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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

or

For the transition period from           to

Commission File Number:  0-29583

Loudeye Corp.

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

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

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

Yes     [X]                    No     [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  o    No þ

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

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Loudeye Corp.

Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2003

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

ITEM  I     FINANCIAL STATEMENTS

LOUDEYE CORP.
CONSOLIDATED BALANCE SHEETS

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See accompanying notes

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LOUDEYE CORP.

See accompanying notes.

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LOUDEYE CORP.

See accompanying notes.

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LOUDEYE CORP.

1.      ORGANIZATION, RISKS, and GOING CONCERN

       The Company

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

       Risks

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

       Going Concern

     The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception, has an accumulated deficit of approximately $186.8 million at March 31, 2003, has experienced negative cash flows from operations since inception and the expansion and development of the Company’s business will require additional capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

     Management has restructured the Company’s operations, reduced its work force, renegotiated leases, and taken other actions to limit the Company’s expenditures. However, there can be no assurance that the Company’s cash balances will be sufficient to sustain its operations until profitable operations and positive cash flows are achieved. Consequently, the Company may require additional capital to fund its operations. There can be no assurance that capital will be available to the Company on acceptable terms, or at all.

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

       Basis of Consolidation

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

       Unaudited Interim Financial Data

     The interim consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted

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accounting principles have been condensed or omitted pursuant to such rules and regulations. These consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 15, 2003. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the quarters ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the full years.

     Use of Estimates

     The preparation of financial statements in conformity with generally accepted accounting principles require management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The recoverability of long-lived assets, which include property and equipment ($2.9 million) and intangible assets ($576,000), is a sensitive accounting estimate for which changes could result in additional charges in the near term. Additional impairment analyses could be required in a number of circumstances, including if the Company’s plans for the assets change, if operating results decline further, or if the price of the Company’s stock declines.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Cash and Cash Equivalents

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

       Short Term Investments

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

       Restricted Investments

     The Company has approximately $576,000 of short-term investments which are utilized as collateral for certain irrevocable standby letters of credit. These securities all mature within one year and reported amounts approximate fair value due to the relatively short maturities of these investments.

       Impairment of Long-lived Assets

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

       Stock based Compensation

     The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issues to Employees,” (APB 25), as interpreted by Financial Accounting Standards Board Interpretation No. 44,

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“Accounting for Certain Transactions Involving Stock Compensation, and Interpretation of APB 25 (FIN 44), and related interpretations. Under APB 25, compensation expense is based on the difference between the exercise price of employee stock options granted and the fair value of the Company’s common stock at the date of grant. Deferred compensation, if any, is amortized over the vesting period of the related options, which is generally four and one-half years.

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

     Stock compensation was $42,000 for the quarter ended March 31, 2003, consisting of the amortization deferred stock compensation, and a credit of approximately $656,000 for the quarter ended March 31, 2002, consisting of the reversal of expense related to accelerated amortization for options that were cancelled.

     The Company records stock-based compensation charges as a separate component of operating expenses. These amounts can be allocated to the other expense categories in the accompanying consolidated statements of operations as follows for the three months ended March 31 (in thousands):

     The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation for the three months ended March 31 (in thousands):

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

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       Reclassifications

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

3.      SPECIAL CHARGES

The Company has recorded Special Charges related to ongoing corporate restructuring, facilities consolidations and the impairment of assets in accordance with its long-lived asset policy (see Note 2). The following table summarizes such charges recorded in the consolidated statements of operations for the three months ended March 31 (in thousands):

Quarter ended March 31, 2003

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

In addition to the impairment charges above, the Company recorded severance and termination benefits of $204,000 associated with a reduction in force announced on March 14, 2003 of approximately 35% of its consolidated staffing. In addition, the Company recorded $297,000 of severance and termination benefits with respect to certain changes in senior management in the first quarter of 2003. The Company incurred costs of approximately $465,000 related to the termination or renegotiation of certain facilities leases in connection with its ongoing facilities consolidation. The other restructuring charges of $878,000 represent

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fees and costs paid to Regent Pacific Management Corporation with respect to interim management services provided to the Company in connection with its management and operational restructuring.

In March 2003, the Company reduced by approximately half the space it occupies for its principal operating facility on Rainier Avenue, Seattle, Washington from a base rent of approximately $108,000 per month with a term expiring on November 30, 2005 to a base rent of approximately $33,000 per month for the remainder of the term which has been shortened to June 30, 2003. The Company has the option of extending the term for two 3-month periods at a base rent of $100,000 and pre-paid utility expenses of $60,000 for each 3-month extension. As consideration for the reduction of space and lease term, the Company allowed its landlord to retain its security deposit in the amount of $218,500 and made cash payments of $276,000.

On April 28, 2003, the Company entered into a lease termination agreement with the landlord of its unoccupied facility on Fourth Avenue, Seattle, Washington. Under the terms of the agreement, the Company paid a lease termination fee of $200,000. As a result, all of the Company’s obligations under the lease were terminated effective April 30, 2003. In accordance with EITF 94-3, the lease termination fee was included in accrued special charges at December 31, 2002 and March 31, 2003. The Company had been paying approximately $29,000 per month under this lease.

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

Quarter ended March 31, 2002

The Company recorded special charges in the first quarter of 2002 associated with a reduction in force announced March 8, 2002 of approximately 12% of consolidated staffing. The special charge of $748,000 was for severance and related termination benefits paid during the quarter.

The following table summarizes the activity in accrued special charges during the three months ended March 31, 2003 (in thousands):

4.      NET LOSS PER SHARE

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

The Company had 905 and 38,021 shares outstanding that were subject to repurchase at March 31, 2003 and 2002, respectively. The weighted average repurchase price of these options subject to repurchase was

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$0.18 and $0.21, at March 31, 2003 and 2002, respectively. The impact of these unvested but exercised options has been removed from the calculation of weighted average shares outstanding for purposes of determining basic and diluted net loss per share.

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

The Company operates in two business segments, Digital Media Services and Media Restoration Services. The following information summarizes the Company’s segments for the three months ended March 31 (in thousands):

The Company had sales to a significant customer that represented 13% and 12% of total revenue in each of the first quarters of 2003 and 2002, respectively. The revenue from this customer was reported primarily in the Media Restoration Services segment.

     6.          CONTINGENCIES

Between July 26, 2001 and August 30, 2001, four substantially similar class action complaints were filed in the Untied States District Court for the Southern District of New York against the Company and certain of its former officers and directors, as well as against certain underwriters who handled its March

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15, 2000 initial public offering of common stock. The various complaints were purportedly filed on behalf of a class of persons who purchased the Company’s common stock during the time period beginning on March 15, 2000 and ending on December 6, 2000. The complaints together allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, primarily based on the allegation that there was undisclosed compensation received by the Company’s underwriters in connection with its initial public offering and the allegation that the underwriters entered into undisclosed arrangements with some investors that were designed to distort and/or inflate the market price for the Company’s common stock in the aftermarket following the initial public offering. These actions have all been consolidated before the same judge for pretrial purposes. No specific amount of damages has been claimed. The individual defendants and the Company have demanded to be indemnified by the underwriter defendants pursuant to the underwriting agreement entered into at the time of the initial public offering. Presently, all claims against the former officers have been withdrawn without prejudice. The Company, along with the many other issuer defendants, moved to dismiss the claims in the complaint. By decision dated February 19, 2003 the court denied the Company’s motion. We believe that we have meritorious defenses to the claims made in the foregoing complaint and we intend to defend the actions vigorously. However, there can be no assurance that we will be successful on our defenses or in our assertion of indemnification, and an adverse resolution of the lawsuit could have a material adverse affect on our financial position and results of operation in the period in which the lawsuit is resolved. The plaintiffs have made a settlement proposal to the defendants. We have indicated a willingness to support the proposal, subject to review and acceptance of a definitive settlement agreement. An estimate of the range of possible loss for this matter cannot be made.

     On or about January 8, 2003 a company known as Dominion Venture Finance, L.L.C. commenced an action against the Company and “John Doe” defendants in the Superior Court of the State of California, County of San Francisco. In its complaint, plaintiff alleges that pursuant to a loan and security agreement and a master lease agreement (the liabilities for which agreement, plaintiff alleges, were acquired by the Company when the Company merged with an entity known as DiscoverMusic.com, Inc.) the Company failed to make certain required payments to plaintiff. Plaintiff asserts causes of action of breach of loan and security agreement, claim and delivery, money lent, breach of master lease agreement and book account. Plaintiff seeks relief in the form of money damages, interest, attorneys’ fees and costs. The Company has filed an answer to the complaint denying the material allegations. The Company believes that it has meritorious defenses to the claims made in the foregoing complaint and intends to defend the action vigorously. However, there can be no assurance that the Company will be successful on its defenses. An estimate of the range of possible loss for this matter cannot be made.

     On February 3, 2003, the Company entered into an agreement (“Agreement”) with Regent Pacific Management Corporation (“Regent Pacific”) pursuant to which Regent Pacific would provide management services to the Company. The Agreement was terminable by either party under certain circumstances. On March 11, 2003, this engagement concluded. Under the Agreement, the Company paid certain fees to Regent Pacific. In addition, Regent Pacific was to receive stock options to purchase up to 4,000,000 shares of the Company’s common stock based on Regent Pacific’s length of service. These options were to be granted at various times throughout their engagement at exercise prices based on the closing market price on each grant date. The amount of stock options to be issued to Regent Pacific has not yet been finalized and is currently under discussion between the Company and Regent Pacific.

     In April 2003, the landlord of one of our unoccupied facilities filed suit against us for breach of its lease and is seeking an unspecified amount of damages. The Company intends to vigorously defend this suit and may also bring certain counterclaims against the landlord.

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

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

Forward-Looking Statements

     The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are made under the safe harbor provisions thereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of terms like these or other comparable terminology. These forward-looking statements are only predictions and actual events or results may differ materially from those projected. Specific factors that could cause actual results to differ materially from those projected include, but are not limited to, uncertainties related to our early stage; uncertainties related to the effectiveness of our technology and development of our products and services; dependence on and management of existing and future corporate relationships; dependence on licensed content and technology; dependence on proprietary technology and uncertainty of patent protection; management of growth; history of operating losses; future capital needs and uncertainty of additional funding; dependence on key personnel; competition; existing governmental regulations and changes in, or the failure to comply with, government regulations, and other risks detailed below, including the Risk Factors in Item 7 of Part II “Management’s Discussion and Analysis of financial Condition and Results of Operations,” and those included from time to time in the Company’s other reports with the SEC and press releases, copies of which are available from the company upon request. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to publicly release any revisions of the forward-looking statements contained herein to reflect events or circumstances after the date hereof. Readers are cautioned not to place undue reliance on these forward-looking statements, as our business and financial performance are subject to substantial risks and uncertainties.

Results of Operations

Three Months Ended March 31, 2003 and 2002

     Revenues. Revenues totaled $3.3 million for the first quarter of 2003 and 2002, an respectively.

We recorded approximately $2.7 million of revenue from our Digital Media Services segment in the first quarter of 2003 compared to $2.5 million in the first quarter of 2002. This increase was due primarily to the acquisition of Streampipe in November of 2002.

Media restoration revenues totaled $650,000 in the first quarter of 2003 compared to $762,000 in the first quarter of 2002. This decrease was primarily the result of decreased spending by our customers on discretionary projects due to current economic conditions.

     Cost of Revenues. Cost of revenues decreased to $2.5 million for the first quarter of 2003 from $3.2 million for the first quarter of 2002. Cost of revenues include the cost of production including personnel, and an allocated portion of facilities and equipment and other supporting functions related to the delivery of digital media services and applications. Excluding depreciation, cost of revenues decreased to $2.3 million for the first quarter of 2003 from $2.4 million for the first quarter of 2002. Cost of revenues in the first quarter of 2003 includes the impact of the acquisition of Streampipe in November 2002.

Depreciation included in cost of revenues decreased to approximately $200,000 in the first quarter of 2003 from $800,000 in the first quarter of 2002. This decrease is due primarily to impairment charges recorded in the fourth quarter of 2002 for certain assets of our Digital Media Services segment. These charges decreased the cost basis of the assets, resulting in lower depreciation charges.

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     Research and Development. Research and development expenses totaled $577,000 and $1.3 million in the first quarter of 2003 and 2002, respectively. This decrease is due primarily to the reduction in the number of development personnel as a result of the corporate restructurings. Research and Development consists of costs of enhancing webcasting offerings, including the recently announced Loudeye Express, the continued support of our music offerings and the development of internal operational solutions necessary to fully integrate previous acquisitions comprised a majority of our research and development expenses in 2003.

We believe that continued investment in research and development is critical to attaining our strategic objectives. However, due to our operational restructurings and a sharper focus on opportunities which we believe will result in near term results, development headcount was significantly reduced as compared to 2002 and, as a result, research and development expenses declined in 2003 as compared to 2002. We expect research and development expenses to remain relatively stable in the foreseeable future. Accordingly, the research and development expenses for the remainder of 2003 should continue to be lower than 2002.

     Sales and Marketing. Sales and marketing expenses totaled $1.5 million and $2.2 million in the first three months of 2003 and 2002, respectively. Sales and marketing expenses consist primarily of salaries, commissions, product branding costs, advertising, trade show expenses, and cost of marketing collateral. The decrease in sales and marketing expenses was primarily due to the decreased personnel subsequent to our reductions in force in the first and second quarters of 2002.

     General and Administrative. General and administrative expenses decreased to $2.8 million for the first quarter of 2003 from $3.5 million for the first quarter of 2002. This decrease was due primarily to the decrease in personnel subsequent to our reductions in force in the first and second quarters of 2002, and related cost reduction initiatives. General and administrative expenses consist primarily of rent, facilities and information technology charges, salaries, legal expenses, investor relation costs, and other costs associated with being a public company. We expect future levels of general and administrative expenses to decrease slightly from 2002 as the full impact of our restructuring is realized.

     Amortization of Intangible and Other Assets. Amortization of intangibles and other assets totaled $525,000 and $696,000 for the first three months of 2003 and 2002, respectively, and includes amortization of identified intangible assets related to past acquisitions. The decrease was due primarily to the impairment charges recorded fourth quarter of 2002, which resulted in lower amortization charges during the first quarter of 2003. This decrease was offset partially by amortization of intangible assets acquired from Streampipe in November 2002.

     Stock-Based Compensation. Stock-based compensation charges for 2003 consisted of the amortization of deferred stock compensation. For the first quarter of 2002, stock compensation was a credit of $656,000, resulting from reversals of previously recorded deferred stock compensation associated with the terminated employees in connection with our restructuring initiatives. The balance of deferred stock compensation was $88,000 at March 31, 2003 and will be fully amortized by the end of 2003.

     Special Charges. We have recorded Special Charges related to ongoing corporate restructuring, facilities consolidations and the impairment of assets in accordance with our long-lived asset policy. Following is a summary of special charges for the quarters ended March 31, 2003 and 2002:

     Quarter ended March 31, 2003

On February 4, 2003, our Chairman and Chief Executive Officer, John T. Baker, resigned and the we engaged Regent Pacific Management Corporation to provide management. On March 7 2003, Regent Pacific’s engagement concluded and Jeffrey M. Cavins was elected President and Chief Executive Officer. These events are described more fully in our Annual Report on Form 10-K for the year ended December 31, 2002. During and subsequent to Regent Pacific’s engagement, we undertook

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a strategic and operational analysis of our business and product lines. This analysis resulted in the development of a new strategic and operational plan, under which we will restructure our business to focus on our core competencies in digital media services and on core strategic customers and markets for our enterprise communications services. We developed a revised corporate forecast in connection with this plan. The revised forecast also considered that we had learned that revenue from a significant customer in our Media Restoration Services segment would be less than originally anticipated. Utilizing the revised forecast, we performed a reassessment of the carrying value of all of our assets, both tangible and intangible. The revised forecast demonstrated that certain tangible and intangible assets and goodwill related to our media restoration services and enterprise communications services businesses were impaired, as the projected undiscounted discernible cash flows did not exceed the carrying value of the assets over their estimated useful lives. The fair value of each of these assets were estimated using primarily a discounted cash flow method. The estimated fair values of each of the assets were then compared to their carrying values to measure the impairments. As a result of this analysis, we recorded impairment charges for goodwill, intangible assets, and property and equipment related to our enterprise communication services and media restoration services businesses of $5.3 million, $685,000, and $601,000, respectively.

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

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

	Quarter ended March 31, 2002

	We recorded special charges in the quarter ended March 31, 2002 associated with a reduction in force announced March 8, 2002 of approximately 12% of consolidated staffing. The special charge of $748,000 was for severance and related termination benefits paid during the quarter

The following table summarizes the activity in accrued special charges during the three months ended March 31, 2003 (in thousands):

     Interest Income. Interest income totaled $85,000 and $333,000 in the first three months of 2003 and 2002, respectively. The decrease was due primarily to the lower average cash and investment balances in 2003 resulting from the voluntary prepayment of our credit facility in the third quarter of 2002, utilization of cash to fund operations, and lower interest rates in 2003. We expect that our interest income will decrease in the future as our cash balances are used to fund our operations.

     Interest Expense. Interest expense consists of interest expense related to our debt instruments, including capital lease obligations. Interest expense totaled $50,000 and $217,000 in the first three months of 2003 and 2002, respectively. The decrease was due primarily to lower average debt balances in 2003 due to the voluntary repayment of our credit facility in the third quarter of 2002 and lower interest rates in 2003.

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Liquidity and Capital Resources

As of March 31, 2003, we had approximately $8.9 million of cash, cash equivalents, short-term investments, and restricted investments. Of these funds, $576,000 is held in an investment account that serves as collateral for standby letters of credit for certain of our capital lease obligations

Net cash used in operating activities was $3.1 million and $7.2 million in the quarters ended March 31, 2003 and 2002, respectively. For 2003, cash used in operating activities resulted primarily from a net loss of $13.1 million partially offset by non-cash charges for depreciation, amortization, special charges, and stock compensation expense aggregating $7.5 million and other working capital changes totaling $2.5 million. For 2002, cash used in operating activities resulted primarily from a net loss of $7.6 million, working capital and other changes totaling $85,000, partially offset by non-cash charges totaling $1.1 million related to stock-based compensation, depreciation and amortization and other. Additional uses of cash related to the approximately $1.0 million in severance related payments and approximately $524,000 in rent and other payments for previously accrued special charges

Net cash provided by investing activities was $5.4 million in the first quarter of 2003, consisting principally of the proceeds from sales of short-term investments and payments received on notes receivable from related parties. For the first quarter of 2002, net cash used in investing activities of $1.2 million was primarily related to purchases of property and equipment, including tenant improvements at the Activate offices prior to facilities consolidation.

Net cash used in financing activities was $521,000 and $226,000 in the first quarter of 2003 and 2002, respectively. The cash used in financing activities in 2003 resulted primarily from principal payments of our long-term debt and capital lease obligations totaling $294,000, as well as the repurchase of common stock from a major stockholder totaling $227,000. The cash used in financing activities in 2002 consisted principally of payments of our long-term debt and capital lease obligations.

As of March 31, 2003, our principal commitments consisted of obligations outstanding under operating and capital leases. We have other credit facilities and leasing arrangements that, in general, are not prepayable without penalty. Total principal amounts outstanding under these arrangements were $1.2 million at March 31, 2003. These instruments bear interest ranging from approximately 6.9% to 9.7% and mature at various times through 2005. Letters of credit of approximately $576,000 collateralize certain of these capital lease obligations. We have $576,000 of short-term investments that are utilized as collateral for certain irrevocable letters of credit. These short-term investments have been classified as restricted investments on the accompanying balance sheets. In addition, we have notes payable aggregating approximately $1.1 million with respect to our acquisition of Streampipe in November, 2002.

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     Contractual Obligations and Commercial Commitments

     The following table provides aggregated information about the Company’s contractual obligations as of March 31, 2003.

In March 2003, we reduced by approximately half the space we occupy for our principal operating facility on Rainier Avenue, Seattle, Washington from a base rent of approximately $108,000 per month with a term expiring on November 30, 2005 to a base rent of approximately $29,000 per month for the remainder of the term which has been shortened to June 30, 2003. We have the option of extending the term for two 3-month periods at a base rent of $100,000 and pre-paid utility expenses of $60,000 for each 3-month extension. As consideration for the reduction of space and lease term, we have allowed our landlord to retain our security deposit in the amount of $218,500 and made cash payments of $276,000.

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

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

Since inception, we have sustained substantial net losses. Beginning in 2001, we commenced a variety of cost reduction initiatives to reduce costs. For 2003, we will continue to focus on reducing costs and increasing sales. We expect the following items may represent significant uses of cash in the foreseeable future:

	•		We have commitments under leases for certain facilities which we no longer occupy. These leases extend past 2003. Scheduled payments under these leases for 2003 total $1.6 million. We are presently negotiating lease reduction or termination agreements that we believe will result in a substantial reduction to future obligations under certain of these leases. However, there can be no assurance that we will be able to do so. In addition, we may have to make up-front cash payments to terminate or reduce our obligations under these leases. At March 31, 2003, accrued special charges includes amounts accrued for rent obligations which meet the criteria for accrual under FAS 146.
	•		The balance of severance payments resulting from workforce reductions in 2002 and in the first quarter of 2003, including certain of our former executives, are estimated to be $501,000 and are expected to be paid in cash over the remainder of 2003.
	•		Acquisition consideration resulting from the Streampipe acquisition in November 2002, totaling $1.1 million plus accrued interest, is due January 1, 2004. The notes contain an equity redemption option pursuant to which we may, at our option, satisfy our obligation by issuing additional shares of our common stock. However, if certain events occur, such as our stock no longer being listed on a principal securities exchange or trading market, we may be required to pay a portion of this

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			consideration in cash. This amount is included in accrued acquisition consideration in the accompanying balance sheets.
	•		We have certain commitments under existing arrangements with certain licensors of copyrighted materials that may require payments estimated to be approximately $607,000 in 2003. These amounts are included in accrued expenses in the accompanying balance sheets.
	•		We may enter into future transactions where we acquire complementary businesses. Such acquisitions may require the use of our capital resources.
	•		We do not have significant capital spending plans for 2003, other than approximately $200,000 to $500,000 to move our media restoration services business unit to a new operating facility.

     There can be no assurance 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 for 2003. Accordingly, if we are unable to fund operating and other expenses, working capital and capital expenditures from our operations, we may find it necessary to secure additional financing, sell assets or reduce expenditures further. In the event additional financing is required, there can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.

Going Concern

     The accompanying consolidated financial statements have been prepared under the assumption that we will continue to operate as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses since inception, have an accumulated deficit, and have experienced negative cash flows from operations since our inception and the expansion and development of our business will require additional capital. These matters raise substantial doubt about our ability to continue as a going concern. Our audited consolidated financial statements for the year ended December 31, 2002 contain a going concern opinion issued by our independent accountants.

     Management has restructured our operations, reduced our work force, renegotiated leases, and taken other actions to limit our expenditures. However, there can be no assurance that our cash balances will be sufficient to sustain our operations until profitable operations and positive cash flows are achieved. Consequently, we may require additional capital to fund our operations. There can be no assurance that capital will be available to us on acceptable terms, or at all.

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

Recent Management Changes

     In January 2003, we engaged Regent Pacific Management Corporation (“Regent Pacific”) to provide certain management consulting and advisory services. This agreement contemplated the payment to Regent Pacific of $200,000 for a two month consulting engagement.

     On February 3, 2003, our former Chairman and Chief Executive Officer, John T. Baker IV, resigned. Simultaneous with Mr. Baker’s resignation, we entered into a new agreement with Regent Pacific, expanding its role. Pursuant to the Regent Pacific agreement, we agreed to pay Regent Pacific $60,000 per week, and four weeks of payments in advance. This agreement provided for a minimum term of six months, with a review and restructuring of fees after three months. The agreement also provided for the issuance to Regent Pacific of stock options to purchase up to 4,000,000 shares of our common stock, based upon length of service. These options were to be granted at various times throughout their engagement at exercise prices based on the closing market price on each grant date. The agreement was terminable by either party under certain circumstances. In connection with that agreement, we appointed Philip J. Gioia, a principal of Regent Pacific, to serve as our President and Chief Executive Officer and agreed to have selected Regent Pacific principals, including Mr. Gioia,

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serve as part of our executive management team. Additionally, Mr. Gary J. Sbona, the chairman and Chief Executive Officer of Regent Pacific, was elected to our board of directors and Charles P. Waite, Jr., a member of our board of directors and a partner of OVP Venture Partners, was elected as Chairman.

     On March 11, 2003, the engagement of Regent Pacific, and the involvement of Regent Pacific principals as part of our executive management team concluded. As a result, Mr. Gioia resigned as President and Chief Executive Officer, and Mr. Sbona resigned from his seat on our board of directors. On March 11, 2003, the our board of directors appointed Jeffrey M. Cavins, who had been the Senior Vice President of Sales, as our President and Chief Executive Officer, and elected him to our board of directors. Our board of directors appointed Anthony J. Bay, a three-year member of the board, as chairman of the board, replacing Mr. Waite, who resigned. We entered into an Employment Agreement dated as of April 1, 2003 with Mr. Cavins. The agreement provides for a base salary of $250,000 and the granting of options to purchase 1,500,000 shares of our common stock. The agreement also provides for the opportunity to receive bonuses based upon the achievement of certain performance criteria by the Company and in the event of a sale of all of our stock or all or substantially all of our assets.

     We entered into an Employment Agreement dated as of April 1, 2003 with Jerold J. Goade, Jr., our Vice President and Chief Financial Officer. The agreement provides for a base salary of $161,000 and the granting of options to purchase 350,000 shares of our common stock. The agreement also provides for the opportunity to receive bonuses based upon the achievement of certain performance criteria by the Company and in the event of a sale of all of our stock or all or substantially all of our assets.

     We entered into a Consulting Agreement dated as of April 1, 2003 with Anthony Bay, our Chairman. The agreement provides for a base compensation of $100,000 and the granting of options to purchase 500,000 shares of our common stock. The agreement provides for the opportunity to receive bonuses based upon the achievement of certain performance criteria by the Company and in the event of a sale of all of our stock or all or substantially all of our assets.

Critical Accounting Policies and Estimates

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

     Long-lived assets. Management periodically evaluates the recoverability of our long-lived assets in accordance with SFAS No. 144. When doing so, management is required evaluate the recoverability of an asset’s (or group of assets) carrying value through estimates of undiscounted future cash flows. If the assets are deemed impaired, the assets are written down to estimated fair value. Estimates of fair value may differ from the actual amount that could be realized if we were to sell our assets.

     Management’s assessments of the impairment of property and equipment, intangible assets and goodwill are sensitive accounting estimates that could result in additional impairment charges in the near term. Factors that impact these estimates include, but are not limited to, possible changes in business plans, market price of our common stock and declining financial results. Net long-term assets subject to impairment review in the future totaled $4.3 million at March 31, 2003. We will continue to review the carrying value of our long-lived assets for impairments. Future adverse developments in our business will result in additional charges.

     Exit costs. We have followed the provisions of EITF 94-3 (before December 31, 2002) and SFAS 146 (after December 31, 2002) to record the costs associated with exit activities. Management is required to make its best estimates of exit costs such as remaining lease obligations and/or termination fees, these estimates be different than the actual amounts that will be paid under existing lease arrangements. As noted above, beginning January 1, 2003, we adopted the provisions of FAS 146 to record the costs associated with exit activities. Future adverse changes in our business could result in additional exit activities and charges.

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

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

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

RISK FACTORS

We have incurred losses and negative cash flows since inception and have an accumulated deficit at March 31, 2003, raising substantial doubt about our ability to continue as a Going Concern

     The accompanying consolidated financial statements have been prepared under the assumption that the Company will continue to operate as a going concern. The Company has incurred losses from inception, has an accumulated deficit, and has experienced negative cash flows from operations since its inception. These matters raise substantial doubt about the company’s ability to continue as a going concern and our audited consolidated financial statements for the year ended December 31, 2002 contain a going concern qualification from our independent accountants.

     Management has restructured the Company’s operations, reduced its work force, renegotiated leases, and taken other actions to limit the Company’s expenditures. However, there can be no assurance that Company’s cash balances will be sufficient to sustain its operations until profitable operations and positive cash flows are achieved. Consequently, the Company may require additional capital to fund its operations. There can be no assurance that capital will be available to the Company on acceptable terms, or at all.

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

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

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

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

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

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

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

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

     As of March 31, 2003, we had approximately $8.9 million in cash and cash equivalents, short-term investments, and restricted investments. There can be no assurance that our existing cash, cash equivalents, short-term investments and restricted investments will be sufficient to fund our operations and meet our working capital and capital expenditure requirements for 2003. Accordingly, if we are unable to fund operating and other expenses, working capital and capital expenditures from our operations, we may find it necessary to secure additional financing, sell assets or reduce expenditures further. In the event additional financing is required, there can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives. This inability could seriously harm our business, results of operations and financial condition.

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

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

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     As of March 31, 2003, we had an accumulated deficit of $186.8 million. We have incurred net losses quarterly from August 12, 1997 (inception) through March 31, 2003, and we expect to continue to incur net losses for the foreseeable future.

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

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

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

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

     Since July 30, 2001, our common stock has failed to maintain a minimum bid price of $1.00 per share for at least 10 consecutive days, which caused our stock price to fail to meet one of the minimum standards required by the Nasdaq Stock Market for continued listing as a Nasdaq National Market security. In order to avoid delisting from Nasdaq entirely, we voluntarily applied to Nasdaq to have our listing transferred to the SmallCap Market. On July 16, 2002 our application was approved to transfer the listing of our common stock to the Nasdaq SmallCap Market. The Nasdaq SmallCap Market also requires compliance with a minimum bid price of $1.00 per share for at least 10 consecutive days. We were notified that we must be in compliance with this requirement by March 28, 2003 (including all grace periods) or face delisting from Nasdaq. On March 31, 2003 we were notified by Nasdaq that we will be provided an additional 90 calendar days, or until June 26, 2003 to regain compliance. On March 11, 2003, we received an affirmative vote at a special meeting of stockholders permitting our board of directors, should it deem beneficial, to effect a reverse stock split at one of three ratios at any time prior to December 31, 2003. The purpose of this reverse split would be to achieve compliance with the Nasdaq SmallCap Market’s minimum bid price of $1.00 per share for at least 10 consecutive days.

     There can be no assurance that we will be able to satisfy all requirements for continued listing of our common stock on the Nasdaq SmallCap Market, including the minimum bid price requirement and

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minimum tangible assets or stockholders’ equity requirements. If we are unable to meet Nasdaq requirements in the future, our stock will be subject to delisting, which may have a material adverse effect on the price of our common stock and the levels of liquidity currently available to our stockholders. Delisting may also make it more difficult for us to raise capital in the future. If our common stock is removed from the Nasdaq SmallCap Market, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common shares. Additionally, our stock may then be subject to “penny stock” regulations.

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

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

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

     We expect to continue to evaluate and acquire businesses, technologies, services, or products that we believe are a strategic fit with our business. In June 2000 we acquired VidiPax, Inc., in June 2001 we acquired Addition Systems, Inc., in March 2001 we acquired DiscoverMusic, and in September 2001 we acquired Activate and we have also acquired certain assets and technology from OnAir and theDial.com.

     Pursuant to an Asset Purchase Agreement dated as of May 29, 2002, the Company acquired certain assets of EncodeThis!, Inc. Pursuant to the Asset Purchase Agreement, the Company acquired certain assets of EncodeThis!, Inc. in exchange for cash and common stock, as well as a warrant to purchase common stock of the Company.

     On November 19, 2002, the Company, TenTV Acquisition Corp., a Delaware corporation wholly-owned by the Company, and TT Holding Corp. (“Holding”), a Delaware corporation and sole shareholder of Technology Education Network, Inc. (“TenTV”) entered into an Agreement and Plan of Reorganization (the “Merger Agreement”). Pursuant to the Merger Agreement, TenTV Acquisition Corp. was merged into Holding and the former stockholders of Holding received, subject to the Merger Agreement and certain Unsecured Promissory Notes with Equity Redemption Option (the “Notes”), 7,900,165 newly issued unregistered shares of the Company’s common stock and Notes in the aggregate original principal amount of $1,062,329. At December 31, 2002, 7,559,306 shares had been issued and 340,859 shares are being held in escrow until January 1, 2004, pursuant to the terms of the Merger Agreement. Subject to the terms of each Note, which provide in part that there is not an event of default and that the Company is listed on a principal exchange excluding the over-the-counter market, the Notes may be redeemed, at the option of the Company and subject to shareholder approval, for common stock of the Company. In the event that the Company elects to redeem the Notes for Common Stock, the number of shares issuable upon redemption shall be calculated by dividing (i) the principal amount and all accrued interest due under the Notes as of the date of redemption, by (ii) the average of the last sale price of the common stock for the thirty (30) trading days preceding January 1, 2004. In such event, the aggregate number of shares of common stock issued in connection with the transactions contemplated by the Merger Agreement will be in excess of twenty percent (20%) of the issued and outstanding common stock of the Company. Nasdaq rules require that the a majority of the company’s stockholders approve any transaction resulting in the issuance of twenty percent (20%) or more of the Company’s common stock.

     We have limited operating history as a combined company and therefore limited experience in addressing emerging trends that may affect our combined business. The integration of these and any future

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acquisitions into our operations may place a significant strain on our employees, systems and other resources. If any acquisition fails to integrate well, our operations and financial position could be harmed.

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

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

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

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

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

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

     A limited number of customers have accounted for a majority of our revenues and may continue to do so for the foreseeable future. During the year ended December 31, 2002, two of our customers accounted for 23% of our revenues and during the year ended December 31, 2001, one of our customers accounted for approximately 17% of our revenues. During each of the first quarters of 2003 and 2002, one customer accounted for approximately 13% and 12% of our revenues, respectively. We believe that a small number of customers may continue to account for a significant percentage of our revenues for the foreseeable future. Due to high revenue concentration among a limited number of customers, the cancellation, reduction or delay of a large customer order or our failure to timely complete or deliver a project during a given quarter is likely to significantly reduce revenues. In addition, if any significant customer fails to pay

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

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

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

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

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

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

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

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

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

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

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

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

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

     We and certain of our current or former officers and directors, as well as certain underwriters who handled our March 15, 2000 initial public offering of common stock, are named as defendants in a purported class action complaint which has been filed allegedly on behalf of certain persons who purchased our common stock during the time period beginning on March 15, 1999 and ending on December 6, 2000. The complaint alleges violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Primarily it alleges that there was undisclosed compensation received by our underwriters in connection with our initial public offering. We can provide no assurance as to the outcome of this matter. Any resolution of this matter in a manner adverse to us could have a material adverse affect on our financial position and results of operation. In addition, the costs to us of defending any litigation or other proceeding, even if resolved in our favor, could be substantial. Such litigation could also substantially divert the attention of our management and our resources in general. Uncertainties resulting from the initiation and continuation of any litigation or other proceedings could harm our ability to compete in the marketplace. In addition, because class action litigation has often been brought against companies following periods of volatility in their stock prices, we could become involved in additional litigation. The plaintiffs have made a settlement proposal to the defendants. We have indicated a willingness to support the proposal, subject to review and acceptance of a definitive settlement agreement.

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

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

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

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

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

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

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

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

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

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     Enterprise Webcasting Competition. Our primary competitors are content distribution networks, such as Akamai, and Internet broadcasters, such as Yahoo!Broadcast. Each of these companies provide services similar to ours and each has a well-established market presence. We also compete with providers of traditional communications technologies, such as teleconferencing and videoconferencing, as well as applications software and tools companies, such as Centra Software, Lotus (SameTime), Microsoft (NetMeeting and Placeware). There are also smaller competitors that focus on certain of our individual market segments, such as investor relations webcasts.

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

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

Our industry is experiencing consolidation that may intensify competition

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     Our officers and directors beneficially own or control the voting of approximately 14% of our outstanding common stock. Martin Tobias, our former chief executive officer and former member of the board of directors, has given the board of directors, an irrevocable proxy to vote all of the approximately 2.8 million shares of our Common Stock that he owns. See Note 18 to the Notes to Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2002 and our Report on Form 8-K as filed with the Securities and Exchange Commission on October 30, 2001 for a more complete description of the proxy. As a result, these stockholders, acting together, have the ability to substantially influence all matters submitted to our stockholders for approval, including:

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

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

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

Government regulation could adversely affect our business prospects

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

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

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

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

Item 3    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

Item 4    DISCLOSURE CONTROLS AND PROCEDURES

     We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed under the Securities Exchange Act, is recorded, processed,

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summarized and reported within the time periods specified by the SEC’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

     Within 90 days prior to the date of filing this report, we carried out an evaluation of our disclosure controls and procedures under the supervision and with the participation of management including the Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting us to material information relating to the Company required to be included in our periodic SEC filings.

     Subsequent to the date of that evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses. However, we were unable to file our Form 10-K for the fiscal year ended December 31, 2002 and our Form 10-Q for the quarter ended March 31, 2003 within the prescribed timeframe due to additional time required by us to close our annual accounting records and adequately prepare our financial statements and related disclosures, as we had recently made changes in management and staffing, including the appointment of the Company’s third Chief Executive Officer since December 31, 2002, a restructuring of the Company and a reduction-in-force in March, 2003.

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PART II.         OTHER INFORMATION

ITEM 1:          LEGAL PROCEEDINGS

     Between July 26, 2001 and August 30, 2001, four substantially similar class action complaints were filed in the Untied States District Court for the Southern District of New York against the Company and certain of its former officers and directors, as well as against certain underwriters who handled its March 15, 2000 initial public offering of common stock. The various complaints were purportedly filed on behalf of a class of persons who purchased the Company’s common stock during the time period beginning on March 15, 2000 and ending on December 6, 2000. The complaints together allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, primarily based on the allegation that there was undisclosed compensation received by the Company’s underwriters in connection with its initial public offering and the allegation that the underwriters entered into undisclosed arrangements with some investors that were designed to distort and/or inflate the market price for the Company’s common stock in the aftermarket following the initial public offering. The allegations set forth in these complaints are substantially similar to those made in class actions filed against over 300 other companies that issued securities within the past four years. These actions have all been consolidated before the same judge for pretrial purposes. No specific amount of damages has been claimed. The individual defendants and the Company have demanded to be indemnified by the underwriter defendants pursuant to the underwriting agreement entered into at the time of the initial public offering. Presently, all claims against the former officers have been withdrawn without prejudice. The Company, along with the many other issuer defendants, moved to dismiss the claims in the complaint. By decision dated February 19, 2003 the court denied the Company’s motion. We believe that we have meritorious defenses to the claims made in the foregoing complaint and we intend to defend the actions vigorously. However, there can be no assurance that we will be successful on our defenses or in our assertion of indemnification, and an adverse resolution of the lawsuit could have a material adverse affect on our financial position and results of operation in the period in which the lawsuit is resolved. The plaintiffs have made a settlement proposals to the defendants. We have indicated a willingness to support the proposal, subject to review and acceptance of a definitive settlement agreement.

     On or about January 8, 2003 a company known as Dominion Venture Finance, L.L.C. commenced an action against the Company and “John Doe” defendants in the Superior Court of the State of California, County of San Francisco. In its complaint, plaintiff alleges that pursuant to a loan and security agreement and a master lease agreement (the liabilities for which agreement, plaintiff alleges, were acquired by the Company when the Company merged with an entity known as DiscoverMusic.com, Inc.) the Company failed to make certain required payments to plaintiff. Plaintiff asserts causes of action of breach of loan and security agreement, claim and delivery, money lent, breach of master lease agreement and book account. Plaintiff seeks relief in the form of money damages, interest, attorneys’ fees and costs. The Company has filed an answer to the complaint denying the material allegations. We believe that we have meritorious defenses to the claims made in the foregoing complaint and we intend to defend the action vigorously. However, there can be no assurance that we will be successful on our defenses.

     In April 2003, the landlord of one of our unoccupied facilities filed suit against us for breach of its lease and is seeking an unspecified amount of damages. We intend to vigorously defent this suit and may also bring certain counterclaims against the landlord.

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

ITEM 2:

CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)

Recent Sales of Unregistered Securities

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None

ITEM 3:		DEFAULTS UPON SENIOR SECURITIES
		None.

ITEM 4:		SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
		On March 11, 2003, we held Special Meeting of Stockholders. At the meeting the following matter was approved by the vote specified below:
		(a)	An amendment to the Company’s Amended and Restated Certificate of Incorporate, as amended, was approved in three variations to effect a reverse stock split of the Company’s common Stock, $0.001 par value per share in either a one-for-twenty, one-for-fifteen or one-for-ten reverse stock split ratio and to grant the Company’s Board of Directors the authority, in its sole discretion, to (i) determine the reverse stock split ratio at one-for-twenty, one-for-fifteen or one-for-ten, or (ii) not to complete the reverse stock split. The votes cast were as follows: 33,097,087 shares of common stock were voted for this amendment, 845,078 shares of common stock were voted against the amendment and 15,405 shares of common stock were withheld.