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Published: 2008-03-26

Services Agreement - Encoding.com Inc. and Valley Media Inc.



Note: Portions of this exhibit indicated by "[*]" are subject to a confidential 
treatment request, and have been omitted from this exhibit. Complete, unredacted
copies of this exhibit have been filed with the Securities and Exchange 
Commission as part of this company's confidential treatment request.


                              SERVICES AGREEMENT

             This Services Agreement (this "Agreement") is executed as of this
17th day of December, 1999 (the "Effective Date") by and between encoding.com,
Inc., a Delaware corporation ("Encoding"), and Valley Media, Inc., a Delaware
corporation ("Valley").

                                    RECITALS

             A. Encoding offers services and applications for encoding,
optimizing and delivering audio and video content on the Internet.

             B. Valley is a distributor of music and video entertainment
products.

             C. Valley desires to obtain certain services from Encoding that
will allow Valley to include a digital music sampling service as part of the
consumer database it offers to its retail customers.

                                   AGREEMENT

             In consideration of the foregoing and the mutual promises and
covenants contained herein, and for other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, Valley and Encoding
hereby agree as follows:

1.   Definitions.  For purposes of this Agreement, the following definitions
will apply:

     1.1.    The term "Confidential Information" means any information that one
             party (the "Disclosing Party") furnishes or makes available to the
             other party (the "Receiving Party") and all information related to
             the business of one party (the "Disclosing Party") which the other
             party (the "Receiving Party") acquires in the course of performing
             its obligations under this Agreement; provided, however, that the
             term "Confidential Information" does not include any information
             that the Receiving Party can prove (a) is generally available to or
             known by the public, (b) was available to or known by the Receiving
             Party on a non-confidential basis prior to disclosure by the
             Disclosing Party, (c) was independently developed for the Receiving
             Party by persons who were not given access to the information
             disclosed by the Disclosing Party, or (d) becomes generally known
             to the public after the Effective Date through no act or omission
             of the Receiving Party.

     1.2.    The term "Major Labels" means, collectively, [*], and (f) any
             affiliate, division or subsidiary of any of the entities described
             in parts (a) through (e) of this Section 1.2.

2.   Inventory Loan.  Valley maintains an inventory of compact discs containing
     prerecorded music (each, a "CD" and, collectively, the "CDs"). Valley will
     [*], one copy of each stock-keeping unit maintained by Valley among its
     inventory of CDs during the term of this Agreement, including the original
     artwork and packaging for each such CD (each, a "Loaned CD" and,
     collectively, the "Loaned CDs"). Valley will deliver the Loaned CDs to
     Encoding. Encoding will [*] in delivering the Loaned CDs. In addition,
     Encoding will pay Valley a handling charge of [*] per Loaned CD delivered
     to Encoding by Valley.

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3.   Product Information File.  Valley maintains an electronic data file
     containing [*] for each recording contained in a CD in its inventory (the
     "Product Information File"). Valley will deliver to Encoding, at [*]
     charge, one electronic copy of the Product Information File. In addition,
     during the term of this Agreement, Valley will deliver to Encoding daily
     updates of the Product Information File ("PIF Updates") containing artist
     and UPC information for recordings contained in CDs that have been added to
     Valley's inventory since the original Product Information File or the last
     PIF Update was delivered to Encoding by Valley, whichever was later. For
     purposes of this Agreement, the term "Product Information File" means the
     Product Information File as updated and/or amended by Encoding to
     incorporate any and all PIF Updates. Valley will not be required to deliver
     updates of the Product Information File to Encoding following the
     termination or expiration of this Agreement unless the parties agree
     otherwise.

4.  Encoding of Loaned CDs.

    4.1.     For each recording contained in a Loaned CD (each, a "Recording"
             and, collectively, the "Recordings"), Encoding will create a
             storable electronic file containing a copy of that Recording in
             digital form (each, a "Song File" and, collectively, the "Song
             Files"). Encoding will create each Song File in a manner that will
             allow that Song File to be encoded into each of the streaming and
             downloading formats and at each of the data rates described in
             Exhibit A hereto, which is incorporated herein by this reference.
             Valley may amend Exhibit A from time to time to include additional
             streaming and/or downloading formats and/or additional data rates,
             and Encoding will create Song Files and Song Clips (as defined
             below) for each Recording in such additional formats and/or at such
             additional data rates in accordance with a schedule agreed upon by
             both parties. Valley will [*] by Encoding in encoding the Loaned
             CDs into such additional formats and/or at such additional data
             rates pursuant to this Section 4.1.

     4.2.    From each Song File, Encoding will create a sound clip (each, a
             "Song Clip" and, collectively, the "Song Clips") of a length, in
             each of the formats and at each of the data rates described in
             Exhibit B hereto, which is incorporated herein by this reference.

     4.3.    Encoding will link each Song Clip to that portion of the Product
             Information File containing product information for the Recording
             underlying the Song Clip, so that users of the Product Information
             File [*] for a particular Recording will be able to [*].

     4.4.    Encoding will create a storable electronic file containing a copy
             of the cover art of each Loaned CD in digital form (each, a "Cover
             Art File" and, collectively, the "Cover Art Files". Encoding will
             incorporate the Cover Art Files into the Product Information File
             so that a digital image of the cover art for a Loaned CD will
             appear on each screen viewed by a user of the Product Information
             File that contains information regarding a Recording contained in
             that Loaned CD.

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     4.5.    After Encoding has created Song Files and Song Clips for each
             Recording contained in a Loaned CD, and created a Cover Art File
             for that Loaned CD, Encoding will promptly return the Loaned CD to
             Valley. Valley will [*] in delivering the returned Loaned CDs.
             Encoding may return Loaned CDs without shrink-wrap, and Encoding
             will use [*] efforts to have each returned Loaned CD in a condition
             that would allow Valley to return the Loaned CD to the vendor from
             which it was purchased without any refurbishment on Valley's part;
             provided, however, if Encoding is not able to return a Loaned CDs
             in such returnable condition, Encoding will pay [*] of Valley's
             wholesale cost for any such Loaned CD.

     4.6.    Encoding will update and/or amend the Product Information File on a
             daily basis to incorporate the information contained in any and all
             PIF Updates.

     4.7.    If, in carrying out its responsibilities under this Agreement, but
             without any separate obligation to do so, Encoding becomes aware of
             a Recording that is contained in a Loaned CD [*].

     4.8.    Encoding will attempt to create a customized clip service that will
             allow an artist or label to select the portion of a Recording by
             that artist or label that is used to create a Song Clip for that
             Recording. The artist or label would be required to bear the cost
             related to the creation of any such customized Song Clip.

5.   Music Sampling Service.  Valley and Encoding will use the Product
     Information File and the Song Clips to create a music sampling service (the
     "Sampling Service") that will be sold or licensed to third parties.
     Encoding and Valley each will have the right to sell or license the
     Sampling Service to third parties; provided, however, that neither Encoding
     nor Valley may sell, license or otherwise transfer the Sampling Service or
     any portion thereof to [*]. Encoding and Valley will each be responsible
     for collecting sales revenue and/or license fees from their respective
     customers and/or licensees. During the term of this Agreement, Encoding and
     Valley will each be entitled to [*] of any license fees received by the
     other party for selling or licensing the Sampling Service, but only to the
     extent [*]. Encoding will perform the following services to support the
     Sampling Service:

     5.1.    Encoding will store the Song Clips on its business systems and use
             those systems to stream the Song Clips to consumers using the
             Sampling Service. In hosting and streaming the Sampling Service,
             Encoding will maintain interface capabilities that are consistent
             with industry standards. Encoding's right to host and stream the
             Sampling Service on behalf of Valley under this Section 5.1. is not
             exclusive, and Valley may retain other persons or entities to
             perform such services in accordance with the following conditions.
             Valley will notify Encoding in writing if it wishes to have hosting
             and streaming services for the Sampling Service performed by a
             person or entity other than Encoding (the "Third Party Service
             Provider"). For a period of sixty (60) days following Encoding's
             receipt of such notice, Valley and Encoding will negotiate in good
             faith regarding Encoding's provision of such services instead of
             the Third Party Service Provider. If, at the conclusion of such
             sixty (60) day period, Valley and Encoding have not reached an
             agreement for Encoding to perform such services after negotiating
             in good faith, Valley will be permitted to retain the Third Party
             Service Provider to perform such services.

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     5.2.    Encoding will collect the data described in Exhibit D hereto (the
             "Consumer Data"), which is incorporated herein by this reference,
             regarding the usage and purchasing habits of consumers that use the
             Sampling Service.

6.   Minimum Service Levels.  In consideration of the capital expenditures that
     will be incurred by Encoding in connection with this Agreement, which are
     described in Section 7.1. below, Valley [*] that Encoding will receive
     revenues from the Sampling Service of at least [*] during each three month
     period (an "Installment Period") during the first twelve (12) months after
     the Sampling Service becomes operational (the "Guaranteed Period") for a
     total guaranteed payment of at least [*]. If Encoding does not receive
     revenues from the Sampling Service of at least [*] during each Installment
     Period during the Guaranteed Period, Valley will make a payment to Encoding
     (each, a "Guaranteed Payment") within thirty (30) Days of the conclusion of
     applicable Installment Period equal to the difference between [*] and the
     amount of revenues actually received by Encoding from the Sampling Service
     during the applicable Installment Period (the "Sampling Service Revenue");
     provided, however, that Encoding will not be entitled to receive the
     Guaranteed Payment if (a) the Sampling Service is not operational on or
     before [*] if Valley has provided the Priority CDs (as defined below)
     within 30 days of the Effective Date,or [*], which is incorporated herein
     by this reference; provided, further, that Valley shall not be obligated to
     make a Guaranteed Payment for a particular Installment Period if Encoding
     has received an average of [*] from Guaranteed Payments and Sampling
     Service Revenue and all Guaranteed Payments for the Installment Period in
     question and each preceding Installment Period. For purposes of this
     Section 6, the Sampling Service will become "operational" when Encoding has
     created Song Files and Song Clips for the [*] Loaned CDs designated as
     "Priority CDs" within 30 days of the Effective Date. For the purposes of
     this Section 6, all references to "revenue" shall be revenue calculated in
     accordance with U.S. GAAP.

7.   Service Fees.

     7.1.    Capital Expenses.  Encoding will pay all the necessary upfront
             capital equipment charges necessary for the creation of the
             Sampling Service which are estimated to total [*] and to include:

             7.1.1.     Facilities
             7.1.2.     Ripping Stations
             7.1.3.     Encoding Stations
             7.1.4.     Raid Online Storage
             7.1.5.     Nearline Storage System
             7.1.6.     Computer servers and Equipment

     7.2.    Shared Costs.  In consideration of the services performed by
             Encoding under this Agreement, Encoding and Valley will [*] the
             costs of creating the Song Files and Song Clips. The costs will
             include [*]. Encoding estimates these direct costs to total [*].
             Therefore, Valley will pay Encoding a total of [*] on [*] for the
             non-refundable expenses for setting up the Sampling Service. The
             above estimates are fixed and in the event the actual costs for
             this service increase or decrease, Valley will [*].

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     7.3.    Maintenance Costs.  For the ongoing maintenance encoding of new
             inventory for the Sampling Service, Valley and Encoding will [*]
             the actual direct ongoing encoding costs estimated at the rate of
             [*] per CD used in the Sampling Service. Therefore, Valley would
             pay Encoding a service fee of [*] per such CD. These costs are
             fixed through September 2000. In the event, the costs for
             maintenance are determined to increase or decrease by [*] or
             higher, the parties agree to renegotiate this clause and its fee
             schedule in good faith. Encoding will invoice Valley on a monthly
             basis that reflects the actual number of files added to the
             Sampling Service inventory. Valley and Encoding will each pay [*]
             of all shipping and handling charges to and from the Valley and
             Encoding.com facilities.

     7.4.    Streaming Costs.  Encoding will charge Valley [*] for the ongoing
             streaming and hosting costs. [*] is defined as the [*] plus [*] of
             the [*] plus [*].

8.   Ownership and Rights upon Termination.

     8.1.    Loaned CDs.

             8.1.1.  The Loaned CDs are, and will at all times remain, Valley's
                  sole and exclusive property, and Valley will have the right to
                  demand the return of any or all of the Loaned CDs, with
                  Encoding and Valley to each pay [*] of the cost of such
                  return, including the original artwork and packaging for each
                  Loaned CD, at any time; provided, however, that, if at any
                  time any or all of the Loaned CDs (other than any Loaned CDs
                  purchased by Encoding pursuant to Section 9.2 of this
                  Agreement) are determined to be Encoding's property, Encoding
                  hereby grants Valley a security interest in such Loaned CDs.

             8.1.2.  Upon the expiration or termination of this Agreement,
                  Encoding will promptly return all of the Loaned CDs, including
                  the original artwork and packaging for each Loaned CD, with
                  Encoding and Valley to each pay [*] of the cost of such
                  return, to Valley (other than any Loaned CDs Encoding has
                  already returned to, or purchased from, Valley pursuant to
                  Section 9.2 of this Agreement).

     8.2.    Files and Clips.

             8.2.1.  The Song Clips, the Song Files and the Cover Art Files will
                  be, and will at all times remain, the sole and exclusive
                  property of Valley; provided, however, that, if at any time
                  any or all of the Song Files and/or the Song Clips and/or the
                  Cover Art Files are determined to be Encoding's property,
                  Encoding hereby grants Valley a security interest in such Song
                  Files and/or Song Clips and/or Cover Art Files .

             8.2.2.  The Product Information File and any and all PIF Updates
                  will be, and will at all times remain, the sole and exclusive
                  property of Valley; provided, however, that, if at any time
                  the Product Information File, any portion thereof, or any or
                  all of the PIF Updates are determined to be Encoding's
                  property, Encoding hereby grants Valley a security interest in
                  the Product Information File and/or such PIF Updates.

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             8.2.3.  Valley hereby grants Encoding a worldwide, perpetual,
                  irrevocable, nonexclusive license to use, store, modify, copy
                  and distribute the Product Information File, the PIF Updates,
                  the Song Clips, the Song Files and the cover Art Files. This
                  license will survive any termination or expiration of this
                  Agreement. Encoding will have the right to sublicense the
                  Product Information File, the PIF Updates, the Song Files, the
                  Song Clips and the Cover Art Files to any entity other than
                  [*].

             8.2.4.  Upon the expiration or termination of this Agreement, or at
                  any earlier time, upon demand by Valley, Encoding will
                  promptly deliver to Valley, [*], copies of all of the Song
                  Files, Song Clips and Cover Art Files in the formats
                  maintained hereunder; provided, however, if Valley terminates
                  this Agreement as a result of a breach of this Agreement by
                  Encoding pursuant to Section 18.2, Encoding shall [*].

     8.3.    Consumer Data. All of the Consumer Data will be, and will at all
             times remain, the sole and exclusive property of Valley; provided,
             however, that Valley will pay Encoding [*] all revenues received by
             Valley through the sale, licensing or other commercial exploitation
             of all or any portion of the Consumer Data during the term of this
             Agreement.

9.   Audiofile License and Deleted Product.

     9.1.    At the same time the parties enter into this Agreement, they will
             enter into an Audiofile License Agreement substantially in the form
             attached hereto as Exhibit F (the "Audiofile License"), which is
             incorporated herein by this reference, pursuant to which Valley
             will license its audiofile database ("Audiofile") to Encoding on a
             royalty free basis during the term of this Agreement. If Valley is
             notified by any of its suppliers that the supplier is deleting one
             of the Loaned CDs from its catalog, Valley will post a deletion
             notice regarding the Loaned CD on Audiofile, and Encoding will
             return its copy of the Loaned CD to Valley on or before the Last
             Customer Return Date stated in the deletion notice, with Encoding
             and Valley to [*] of the cost of such return.

     9.2.    If Valley posts a deletion notice regarding a Loaned CD on
             Audiofile and Audiofile is fully operational and accessible by
             Encoding, and Encoding fails to return its copy of the Loaned CD to
             Valley prior to the Last Customer Return Date stated in the
             deletion notice, Encoding will purchase the Loaned CD from Valley
             at Valley's wholesale price for the Loaned CD.

10.  Initial Warrant Grant.  Encoding will issue warrants for [*] shares of
     Encoding common stock with a strike price of [*] per share and an exercise
     period of [*] (the "Initial Warrants"). The Initial Warrants will be
     granted upon commencement of this agreement.

11.  Rights Acquisition.  Encoding will grant Valley an additional [*] on the
     same terms and conditions as the Initial Warrants in consideration of
     Valley's certification attached hereto as Exhibit G (the "Certificate"),
     which is incorporated herein by this reference, regarding Valley's attempts
     to [*]. The statements contained in the Certificate will constitute
     representations and warranties of Valley under this Agreement. If Valley
     enters into a definitive written agreement with [*] regarding the matters
     set forth in the Certificate, Valley will provide a copy of such agreement
     to Encoding.

12.  Future Endeavors.

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     12.1.   Valley and Encoding will explore the possibility of a variety of 
             new offerings leveraging either the existing assets such as the
             Song Files, Song Clips and/or the PIF for additional Internet Music
             services including digital downloading services for Valley's
             customers, Internet radio broadcasts, Internet or digital juke
             boxes, "just-in-time" compact disc manufacturing; or offerings
             leveraging other assets of Valley and Encoding.

     12.2.   Valley and Encoding agree that both parties will mutually agree 
             upon the appropriate business model for all new jointly created new
             ventures. In such ventures as may occur, Encoding and Valley will
             [*] but will attempt to structure the ventures so [*].

13.  Representations and Warranties of Encoding. To induce Valley to enter into
     this Agreement and to perform the transactions contemplated hereunder,
     Encoding represents and warrants as follows:

     13.1.   Organization.  Encoding is a corporation duly organized, validly 
             existing and in good standing under the laws of the state of 
             Delaware.

     13.2.   Authority; Consents and Approvals; No Violations. Encoding has 
             the full corporate power and authority and legal right to execute
             and deliver this Agreement, and otherwise to perform its
             obligations hereunder. This Agreement has been validly executed and
             delivered by Encoding and will constitute a valid and binding
             obligation of Encoding enforceable in accordance with its terms,
             except to the extent such enforceability may be limited by the
             effects of bankruptcy, insolvency, reorganization, moratorium or
             other similar laws affecting creditors' rights generally, and by
             the effect of general principles of equitable law, regardless of
             whether such enforceability is considered in a proceeding in equity
             or at law. The execution and delivery of this Agreement and the
             consummation of the transactions contemplated hereby do not and
             will not violate any provision of Encoding's Certificate of
             Incorporation or Bylaws, or violate, conflict with, result in a
             breach of or constitute (with or without due notice, lapse of time
             or both) a default under any agreement, license, contract,
             franchise, permit, indenture, lease, or other instrument to which
             Encoding is a party, or by which it or any of its assets are bound.

     13.3.   Performance Standards.  Encoding will perform the services 
             described in Sections 4 and 5 of this Agreement in a professional 
             and workmanlike manner that is consistent with the highest 
             industry standards.

14.  Representations and Warranties of Valley.  To induce Encoding to enter
     into this Agreement and to perform the transactions contemplated hereunder,
     Valley represents and warrants as follows:

     14.1.   Organization.  Valley is a corporation duly organized, validly 
             existing and in good standing under the laws of the state of 
             Delaware.

     14.2.   Authority; Consents and Approvals; No Violations. Valley has the
             full corporate power and authority and legal right to execute and
             deliver this Agreement, and otherwise to perform its obligations
             hereunder. This Agreement has been validly executed and delivered
             by Valley and will constitute a valid and binding obligation of
             Valley enforceable in accordance with its terms, except to the
             extent such enforceability may be limited by the effects of
             bankruptcy, insolvency,

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             reorganization, moratorium or other similar laws affecting
             creditors' rights generally, and by the effect of general
             principles of equitable law, regardless of whether such
             enforceability is considered in a proceeding in equity or at law.
             The execution and delivery of this Agreement and the consummation
             of the transactions contemplated hereby do not and will not violate
             any provision of Valley's Certificate of Incorporation or Bylaws or
             violate, conflict with, result in a breach of or constitute (with
             or without due notice, lapse of time or both) a default under any
             agreement, license, contract, franchise, permit, indenture, lease,
             or other instrument to which Valley is a party, or by which it or
             any of its assets are bound.

15.  Indemnification.  Each party will, at all times, indemnify, defend and
     hold the other party harmless from and against any and all third-party
     claims, damages, liabilities, costs and expenses (including reasonable
     attorney's fees) arising out of any breach or alleged breach by the
     indemnifying party of any representation, warranty or obligation of such
     party under this Agreement. In addition, each party will, at all times,
     indemnify, defend and hold the other party harmless from and against any
     and all third-party claims, damages, liabilities, costs and expenses
     (including reasonable attorney's fees) arising out of any infringement or
     alleged infringement of the patents, copyrights, trademarks or other
     intellectual property rights of any third party that results from the
     commercial use of the Sampling Service by the indemnifying party, any of
     the indemnifying party's licensees, or any person or entity that has
     purchased the Sampling Service, or any portion thereof, from the
     indemnifying party.

16.  Limitation on Damages.  IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE
     OTHER FOR INDIRECT OR CONSEQUENTIAL DAMAGES, WHETHER OR NOT SUCH PARTY HAS
     BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF THE FORM
     OF ACTION.

17.  Confidential Information.  Neither Encoding nor Valley may use any
     Confidential Information of the other except as permitted under this
     Agreement. In addition, neither Encoding nor Valley may disclose any
     Confidential Information of the other unless (a) such disclosure is made to
     the Disclosing Party's employees or agents on a "need to know" basis or (b)
     such disclosure is required by law or legal process and the party from whom
     such disclosure is required has given the other party prior notice of such
     requirement and has cooperated with the non-Disclosing Party to oppose
     disclosure. For purposes of this Agreement, any unauthorized use or
     disclosure of Confidential Information by an employee or agent of either
     party will be treated as an unauthorized disclosure by such party.

18.  Term and Termination.

     18.1.   This Agreement will terminate on the [*]of the Effective Date (the
             "Initial Termination Date"), unless both parties provide a written
             amendment at least ninety (90) days prior to the Initial
             Termination Date, in which case this Agreement will be extended for
             an additional [*] years and will terminate upon the [*] anniversary
             of the Effective Date.

     18.2.   Either party may terminate this Agreement if (i) the other party
             materially breaches any of its obligations under this Agreement,
             (ii) the non-breaching party sends written notice to the breaching
             party describing the breach in reasonable detail, and (iii) the
             breaching party does not cure the breach within thirty (30) days
             following its receipt of such notice.

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     18.3.   Either party may terminate this Agreement if (i) the other party
             becomes insolvent, or (ii) a petition is filed by or against the
             other party under any bankruptcy or insolvency laws and, in the
             event of any involuntary petition, the petition is not dismissed
             within forty-five (45) days of the filing date.

     18.4.   The parties may terminate this Agreement by mutual consent through
             a signed writing.

19.  Press Release.  Upon execution of this Agreement, Encoding and Valley
     will issue a joint press release (the "Press Release") announcing the
     execution of this Agreement and briefly describing the transactions
     contemplated hereby. Neither party will issue the Press Release, nor any
     other release concerning this Agreement or the transactions contemplated
     hereby, without the other party's prior consent.

20.  Miscellaneous

     20.1.   Assignment. Neither party may assign any of its rights under this
             Agreement without the other party's prior written consent;
             provided, however, that either party may assign its rights under
             this Agreement to any affiliate of such party, any entity into
             which such party is merged or any entity that purchases
             substantially all of the assets of such party.

     20.2.   Further Assurances.  In addition to the obligations required to be
             performed by the parties hereto under the other provisions of this
             Agreement, the parties agree to perform, without further
             consideration, such other acts and to execute, file, acknowledge
             and deliver such other instruments and documents, including without
             limitation UCC-1 financing statements covering the Loaned CDs, the
             Song Files, the Song Clips, the Product Information File and the
             PIF Updates, as may be reasonably required to carry out the
             provisions and purposes of this Agreement and to fully and properly
             consummate the transactions contemplated hereby.

     20.3.   Amendment and Waiver. No amendment or modification of this
             Agreement will be effective unless set forth in a writing signed by
             an authorized representative of the party against which enforcement
             of such amendment is sought. No waiver by a party of the other
             party's obligation to comply with any provision of this Agreement
             will be deemed or will constitute a waiver of the nonwaiving
             party's obligation to comply with any other provision of this
             Agreement or with the nonwaiving party's obligation to comply with
             the waived provision on a subsequent occasion.

     20.4.   Arbitration. Any dispute or controversy arising between Encoding
             and Valley regarding this Agreement will be submitted to
             arbitration in the state of the defending party in accordance with
             the rules then in effect of the American Arbitration Association.
             Any award made by an arbitrator pursuant to this Section 20.4 will
             be binding upon both parties in the absence of fraud and may be
             entered in any court of competent jurisdiction.

     20.5.   Notices. Any notice to a party pursuant to this Agreement shall be
             given by one of the following means: (a) certified or registered
             United States mail, postage prepaid, (b) private courier or express
             service requesting evidence of receipt as a part of its service, or
             (c) by telecopy, with a copy also to

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             be given by first class United States mail, postage prepaid, or by
             any means permitted under parts (a) or (b) of this Section 20.5.
             Notices shall be given to the parties at the following addressees:

               If to Valley:   Valley Media, Inc.
                               1280 Santa Anita Court
                               Woodland, California  95776
                               Attention:  Sachin Adarkar
                               Fax Number:  (530) 406-5231

               If to Encoding: encoding.com, Inc.
                               414 Olive Way, 3rd Floor
                               Seattle, Washington  98101
                               Attention:  CFO
                               Fax Number:  206-832-4001

               with a mandatory copy to:  Venture Law Group
                               4750 Carillon Point
                               Kirkland, WA 98033
                               Attention:  John W. Robertson
                               Fax Number:  (425) 739-8750

     20.6.   Binding Effect.  Upon execution of this Agreement by all parties
             hereto, this Agreement shall inure to the benefit of, and be
             binding on and enforceable against, the parties and their
             respective heirs, legal representatives, successors and permitted
             assigns.

     20.7.   Entire Agreement. This Agreement, including the exhibits and
             schedules hereto, together with the Audiofile License and the
             Warrant, constitute the entire agreement and understanding between
             the parties with respect to the subject matter hereof, and
             supersede any prior or contemporaneous agreements or understandings
             relating to the subject matter hereof, whether written or oral.

     20.8.   Counterparts.  This Agreement may be executed in two or more
             counterparts, each of which shall be deemed an original and all of
             which, taken together, will constitute one and the same instrument.

     20.9.   Attorneys' Fees. If any arbitration, legal action or other
             proceeding is brought for the enforcement of this Agreement, or
             because of an alleged dispute, breach, default or misrepresentation
             in connection with any of the provisions of this Agreement, the
             successful or prevailing party will be entitled to recover
             reasonable attorneys' fees and other costs incurred in such action
             or proceeding, in addition to any other relief to which it may be
             entitled.

     20.10.  Survival. The provisions of Sections 1, 8.3, 15, 16, 17, and 20
             will survive any termination or expiration of this Agreement.

     20.11.  Headings. The headings of the paragraphs and sections of this
             Agreement are included for purposes of convenience only and shall
             not affect the construction or interpretation of any provisions
             hereunder.

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     20.12.  Partial Invalidity. The invalidity of any part or provision of this
             Agreement will not affect the enforceability of the remainder of
             this Agreement.

     20.13.  Governing Law. This Agreement will be governed by and construed in
             accordance with the substantive laws of the State of California
             applicable to contracts entered into and performed entirely within
             that state.

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             In witness whereof, the parties have executed this Services 
Agreement as of the Effective Date.


Valley Media, Inc.                     encoding.com, Inc.

/s/ Sachin Adarkar                     /s/ David C. Bullis
____________________________           __________________________
By:                                    By:
Its:                                   Its:
 


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