilities                          |   |             | 30,272 |          |   |          | 31,689 | 
|                                               | Commitments and contingencies                                                                                                                                                                                             |                                            |   |             |        |          |   |          |       
|STOCKHOLDERS EQUITY (DEFICIT)                 |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               | Preferred stock, $0.001 par value, 41,000,000 shares authorized, none
outstanding                                                                                                                                         |                                            |   |            |        |          |   |         |       
|                                               | Common stock, additional paid-in capital and warrants, $0.001 par value,
100,000,000 shares authorized; 44,506,170 and 40,506,170 issued and outstanding in 2002
and 44,475,174 issued and 40,475,174 outstanding in 2001 |                                            |   | 191,484     |        |          |   | 192,627  |       
|                                               | Deferred stock compensation                                                                                                                                                                                               |                                            |   | (370        | )      |          |   | (883     | )     
|                                               | Accumulated deficit                                                                                                                                                                                                       |                                            |   | (150,188    | )      |          |   | (142,550 | )     
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total stockholders equity                 |   |             | 40,926 |          |   |          | 49,194 | 
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         
|                                               |                                                                                                                                                                                                                           | Total liabilities and stockholders equity |   | $           | 71,198 |          |   | $        | 80,883 | 
|                                               |                                                                                                                                                                                                                           |                                            |   |             |        |          |   |         

The accompanying notes are an integral part of these statements.

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

|                                     |                                              |                        |        |                    |       |      |         |            |        |  
|------------------------------------ | -------------------------------------------- | ---------------------- | ------ | ------------------ | ----- | ---- | ------- | ---------- | ------ | -
|                                     |                                              |                        |        | Three
Months Ended
|                                     |                                              |                        |        | March 31,         
|                                     |                                              |                        |        |                   
|                                     |                                              |                        |        | 2002               |       | 2001
|                                     |                                              |                        |        |                    |       |     
|REVENUES                             |                                              | $                      | 3,260  |                    |       | $    | 1,929   |           
|COST OF REVENUES                     |                                              |                        |        |                    |       |      |         |           
|                                     | Cost of revenues, excluding depreciation     |                        |        | 2,410              |       |      |         | 2,280      |       
|                                     | Depreciation                                 |                        |        | 835                |       |      |         | 991        |       
|                                     |                                              |                        |        |                    |       |      |         |           
|                                     |                                              | Total cost of revenues |        |                    | 3,245 |      |         |            | 3,271  |  
|                                     |                                              | Gross margin           |        |                    | 15    |      |         |            | (1,342 | )
|OPERATING EXPENSES                   |                                              |                        |        |                    |       |      |         |           
|                                     | Research and development                     |                        |        | 1,290              |       |      |         | 2,670      |       
|                                     | Sales and marketing                          |                        |        | 2,216              |       |      |         | 2,612      |       
|                                     | General and administrative                   |                        |        | 3,475              |       |      |         | 2,750      |       
|                                     | Amortization of intangibles and other assets |                        |        | 696                |       |      |         | 2,228      |       
|                                     | Stock-based compensation                     |                        |        | (656               | )     |      |         | 893        |       
|                                     |                                              |                        |        |                    |       |      |         |           
|                                     |                                              |                        | 7,021  |                    |       |      | 11,153  |           
|Special charges                      |                                              |                        | 748    |                    |       |      | 14,623  |           
|                                     |                                              |                        |        |                    |       |      |         |           
|OPERATING LOSS                       |                                              |                        | (7,754 | )                  |       |      | (27,118 | )         
|OTHER INCOME (EXPENSE), net          |                                              |                        |        |                    |       |      |         |           
|                                     | Interest income                              |                        |        | 333                |       |      |         | 1,262      |       
|                                     | Interest expense                             |                        |        | (217               | )     |      |         | (342       | )     
|                                     |                                              |                        |        |                    |       |      |         |           
|                                     |                                              | Total other income     |        |                    | 116   |      |         |            | 920    |  
|                                     |                                              |                        |        |                    |       |      |         |           
|Net loss                             |                                              | $                      | (7,638 | )                  |       | $    | (26,198 | )         
|                                     |                                              |                        |        |                    |       |      |         |           
|Basic and diluted net loss per share |                                              | $                      | (0.19  | )                  |       | $    | (0.68   | )         
|                                     |                                              |                        |        |                    |       |      |         |           
|Weighted average shares outstanding  |                                              |                        |        |                    |       |      |         |           
|                                     | - basic and diluted net loss per share       |                        |        | 40,431,732         |       |      |         | 38,283,453 |       
|                                     |                                              |                        |        |                    |       |      |         |           

The accompanying notes are an integral part of these statements.

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

|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |         |        |        |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------ | ------------------ | ------ | ------ | ------- | ------ | ------ | -
|                                                                         |                                                                                               |                                                   |                                           |        | Three Months Ended
|                                                                         |                                                                                               |                                                   |                                           |        | March 31,         
|                                                                         |                                                                                               |                                                   |                                           |        |                   
|                                                                         |                                                                                               |                                                   |                                           |        | 2002               |        | 2001  
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |       
|Cash flows from operating activities:                                    |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         | Net loss                                                                                      |                                                   | $                                         | (7,638 | )                  |        | $      | (26,198 | )     
|                                                                         | Adjustments to reconcile net loss to net cash from operating activities:                      |                                                   |                                           |        |                    |        |        |         |       
|                                                                         |                                                                                               | Depreciation and amortization                     |                                           |        | 1,733              |        |        |         | 4,191  |       
|                                                                         |                                                                                               | Special charges and other                         |                                           |        | 20                 |        |        |         | 13,630 |       
|                                                                         |                                                                                               | Stock-based compensation                          |                                           |        | (656               | )      |        |         | 893    |       
|                                                                         | Changes in operating assets and liabilities, net
of amounts acquired in purchase of business: |                                                   |                                           |        |                    |        |        |         |       
|                                                                         |                                                                                               | Accounts receivable                               |                                           |        | (135               | )      |        |         | 2,110  |       
|                                                                         |                                                                                               | Prepaid expenses and other assets                 |                                           |        | 830                |        |        |         | (379   | )     
|                                                                         |                                                                                               | Accounts payable                                  |                                           |        | 316                |        |        |         | 181    |       
|                                                                         |                                                                                               | Accrued compensation, benefits and other expenses |                                           |        | (791               | )      |        |         | 1,344  |       
|                                                                         |                                                                                               | Accrued special charges                           |                                           |        | (524               | )      |        |         |       |       
|                                                                         |                                                                                               | Deposits and deferred revenues                    |                                           |        | (305               | )      |        |         | (480   | )     
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         |                                                                                               |                                                   | Net cash from operating activities        |        |                    | (7,150 | )      |         |        | (4,708 | )
|Cash flows from investing activities:                                    |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         | Purchases of property and equipment and other                                                 |                                                   |                                           | (915   | )                  |        |        | (2,060  | )     
|                                                                         | Cash paid for acquisition of business and technology, net                                     |                                                   |                                           |       |                    |        |        | (4,219  | )     
|                                                                         | Sales (purchases) of short-term investments, net                                              |                                                   |                                           | 28     |                    |        |        | 6,605   |       
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         |                                                                                               |                                                   | Net cash from investing activities        |        |                    | (887   | )      |         |        | 326    |  
|Cash flows from financing activities:                                    |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         | Proceeds from sale of stock and exercise of stock options, net                                |                                                   |                                           | 6      |                    |        |        | 28      |       
|                                                                         | Proceeds from long-term debt                                                                  |                                                   |                                           |       |                    |        |        | 131     |       
|                                                                         | Principal payments on long-term debt                                                          |                                                   |                                           | (232   | )                  |        |        | (1,256  | )     
|                                                                         | Loans made to related party                                                                   |                                                   |                                           | (350   | )                  |        |        |        |       
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |        
|                                                                         |                                                                                               |                                                   | Net cash from financing activities        |        |                    | (576   | )      |         |        | (1,097 | )
|                                                                         |                                                                                               |                                                   | Net decrease in cash and cash equivalents |        |                    | (8,613 | )      |         |        | (5,479 | )
|Cash and cash equivalents, beginning of period                           |                                                                                               |                                                   | 37,159                                    |        |                    |        | 51,689 |        
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |        
|Cash and cash equivalents, end of period                                 |                                                                                               | $                                                 | 28,546                                    |        |                    | $      | 46,210 |        
|                                                                         |                                                                                               |                                                   |                                           |        |                    |        |        |        
|Supplemental disclosure of cash flow information:                        |                                                                                               |                                                   |                                           |        |                    |        |        |        
|Cash paid for interest                                                   |                                                                                               | $                                                 | 217                                       |        |                    | $      | 275    |        
|Issuance of common stock for acquisition of business and technology      |                                                                                               |                                                   |                                          |        |                    |        | 6,750  |        
|Issuance of common stock and common stock warrants to strategic partners |                                                                                               |                                                   |                                          |        |                    |        | 50     |        

The accompanying notes are an integral part of these statements.

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LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(UNAUDITED)

1. ORGANIZATION AND DEVELOPMENT STAGE RISKS

The Company

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

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

The condensed 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 quarters ended March 31, 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 an original maturity of three
months or less to be cash equivalents.

Short-term Investments

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

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As described further in Note 7, an investment account that holds at least
$30.0 million of short-term investments and cash equivalents is utilized as
collateral for the Companys credit facility. Additionally, the Company has
approximately $1.4 million of short-term investments which are utilized as
collateral for certain irrevocable standby letters of credit.

Long-lived Assets

The Company assesses potential impairments to its long-lived assets when there
is evidence that events or changes in circumstances have made recovery of the
assets carrying value unlikely. An impairment loss is recognized when the sum
of the expected future undiscounted net cash flows over the remaining useful
life is less than the carrying amount of the asset. As described in Note 4, the
Company recorded impairment charges of $13.6 million in the quarter ended
March 31, 2001.

The Company will continue to evaluate the recoverability of its long-lived
assets in accordance with the above policy, however, as of March 31, 2002, no
additional impairments are anticipated.

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

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

Other revenues are generated from 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 made based upon volumes of data
delivered or minutes of content streamed, and revenue is recognized as the
services are delivered.

MEDIA RESTORATION SERVICES

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

4. SPECIAL CHARGES

The Company has recorded Special Charges in each of the six quarters ended
March 31, 2002 related to ongoing corporate restructuring, facilities
consolidations and the impairment of assets in accordance with

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its long-lived asset policy (see Note 2). The following table summarizes such
charges recorded in the three months ended March 31, 2002 and 2001:

|                                                                          |  |                    |     |      |  |   |        | 
|------------------------------------------------------------------------- |  | ------------------ | --- | ---- |  | - | ------ | 
|                                                                          |  | Three Months Ended
|                                                                          |  | March 31,         
|                                                                          |  |                   
|                                                                          |  | 2002               |     | 2001
|                                                                          |  |                    |     |     
|                                                                          |  | (in thousands)    
|Impairment of goodwill associated with the acquisition of Alive.com       |  | $                  |    |      |  | $ | 10,612 | 
|Impairment of property and equipment related to video encoding
operations |  |                    |    |      |  |   | 1,272  | 
|Impairment of deferred charge related to terminated customer agreement    |  |                    |    |      |  |   | 781    | 
|Employee severance                                                        |  |                    | 748 |      |  |   | 682    | 
|Other                                                                     |  |                    |    |      |  |   | 677    | 
|Impairment of duplicative music sampling platform                         |  |                    |    |      |  |   | 599    | 
|                                                                          |  |                    |     |      |  |   |        | 
|                                                                          |  | $                  | 748 |      |  | $ | 14,623 | 
|                                                                          |  |                    |     |      |  |   |        | 

Quarter ended March 31, 2002

The Company recorded special charges in the quarter ended March 31, 2002
associated with a reduction in force announced March 8, 2002 of approximately
12% of consolidated staffing. The special charge of $748,000 was for severance
and related termination benefits incurred during the quarter. The Company does not
anticipate future special charges at this time.

Quarter ended March 31, 2001

The Company recorded special charges in the quarter ended March 31, 2001
totaling $14.6 million related to the market trends at the time. The Company
had experienced decreasing demand for its video services. Accordingly, the
Companys board of directors approved a plan to close the Companys Santa
Monica facility and reduce video production capacity in Seattle, which resulted
in an impairment in the value of its video encoding equipment as well as
existing tenant improvements at its Santa Monica facility which was closed in
the first quarter of 2001. Management decided in the first quarter of 2001 to
focus primarily upon audio or music related sources of revenues as that area
appeared to be more fully developed. As a result of this decision, the Company
will no longer provide and support certain products, and therefore, certain
related assets became impaired. In accordance with its accounting policy for
long-lived assets, the Company adjusted certain property, equipment and
intangibles to estimated fair market value as of March 31, 2001.

The Company determined that due to the acquisition of an archival platform for
music samples acquired from DiscoverMusic, the previously capitalized software
costs associated with Loudeyes separately developed music samples platform
were redundant and not recoverable. Accordingly, since the code base developed
by Loudeye will not be sold or otherwise used, it was determined to have no
further value and the remaining unamortized cost, approximately $600,000, was
adjusted to zero.

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

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As of March 31, 2002, approximately $2.4 million was included in accrued
expenses related to special charges recorded in 2002 and 2001. The following table
represents a rollforward of the accrued special charges account. The Company
believes that it will ultimately pay all of these accrued charges in cash.

|                    |  |                |        |  
|------------------- |  | -------------- | ------ | -
|                    |  | (in thousands)
|                    |  |               
|December 31, 2001   |  | $              | 2,939  |  
|Additional accruals |  |                | 748    |  
|Paid in cash        |  |                | (1,272 | )
|                    |  |                |        |  
|March 31, 2002      |  | $              | 2,415  |  
|                    |  |                |        |  

5. NET LOSS PER SHARE

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

|                     |  |  |           | 
|-------------------- |  |  | --------- | 
|Options outstanding  |  |  | 6,777,327 | 
|Warrants outstanding |  |  | 162,978   | 
|                     |  |  |           | 
|Shares excluded      |  |  | 6,940,305 | 
|                     |  |  |           | 

The Company had 38,021 and 218,818 stock options outstanding that had been
exercised but which were subject to repurchase at March 31, 2002 and 2001,
respectively. The weighted average repurchase price of these options subject to
repurchase was $0.21 and $0.34, at March 31, 2002 and 2001, respectively. The
impact of these unvested but exercised options has been removed from the
calculation of weighted average shares outstanding for purposes of determining
basic and diluted earnings per share.

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

|                                                                            |  |                              |            |      |  |  |            |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | ---- |  |  | ---------- | -
|                                                                            |  | Three
Months Ended March 31,
|                                                                            |  |                             
|                                                                            |  | 2002                         |            | 2001
|                                                                            |  |                              |            |     
|Weighted average shares
outstanding                                         |  |                              | 40,494,947 |      |  |  | 38,568,478 |  
|Weighting of shares subject to
repurchase                                   |  |                              | (63,215    | )    |  |  | (285,025   | )
|                                                                            |  |                              |            |      |  |  |            |  
|Weighted average shares
outstanding   basic and diluted
earnings per share |  |                              | 40,431,732 |      |  |  | 38,283,453 |  
|                                                                            |  |                              |            |      |  |  |            |  

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

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considered to have a fair value equal to book value. The Company maintains cash
and cash equivalents on deposit at various institutions that at times exceed
the insured limits by the Federal Deposit Insurance Corporation. This exposes
the Company to potential risk of loss in the event the institutions become
insolvent. The Company does not use derivative financial instruments;
accordingly SFAS No. 133 has no impact on results.

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

During the quarters ended March 31, 2002 and 2001, the Company had sales to
certain significant customers, as a percentage of revenues, as follows:

|           |  |                    |    |      |  |  |    |  
|---------- |  | ------------------ | -- | ---- |  |  | -- | -
|           |  | Three Months Ended
|           |  | March 31,         
|           |  |                   
|           |  | 2002               |    | 2001
|           |  |                    |    |     
|Customer A |  |                    |   |      |  |  | 25 | %
|Customer B |  |                    | 12 | %    |  |  | 15 | %
|           |  |                    |    |     
|           |  |                    | 12 | %    |  |  | 40 | %
|           |  |                    |    |     

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

|               |  |                                   |        |                                   |  |              |       |          |  |             |        |              |  |   |         |   |  |   |       |  |  |   |         |  
|-------------- |  | --------------------------------- | ------ | --------------------------------- |  | ------------ | ----- | -------- |  | ----------- | ------ | ------------ |  | - | ------- | - |  | - | ----- |  |  | - | ------- | -
|               |  | Three Months Ended March 31, 2002 |        | Three Months Ended March 31, 2001
|               |  |                                   |        |                                  
|               |  | Digital                           |        |                                   |  |              |       |          |  |             |        | Digital      |  |   |         |   |  |   |       | 
|               |  | Media                             |        | Media                             |  |              |       |          |  | Media       |        | Media        |  |   |         |  
|(in thousands) |  | Services                          |        | Restoration                       |  | Consolidated |       | Services |  | Restoration |        | Consolidated
|               |  |                                   |        |                                   |  |              |       |          |  |             |        |             
|Revenues       |  | $                                 | 2,498  |                                   |  | $            | 762   |          |  | $           | 3,260  |              |  | $ | 1,369   |   |  | $ | 560   |  |  | $ | 1,929   |  
|Gross margin   |  |                                   | (332   | )                                 |  |              | 347   |          |  |             | 15     |              |  |   | (1,730  | ) |  |   | 388   |  |  |   | (1,342  | )
|Net loss       |  |                                   | (7,595 | )                                 |  |              | (43   | )        |  |             | (7,638 | )            |  |   | (26,201 | ) |  |   | 3     |  |  |   | (26,198 | )
|Total assets   |  | $                                 | 69,024 |                                   |  | $            | 2,174 |          |  | $           | 71,198 |              |  | $ | 115,171 |   |  | $ | 1,924 |  |  | $ | 117,095 |  

7. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term Debt

As of March 31, 2002, the Companys principal commitments consisted of
obligations outstanding under operating leases, capital leases and credit
facilities with its bank. On August 22, 2001, the Company entered into a
credit agreement with a bank providing for a revolving credit facility and
letters of credit aggregating up to $15.0 million to be used for working
capital and general corporate needs, and to refinance existing long-term debt.
On October 25, 2001, the Credit Agreement was amended to increase the principal
sum to $19.0 million. Obligations under the Credit Agreement are
collateralized by a security interest in an investment account that must hold
short-term investments and cash equivalents with a value of at least $30.0
million. The revolving facility requires monthly payments of interest only
until maturity on July 31, 2003. On July 31, 2002, the Company has an option to
extend the maturity date to July 31, 2004, provided that the Company is not in
default at that time. At March 31, 2002, $19.0 million was outstanding

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under the revolving facility.

Loans under the revolving facility bear interest, at the Companys option, at
the banks prime rate, or the London Interbank Offered Rate (LIBOR) plus 100
basis points. Our interest rate on the outstanding principal balance was
2.91% at March 31, 2002. The interest rates will be adjusted after each LIBOR
term to reflect the LIBOR rate in effect at that time.

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 $2.0 million as of March 31, 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.

If certain events occur, such as the Companys common stock not being listed on
the Nasdaq National Market, the Company may be required to pay $1.5 million of
the accrued acquisition consideration in cash instead of having the option to
pay the entire $3.0 million balance with the Companys common stock in
September 2002.

8. LEGAL PROCEEDINGS

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

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

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

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The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. As of March 31, 2002, management is not aware of
any asserted or pending litigation or claims against the Company that would
have a material adverse effect on the Companys financial condition, results of
operations or liquidity.

9. RELATED PARTY TRANSACTIONS

On October 26, 2001, the Company entered into an agreement with 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 4.6 million Loudeye shares.
Under the terms of the agreement, the collateral shares will be restricted from
public market sale, without Loudeyes consent, until the later of January 31,
2003, or the full repayment of the Loan. The Loan matures June 30, 2003. As of
March 31, 2002, there was $1,350,000 advanced under the credit line, which is
presented in intangibles and other long-term assets in the accompanying balance
sheets. In April 2002 another $400,000 was advanced under the credit line and
subsequently Mr. Tobias made a Loan payment of $378,552. As of May 1, 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. Pursuant to the Minimum
Liquidity Commitment, the Company bought 613,040 shares of its common stock
from Mr. Tobias in April 2002 at a price of $0.6175 per share. As required by
the agreements, Mr. Tobias used the $378,552 paid for those shares to reduce
the outstanding balance of the Loan.

10. RECENT ACCOUNTING PRONOUNCEMENT

Effective January 1, 2002, the Company adopted FAS 142, Goodwill and Other
Intangible Assets, (FAS 142) which stipulates that goodwill can no longer be
amortized. FAS 142 also establishes a new method of testing goodwill for
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The initial phase of the impairment test is required to be
completed by June 30, 2002, and if the fair value of the reporting unit is less
than its carrying value, the second phase to determine the amount of the
impairment is to be completed by December 31, 2002. Management is in the
process of completing the goodwill impairment testing required by this
standard. Management expects the impairment test to be completed within the
timeframe stipulated by the pronouncement. At January 1, 2002, the Company had
net goodwill of $1.3 million. The implementation of FAS 142 decreased
amortization expense by approximately $459,000 in the three months ended March
31, 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 highly scalable, live
and on-demand audio and video Webcasting services, supported by proprietary
applications such as synchronized streaming slide presentation capabilities.
Using our services, enterprises can offer small and large audiences access to
Webcasts of a variety of corporate events, such as product launches, investor
earnings calls, conferences and distance learning seminars. The target
customers for these solutions include medium and large-sized enterprises across
a range of industry segments. We recognize revenues as services are rendered.

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

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

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

One of our key strategies 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. In 2000 and
2001 we completed five acquisitions.



| |  |  | Vidipax Acquisition.In June 2000, we acquired Vidipax, a New
York company which performs audio and video media restoration and
migration services. The acquisition price was $1.9 million in cash,
68,284 shares of common stock and an additional contingent payment in
July 2001 of 2,189,111 shares.                                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | DiscoverMusic Acquisition.In March 2001, we acquired
DiscoverMusic, a Seattle company which 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 acquisition price was $2.2 million
in cash and 645,096 shares of common stock.                                                                                                                                                                
|
| |  |  | Addition Systems Acquisition.In June 2001, we acquired Addition
Systems, Inc., a Los Angeles company which develops proprietary
content insertion technology. The acquisition price was $1.5 million
in cash plus acquisition costs and 550,000 shares of common stock.                                                                                                                                        
|
| |  |  | Activate Acquisition.In September 2001, we acquired
Activate.net Corporation, a Seattle company which provides live and
on-demand webcasting services for a variety of enhanced enterprise
communication needs. The acquisition price was $1.0 million in cash,
$2.4 million of assumed liabilities and a deferred payment of $3.0
million in stock or cash one year from the initial close of the
transaction.

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

We estimate that a significant majority of our cost
of 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 March 31, 2002, we had an
accumulated deficit of $150.2 million. Operating losses resulted from
significant costs incurred in the development and sale of our products and
services as well as significant non-cash charges related to stock-based
compensation and amortization of intangibles and other assets. Special charges
related to property and equipment impairments, intangibles impairments and
facilities shut-downs have been a material component of operating losses as
well. We expect our operating expenses to decrease on an annual basis as we
execute our business plan.

We anticipate that operating expenses, as well as planned capital expenditures,
debt repayments and any acquisitions, will constitute a material use of our
cash resources in 2002. We expect to incur additional losses 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 March 31, 2002 compared to 2001

Revenues. Revenues totaled $3.3 million and $1.9 million for the three
months ended March 31, 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.

We recorded approximately $1.1 million from our Webcasting services in the
first quarter of 2002. In addition, we recognized three months of revenues in
the quarter ended March 31, 2002 from the music sample service acquired from
DiscoverMusic in March 2001 compared to one month in the first quarter of 2001.
This service contributed approximately $400,000 to the increase in revenues
compared to the same period in 2001. We also recognized revenues of
approximately $260,000 in the first quarter of 2002 associated with the
termination of a service contract. Payment had previously been received under
this contract and a portion of it was included in deferred revenues at December
31, 2001. The increases described above were offset by amounts related to
products and services that were supported in 2001, but are no longer supported.
Such products and services represented approximately $400,000 in revenues in
the quarter ended March 31, 2001. We also generated a lower level of revenues
from encoding services as compared to the prior year. We expect total revenues
to increase each quarter throughout 2002.

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Media restoration revenues totaled $762,000 in 2002, as compared to $560,000 in
2001. This increase was the result of increased orders from customers, notably
Coca-Cola, which provided approximately 12% of consolidated revenues in the
first quarter of 2002. We expect revenues generated from VidiPax to increase
each quarter in 2002.

Cost of Revenues. Cost of revenues decreased to $3.2 million in the three
months ended March 31, 2002 from $3.3 million in the period ended March 31,
2001. Costs, excluding depreciation and amortization, to generate the revenues
described above increased to $2.4 million in 2002 from $2.3 million in 2001.
This was primarily due to the significantly lower number of personnel involved
in digital media services production, more than offset by increases in
personnel and other expenses as a result of the acquisition of Activate. This
reduction in headcount came as a result of the completion of our digital media
archive system, which has allowed us to fulfill digital music encoding orders
in a more automated manner rather than the historical method requiring
significant manual processing. The non-cash component of cost of revenues,
which is primarily depreciation, decreased to $835,000 from $1.0 million in the
first quarter of 2001 as a result of the property and equipment write-downs
recorded during 2001. We believe that margins should improve as a result of the
consolidation of our production operations from three separate facilities to
one facility and the related reduction in personnel. This integration should
result in lower overhead costs. We expect margins on traditional service
offerings to improve as product mix changes towards enterprise webcasting,
subscription services and offerings based upon our archival systems platform.
Additionally, our margins should improve on a quarterly basis as production
efficiency increases. We expect our capacity to be more fully utilized as our
recently increased sales force realizes greater market penetration.

Media restoration cost of sales totaled $415,000 in 2002, an increase from
$171,000 in 2001. The increase rose at a higher percentage rate than revenues
due to the incremental fixed nature of adding equipment and personnel necessary
to generate the increased 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 future.

Research and Development Expenses.Research and development expenses
totaled $1.3 million and $2.7 million in the three months ended March 31, 2002
and 2001, respectively. The decrease over the same period in 2001 is primarily
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 continued
development of online radio technology and other 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
restructuring and focus on digital audio opportunities and enterprise
webcasting services, development headcount was significantly reduced and, as a
result, we expect research and development expenses to decline in 2002 compared
to 2001. We had no media restoration services costs classified as research and
development.

Sales and Marketing Expenses.Sales and marketing expenses totaled $2.2
million and $2.6 million in the three months ended March 31, 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 primarily due to the decreased personnel subsequent to
our January 2001 reduction in force partially offset by an increase in sales
and marketing expenses from our acquisition of Activate.

Media restoration services sales and marketing expenses totaled $46,000 and
$64,000 in 2002 and 2001, respectively.

General and Administrative Expenses. General and administrative expenses
totaled $3.5 million and $2.8 million in the three months ended March 31, 2002
and 2001, respectively. General and administrative expenses consist primarily
of unallocated rent, facilities and information technology charges, salaries,
legal expenses, investor relation costs, and other costs associated with being
a public company. The increase over the same period in 2001 reflects the
impact of integrating of Activates operations. We expect future

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levels of general and administrative expenses to decrease slightly from
the first quarter of 2002 as the full impact of our restructuring is realized.

Amortization of Intangibles and Other Assets.Amortization of
intangibles and other assets totaled $696,000 and $2.2 million in the three
months ended March 31, 2002 and 2001, respectively, and includes amortization
of goodwill and identified intangible assets related to past acquisitions. 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. Stock-based compensation charges were lower as a
result of previous reductions in force. These reductions have resulted in
significant reversals of previously recorded deferred stock compensation
associated with the terminated employees. 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. Additionally, as a result of
stock option cancellations, we recorded a stock-based compensation credit of
$835,000 in the first quarter of 2002. The remaining charge was due to normal,
recurring amortization totaling $179,000.

Special Charges.We have recorded Special Charges in each of the six
quarters ended March 31, 2002 related to ongoing corporate restructuring,
facilities consolidations and the impairment of assets in accordance with our
long-lived asset policy (see Note 2). The following table summarizes such
charges recorded in the three-month periods ended March 31, 2002 and 2001:

|                                                                          |  |                    |     |      |  |   |        | 
|------------------------------------------------------------------------- |  | ------------------ | --- | ---- |  | - | ------ | 
|                                                                          |  | Three Months Ended
|                                                                          |  | March 31,         
|                                                                          |  |                   
|                                                                          |  | 2002               |     | 2001
|                                                                          |  |                    |     |     
|                                                                          |  | (in thousands)    
|Impairment of goodwill associated with the acquisition of Alive.com       |  | $                  |    |      |  | $ | 10,612 | 
|Impairment of property and equipment related to video encoding
operations |  |                    |    |      |  |   | 1,272  | 
|Impairment of deferred charge related to terminated customer agreement    |  |                    |    |      |  |   | 781    | 
|Employee severance                                                        |  |                    | 748 |      |  |   | 682    | 
|Other                                                                     |  |                    |    |      |  |   | 677    | 
|Impairment of duplicative music sampling platform                         |  |                    |    |      |  |   | 599    | 
|                                                                          |  |                    |     |      |  |   |        | 
|                                                                          |  | $                  | 748 |      |  | $ | 14,623 | 
|                                                                          |  |                    |     |      |  |   |        | 

Quarter ended March 31, 2002

We recorded special charges in the quarter ended March 31, 2002 associated with
a reduction in force announced March 8, 2002 of approximately 12% of
consolidated staffing. The special charge of $748,000 was for severance and
related termination benefits incurred during the quarter. We do not anticipate
future special charges at this time.

Quarter ended March 31, 2001

We recorded special charges in the quarter ended March 31, 2001 totaling $14.6
million related to the market trends at the time. We had experienced decreasing
demand for our video services. Accordingly, our board of directors approved a
plan to close our Santa Monica facility and reduce video production capacity in
Seattle, which resulted in the impairment of our video encoding equipment as
well as existing tenant improvements at our Santa Monica facility that was
closed in the first quarter of 2001. Management decided in the first quarter of
2001 to focus primarily upon audio or music related sources of revenues as that
area appeared to be more fully developed. As a result of this decision, we no
longer provides and supports certain products, and therefore, related assets
became impaired. In accordance with our accounting policy for long-lived
assets, we adjusted certain property, equipment and intangibles to estimated
fair market value as of March 31, 2001.

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We determined that due to the acquisition of DiscoverMusic, the previously
capitalized software costs associated with our separately developed music
samples platform were redundant and not recoverable. Accordingly, since the
code base developed by us will not be sold or otherwise used, it was determined
to have no further value and the remaining unamortized cost, approximately
$600,000, was adjusted to zero.

We also decided to cease supporting certain digital media technology platforms
in conjunction with the overall efforts to focus on the music related business
opportunities. The goodwill previously recognized associated with the Alive.com
acquisition became impaired as a result of the refocused business. Accordingly,
we determined that an impairment analysis was necessary for these assets. As
each of these assets had no determinable cash flows associated with them, they
were deemed fully impaired and remaining unamortized balances totaling $10.9
million, were written off.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $333,000 and $1.3 million in the
three months ended March 31, 2002 and 2001, respectively. The decreased income
was due primarily to the lower average cash and investment balances in 2002 as
well as the lower interest rates. We expect that our interest income will
decrease in the future as our cash balances are used to fund our operating,
investing and financing activities.

Interest Expense.Interest expense consists of interest expense related to
our debt instruments as well as amortization of financing charges related to
our debt instruments. This totaled $217,000 and $342,000 in the three months
ended March 31, 2002 and 2001, respectively. The decrease was due primarily to
lower interest rates partially offset by higher borrowed balances.

Liquidity and Capital Resources

As of March 31, 2002, we had approximately $52.3 million of cash, cash
equivalents and short-term investments. A portion of these funds is held in an
investment account that serves as collateral for the credit facility. Pursuant
to the terms of that facility, we are required to keep at least $30.0 million
in that investment account.

Net cash used in operating activities was $7.2 million and $4.7 million in the
quarters ended March 31, 2002 and 2001, respectively. For 2002, cash used in
operating activities resulted primarily from a net loss of $7.6 million,
working capital and other changes totaling $85,000, partially offset by
non-cash charges totaling $1.1 million related to stock-based compensation,
depreciation and amortization and other. Additional uses of cash related to the
approximately $1.0 million in severance related payments and approximately
$524,000 in rent and other payments for previously accrued special charges. For
2001, cash used in operating activities resulted primarily from a net loss of
$26.2 million, a decrease of approximately $2.1 million in accounts receivable
and an increase in accrued compensation, benefits and other expenses of $1.3
million, partially offset by non-cash charges totaling $18.7 million related to
stock-based compensation, depreciation and amortization, and the non-cash
component of the special charges.

Net cash used in investing activities was $887,000 in the quarter ended March
31, 2002, and net cash provided of $326,000 in the quarter ended March 31,
2001. For 2002, cash used in investing activities was primarily related to
purchases of property and equipment including tenant improvements at the
Activate offices prior to facilities consolidation. 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 and technology of
OnAir in March 2001.

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Net cash provided by financing activities was $576,000 and $1.1 million in the
quarters ended March 31, 2002 and 2001, respectively. The cash used in
financing activities in 2002 primarily resulted from $232,000 in principal
payments of our long-term debt as well as $350,000 of additional funding of a
secured related party loan. In 2001, financing activities consisted primarily
of $1.3 million in long-term debt principal payments.

As of March 31, 2002, our principal commitments consisted of obligations
outstanding under operating leases, capital leases and credit facilities with
our bank. On August 22, 2001, we entered into a credit agreement with a bank
providing for a revolving credit facility and letters of credit aggregating up
to $15.0 million to be used for working capital and general corporate needs,
and to refinance existing long-term debt. On October 25, 2001, the Credit
Agreement was amended to increase the principal sum to $19.0 million.
Obligations under the Credit Agreement are collateralized by a security
interest in an investment account that must hold short-term investments and
cash equivalents with a value of at least $30.0 million. The revolving facility
requires monthly payments of interest only until maturity on July 31, 2003. On
July 31, 2002, we have an option to extend the maturity date to July 31, 2004,
provided that we are not in default at that time. At March 31, 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 2.91% at
March 31, 2002. The interest rates will be adjusted after each 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 $2.0 million as of March 31, 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.

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 or
borrow it on acceptable terms, or at all.

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



| |  |  | Capital expenditures, excluding acquisitions, are expected to total
approximately $1.0 million in the remainder of calendar year 2002.                                                                                                                                                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Acquisition consideration resulting from the Activate.net
acquisition in September 2001, totaling $3.0 million is due in
September 2002. This can be settled in a combination of stock and cash.
If certain events occur, such as our common stock not being listed on
the Nasdaq National Market, we may be required to pay $1.5 million of
this consideration in cash.
|
| |  |  | Additional commitments are outstanding under the existing
facilities leases that have previously been expensed by us in the
special charges. We expect to pay approximately $1.3 million in rental
charges during the remainder of 2002 for the facilities that we no
longer occupy.                                                                                    
|
| |  |  | Under our secured loan agreement with Martin Tobias, we made
advances of $350,000 in loans in March 2002, $400,000 in April 2002,
and may extend up to an additional $250,000 in 2002.                                                                                                                                                                                  

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CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangible Assets, (FAS 142) which stipulates that goodwill can no
longer be amortized. FAS 142 also establishes a new method of testing goodwill
for impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce the fair value of a reporting unit below
its carrying value. The initial phase of the impairment test is required to be
completed by June 30, 2002, and if the fair value of the reporting unit is less
than its carrying value, the second phase to determine the amount of the
impairment is to be completed by December 31, 2002. Management is in the
process of completing the goodwill impairment testing required by this
standard. Management expects the impairment test to be completed within the
timeframe stipulated by the pronouncement. At January 1, 2002, the Company had
net goodwill of $1.3 million. The implementation of FAS 142 decreased
amortization expense by approximately $459,000 in the three months ended March
31, 2002.

In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective for the Company on
January 1, 2002. This Statement supersedes FASB Statement

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No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of and other related accounting guidance. This had no
impact on our financial statements.

RISK FACTORS

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

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

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

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



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

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

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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 March 31, 2002, we had approximately $52.3 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 through 2002.
Thereafter, we may need to raise additional funds. We may have to raise funds
even sooner in order to fund more rapid expansion, to develop new or enhanced
services or products, to respond to competitive pressures, to acquire
complementary products, businesses or technologies or otherwise to respond to
unanticipated requirements. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our current stockholders will be reduced and these securities may have rights
and preferences superior to that of our current stockholders. If we raise
capital through debt financing, we may be forced to accept restrictions
affecting our liquidity, including restrictions on our ability to incur
additional indebtedness or pay dividends. We cannot assure you that additional
financing will be available on favorable terms or at all. If adequate funds
are not available or are not available on acceptable terms, we may not be able
to pursue our business objectives. This inability could seriously harm our
business, results of operations and financial condition.

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

We have incurred quarterly net losses totaling $136.0 million from August 12,
1997 (inception) through March 31, 2002, and we expect to continue to incur net
losses for the foreseeable future. As of March 31, 2002, we had an accumulated
deficit of $150.2 million. We may increase our operating expenses and capital
expenditures in the future as we attempt to expand our Webcasting services,
digital media service and application offerings, enter into licensing
agreements with copyright holders, grow our customer base, enhance our brand
image and improve our technology infrastructure. This would likely increase
our quarterly net losses and negative cash flows.

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



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

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

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Even if we ultimately do achieve profitability, we may not be able to sustain
or increase profitability on a quarterly or annual basis.

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

The trading price of our common stock has been and is likely to continue to be
highly volatile. For example, during the 52-week period ended April 30, 2002,
the price of our common stock ranged from $0.32 to $1.97 per share. Our stock
price could be subject to wide fluctuations in response a variety of factors,
including, but not limited to, to actual or anticipated variations in quarterly
operating results, competitors announcements, changes in recommendations by
securities analysts, and conditions in the digital media services markets.

Our stock price has traded below $1.00 per share for over 30 consecutive
trading days and on April 2, 2002 we received notice from Nasdaq that we need
to comply with the $1.00 minimum bid requirement for continued listing on the
Nasdaq National Market for 10 consecutive trading days by July 1, 2002 or be
moved to, and traded on, the Nasdaq SmallCap Market. We believe the Company
currently meets all listing requirements of the Nasdaq National Market, except
the $1.00 minimum bid price. If our stock listing is transitioned to the Nasdaq
SmallCap Market, we would have up to 360 days from April 2, 2002 to trade above
$1.00 per share for 30 consecutive trading days. If we fail to do that, we
would be delisted from Nasdaq and would most likely be quoted on the OTC
Bulletin Board. If our stock is removed from the Nasdaq National Market or the
Nasdaq SmallCap Market, an investor could find it more difficult to dispose of,
or to obtain accurate quotations as to the market value of, our common stock.
Additionally, our stock may be subject to penny stock regulations.

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

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

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

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

Acquisitions require integrating the business, personnel, technology and
products of the acquired entity and may result in unforeseen operating
difficulties and expenditures. In addition, acquisitions may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we cannot assure you that the
anticipated benefits of any acquisition will be realized. Acquisitions could
result in potentially dilutive issuances of equity securities, the incurrence
of debt, the assumption of known and unknown liabilities associated with the
acquired business, or amortization

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expenses related to intangible assets and the incurrence of large and immediate
write-offs, any of which could seriously harm our business, results of
operations and financial condition.

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

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

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

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

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

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

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

A limited number of customers have accounted for a significant portion of our
revenues and may continue to do so for the foreseeable future. During the
quarter ended March 31, 2002, one of our customers accounted for 12% of our
revenues and during the quarter ended March 31, 2001, two of our customers
accounted for approximately 40% of our revenues. We believe that a small
number of customers may continue to account for a significant percentage of our
revenues for the foreseeable future. Due to high revenue concentration among a
limited number of customers, the cancellation, reduction or delay of a large
customer order or our failure to timely complete or deliver a project during a
given quarter is likely to significantly reduce revenues. In addition, if any
significant customer fails to pay amounts it owes us, or

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does not pay those amounts on time, our revenues and operating results could
suffer. If we are unsuccessful in increasing and broadening our customer base,
our business could be harmed.

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

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

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

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



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

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

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

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

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

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

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

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

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

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

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

Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies and
content providers. We rely on these relationships for licensed technology and
content. We also rely on relationships with major recording labels for our
music content licensing strategy. Obtaining

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comprehensive music content licenses is challenging, as doing so may require us
to obtain copyright licenses with various third parties in the fragmented music
recording and publishing industries. These copyrights often address differing
activities related to the delivery of digital media, including reproduction and
performance, some of which may require separate licensing arrangements from
various rights holders such as publishers, artists and record labels. The
effort to obtain the necessary rights by such third parties is often
significant, and could disrupt, delay, or prevent us from executing our
business plans. Because of the large number of potential parties from which we
must obtain licenses, we may never be able to obtain a sufficient number of
licenses to allow us to provide services that will meet our customers
expectations.

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

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

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

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

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



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

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

Enterprise Webcasting Competition. Our primary competitors are content
distribution networks, such as Akamai and iBEAM, and Internet broadcasters,
such as Yahoo!Broadcast. Each of these companies provide services similar to
ours and each has a well-established market presence. We also compete with
providers of traditional communications technologies, such as teleconferencing
and videoconferencing, as

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well as applications software and tools companies, such as Centra Software,
Evoke Communications, Lotus (SameTime), Microsoft (NetMeeting) and Placeware.
There are also smaller competitors that focus on certain of our individual
market segments, such as investor relations webcasts.

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

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

Our industry is experiencing consolidation that may intensify competition

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



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

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

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

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



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

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

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

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



| |  |  | Damage our reputation;                                             
| | - |  | -------------------------------------------------------------------
|
| |  |  | Cause our customers to initiate product liability suits against us;
|
| |  |  | Increase our product development resources;                        
|
| |  |  | Cause us to lose sales; and                                        

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| |  |  | Delay market acceptance of our digital media services and applications.
| | - |  | -----------------------------------------------------------------------

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

Our 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.

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

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

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

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

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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
4.0 million shares of our Common Stock that he owns. See Notes
to Consolidated Financial Statements and our Report on Form 8-K as filed with
the Securities and Exchange Commission on October 30, 2001 for a more complete
description of the proxy. As a result, these stockholders, acting together,
have the ability to substantially influence all matters submitted to our
stockholders for approval, including:



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

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

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

Government regulation could adversely affect our business prospects

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



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

Specifically with respect to one aspect of copyright law, on October 28, 1998,
the Digital Millennium Copyright Act (or DMCA) was enacted. The DMCA
includes statutory licenses for the performance of sound recordings and for the
making of recordings to facilitate transmissions. Under these statutory
licenses, depending on our future business activities, we and our customers may
be required to pay licensing fees in connection with digital sound recordings
we deliver or our customers provide on their web

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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

In connection with the acquisition of DiscoverMusic, Loudeye assumed certain
liabilities, including a patent infringement law suit filed on March 31, 2000,
as amended April 26, 2000, by InTouch, a California corporation, against
Amazon.com Inc., a Delaware corporation, Liquid Audio, Inc., a Delaware
corporation, Listen.com, Inc., a California corporation, Entertaindom LLC, a
Delaware limited liability company, Muze, Inc., a New York corporation, and
DiscoverMusic.com, Inc., a California corporation. On February 6, 2002, the
Company executed an agreement with Intouch to settle all disputes. The
settlement amount was immaterial to the financial statements presented herein.
Pursuant to this agreement, Intouch released all claims against Loudeye
Technologies, Loudeye Sample Services, Inc., and DiscoverMusic.com, and granted
a license under Intouchs patents that extends to all customers of Loudeyes
sample services customers to the extent that the customers are operating in
connection with Loudeye. Through their attorneys, Loudeye and Intouch have
stipulated to a dismissal of their claims in the action.




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)  Recent Sales of Unregistered Securities



| |  |  | None
| |  |  | ----




ITEM 3: DEFAULTS UPON SENIOR SECURITIES



| |  |  | None
| |  |  | ----




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



| |  |  | None
| |  |  | ----




ITEM 5: OTHER INFORMATION



| |  |  | None
| |  |  | ----




ITEM 6: EXHIBITS AND REPORTS ON FORM 10-Q

(a)  Exhibits.

None

(b)  Reports on Form 8-K

None

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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 May 7, 2002.

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



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

35