1064648--3/15/2006--LOUDEYE

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{property, intellectual, protect}

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Our quarterly and annual financial results will continue to fluctuate making it difficult to forecast our operating results. We have restructured our business to focus on our digital media store services operated out of Europe. Even after giving effect to this restructuring, we may not have sufficient cash to execute on our current business plan and any restructuring may impact our ability to execute on our business plan. We depend on a limited number of customers for a significant percentage of our digital media store services revenue. These customers may be able to terminate their service contracts with us on short notice, with or without cause. Accordingly, the loss of, or delay in payment from, one or a small number of customers could have a significant impact on our revenue, operating results and cash flows. EMI Music is transitioning away from our encoding services and we may not be successful in adding additional customers or markets for our encoding services, which would impact our revenue and results of operations and could impact our other digital media content services. If we are unsuccessful in expanding our mobile music store service offerings to additional customers, we may fail to meet expectations of our business plan and our results of operations could be harmed. Our digital media store services generally have relatively low gross margins. Increases in wholesale rates for digital music content may negatively impact gross margins which could harm our business Our efforts to institute variable pricing rates for digital content may result in loss of end consumers and a reduction in transactional revenue, which could harm our business, reputation and results of operations. Our music content licenses are generally for limited terms. If we are unable to reach agreement with recorded music companies, especially with the four major recorded music companies, to renew existing licenses or to grant us expanded license rights, portions of our services could be interrupted and our business and results of operations could be harmed. Our music content licenses generally require prior approval for us to distribute content to our customers. If approval is delayed or withheld, portions of our services could be interrupted and our business and results of operations could be harmed. Recorded music companies and our customers may desire to have a direct license relationship. This trend may lengthen our sales cycle and may result in us reporting certain music store services revenue on a net basis rather than on a gross basis. Our music content licenses could result in operational complexity that may divert resources or make our business more expensive to conduct. We make estimates of music publishing and performance rates; a determination of higher than estimated royalty rates could negatively impact our operating results. We may be liable or alleged to be liable to third parties for music, software, and other content that we encode, distribute, archive or make available to our customers. Competition may decrease our market share, revenue, and gross margins. If we do not continue to add customers for our services, our revenue and business will be harmed. Our business will suffer if we do not anticipate and meet specific customer requirements or respond to technological change. Paid digital media content services face competition from free peer-to-peer services. Average selling prices of our services may decrease, which may negatively impact our gross margins. Our music store services operating results fluctuate on a seasonal and quarterly basis. A decline in current levels of consumer spending could reduce our music store service revenue. Efforts by record labels to shore up declining sales of CDs may impact sales of digital content. Our success is dependent on the performance of our CEO and the cooperation, performance and retention of our executive officers and key employees. We cannot be certain that we will be able to protect our intellectual property. We may be subject to intellectual property infringement claims which are costly to defend and could limit our ability to use certain technologies in the future. We currently maintain two service platforms for our digital media store services which represents potential additional significant expense. We must enhance our existing digital media services and develop and introduce new services in a timely manner to remain competitive in that segment. Any failure to do so in a timely manner will cause our results of operations to suffer. Delays in technology enhancements could result in customer terminations which could cause our results of operations to suffer. The success of our digital media store services depends, in part, on interoperability with our customer s music playback hardware. The technology underlying our services is complex and may contain unknown defects that could harm our reputation, result in liability or decrease market acceptance of our services. More consumers are utilizing non-PC devices to access digital content, and we may not be successful in developing versions of our services that will gain widespread adoption by users of such devices. We provide guarantees to some of our customers under service level agreements and could be liable for service credits for failure to meet specified performance metrics. Our network is subject to security and stability risks that could harm our business and reputation and expose us to litigation or liability. Our services are complex and are deployed in complex environments and therefore may have errors or defects that could seriously harm our business. Our transmission capacity is not entirely in our control, as we rely in part on transmission capacity provided by third parties. Insufficient transmission capacity could result in delays or interruptions in our services and loss of revenue. We may need to make additional future acquisitions to remain competitive. The process of identifying, acquiring and integrating these future acquisitions may have a material adverse effect on our operating results. Our operations could be harmed by factors including political instability, natural disasters, fluctuations in currency exchange rates and changes in regulations that govern international transactions. We are subject to exchange rate risk in connection with our international operations. The lease for our corporate headquarters in Seattle, Washington can be terminated by the landlord on 150 days notice. If the landlord terminates our lease, we most likely would be required to locate new facilities and make significant expenditures in relocating our operations. Our business and operations may be especially subject to the risks of earthquakes and other natural catastrophes in the Pacific Northwest. Risks Related to Our Industry We must provide digital rights management solutions that are acceptable to both content providers and consumers. Our industry is experiencing consolidation that may intensify competition. Our business could be harmed by a lack of availability of popular content. The growth of our business depends on the increased use of the Internet and wireless networks for communications, electronic commerce and advertising. If broadband technologies do not become widely available or widely adopted, our online media distribution services may not achieve broad market acceptance, and our business may be harmed. Government regulation could adversely affect our business. We may be subject to market risk and legal liability in connection with the data collection capabilities of our services. Risks Related to Our Common Stock Our future capital-raising activities could involve the issuance of equity securities, which would dilute your investment and could result in a decline in the trading price of our common stock. Some provisions of our amended and restated certificate of incorporation and amended bylaws and of Delaware law may deter takeover attempts, which may limit the opportunity of our stockholders to sell their shares at a favorable price. Securities analysts may not continue to cover our common stock or may issue negative reports, and this may have a negative impact on our common stock s market price. Market fluctuations and volatility could cause the trading price of our common stock to decline and limit our ability to raise capital. Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price. Our common stock could be delisted from the Nasdaq Capital Market if our stock price continues to trade below $1.00 per share. We may implement a reverse stock split in order to regain compliance with Nasdaq listing requirements. If our stock price drops following a reverse stock split, we may owe amounts to investors in our February 2006 private placement transaction, which we may elect to satisfy by issuing additional shares of our common stock. The large number of holders and lack of concentration of ownership of our common stock may make it difficult for us to reach a quorum or obtain an affirmative vote of our stockholders at future stockholder meetings.

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1064648--3/15/2006--LOUDEYE_CORP