UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2001

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

For the transition period from to
---------- ----------

Commission File Number:0-29583

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

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

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

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

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

Yes [X] No [ ]

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

Common 41,454,270
- ------ ---------------------------
(Class) (Outstanding at May 1, 2001)

Loudeye Technologies, Inc.

Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2001

TABLE OF CONTENTS

Page
Number
------

PART I. Financial Information
Item 1 Financial Statements..................................................................... 1

Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31, 2000......... 1

Condensed Consolidated Statements of Operations for the three months ended March 31,
2001 and 2000............................................................................ 2

Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2001 and 2000............................................................................ 3

Notes to Unaudited Condensed Consolidated Financial Statements........................... 4

Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.... 14

Item 3 Quantitative and Qualitative Disclosures About Market Risk............................... 40

PART II. Other Information
Item 1 Legal Proceedings........................................................................ 41
Item 2 Changes in Securities and Use of Proceeds................................................ 41
Item 3 Defaults Upon Senior Securities.......................................................... 42
Item 4 Submission of Matters to a Vote of Security Holders...................................... 42
Item 5 Other Information........................................................................ 42
Item 6 Exhibits and Reports on Form 8-K......................................................... 43

SIGNATURES......................................................................................... 45

PART I - FINANCIAL INFORMATION

ITEM I FINANCIAL STATEMENTS

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

March 31, December 31,
2001 2000
--------- ------------
(Unaudited)

ASSETS
- ------

Current assets:
Cash and cash equivalents $ 46,210 $ 51,689
Short-term investments 36,844 43,300
Accounts receivable, net of allowance of $750 and $709, respectively 1,860 3,241
Prepaid and other current assets 1,633 1,072
-------- --------
Total current assets 86,547 99,302

Property and equipment, net 14,559 15,955
Assets held for sale, net 591 -
Goodwill, net 337 9,785
Intangibles and other long-term assets, net 15,061 7,634
-------- --------
Total assets $117,095 $132,676
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------

Current liabilities:
Accounts payable $ 1,383 $ 1,137
Accrued compensation and benefits 1,707 1,554
Other accrued expenses 4,248 1,368
Deposits and deferred revenues 320 800
Current portion of long-term debt and capital lease obligations 5,164 4,425
-------- --------
Total current liabilities 12,822 9,284

Long-term debt and capital lease obligations, net of current portion 6,642 7,324
-------- --------
Total liabilities 19,464 16,608
-------- --------

Stockholders' equity (deficit):
Common stock, additional paid-in capital and warrants, $0.001
par value, 100,000,000 shares authorized; 41,286,329
and 37,072,442 issued and outstanding 192,599 185,609
Deferred stock compensation (2,616) (3,387)
Accumulated deficit (92,352) (66,154)
-------- --------
Total stockholders' equity 97,631 116,068
-------- --------

Total liabilities and stockholders' equity $117,095 $132,676
======== ========

The accompanying notes are an integral part of these financial statements

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

Three Months Ended
March 31,
--------------------------------------------
2001 2000
----------------- -----------------

Revenues:
Digital media services $ 1,615 $ 1,551
Digital media applications and other 314 98
----------------- -----------------
Total revenues 1,929 1,649

Cost of revenues: (excluding stock-based compensation expense of $21 in 2001
and $253 in 2000 shown below)
Digital media services 3,081 2,134
Digital media applications and other 190 36
----------------- -----------------
Total cost of revenues 3,271 2,170

Gross margin (1,342) (521)

Operating expenses:
Research and development (excluding stock-based compensation expense
of $13 in 2001 and $157 in 2000 shown below) 2,670 1,313
Sales and marketing (excluding stock-based compensation expense of $34
in 2001 and $416 in 2000 shown below) 2,612 2,776
General and administrative (excluding stock-based compensation expense of
$825 in 2001 and $2,313 in 2000 shown below) 2,750 1,651
Amortization of intangibles and other assets 2,228 1,703
Stock-based compensation 893 3,139
----------------- -----------------
Total operating expenses 11,153 10,582

Special charges 14,623 -
----------------- -----------------
Operating loss (27,118) (11,103)

Interest income 1,262 691
Interest expense (342) (110)
----------------- -----------------
Total other income 920 581
----------------- -----------------
Net loss $ (26,198) $ (10,522)
================= =================

Basic and diluted net loss per share $ (0.68) $ (0.84)
================= =================

Weighted average shares outstanding used to compute
basic and diluted net loss per share 38,283,453 12,452,312
================= =================

Basic and diluted pro forma net loss per share $ (0.68) $ (0.35)
================= =================

Weighted average shares outstanding used to compute
basic and diluted pro forma net loss per share 38,283,453 29,770,973
================= =================

The accompanying notes are an integral part of these statements.

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

Three Months Ended
March 31,
--------------------------------
2001 2000
---------- ----------

Cash flows from operating activities:
Net loss $(26,198) $(10,522)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 4,191 2,351
Special charges and other 13,630 25
Stock-based compensation 893 3,139
Changes in operating assets and liabilities, net
of amounts acquired in purchase of business
Accounts receivable 2,110 185
Prepaid expenses and other assets (379) (411)
Accounts payable 181 (3,459)
Accrued compensation, benefits and other expenses 1,344 1,858
Deposits and deferred revenue (480) 895
--------------- ------------
Net cash used in operating activities (4,708) (5,939)

Cash flows from investing activities:
Purchases of property and equipment (2,060) (6,810)
Cash paid for acquisition of business and technology, net (4,219) -
Sales (purchases) of short-term investments, net 6,605 (3,529)
--------------- ------------
Net cash provided by (used in) investing activities 326 (10,339)

Cash flows from financing activities:
Proceeds from sale of stock and exercise of stock options, net 28 70,891
Proceeds from long-term debt and capital lease obligations 131 361
Principal payments on long-term debt and capital lease obligations (1,256) (293)
--------------- ------------
Net cash (used in) provided by financing activities (1,097) 70,959
--------------- ------------

Net (decrease) increase in cash and cash equivalents (5,479) 54,681

Cash and cash equivalents, beginning of period 51,689 49,273
--------------- ------------
Cash and cash equivalents, end of period $ 46,210 $103,954
=============== ============

Supplemental disclosure of cash flow information:
Cash paid for interest $ 275 $ 105
Issuance of common stock for acquisition of business and technology 6,750 -
Issuance of common stock and common stock warrants to strategic partners 50 -

The accompanying notes are an integral part of these statements.

LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)

1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:

The Company

Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications including transforming audio and video
content from traditional sources into Internet compatible formats. The Company
is headquartered in Seattle, Washington and to-date has conducted business in
the United States and Europe in one business segment.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Unaudited Interim Financial Data

The interim condensed consolidated financial statements are unaudited and
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on February 27, 2001. The financial information included
herein reflects all adjustments (consisting only of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the results for interim periods. The results of operations for
the quarters ended March 31, 2001 and 2000 are not necessarily indicative of the
results to be expected for the full years.

Cash and Cash Equivalents

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

Short-term Investments

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

Additionally, the Company has established irrevocable standby letters of
credit totaling approximately $3.0 million. Approximately $1.4 million of short-
term investments are utilized as collateral for certain of the letters of
credit.

Long-Lived Assets

The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected future undiscounted net cash flows is less than the carrying
amount of the asset. As described in Note 4, the Company recorded impairment
charges of $13.6 million and $637,000 in the quarters ended March 31, 2001 and
December 31, 2000, respectively.

The Company will continue to evaluate the recoverability of its long-lived
assets in accordance with the above policy, however, other than the expected
future charges described in Note 4, no additional impairments are anticipated.

Software Development Costs

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

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

To date, $1.3 million in software development costs had been capitalized,
of which approximately $225,000 had been amortized. Additionally, as described
in Note 4, the Company recognized an impairment charge of approximately $800,000
in the quarter

ended March 31, 2001, related to previously capitalized software development
costs. The remaining amounts are considered realizable and are included in other
long-term assets.

Reclassifications

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

3. REVENUE RECOGNITION

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

DIGITAL MEDIA SERVICES

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

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

Consulting Services consist of services provided by our consulting services
group to enable customers to utilize streaming media within their intranets,
websites and Internet applications. Consulting services are provided under
short-term contracts that are generally time and materials based. Consulting
services revenue generated by time and materials contracts are recognized as the
services are provided if there are no contingencies.

DIGITAL MEDIA APPLICATIONS AND OTHER

Digital Media Applications and other revenues are generated from our music
samples service business and in the prior year from licensing and selling of
software and through application service provider arrangements. Our revenue
recognition policies are in accordance with Statement of Position (SOP 97-2),
Software Revenue Recognition as amended by SOP 98-9. Under SOP 97-2, in general,
license revenues are recognized when a non-cancelable license agreement has been
signed and the customer acknowledges an unconditional obligation to pay, the
software product has been delivered, there are no uncertainties surrounding
customer acceptance, the fees are fixed and determinable, and collection is
considered probable. The Company records deferred revenue for software
arrangements when billings have been made or cash has been received from the
customer and the arrangement does not qualify for revenue recognition under the
Company's revenue recognition policy.

The Company sells digital media applications in application service
provider arrangements. The Company is required to host the applications and the
customer does

not have the ability to have the application hosted by another entity without
penalty to the customer, billings are made based upon minutes of content
streamed, and revenue is recognized as the services are delivered.

4. SPECIAL CHARGES

In January 2001, the Company announced a cost-savings initiative which
resulted in a $947,000 special charge being incurred in 2000, and a related
charge of $700,000 in the first quarter of 2001 for severance payments to
employees terminated during that quarter.

Consistent with the continuing market trends, the Company has experienced
decreasing demand for our video services. Accordingly, in December 2000 our
board of directors approved a plan to close our Santa Monica facility and reduce
video production capacity in Seattle, which resulted in an impairment in the
value of our video encoding equipment as well as existing tenant improvements at
our Santa Monica facility which was closed in the first quarter of 2001.
Management decided in the first quarter of 2001 to focus primarily upon audio or
music related sources of revenues as that area currently appears to be more
fully developed. As a result of this decision, the Company will no longer
provide and support certain products, and therefore, certain related assets
became impaired. In accordance with our accounting policy for long-lived assets,
we adjusted certain property, equipment and intangibles to estimated fair market
value as of March 31, 2001. The components of the impairment charge in the
quarter ended March 31, 2001 are as follows:

(In Millions)
-------------

Intangible and other asset impairments $11.3
Property and equipment impairments 1.5
Software impairments 0.8
Severance costs 0.7
Other 0.3
-----
$14.6
=====

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

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

$10.9 million, were adjusted to zero. This write-off is included in the Special
Charge line item on the statements of operations.

The Company's decision to focus on audio business, the termination of most
of its video production personnel and the continued decline in demand for its
video offerings led to a further review of its video assets. The Company
performed a review of the current market prices for similar used equipment and
adjusted the remaining value of its video assets down to the estimated net
realizable value. The Company has placed certain of these assets for sale and
accordingly has ceased depreciation until such time as they are disposed of.

As of December 31, 2000, approximately $300,000 was included in accrued
expenses related to the first phase of the restructuring efforts, of which,
approximately $200,000 was paid in the first quarter of 2001. As of March 31,
2001, approximately $300,000 was included within accrued expenses related to the
restructuring process.

In April 2001, we announced a continuation of the restructuring efforts
necessary to fully integrate the DiscoverMusic acquisition and OnAir asset
purchase, and remove redundant positions and facilities. We expect to incur
additional cash charges of approximately $2.0 million in the second quarter of
2001, primarily for severance related costs. Other cash and noncash charges
related to facility closures and disposal of equipment are expected to continue
in the second quarter of 2001, resulting in further charges of approximately
$1.0 million in that period.

5. NET LOSS PER SHARE

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

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

At March 31, 2001, the Company had 218,818 stock options that had been
exercised but which were subject to repurchase at a weighted average exercise
price of $0.34 per share. Accordingly, the impact of these unvested but
exercised options has been removed from the calculation of weighted average
shares outstanding for purposes of determining net loss per share.

As part of the terms of the acquisition of Alive.com on December 14, 1999,
49,604 Loudeye shares originally issued by Alive.com under the terms of a stock
purchase agreement with Allaire Corporation were subject to repurchase at a
weighted average exercise price of $0.20 within 90 days of the termination date
of the licensing and stock purchase agreement assumed by Loudeye. Accordingly,
the impact of these shares has been removed from the calculation of weighted
average shares outstanding for purposes of determining net loss per share. The
shares purchased by Allaire under the original arrangement with Alive.com will
become fully vested and no longer subject to repurchase in the third quarter of
2001.

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

For the Three Months Ended For the Three Months Ended
March 31, 2001 March 31, 2000
Actual Pro Forma Actual Pro Forma
--------------- --------------- --------------- ---------------

Weighted average shares outstanding 38,568,478 38,568,478 13,911,827 31,230,488
Weighting of shares subject to
repurchase (285,025) (285,025) (1,459,515) (1,459,515)
--------------- --------------- --------------- ---------------
Weighted average shares used to
calculate basic and diluted net loss
per share 38,283,453 38,283,453 12,452,312 29,770,973
=============== =============== =============== ===============

6. CONCENTRATION OF RISK AND SEGMENT DISCLOSURES

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

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

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

2001 2000
---- ----

Customer A - 29%
Customer B - 12%
Customer C - 10%
Customer D 25% -
Customer E 15% -
-- --
40% 51%
== ==

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

7. ACQUISITIONS, GOODWILL, INTANGIBLES AND OTHER LONG-TERM ASSETS

Generally, the Company's goodwill, intangibles and other assets have
resulted from purchase acquisitions, equity transactions or the capitalization
of software development costs. The acquisition described below was accounted for
under the purchase method of accounting.

In March 2001, the Company purchased DiscoverMusic, a Seattle company which
is the largest provider of music samples on the Internet. The Company paid $4.0
million in cash, net of DiscoverMusic's cash, and issued 3,677,013 shares of
common stock valued at $6.1 million for cash and stock consideration of $10.7
million. As part of the purchase price, the Company placed $1.0 million in cash
into an escrow account to pay for certain legal exposures assumed. If these
amounts are not paid for litigation expenses, they will be remitted to the
former shareholders. The total purchase price, including costs of the
acquisition and liabilities assumed, of $16.3 million was allocated as follows:

(In Millions)
- -------------

Assets acquired $ 5.2
Property and equipment 1.1
Customer list 7.9
Digital samples archive 2.1
-----
$16.3
=====

The customer list and digital samples archive acquired are being amortized
over three years. At March 31, 2001, approximately $1.0 million of the cash
purchase price had not been remitted to the selling shareholders, and
accordingly is presented within accrued expenses on the balance sheet.

In addition to the intangibles resulting from previous acquisitions, the
Company has previously recognized intangible assets related to discounts on
stock and the fair value of warrants issued to certain strategic partners. Each
of these intangibles and other assets are being amortized over one to three
years. The following table sets forth information related to the Company's
intangibles and other assets at March 31, 2001:

Accumulated
(In Thousands) Gross Asset Amortization Net Book Value
- ------------- -------------- ---------------- ---------------

VidiPax identified intangibles $ 3,776 $ (703) $ 3,073
Capitalized software development costs 432 (77) 355
DiscoverMusic identified intangibles 9,991 (305) 9,686
OnAir acquired technology 1,116 (10) 1,106
Other long-term assets and long-term deposits 1,258 (417) 841
Goodwill resulting from the acquisition of VidiPax 457 (120) 337
------- -------- -------
$17,030 $(1,632) $15,398
======= ======= =======

8. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Long-term Debt

The Company has an equipment line of credit for up to $1.0 million secured
by the Company's property and equipment. Advances under the equipment line are
payable over 36 equal monthly installments that commenced on August 30, 1999.
The equipment line bears interest at the bank's prime rate (8.00% at March 31,
2001) and had an outstanding balance of approximately $444,000 as of March 31,
2001.

The Company also has a credit facility that provides for advances up to
$2.6 million for the purchase of capital equipment. Advances under the equipment
loan are payable in 36 equal monthly installments from inception date and are
secured by assets financed under the agreement. As of March 31, 2001,
approximately $1.4 million was outstanding under the equipment facility. The
notes payable bear interest at rates ranging from 8.57% to 9.65%, with various
maturity dates through February 2003. A fee equal to 15% of the principal
balance is due with the final payment of each advance. That additional fee is
accrued on a monthly basis and is included in accrued liabilities and interest
expense over the term of the loan.

In May 2000, the Company amended the credit facility to provide for a term
loan of up to $10.0 million for the purchase of capital equipment, in addition
to providing revolving borrowings aggregating up to $2.0 million. The $10.0
million equipment facility bears interest payable monthly during each draw
period at the bank's prime rates plus 0.75% (8.75% at March 31, 2001), followed
by 36 equal monthly payments of principal plus interest. Advances under this
facility are secured by substantially all of the Company's assets. At March 31,
2001, approximately $9.0 million was outstanding under the equipment credit
facility. The $2.0 million credit line bears interest at the bank's

prime rate (8.00% at March 31, 2001), with principal and interest due at
maturity, currently May 17, 2001. There were no borrowings outstanding under the
credit line at March 31, 2001, although it is currently being used
to back-up a stand-by letter of credit. If the Company does not renew this
credit line, it would use short-term investments to back up the letter of
credit.

Capital Lease Obligations

In March 2001, in connection with the acquisition of DiscoverMusic, the
Company assumed master lease agreements with two finance companies for the lease
of certain property and equipment. Borrowings under the lease agreements have
individual terms of 36 months and bear interest ranging from 9.00% to 9.25% and
are collateralized by the assets purchased. As of March 31, 2001, approximately
$1.0 million was outstanding under the leases.

The Company's long-term debt and capital lease agreements require that the
Company maintain various financial ratios on a quarterly basis. These financing
arrangements also place restrictions on the amount of cash dividends that the
Company could pay to its stockholders. The Company is in compliance with all
necessary financial requirements.

Commitments and Contingencies

In accordance with the terms of past acquisitions, additional consideration
is required to be paid to the employees and former shareholder based upon
results of operations in the first year subsequent to the acquisition. These
payments can be made in a combination of cash and stock as determined solely by
the Company. The value of the estimated additional consideration is between $1.3
million and $3.3 million. The current estimate of $1.3 million has been accrued
as contingent consideration in the balance sheet and is accrued at the time that
all uncertainties concerning such amounts are resolved. The additional payment
to the former selling shareholder is considered additional goodwill and will be
amortized over the remaining two-year period. Any payments to employees have
been expensed once estimable.

9. STOCK-BASED COMPENSATION

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

During the quarters ended March 31, 2001 and 2000, the Company amortized
approximately $500,000 and $1.2 million, respectively, of deferred stock
compensation that is included in stock-based compensation expense in the
accompanying statements of operations. Due to stock option cancellations,
$355,000 of deferred stock compensation was reversed and approximately $300,000
in previously amortized deferred stock compensation was recorded as a credit to
stock-based compensation expense in the quarter ended March 31, 2001. No such
amounts were recorded in 2000. In the quarter ended March 31, 2000, $1.9 million
was recognized as stock-based compensation expense related to marking options
granted to consultants to fair value. These options were canceled in the third
quarter of 2000, and accordingly no such charges were recorded in 2001.

The Company modified the terms of approximately 300,000 options granted to
a former employee. This resulted in a charge of approximately $635,000 to stock-
based compensation. No comparable charges were incurred in 2000.

The Company records stock-based compensation charges as a separate
component of operating expenses. That amount represents the consulting expenses,
amortization of stock options granted below fair market value, the charges for
acceleration of options and amounts paid under rescission. These amounts can be
allocated to the other expense categories in the accompanying statements of
operations as follows:

(In Thousands) 2001 2000
-------------- ----- ------

Production (cost of revenues) $ 21 $ 253
Research and development 13 157
Sales and marketing 34 416
General and administrative 825 2,313
----- ------
$ 893 $3,139
===== ======

10. LEGAL PROCEEDINGS

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

11. SUBSEQUENT EVENTS

In April 2001, the Company continued its operational restructuring. This
resulted in the termination of approximately 45 percent of its permanent
workforce. The resulting cash charges, estimated to be approximately $2.0
million, will be recognized as a special charge in the quarter ended June 30,
2001, and relate primarily to severance related costs. Additional non-cash
charges expected to be approximately $1.0 million will be recorded in the
quarter ended June 30, 2001.

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

Forward-Looking Statements

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

Overview

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

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

Loudeye is presently focused on digital music infrastructure and
distribution because the Company believes it offers the best market opportunity
over the next 12 to 24 months. Our solutions simplify and accelerate the process
of delivering audio and video content on the Internet and other digital
distribution platforms. Our proprietary systems and technology enable scalable
and cost effective archival, retrieval and processing of large inventories of
digital media. Our services and applications are built upon a robust production
and delivery infrastructure. The benefits of our services and applications
include:

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

In the first quarter of 2001, we delivered over 800,000 encoded audio files
and nearly 100,000 encoded video minutes to customers. We served over 150
customers in the first quarter, including Hutchison 3G, CD Now!, Amazon.com,
Sonicnet, BMG Direct, Universal Music Group, Tower Records, barnesandnoble.com,
launch.com, and Real Networks.

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

. developing and marketing an end-to-end suite of products and services;
. leveraging existing management, production and delivery systems to
support new products and services;
. establishing relationships and obtaining content licensing agreements
from content owners;
. expanding into selected international markets; and
. selectively pursuing strategic acquisitions to strengthen our market
position, expand our proprietary technology and accelerate our product
strategy.

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

Substantially all of our revenues to date have been generated from digital
media services. With the acquisition of DiscoverMusic in March 2001, we began
generating recurring digital media applications revenues from Media Subscription
Services provided through an applications service provider model. We charge our
customers for digital

media services on either a time and materials basis or a fixed fee basis that
depends on a variety of factors, such as volume and type of content provided and
number and type of output formats requested. We recognize digital media services
revenues as the service is provided and we have no further involvement. Standard
payment terms with customers require payment within 30 days of the invoice date.
Our ongoing digital media applications strategy consists primarily of the Media
Subscription Services applications obtained in the DiscoverMusic acquisition and
certain online radio technology assets purchased from OnAir Streaming Networks
in March 2001.

We have sustained losses on a quarterly basis since inception and we expect
to sustain losses for the foreseeable future. For the three months ended March
31, 2001, we had a net loss of $26.2 million. As of March 31, 2001, we had an
accumulated deficit of $92.4 million. Operating losses resulted from significant
costs incurred in the development and sale of our products and services as well
as significant non-cash charges related to stock-based compensation and
amortization of intangibles and other assets. In addition to normal, recurring
charges, we recorded $14.6 million in special charges in the first quarter,
related to a company-wide restructuring. These charges relate to employee
severance, impairments of assets and facilities consolidation. We expect the
restructuring of operations to generate significant cost savings in all
functional areas once fully implemented.

We anticipate that operating expenses, as well as planned capital
expenditures, debt repayments and any acquisitions, will constitute a material
use of our cash resources throughout the remainder of 2001. We expect to incur
additional losses and continued negative cash flow from operations in the
future. We cannot assure you that we will achieve or sustain profitability.

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

Results of Operations

Three Months Ended March 31, 2001 compared to 2000

Revenues. Revenues totaled $1.9 million and $1.6 million for the three
months ended March 31, 2001 and 2000, respectively. The increase was due
primarily to the acquisition of DiscoverMusic in March 2001 and the acquisition
of VidiPax in June 2000. We have operated historically in one segment, Digital
Media Services and Applications, although we have included additional detail to
provide insight into our operations and revenues.

We earned approximately $600,000 from the performance of our four largest
audio projects in 2001, as compared with approximately $436,000 for our four
largest such projects in 2000. The increase in large audio projects was
primarily driven by the rapid expansion of companies and business models
oriented towards audio on the Internet, as well as the build-out of our capacity
in late 1999 and early 2000 to be able to handle demand. We expect this trend of
significant revenue concentration among large audio customers to continue in
2001, however the timing of any revenue realized will continue to be affected by
issues surrounding the rights of our customers to use copyrighted music and the
ultimate survival of varied business models.

Media Subscription Services revenues totaled $314,000 in the three months
ended March 31, 2001 and includes revenues related to the offering of music
samples through the platform obtained in the DiscoverMusic acquisition during
the quarter. We had no subscription services available in the three months ended
March 31, 2000, and accordingly had no revenues. We expect Subscription Services
revenues to increase on a quarterly basis as the results of the DiscoverMusic
acquisition are included for full quarters. Additionally, we expect the monthly
revenues to remain relatively flat or increase modestly as the customer base
evolves. Our Media Subscription Services strategy for the future is geared
towards the rapidly expanding music industry and our Music Samples offerings.
Additional Subscription Services offerings may be available in the future in
areas such as online radio, full song lockers and other music-related
subscription offerings.

Video and other related revenues remained relatively flat on a comparative
basis. Video encoding projects decreased significantly in the first quarter of
2001 and media restoration revenues, including those from VidiPax increased due
to inclusion in our financial results in 2001 and not in the same period in
2000. We expect video-related revenues to continue to decrease or remain
relatively flat on a sequential or quarter-over-quarter basis in 2001 as we
continue to focus primarily on the digital music opportunities.

Consulting services related primarily to video projects and revenues
decreased both on a comparative basis and on a sequential quarterly basis
primarily due our focus on audio-related opportunities in the first quarter of
2001 and the slowing of the demand for our digital video media offerings. As a
part of our announced restructuring, we reduced the number of consultants we
employ and, as a result, we expect that consulting services revenues will
continue to decrease in the future and will not be a significant component of
our revenues.

In the three months ended March 31, 2000 we generated revenues from the
sale or license of custom applications totaling $98,000. These revenues related
to product offerings which we decided were no longer going to be supported in
conjunction with our operational restructuring. In the three months ended March
31, 2001 we generated no revenues from sales or license of such technologies. We
do not expect to generate any revenues from such applications in the foreseeable
future.

Cost of Revenues. Cost of revenues increased to $3.3 million in the three
months ended March 31, 2001 from $2.2 million in the period ended March 31,
2000. Cost of revenues includes the cost of production and consulting, personnel
and an allocated portion of facilities and equipment and other supporting
functions related to the delivery of digital media services and applications.
Stock-based compensation charges of $21,000 and $253,000 for the quarters ended
March 31, 2001 and 2000, respectively, are attributable to employees included in
cost of revenues and are presented in the separate operating expense line item
within the statements of operations. Cost of revenues as a percent of revenues
increased significantly from the same period in 2000 primarily due to increased
personnel, facilities costs and increased depreciation on purchased equipment.
The decreased gross margin was primarily due to the significant increase in the
amount of fixed expenses within cost of revenues. The increase in depreciation
and amortization expense was consistent with the increased capital expenditures
in 2000. We expect margins on traditional service offerings to remain fairly
constant through the remainder of 2001 and expect future margins to improve as
product mix changes towards Media Subscription Services and offerings based upon
our digital media archive system.

Operating Expenses. Total operating expenses were $25.8 million and $10.6
million in the three months ended March 31, 2001 and 2000, respectively. Without
the effect of $893,000 of stock-based compensation charges, $2.2 million in
amortization of intangible and other long-term assets, and $14.6 million in
special charges in 2001, operating expenses for the quarter ended March 31, 2001
would have been $8.1 million, an increase of $2.3 million over the comparable
amount in the same period in 2000.

Research and Development Expenses. Research and development expenses
totaled $2.7 million and $1.3 million in the three months ended March 31, 2001
and 2000, respectively. Research and development expenses consist of salaries
and consulting fees paid to support technology development, costs of technology
acquired from third parties to incorporate into applications and other
proprietary technology currently under development. Costs of developing a music
sampling platform prior to the acquisition of redundant technology from
DiscoverMusic in March 2001, the digital media archive production system,
continued development of acquired technology from OnAir and other unannounced
applications, as well as continued work on enhancing our proprietary automated
encoding processes, comprised a majority of our research and development
expenses. Stock-based compensation charges of approximately $13,000 and $157,000
for the three months ended March 31, 2001 and 2000, respectively, are
attributable to employees categorized within research and development and are
presented in the separate operating expense line item in the statements of
operations.

To date, we have capitalized approximately $1.3 million in software
development costs. Through March 31, 2001, $225,000 of these capitalized amounts
had been amortized into expense. Approximately $800,000 in previously
capitalized software development costs were written off as a component of the
special charge during the quarter ended March 31, 2001 due to either duplication
of technology platforms resulting from the acquisition of DiscoverMusic or
cessation of support for that technology as an offering. All other research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
objectives. However, due to our operational restructuring and focus on digital
audio opportunities, development headcount was significantly reduced in April
2001 and, as a result, we expect research and development expenses to continue
at lower rates in 2001.

Sales and Marketing Expenses. Sales and marketing expenses totaled $2.6
million and $2.8 million in the three months ended March 31, 2001 and 2000,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product branding costs,
advertising and cost of marketing collateral. The slight decrease in sales and
marketing expenses was primarily due to the decreased personnel subsequent to
our January 2001 reduction in force. Stock-based compensation charges of
approximately $34,000 and $416,000 for the three months ended March 31, 2001 and
2000, respectively, are attributable to employees categorized within sales and
marketing and are presented in the separate operating expense line item in the
statements of operations.

General and Administrative Expenses. General and administrative expenses
totaled $2.8 million and $1.7 million in the three months ended March 31, 2001
and 2000, respectively. General and administrative expenses consist primarily of
unallocated rent, facilities and information technology charges, salaries, legal
expenses for general corporate purposes and investor relations and other costs
associated with being a public company. The increase was primarily due to full-
scale operations in 2001 at facilities opened during late 1999 and the first
quarter of 2000 and, subsequent to our March 2000 initial public offering, the
significant increase required to support a larger organization, and increased
public company reporting obligations. Additional factors leading to the increase
in 2001 were other expenses associated with being a public company and legal
expenses related to ongoing corporate initiatives. We believe that general and
administrative expenses will decrease slightly in future periods as a result of
our restructuring efforts, although, new initiatives may cause these expenses to
actually increase over time. Stock-based compensation charges totaling $825,000
and $2.3 million for the three months ended March 31, 2001 and 2000,
respectively, are attributable to employees categorized within general and
administrative and are presented in the separate operating expense line item in
the statements of operations.

Amortization of Intangibles and Other Assets. Amortization of intangibles
and other assets totaled $2.2 million and $1.7 million in the three months ended
March 31, 2001 and 2000, respectively, and includes amortization of the goodwill
and identified intangible assets related to past acquisitions and amortization
related to the fair value of

warrants granted to certain partners. The increase was primarily due to the
timing of the acquisition of VidiPax in June 2000 and DiscoverMusic in March
2001. As a component of the special charge in 2001, goodwill and intangibles
recognized as a result of the Alive.com acquisition in December 1999 were
written down. This impairment writedown will result in lower amortization in
future periods, although that decrease will be substantially offset by increased
amortization as a result of the acquisition of DiscoverMusic in the first
quarter of 2001.

Stock-Based Compensation. Stock-based compensation totaled $893,000 and
$3.1 million in the three months ended March 31, 2001 and 2000, respectively.
Stock-based compensation in 2001 consisted of approximately $500,000 in
amortization of deferred stock compensation, offset by a credit resulting from
option cancellations which had previously amortized deferred stock compensation
of approximately $300,000, and a charge of $635,000 related to a modification
associated with stock options held by a former employee. Stock-based
compensation in 2000 consisted of $1.2 million in amortization of deferred stock
compensation related to stock options granted below deemed fair market value
through March 31, 2000 and $1.9 million in expense related to marking options
granted to consultants to fair market value as of March 31, 2000.

Special Charges. In January 2001, the Company announced a cost-savings
initiative which resulted in a $947,000 special charge being incurred in 2000,
and a related charge of $700,000 in the first quarter of 2001 for severance
payments to employees terminated during that quarter.

Consistent with continuing market trends, the Company has experienced
decreasing demand for our video services. Accordingly, in December 2000 our
board of directors approved a plan to close our Santa Monica facility and reduce
video production capacity in Seattle, which resulted in an impairment in the
value of our video encoding equipment as well as existing tenant improvements at
our Santa Monica facility which was closed in the first quarter of 2001.
Management decided in the first quarter of 2001 to focus primarily upon audio or
music related sources of revenues as that area currently appears to be more
fully developed. As a result of this decision, the Company will no longer
provide and support certain products, and therefore, certain related assets
became impaired. In accordance with our accounting policy for long-lived assets,
we adjusted certain property, equipment and intangibles to estimated fair market
value as of March 31, 2001. The components of the impairment charge in the
quarter ended March 31, 2001 are as follows:

(In Millions)
-------------

Intangible and other asset impairments $11.3
Property and equipment impairments 1.5
Software impairments 0.8
Severance costs 0.7
Other 0.3
-----
$14.6
=====

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

In April 2001, we announced a continuation of the restructuring efforts
necessary to fully integrate the DiscoverMusic acquisition and OnAir asset
purchase, and remove redundant positions and facilities. We expect to incur
additional cash charges of approximately $2.0 million in the second quarter of
2001, primarily for severance related costs. Other cash and non-cash charges
related to facility closures and disposal of equipment are expected to continue
in the second quarter of 2001, resulting in further charges of approximately
$1.0 million in that period.

Upon its completion later in the second quarter, the operational
restructuring is anticipated to produce annualized cash savings of approximately
$12.0 million. Associated with the cost-savings initiative, we expect to save
approximately $1.0 million on a quarterly basis in expenses classified within
cost of revenues. Approximately $750,000 of these cost savings are cash
expenditures, while the remainder are non-cash expenses. The remaining
anticipated cash savings are related to activities historically categorized as
operating expenses.

Interest Income. Interest income representing earnings on our cash, cash
equivalents and short-term investments totaled $1.3 million and $691,000 in the
three months ended March 31, 2001 and 2000, respectively. The increased income
was due primarily to interest earned on our significantly higher average cash
and investment balances in 2001. We expect that our interest income will
decrease in the future as our cash balances decrease to fund our operating,
investing and financing activities.

Interest Expense. Interest expense and other consists of interest expense
related to our debt instruments as well as amortization of financing charges
related to our debt instruments. This totaled $342,000 and $110,000 in the three
months ended March 31, 2001 and 2000, respectively. The increase was due
primarily to increased levels of borrowings incurred to finance fixed asset
acquisitions.

Liquidity and Capital Resources

As of March 31, 2001, we had approximately $83.0 million of cash, cash
equivalents and short-term investments.

Net cash used in operating activities was $4.7 million and $5.9 million in
the three months ended March 31, 2001 and 2000, respectively. For 2001, cash
used in operating activities resulted primarily from a net loss of $26.2
million, a decrease of approximately $2.1 million in accounts receivable and an
increase in accrued compensation, benefits and other expenses of $1.3 million,
partially offset by non-cash charges totaling $18.7 million related to stock-
based compensation, depreciation and amortization, and the non-cash component of
the special charge. Cash used in operating activities in 2000 was due primarily
to a net loss of $10.5 million, a decrease in accounts payable of $3.5 million,
partially offset by an increase in accrued compensation, benefits and other
expenses of $1.9 million and non-cash stock-based compensation, depreciation and
amortization charges totaling $5.5 million.

Net cash provided by investing activities was $326,000 in the quarter ended
March 31, 2001, and net cash used in investing activities was $10.3 million in
the quarter ended March 31, 2000. For 2001, cash provided by investing
activities was primarily related to the net sales of short-term investments,
partially offset by purchases of property and equipment and cash paid for the
acquisition of DiscoverMusic and certain assets and technology of OnAir in March
2001. Cash used in investing activities in 2000 was primarily related to
purchases of property and equipment and short-term investments.

Net cash used in financing activities was $1.1 million in the quarter ended
March 31, 2001 and net cash provided by financing activities was $71.0 million
in the quarter ended March 31, 2000. The cash used in financing activities in
2001 primarily resulted from principal payments of our long-term debt and
capital lease obligations. Net cash provided by financing activities in 2000
primarily resulted from the net proceeds of our initial public offering, and the
concurrent sale of common shares to a strategic investor.

As of March 31, 2001, our principal commitments consisted of obligations
outstanding under operating leases, as well as notes payable totaling $11.8
million under our credit facilities and capital lease obligations. In addition,
we have certain financial commitments under existing agreements that will
require significant uses of our cash resources. We entered into a strategic
partnership agreement that commits us to purchase at least $625,000 in services
in 2001. Additionally, pursuant to the acquisition of VidiPax in June 2000,
additional consideration will be paid to the employees and a former shareholder
based upon results in the first year subsequent to acquisition. These payments
can be made in a combination of cash and stock in a manner to be determined
solely by the Company. The additional consideration under this arrangement is
expected to range from $1.3 million to $3.3 million and accordingly, we have
accrued $1.3 million as contingent consideration within current liabilities.

In January 2001, we announced a cost-savings initiative which resulted in a
$947,000 special charge being recognized in 2000; a similar charge totaling
approximately $14.6 million was recorded in the first quarter of 2001. The
December 2000 charge included approximately $300,000 related to employee
termination payments, of which approximately $200,000 was paid in the first
quarter of 2001. The 2001 charge relates primarily to payments for terminations
announced in January 2001 and were paid in cash during the first quarter of
2001. In April 2001, we reduced our permanent workforce by approximately 45
percent. Related to this reduction in force, we expect to pay cash severance of
approximately $1.5 million in the second quarter of 2001.

Since our inception, our operating expenses have significantly increased in
order to support our growth. We currently anticipate that such expenses will
continue to be a material use of our cash resources. We expect that capital
expenditures, excluding acquisitions, will total approximately $6.0 million in
2001.

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

RISK FACTORS

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

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

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

We have incurred net losses from operations of $78.3 million during the
period August 12, 1997 (inception) through March 31, 2001. Given the level of
our planned operating and capital expenditures, we expect to continue to incur
losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:

. Achieve customer adoption and acceptance of our products and services;
. Successfully scale our current operations;
. Introduce new digital media services and applications;
. Implement and execute our business and marketing strategies;
. Address media copyright issues without negatively impacting our
business;
. Develop and enhance our brand;
. Adapt to meet changes in the marketplace;
. Respond to competitive developments in the Internet media infrastructure
industry;
. Continue to attract, integrate, retain and motivate qualified personnel;
and
. Upgrade and enhance our technologies to accommodate expanded digital
media service and application offerings.

We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our

business, results of operations and financial position. Even if we ultimately do
achieve profitability, we may not be able to sustain or increase profitability
on a quarterly or annual basis. Additionally, we will likely increase our
operating expenses in the future as we attempt to expand our digital media
service and application offerings; obtain, administer, and renew financially
reasonable music content license agreements with the various third parties in
the fragmented music recording and publishing industries; grow our customer
base; enhance our brand image; improve our technology infrastructure; and open
new offices. We expect the number of our employees may grow. These higher
operating costs will likely increase our quarterly net losses for the
foreseeable future. Accordingly, our ability to operate our business and
implement our business strategy may be hampered and the value of our stock may
decline.

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

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

. Variability in demand for our digital media services and applications;
. Profitability and viability of existing and emerging businesses focused
on distribution of digital media content over the Internet;
. Market acceptance of new digital media services and applications
offered by us and our competitors;
. Ability of our customers to procure necessary intellectual property
rights in the digital media content they intend to utilize in their
businesses;
. Introduction or enhancement of digital media services and applications
offered by us and our competitors;
. Willingness of our customers to enter into digital media and
applications services agreements for digital media in light of the
economic and legal uncertainties related to their business models;
. The mix of distribution channels through which our products and
services are licensed and sold;
. Changes in the growth rate of Internet usage and adoption of broadband
access;
. Variability in average order size or product mix;
. Changes in our pricing policies or the pricing policies of our
competitors;
. Technical difficulties with respect to the use of our products;
. Governmental regulations affecting use of the Internet, including
regulations concerning intellectual property rights and security
measures;
. The amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure;
. General economic conditions such as fluctuating interest rates and
inflation; and
. Economic conditions specifically related to the Internet such as
fluctuations in the costs of Internet access, hardware and software.

As a result of our cost savings initiative, we expect our operating
expenses to decrease in absolute dollars on an annual basis, but over time, they
will likely increase. Our current and future levels of operating expenses and
capital expenditures are based largely on our growth plans and estimates of
expected future revenues. However, future alterations in our business model may
require future increases in operating expenses in order to execute our business
plan. These expenditure levels are, to a large extent, fixed in the short term.
Thus, we may not be able to adjust spending in a timely manner to compensate for
any shortfall in revenues and any significant shortfall in revenues relative to
planned expenditures could have an immediate adverse effect on our business and
results of operations. If our operating results fall below our expectations as
well as those of securities analysts and investors in some future periods, our
stock price will likely decline.

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

Although we have recently achieved significant percentage increases in our
quarter over quarter revenues, we believe future quarters may not show similar
percentage revenue changes and may show declining revenue.

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

Our common stock price has been, and may continue to be, extremely
volatile, and there is a risk we could be delisted from the Nasdaq National
Market. The market price of our common stock has declined significantly in
recent months, and we expect that it will continue to be subject to significant
fluctuations as a result of variations in our quarterly operating results and
volatility in the financial markets. On several recent occasions, our stock has
traded below $1.00 and may continue to do so. If our stock continues to trade
below $1.00 per share for 30 consecutive business days, we may receive notice
from the Nasdaq National Market that we need to comply with the requirements for
continued listing on the Nasdaq National Market within 90 calendar days from
such notification or be delisted. If our stock is delisted from the Nasdaq
National Market, an investor could find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, our common stock.
Additionally, our stock may be subject to "penny stock" regulations. If our
common stock were subject to "penny stock" regulations, which apply to certain
equity

securities not traded on the Nasdaq National Market which have a market price of
less than $5.00 per share, subject to limited exceptions, additional disclosure
would be required by broker-dealers in connection with any trades involving such
penny stock.

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

Sales of a substantial number of shares of common stock in the public
market, including the shares issued to the former stockholders of
DiscoverMusic.com, Inc. ("DiscoverMusic") registered in our Registration
Statement on Form S-3 as filed with the Securities and Exchange Commission on
April 4, 2001, or the perception that these sales may occur, could adversely
affect the market price of the common stock by potentially introducing a large
number of sellers of our common stock into a market in which the common stock
price is already volatile, thus driving the common stock price down. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional equity securities.

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

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

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

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

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

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

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

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

In addition, we face the risk that our customers might not have all
necessary ownership or license rights in the content for us to perform our
encoding services. Any

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

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

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

A limited number of customers have accounted for a majority of our revenues
and will continue to do so for the foreseeable future. During the three months
ended March 31, 2001, two of our customers accounted for approximately 40% of
our revenues; while in the three months ended March 31, 2000, three other
customers accounted for approximately 51% of our revenues. We believe that a
small number of customers will likely continue to account for a significant
percentage of our revenues for the foreseeable future. Due to high revenue
concentration among a limited number of customers, the cancellation, reduction
or delay of a large customer order or our failure to timely complete or deliver
a project during a given quarter is likely to significantly reduce revenues for
the quarter. If we were to lose a key customer, our business, financial
condition, and operating results could suffer. In addition, if any customer
fails to pay amounts it owes us, or does not pay those amounts on time, our
revenues and operating results could suffer. If we are unsuccessful in
increasing our customer base, our business could be harmed.

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

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

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

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

. Diversion of management's attention from other business concerns;
. Failure to assimilate the acquired company with our pre-existing
business;
. Potential loss of key employees from either our pre-existing business or
the acquired business;
. Dilution of our existing stockholders as a result of issuing equity
securities; and
. Assumption of liabilities of the acquired company.
. Complementary products and services may not be available on commercially
reasonable terms;
. We may be unable to compete for acquisitions of products and services
with many of our competitors who have greater financial resources than
we do;
. Acquired products and services may not meet the needs of our customers;
. We may incur difficulties associated with the integration of the
personnel and operations of an acquired company with our personnel and
operations;
. We may incur difficulties in assimilating acquired products, services or
technologies, with our existing products, services and technologies such
as those acquired in the DiscoverMusic and OnAir transactions; and
. Integration of acquired and existing products and services may result in
decreases in revenue from existing products and services.

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

In addition, the reduced availability of write-offs for in-process research
and development costs under the purchase method of accounting in connection with
an acquisition could make an acquisition more costly for us. We will incur
additional amortization expense in future periods as a result of the excess
purchase price associated with our acquisition of DiscoverMusic.

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

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

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

Our current or future infrastructure and systems (such as information
technologies and accounting) may prove to be insufficient to indefinitely
accommodate our targeted level of future operations. Effectively managing any
future growth will require, among other things, that we successfully upgrade and
expand our production processes and systems, expand the breadth of products and
services we offer, continue to improve our management reporting capabilities and
accounting systems. We also need to retain our highly skilled and motivated
executives and other employees. We must also maintain close coordination among
our marketing, operations, development, finance and administrative
organizations.

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

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

Technological advances may cause our services and applications to be unnecessary

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

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

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

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

Our products and services are divided into digital media services, which is
the encoding of audio and video content for deployment over the Internet, media
migration and restoration services and consulting services; and digital media
applications, which are primarily subscription services focused towards business
models providing music over the Internet.

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

In addition, we may not compete successfully against current or future
competitors, many of whom have substantially more capital, longer operating
histories, greater brand recognition, larger customer bases and significantly
greater financial, technical and marketing resources than we do. These
competitors may also engage in more extensive development of their technologies,
adopt more aggressive pricing policies and establish more comprehensive
marketing and advertising campaigns than we can. Our competitors may develop
products and service offerings that are more sophisticated than our own. 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 business model is unproven, making it difficult to forecast our revenues and
operating results

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

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

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

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

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

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

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

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

Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents, trade
secrets, confidentiality provisions in our customer, supplier and strategic
relationship agreements, nondisclosure

agreements with third parties, and invention assignment agreements with our
employees and contractors. We have filed six U.S. patent applications and four
international patent applications that claim priority to six previously filed
provisional applications. We cannot assure that measures we take to protect our
intellectual property will be successful or that third parties will not develop
alternative solutions that do not infringe upon our intellectual property.

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

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

Our customers typically include large corporations that often require long
testing and approval processes before making a purchase decision. Therefore, the
length of our sales cycle, the time between an initial customer contact and
completing a sale, has been and may continue to be unpredictable. The time
between the date of our initial contact with a potential new customer and the
execution of a sales contract with that customer ranges from less than two weeks
to more than six months, depending on the size of the customer, the application
of our solution and other factors. Our sales cycle is also subject to delays as
a result of customer-specific factors over which we have little or no control,
including

their procurement of appropriate rights from content owners, budgetary
constraints and internal acceptance procedures. During the sales cycle, we may
expend substantial sales and management resources without generating
corresponding revenues. Our expense levels are relatively fixed in the short
term and are based in part on our expectation of future revenues. As a result,
any delay in our sales cycle could cause significant variations in our operating
results, particularly because a relatively small number of customer orders
represent a large portion of our revenues.

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

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

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

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

Our expansion into international markets will require significant resources and
will subject us to new uncertainties that may limit our return from our
international sales efforts

One of our strategies to increase our sales is to selectively add an
international sales force and operations. In March 2000, we opened a sales
office in London, England. Our further expansion will involve a significant use
of management and financial resources, particularly because we have no previous
experience with international operations. We may not be successful in creating
international operations or sales. In addition, international business
activities are subject to a variety of risks, including:

. The adoption of laws detrimental to our operations such as legislation
relating to the collection of personal data over the Internet or laws,
regulations or treaties governing the export of encryption related
software;

. Currency fluctuations;
. Actions by third parties such as discount pricing and business
techniques unique to foreign countries;
. Political instability; and
. Economic conditions including inflation, high tariffs or wage and price
controls.

We do not possess "political risk" insurance, and any of these risks could
restrict or eliminate our ability to do business in foreign jurisdictions.

We have in the past experienced returns of our customers' encoded content, and
as our business grows we may experience increased returns, which could harm our
reputation and negatively affect our operating results

In the past, we have had on occasion difficulty monitoring the quality of
our service. A limited number of our customers have returned encoded content to
us for our failure to meet the customer's specifications and requirements. It is
likely that we will experience some level of returns in the future and, as our
business grows, the amount of returns may increase. Also, returns may harm our
relationship with potential customers and business in the future. If returns
increase, our reserves may not be sufficient and our operating results would be
negatively affected.

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

Certain of our existing stockholders have significant influence over our
management and affairs, which they could exercise against your best interests.
As of March 31, 2001, our officers and directors, together with entities that
may be deemed affiliates of or related to such persons or entities, will
beneficially own approximately 40% of our outstanding common stock. As a result,
these stockholders, acting together, may be able to influence significantly our
management and affairs and matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions.
Accordingly, this concentration of ownership may have the effect of impeding a
merger, consolidation, takeover or other business consolidation involving us, or
discouraging a potential acquiror from making a tender offer for our shares.
This concentration of ownership could also adversely affect our stock's market
price or lessen any premium over market price that an acquiror might otherwise
pay.

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

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

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

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

Since our primary encoding and data storage facilities and network
facilities are located in the state of Washington, a seismic disturbance, or
other natural disaster could affect these primary facilities simultaneously. An
unexpected event like a power or telecommunications failure, fire, flood,
seismic disturbance at or near our encoding and on-site data storage facility or
at any of our Internet service providers' facilities could cause the loss of
critical data and prevent us from offering our services to our customers. In
addition, California utility companies are currently experiencing a financial
crisis which have led to "brownouts," "rolling blackouts" and other disruptions
of power services to consumers, and this crisis could spread to the state of
Washington as well. These losses of power could continue or worsen due to
circumstances out of our control and adversely affect our business and other
operations entirely. Our insurance may not adequately compensate us for any
losses that may occur.

Government regulation may require us to change our business

On October 28, 1998, the United States Congress enacted the Digital
Millennium Copyright Act (or "DMCA"). The DMCA includes statutory licenses for
the performance of sound recordings and for the making of recordings to
facilitate transmissions. Under these statutory licenses, depending on our and
our customers' future business activities, we and our customers may be required
to pay licensing fees for digital sound recordings streamed or distributed from
web sites and through retransmissions of radio broadcasts and/or other audio
content. The DMCA does not specify the rate and terms of such licenses, which
will be determined either through voluntary inter- industry negotiations or
arbitration. Moreover, with respect to digital publishing, sound recording and
other music

licenses not directly covered by the DMCA, various companies and individuals in
the digital music industry plan to engage in a proceeding before a tribunal of
the United States Copyright Office along with the Recording Industry Association
of America during 2001 to determine what, if any, licensee fees should be paid
to various rights holders. Depending on the rates and terms adopted for the
statutory licenses, our business could be harmed both by increasing our own cost
of doing business, and by increasing the cost of doing business for our
customers.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

PART II. OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

In connection with the acquisition of DiscoverMusic, Loudeye assumed
certain liabilities, including a patent infringement law suit filed on March 31,
2000, as amended April 26, 2000, by InTouch, a California corporation, against
Amazon.com Inc., a Delaware corporation, Liquid Audio, Inc., a Delaware
corporation, Listen.com, Inc., a California corporation, Entertaindom LLC, a
Delaware limited liability company, Muze, Inc., a New York corporation, and
DiscoverMusic in Case No. C00-1156 pending before the United States District
Court for the Northern District of California. The complaint alleges that each
of the defendants has infringed or induced infringement of U.S. Patent Nos.
5,237,157 (the "'157 Patent") and 5,963,916 (the "'916 Patent") by making,
using, selling, and/or offering for sale (including through licenses)
interactive music previewing technology that operates on a web site or kiosk.
InTouch is seeking an injunction preventing the defendants from infringing the
'157 Patent and '916 Patent, a declaratory judgment that both the '157 Patent
and the '916 Patent are valid, and an order requiring each defendant to pay to
InTouch up to three times the amount of damages sustained by InTouch, attorneys'
fees and any pre-judgment interest. On February 22, 2001, InTouch filed a
request for the court to dismiss InTouch's claims of infringement against
DiscoverMusic regarding the '157 Patent, which the court so ordered on February
26, 2001. We believe that we have meritorious defenses to InTouch's claims
related to the `916 Patent and we intend to vigorously defend against such
claims.

ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS

On March 2, we issued 3,677,013 shares of Loudeye Common Stock to the
former shareholders of DiscoverMusic.com in connection with our acquisition of
DiscoverMusic.com. The shares issued in the acquisition were issued in reliance
on the exemption from registration provided by Rule 506 of Regulation D
promulgated under the Act. No underwriter or placement agent was used. Each of
the former shareholders represented to us that they were accredited investors as
defined in Rule 501 of Regulation D, made further representations as to their
investment intent and received information about the Loudeye. The resale of
these shares has been registered on a Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on April 4, 2001.

On March 19, we issued 645,096 shares of Loudeye Common Stock to the former
shareholders of OnAir Streaming Networks, Inc. in connection with our purchase
of certain assets of OnAir Streaming Networks, Inc. The shares issued in the
asset purchase were issued in reliance on the exemption from registration
provided by Section 4(2) under the Act. No underwriter or placement agent was
used. Each the selling

stockholders of OnAir Streaming Networks, Inc. represented to us that they were
accredited investors as defined in Rule 501 of Regulation D, made further
representations as to their investment intent and received information about
Loudeye.

On March 30, as consideration for a business alliance, we issued 66,667
shares of Loudeye Common Stock in connection with a commercial agreement. The
issuance of the shares were deemed to be exempt from registration under the
Securities Act in reliance upon Section 4 (2) thereof as transactions by an
issuer not involving any public offering. The recipient had adequate information
about Loudeye.

(d) Use of Proceeds from Sales of Registered Securities

The net proceeds of our initial public offering and the concurrent
sale of shares to Akamai Technologies, Inc. which both closed on March
15, 2000, as well as the underwriters' over-allotment option exercised
on April 14, 2000, totaled $82.0 million. As of March 31, 2001, we
have used approximately $63.0 million of those proceeds for working
capital and general corporate purposes, including increased spending
on sales and marketing, customer support, research and development,
expansion of our operational and administrative infrastructure, and
the purchase of capital equipment and businesses. We expect to use the
remaining proceeds of the offering for similar purposes. In addition,
we may use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, product lines or products.
However, specific amounts for any future use of proceeds have not yet
been determined and we have no current plans, agreements or
commitments with respect to any such acquisition. Pending these uses,
we intend to invest the net proceeds in short-term, interest-bearing,
investment grade securities with original maturities of less than one
year.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

Exhibit
Number Description
- ------- -----------
2.1(1) Agreement and Plan of Reorganization dated November 19, 1999 between
Loudeye Technologies, Inc. and Alive.com, Inc.

2.2(5) Agreement and Plan of Merger among Loudeye Technologies, Inc.,
DiscoverMusic.com, Inc. and Santa Acquisition, Inc. dated January
30, 2001.

3.1(1) Fifth Amended and Restated Certificate of Incorporation of Loudeye
Technology, Inc.

3.2(1) Form of Amended and Restated Certificate of Incorporation of
Loudeye.

3.4(4) Form of Amended and Restated Bylaws of Loudeye Technologies, Inc.,
dated November 21, 2000.

4.1(1) Form of Loudeye Technologies, Inc. common stock certificate

10.1(1) Form of Indemnification Agreement between Loudeye Technologies and
each of its officers and directors.

10.2(1) 1998 Stock Option Plan, as amended.

10.3(1) Alive.com, Inc. 1998 Stock Option Plan.

10.4(1) 2000 Stock Option Plan.

10.5(1) 2000 Director Stock Option Plan.

10.6(1) 2000 Employee Stock Purchase Plan.

10.7(1) Amended and Restated Investors' Rights Agreement dated December 14,
1999 among Loudeye Technologies, Inc. and certain holders of our
preferred stock.

10.8(1) Lease Agreement dated August 10, 1999 between Loudeye Technologies,
Inc. and Times Square Building L.L.C. for offices at Times Square
Building, 414 Olive Way, Suite 300, Seattle, Washington.

10.9(1) Lease Agreement dated September 1, 1998 between Loudeye
Technologies, Inc. and Martin Tobias for offices at 3406 E. Union
Street, Seattle, Washington.

10.10(1) Lease Agreement dated October 28, 1999 between Loudeye Technologies,
Inc. and Westlake Park Associates for offices at Centennial
Building, 1904 Fourth Avenue, Seattle, Washington.

10.11(1) Lease Agreement dated November 9, 1999 between Loudeye Technologies,
Inc. and Downtown Entertainment Associates, LP for offices at 1424
Second Street, Santa Monica, California.

10.13(1) Loan and Security Agreement with Dominion Venture Finance L.L.C.
dated June 15, 1999 between Loudeye Technologies, Inc. and Dominion
Venture Finance L.L.C.

10.15(1) Offer Letter to Douglas Schulze dated August 30, 1999.

10.16(1) Offer Letter to James Van Kerkhove dated November 5, 1999.

10.17(1) Offer Letter to David Weld dated December 2, 1999.

10.18(1) Services Agreement between Loudeye Technologies, Inc. and Akamai
Technologies, Inc. dated as of February 15, 2000.

10.19(2) Amended and Restated Loan and Security Agreement between Imperial
Bank and Loudeye Technologies, Inc. dated May 17, 2000.

10.20(2) Amended and Restated Services Agreement between Valley Media, Inc.
and Loudeye Technologies, Inc. dated April 2000.

10.21(2) Stock Purchase Agreement dated as of June 14, 2000 by and among
Loudeye Technologies, Inc., Vidipax, Inc. and James Lindner.

10.22(2) First Amendment of Office Lease Agreement dated April 3, 2000
between Times Square Building L.L.C. and Loudeye Technologies, Inc.

10.23(2) Second Amendment of Office Lease Agreement dated May 1, 2000 between
Times Square Building L.L.C. and Loudeye Technologies, Inc.

10.24(2) Lease Agreement dated June 14, 2000 between Brown Bear Realty
Corporation and Loudeye Technologies, Inc.

10.25+(3) Volume Purchase Order dated July 19, 2000 by and between MusicBank
and Loudeye Technologies, Inc.

10.26 Offer Letter to Todd Hinders dated December 15, 2000 (filed
herewith).

10.27(4) Underlease Agreement and Agreement to Lease dated December 21, 2000
between WCRS Limited and Loudeye Technologies, Inc.

10.29+(4) Encoding Services and Compact Disc Purchase Agreement between XM
Satellite Radio, Inc., and Loudeye Technologies, Inc., dated August
25, 2000.

10.30+(4) First Addendum to Encoding Services and Compact Disc Purchase
Agreement between XM Satellite Radio, Inc., and Loudeye
Technologies, Inc., dated October 10, 2000.

10.31 2000 Employee Stock Option Plan as amended March 5, 2001 (filed
herewith).

10.32 Offer Letter to John Baker dated February 23, 2001 (filed herewith).

10.33 Offer Letter to Joel McConaughy dated March 14, 2001 (filed
herewith).

10.34 Offer Letter to John Shaw dated April 4, 2001 (filed herewith).

10.35(5) Registration Rights Agreement among Loudeye Technologies, Inc. and
the former stockholders of DiscoverMusic.

24.1(4) Powers of Attorney of Board of Directors.

- ----------

+ Confidential treatment has been requested as to certain portions of this
Exhibit.

(1) Incorporated by reference to Loudeye Technologies, Inc.'s registration
statement on Form S-1 file number 333-93361.

(2) Incorporated by reference to Loudeye Technologies, Inc.'s Form 10-Q, for
the period ending June 30, 2000.

(3) Incorporated by reference to Loudeye Technologies, Inc.'s Form 10-Q, for
the period ending September 30, 2000.

(4) Incorporated by reference to Loudeye Technologies, Inc.'s Form 10-K, for
the period ending December 31, 2000.

(5) Incorporated by reference to Loudeye Technologies, Inc.'s Report on Form 8-
K dated March 13, 2001.

(b) Reports on Form 8-K

On March 13, 2001 we filed a report on Form 8-K which announced that on
March 2, 2001 we closed the acquisition of DiscoverMusic.com, Inc. Our press
releases announcing the acquisition were filed as exhibits to the report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 15, 2001.

LOUDEYE TECHNOLOGIES, INC.

By /s/ BRADLEY A. BERG
--------------------------------------
Bradley A. Berg
Senior Vice President and Chief
Financial Officer
Principal Financial Officer

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