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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

Loudeye Corp.

1130 Rainier Avenue South, Seattle, WA 98144

206-832-4000

Securities registered pursuant to Section 12(b) of the Act:

      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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

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

      The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $33,337,055 as of June 30, 2003, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the registrant’s Proxy Statement relating to the registrant’s 2004 Annual Meeting are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

LOUDEYE CORP.

ANNUAL REPORT ON FORM 10-K

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PART I

Forward Looking Statements

      Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed herein, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II hereof, and statements regarding regulatory approvals, operating results and capital requirements, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and are made under the safe harbor provisions thereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of terms like these or other comparable terminology. These forward-looking statements are only predictions and actual events or results may differ materially from those projected. Specific factors that could cause actual results to differ materially from those projected include, but are not limited to, uncertainties related to our new product offerings; uncertainties related to the effectiveness of our technology and the development of our products and services; dependence on and management of existing and future corporate relationships; dependence on licensed content and technology; dependence on proprietary technology and uncertainty of patent protection; management of growth; history of operating losses; future capital needs and uncertainty of additional funding; dependence on key personnel; intense competition and probable new entrants; existing government regulations and changes in, or the failure to comply with, government regulations, and other risks detailed below, including the Risk Factors in Item 7 of Part II “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those included from time to time in the Company’s other reports with the SEC and press releases, copies of which are available from the Company upon request. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to publicly release any revisions of the forward-looking statements contained herein to reflect events or circumstances after the date hereof. Readers are cautioned not to place undue reliance on these forward-looking statements, as our business and financial performance are subject to substantial risks and uncertainties.

Overview

      We are an innovative business-to-business provider of services that facilitate the distribution and promotion of digital media content to media & entertainment, retail and enterprise customers. Our services enable our customers to outsource the management and distribution of audio and video digital media content over the Internet and on other digital distribution platforms. Our technical infrastructure and back-end solutions, combined with our proprietary applications, comprise an end-to-end solution, from basic digital media services, such as the hosting, storage, encoding, management and protection of media assets for content owners, to complex, fully-outsourced digital media distribution and promotional services, such as private-labeled digital music download stores and streaming Internet radio and music sample services. Our solutions reduce the complexity and cost of internal solutions, and enable our customers to provide branded digital media offerings to their users while supporting a variety of digital media technologies and consumer business models.

      Some of our customers include Amazon.com, America Online, Apple Computer, BuyMusic, The Coca-Cola Company, Digital Music Initiative, Dreamworks Records, EMI Recorded Music Holdings, Microsoft Corporation, Siebel Systems, Sirius Corporation and Yahoo!.

      The use of the Internet as a medium for media distribution has continued to evolve and grow in recent years. Traditional media & entertainment companies, such as major record labels, have in recent years faced significant challenges associated with the digital distribution of music. However, these companies have recently begun to license some of the rights to their digital music content for distribution and sale online on a subscription or individual track or album basis. Additionally, retailers and advertisers have begun to use digital

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      We developed our solutions to address the new methods of media distribution, promotion and content management that have emerged over recent years. Our digital media services enable digital distribution of media via the Internet and other emerging technologies. These services encompass a variety of related services and provide the major components needed to address the management and delivery of digital media, from content management to content distribution, including:

	•	Advanced application services. Our software applications enable our customers to outsource to us the complete requirements to run a digital media service over the Internet directed to end users or end consumers. We develop and provide proprietary Internet and wireless software applications to publish and manage digital media for the end users of our customers. The applications support private label user interfaces and customized templates. We can host the applications on behalf of the customer, and the customer’s deployment of these applications are designed to have the look, feel and branding of the customer’s existing products and website. The application platform and services support integration to a customer’s website, inventory, and commerce and billing systems. We offer such application services as the Loudeye Digital MusicStoreTM, iRadioTM, music sample and webcasting services;
	•	Digital media storage and access. Our proprietary systems and technology enable the scalable archiving, retrieval and processing of large inventories of digital media. Digitized masters of the media assets are stored on our high capacity storage array systems and accessed via our proprietary, automated, web-based access tools to search, deliver and manage such content;
	•	Digital media distribution. Digitally formatted content can be distributed to end users on behalf of our customers via streaming or download services. Our solution can support full tracking and reporting of such end user activity for purposes such as royalty settlement or direct marketing. Our scalable network infrastructure can deliver to large numbers of end-users with high levels of reliability;
	•	Traditional source media ingest and capture. Source content is captured live via our extensive signal ingress capabilities, including satellite downlinks, video fiber, frame relay, ISDN, automated telephony-to-IP switches and teleconferencing equipment, as well as on-demand via processing of archived source audio and video in a wide range of legacy and digital formats; and
	•	Media processing services. Media assets are processed into the digital media formats of our customers’ specifications via our proprietary encoding and transcoding systems.

      To support these solutions, we have obtained licenses and cultivated relationships with the five major record labels and hundreds of independent record labels. The target customers for our digital music services include media & entertainment companies, such as media portals, broadcasters, major record labels and advertisers, traditional and Internet-based retailers, wireless companies and consumer electronics manufacturers.

      We also offer highly scalable live and “on-demand” audio and video webcasting services, supported by proprietary applications and an advanced Internet-protocol based digital broadcast center based in Seattle. The target customers for these solutions include media & entertainment companies, as well as large and medium-sized enterprises across a range of industries. Webcasting services are often sold in arrangements that include a continuing “on-demand” archival component that enables the customer access to its content after an event has been webcast.

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      Our capabilities include a robust production and rich media delivery infrastructure, featuring significant capacity to manage customer requirements and a flexible and extensible platform to enable tailored solutions and serve a diverse range of market opportunities. Our solutions offer customers the following key benefits:

	•	End-to-end outsourced solutions reduce complexity and cost of in-house implementations;
	•	High degree of flexibility enables tailored customer solutions;
	•	Scalable systems and network infrastructure provide significant capacity and reliability; and
	•	Strategic relationships facilitate authorized digital media strategies.

      In January 2004, we sold our media restoration services business to a company controlled by the general manager of those operations. We will continue to sell, for a fee, media restoration services on behalf of the purchaser for a two-year period, but this is no longer a material part of our business.

      Our shares trade through the Nasdaq SmallCap Market under the symbol “LOUD.” Our address is 1130 Rainier Avenue South, Seattle, WA 98144 and our telephone number is (206) 832-4000. Our Internet site is located at www.loudeye.com. We make available through our website free of charge all of our annual reports on Form 10-K, quarterly reports on Form  10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we file them electronically with, or furnish them to, the SEC. The information found on our website is not part of this annual report.

Industry Background

      The digital media industry encompasses many sectors, software and technologies. Companies operating in the digital media industry focus on developing and deploying innovative technologies to perform, promote and distribute audio and video content over the Internet and over other digitally-enabled channels such as personal computers, televisions, mobile phones and other portable devices.

      In 2003, digital media continued to grow as a broad-based tool for communications, online media promotions and the distribution of content, particularly in the media, entertainment and corporate sectors. This growth has been driven in large part by an increase in broadband adoption and significant improvements in streaming technologies capable of delivering high quality content in smaller file sizes. A critical trend in these technology and streaming format enhancements is a marked increase in ease of use and effectiveness of streaming media, including, in some cases, instant-on access to streaming content without buffering. At the same time, content owners such as major media companies, film studios and record labels are providing more content in a digital format to capitalize on these opportunities.

      The digital media industry underwent significant changes in 2003, and is rapidly adapting to satisfy the growing consumer and business demand for digital media products and services. Key trends in the industry over the past year have included:

	•	Increasing consumer broadband connectivity. The estimated number of consumers with a broadband Internet connection will reach approximately 30 million by the end of 2004, according to a 2003 report by Forrester Research. Jupiter Research concludes that a larger Internet audience using broadband connections will combine to shift nearly $2 billion in music spending to online distribution in the next five years.
	•	Wide proliferation of digital music technologies and devices. Digital media is no longer confined to personal computers. For example, in 2003 there was a significant increase in the number of portable digital music players, as well as an increase in the usage of digital music on other mobile devices. Jupiter Research predicts up to a 50% growth in the United States MP3 player market for the next three years, reaching an estimated install base of approximately 26 million players by 2006. Research group IDC predicts that the U.S. ringtone market will grow to more than $1.0 billion by 2007, and that approximately 1.5 million ringtones are purchased on the Internet each month in North America. Music subscription services are also expected to attract approximately 2.0 million subscribers and

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		account for approximately $125 million, or 10%, of music sales by 2007, according to Forrester Research.
	•	Major record labels begin licensing digital media content. Music companies have faced a three-year decline in new CD sales, which they blame largely on illegal file swapping and other illegitimate means of copying and transferring copyrighted music. To create a legal means to meet the strong consumer demand for digital music, and to compensate for lost revenue as a result of peer-to-peer file sharing, the music industry has generally supported the launch of new music stores and services by licensing their catalogs for digital distribution.
	•	Consumer migration from illegal file sharing to legitimate music downloads. There are indications that illegal file sharing is declining due to factors including:

	•	Increased pressure from the Recording Industry Association of America (RIAA), including litigation directed at individual file traders;
	•	Corrupted files and other viruses embedded in files found on peer-to-peer networks;
	•	Declining pre-pressed CD prices; and
	•	The introduction of legitimate digital music stores.

      For example, Nielsen SoundScan concluded that for the last three months of 2003, CD sales increased 5.6% and overall music sales, including singles and online downloads, increased 10.5% from the year-ago period. Forrester Research has predicted that downloads will generate approximately $2.1 billion by 2007 and account for approximately 33% of music sales the following year.

      These shifts in the industry present market opportunities for us, as our turnkey product offerings address the technical challenges our partners face in launching their own music store or service to distribute digital music content to end-users.

Challenges in Digital Media Distribution

      To manage and distribute digital media, companies may develop internally the core competencies required to develop and deploy digital media content, or they may outsource these responsibilities to a third party. The core competencies required to manage and distribute digital media content include:

	•	Application and business model support to enhance the audio and video experience, track and report usage, monetize and protect content, and manage customer service;
	•	Scalable and reliable hosting and network distribution;
	•	High quality encoding and third-party digital media technology support;
	•	Digital media archive management; and
	•	Source media and metadata capture.

      Metadata provides descriptive data to the consumer such as, in the case of music titles, artist information, track level data, title name, and cover art. Metadata may also include additional information that can be used to facilitate transactions or establish marketing relationships, such as links to online sale sites or opt-ins for email marketing campaigns. In addition, metadata is important to facilitating the administration of tracking and reporting required in many licensing arrangements with copyright holders.

      It may be difficult or cost-prohibitive for providers and distributors of digital media content to develop, manage, and maintain these core competencies on an ongoing basis, as such companies may lack the internal resources or time to develop the expertise necessary to address these problems without disrupting their core business activities.

      In addition to the technical challenges, digital media distributors may encounter a number of difficulties in obtaining copyright licenses from content owners. For example, a company may obtain a copyright license

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      For content owners, the digital media industry presents certain additional challenges. Content owners must:

	•	Ensure proper and timely distribution of their music catalog to hundreds of music services around the world;
	•	Ensure content is protected against unauthorized distribution or prohibited use;
	•	Collect and manage usage reports and associated royalty payments for the sale of content; and
	•	Manage sufficient and reliable technology resources to distribute content to partners and stay abreast of current technological developments that affect their interest and revenue potential in the digital distribution channel.

The Loudeye Solution

      We support the end-to-end management and delivery of digital media content for both content owners and downstream distributors. Our digital media services enable our business partners to outsource completely the creation, management and delivery of audio, video and other visual content via the Internet and other digital distribution platforms. Our solutions reduce the complexity and cost of internal digital media solutions, while supporting a variety of digital media strategies and customer business models.

      We believe we have been and remain a pioneer and industry leader in the rapidly developing digital music market. Through our new turnkey products, the Digital MusicStore^TM and iRadio Service^TM, we have expanded our signature services to enable our customers to launch digital music storefronts under their own private brand names. We also continue to increase the digital music catalog available to our customers, the size of which we believe is unparalleled in the industry.

      Our digital media solutions offer our customers the following key benefits:

	•	End-to-end outsourced solutions reduce complexity and cost of in-house implementations. Large and medium-sized enterprises and content owners that want to encode and distribute their video and audio content can do so either from their own production capabilities and network servers or through third-party service providers. Our services and applications provide a comprehensive solution through a single outsourced solution. Our solutions reduce complexity and allow our customers to avoid the development and ongoing maintenance costs of establishing internal capabilities. Our end-to-end services address a series of highly complex steps required to deploy digital media effectively and reliably to large audiences. We deliver high quality and reliable services at a lower cost than the development and maintenance of comparable internal solutions, enabling our customers to leverage our existing and evolving expertise.
	•	Transferable content license rights. We have obtained copyright licenses for various offerings within our digital music services which are transferable to our customers. We can therefore enable our customers to avoid the cost and time required to negotiate and obtain such licenses for themselves. We have developed relationships and signed content licensing agreements with all five of the major record labels: UMG Recordings, Inc., Sony Music Entertainment, Inc., Warner Music Group, Inc., EMI Recorded Music Holdings, Inc. and BMG Music, and hundreds of independent record labels, and we continue to develop working relationships with other music companies.
	•	Comprehensive digital media services to address the marketing and entertainment markets and enterprise communication. Customers in a broad range of industries are beginning to deploy digital

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		media to communicate, market products, and distribute media & entertainment. We support the online marketing initiatives of our customers through our digital media services including our leading music samples services, online radio services, advertisement insertion solutions, and music download services. In addition, we provide outsourced services to support the management and distribution of our customers’ digital media catalogs, including scalable encoding and delivery services. Our proprietary suite of webcasting and web conferencing applications and services, coupled with our scalable network and production infrastructure technologies, provide a simple, cost-effective method for companies to communicate online with audiences of any size. Using our services, enterprises can offer their target audiences access to webcasts of a variety of corporate events such as product launches, investor earnings calls, conferences and distance learning seminars.
	•	Scalable systems and network infrastructure provide significant capacity and reliability. Corporations and content owners may encounter capacity and technological limitations if they attempt to deliver digital media to large numbers of end-users using in-house production capabilities and network servers. Our solution is highly scalable, allowing us to process a large number of simultaneous audio or video events and to seamlessly add additional capacity as necessary. We have developed proprietary products and services based upon an automated and distributed architecture of encoding, conversion and media enhancement systems. We have one of the most extensive signal ingress capacities in the industry that allows us to acquire hundreds of audio and video signals simultaneously. Additionally, we can handle a wide range of other traditional and legacy media formats. The content is then encoded by hundreds of distributed video/audio encoding servers. The content can be delivered back to customers in raw digital formats through a variety of methods, or hosted and served by our proprietary cell-based streaming network architecture. Our facility’s design is modular and scalable to accommodate growth and changes in technology.
	•	High degree of flexibility enables tailored customer solutions. Because our customers require flexibility in the formats and manner that their digital media is distributed, as well as the manner in which their content is captured, we offer a wide range of media ingest and capture methods and support a wide range of digital media formats and other third party technologies. In addition, our hosting services and proprietary applications provide additional support to customers, enabling them to access advanced reporting and management tools and offer value-added services such as digital rights management and ad insertion to enable a variety of business models and strategies for our customers.

Products and Services

      Our comprehensive digital media products and services include private-branded digital music stores, such as our Digital MusicStore^TM and iRadio Service^TM, digital music encoding, metadata licensing, advanced fingerprint database generation, hosted music sample services, hosted music download services, including digital rights management license clearing, online radio solutions and rich media advertisement insertion. The target customers for our digital media services include traditional and Internet-based retailers, media & entertainment companies, including media portals, broadcasters and the major record labels.

      We also provide enhanced enterprise communication services, which include highly scalable, live and on-demand audio and video webcasting services supported by proprietary applications such as synchronized streaming slide presentation capabilities. Using our services, enterprises can offer small and large audiences access to webcasts of a variety of corporate events, such as product launches, investor earnings calls, conferences and distance learning seminars. Our web conferencing service enables companies to easily facilitate small online slide presentation meetings. The target customers for these solutions include medium and large-sized enterprises across a range of industries.

      Our digital media solutions are offered through three tiers of service — application services, hosting and streaming services and encoding services and customers may choose any combination of these tiers of service. Our services are priced based on several criteria, including the extent and volume of infrastructure usage, particularly of network and storage; the means used to capture the content; the applications used; and the extent of additional value-added services provided.

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      We have built an application layer of proprietary products comprising end-to-end solutions. These applications are deployed on an application services provider (ASP) basis where the software runs on equipment managed and monitored by us. Our customers have flexibility and options to choose their individual level of customization or integration.

      The Loudeye Digital MusicStore^TM provides the components necessary to enable a partner to create, promote and operate a superior digital music experience under its own brand name. Digital MusicStore will permit our partners to give their customers the ability to search, sample, solicit recommendations, manage, purchase and download legally CD-quality music tracks, albums and ring tunes to devices of their choice. Our Digital MusicStore integrates with a partner’s existing technology and infrastructure, offering either a complete storefront or expanding an existing presence. Key features of Digital MusicStore include:

	•	Web-based, private-branded music discovery client;
	•	Digital music hosting and download delivery;
	•	Digital rights management using Windows Media DRM;
	•	Usage reporting;
	•	Digital music royalty settlement;
	•	Streaming music samples and cover art;
	•	Music metadata; and
	•	Rich media ring tunes (for wireless applications).

      The Loudeye iRadio Service^TM offers 100 channels of CD-quality streaming music delivered through a partner’s own privately branded player interface. It is capable of supporting delivery to a range of consumer music devices and appliances. The iRadio service can be deployed online for web-based retailers and portals, as well as offline for consumer electronic devices and appliances, digital home entertainment systems and other digital broadcasting outlets. Key features in the first release of iRadio include:

	•	24x7 music programming in compliance with the Digital Millennium Copyright Act;
	•	Web-based, private-branded music discovery client;
	•	100 channels of pre-programmed or customizable (by artist or genre) CD quality music; and
	•	Support for delivery to PCs and consumer electronics products.

      We have additional proprietary applications that support a variety of business models and customer strategies. Our advertisement insertion solutions support dynamic content insertion that enable digital media advertising and marketing campaigns and our digital download platform includes rights management clearing. These applications enable customers to promote, manage, and monetize their digital media offerings.

      Our hosting services allow digital media content to be packaged and converted into a variety of streaming media and digital download formats via our encoding services. We can also host this content in a central media repository.

      We provide comprehensive webcasting solutions that enable enterprises to broadcast audio, video and visually oriented communications over the Internet. Our proprietary suite of webcast applications and services, coupled with our scalable network and production infrastructure technologies, provide a simple, cost-effective way for corporations to communicate online with large groups. We provide our services to large and medium sized enterprises as well as traditional media and broadcast companies.

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      We provide our customers with the infrastructure and service components necessary to deploy a streaming media offering as part of an Internet or intranet presence. Our enterprise clients use this offering to augment and support their existing business initiatives. We also provide streaming services for audio and video conferencing, distance learning, corporate or departmental meetings, presentations, conferences, roadshows and other investor relations offerings. Our webcasting services include both live events and on-demand streaming services.

      Our web broadcasting capabilities allow customers to extend significantly the reach of traditional conferencing services or live events to enable one-to-many communications to be broadcast conveniently and economically to the widest possible audience. Companies are able to leverage the creation of content over a mass medium, reduce communication costs, maintain brand identity through a controlled user experience, and in many instances, generate additional revenue streams from the distribution of content to previously untapped audiences and markets.

      We also provide customers with access to our samples services, which is a hosted end-to-end streaming service that delivers high quality music samples to customers in the online music business. Our music samples are streaming files containing selected portions or “samples” of a full music track. For all musical genres except classical and jazz, the music samples are generally 30 seconds in duration. For classical and jazz music tracks, the music samples are typically 60 seconds in duration. Music samples are used by customers for many purposes, including increasing online music sales, user traffic and customer retention.

      To transmit digital media over the Internet and other advanced digital distribution networks, the uncompressed digitized content needs to be encoded into compressed, Internet-compatible digital formats. Encoding large volumes of content in an efficient manner is a complex process that requires highly scalable production technology. In addition, it is at the encoding stage that metadata is at times merged with the encoded file from a centralized database, which adds to the complexity of the encoding process. Various digital encoding formats and technologies continue to evolve and often conflict with one another. As a result, content owners often desire to create multiple versions of their digital content in multiple formats to support their distribution strategies. Additionally, the encoding process for a particular item (or for an entire library) may need to be repeated over time to keep pace with the introduction of new formats and the changing preferences of online users.

      Our innovative services address these challenges via the outsourced management and encoding of our customers’ content. Typical digital media service projects can involve conversion of tens of thousands of music titles or thousands of hours of video content into encoded content of multiple formats and bit rates. Once content has been encoded, we can provide watermarking, encryption and other digital rights management technologies to enable our customers to protect and manage their content. A file created from the source materials containing specified database and attribute data relating to a particular piece of content can then be linked to that content as part of the overall encoding process. We also provide project analysis, as well as consulting, integration and custom application development.

Loudeye’s Content Catalog

      Our digital music archive includes nearly 4.5 million full song tracks and includes metadata associated with the music files. In 2003, we delivered approximately 14.0 million digital music files and served nearly a billion song samples to consumers through major online music retailers and websites, such as America Online, Amazon.com, barnesandnoble.com, CDNow, Yahoo!, House of Blues, Windowsmedia.com and MSN. We offer the service primarily under long-term contracts.

Anti-Piracy and Peer-to-Peer Promotional Tools

      In March 2004 we acquired Overpeer, Inc., a provider of digital media anti-piracy, data mining and promotional solutions on peer-to-peer (p2p) networks worldwide. Overpeer holds multiple patents in Asia and Europe, and has three patents pending in the U.S. for its proprietary technology, systems and software.

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      With the inclusion of Overpeer’s technologies into our comprehensive package of digital media solutions, we now provide our content owners with the following additional benefits:

	•	Powerful data mining and analytical tools and comprehensive information on digital music, video, game and software usage;
	•	Potent anti-piracy solutions to disrupt the illegal sharing of copyrighted material; and
	•	Targeted promotional services for companies to capitalize on previously untapped revenue streams across content sharing networks.

Sales and Marketing

      We sell our services through a combination of direct and indirect sales, with all channels and regional offices managed by a single sales organization. Our digital media services direct sales force markets our services to customers in a diverse range of markets, such as media & entertainment, retail, computer software, business services, financial services, pharmaceutical and manufacturing. We currently have a sales presence in Seattle, Washington and Los Angeles, California. Sales employees are compensated with a salary and commission based upon business with existing and new clients.

      Our indirect sales group targets resellers who market to their established customer bases. We private label or co-brand our services for these partners depending on their requirements. We also partner with companies to resell our services through their websites, or through co-branded websites, or to include our services with their product offerings. We offer our reseller partners our services at a discount to our traditional retail pricing model and our referral partners receive a percentage of revenue pursuant to terms of the agreements.

      Our marketing objectives are to build awareness for our brand among key market segments and to maintain a position as a leading full-service digital media service provider. To support these objectives, we utilize public relations, trade shows, advertising and direct marketing.

      As of February 15, 2004, we had nine full-time employees in our sales and marketing organization, all of whom were located in the United States.

Operations and Technology

      We manage all aspects of our digital media products including encoding, content preparation, digital rights management, license verification, reporting and royalty payments, hosting and distribution to the Internet, and digital music licensing from our “Grand Central” media operations center in Seattle, Washington.

	•	Digital music storage and access. Our proprietary systems and technologies enable the scalable archiving, retrieval and processing of large inventories of digital music. Digitized content is stored on our high capacity storage array systems and accessed through our proprietary, automated web-based access tools to search, provision and manage such content. Once captured and digitized in uncompressed format, content can be stored on our digital music archive system for later uses.
	•	Music processing services. We process music to customer specifications using our proprietary production systems. The production system is an automated, scalable combination of hardware and software consisting of advanced digital archive technology, proprietary file management systems, customized user interfaces and a highly distributed encoding system. Metadata is also used to track and report information required by many licensing arrangements with copyright holders.

We encode customer content in a parallel process and we have developed proprietary processes which allow us to encode audio and video content across several streaming media and download formats simultaneously. Our parallel process supports multiple codecs and technologies from third party developers such as Microsoft, RealNetworks, Audible Magic and others. This format flexibility enables customers to support a variety of digital music strategies. Because these formats and platforms

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continue to evolve, we believe that the benefits of our multiple platform approach will remain applicable as new technologies emerge. Encoded files are reviewed for quality and then delivered to the customer as a collection of files or routed automatically to our hosting services for direct delivery as a hosted stream or available download, over the Internet and through the Loudeye Digital MusicStore.

	•	Digital music distribution. Digitally formatted content can be delivered to customers through a range of methods, from secured file delivery to a fully hosted streaming or download service published and streamed through our network infrastructure and the Loudeye Digital MusicStore.

      We have invested in a network distribution infrastructure built around a scalable, redundant, “cell-based” network architecture. Depending on the music format and the bit rate, we are able to stream and host simultaneously thousands of outbound streams and music downloads. We can expand our capacity by adding additional servers within cells. This network is backed by high-capacity online storage that uses mirroring and other techniques to increase redundancy and scalability. Our hosting and distribution operation includes hundreds of servers and supports load balancing and other network management techniques that have been optimized for digital music downloads. We can also serve content across networks of other providers if we exceed our capacity or if we are requested to do so.

      Our operations and production personnel are organized into functional teams which include project management, quality control, logistics operations, data measurement, audio capture and encoding, video capture and encoding, and production systems engineering support. In addition, we have a team that supports our network and hosting services. As of February 15, 2004 we had six full-time employees in engineering, network services and information technology support and 32 full-time employees in our production and research and development areas.

Customers

      The target customers for our digital music products include major consumer electronics companies, traditional and Internet-based retailers, media & entertainment companies, wireless carriers and branded consumer products companies. In 2003, we served over 500 customers. Our customers include Amazon.com, America Online, Apple Computer, BuyMusic, The Coca-Cola Company, Digital Music Initiative, Dreamworks Records, EMI Recorded Music Holdings, Microsoft Corporation, Siebel Systems, Sirius Corporation and Yahoo!. In 2003, Microsoft Corporation and The Coca-Cola Company accounted for 5% and 11% of our revenues. In 2002, Microsoft Corporation and The Coca-Cola Company accounted for 10% and 13% of our revenues. In 2001, The Coca-Cola Company accounted for 17% of our revenues.

Competition

      The market for digital media solutions is rapidly evolving and intensely competitive. We expect competition to persist and intensify in the future. Although we do not currently compete against any one entity with respect to all aspects of our services, we do compete with various companies and technologies in regards to specific elements of our services. In addition, we face competition from in-house solutions.

      For our digital music solutions, we compete with several companies providing similar levels of outsourced digital music services including Roxio (through its Napster service), Liquid Digital, MusicNet, and MusicNow. For encoding services, we compete with companies including Muze and All Music Guide. In addition, well-capitalized, diversified digital media technology companies such as Microsoft, Apple and Real Networks may compete with us in the future with their own services or applications. In certain markets, such as music distribution, the major record labels have acquired and invested in digital music services and technologies that could compete with our digital music services. Traditional radio broadcasters could also develop online music and radio services which could compete with our solutions.

      A significant source of competition includes our potential customers who choose to invest in the resources and equipment to digitally manage, encode and/or host and deliver their media themselves on an in-house basis. In-house service is expected to remain a significant competitor to our services, although we believe that as digital music strategies expand, and the scale of infrastructure and applications required to support business

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      We believe that the principal competitive factors in our market include:

	•	Ability to offer a private branded solution;
	•	Service functionality;
	•	Service quality;
	•	Service performance;
	•	Ease of use of products and services;
	•	Reliability of services,
	•	Scalability of services;
	•	Security of services;
	•	Breadth of content;
	•	Customer service and support; and
	•	Pricing.

      Although we believe that our products and services compete favorably with respect to each of these factors, the market for our products and services is new and evolving rapidly. We may not compete successfully against current or future competitors, many of which 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 or 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.

Proprietary Rights and Intellectual Property

      We rely primarily on a combination of copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. We have one issued patent, and we have filed eight U.S. patent applications and twelve international patent applications that claim priority to six previously filed provisional applications. Our Overpeer subsidiary, acquired in March 2004, holds multiple patents in Asia and Europe, and has four patents pending in the U.S. for their proprietary technology, systems and software. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States.

      The digital music industry is characterized by the existence of a large number of patents, licenses and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As discussed above, obtaining the requisite licenses can be difficult, as separate licenses often must be obtained from a variety of rights holders for distinct activities related to the delivery of digital music, such as reproduction and performance, which requires separate licensing arrangements. In addition, these copyrights may be held by different parties, such as publishers, artists and record labels. The music industry in the United States is generally regarded as highly litigious. As a result, in the future we may be engaged in litigation with

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      Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third party proprietary rights, such as patents, trademarks or copyrights, by us or our licensees, from time to time in the ordinary course of business. Any claims relating to the infringement of third party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from providing our products or services in the United States or abroad. Any of these results could harm our business. We may increasingly be subject to infringement claims if the number of products and competitors in our industry grow and the functions of products overlap.

Government Regulation

      We are not currently subject to direct regulation by any governmental agency, other than laws and regulations generally applicable to businesses, although certain U.S. export controls and import controls of other countries, including controls on the use of encryption technologies, may apply to our products. Few existing laws or regulations specifically apply to the Internet. However, it is likely that a number of laws and regulations may be adopted in the United States and other countries with respect to the Internet. These laws may relate to areas such as content issues (such as obscenity, indecency and defamation), encryption concerns, including export contents, copyright and other intellectual property rights, caching of content by server products, electronic authentication or “digital signatures,” personal privacy, advertising, taxation, electronic commerce liability, email, network and information security and the convergence of traditional communication services with Internet communications, including the future availability of broadband transmission capability. Other countries and political organizations may also impose regulations, some of which may conflict with U.S. regulation.

      The adoption of such laws or regulations, and the uncertainties associated with their validity and enforcement, may affect our ability to provide our products and services, may increase the costs associated with our products and services and may affect the growth of the Internet generally. These laws or regulations may therefore harm our business.

      We do not know with certainty how existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, illegal or obscene content, retransmission of media and personal privacy and data protection apply to the Internet or to the distribution of music over the Internet. The vast majority of such laws were adopted before the advent of the Internet and related technologies and do not address the unique issues associated with the Internet and related technologies. Most of the laws that relate to the Internet have not yet been interpreted. Changes to or the interpretation of these laws could:

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

      Specifically, with respect to one aspect of copyright law, on October 28, 1998, the Digital Millennium Copyright Act, or DMCA, was enacted. The DMCA includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, depending on our future business activities, we and our customers may be required to pay licensing fees for digital sound recordings we deliver or our customers provide on their web site and through retransmissions of radio broadcasts and/or other audio content. The DMCA does not specify the rate and terms of such licenses,

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      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.

Employees

      As of February 15, 2004, we had a total of 56 full-time employees, of which 19 were in production, 13 were in research and development, 9 were in sales and marketing, 6 were in engineering, network services and information technology support, and 9 were in general and administration. None of our employees are subject to a collective bargaining agreement. We consider our relations with our employees to be good.

      Following is a summary of our properties and related lease obligations. We do not own any real property.

	1130 Rainier Avenue, Seattle, WA. Our principal operations are conducted here. We lease 41,763 square feet of this facility. The lease expires on December 31, 2005 and annual base rent is approximately $823,000 for 2004 and $921,000 for 2005.
	1601 Cloverfield, Santa Monica, CA. We lease offices for our sales staff in a shared office space arrangement at this facility. The annual rent is approximately $48,000 with a lease term expiring November 30, 2004.
	414 Olive Way, Seattle, WA. We have a lease obligation for 39,098 square feet of space at the Times Square Building. The current annual rent is $1.1 million with the lease term expiring May 31, 2005. We have surrendered the leased premises and the landlord has filed suit against us for breach of the lease. See Item 3 — “Legal Proceedings” for additional information on this suit. An estimate of the lease termination settlement and related costs is included in accrued special charges at December 31, 2003.
	1424 Second Street, Santa Monica, CA. We lease approximately 4,632 square feet at an annual base rent of $200,288. We sublease the entire premises to a tenant at the full base rent amount. The term of the lease and sublease expires on December 31, 2004.
	110 East 55th Street, New York, NY. As a result of our acquisition of Overpeer, Inc. in March 2004, we lease approximately 1,500 square feet at an annual base rent of $60,000. The lease expires on April 30, 2004.

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

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      On February 3, 2003, we entered into an agreement with Regent Pacific Management Corporation pursuant to which Regent Pacific would provide management services. The agreement was for a term of 26 weeks, with an option to renegotiate certain terms of the agreement after 13 weeks, and was terminable by either party under certain circumstances. Under the agreement, we paid certain fees to Regent Pacific. In addition, Regent Pacific was to receive stock options to purchase up to 4,000,000 shares of our common stock based on Regent Pacific’s length of service. These options were to be granted at various times throughout their engagement at exercise prices based on the closing market price on each grant date. On March 7, 2003, Regent Pacific resigned from the engagement. On July 25, 2003, Regent Pacific filed suit against us in the United States District Court for the Northern District of California for breach of the agreement. In this complaint, Regent Pacific is seeking unspecified damages and specific performance of our alleged obligation to grant the stock options due them under the contract. We believe that we have meritorious defenses to the claims made in the suit, intend to defend vigorously this suit, and intend to bring certain counterclaims against Regent Pacific.

      On or about January 8, 2003 Dominion Venture Finance, L.L.C. commenced an action against us and other defendants in the Superior Court of the State of California, County of San Francisco. In its complaint, plaintiff alleged that pursuant to a loan and security agreement and a master lease agreement (the liabilities for which agreement, plaintiff alleged, were acquired by us when we merged with an entity known as DiscoverMusic.com, Inc.), we failed to make certain required payments to plaintiff. On August 5, 2003, we agreed to settle all claims under the suit for a cash payment of approximately $228,000, which represented the outstanding principal and interest under the agreements.

      In April 2003, the landlord of our unoccupied facility at 414 Olive Way, Seattle, WA filed suit against us in the Superior Court of Washington, King County, for breach of our lease and is seeking damages of $2.0 million. In January 2004, the Court entered a judgment in favor of the plaintiff for rents due through January 2004 of $438,000, which we appealed immediately. The Court reserved the other issues in the suit, including mitigation, interest and attorney’s fees, for trial. We believe that we have meritorious defenses to the claims made in the suit and intend to defend this suit vigorously and may also bring certain counterclaims against the landlord. If we do not prevail on our appeal or our counterclaims, we may be held liable for additional amounts beyond the amount of the judgment. As of December 31, 2003, we have recorded in accrued special charges an estimate of the amount we may ultimately be required to pay with respect to this matter.

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

      None.

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PART II

      The following table sets forth for the periods indicated the high and low closing prices for our common stock. These quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not represent actual transactions.

      As of February 15, 2004, there were 476 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.

      We have not paid any cash dividends to date and do not intend to pay any cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

      As discussed in Note 7 to the consolidated financial statements, in November 2002, we entered into a merger agreement pursuant to which we acquired TT Holding Corp., also known as Streampipe. Pursuant to the merger agreement, we issued the former stockholders of Streampipe shares of our common stock and unsecured promissory notes bearing interest at 5 percent per annum, in an aggregate original principal amount of $1,059,435. The notes were redeemable by us in the form of common stock if we met certain conditions, including that we were not in default under the notes and our common stock was listed on a principal exchange or on NASDAQ. In December 2003, we redeemed the notes at a redemption price of $1.76 per share by issuing 635,386 shares of common stock. The number of shares was calculated by dividing the principal and all accrued interest due under the notes as of the date of redemption by the average of the last sale price of the common shares for the 30 trading days preceding January 1, 2004. The shares issued upon redemption of the notes were issued in reliance upon the exemption contained in Section 3(a)(9) of the Securities Act, since the redemption involved the exchange of securities with our existing securities holders, and no commission or other remuneration was paid or given directly or indirectly.

      Of the shares of common stock issued upon redemption of the notes, 624,447 are registered for resale under the Securities Act on a registration statement on Form S-3 declared effective by the SEC on October 14, 2003. The remaining 10,939 shares issued upon redemption of the notes have not been registered under the Securities Act and unless so registered, may not be sold in the United States, except pursuant to an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.

      The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this Form 10-K. The selected Consolidated Statements of Operations Data for the years ended December 31, 2003, 2002 and 2001 and Balance Sheet Data as of December 31,

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