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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2001
 or

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

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

Loudeye Technologies, Inc.(Exact name of registrant as specified in its charter)

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

|                                                            |  |           
|----------------------------------------------------------- |  | ----------
|Times Square Building 414 Olive Way, Suite 500, Seattle, WA |  | 98101     
|(Address of principal executive offices)                    |  | (Zip Code)

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

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

Yes [X] No [   ]

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

|        |  |                                  
|------- |  | ---------------------------------
|Common  |  | 40,470,486                       
|        |  |                                  
|(Class) |  | (Outstanding at November 1, 2001)



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TABLE OF CONTENTS



|                               |                                                                                               |                                                      |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION
|                               | ITEM I  FINANCIAL STATEMENTS                                                                
|                               |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                               |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                               |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                               | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION    
|                               | ITEM 1: LEGAL PROCEEDINGS                                                                    
|                               | ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                               | ITEM 3: DEFAULTS UPON SENIOR SECURITIES                                                      
|                               | ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS                             
|                               | ITEM 5: OTHER INFORMATION                                                                    
|                               | ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|EXHIBIT 10.36                 
|EXHIBIT 10.37                 



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##### Table of Contents



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

|           |                                                                                                                 |    |    |  | 
|---------- | --------------------------------------------------------------------------------------------------------------- | -- | -- |  | 
|           | Page                                                                                                           
|           | Number                                                                                                         
|           |                                                                                                                
|PART I     | FINANCIAL INFORMATION                                                                                           |   
|Item 1     | Financial Statements                                                                                            |    | 1 
|          
|           | Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                            |    | 1  | 
|          
|           | Condensed Consolidated Statements of Operations for the three and
nine months ended
September 30, 2001 and 2000 |    | 2  | 
|          
|           | Condensed Consolidated Statements of Cash Flows for the nine months ended September
30, 2001 and 2000           |    | 3  | 
|          
|           | Notes to Unaudited Condensed Consolidated Financial Statements                                                  |    | 4  | 
|          
|Item 2     | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |    | 12 | 
|          
|Item 3     | Quantitative and Qualitative Disclosures About Market Risk                                                      |    | 29 | 
|          
|PART II.   | OTHER INFORMATION                                                                                               |   
|Item 1     | Legal Proceedings                                                                                               |    | 30 | 
|Item 2     | Changes in Securities and Use of Proceeds                                                                       |    | 30 | 
|Item 3     | Defaults Upon Senior Securities                                                                                 |    | 30 | 
|Item 4     | Submission of Matters to a Vote of Security Holders                                                             |    | 30 | 
|Item 5     | Other Information                                                                                               |    | 31 | 
|Item 6     | Exhibits and Reports on Form 8-K                                                                                |    | 32 | 
|          
|SIGNATURES |                                                                                                                 | 32 |   



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##### Table of Contents






PART I  FINANCIAL INFORMATION




ITEM I  FINANCIAL STATEMENTS




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

|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |         |         | 
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- | ------------ | ----- | ------- | ------- | 
|                                                                     |                                                                                                                                                          |                                            |        | September 30, |         | December 31,
|                                                                     |                                                                                                                                                          |                                            |        | 2001          |         | 2000        
|                                                                     |                                                                                                                                                          |                                            |        |               |         |             
|                                                                     |                                                                                                                                                          |                                            |        | (Unaudited)   |         |              |       |        
|ASSETS                                                               |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                    
|Current assets:                                                      |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     | Cash and cash equivalents                                                                                                                                |                                            | $      | 61,866        |         |              | $     | 51,689  |        
|                                                                     | Short-term investments                                                                                                                                   |                                            |        | 6,783         |         |              |       | 43,300  |        
|                                                                     | Accounts receivable, net of allowance of $722 and $709, respectively                                                                                     |                                            |        | 2,867         |         |              |       | 3,241   |        
|                                                                     | Prepaid and other current assets                                                                                                                         |                                            |        | 2,618         |         |              |       | 1,072   |        
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total current assets                       |        |               | 74,134  |              |       |         | 99,302  | 
|                                                                     | Property and equipment, net                                                                                                                              |                                            |        | 12,036        |         |              |       | 15,955  |        
|                                                                     | Goodwill, net                                                                                                                                            |                                            |        | 3,080         |         |              |       | 9,785   |        
|                                                                     | Intangibles and other long-term assets, net                                                                                                              |                                            |        | 16,633        |         |              |       | 7,634   |        
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total assets                               |        | $             | 105,883 |              |       | $       | 132,676 | 
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                 |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                    
|Current liabilities:                                                 |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     | Accounts payable                                                                                                                                         |                                            | $      | 1,730         |         |              | $     | 1,137   |        
|                                                                     | Accrued compensation and benefits                                                                                                                        |                                            |        | 2,058         |         |              |       | 1,554   |        
|                                                                     | Other accrued expenses                                                                                                                                   |                                            |        | 3,377         |         |              |       | 1,368   |        
|                                                                     | Deposits and deferred revenues                                                                                                                           |                                            |        | 425           |         |              |       | 800     |        
|                                                                     | Current portion of long-term debt and capital lease obligations                                                                                          |                                            |        | 1,429         |         |              |       | 4,425   |        
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total current liabilities                  |        |               | 9,019   |              |       |         | 9,284   | 
|Long-term debt and capital lease obligations, net of current portion |                                                                                                                                                          |                                            | 15,765 |               |         |              | 7,324 |        
|Accrued acquisition consideration                                    |                                                                                                                                                          |                                            | 3,000  |               |         |              |      |        
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total liabilities                          |        |               | 27,784  |              |       |         | 16,608  | 
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|Stockholders equity (deficit):                                      |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     | Common stock, additional paid-in capital and warrants, $0.001
par value, 100,000,000 shares authorized; 44,397,788 and
37,072,442 issued and outstanding |                                            |        | 194,585       |         |              |       | 185,609 |        
|                                                                     | Deferred stock compensation                                                                                                                              |                                            |        | (1,142        | )       |              |       | (3,387  | )      
|                                                                     | Accumulated deficit                                                                                                                                      |                                            |        | (115,344      | )       |              |       | (66,154 | )      
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total stockholders equity                 |        |               | 78,099  |              |       |         | 116,068 | 
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        
|                                                                     |                                                                                                                                                          | Total liabilities and stockholders equity |        | $             | 105,883 |              |       | $       | 132,676 | 
|                                                                     |                                                                                                                                                          |                                            |        |               |         |              |       |        

The accompanying notes are an integral part of these balance sheets.



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

|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |        |       |  
|-------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------- | ---------- | ------------------ | ----- | ----------------- | ---------- | ----- | ----- | ---- | ---------- | ----- | ------ | - | ---------- | ------ | ----- | -
|                                                                                                   |                                              |                        |            | Three Months Ended |       | Nine Months Ended
|                                                                                                   |                                              |                        |            | September 30,      |       | September 30,    
|                                                                                                   |                                              |                        |            |                    |       |                  
|                                                                                                   |                                              |                        |            | 2001               |       | 2000              |            | 2001  |       | 2000
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |     
|Revenues:                                                                                          |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   | Digital media services                       |                        | $          | 1,588              |       |                   | $          | 3,037 |       |      | $          | 4,964 |        |   | $          | 6,987  |      
|                                                                                                   | Digital media applications and other         |                        |            | 910                |       |                   |            | 381   |       |      |            | 2,139 |        |   |            | 632    |      
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   |                                              | Total revenues         |            |                    | 2,498 |                   |            |       | 3,418 |      |            |       | 7,103  |   |            |        | 7,619 |  
|Cost of revenues:                                                                                  |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   | Digital media services                       |                        |            | 2,159              |       |                   |            | 3,320 |       |      |            | 7,251 |        |   |            | 8,453  |      
|                                                                                                   | Digital media applications and other         |                        |            | 579                |       |                   |            | 76    |       |      |            | 1,297 |        |   |            | 160    |      
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   |                                              | Total cost of revenues |            |                    | 2,738 |                   |            |       | 3,396 |      |            |       | 8,548  |   |            |        | 8,613 |  
|                                                                                                   |                                              | Gross margin           |            |                    | (240  | )                 |            |       | 22    |      |            |       | (1,445 | ) |            |        | (994  | )
|Operating expenses:                                                                                |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   | Research and development                     |                        |            | 2,459              |       |                   |            | 1,816 |       |      |            | 7,868 |        |   |            | 4,909  |      
|                                                                                                   | Sales and marketing                          |                        |            | 2,001              |       |                   |            | 3,920 |       |      |            | 7,341 |        |   |            | 10,924 |      
|                                                                                                   | General and administrative                   |                        |            | 2,508              |       |                   |            | 2,016 |       |      |            | 7,710 |        |   |            | 5,548  |      
|                                                                                                   | Amortization of intangibles and other assets |                        |            | 2,131              |       |                   |            | 2,051 |       |      |            | 5,941 |        |   |            | 5,580  |      
|                                                                                                   | Stock-based compensation                     |                        |            | 313                |       |                   |            | 1,035 |       |      |            | 211   |        |   |            | 4,402  |      
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   |                                              |                        | 9,412      |                    |       |                   | 10,838     |       |       |      | 29,071     |       |        |   | 31,363     |       
|Special charges                                                                                    |                                              |                        | 2,721      |                    |       |                   |           |       |       |      | 20,462     |       |        |   |           |       
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Operating loss                                                                                     |                                              |                        | (12,373    | )                  |       |                   | (10,816    | )     |       |      | (50,978    | )     |        |   | (32,357    | )     
|Interest income                                                                                    |                                              |                        | 631        |                    |       |                   | 1,659      |       |       |      | 2,731      |       |        |   | 4,075      |       
|Interest expense                                                                                   |                                              |                        | (267       | )                  |       |                   | (298       | )     |       |      | (943       | )     |        |   | (574       | )     
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|                                                                                                   |                                              |                        | 364        |                    |       |                   | 1,361      |       |       |      | 1,788      |       |        |   | 3,501      |       
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Net loss                                                                                           |                                              | $                      | (12,009    | )                  |       | $                 | (9,455     | )     |       | $    | (49,190    | )     |        | $ | (28,856    | )     
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Basic and diluted net loss per share                                                               |                                              | $                      | (0.27      | )                  |       | $                 | (0.27      | )     |       | $    | (1.19      | )     |        | $ | (1.05      | )     
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Weighted average shares outstanding used to compute
basic and diluted net loss per share           |                                              |                        | 44,280,456 |                    |       |                   | 35,570,456 |       |       |      | 41,361,885 |       |        |   | 27,565,273 |       
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Basic and diluted pro forma net loss per share                                                     |                                              |                        |            |                    |       |                   |            |       |       | $    | (1.19      | )     |        | $ | (0.87      | )     
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       
|Weighted average shares outstanding used to compute
basic and diluted pro forma net loss per share |                                              |                        |            |                    |       |                   |            |       |       |      | 41,361,885 |       |        |   | 33,338,160 |       
|                                                                                                   |                                              |                        |            |                    |       |                   |            |       |       |      |            |       |        |   |            |       

The accompanying notes are an integral part of these statements.



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LOUDEYE TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)

|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |         |        |         |  
|------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------- | ----------------- | ------- | ------ | ------- | ------ | ------- | -
|                                                                    |                                                                                              |                                                   |                                                     |         | Nine Months Ended
|                                                                    |                                                                                              |                                                   |                                                     |         | September 30,    
|                                                                    |                                                                                              |                                                   |                                                     |         |                  
|                                                                    |                                                                                              |                                                   |                                                     |         | 2001              |         | 2000  
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |       
|Cash flows from operating activities:                               |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    | Net loss                                                                                     |                                                   | $                                                   | (49,190 | )                 |         | $      | (28,856 | )     
|                                                                    | Adjustments to reconcile net loss to net cash used in operating activities:                  |                                                   |                                                     |         |                   |         |        |         |       
|                                                                    |                                                                                              | Depreciation and amortization                     |                                                     |         | 11,396            |         |        |         | 8,590  |        
|                                                                    |                                                                                              | Special charges and other                         |                                                     |         | 16,160            |         |        |         | 24     |        
|                                                                    |                                                                                              | Stock-based compensation                          |                                                     |         | 211               |         |        |         | 4,402  |        
|                                                                    | Changes in operating assets and liabilities, net
of amounts acquired in purchase of business
|                                                                    |                                                                                              | Accounts receivable                               |                                                     |         | 2,235             |         |        |         | (1,939 | )      
|                                                                    |                                                                                              | Prepaid expenses and other assets                 |                                                     |         | (453              | )       |        |         | (539   | )      
|                                                                    |                                                                                              | Accounts payable                                  |                                                     |         | (345              | )       |        |         | (4,332 | )      
|                                                                    |                                                                                              | Accrued compensation, benefits and other expenses |                                                     |         | 1,808             |         |        |         | 1,070  |        
|                                                                    |                                                                                              | Deposits and deferred revenue                     |                                                     |         | (375              | )       |        |         |       |        
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    |                                                                                              |                                                   | Net cash used in operating activities               |         |                   | (18,553 | )      |         |        | (21,580 | )
|Cash flows from investing activities:                               |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    | Purchases of property and equipment, net of amounts acquired                                 |                                                   |                                                     | (2,264  | )                 |         |        | (14,820 | )     
|                                                                    | Cash paid for acquisition of business and technology, net                                    |                                                   |                                                     | (9,580  | )                 |         |        | (1,907  | )     
|                                                                    | Cash
placed into escrow related to acquisitions of  business                                 |                                                   |                                                     |        |                   |         |        |        |       
|                                                                    | Sales (purchases) of short-term investments, net                                             |                                                   |                                                     | 36,688  |                   |         |        | (370    | )     
|                                                                    | Capitalized software development costs                                                       |                                                   |                                                     |        |                   |         |        | (883    | )     
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    |                                                                                              |                                                   | Net cash provided by (used in) investing activities |         |                   | 24,844  |        |         |        | (17,980 | )
|Cash flows from financing activities:                               |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    | Proceeds from sale of stock and exercise of stock options, net                               |                                                   |                                                     | 137     |                   |         |        | 80,836  |       
|                                                                    | Proceeds from long-term debt and capital lease obligations                                   |                                                   |                                                     | 15,163  |                   |         |        | 9,279   |       
|                                                                    | Principal payments on long-term debt and capital lease obligations                           |                                                   |                                                     | (11,414 | )                 |         |        | (1,333  | )     
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    |                                                                                              |                                                   | Net cash provided by financing activities           |         |                   | 3,886   |        |         |        | 88,782  |  
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|                                                                    |                                                                                              |                                                   | Net increase in cash and cash equivalents           |         |                   | 10,177  |        |         |        | 49,222  |  
|Cash and cash equivalents, beginning of period                      |                                                                                              |                                                   | 51,689                                              |         |                   |         | 49,273 |        
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|Cash and cash equivalents, end of period                            |                                                                                              | $                                                 | 61,866                                              |         |                   | $       | 98,495 |        
|                                                                    |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|Supplemental disclosure of cash flow information:                   |                                                                                              |                                                   |                                                     |         |                   |         |        |        
|Cash paid for interest                                              |                                                                                              | $                                                 | 718                                                 |         |                   | $       | 402    |        
|Issuance of common stock for acquisition of business and technology |                                                                                              |                                                   | 10,756                                              |         |                   |         | 1,105  |        

The accompanying notes are an integral part of these statements.



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

1. ORGANIZATION AND DEVELOPMENT STAGE RISKS

The Company

Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services, live and on-demand enterprise webcasting services,
digital media applications and audio and video content restoration services.
The Company is headquartered in Seattle, Washington and to-date has conducted
business in the United States and Europe in one business segment.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Data

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

Cash and Cash Equivalents

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

Short-term Investments

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

As described further
in Note 8, at least $25 million of short-term investments and cash
equivalents are utilized as collateral for the company's credit
facility.  Additionally, the Company has approximately $670,000 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 is less than the
carrying amount of the asset. As described in Note 4, the Company recorded
impairment charges of $2.0 million related to long-lived assets in the quarter
ended September 30, 2001.

Software Development Costs



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

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

As of September 30, 2001, the Company has approximately $432,000 of
remaining capitalized software development costs, of which approximately
$150,000 has been amortized. The Company performs ongoing analysis of these
assets and believes them to be fully realizable.

Reclassifications

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

3. REVENUE RECOGNITION

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

Digital media services

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

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

Enterprise webcasting services are provided through the Companys
subsidiary, Activate. Customer arrangements are generally for a quantity of
services over a specified time frame (generally one year) or for specific
events. Revenues are recognized when collectibility is probable and all
services have been provided.

Digital media applications and other

Digital Media Applications and other revenues are generated from our music
samples service business and in the prior year from licensing and selling of
software and through application service provider arrangements. The Company
sells digital media applications in application service provider arrangements.
The Company is required to host the applications and the customer does not have
the ability to have the application hosted by another entity without penalty to
the customer. Billings are made based upon minutes of content streamed, and
revenue is recognized as the services are delivered.

4. SPECIAL CHARGES

As described further in Note 7, the Company closed the acquisition of
Activate.net, a Seattle-based company which provides live and on-demand
enterprise webcasting services. Concurrent with the closing of this acquisition
the Company developed a facilities consolidation plan as well as a plan to
eliminate redundant personnel and equipment. In addition, the Company continued
its previously announced cost-savings initiatives. These combined activities
resulted in a special charge of $2.7 million in the third quarter of 2001.

The Companys Board of Directors formally approved the facilities
consolidation plan which, when implemented in the fourth quarter of 2001 and
first quarter of 2002, will result in all Seattle-based operations moving to
Activates facilities in



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Seattle. The facility consolidation resulted in an
impairment charge of $2.0 million, primarily related to tenant improvement
write-offs for facilities to be closed in the fourth quarter and redundant
equipment. In addition, other closure costs of approximately $522,000 are
expected to be incurred. The remaining portion of the special charge is cash
severance charges related to employees terminated in September.

The Companys special charge accrual activity was as follows for the
quarter ended September 30, 2001:

|                    |  |               |     |          |  |          |      |                |  |   |     |         |  |   |       | 
|------------------- |  | ------------- | --- | -------- |  | -------- | ---- | -------------- |  | - | --- | ------- |  | - | ----- | 
|                    |  | Balance       |     |          |  |          |      |                |  |   |     | Balance
|(in thousands)      |  | June 30, 2001 |     | Payments |  | Accruals |      | Sept. 30, 2001
|                    |  |               |     |          |  |          |      |               
|Facilities charges  |  | $             | 661 |          |  | $        | (132 | )              |  | $ | 522 |         |  | $ | 1,051 | 
|Severance and other |  |               | 203 |          |  |          | (88  | )              |  |   | 11  |         |  |   | 126   | 
|                    |  |               |     |          |  |          |      |                |  |   |     |         |  |   |       | 
|                    |  | $             | 864 |          |  | $        | (220 | )              |  | $ | 533 |         |  | $ | 1,177 | 
|                    |  |               |     |          |  |          |      |                |  |   |     |         |  |   |       | 

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

5. NET LOSS PER SHARE

In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, Earnings Per Share, basic earnings per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing net loss
by the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of shares of
common stock issuable upon the conversion of the convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method); common equivalent
shares are excluded from the calculation if their effect is antidilutive.
Diluted net loss per share for all periods shown does not include the effects
of the convertible preferred stock and shares issuable upon the exercise of
stock options and warrants as the effect of their inclusion is antidilutive
during each period presented.

Basic and diluted pro forma net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock into common stock upon the
completion of the Companys initial public offering on March 15, 2000 (using
the if-converted method from the original issue date) as if the conversion and
IPO had occurred on January 1, 2000. Diluted pro forma net loss per share
excludes the impact of stock options and warrants, as the effect of their
inclusion would be antidilutive. As of September 30, 2001, the Company had
8,263,548 options outstanding which have been excluded for calculation of
earnings per share as their inclusion would be antidilutive.

At September 30, 2001, the Company had 106,327 stock options that had been
exercised but which were subject to repurchase at a weighted average exercise
price of $0.30 per share. Accordingly, the impact of these unvested but
exercised options has been removed from the calculation of weighted average
shares outstanding for purposes of determining net loss per share.

The following table presents shares used to calculate earnings per share:

|                                                                               |  |                                      |            |      |  |  |            |  
|------------------------------------------------------------------------------ |  | ------------------------------------ | ---------- | ---- |  |  | ---------- | -
|                                                                               |  | For
the Three Months Ended Sept. 30,
|                                                                               |  |                                     
|                                                                               |  | 2001                                 |            | 2000
|                                                                               |  |                                      |            |     
|Weighted average shares outstanding                                            |  |                                      | 44,394,975 |      |  |  | 36,927,215 |  
|Weighting of shares subject to repurchase                                      |  |                                      | (114,519   | )    |  |  | (1,356,759 | )
|                                                                               |  |                                      |            |      |  |  |            |  
|Weighted average shares used to
calculate basic and diluted earnings per
share |  |                                      | 44,280,456 |      |  |  | 35,570,456 |  
|                                                                               |  |                                      |            |      |  |  |            |  

|                                                                               |  |                                     |            |        |  |           |            |   |  |  |            |  
|------------------------------------------------------------------------------ |  | ----------------------------------- | ---------- | ------ |  | --------- | ---------- | - |  |  | ---------- | -
|                                                                               |  | For the Nine Months Ended Sept. 30,
|                                                                               |  |                                    
|                                                                               |  | 2001                                |            | 2000  
|                                                                               |  |                                     |            |       
|                                                                               |  | Actual                              |            | Actual |  | Pro Forma
|                                                                               |  |                                     |            |        |  |          
|Weighted average shares outstanding                                            |  |                                     | 41,565,429 |        |  |           | 29,093,959 |   |  |  | 34,866,846 |  
|Weighting of shares subject to repurchase                                      |  |                                     | (203,544   | )      |  |           | (1,528,686 | ) |  |  | (1,528,686 | )
|                                                                               |  |                                     |            |        |  |           |            |   |  |  |            |  
|Weighted average shares used to
calculate basic and diluted earnings
per share |  |                                     | 41,361,885 |        |  |           | 27,565,273 |   |  |  | 33,338,160 |  
|                                                                               |  |                                     |            |        |  |           |            |   |  |  |            |  



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6. CONCENTRATION OF RISK AND SEGMENT DISCLOSURES

Financial instruments that potentially subject the Company to
concentrations of market risk consist of cash and cash equivalents, short-term
investments, and long-term obligations. Fair values of cash and cash
equivalents and short-term investments approximate cost due to the short period
of time to maturity. The fair values of financial instruments that are
short-term or that have little or no market risk are considered to have a fair
value equal to book value. The Company maintains cash and cash equivalents on
deposit at various institutions that at times exceed the insured limits by the
Federal Deposit Insurance Corporation. This exposes the Company to potential
risk of loss in the event the institutions become insolvent.

The Company is exposed to credit risk since it extends credit to its
customers. The Company performs initial and ongoing evaluations of its
customers financial positions, and generally extends credit on open account,
requiring collateral as deemed necessary. As of September 30, 2001, one of the
companys customers accounted for 13% of its outstanding receivables.

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

|           |  |      |    |      |  |  |    |  
|---------- |  | ---- | -- | ---- |  |  | -- | -
|           |  | 2001 |    | 2000
|           |  |      |    |     
|Customer A |  |      | 18 | %    |  |  |   |  
|Customer B |  |      | 13 | %    |  |  |   |  
|Customer C |  |      | 0  | %    |  |  | 35 | %
|           |  |      |    |      |  |  |    |  
|           |  |      | 31 | %    |  |  | 35 | %
|           |  |      |    |      |  |  |    |  

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

7. ACQUISITION OF ACTIVATE.NET

The Company acquired 100% of the voting interests of Activate.net
Corporation (Activate) on September 25, 2001. Activate is a Seattle-based
company which provides live and on-demand webcasting services for a variety of
enterprise business communication needs in all major industry standard formats.
Activate had been operated as a majority-owned operating company of CMGi, Inc.
The acquisition is expected to provide positive gross margin and operating
efficiencies after the facilities consolidation is completed. Activates
historical operations incorporate many of the services the Company has
previously provided either internally or through outsourcing, therefore, the
Company does not believe that this will result in a segment as defined by
SFAS131, rather the results will be presented as digital media services in the
statements of operations.

Total purchase consideration was $6.6 million, $1.0 million was paid in
cash at closing and the Company assumed $2.4 million of liabilities. The
remaining $3.0 million of the purchase price will be paid in cash or stock one
year from the initial close of the transaction. The Company may determine the
composition of the second closing payment subject to a number of factors,
including the market price of Loudeyes common stock and the ownership level
the stock would represent to CMGi. The purchase consideration was as follows:

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



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The Company accounted for the acquisition in accordance with SFAS No. 141
Business Combinations (SFAS141). The primary identified intangibles were
related to technology in service which has not yet been patented and purchased
contracts with firmly committed customer backlog. No purchase price has been
assigned to goodwill or in-process research and development. The preliminary
purchase price allocation based upon the Companys estimates was as follows:

|                                      |  |   |     | 
|------------------------------------- |  | - | --- | 
|(in millions)                         |  |   |     | 
|Preliminary Purchase Price Allocation |  |   |     | 
|                                      |  |   |     | 
|Current assets assumed                |  | $ | 2.5 | 
|Property and Equipment                |  |   | 2.4 | 
|Unpatented Technology                 |  |   | 1.6 | 
|Acquired Contracts                    |  |   | 0.1 | 
|                                      |  |   |     | 
|                                      |  | $ | 6.6 | 
|                                      |  |   |     | 

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

As the acquisition was completed on September 25, only four days of
operating results are included in the consolidated results for the period ended
Sept. 30, 2001. The Company will be filing an Amended Report on Form 8-K (Form
8-K) with the Securities and Exchange Commission by December 10, 2001, which
should be referred to for greater detail concerning historical results of
operations for Activate and for pro forma results of operations as if the
transaction had occurred at the beginning of the periods presented. The pro
forma information required by SFAS141 will be included in the Form 8-K.

8. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term Debt

On August 22, 2001, the Company entered into a credit agreement (the
Credit Agreement) with a bank providing for a revolving credit facility
(Revolving Facility) and letters of credit aggregating up to $15.0 million to
be used for working capital and general corporate needs, and to refinance
existing long-term debt. Obligations under the Credit Agreement are
collateralized by a security interest in short-term investments and
cash equivalents with a value of at least $25.0 million. The Revolving Facility requires monthly payments of
interest only until maturity on July 31, 2003. On July 31, 2002, the Company
has an option to extend the maturity date to July 31, 2004, provided that the
Company is not in default under the Credit Agreement.

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. On August 22, 2001, the Company borrowed $15 million against
the Revolving Facility with an interest rate election of LIBOR plus 100 basis
points, or 4.5125%. The interest rate will be adjusted after the LIBOR term to
reflect the LIBOR rate in effect at that time. Approximately $8 million of the
proceeds were utilized to pay off an existing line of credit and term loan
facility with another bank. In October 2001, the Credit Agreement was amended
to increase the principal sum to $19 million and, accordingly
the collateral requirement was increased to $30 million.

The Company also has
a credit facility that provided advances for the purchase of capital equipment. Advances under the
equipment loan are payable in 36 equal monthly installments from inception date
and are secured by assets financed under the agreement. As of September 30,
2001, approximately $980,000 was outstanding under this equipment facility. The
notes payable bear interest at rates ranging from 8.57% to 9.65%, with various
maturity dates through February 2003. A fee equal to 15% of the principal
balance is due with the final payment of each advance. That additional fee is
accrued on a monthly basis and is included in other accrued expenses and
interest expense over the term of the loan.

Capital Lease Obligations

In March 2001, in connection with the acquisition of DiscoverMusic, the
Company assumed master lease agreements with two finance companies for the
lease of certain property and equipment. Borrowings under the lease agreements
have individual



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terms of 36 months and bear interest ranging from 9.00% to
9.25% and are collateralized by the assets purchased. As of September 30, 2001,
approximately $646,000 was outstanding under the leases.

9. STOCK-BASED COMPENSATION

The Company records deferred stock compensation for the difference between
the exercise price of stock options granted and the deemed fair market value or
the price of the Companys common shares as traded on the NASDAQ national
market at the date of grant. The deferred compensation is amortized over the
vesting period of the related options, which is generally four and one-half
years.

During the quarter ended September 30, 2001, the Company amortized
approximately $313,000 of deferred stock compensation that is included in
stock-based compensation expense in the accompanying statements of operations.

The Company records stock-based compensation charges as a separate
component of operating expenses. In July 2001, the Company completed a stock
option exchange whereby employees holding options with an exercise price
greater than $4.30 were allowed to exchange those options at an exchange ratio
of 3 for 4. A total of 1,083,250 options with a weighted average exercise price
of $7.50, were exchanged for options to purchase 812,443 shares of common stock
priced at $1.21 per share. The new options are being treated as a re-pricing in
accordance with FASB Interpretation No. 44, and accordingly, are treated under
the variable method of accounting, which requires the company to mark the
options to market until the date those options are exercised, are forfeited, or
expire unexercised. The new options have a vesting period of three years from
the date of issuance. As the companys stock price at September 30, 2001 was
lower than the strike price of the re-granted shares, there was no stock-based
compensation recorded in the quarter ended September 30, 2001.

10. LEGAL PROCEEDINGS

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

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, 1999 and ending on December
6, 2000. The complaints together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934 primarily based on the allegation
that there was undisclosed compensation received by our underwriters in
connection with our initial public offering and the allegation that the
underwriters entered into undisclosed arrangements with some investors that were
designed to distort and/or inflate the market price for our common stock in the
aftermarket following the initial public offering. The allegations set forth
in these complaints are substantially similar to those made in class actions
filed against approximately 180 other companies that issued securities within
the past three years. These actions have all been consolidated before the same
judge for pretrial purposes.

We believe that the individual defendants and we have meritorious defenses
to the claims made in the complaint and we intend to defend the actions
vigorously. However, there can be no assurance that we will be successful, 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,



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and
that termination was effective 30 days thereafter. The company has also
alleged claims for misrepresentation, fraud, unjust enrichment and promissory
estoppel. The date for the arbitration hearing is June 10, 2002. Under AAA
rules, arbitration proceedings are confidential and private. Valley has filed
an answer in which it denies liability, and asserts counterclaims for breach of
contract, conversion, and declaratory relief.

11. SUBSEQUENT EVENTS

In November 2001, the Company announced a permanent reduction in force of
approximately 50 employees or approximately 19 percent of the workforce. This
reduction is expected to result in an additional special charge related
primarily to payments for severance and outplacement totaling approximately
$1.0 million, in addition to certain non-cash charges expected to approximate
$1.0 million in the fourth quarter of 2001.

On October 26, 2001, the Company entered into an agreement with its
founder and largest shareholder, Martin Tobias, and his wife, Alex Tobias.
Loudeye purchased 4 million shares of Loudeye common stock from Mr. Tobias for
$2.0 million, or $0.50 per share, and also entered into a comprehensive
agreement with Mr. Tobias, including the extension of a $2.0 million secured
line of credit to Mr. Tobias (the Loan). Mr. Tobias had previously entered
into a loan agreement with City National Bank to borrow a principal amount of
$3.0 million. The Company secured $2.5 million of the principal amount with a
letter of credit. The $2.0 million payment due to Mr. Tobias from the Company
for the common stock was paid directly to City National Bank to reduce the
current outstanding principal balance to $500,000 which the company
secured by a letter of credit in the same amount. The new credit line is
collateralized by liens on certain real property assets owned by Mr. Tobias, as
well as all his remaining 4.6 million Loudeye shares. Under the terms of the
agreement, the collateral shares will be restricted from public market sale,
without Loudeyes consent, until the later of January 31, 2003, or the full
repayment of the credit facility. The credit line matures June 30, 2003. As
part of the agreement, Mr. Tobias granted the Board of Directors of the Company
an irrevocable proxy to vote the remaining shares of Common Stock owned by Mr.
Tobias at any stockholders meeting. The proxy terminates on the later of
January 31, 2003 or the repayment of the Loan. In addition, as part of the
agreement, Mr. Tobias resigned from the Companys Board of Directors. The
agreement also permits Mr. Tobias to establish a program for sales of his
shares consistent with Rule 10b5-1 under the Securities Exchange Act of 1934
and with Rule 144 under the Securities Act of 1933, so long as the minimum per
share sales price of the shares under such plan equals or exceeds $1.25. The
Company has also agreed to exercise reasonable efforts to identify and to
assist Mr. Tobias in identifying a private buyer for some or all of Mr.
Tobiass shares, on terms acceptable to Mr. Tobias.

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

Further details are included in the Report on Form 8-K as filed with the
Securities and Exchange Commission on October 26, 2001.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. The Company believes that its current practices
regarding purchase price allocation are consistent with SFAS141, and
accordingly does not believe that its implementation will require
reclassification of intangibles with indefinite lives into goodwill or
reclassification from goodwill into identified intangibles. SFAS No. 142
requires the use of a nonamortization approach to account for purchased
goodwill and certain intangibles. Under a nonamortization approach, goodwill
and certain intangibles will not be amortized into results of operations, but
instead will be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill and
certain intangibles is more than its estimated fair value. The provisions of
each statement which apply to goodwill and intangible assets



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acquired prior to
June 30, 2001 will be adopted by the Company on January 1, 2002. The adoption
of SFAS No. 142 will result in the Companys discontinuation of amortization of
its goodwill; however, the Company will be required to test its goodwill for
impairment under the new standard beginning in the first quarter of 2002, which
could have an adverse effect on the Companys future results of operations if
an impairment occurs. The Company currently has gross goodwill of approximately
$3.9 million, with approximately $851,000 in related accumulated amortization
as of September 30, 2001. This goodwill is expected to have related
amortization expense of approximately $370,000 through the remainder of 2001,
at which point amortization will cease. At implementation, the Company expects
to have unamortized goodwill of approximately $2.8 million, which will be
treated in accordance with SFAS142; accordingly, the Company expects the impact
of implementation of these two standards to have a positive net future impact
resulting from the decrease in amortization by approximately $2.8 million in
2002.

In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
effective for the Company on January 1, 2002.  This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and
other related accounting guidance.  The Company is in the process of
evaluating the financial statement impact of the adoption of SFAS No.
144.



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

Forward-Looking Statements

The following discussion of our financial condition and results of
operations contains forward-looking statements within the meaning of section
27A of the Securities Act of 1993 and Section 21E of the Securities Exchange
Act of 1934. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as may, will, should, expect, plan, anticipate, believe,
estimate, predict, potential or continue, the negative of terms like these or
other comparable terminology. These statements are only predictions. Actual
events or results may differ materially. All forward-looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. In evaluating these statements, you should specifically consider
various factors, including the risks outlined under the caption Risk Factors
set forth at the end of this Item 2, the Risk Factors set forth in our Annual
report on Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission and those contained from time to time in our
other filings with the SEC. We caution investors that our business and
financial performance are subject to substantial risks and uncertainties.

Overview

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



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

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



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

In the third quarter of 2001, we served over 150 customers, including AOL,
MSN, Napster, Coca Cola, CD Now!, BMG Direct, Universal Music Group,
barnesandnoble.com and Amazon.com.

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



| |  |  | developing and marketing an end-to-end suite of products and services;                               
| | - |  | -----------------------------------------------------------------------------------------------------
|
| |  |  | leveraging existing management, production and delivery systems to support new products and services;
|
| |  |  | establishing relationships and obtaining content licensing agreements from content owners;           
|
| |  |  | expanding into selected international markets; and                                                   



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| |  |  | selectively pursuing strategic acquisitions to strengthen our
market position, expand our proprietary technology and accelerate our
product strategy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

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

We have sustained losses on a quarterly basis since inception and we
expect to sustain losses for the foreseeable future. For the three months ended
September 30, 2001, we had a net loss of $12.0 million. As of September 30,
2001, we had an accumulated deficit of $115.3 million. Operating losses
resulted from significant costs incurred in the development and sale of our
products and services as well as significant non-cash charges related to
stock-based compensation and amortization or write-down of intangibles and
other assets associated with the corporate restructuring. In addition to
normal, recurring charges, we recorded $2.7 million in the third quarter of
2001, and $20.5 million year to date related to a company-wide restructuring
and consolidation of operations and integration of acquisitions. These charges
related to employee severance, impairments of assets and facilities
consolidation. We expect the restructuring of operations to generate
significant cost savings once fully implemented.

We anticipate that operating expenses, as well as planned capital
expenditures, debt repayments and any acquisitions, will constitute a material
use of our cash resources throughout the remainder of 2001 and into 2002. We
expect to incur additional losses and continued negative cash flow from
operations in the foreseeable future. We cannot assure you that we will achieve
or sustain profitability 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
recent periods; however, we do not believe that prior growth rates or possibly
even sequential quarterly growth are sustainable or indicative of future growth
rates (see Forward-Looking Statements). In some future quarter our operating
results may fall below our expectations as well as those of securities analysts
and investors. In this event, the trading price of our common stock may fall
significantly.

Results of Operations

Three Months Ended September 30, 2001 compared to 2000

Revenues. Revenues totaled $2.5 million and $3.4 million for the three
months ended September 30, 2001 and 2000, respectively. The decrease was
primarily due to the decrease in demand for large-scale encoding projects, the
termination of our consulting services group and the discontinuation of our
Loudeye Media Syndicator offering, offset by increases related to the
acquisition of DiscoverMusic in March 2001 and the acquisition of VidiPax in
June 2000.



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Digital Media Services revenues were generated from a large number of
projects, including projects with XM Radio, Napster and Coca-Cola as well as
the continued performance of our Media Subscription Services. One audio project
represented 13% of the Companys revenues in the three months ended September
2001.

Media Subscription Services revenues totaled $910,000 in the three months
ended September 30, 2001. Those revenues are related to the offering of music
samples to customers obtained in the DiscoverMusic acquisition during the first
quarter of 2001 and are included in digital media applications and other in the
statements of operations. We had no subscription services available in the
three months ended September 30, 2000, and accordingly had no revenues. We
expect the quarterly revenues to remain relatively flat or decrease as the
customer base evolves and pricing pressures on the services continues. Our
Media Subscription Services strategy for the future is geared towards the music
industry. Additional Subscription Services offerings may be available in the
future in areas such as online radio, full song lockers and other music-related
subscription offerings.

We had no video encoding revenues in 2001 as a direct result of our
decision to significantly de-emphasize that line of business. Media restoration
revenues, including those from VidiPax increased significantly over the same
period in prior year. We expect video-related revenues from VidiPax, to remain
relatively flat or achieve a slight increase on a sequential or
quarter-over-quarter basis in 2001 as we continue to focus primarily on digital
music opportunities.

In the three months ended September 30, 2000 we generated revenues from
the sale or license of custom applications totaling $381,000. These revenues
related to product offerings that we decided to no longer support in
conjunction with our operational restructuring. In the three months ended
September 30, 2001 we generated no revenues from sales or license of such
technologies.

We expect consolidated revenues to increase approximately 50% sequentially
in the fourth quarter primarily as a result of the acquisition of Activate.

Cost of Revenues.Cost of revenues decreased to $2.7 million in the three
months ended September 30, 2001 from $3.4 million in the period ended September
30, 2000. Cost of revenues includes the cost of production and consulting,
personnel and an allocated portion of facilities and equipment and other
supporting functions related to the delivery of digital media services and
applications. Stock-based compensation charges of $25,000 and $67,000 for the
quarters ended September 30, 2001 and 2000, respectively, are attributable to
employees included in cost of revenues and are presented in the separate
operating expense line item within the statements of operations. Cost of
revenues as a percent of revenues increased from the same period in 2000
primarily due to decreased capacity utilization resulting from the fewer
large-scale encoding projects in the quarter. This underutilization was
partially offset by lower personnel and facilities costs as a result of our
restructuring; decreased depreciation related to equipment taken out of service
or otherwise disposed of and the inclusion of higher margin product offerings
acquired from DiscoverMusic. We expect margins on digital media applications
provided through our Media Subscription Services and media restoration services
provided by VidiPax to remain consistent through the fourth quarter. We expect
the margins generated by traditional digital media services to be positively
impacted as a result of the acquisition of Activate and as the effects of our
cost-containment initiatives are realized.

Research and Development Expenses.Research and development expenses
totaled $2.5 million and $1.8 million in the three months ended September 30,
2001 and 2000, respectively. Research and development expenses consist of
salaries and consulting fees paid to support technology development, costs of
technology acquired from third parties to incorporate into applications and
other proprietary technology currently under development. The increase over the
same period in 2000 is primarily due to the acquisition of on-line radio
technology and personnel in 2001. Additionally, in 2000, certain projects met
the requirements for capitalization of development costs. We do not currently
have any development projects that meet the criteria for capitalization. Costs
of developing the automated production system, continued development of online
radio technology and other unannounced applications comprised a majority of our
research and development expenses. Stock-based compensation charges of $16,000
and $42,000 for the quarters ended September 30, 2001 and 2000, respectively,
are attributable to employees included in research and development and are
presented in the separate operating expense line item within the statements of
operations.

We believe that continued investment in research and development is
critical to attaining our strategic objectives. However, due to our operational
restructuring and focus on digital audio opportunities and enterprise
webcasting services, development headcount was significantly reduced and, as a
result, we expect research and development expenses to continue sequentially at
lower rates. This decrease is expected to be slightly offset by the development
efforts ongoing at Activate.

Sales and Marketing Expenses.Sales and marketing expenses totaled $2.0
million and $3.9 million in the three months ended September 30, 2001 and 2000,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-



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marketing expenses, trade show expenses, product branding
costs, advertising and cost of marketing collateral. The significant decrease
in sales and marketing expenses was primarily due to the decreased personnel
subsequent to our corporate restructuring, a focus on controlling costs in all
areas of our business, and to a lesser degree, reduced sales commission on the
lower level of sales. Stock-based compensation charges of $41,000 and $110,000
for the quarters ended September 30, 2001 and 2000, respectively, are
attributable to employees included in sales and marketing and are presented in
the separate operating expense line item within the statements of operations.
We expect sales and marketing expenses to increase in the fourth quarter as a
direct result of the acquisition of Activate. In addition, sales and marketing
expenses are expected to increase as the level of sales grows.

General and Administrative Expenses. General and administrative expenses
totaled $2.5 million and $2.0 million in the three months ended September 30,
2001 and 2000, respectively. General and administrative expenses consist
primarily of unallocated rent, facilities and information technology charges,
salaries and legal and other general corporate expenses associated with being a
public company. The increase was primarily due to increased legal expenses
related to ongoing corporate initiatives, litigation and rights acquisitions.
Stock-based compensation charges of $231,000 and $816,000 for the quarters
ended September 30, 2001 and 2000, respectively, are attributable to employees
included in general and administrative and are presented in the separate
operating expense line item within the statements of operations. We expect
general and administrative expenses to increase on a gross basis, but decrease
on a percentage of total expense basis as a result of the Activate acquisition.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $2.1 million and $2.1 million in the three months
ended September 30, 2001 and 2000, respectively, and includes amortization of
the goodwill and identified intangible assets related to past acquisitions and
amortization related to the fair value of warrants granted to certain partners.
The amortization expense remained flat, however, this was due to increased
amortization on intangibles related to acquisitions closed in 2001 offset by
lower amortization on intangibles resulting from the Alive.com transaction in
1999, which were written down in the impairment charge in the first quarter of
2001. The closing of the Activate acquisition in September 2001 will increase
future amortization. We expect to continue our growth strategy and should
additional acquisitions occur, amortization expense would increase accordingly.

Stock-Based Compensation.Stock-based compensation expense totaled
$313,000 and $1.0 million in the three months ended September 30, 2001 and
2000, respectively. This decrease was primarily related to lower deferred
compensation balances as a result of past reductions in force. We expect the
future amortization levels to continue to decrease, although at a slower rate.

In July 2001, we completed a stock option exchange whereby employees
holding options with an exercise price greater than $4.30 were allowed to
exchange those options at an exchange ratio of 3 for 4. A total of 1,083,250
options with a weighted average exercise price of $7.50, were exchanged for
options to purchase 812,443 shares of common stock priced at $1.21 per share.
The new options will be treated as a re-pricing in accordance with FASB
Interpretation No. 44, and accordingly, will be treated under the variable
method of accounting, which requires the company to mark the intrinsic value of
the options to market until the date those options are exercised, are
forfeited, or expire unexercised. The new options vest ratably three years from
the date of issuance. As the companys stock price at September 30, 2001 was
lower than the strike price of the newly issued options, there was no
stock-based compensation recorded in the quarter ended September 30, 2001. As a
result of this tender offer, we believe that stock-based compensation will
fluctuate in future periods as our stock price continues to fluctuate.

Special Charges.We closed the acquisition of Activate, a Seattle-based
company which provides live and on-demand enterprise webcasting services. This
acquisition led to a facilities integration plan as well as a plan to eliminate
redundant personnel and equipment. In addition, we continued our previously
announced cost-savings initiative. These combined activities resulted in a
special charge of $2.7 million in the third quarter of 2001.

Our Board of Directors formally approved the facilities consolidation plan
which, when implemented, will result in all Seattle-based operations moving to
Activates facility in Seattle. The facility consolidation resulted in an
impairment charge of $2.0 million, primarily related to tenant improvement
write-offs for facilities expected to be closed by the end of the fourth
quarter and redundant equipment. In addition, other closing costs of
approximately $522,000 are expected to be incurred. The remaining portion of
the special charge is cash severance charges related to employees terminated in
September 2001. In November we announced a permanent reduction in force of
approximately 19%. This reduction is expected to result in an additional charge
totaling approximately $1.0 million. In addition, certain related charges,
primarily non-cash tenant improvement write-downs, totaling an additional $1.0
million are expected to be recorded in the fourth quarter of 2001. Included in
the property and equipment charges are accrued lease buy-out fees for closed
facilities as well as assets related to the reduction in personnel that took
place as a result of the announced restructuring.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled



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$631,000 and $1.7 million in the
three months ended September 30, 2001 and 2000, respectively. The decreased
income was due primarily to our significantly lower average cash and investment
balances in 2001 in addition to lower interest rates. We expect that our
interest income will decrease in the future as our cash balances decrease to
fund our operating, investing and financing activities.

Interest Expense.Interest expense consists of interest expense related to
our debt instruments as well as amortization of financing charges related to
our debt instruments. This totaled $267,000 and $298,000 in the three months
ended September 30, 2001 and 2000, respectively. The decrease was due primarily
to the improved terms of our refinanced debt and the lower prevailing interest
rates.

Nine Months Ended September 30, 2001 compared to 2000

Revenues. Revenues totaled $7.1 million and $7.6 million for the nine
months ended September 30, 2001 and 2000, respectively. The decrease was
primarily due to decreases in revenues associated with video encoding
projects and consulting services, offset largely by increases related to the
acquisition of DiscoverMusic in March 2001 and the acquisition of VidiPax in
June 2000.

Media Subscription Services revenues totaled $2.1 million in the nine
months ended September 30, 2001. We had no subscription services available in
the nine months ended September 30, 2000, and accordingly had no revenues.
Video and other related revenues remained relatively flat on a comparative
basis. Revenues from video encoding projects and consulting projects decreased
significantly in the first three quarters of 2001 as a result of our decision
to de-emphasize that portion of our business. Media restoration revenues, which
include those from VidiPax, increased due to the inclusion of nine months in
our financial results in 2001 and three and one half-months in the same period in 2000,
offsetting the decrease in video encoding and consulting revenues. In the nine
months ended September 30, 2000 we generated revenues from the sale or license
of custom applications totaling $632,000. These revenues related to product
offerings, which we decided to no longer support after our operational
restructuring. In the nine months ended September 30, 2001 we generated no
revenues from sales or license of those technologies.

Cost of Revenues.Cost of revenues decreased to $8.5 million in the nine
months ended September 30, 2001 from $8.6 million in the period ended September
30, 2000. A stock-based compensation credit totaling $34,000 was related to
stock option cancellations of $138,000 and deferred stock amortization charges
of $104,000 for the three quarters ended September 30, 2001 and stock-based
compensation charges of $407,000 in 2000, are attributable to employees
included in cost of revenues and are presented in the separate operating
expense line item within the statements of operations. Cost of revenues as a
percent of revenues increased slightly from the same period in 2000 primarily
due to the significantly higher personnel levels in the first quarter of 2001,
as well as decreased capacity utilization resulting from lower volumes of
large-scale encoding projects in 2001. Additional depreciation in 2001 from
significant asset acquisitions in 2000 also contributed to the increase. These
increases were partially offset by the inclusion of higher margin product
offerings acquired from DiscoverMusic and VidiPax. We believe that margins
should improve as a result of the consolidation of our production operations
from three separate facilities to the one facility acquired in the Activate
transaction and the related reduction in personnel requirements. This
integration of business units should result in lower overhead costs in one
shared facility. We expect margins on traditional service offerings to remain
fairly constant through the remainder of 2001 and expect future margins to
improve as product mix changes towards Media Subscription Services and
offerings based upon our archival platform.

Research and Development Expenses.Research and development expenses
totaled $7.9 million and $4.9 million in the nine months ended September 30,
2001 and 2000, respectively. The increase over the same period in 2000 is
primarily due to the acquisition of on-line radio technology and personnel in
2001, increased headcount in the first quarter of 2001 over the same period in
the prior year and the cessation of capitalization of software development
costs on completed projects in 2000. We do not currently have any development
projects which meet the criteria for capitalization. Costs of enhancing the
automated production system, the development of our archival platform and the
continued development of online radio technology and other unannounced
applications and service offerings comprised a majority of our research and
development expenses in 2001, while 2000 included a number of projects which
have since been terminated. A stock-based compensation credit totaling $21,000
was related to stock option cancellations of $85,000 and deferred stock
amortization charges of $64,000 for the three quarters ended September 30,
2001. Stock-based compensation charges of $253,000 in 2000, are attributable to
employees included in research and development and are presented in the
separate operating expense line item within the statements of operations.

We believe that continued investment in research and development is
critical to attaining our strategic objectives. However, due to our operational
restructuring and focus on digital audio opportunities and enterprise
webcasting services,



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development headcount was significantly reduced and, as a
result, we expect research and development expenses to continue sequentially at
lower rates. This decrease is expected to be slightly offset by the development
efforts ongoing at Activate.

Sales and Marketing Expenses.Sales and marketing expenses totaled $7.3
million and $10.9 million in the nine months ended September 30, 2001 and 2000,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product branding
costs, advertising and cost of marketing collateral. The significant decrease
in sales and marketing expenses was primarily due to the decreased personnel
subsequent to our corporate restructuring and an overall reduction in marketing
spending. A stock-based compensation credit totaling $57,000 was related to
stock option cancellations of $227,000 and deferred stock amortization charges
of $170,000 for the three quarters ended September 30, 2001 and stock-based
compensation charges of $668,000 in 2000, are attributable to employees
included in sales and marketing and are presented in the separate operating
expense line item within the statements of operations.

General and Administrative Expenses. General and administrative expenses
totaled $7.7 million and $5.5 million in the nine months ended September 30,
2001 and 2000, respectively. The increase was primarily due to the higher
headcount in early 2001 compared to the same period in 2000 as well as higher
unallocated facilities charges in 2001. Additional increases were due to
contractual bonuses paid to employees acquired in the Vidipax transaction and
increased legal expenses related to ongoing corporate initiatives. We believe
that general and administrative expenses will decrease slightly or remain flat
in future periods as a result of our restructuring efforts and our focus on
controlling costs in all areas, although, new initiatives may cause these
expenses to actually increase over time. Stock-based compensation charges
totaling $323,000 were related to the acceleration of certain options in the
first quarter of 2001 of $635,000, deferred stock amortization charges of
$947,000, partially offset by stock option cancellations of $1,259,000.
Stock-based compensation charges of $3.1 million in 2000, are attributable to
employees included in general and administrative. Stock-based compensation
charges are presented in the separate operating expense line item within the
statements of operations.

Amortization of Intangibles and Other Assets.Amortization of intangibles
and other assets totaled $5.9 million and $5.6 million in the nine months ended
September 30, 2001 and 2000, respectively, and includes amortization of the
goodwill and identified intangible assets related to past acquisitions and
amortization related to the fair value of warrants granted to certain partners.
The increase was primarily due to increased amortization resulting from the
DiscoverMusic, OnAir, Addition Systems, Inc. and theDial transactions closed in
2001 and amortization of intangibles resulting from the VidiPax acquisition in
June 2000, partially offset by lower amortization on intangibles resulting from
the Alive.com transaction in 1999, which were written down in the impairment
charge in the first quarter of 2001. Future amortization will increase as a
result of the Activate acquisition. Additionally, we expect to continue our
growth strategy and should additional acquisitions occur, amortization expense
would increase accordingly.

Stock-Based Compensation.Stock-based compensation totaled $211,000 and
$4.4 million in the nine months ended September 30, 2001 and 2000,
respectively. Stock-based compensation in 2001 consisted of approximately
$1,285,000 in amortization of deferred stock compensation, a charge of $635,000
related to a modification associated with stock options held by a former
employee, partially offset by a credit related to option cancellations
resulting from employee terminations and cancellation of related stock options
which had previously generated amortized deferred stock compensation of
approximately $1.7 million. Stock-based compensation in 2000 consisted of $3.7
million in amortization of deferred stock compensation related to stock options
granted below deemed fair market value through March 31, 2000, charges of $1.3
million related to marking options granted to consultants to fair market value
as of September 30, 2000 and a credit resulting from option cancellations which
had previously amortized deferred stock compensation of approximately $574,000.

Special Charges.Throughout 2001, we have implemented an effort to reduce
overall levels of operating expenses through a series of operational
restructurings and consolidations. As a result of these restructurings, the
reduction in personnel, the discontinuation of certain product offerings,
facilities consolidations, the impairment of redundant equipment and the
impairment of previously recorded intangibles resulting from past acquisitions,
we have recorded special charges totaling approximately $20.5 million in 2001.
There were no such charges recorded in 2000. Of these special charges, $16.2
million of represents non-cash charges related to the write-down of
video-related equipment, intangibles, redundant equipment or leasehold
improvements. The remaining charges of $4.0 million are related to facility
closure costs and severance-related payments to terminated employees. A
breakout of these charges for the nine months ended September 30, 2001 follows:


17Table of Contents

|                           |  |   |      | 
|-------------------------- |  | - | ---- | 
|(in millions)              |  |   |      | 
|Intangible impairments     |  | $ | 12.2 | 
|Equipment impairments      |  |   | 2.6  | 
|Facility charges and other |  |   | 3.4  | 
|Employee severance         |  |   | 2.3  | 
|                           |  |   |      | 
|                           |  | $ | 20.5 | 
|                           |  |   |      | 

We currently anticipate future special charges related to the facilities
consolidation into Activates facilities and the reduction in force announced
in November of approximately $2.0 million. We reevaluate the carrying value of
our assets at appropriate times, and future charges may be necessary if
conditions require them.

Interest Income.Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $2.7 million and $4.1 million in
the nine months ended September 30, 2001 and 2000, respectively. The decreased
income was due primarily to our lower average cash and investment balances in
2001 in addition to lower interest rates. We expect that our interest income
will decrease in the future as our cash and investment balances decrease to
fund our operating, investing and financing activities.

Interest Expense.Interest expense consists of interest expense related to
our debt instruments as well as amortization of financing charges related to
our debt instruments. This totaled $943,000 and $574,000 in the nine months
ended September 30, 2001 and 2000, respectively. The increase was due primarily
to increased levels of borrowings incurred to finance fixed asset acquisitions,
partially offset by decreased interest rates.

Liquidity and Capital Resources

As of September 30, 2001, we had approximately $68.6 million of cash, cash
equivalents and short-term investments.

Net cash used in operating activities was $18.6 million and $21.6 million
in the nine months ended September 30, 2001 and 2000, respectively. For 2001,
cash used in operating activities resulted primarily from a net loss of $49.2
million; partially offset by non-cash charges totaling $27.8 million related to
depreciation and amortization, the non-cash components of the special charges,
and stock- based compensation, a decrease of approximately $2.2 million in
accounts receivable, an increase in accrued compensation, benefits and other
expenses of $1.8 million, partially offset by other uses of $1.2 million. Cash
used in operating activities in 2000 was due primarily to a net loss of $28.9
million, a decrease in accounts payable of $4.3 million, an increase in
accounts receivable of $1.9 million, partially offset by an increase in accrued
compensation, benefits and other expenses of $1.0 million and non-cash
stock-based compensation, depreciation and amortization charges totaling $13.0
million.

Net cash provided by
investing activities was $24.8 million in the nine months
ended September 30, 2001, and net cash used in investing activities was $18.0
million in the nine months ended September 30, 2000. For 2001, cash provided by
investing activities was primarily related to the net sales of short-term
investments, partially offset by purchases of property and equipment and cash
paid for the acquisitions closed in 2001. Cash used in investing activities in
2000 was primarily related to purchases of property and equipment; cash paid
for acquisition of businesses and capitalized software costs.

Net cash provided by financing activities was $3.9 million in the nine
months ended September 30, 2001 and net cash provided by financing activities
was $88.8 million in the nine months ended September 30, 2000. The cash
provided by financing activities in 2001 primarily resulted from the funds
received from our new credit facility, offset by principal payments of our
long-term debt and capital lease obligations. Net cash provided by financing
activities in 2000 primarily resulted from the net proceeds of our initial
public offering, the concurrent sale of common shares to a strategic investor,
and the underwriters exercise of their over-allotment option.

As of September 30, 2001, our principal commitments consisted of
obligations outstanding under operating leases, as well as notes payable
totaling $17.2 million under our credit facilities and capital lease
obligations. In addition, we have certain financial commitments under existing
agreements that will require significant uses of our cash resources.

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 capital
expenditures, excluding acquisitions, will total approximately $500,000 in the
remainder of calendar year 2001 and will relate primarily to the facilities
consolidation.



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We believe that our existing cash, cash equivalents, and short-term
investments will be sufficient to fund our operations and meet our working
capital and capital expenditure requirements during 2001 and 2002. Thereafter,
if we cannot fund operating and other expenses, working capital and capital
expenditure requirements from our operations, we may find it necessary to
obtain additional equity or debt financing, sell assets or reduce spending
plans. In the event additional equity or debt financing is required, we may not
be able to raise it on acceptable terms, or at all.

RISK FACTORS

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

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

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

We have incurred net losses from operations of $101.2 million during the
period August 12, 1997 (inception) through September 30, 2001. Given the level
of our planned operating and capital expenditures, we expect to continue to
incur losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:



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

We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. Our ability to reduce
our operating expenses from our corporate cost-savings initiatives implemented
throughout 2001 may be adversely affected by expenditures related to expanding
our digital media service and application offerings; obtaining, administering,
and renewing financially reasonable music content license agreements with the
various third parties in the fragmented music recording and publishing
industries; growing our customer base; enhancing our brand image; and improving
our technology infrastructure.

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 have to 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.



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

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



| |  |  | Variability in demand for our digital media services and applications;                                                                                                                            
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Profitability and viability of existing and emerging businesses
focused on distribution of digital media content over the Internet;                                                               
|
| |  |  | Willingness of our customers to enter into digital media and
applications services agreements for digital media in light of the
economic and legal uncertainties related to their business models;
|
| |  |  | Ability of our customers to procure necessary intellectual property
rights in the digital media content they intend to utilize in their
businesses;                                               
|
| |  |  | Market acceptance of new digital media services and applications offered by us and our competitors;                                                                                               
|
| |  |  | Introduction or enhancement of digital media services and applications offered by us and our competitors;                                                                                         
|
| |  |  | The mix of distribution channels through which our products and services are licensed and sold;                                                                                                   
|
| |  |  | Changes in the growth rate of Internet usage and adoption of broadband access;                                                                                                                    
|
| |  |  | Variability in average order size or product mix;                                                                                                                                                 
|
| |  |  | Ability of customers to cancel agreements or orders on little or no advance notice;                                                                                                               
|
| |  |  | Changes in our pricing policies or the pricing policies of our competitors;                                                                                                                       
|
| |  |  | Technical difficulties with respect to the use of our products and services;                                                                                                                      
|
| |  |  | Governmental regulations affecting use of the Internet, including
regulations concerning intellectual property rights and security
measures;                                                      
|
| |  |  | The amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure;                                                             
|
| |  |  | Competition from companies entering our markets;                                                                                                                                                  
|
| |  |  | General economic conditions such as fluctuating interest rates and inflation; and                                                                                                                 
|
| |  |  | Economic conditions specifically related to the Internet such as
fluctuations in the costs of Internet access, hardware and software.                                                             

Our current and future levels of operating expenses and capital
expenditures are to a large extent, fixed in the short term. Thus, we may not
be able to adjust spending in a timely manner to compensate for any shortfall
in revenues and any significant shortfall in revenues relative to planned
expenditures could have an immediate adverse effect on our business and results
of operations. If our operating results fall below our expectations as well as
those of securities analysts and investors in some future periods, our stock
price will likely decline.

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

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

Our common stock price has been, and may continue to be, extremely
volatile, and there is a risk we could be delisted from the Nasdaq National
Market. The market price of our common stock has declined significantly in
recent months, and we expect that it will continue to be subject to significant
fluctuations as a result of variations in our quarterly operating results and
volatility in the financial markets. Our stock currently trades below $1.00 and
may continue to do so. If our stock continues to trade below $1.00 per
share for 30 consecutive business days after December 31, 2001, we may receive
notice from the Nasdaq National Market that we need to comply with the
requirements for continued listing on the Nasdaq National Market within 90
calendar days from such notification or be delisted. If our stock is delisted
from the Nasdaq National Market, an investor could find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, our
common stock. Additionally, our stock may be subject to penny stock
regulations. If our common stock were subject to penny stock regulations,
which apply to certain equity securities not traded on the Nasdaq National
Market which have a market price of less than $5.00 per share, subject to
limited exceptions, additional disclosure would be required by broker-dealers
in connection with any trades involving such penny stock.



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

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

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

We depend on the development and rate of adoption of digital media and
Internet broadcasting and the delay or failure of this development would
seriously harm our business. Our success depends on users having access to the
necessary hardware, software and bandwidth, or data transmission capability, to
receive high quality digital media over the Internet. Congestion over the
Internet and data loss may interrupt audio and video streams, resulting in
unsatisfying user experiences. The success of digital media over the Internet
depends on the continued rollout of broadband access to consumers on an
affordable basis. If the Internet does not develop as an effective medium for
the distribution of digital media content to consumers or if businesses
predicated on the distribution of digital media content are not profitable or
are unable to raise necessary operating capital, then we will not succeed in
executing our business plan. Many factors could inhibit the growth of
electronic commerce in general and the distribution of digital media content in
particular, including concerns about the profitability of Internet-based
businesses, uncertainty about intellectual property rights associated with
music and other digital media, bandwidth constraints, piracy and privacy.
Widespread adoption of digital media technology depends on overcoming these
obstacles, identifying viable revenue models for digital media-based business,
improving audio and video quality and educating customers and users in the use
of digital medial technology. If digital media technology fails to overcome
these obstacles, our business could be seriously harmed.

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

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

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

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

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



| |  |  | If the content or the performance of our services violates third
party copyright, trademark, or other intellectual property rights;              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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.                                      

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

Because we host audio and video content on our Web site and on other Web
sites for customers and provide services related to digital media content, we
face potential liability or alleged liability for negligence, infringement of
copyright, patent, or trademark rights, defamation, indecency and other claims
based on the nature and content of the materials we host. Claims of



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this nature
have been brought, and sometimes successfully pressed, against Internet content
distributors. In addition, we could be exposed to liability with respect to the
unauthorized duplication of content or unauthorized use of other parties
proprietary technology. The music industry in particular has recently been the
focus of heightened concern with respect to copyright infringement and other
misappropriation claims, and the outcome of developing legal standards in that
industry is expected to impact music, video and other content being distributed
over the Internet. These risks are difficult to quantify in light of the
continuously evolving nature of laws and regulations governing the Internet.
Any claim relating to proprietary rights, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements, and we can not assure
you that we will have adequate insurance coverage or that royalty or licensing
agreements will be available on terms acceptable to us or at all.

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

A limited number of customers have accounted for a majority of our
revenues and will continue to do so for the foreseeable future. During the
three months ended September 30, 2001, two of our customers accounted for
approximately 31% of our revenues; while in the three months ended September
30, 2000, one other customer accounted for approximately 35% of our revenues.
We believe that a small number of customers will likely continue to account for
a significant percentage of our revenues for the foreseeable future. Due to
high revenue concentration among a limited number of customers, the
cancellation, reduction or delay of a large customer order or our failure to
timely complete or deliver a project during a given quarter is likely to
significantly reduce revenues for the quarter. If we were to lose a key
customer, our business, financial condition, and operating results could
suffer. In addition, if any customer fails to pay amounts it owes us, or does
not pay those amounts on time, our revenues and operating results could suffer.
If we are unsuccessful in increasing our customer base, our business could be
harmed.

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

Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies
including, among others, Apple Computer, Inc., Microsoft Corporation, and
RealNetworks, Inc. We rely on these relationships for licensed technology to
maintain our ability to service RealNetworks RealMedia, Microsoft Windows Media
and Apple Quicktime platforms and applications. In addition, we rely on
relationships with major recording labels for our music content licensing
strategy. Obtaining comprehensive music content licenses is challenging, as
doing so may require us to obtain copyright licenses with various third parties
in the fragmented music recording and publishing industries. These copyrights
often address differing activities related to the delivery of digital media,
including reproduction and performance, some of which may require separate
licensing arrangements from various rights holders such as publishers, artists
and record labels. The effort to obtain the necessary rights by such third
parties is often significant, and could disrupt, delay, or prevent us from
executing our business plans. Because of the large number of potential parties
from which we must obtain licenses, we may never be able to obtain a sufficient
number of licenses to allow us to provide services that will meet our
customers expectations. We cannot be certain that we will be successful in
developing new relationships or that our partners will view these relationships
as significant to their own business or that they will continue their
commitment to us in the future. If we are unable to maintain or enhance these
relationships, we may have difficulty strengthening our technology development
and increasing the adoption of our brand and services.

Our growth could be limited if we fail to successfully identify and integrate
potential acquisitions and investments

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



| |  |  | Diversion of managements attention from other business concerns;                                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Failure to assimilate the acquired company with our pre-existing business;                                                                                            
|
| |  |  | Potential loss of key employees from either our pre-existing business or the acquired business;                                                                       
|
| |  |  | Dilution of our existing stockholders as a result of issuing equity
securities, including the shares potentially issuable as a result of
the Activate acquisition; and
|
| |  |  | Assumption of liabilities of the acquired company.                                                                                                                    
|
| |  |  | Complementary products and services may not be available on commercially reasonable terms;                                                                            
|
| |  |  | We may be unable to compete for acquisitions of products and
services with many of our competitors who have greater financial
resources than we do;                   



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| |  |  | Acquired products and services may not meet the needs of our
customers;                                                                                               
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We may incur difficulties associated with the integration of the
personnel and operations of an acquired company with our personnel and
operations;                   
|
| |  |  | We may incur difficulties in assimilating products, services or
technologies, with our existing products, services and technologies we
obtained from acquisitions; and
|
| |  |  | Integration of acquired and existing products and services may
result in decreases in revenue from existing products and services.                                    

In particular, transactions of this sort require the process of
integrating an acquired business, technology, service, or product and may
result in unforeseen operating difficulties and expenditures and may absorb
significant management attention that would otherwise be available for ongoing
development of our business. Moreover, we cannot assure you that the
anticipated benefits of any acquisition will be realized. For example, we may
not be able to successfully assimilate the personnel, technology, operations
and customers we obtained from acquisitions into our business. In addition, we
may fail to achieve the anticipated synergy from these acquisitions, including
marketing, product development, distribution and other operational synergies.
Acquisitions could also result in material use of cash resources, potentially
dilutive issuances of equity securities, the incurrence of debt, contingent
liabilities, or amortization expenses related to goodwill and other intangible
assets and the incurrence of large and immediate write-offs, any of which could
seriously harm our business, results of operations and financial condition.

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

As a result of the Activate acquisition, we will be required to make
payments totaling $3.0 million on September 25, 2002. If the common stock
issued at that time is the maximum amount as prescribed by the closing
agreement, existing stockholders could have their current holdings diluted by
approximately 15%.

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

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

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

We and certain of our current 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 would have a material
adverse affect on our financial position and results of operation. In
addition, the costs to us of defending any litigation or other proceeding, even
if resolved in our favor, could be substantial. Such litigation could also
substantially divert the attention of our management and our resources in
general. Uncertainties resulting from the initiation and continuation of any
litigation or other proceedings could harm our ability to compete in the
marketplace. 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.

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

Our current or future infrastructure and systems (such as information
technologies and accounting) may prove to be insufficient to indefinitely
accommodate our targeted level of future operations. Effectively managing any
future growth will



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require, among other things, that we successfully upgrade
and expand our production processes and systems, expand the breadth of products
and services we offer, continue to improve our management reporting
capabilities and accounting systems. We also need to retain our highly skilled
and motivated executives and other employees. We must also maintain close
coordination among our marketing, operations, development, finance and
administrative organizations.

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

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

Technological advances may cause our services and applications to be
unnecessary

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

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

Because of the complexity of our services, applications and related
technologies, we are substantially dependent upon the continued service of our
existing product development personnel. In addition, we may hire additional
engineers with high levels of experience in designing and developing software
and rich media products in time pressured environments. As we continue to
introduce additional applications and services, and as our customer base and
revenues grow, we will need to hire additional qualified personnel in other
areas of operations as well. New personnel will require training and education
and take time to reach full productivity. Our failure to attract, train, and
retain these key technical personnel could seriously harm our business.
Further, our business and operations are substantially dependent on the
performance of our executive officers and key employees, all of whom are
employed on an at-will basis and have worked together for only a relatively
short period of time. We do not maintain key person life insurance on any of
our executive officers. In addition, we hired or named new employees in 2000
and 2001 in key executive positions, including our Chief Executive Officer,
Chief Financial Officer, Senior Vice President of Sales, Senior Vice President
of Corporate Development and General Counsel. The loss of several key
executives could seriously harm our business. Finally, we added significant
numbers of employees in connection with our acquisitions of
DiscoverMusic and Activate and the OnAir and theDial transactions. As we complete the integration
of those acquisitions and employees, we are reviewing our organizational
structure and number of employees. Any reorganization or reduction in the size
of our employee base could harm our ability to attract and retain other
valuable employees critical to the success of our business.

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

The market for digital media services and applications is relatively new,
and we face competition from in-house encoding services by potential customers,
other vendors that provide outsourced digital media services and companies that
directly provide digital media applications. If we do not compete effectively
or if we experience reduced market share from increased competition, our
business will be harmed. In addition, the more successful we are in the
emerging market for Internet media services and applications, the more
competitors are likely to emerge including turnkey Internet media application
and service providers; streaming media platform developers; digital music
infrastructure providers; and digital media applications service providers
(including for digital music subscription). As we continue to develop media
subscription applications, we may also over time begin to compete with some of
our historical customers and partners who could also develop and market
business-to-business subscription offerings.

In addition, we may not compete successfully against current or future
competitors, many of whom have substantially more capital, longer operating
histories, greater brand recognition, larger customer bases and significantly
greater financial, technical and marketing resources than we do. These
competitors may also engage in more extensive development of their
technologies, adopt more aggressive pricing policies and establish more
comprehensive marketing and advertising campaigns than we can. Our competitors
may develop products and service offerings that are more sophisticated than our
own. In addition, our competitors may bundle their services with other software
or hardware to offer a more complete range of Internet media products and
services to meet all of the content distribution needs of our customers. For
these and other reasons, our



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competitors products and services may achieve
greater acceptance in the marketplace than our own, limiting our ability to
gain market share and customer loyalty and to generate sufficient revenues to
achieve a profitable level of operations.

Our industry is experiencing consolidation that may intensify competition

The Internet and media distribution industries have recently experienced
substantial consolidation and a proliferation of strategic transactions. We
expect this consolidation and strategic partnering to continue. Acquisitions
or strategic relationships could harm us in a number of ways. For example:



| |  |  | competitors could acquire or enter into relationships with companies
with which we have strategic relationships and discontinue our
relationship, resulting in the loss of distribution opportunities for
our products and services or the loss of certain enhancements or
value-added features to our products and services;                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | competitors could obtain exclusive access to desirable multimedia
content and prevent that content from being available in our formats,
thus decreasing the use of our products and services to distribute and
experience the content that audiences most desire, and hurting our
ability to attract advertisers to our Web sites and product offerings;
|
| |  |  | 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, which
could cause us to lose customers, revenue and market share. They could also
force us to expend greater resources to meet the competitive threat, which
could also harm our operating results.

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

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

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

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

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

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



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

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

Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with third parties,
and invention assignment agreements with our employees and contractors. We have
filed six U.S. patent applications and four international patent applications
that claim priority to six previously filed provisional applications. We cannot
assure that measures we take to protect our intellectual property will be
successful or that third parties will not develop alternative solutions that do
not infringe upon our intellectual property.

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

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

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



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shared copies are available,
legally or illegally, consumers may choose not to pay for downloads from retail
and other music delivery sites, which could harm our business.

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

Because other digital recorded music formats, such as MP3, do not contain
mechanisms for tracking the source or ownership of digital recordings, users
are able to download and distribute unauthorized or pirated copies of
copyrighted recorded music over the Internet. This piracy is a significant
concern to record companies and artists, and is the reason many record
companies and artists are reluctant to digitally deliver their recorded music
over the Internet. The Secure Digital Music Initiative (SDMI) is a committee
formed by the Recording Industry Association of America (RIAA) to propose a
standard format for the secure digital delivery and use of recorded music. If a
standard format is not adopted, however, unsecured copies of recorded music may
continue to be available on the Internet, and record companies and artists
might not permit the digital delivery of their music. Additionally, as long as
pirated recordings are available, many consumers will choose free pirated
recordings rather than paying for legitimate recordings. Accordingly, if a
standard format for the secure digital delivery of music is not adopted, our
business might be harmed.

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

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

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

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

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



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

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

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



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Certain of our existing stockholders have significant influence over our
management and affairs, which they could exercise against your best interests.
As of November 1, 2001, our officers and directors, together with entities that
may be deemed affiliates of or related to such persons or entities, will
beneficially own or have voting control over approximately 32% of our
outstanding common stock. Martin Tobias, a former member of the board of
directors, has given the board of directors, an irrevocable proxy to vote all
of the 4.6 million shares of our Common Stock that he owns. See Note 11 to the
Notes to Consolidated Financial Statements and our Report on Form 8-K as filed
with the Securities and Exchange Commission on October 30, 2001 for a more
complete description of the proxy. As a result, these stockholders, acting
together, may be able to influence significantly our management and affairs and
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. Accordingly, this concentration
of ownership may have the effect of impeding a merger, consolidation, takeover
or other business consolidation involving us, or discouraging a potential
acquiror from making a tender offer for our shares. This concentration of
ownership could also adversely affect our stocks market price or lessen any
premium over market price that an acquiror might otherwise pay.

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

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

We believe that our existing cash, cash equivalents, short-term
investments, the amounts available under our modified credit facility will be
sufficient to meet our operating expenses working capital, capital expenditure
and business expansion requirements through 2001 and 2002. Thereafter, we may
need to raise additional funds. We may have to raise funds even sooner in order
to fund more rapid expansion, to develop new or enhanced services or products,
to respond to competitive pressures, to acquire complementary products,
businesses or technologies or otherwise to respond to unanticipated
requirements. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced. If we raise capital through debt financing, we may be forced to
accept restrictions affecting our liquidity, including restrictions on our
ability to incur additional indebtedness or pay dividends. We cannot assure you
that additional financing will be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
may not be able to fund our ongoing operations and planned expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services and applications or respond to competitive pressures. This inability
could seriously harm our business, results of operations and financial
condition.

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

Since our primary encoding and data storage facilities and network
facilities are located in the state of Washington, a seismic disturbance, or
other natural disaster could affect these primary facilities simultaneously. An
unexpected event like a power or telecommunications failure, fire, flood,
seismic disturbance at or near our encoding and on-site data storage facility
or at any of our Internet service providers facilities could cause the loss of
critical data and prevent us from offering our services to our customers. Our
insurance may not adequately compensate us for any losses that may occur.

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

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

Our online radio business will likely be subject to the uncertainty
related to copyrights and royalty payments discussed above.



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Government regulation may require us to change our business

On October 28, 1998, the United States Congress enacted the Digital
Millennium Copyright Act (or DMCA). The DMCA includes statutory licenses for
the performance of sound recordings and for the making of recordings to
facilitate transmissions. Under these statutory licenses, depending on our and
our customers future business activities, we and our customers may be required
to pay licensing fees for digital sound recordings streamed or distributed from
web sites and through retransmissions of radio broadcasts and/or other audio
content. The DMCA does not specify the rate and terms of such licenses, which
will be determined either through voluntary inter- industry negotiations or
arbitration. Moreover, with respect to digital publishing, sound recording and
other music licenses not directly covered by the DMCA, various companies and
individuals in the digital music industry plan to engage in a proceeding before
a tribunal of the United States Copyright Office along with the Recording
Industry Association of America during 2001 to determine what, if any, licensee
fees should be paid to various rights holders. Depending on the rates and terms
adopted for the statutory licenses, our business could be harmed both by
increasing our own cost of doing business, and by increasing the cost of doing
business for our customers. In addition, broadcasting of content over the
Internet may become subject to more extensive government regulations, similar
in scope to those applying to television and radio.

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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



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PART II. OTHER INFORMATION




ITEM 1: LEGAL PROCEEDINGS

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 or former
officers and directors as well as against certain underwriters who handled our
March 15, 2000 initial public offering of common stock. The various complaint
were purportedly filed on behalf of a class of persons who purchased our common
stock during the time period beginning on March 15, 1999 and ending on December
6, 2000. The complaint together allege violations of the Securities Act of
1933 and the Securities Exchange Act of 1934 primarily based on the allegation
that there was undisclosed compensation received by our underwriters in
connection with our initial public offering and the allegation that the
underwriters entered into undisclosed arrangement 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 approximately 180 other companies that issued securities within
the past three years. These actions have all been consolidated before the same
judge for pretrial purposes.

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

On May 8, 2001, we filed an arbitration demand with the American
Arbitration Association (AAA) against Valley Media, Inc (Valley). We
alleged that Valley is liable for substantial damages for material breaches of
a Services Agreement between the companies dated as of December 17, 1999, in
which Valley made representations and warranties and agreed to perform certain
obligations to facilitate the creation of a venture to create and market an
Internet music clip streaming service. We provided notice of our intent to
terminate that agreement by letter dated February 6, 2001, and that termination
was effective 30 days thereafter. We have also alleged claims for
misrepresentation, fraud, unjust enrichment and promissory estoppel. The date
for the arbitration hearing is June 10, 2002. Under AAA rules, arbitration
proceedings are confidential and private. Valley has filed an answer in which
it denies liability, and asserts counterclaims for breach of contract,
conversion, and declaratory relief.

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




ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)  Recent Sales of Unregistered Securities

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




ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.




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



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None.




ITEM 5: OTHER INFORMATION

None.



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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits.

|        |  |                                                                                                                                       
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                       
|Number  |  | Description                                                                                                                           
|        |  |                                                                                                                                       
|10.36   |  | Credit Agreement between US Bank National Association and Loudeye
Technologies, Inc., dated as of August 22, 2001.                    
|10.37   |  | First Amendment to Credit Agreement between US Bank National
Association and Loudeye Technologies, Inc., dated as of
October 25, 2001.

(b)  Reports on Form 8-K

On September 25, 2001 we filed a Report on Form 8-K that announced that on such
date we closed the acquisition of Activate.net Corporation. Our press release
announcing the acquisition was filed as an exhibit to the report.

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




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 November 13, 2001.

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

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



32