1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

------------------

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 000-30063

ARTISTDIRECT, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-4644384
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5670 WILSHIRE BOULEVARD, SUITE 200 90036
LOS ANGELES, CALIFORNIA (Zip Code)
(Address of principal executive office)

(323) 634-4000
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year,
if changed since last report)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]

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

Number of shares of Common Stock outstanding as of March 31, 2001: 37,796,081
shares.

INDEX

PART I FINANCIAL INFORMATION Page
----

ITEM 1. CONSOLIDATED BALANCE SHEETS AT MARCH 31, 2001 (UNAUDITED)
AND DECEMBER 31, 2000 ...................................................... 1

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 (UNAUDITED) AND 2000 (UNAUDITED)................ 2

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2001 (UNAUDITED) AND 2000 (UNAUDITED)................ 3

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................. 4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................... 12

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................. 36

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS........................................................... 37

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................... 37

ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................. 37

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 37

ITEM 5. OTHER INFORMATION........................................................... 37

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................ 37

A. EXHIBITS................................................................ 37

B. REPORTS ON FORM 8-K..................................................... 37

SIGNATURES.............................................................................. 38

In this Report, "ARTISTdirect," the "Company," "we," "us" and "our"
collectively refers to ARTISTdirect, Inc.

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PART I FINANCIAL INFORMATION

ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)

MARCH 31, DECEMBER 31,
2001 2000
--------- ------------

ASSETS
Current assets:
Cash and cash equivalents $ 49,259 $ 51,457
Cash held for clients 66 743
Short term investments 30,413 36,368
Accounts receivable, net 362 948
Prepaid expenses and other current assets 2,212 3,218
--------- ---------
Total current assets 82,312 92,734
Property and equipment, net 8,843 9,057
Goodwill and intangibles, net 9,509 15,018
Other assets, net 1,760 1,696
--------- ---------
$ 102,424 $ 118,505
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash held for clients $ 66 $ 743
Accounts payable 1,005 2,257
Accrued expenses 4,715 5,186
Loans and notes payable 185 178
Deferred revenue -- 34
--------- ---------
Total current liabilities 5,971 8,398
Long term liabilities 1,726 1,530
--------- ---------
Total liabilities 7,697 9,928
--------- ---------
Redeemable securities:
Redeemable common securities, $.01 par value. Authorized
10,800,000 shares. Liquidation preference and redemption value
of $10,820 and $10,778 in 2001 and 2000, respectively 10,820 10,778
--------- ---------
Total redeemable securities 10,820 10,778
--------- ---------
Stockholders' equity:
Common stock, $.01 par value. Authorized 150,000,000 shares in
2001 and 2000; issued and outstanding 37,796,081 shares in 2001
and 2000 379 379
Additional paid-in-capital 200,410 200,690
Unearned compensation (16,894) (20,364)
Accumulated deficit (99,988) (82,906)
--------- ---------
Total stockholders' equity 83,907 97,799
--------- ---------
$ 102,424 $ 118,505
========= =========

The accompanying notes are an integral part of these financial statements.

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ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
(AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE DATA)

THREE MONTHS ENDED
MARCH 31,
-------------------------------
2001 2000
------------ ------------

Net revenue:
E-Commerce $ 2,394 $ 2,029
Media 734 1,797
Agency 225 545
Record label -- 126
------------ ------------
Total net revenue 3,353 4,497
Cost of revenue:
Direct cost of product sales 2,113 1,921
Other cost of revenue 1,741 1,633
Stock-based compensation 1,549 2,793
------------ ------------
Total cost of revenue 5,403 6,347
Gross profit (loss) (2,050) (1,850)
Operating expenses:
Web site development 1,647 807
Sales and marketing 2,426 5,117
General and administrative 4,220 3,660
Amortization of stock-based compensation 1,683 (366)
Depreciation and amortization 1,996 1,174
Loss from impairment of goodwill 4,458 --
------------ ------------
Loss from operations (18,480) (12,242)
Income from equity investment 55 --
Interest income, net 1,343 1,055
------------ ------------
Net loss $ (17,082) $ (11,187)
Interest on rescission offer 164 222
Dividend on redeemable stock -- 963
Beneficial conversion feature on redeemable preferred stock -- 24,375
------------ ------------
Net loss attributable to common shareholders $ (17,246) $ (36,747)
============ ============
Basic and diluted loss per share $ (0.46) $ (2.47)
============ ============
Weighted average common shares outstanding 37,796,081 14,901,505
============ ============

The accompanying notes are an integral part of these financial statements.

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ARTISTDIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

THREE MONTHS ENDED
MARCH 31
-------------------------
2001 2000
--------- ---------

Cash flows from operating activities:
Net loss $ (17,082) $ (11,187)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,996 1,174
Income from equity investment (55) --
Loss on sale of equipment 10 --
Loss from impairment of goodwill 4,458 --
Allowance for doubtful accounts and sales returns 107 88
Amortization of unearned compensation 3,232 2,427
Changes in assets and liabilities:
Accounts receivable 693 (1,056)
Prepaid expenses and other current assets 1,006 (2,165)
Other assets (9) 1,617
Accounts payable, accrued expenses and other liabilities (1,520) 1,382
Deferred revenue (34) 36
--------- ---------
Net cash used in operating activities (7,412) (7,684)
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment (781) (2,620)
Proceeds from the sale of property and equipment 40 --
Proceeds from maturities of short-term investments 5,955 --
Investments in trademarks -- (120)
--------- ---------
Net cash provided by (used in) investing activities 5,214 (2,740)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock -- 175
Proceeds from exercise of stock options -- 1,558
Proceeds from issuance of preferred securities -- 15,224
Proceeds from initial public offering, net of
offering costs paid -- 53,050
--------- ---------
Net cash provided by financing activities -- 70,007
--------- ---------
Net (decrease) increase in cash and cash equivalents (2,198) 59,583
Cash and cash equivalents at beginning of period 51,457 69,119
--------- ---------
Cash and cash equivalents at end of period $ 49,259 $ 128,702
========= =========

The accompanying notes are an integral part of these financial statements.

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ARTISTDIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 - THE COMPANY

ARTISTdirect, Inc. (the "Company") was formed on October 6, 1999 upon its merger
with ARTISTdirect, LLC (the "Capital Reorganization"). The Capital
Reorganization was only a change in the form of ownership of the Company.
ARTISTdirect, LLC was organized as a California limited liability company and
commenced operations on August 8, 1996.

NOTE 2 - ACCOUNTING POLICIES

Principles of Consolidation

The accompanying financial statements include the consolidated accounts of the
Company and its subsidiaries in which it has controlling interests in the form
of voting and operating control. All significant intercompany accounts and
transactions have been eliminated for all periods presented.

Unaudited Interim Financial Information

The unaudited interim financial statements of the Company included herein have
been prepared in accordance with the instructions for Form 10-Q under the
Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X
under the Securities Act of 1933, as amended. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations relating to interim financial statements.

In the opinion of management, the accompanying unaudited interim consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company at March 31, 2001 and results of its operations and cash flows for the
three months ended March 31, 2001 and 2000. The results for the three months
ended March 31, 2001 are not necessarily indicative of the expected results for
the full year or any future period. These financial statements should be read in
conjunction with the consolidated financial statements and footnotes included in
the Company's documents filed with the Securities and Exchange Commission
("SEC") including its Registration Statements on Form S-1, and all amendments
thereto.

Revenue Recognition

E-Commerce revenue, which consists primarily of the gross amount of sales
revenue paid by the customer for recorded music and merchandise sold via the
Internet, include shipping fees and are recognized when the products are
shipped. The Company obtains merchandise from merchandisers and manufacturers,
music from a third-party distributor, contracts for warehousing and fulfillment,
processes customer orders and provides customer service. The Company takes title
to all products sold and bears the risk of loss for collections and nondelivery
subject to any recourse against the shipper. E-Commerce revenues are subject to
amounts due to the respective

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artists based on their contracts, and such expense is recorded as part of the
direct cost of product sales.

The Company generates media revenue from the sale of advertisements and
sponsorships, both online and offline, under short-term contracts. To date, the
duration of the Company's advertising and sponsorship commitments has generally
averaged from one to six months. The Company's obligations typically include the
guarantee of a minimum number of "impressions" or times that an advertisement
appears in pages viewed by the users of the Company's online properties. Online
advertising revenue is generally recognized as the impressions are served during
the period in which the advertisement is displayed, provided that no significant
obligations of the Company remain and collection of the resulting receivable is
probable. The Company records a reserve for contracts in which the guarantee of
a minimum number of impressions are not expected to be met. There were no such
instances as of March 31, 2001 and 2000. Revenue generated from offline
advertising and sponsorships is recognized ratably over the terms of the
agreements.

From time to time, the Company has entered into contracts with advertisers
whereby the parties exchanged online and offline advertising. This revenue was
recognized as trade and barter. Trade and barter is valued based upon similar
cash transactions which have been entered into within six months of the
respective trade and barter agreement. Trade and barter revenue was $0 and
$67,000 for the three months ended March 31, 2001 and 2000, respectively.

Agency revenue is recognized in accordance with the terms of the representation
agreements between the Company and its clients. Commission revenue is generally
recorded upon payment for the performance of services or delivery of materials
created by the artists represented.

Overhead advances on the record label are recognized as revenue evenly over the
period covered by the advances. Royalties earned on albums sold by artists
signed to the record label are recognized as revenue at the time the releases
are shipped to the retailer. Reserves are established for possible returns.

Cost of Revenue

Direct cost of product sales consists of amounts payable to artists, which
includes the costs of merchandise sold and share of net proceeds, and online
commerce transaction costs, including credit card fees, fulfillment charges and
shipping costs. Other costs of revenue consists primarily of Web site hosting
and maintenance costs, online content programming costs, online advertising
serving costs, record royalties payable to artist and payroll and related
expenses for staff involved in Web site maintenance, content programming and the
agency. Stock-based compensation expense relates to non-cash charges in
connection with warrants issued to vendors and options issued to artists and
their advisors for the right to operate their stores. Amounts payable to artists
and transaction costs are recognized upon shipment. Web site-related costs are
recognized immediately when incurred. Payroll and related expenses are
recognized in the period incurred. Non-cash stock-based compensation charges are
recognized over the period of the related agreements.

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Loss Per Common Share

The Company computes net loss per share in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", and
Securities and Exchange Commission Staff Accounting Bulletin No. 98 (SAB 98).
SFAS No. 128 requires companies with complex capital structures to present basic
and diluted EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average outstanding common shares for the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect on
a per-share basis of potential common shares (e.g., convertible securities,
options, and the like) as if they had been converted at the beginning of the
periods presented. Potential common shares that have an anti-dilutive effect
(i.e., those that increase income per share or decrease loss per share) are
excluded from diluted EPS.

Included in net loss attributable to common stockholders for the three months
ended March 31, 2000 is the effect of the beneficial conversion feature of the
Series C redeemable preferred stock which converted into common shares as of
March 31, 2000 in connection with the Company's initial public offering. The
value of the beneficial conversion feature was calculated based on the $2.40 per
share difference between the initial public offering price of $12.00 and the
effective conversion price of $9.60 multiplied by the 10,156,252 shares of
common stock issued to the Series C shareholders.

Stock-Based Compensation

The Company accounts for stock-based employee compensation in accordance with
the provisions of Accounting Principles Board (APB) opinion No. 25 and FASB
Interpretation No. 44 (FIN 44), "Accounting for Certain Transactions Involving
Stock Compensation" and complies with the disclosure requirements of SFAS No.
123, "Accounting for Stock-Based Compensation". Under APB No. 25, compensation
expense is recorded based on the difference, if any, between the fair value of
the Company's stock and the exercise price on the measurement date. The Company
accounts for stock issued to nonemployees in accordance with SFAS No. 123 and
EITF 96-18, addresses the measurement date and recognition approach for such
transactions.

Impairment of Long-Lived Assets and Goodwill

The Company has reviewed the carrying value of its long-lived assets and
goodwill for possible impairment in accordance with SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The Company determined that the remaining goodwill associated with the
acquisition of Mjuice was impaired due to the Company's decision to wind down
the related operation. In addition, the Company determined that there is
sufficient basis to support the carrying amount of goodwill associated with the
acquisition of iMusic and the minority interest in the UBL based upon the
projected undiscounted future cash flows related to the underlying assets of
these goodwill amounts. However, these assets, which are significantly impacted
by online advertising and promotions, may become impaired in the future if
advertising revenue continues to decline. During the three months ended March
31, 2001, the Company recorded a loss from impairment of the goodwill from the
Mjuice transaction of $4.5 million.

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Estimates

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Recently Issued Accounting Pronouncements

The Financial Accounting Standards Board recently issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (as amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective date of FASB Statement No. 133")
and SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which becomes effective January 1, 2001. These pronouncements
establish accounting and reporting standards for derivative instruments and
hedging activities by requiring that all derivative instruments be reported as
assets or liabilities and measured at their fair values. Under SFAS 133, changes
in the fair values of derivative instruments are recognized immediately in
earnings unless those instruments qualify as hedges of the (1) fair values of
existing assets, liabilities, or firm commitments, (2) variability of cash flows
of forecasted transactions, or (3) foreign currency exposures on net investments
in foreign operations. The adoption of these pronouncements on January 1, 2001
did not have an impact on the consolidated financial statements of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
SAB 101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Any change in the
Company's revenue recognition policy resulting from the implementation of SAB
101 would be reported as a change in accounting principle. In June 2000, the SEC
issued SAB 101B which delayed the implementation date of SAB 101 until the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 did not have an impact on the Company's consolidated
financial statements

NOTE 3 - RESCISSION OFFER

Included in Redeemable Securities are amounts related to options and securities
subject to a potential rescission offer. As disclosed in the Company's S-1
Registration Statement filed on November 22, 2000, the Company issued shares or
options to purchase shares to employees, artists and advisors. The issuance of
these shares or options did not fully comply with certain requirements under the
Securities Act, or available exemptions there under, and as a result the Company
intends to make a rescission offer to all these persons pursuant to an effective
registration statement filed under the Securities Act and pursuant to California
securities law.

In the rescission offer, the Company will offer to repurchase from these persons
all shares issued directly to these persons or pursuant to option exercises by
these persons before the expiration of the rescission offer for an amount equal
to the purchase or exercise price paid for the shares, plus interest at the rate
of 7% from the date of issuance until the rescission offer expires. The
rescission offer

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will expire approximately 30 days after the effectiveness of the rescission
offer registration statement. Based upon the number of options exercised through
March 31, 2001, the out-of-pocket cost to the Company to purchase the shares
issued upon such exercised options would be approximately $2.2 million, plus
interest.

In addition, the Company will also offer to repurchase all unexercised options
to these persons at 20% of the option exercise price times the number of option
shares, plus interest at the rate of 7% from the date the options were granted.
Based on the number of options outstanding as of March 31, 2001, and assuming
that none of these options are exercised prior to the end of the rescission
offer, the out-of-pocket cost to the Company in repurchasing such unexercised
options would be approximately $7.7 million, plus interest.

NOTE 4 - STOCK-BASED COMPENSATION

Stock Options

The Employee Stock Option Plan has reserved 7,255,922 shares of common stock for
issuance to employees, non-employee members of the Board of Directors and
consultants. Compensation expense related to such option grants for the three
months ended March 31, 2001 and 2000 was $925,000 and $1.2 million,
respectively.

The Artist Stock Option Plan and the Artist and Artist Advisor Stock Option Plan
have reserved 4,755,922 and 2,225,000 shares, respectively, of common stock for
issuance to artists and their advisors for the ARTIST channels and promotional
services. Compensation expense related to such option grants was $2.2 million
for the three months ended March 31, 2001, of which $1.5 million was included in
cost of revenue and $700,000 was included in operating expenses. Compensation
expense related to such option grants was $3.5 million for the three months
ended March 31, 2000, of which $2.7 million was included in cost of revenue and
$800,000 was included in operating expenses.

In February 2000, the Company accelerated the vesting of 114,796 stock options
granted to an executive of the Company. The resulting compensation expense of
$964,000 was recorded for the three months ended March 31, 2000.

Variable Equity Interests

During 1998, the Company issued common units, which were converted to common
shares upon the conversion of the Company to a C corporation in October 1999, to
certain executive employees and its outside legal counsel in connection with
services rendered and to be rendered. The holders of these shares were entitled
to receive the amount of appreciation per share through March 31, 2000 above the
value on the date of grant. The fair value of the Company's common stock
decreased from $11.48 as of December 31, 1999 to $7.63 as of March 31, 2000,
which resulted in a decrease in the appreciation per share, and a credit to
stock based compensation expense of $6.6 million for the three months ended
March 31, 2000.

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Warrants

In May and June 1999, the Company issued warrants to purchase common stock to
two vendors. The fair value of the warrants is being amortized as cost of
revenues over the term of the related merchandising agreements. The Company
recorded compensation expense reflected in cost of revenue of $65,000 for the
three months ended March 31, 2001 and March 31, 2000.

In December 1999, the Company issued warrants to purchase 339,254 shares of
common stock in connection with an advertising and promotion agreement. The
Company recorded compensation expense reflected in operating expenses of $23,000
for the three months ended March 31, 2001 and $162,000 for the three months
ended March 31, 2000.

The Company entered into an agreement with a landlord for office space for a
term of ten years. In connection with the agreement, the Company issued warrants
to purchase 62,500 shares of common stock. The expense related to the warrants
is being amortized over the term of the lease. The Company recorded expense of
$14,000 and $5,000 for the three months ended March 31, 2001 and 2000,
respectively.

Equity Transfer

In March 2000, the founders of the Company entered into a series of transactions
whereby two employees and an outside legal counsel would receive the
appreciation on the Company's common stock above $13.93 per share through the
third day of trading after the initial public offering. Additionally, the two
employees and outside legal counsel received stock options on the third day of
trading after the initial public offering with an exercise price equal to $13.93
per share. There was no expense charge for the appreciation rights and stock
options granted to the two employees. The fair value of the appreciation rights
and stock options granted to the outside legal counsel was $2,150,000, and was
recorded as expense for the three months ended March 31, 2000, as the grants
related to past services.

NOTE 5 - SEGMENT INFORMATION

The Company provides integrated music entertainment products and services
through five reportable segments. The five reportable segments, based upon
management's new focus in January, are ARTISTdirect Media Group ("Media"),
E-Commerce Operations Group ("E-Commerce"), Digital Music Distribution Group
("Digital Music"), Talent Agency and Live Event Group ("Agency") and Record
Label ("Record Label"). E-Commerce revenue is generated from the sale of
recorded music and music-related merchandise. Media revenue is generated
primarily from the sale of advertising and sponsorships, both online and
offline. Talent agency revenue is generated from commissions based on the income
received by agency clients for live performances. The Digital Music and the
Record Label segments currently are not generating revenue. Prior to January 1,
2001, the Company had three reportable segments: music-related Web site
operations ("ARTISTdirect Network"), musical artist booking operations ("
Agency") and record label operations ("Record Label"). ARTISTdirect Network
generated revenue primarily from the sale of recorded music and music-related
merchandise and from the sale of advertising on our Web sites. The Agency
generated revenue from commissions based on the income received by agency
clients for live performances. The Record Label generated revenue from advances
under an agreement with RCA, which was terminated in June 2000, and from
royalties on sales of recorded music. The factors for determining reportable
segments were based on service and products. Each segment is responsible for
executing a unique marketing and

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business strategy. The accounting policies of the new classifications of
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on earnings before
interest, taxes, depreciation and amortization (EBITDA) profit or loss from
operations. The following table summarizes the revenue and operating income by
segment for the three months ended March 31, 2001 and 2000.

Three months ended
March 31,
-----------------------
2001 2000
-------- --------
(in thousands)

Net Revenue:
E-Commerce $ 2,394 $ 2,029
Media 734 1,797
Agency 225 545
Digital Music -- --
Record Label -- 126
-------- --------
3,353 4,497
EBITDA Net Loss
E-Commerce (2,696) (3,067)
Media (4,750) (5,015)
Agency (441) (405)
Digital Music (768) --
Record Label -- (72)
-------- --------
$ (8,655) $ (8,559)
======== ========

Reconciliation of EBITDA Net Loss to Net Loss:
EBITDA Net Loss Per Segments (8,655) (8,559)
Amortization of vendor prepaid (139) (82)
Amortization of stock-based compensation (3,232) (2,427)
Depreciation and amortization (1,996) (1,174)
Loss from impairment of goodwill (4,458) --
Interest income, net 1,343 1,055
Income from equity investment 55 --
-------- --------
Net Loss $(17,082) $(11,187)
======== ========

The following table summarizes assets as of March 31, 2001 and December 31,
2000.

March 31, December 31,
2001 2000
--------- ------------
(in thousands)

Assets:
Corporate $ 90,116 $ 98,857
E-Commerce 6,103 9,394
Media 6,131 9,486
Agency 74 768
Digital Music -- --
Record Label -- --
-------- --------
$102,424 $118,505
======== ========

Assets by segment are those assets used in the Company operations in each
segment. Corporate assets are principally made up of cash and cash equivalents,
short-term investments, prepaid expenses, computer equipment, leasehold
improvements and other assets.

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NOTE 6 - TENDER OFFER

In February 2001, the Company authorized the repurchase of up to 2.0 million
shares of the Company's outstanding shares of common stock. The repurchase was
made through a "Dutch Auction" style self-tender offer. The tender offer expired
on April 11, 2001. The final count by the depositary for the offer indicated
that 6,450,678 shares were tendered and not withdrawn at $1.25 per share. The
Company purchased two million shares tendered at $1.25 per share. In accordance
with the terms of the offer, the Company accepted all shares properly tendered
at $1.25 per share by eligible odd lot stockholders. The aggregate purchase
price paid was $2.5 million. This amount was paid in April 2001.

NOTE 7 - REVERSE STOCK SPLIT

On April 11, 2001, the Company filed a preliminary proxy with the SEC that
contained a proposal for a reverse stock split in which each five issued and
outstanding shares of the Company's common stock will be converted into one
share. The reverse stock split proposal may be modified in subsequent proxy
filings and is subject to stockholder approval at the Company's annual meeting.

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

This report on Form 10-Q contains forward-looking statements based on our
current expectations, estimates and projections about our industry, management's
beliefs and certain assumptions made by us. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "may," "will" or similar expressions
are intended to identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances, including any underlying assumptions, are
forward-looking statements. Such statements include, but are not limited to,
statements concerning ARTISTdirect's unproven business model, our ability to
negotiate and enter into an employment agreement and a co-venture record label
with Ted Field, increased competition in its industry, ARTISTdirect's ability to
increase revenues from online product sales, advertising and other revenue
streams, ability to increase visits to ARTISTdirect's site, ability to attract
and retain artists, ability to offer compelling content, ability to fulfill
on-line music and merchandise orders in a timely manner, ability to build brand
recognition, ability to integrate acquisitions of technology and other
businesses, ability to protect and/or obtain intellectual property rights, and
ability to manage growth. Such statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, our actual results could differ materially
and adversely from those expressed in any forward-looking statements as a result
of various factors. The section entitled "Factors That May Affect Future
Results" set forth in this Form 10-Q and similar discussions in our other
filings with the SEC, discuss some of the important risk factors that may affect
our business, results of operations and financial condition. You should
carefully consider those risks, in addition to the other information in this
report and in our other filings with the SEC, before deciding to invest in our
company or to maintain or increase your investment. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason. The
information contained in this Form 10-Q is not a complete description of our
business or the risks associated with an investment in our common stock. We urge
you to carefully review and consider the various disclosures made by us in this
report and in our other reports filed with the SEC that discuss our business in
greater detail.

OVERVIEW

We are an online music company that connects artists directly with their fans
worldwide. We provide music entertainment through our ARTISTdirect Network, an
integrated network of Web sites offering multi-media content, music news and
information, community around shared music interests, and music-related
commerce. As of March 31, 2001, ARTISTdirect featured 125 unique, artist-owned
ARTISTchannels, and had signed agreements to launch channels with an additional
11 artists. The ARTISTdirect Network also features the UBL, a music search
engine on the Web, iMusic, a popular online community where fans exchange music
interests and commentary, Digital Music, a feature that allows users to download
music, both free and paid, stream promotional tracks and listen to Internet
radio stations on the ARTISTdirect Network. We also operate a music talent
agency, the ARTISTdirect Agency. Prior to June 30, 2000, we also managed a
traditional record label, Kneeling Elephant Records, which we no longer operate.

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ARTISTdirect was organized as a California limited liability company in
August 1996 and conducted operations through a group of affiliated limited
liability companies. From inception through December 1996, our primary
activities consisted of developing our business model, recruiting and training
employees and developing our infrastructure. During 1997, our operations
consisted primarily of the ARTISTdirect Agency and the Kneeling Elephant Records
label. In July 1997, we formed a joint venture to own a controlling interest in
UBL, LLC.

In September 1997, we launched our first ARTISTchannel. In June 1998, we
expanded content offerings on the UBL and added an online retail store now known
as the ARTISTdirect Superstore. Also in June 1998, we launched our second
ARTISTchannel and, by the end of 1998, we had nine ARTISTchannels in operation.

In February 1999, ARTISTdirect acquired all of the outstanding capital stock
of iMusic, Inc. The purchase consideration for iMusic was approximately $2.5
million, including $110,000 in cash, redeemable common units in UBL valued at
approximately $2.2 million and the assumption of approximately $180,000 in
liabilities. The acquisition was accounted for as a purchase. The purchase price
has been largely allocated to goodwill, which is being amortized over five
years.

In May 1999, we engaged in an exchange transaction in which all membership
interests in UBL, LLC that we did not own were exchanged for membership
interests in ARTISTdirect, LLC. The value of the consideration given was
approximately $13.9 million and the transaction was accounted for as a purchase.
The purchase price has been largely allocated to goodwill, which is being
amortized over five years.

In July 1999, we officially launched the ARTISTdirect Network, integrating
the UBL and iMusic Web sites with our ARTISTchannels. Since 1997, our revenue
mix has shifted from primarily agency commissions and record label revenue to
electronic commerce revenue and online advertising. As discussed in more detail
below, we have entered into a preliminary agreement with Ted Field to develop
and operate a co-venture record label. Although we do not expect to generate
significant revenue from the record label in the near future, our long-term plan
is to increase our record label revenue.

On October 6, 1999, ARTISTdirect, LLC merged into ARTISTdirect, Inc. Before
that time, we operated as a group of limited liability companies and did not
incur federal and state income taxes, other than iMusic, which is a Washington
corporation that we acquired in February 1999. Federal and state income taxes
attributable to losses during such periods were incurred and paid directly by
the members. Accordingly, no discussion of income taxes is included in "Results
of Operations" below. Any tax benefit attributable to losses generated before
our conversion will not be available to us. As a Delaware corporation, we are
fully subject to federal and state income taxation.

In August 2000, we acquired all of the outstanding capital stock of
Mjuice.com, Inc. The total purchase consideration for Mjuice.com was
approximately $5.0 million. The acquisition was accounted for as a purchase. The
purchase price has been largely allocated to goodwill, which was being amortized
over five years. The remaining carrying amount as of March 31, 2001 of $4.5
million was written off as the balance was deemed to not be recoverable.

In January 2001, ARTISTdirect reorganized the company into five distinct
business groups: ARTISTdirect Media Group ("Media"), E-Commerce Operations Group
("E-Commerce"), Digital Music Distribution Group ("Digital Music"), Talent
Agency and Live Event Group ("Agency") and Record Label ("Record Label").

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In April 2001, we entered into a preliminary agreement with veteran
entertainment executive Ted Field to become chairman and chief executive officer
of ARTISTdirect and form a new record label in partnership with ARTISTdirect.
The record label will be a 50/50 co-venture between ARTISTdirect and Mr. Field,
with ARTISTdirect providing a significant financial commitment. In addition to
the formation of the joint venture and our financial commitment, the preliminary
agreement contemplates that we will enter into a five-year employment agreement
with Mr. Field and that he will join our board of directors. As currently
contemplated, Mr. Field would also serve as the CEO of the record label.

The preliminary agreement is non-binding, and there can be no assurance that
we will be successful in entering into a definitive transaction with Mr. Field.
The consummation of a transaction is conditioned on the parties successfully
negotiating and entering into a definitive agreement, as well as the completion
of legal, financial and business due diligence by both parties. The transaction
is also subject to final approval by the board of directors, as well as
stockholder approval for the transaction.

We have received notice from Nasdaq that our shares of common stock will be
delisted from The NASDAQ National Market and have appealed Nasdaq's decision to
delist our shares. While we believe our common stock will continue to be listed
on The NASDAQ National Market during the pendency of the appeal, we cannot
assure you that our shares will not be delisted after the conclusion of the
appeal process. Such delisting or a prolonged decline in the price of our stock
may reduce the liquidity of our stock and adversely impact our ability to
execute our business plan.

ARTISTdirect has incurred cumulative net losses of $141.0 million from
inception to March 31, 2001, of which approximately $51.7 million represented
stock-based compensation expense. While we have significantly reduced our
operating expenses, we expect our net losses to continue for the foreseeable
future. We plan to expend significant resources developing a new record label
with Ted Field. In addition, we are still expanding resources on our online
operations, but are significantly reducing such expenditures going forward. We
have a limited operating history on which to base an evaluation of our business
and prospects. Our prospects must be considered in light of the risks, expenses,
and difficulties encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets, such as electronic
commerce. See "Factors That May Affect Future Results" for a more complete
description of the many risks we face. Our business is evolving rapidly, and
therefore we believe that period-to-period comparisons of our operating results
are not meaningful and should not be relied upon as an indication of future
performance.

REVENUE

We generate revenue from three sources: E-Commerce, Media and Agency. Prior
to June 30, 2000, we generated revenue from our Record Label. Substantially all
of our revenue is generated in cash. For the three months ended March 31, 2001
there was no barter revenue and approximately 1% of our revenue for the year
ended December 31, 2000 was barter revenue.

E-Commerce Revenue. E-Commerce revenue includes the sale of music and related
merchandise, such as apparel, collectibles and accessories, through the
ARTISTdirect shopping mall of our network. We recognize the gross amount of
product sales and shipping revenue upon shipment of the item and record
appropriate reserves for product returns. We have experienced

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seasonality with respect to our online product sales. In particular, our
E-Commerce sales in the fourth quarter have, on average, been higher than in
other quarters. We believe that this trend may continue for the foreseeable
future. For the three months ended March 31, 2001 and the year ended December
31, 2000, E-Commerce revenue constituted approximately 71% and 56%,
respectively, of our total net revenue for those periods.

Media Revenue. Media revenue consists primarily of sales of banner
advertisements and sponsorships. In sales of banner advertisements, we
principally earn revenue based on the number of impressions or times an
advertisement appears on pages viewed within our Web sites. Our banner
advertising commitments generally range from one to three months. Banner
advertising revenue is generally recognized as the impressions are served during
the period in which the advertisement is displayed, provided that no significant
obligations of the Company remain and collection of the resulting receivable is
probable. We typically guarantee a minimum number of impressions to the
advertiser. To the extent that minimum guaranteed page deliveries are not met,
we defer recognition of the corresponding revenue until the guaranteed
impressions are delivered. We also sell to advertisers sponsorship of a Web page
or event for a specified period of time. We recognize sponsorship revenue over
the period in which the sponsored page or event is displayed. To the extent that
committed obligations under sponsorship agreements are not met, revenue
recognition is deferred until the obligations are met. For the three months
ended March 31, 2001 and the year ended December 31, 2000, media revenue
constituted approximately 22% and 29%, respectively, of our total net revenue
for those periods.

During the three months ended March 31, 2001, Universal Music Group accounted
for 34%, Pringles, a division of Procter & Gamble, accounted for 20% and ESPN
X-Games, accounted for 18%, of our total media revenue. No other advertisers
accounted for more than 10% of our media revenue for that period.

Agency Revenue. Revenue from the ARTISTdirect Agency consists primarily of
commissions generated on tour and event bookings of artists represented by the
agency. Agency revenue is recognized at the time the artist gets paid. Agency
revenue fluctuates depending on touring schedules of major artists represented
by the agency. Touring schedules are subject to seasonality, with summer
typically being a more active period. For the three months ended March 31, 2001
and the year ended December 31, 2000, agency revenue constituted approximately
7% and 14%, respectively, of our total net revenue for those periods.

Record Label. Prior to June 30, 2000, revenue from Kneeling Elephant Records
was generated from overhead advances and from royalties earned on albums sold by
artists signed to the label. We recognized royalties at the time the releases
were shipped to the retailer. Reserves were established for possible returns.

COST OF REVENUE

Cost of revenue consists primarily of amounts payable to artists, which
includes the cost of merchandise sold and share of net proceeds, online
transaction costs, including credit card fees, fulfillment charges and shipping
costs, Web site hosting and maintenance costs, online content and programming
costs, online advertising serving costs, payroll and related expenses for staff
involved in Web site maintenance, content programming and the ARTISTdirect
Agency, and amortization of non-cash compensation expense related to vendor
warrants and stock options granted to artists and their advisors in connection
with entering into contractual commitments to

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exclusively operate their online commerce activities. Artist royalties are based
primarily on electronic commerce revenue generated from the sale of their
licensed merchandise. Web site maintenance costs include personnel-related
costs, software consulting costs, Internet hosting charges, and networking
costs.

In connection with the amortization of vendor warrants and artist stock
options granted through March 31, 2001, we recorded non-cash compensation
expense of approximately $1.5 million for the three months ended March 31, 2001
and approximately $7.5 million for the year ended December 31, 2000. We may
grant additional equity instruments in the future related to signing additional
artists. These equity grants may cause us to record substantial non-cash
compensation expense in the foreseeable future.

OPERATING EXPENSE

Web Site Development. Web site development expense consists primarily of
expenses incurred to update the content and design of our Web sites and
underlying technology infrastructure. These expenses primarily include payments
to third-party service vendors and personnel costs.

Sales and Marketing. Sales and marketing expense consists primarily of
advertising, marketing and promotion expenses incurred to promote our Web sites
and our brands, plus payroll and related expenses for personnel engaged in
marketing and advertising sales activities.

General and Administrative. General and administrative expense consists of
payroll and related expenses for executive and administrative personnel,
professional services expenses, facilities expenses, travel and other general
corporate expenses.

Amortization of Stock-based Compensation. We recorded a total of $40.9
million of stock-based compensation expense for the period from inception
through March 31, 2001 in connection with equity granted to employees,
directors, professional firms, artists and advisors during this period. We
recorded amortization of stock-based compensation expense of approximately $1.7
million during the three months ended March 31, 2001 and approximately $5.1
million during the year ended December 31, 2000. We anticipate granting
additional equity securities in the future to employees, directors and artists.

We are currently anticipating initiating a rescission offer with respect to
options and shares of our common stock issued prior to our initial public
offering in March 2000. To the extent that employees holding options subject to
the rescission offer, accept the offer, we will record compensation expense for
such payments, which could be significant. The amount of expense recorded for
the repurchase of unexercised stock options from employees shall be the sum of
the intrinsic value at the original measurement date (less any expense related
to the intrinsic value recorded up to the acceptance of the rescission offer)
and the amount of cash paid to the holder that exceeds the lesser of the
intrinsic value at the original measurement date or immediately prior to
settlement. The amount of expense that shall be recorded for the repurchase of
unexercised non-employee options shall be the difference between the amount paid
for each option and the fair value of the options on the date the repurchase
offer is accepted. The fair value of the options shall be determined using the
Black-Scholes option-pricing model over the remaining expected life of the
options. Any unamortized expense at the time of repurchase related to the
initial grant of the options to the non-employees shall continue to be amortized

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over the remaining service period related to the original option grants. The
Company shall also record as expense for the repurchase of shares issued
pursuant to the exercise of options the difference between the cash paid for the
repurchase of the shares and the fair value of the shares on the date the
repurchase is accepted. The amount of expense will vary depending on the number
of individuals that accept the rescission offer and the Company's stock price on
the date any rescission is consummated.

Depreciation and Amortization. Depreciation and amortization expense
consists of the depreciation of fixed assets and the amortization of acquired
intangible assets. The acquisitions of iMusic, Mjuice and the minority interest
of the UBL were accounted for using the purchase method of accounting and,
accordingly, the purchase prices have been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
value on the acquisition dates. Substantially all of the purchase price of these
transactions is attributable to the acquired intangible assets. As a result, the
aggregate excess purchase price over the net tangible assets allocated to
goodwill was $20.6 million and is being amortized over five years, the expected
estimated average useful life of these assets. These non-cash charges will
significantly affect our reported operating results over the next several years.

INTEREST INCOME AND EXPENSE

Interest income consists of earnings on our cash and cash equivalents, and
interest expense consists of interest associated with short-term borrowings.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2001 AND 2000

NET REVENUE

Net revenue decreased to $3.4 million for the three months ended March 31,
2001 from $4.5 million for the three months ended March 31, 2000, which
represented a decrease of 25%. The decrease was primarily due to decreases in
media and agency revenue, partially offset by an increase in E-Commerce revenue.
Media revenue decreased $1.1 million, or 59%, to $734,000 for the three months
ended March 31, 2001 from $1.8 million for the three months ended March 31,
2000, primarily as a result of a decrease in sales of impression based
advertising due to an overall soft advertising market. E-Commerce revenue
increased 18% to $2.4 million from $2.0 million, primarily as a result of an
increase in the number of customer orders and the average order value.
Commission revenue from the agency decreased 59% from $545,000 for the three
months ended March 31, 2000 to $225,000 for the three months ended March 31,
2001, due primarily to decreased touring activity of the agency's artists.

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COST OF REVENUE

Direct cost of product revenue increased to $2.1 million for the three months
ended March 31, 2001 from $1.9 million for the three months ended March 31,
2000, which represented an increase of 10%. This $192,000 increase was primarily
due to an increase in the number of customer orders. Other cost of revenue
increased to $1.7 million for the three months ended March 31, 2001 from $1.6
million for the three months ended March 31, 2000, which represented an increase
of 7%. This $108,000 increase was primarily due to increases in Web site hosting
and maintenance costs. For the three months ended March 31, 2001, we recorded
non-cash stock-based compensation charges of $1.5 million compared to $2.8
million for the three months ended March 31, 2000. The stock-based compensation
expense relates to the amortization of the estimated value of the options, using
the Black-Scholes method, given to artists in connection with the operation of
their stores and is amortized over the life of the associated contract periods.
Our overall gross profit margin decreased to -61% in the first quarter of 2001
from -41% in the first quarter of 2000 primarily due to the significant decrease
in media revenue.

OPERATING EXPENSE

Web Site Development. Web site development expense increased 104% to $1.6
million for the three months ended March 31, 2001 from $807,000 for the three
months ended March 31, 2000. This increase was primarily attributable to
increased costs associated with bringing our Pandesic E-Commerce system
in-house, as well as fees paid to third party service vendors relating to the
continued development and content updates of our network and development costs
of digital music products.

Sales and Marketing. Sales and marketing expense decreased 53% to $2.4
million for the three months ended March 31, 2001 from $5.1 million for the
three months ended March 31, 2000. The decrease was primarily attributable to
reduced spending on advertising to promote the ARTISTdirect Network.

General and Administrative. General and administrative expense increased 15%
to $4.2 million for the three months ended March 31, 2001 from $3.6 million for
the three months ended March 31, 2000. This increase was primarily attributable
to severance costs associated with the reduction of the staff.

Amortization of Stock-based Compensation. We recorded stock-based
compensation expense of $1.7 million for the three months ended March 31, 2001
in connection with stock option issuances to employees, directors, professional
firms and artists for promotional services. Stock-based compensation for the
comparable period in 2000 was a credit of $366,000, primarily in connection with
stock option issuances to employees, directors and professional firms, which
represented a decrease of 560%. The negative expense during 2000 reflected a
credit to stock-based compensation granted to certain executives of the Company
as a result of a reduction in the valuation of the Company's underlying common
stock as of March 31, 2000 as compared with December 31, 1999. This credit was
partially offset by the amortization during the quarter of stock-based
compensation expense related to non-variable options granted to employees and
advisors.

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Depreciation and Amortization. Depreciation and amortization expense
increased to $2.0 million for the three months ended March 31, 2001 from
approximately $1.1 million for the three months ended March 31, 2000. This
increase was primarily attributable to the amortization of the goodwill
associated with the acquisition Mjuice as well as an increase in depreciation of
fixed assets.

Impairment of Goodwill. We recorded a loss on impairment of goodwill related
to the Mjuice acquisition in the amount of $4.5 million for the three months
ended March 31, 2001.

NET LOSS

Net loss increased 53% to $17.1 million for the three months ended March 31,
2001, compared to $11.2 million for the three months ended March 31, 2000. The
increase in the net loss is primarily attributable to a $840,000 increase in web
site development, a $560,000 increase in general and administrative expense, a
$2.1 million increase in the amortization of stock-based compensation, a
$822,000 increase in depreciation and amortization expense and a $4.5 million
loss from impairment of goodwill, partially offset by a $2.7 million decrease in
sales and marketing expense.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2000, we completed our initial public offering ("IPO") and
raised net proceeds of approximately $53.1 million through the sale of 5.0
million common shares. In addition, we raised an aggregate of $97.5 million of
gross proceeds through the sale of 7,000,291 shares of Series C Preferred stock
in December 1999 and January 2000. In May 1999, we issued 3,750,0000 shares of
Series B preferred securities in exchange for an aggregate purchase price of
$15.0 million. Between July 1998 and December 1998, we issued 3,207,815 shares
of Series A preferred securities in exchange for an aggregate purchase price of
$4.9 million. Prior to July 1998, we financed our operations and growth entirely
from internally generated cash flow and capital contributions from founders. As
of March 31, 2001, we had $79.7 million of cash, cash equivalents and short-term
investments, excluding cash held for clients.

Net cash used in operating activities was $7.4 million for the three
months ended March 31, 2001 and $7.7 million for the three months ended March
31, 2000. Net cash used in operating activities for each of these periods
primarily consisted of net losses partially offset by non-cash items such as
stock-based compensation and depreciation and amortization. In addition, 2001
included a non-cash loss from impairment of goodwill and an increase in prepaid
expenses and other current assets.

Net cash provided by investing activities was $5.2 million for the three
months ended March 31, 2001 and net cash used in investing activities was $2.7
million for the three months ended March 31, 2000. Net cash provided by
investing activities for 2001 consisted primarily of the maturity of short-term
investments.

There was no cash provided by financing activities for the three months
ended March 31, 2001. Net cash provided by financing activities was $70.0
million for the three months ended March 31, 2000, which consisted primarily of
the net proceeds from the sale of securities in our initial public offering and
our Series C Preferred Stock financing.

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As of March 31, 2001 our principal commitments consisted of obligations
outstanding under operating leases and employment contracts.

We have entered into a preliminary agreement with Ted Field for a
co-venture record label. As currently contemplated, we would be required to
provide a significant financial commitment to the co-venture record label.
However, the agreement is still subject to several conditions, including board
and stockholder approval and the negotiation of definitive agreements.

We currently anticipate that our available cash resources will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months, including the potential
significant financial commitment to the co-venture record label with Ted Field.
There can be no assurance, however, that the underlying assumed levels of
revenues and expenses will prove to be accurate. Although we do not currently
have any specific material capital commitments beyond such 12-month period, if
we are unsuccessful in generating sufficient cash flow from operations, we may
need to raise additional funds in future periods through public or private
financings, or other arrangements to fund our operations and potential
acquisitions. If any additional financing is needed, we might not be able to
raise capital on reasonable terms or at all. Failure to raise capital when
needed could seriously harm our business and operating results. If additional
funds were raised through the issuance of equity securities, the percentage of
ownership of our stockholders would be reduced. Furthermore, these equity
securities might have rights, preferences or privileges senior to our common
stock. We currently do not have any plans for future equity offerings.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

In future periods, our business, financial condition and results of
operations may be affected by many factors, including but not limited to the
following:

IT IS DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS BECAUSE WE HAVE A LIMITED
OPERATING HISTORY

We were formed in August 1996. We acquired the UBL in July 1997, launched our
first ARTISTchannel in September 1997, acquired iMusic in February 1999 and
acquired Mjuice.com, Inc. in August 2000. We have been operating all of these
sites as an integrated network since July 1999 or acquisition date, if later.
Our limited operating history, particularly as an integrated network of Web
sites, makes it difficult to evaluate our current business and prospects or to
accurately predict our future revenue or results of operations. Our revenue and
income potential are unproven, and our business model is constantly evolving.
Because the Internet is constantly changing, we may need to modify our business
model to adapt to these changes, including our recent decision to focus a
significant amount of resources on off-line businesses such as the record label.

OUR BUSINESS MODEL IS NEW AND UNPROVEN, AND WE MAY NOT BE ABLE TO GENERATE
SUFFICIENT REVENUE TO OPERATE OUR BUSINESS SUCCESSFULLY

Our model for conducting business and generating revenue is new and unproven.
Our success will depend primarily on our ability to generate revenue from our
offline assets and from multiple sources through the ARTISTdirect Network,
including:

- online sales of music and related merchandise;

- sales of advertising and sponsorships;

- marketing our database of consumer information and preferences;

- sales of, or subscription fees for, digitally distributed music; and

- royalties and related revenue from record label operations.

It is uncertain whether a music-related Web site that relies on attracting
people to learn about, listen to and purchase music and related merchandise can
generate sufficient revenue from electronic commerce, advertising, sales of
database information and sales of, or fees for, digital downloads of music, to
become a viable business. We provide many of our products and services without
charge, and we may not be able to generate sufficient revenue to pay for these
products and services. In addition, it may take a significant amount of time for
us to develop and operate our planned record label with Ted Field. Accordingly,
we are not certain that our business model will be successful or that we can
sustain revenue growth or be profitable. If our markets develop more slowly than
expected or become saturated with competitors, our products and services do not
achieve or sustain market acceptance, or we are not able to successfully
negotiate a record label agreement with Ted Field we may not be able to
successfully operate our business.

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WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE LOSSES AND NEGATIVE CASH
FLOW FOR THE FORESEEABLE FUTURE

To date, we have not been profitable on an annual or quarterly basis and have
incurred accumulated losses of approximately $141 million as of March 31, 2001.
For the three months ended March 31, 2001 and the year ended December 31, 2000,
we incurred net losses of approximately $17.1 million and $59.3 million,
respectively, which represented approximately 510% and 274%, respectively, of
our revenue for those periods. We expect our operating losses and negative cash
flow to continue for at least the near future. We will need to generate
significant additional revenue to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in the
future, then we will be unable to continue our operations.

OUR OPERATING RESULTS MAY PROVE UNPREDICTABLE

Our operating results are likely to fluctuate significantly in the future due
to a variety of factors, many of which are outside of our control. Because our
operating results are volatile and difficult to predict, in some future quarters
our operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may fall
significantly.

IF WE ARE NOT SUCCESSFUL IN GENERATING REVENUE FROM A CO-VENTURE RECORD LABEL
WITH TED FIELD, WE MAY NOT BE ABLE TO INCREASE OUR NET REVENUES.

We have recently decided to invest a significant amount of our resources in
offline activities such as a record label. Accordingly, in April 2001, we
entered into a preliminary agreement with music and entertainment veteran, Ted
Field, to develop and operate a co-venture record label and to hire Mr. Field as
our Chairman and CEO. The agreement is subject to several conditions, including
board and stockholder approval and the negotiation of definitive agreements. If
we are not able to agree on definitive agreements or obtain the necessary
approvals, we will not be able to consummate the transactions contemplated by
the preliminary agreement, including the record label. Even if we are able to
develop the record label, we may not be able to successfully operate the label
to increase our net revenue. In this event, our business, results of operations
and financial condition would be materially and adversely affected.

IF WE DO NOT INCREASE ADVERTISING REVENUE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED

If we do not increase advertising revenue, our business will be adversely
affected. Increasing our advertising revenue depends upon many factors,
including our ability to:

- respond to and anticipate fluctuations in the demand for, and pricing of,
online advertising;

- conduct successful selling and marketing efforts aimed at advertisers;

- increase the size of our audience and the amount of time that our audience
spends on our Web sites;

- increase our direct advertising sales force and build up our international
marketing team;

- increase the amount of revenue per advertisement;

- aggregate our target demographic group of 13 to 34 year-old active music
consumers;

- offer advertisers the means to effectively target their advertisements to
our audience;

- accurately measure the size and demographic characteristics of our
audience;

- maintain key advertising relationships; and compete for advertisers with
Internet and traditional media companies.

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Our failure to achieve one or more of these objectives could impair our
ability to increase advertising revenue, which could adversely affect our
business. In addition to the above factors, general economic conditions, as well
as economic conditions specific to online advertising, electronic commerce and
the music industry, could affect our ability to increase our advertising
revenue. In particular, the growth of online advertising has recently declined,
which has had, and in the future may continue to have, a significant adverse
effect on our revenue from online advertising.

OUR STOCK MAY BE DELISTED FROM THE NASDAQ EXCHANGE

IF WE DO NOT GENERATE INCREASED REVENUE FROM ONLINE PRODUCT SALES, OUR GROWTH
WILL BE LIMITED AND OUR BUSINESS WILL BE ADVERSELY AFFECTED

If we do not generate increased revenue from sales of online products, our
growth will be limited and our business will be adversely affected. To generate
significant online product revenue, we will have to offer music and related
merchandise that appeal to a large number of online consumers. We also will have
to continue to create online communities that are conducive to electronic
commerce, maintain a sufficiently robust and scalable electronic commerce
platform and increase our order fulfillment capability. Since our target market
includes Internet users below the age of 18, and these users have limited access
to credit cards, our ability to capture online product revenue from this group
may be limited. If we are not successful in meeting these challenges, our growth
will be limited and our business will be adversely affected.

THE EFFECTIVENESS OF THE INTERNET FOR ADVERTISING IS UNPROVEN, WHICH MAY
DISCOURAGE SOME ADVERTISERS FROM ADVERTISING ON OUR SITES

Our future depends in part on an increase in the use of the Internet and
other forms of digital media for advertising. The Internet advertising market is
new and rapidly evolving, and we cannot yet gauge the effectiveness of
advertising on the Internet as compared to traditional media. As a result,
demand for Internet advertising is uncertain. Many advertisers have little or no
experience using the Internet for advertising purposes. The adoption of Internet
advertising, particularly by companies that have historically relied upon
traditional media for advertising, requires the acceptance of a new way of
conducting business, exchanging information and advertising products and
services. Such customers may find advertising on the Internet to be undesirable
or less effective than traditional advertising media for promoting their
products and services. For example, we believe that the recent growth of online
advertising revenue has been less than was generally expected. If the Internet
advertising market fails to fully develop or

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develops more slowly than we expect, our business could be adversely affected.
In addition, the market for advertising on other forms of digital media, such as
broadband distribution, is even less developed than Internet advertising, and if
that market does not develop, our growth may be limited.

WE DEPEND UPON ARTISTS TO ATTRACT ADVERTISERS AND GENERATE ELECTRONIC COMMERCE
REVENUE

We believe that our future success depends in part on our ability to maintain
our existing artist agreements and to secure additional agreements with artists.
Our business would be adversely affected by any of the following:

- inability to recruit new artists and increase the number of
ARTISTchannels;

- the loss of popularity of artists for whom we operate ARTISTchannels;

- increased competition to maintain existing relationships with artists;

- non-renewals of our current agreements with artists; and

- poor performance or negative publicity of our artists.

If we are not able to provide valuable services or incentives to artists, or
if we otherwise fail to maintain good relations with our artists, they may lose
interest in providing content and merchandise and otherwise promoting their
ARTISTchannels or the ARTISTdirect Network. The artists own the domain names for
their ARTISTchannels and some of the intellectual property rights with respect
to content developed for the ARTISTchannels. As a result, we may lose the rights
to operate artists' sites if our agreements with these artists terminate and are
not renewed.

Most of our current artist contracts have a term of three years. Upon
expiration, artists may not renew these contracts on reasonable terms, if at
all. If artists decide to remove their online stores from the ARTISTdirect
Network when their agreements terminate, we may be unable to recoup our costs to
develop, operate and promote the sites. Of the 111 ARTISTchannel contracts we
had as of March 31, 2001, 9 will expire in 2001, 64 will expire in 2002 and 38
will expire in 2003. In addition, as of March 31, 2001, we did not have signed
contracts for 25 of the 125 ARTISTchannels that we operate.

In the past, we have offered our artists options to purchase our common
stock. Options were intended to provide artists with an additional incentive to
actively promote the ARTISTchannels and the ARTISTdirect Network. We may not be
able to offer artists options or other equity incentives on terms as attractive
to artists as what we have offered previously. If we cannot provide adequate
incentives, our efforts to sign new artists may be impaired. If we cannot
maintain our current relationships with artists or sign agreements with new
artists, our user base would likely diminish and our ability to generate
revenues from electronic commerce and advertising would be seriously harmed.

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WE MAY NOT BE ABLE TO DEVELOP OR OBTAIN SUFFICIENTLY COMPELLING CONTENT TO
ATTRACT AND RETAIN OUR TARGET AUDIENCE

For our business to be successful, we must provide content and services that
attract consumers who will purchase music and related merchandise online. We may
not be able to provide consumers with an acceptable mix of products, services,
information and community to attract them to our Web sites frequently or to
encourage them to remain on our Web sites for an extended period of time. If our
audience determines that our content does not reflect its tastes, then our
audience size could decrease or the demographic characteristics of our audience
could change and we may be unable to react to those changes effectively or in a
timely manner. Any of these results would adversely affect our ability to
attract advertisers and sell music and other related merchandise. Our ability to
provide compelling content could be impaired by any of the following:

- reduced access to content controlled by record labels, music publishers
and artists;

- diminished technical expertise and creativity of our production staff; and

- inability to anticipate and capitalize on trends in music.

IF WE DO NOT BUILD AND MAINTAIN STRONG BRANDS, WE MAY NOT BE ABLE TO ATTRACT A
SUFFICIENT NUMBER OF USERS TO OUR WEB SITES

To attract users we must develop a brand identity for ARTISTdirect and
increase public awareness of the ARTISTchannels, the UBL and iMusic and may
spend significant amounts on our offline and online advertising and promotional
efforts to increase brand awareness, traffic and revenue. Our marketing
activities may, however, not result in increased revenue and, even if they do,
any increased revenue may not offset the expenses we incur in building our
brands. Moreover, despite these efforts we may be unable to increase public
awareness of our brands, which would have an adverse effect on our results of
operations.

OUR ONLINE STORE AGREEMENTS WITH ARTISTS DO NOT PRECLUDE OUR ARTISTS FROM
SELLING MUSIC AND RELATED MERCHANDISE ON OTHER WEB SITES

Our online store agreements with artists do not preclude them from selling
merchandise and compact discs or offering music downloads on other Web sites. If
we are unable to attract sufficient traffic to the ARTISTdirect Network,
consumers may purchase the products that we offer on other Web sites. If we are
unable to generate revenue from the sale of music and related merchandise, our
results of operations will be adversely affected.

OUR MARKET IS HIGHLY COMPETITIVE AND WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY
AGAINST OUR CURRENT AND FUTURE COMPETITORS

The market for the online promotion and distribution of music and related
merchandise is highly competitive and rapidly changing. We estimate that there
are currently over 100 Web sites that promote and distribute music and related
merchandise. The number of Web sites competing for the attention and spending of
consumers, advertisers and users has increased, and we expect it to continue to
increase because there are few barriers to entry to Internet commerce.

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We face competitive pressures from numerous actual and potential competitors.
Our competitors include MP3.com, Launch Media, Amazon.com, CDnow, MTVi, major
Internet portals and traditional music companies. Competition is likely to
increase significantly as new companies enter the market and current competitors
expand their services. Some of our competitors have announced agreements to work
together to offer music over the Internet, and we may face increased competitive
pressures as a result. Many of our current and potential competitors in the
Internet and music entertainment businesses may have substantial competitive
advantages relative to us, including:

- longer operating histories;

- significantly greater financial, technical and marketing resources;

- greater brand name recognition;

- larger existing customer bases; and

- more popular content or artists.

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services than we can. Web sites
maintained by our existing and potential competitors may be perceived by
consumers, artists, talent management companies and other music-related vendors
or advertisers as being superior to ours. In addition, increased competition
could result in reduced advertising rates and margins and loss of market share,
any of which could harm our business.

WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS FOR MUSIC MERCHANDISE, FULFILLMENT
AND DISTRIBUTION; IF WE CANNOT SECURE ALTERNATE SUPPLIERS, OUR BUSINESS MAY BE
HARMED

We rely to a large extent on timely distribution by third parties. We
currently rely substantially on one vendor, Alliance Entertainment, to fulfill
and distribute our orders for music and related merchandise. During the three
months ended March 31, 2001 and the year ended December 31, 2000, virtually all
of our orders for music and related merchandise were fulfilled by Alliance. Our
agreement with Alliance covers fulfillment services for sales under the
ARTISTdirect Superstore, but does not cover fulfillment services for our
ARTISTchannels. Although Alliance has been fulfilling orders for music and
related merchandise from the ARTISTchannels on the same terms as orders from the
ARTISTdirect Superstore, Alliance may terminate the ARTISTchannel arrangement at
any time.

We purchase almost all of our compact discs from Alliance and a substantial
portion of our other music-related merchandise from Giant Merchandising, SMI
Promotional Apparel and several other vendors. During the three months ended
March 31, 2001, we purchased approximately 78% of the dollar volume of our
compact discs from Alliance, and we obtained approximately 32% of the dollar
volume of our other music-related merchandise from Giant Merchandising,
approximately 13% from SMI Promotional Apparel and approximately 11% from
Georgiann. Our business could be significantly disrupted if Alliance, Giant, SMI
Promotional Apparel or Georgiann were to terminate or breach their agreements or
suffer adverse developments that affect their ability to supply products to us.
If, for any reason, Alliance, Giant, SMI Promotional Apparel or Georgiann are
unable or unwilling to supply products to us in

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sufficient quantities and in a timely manner, we may not be able to secure
alternative suppliers, on acceptable terms in a timely manner, or at all.

WE DEPEND ON THIRD PARTY INVENTORY AND FINANCIAL SYSTEMS AND CARRIER SERVICES

Because we rely on third parties to fulfill orders, we depend on their
systems for tracking inventory and financial data. If our distributors' systems
fail or are unable to scale or adapt to changing needs, or if we cannot
integrate our information systems with the systems of any new distributors, we
may not have adequate, accurate or timely inventory or financial information. We
also rely on third-party carriers for shipments to and from distribution
facilities. We are therefore subject to the risks, including employee strikes
and inclement weather, associated with our carriers' ability to provide delivery
services to meet our distribution and shipping needs. In the past, both we and
Alliance have occasionally experienced an unusually high volume of orders, which
resulted in shipping delays to our customers. These delays did not have a
material adverse effect, however, our failure to deliver products to our
customers in a timely and accurate manner in the future could harm our
reputation, our relationship with customers, the ARTISTdirect brand and our
results of operations.

OUR BUSINESS IS SUBJECT TO SEASONALITY, WHICH COULD ADVERSELY AFFECT OUR
OPERATING RESULTS

We have experienced and expect to continue to experience seasonal
fluctuations in our online sales. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, a disproportionate amount
of our online sales have been realized during the fourth calendar quarter and
during the summer months, traditionally when artists go on tour. Due to our
limited operating history, it is difficult to predict the seasonal pattern of
our online sales and the impact of such seasonality on our business and
operating results. Our seasonal online sales patterns may become more
pronounced, strain our personnel, warehousing, and order shipment activities and
cause our operating results to be significantly less than expected for any given
period. This would likely cause our stock price to fall.

WE MAY BE SUBJECT TO SYSTEM DISRUPTIONS, WHICH COULD REDUCE OUR REVENUE

Our ability to attract and retain artists, users, advertisers and merchants
for our online network depends on the performance, reliability and availability
of our Web sites and network infrastructure. The maintenance and operation of
substantially all of our Internet communications hardware and servers have been
outsourced to the facilities of Digex and Level(3) Communications. We have
periodically experienced service interruptions caused by temporary problems in
our own systems or software or in the systems or software of these third
parties. While we are implementing procedures to improve the reliability of our
systems, these interruptions may continue to occur from time to time.

In addition, under our agreement with Digex, it is not liable to us for any
damage or loss it may cause to our business, and we may be unable to seek
reimbursement from it for losses that it causes. Our users also depend on third
party Internet service providers and Web site operators for access to our Web
sites. These entities have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
in the future which are unrelated to our systems, but which could nonetheless
adversely affect our business.

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COMPUTER VIRUSES, ELECTRONIC BREAK-INS OR SIMILAR DISRUPTIVE EVENTS COULD
DISRUPT OUR ONLINE SERVICES

Computer viruses, electronic break-ins or similar disruptive events could
disrupt our online services. System disruptions could result in the
unavailability or slower response times of our Web sites, which would reduce the
number of advertisements delivered or commerce conducted on our Web sites and
lower the quality of our users' experience. Service disruptions could adversely
affect our revenue and, if they were prolonged, would seriously harm our
business and reputation. Our business interruption insurance may not be
sufficient to compensate us for losses that may occur as a result of these
interruptions.

IF WE DO NOT MANAGE OUR GROWTH, WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS
EFFECTIVELY

Since our inception in August 1996, we have rapidly and significantly
expanded our operations. We expect further significant expansion will be
required to address potential growth in our artist and consumer bases, the
breadth of our product and service offerings, and other opportunities. This
expansion has strained, and we expect that it will continue to strain, our
management, operations, systems and financial resources. In addition, we
recently reduced our headcount to conserve cash. Accordingly, to manage our
operations and personnel, we must improve and effectively utilize our existing
operational, management, marketing and financial systems and maintain close
coordination among our technical, finance, marketing, sales and production
staffs. In addition, we may also need to increase the capacity of our software,
hardware and telecommunications systems on short notice. We also will need to
manage an increasing number of complex relationships with users, strategic
partners, advertisers and other third parties. Our failure to manage growth
could disrupt our operations and ultimately prevent us from generating the
revenue we expect.

THE LOSS OF KEY PERSONNEL, INCLUDING MARC GEIGER, DONALD MULLER OR KEITH
YOKOMOTO, COULD ADVERSELY AFFECT OUR BUSINESS BECAUSE THESE INDIVIDUALS ARE
IMPORTANT TO OUR CONTINUED GROWTH

Our future success depends to a significant extent on the continued services
of our senior management, particularly Marc Geiger, Donald Muller and Keith
Yokomoto. The loss of any of these individuals would likely have an adverse
effect on our business. Competition for personnel throughout our industry is
intense and we may be unable to retain these key employees or attract, integrate
or retain other highly qualified employees in the future. We have in the past
experienced, and we expect to continue to experience, difficulty in hiring and
retaining highly skilled employees with appropriate qualifications. If we do not
succeed in attracting new personnel or retaining and motivating our current
personnel, our business could be adversely affected.

IF WE DO NOT REALIZE THE ANTICIPATED BENEFITS OF POTENTIAL FUTURE ACQUISITIONS,
OUR BUSINESS COULD BE SERIOUSLY HARMED AND OUR STOCK PRICE COULD FALL

We regularly evaluate, in the ordinary course of business, potential
acquisitions of, or investments in, complementary businesses, products and
technologies. If we are presented with appropriate opportunities, we intend to
actively pursue these acquisitions and/or investments. We may not, however,
realize the anticipated benefits of any acquisition or investment. If we buy a
company, we could have difficulty in assimilating that company's personnel,
technology, operations or products into our operations. In addition, the key
personnel of the acquired company may decide not to work for us. These
difficulties could disrupt our ongoing business, distract our management and
employees and increase our expenses. Acquisitions or business

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combinations could also cause us to issue equity securities that would dilute
your percentage ownership in us, incur debt or assume contingent liabilities and
take large immediate or future write-offs or charges, including amortization of
goodwill or compensation expense. Each of these results could materially and
adversely affect our business and adversely affect the price of our common
stock.

IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR COMPETITIVE
POSITION COULD BE HARMED OR WE COULD BE REQUIRED TO INCUR EXPENSES TO ENFORCE
OUR RIGHTS

We rely upon common-law trademark rights that arise from our commercial use
of the ARTISTdirect, ARTISTdirect Agency, UBL, Ultimate Band List, iMusic and
Kneeling Elephant Records brand names, and the respective associated domain
names, and the ARTISTdirect logo. We seek to protect our trademarks, copyrights
and other proprietary rights by registration and other means, but these actions
may be inadequate. We have trademark applications pending in several
jurisdictions, but our registrations may not be accepted or may be preempted by
third parties and/or we may not be able to register our trademarks in all
jurisdictions in which we intend to do business. We generally enter into
confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to and distribution of our
proprietary information.

The steps we have taken may not prevent misappropriation of our proprietary
rights, particularly in foreign countries where laws or law enforcement
practices may not protect our proprietary rights as fully as in the United
States. If third parties were to use or otherwise misappropriate our copyrighted
materials, trademarks or other proprietary rights without our consent or
approval, our competitive position could be harmed, or we could become involved
in litigation to enforce our rights. In addition, policing unauthorized use of
our content, trademarks and other proprietary rights could be very expensive,
difficult or impossible, particularly given the global nature of the Internet.

OUR ACCESS TO COPYRIGHTED CONTENT DEPENDS UPON THE WILLINGNESS OF CONTENT OWNERS
TO MAKE THEIR CONTENT AVAILABLE

The music content available on the ARTISTdirect Network is typically
comprised of copyrighted works owned or controlled by multiple third parties.
Most of the content on ARTISTchannels is either owned or licensed by the artist.
On other parts of the ARTISTdirect Network, depending on the nature of the
content and how we use the music content, we typically license such rights from
publishers, record labels, performing rights societies or artists. We frequently
either do not have written contracts or have short-term contracts with copyright
owners, and, accordingly, our access to copyrighted content depends upon the
willingness of such parties to continue to make their content available. If the
fees for music content increase substantially or if significant music content
becomes unavailable, our ability to offer music content could be materially
limited.

We have not obtained a license for some of the content offered on the
ARTISTdirect Network, including links to other music-related sites and
thirty-second streamed song samples, because we believe that a license is not
required under existing law. However, this area of law remains uncertain and may
not be resolved for a number of years. When this area of law is resolved, we may
be required to obtain licenses for such content, alter or remove the content
from our Web sites and be forced to pay potentially significant financial
damages for past conduct.

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INTELLECTUAL PROPERTY CLAIMS AGAINST US COULD BE COSTLY AND COULD RESULT IN THE
LOSS OF SIGNIFICANT RIGHTS

Third parties may assert trademark, copyright, patent and other types of
infringement or unfair competition claims against us. If we are forced to defend
against any such claims, whether they are with or without merit or are
determined in our favor, we may face costly litigation, loss of access to, and
use of, content, diversion of technical and management personnel, or product
shipment delays. As a result of such a dispute, we may have to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. While we have resolved all such disputes in the
past, we may not be able to do so in the future. If there is a successful claim
of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology or content on a timely
basis, it could harm our business.

In addition, we rely on third parties to provide services enabling our online
product sales transactions, including credit card processing, order fulfillment
and shipping. We could become subject to infringement actions by third parties
based upon our use of intellectual property provided by our third-party
providers. It is also possible that we could become subject to infringement
actions based upon the content licensed from third parties. Any such claims or
disputes could subject us to costly litigation and the diversion of our
financial resources and technical and management personnel. Further, if our
efforts to enforce our intellectual property rights are unsuccessful or if
claims by third parties against ARTISTdirect, the UBL and iMusic are successful,
we may be required to change our trademarks, alter or remove content, pay
financial damages, or alter our business practices. These changes of trademarks,
alteration of content, payment of financial damages or alteration of practices
may adversely affect our business.

WE MAY BE UNABLE TO ACQUIRE NECESSARY WEB DOMAIN NAMES

We may be unable to acquire or maintain Web domain names relating to our
brand or to specific ARTISTchannels in the United States and other countries in
which we may conduct business. We currently hold various relevant domain names,
including the "artistdirect.com," "ubl.com," "imusic.com" and
"downloadsdirect.com" domain names. The acquisition and maintenance of domain
names generally is regulated by governmental agencies and their designees and is
subject to change. The relationship between regulations governing domain names
and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we could be unable to prevent third parties from acquiring or using
domain names that infringe or otherwise decrease the value of our brand name,
trademarks and other proprietary rights.

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IF OUR ONLINE SECURITY MEASURES FAIL, WE COULD LOSE VISITORS TO OUR SITES AND
COULD BE SUBJECT TO CLAIMS FOR DAMAGE FROM OUR USERS, CONTENT PROVIDERS,
ADVERTISERS AND MERCHANTS

Our relationships with consumers would be adversely affected and we may be
subject to claims for damage if the security measures that we use to protect
their personal information, especially credit card numbers, are ineffective. We
rely on security and authentication technology that we license from third
parties to perform real-time credit card authorization and verification with our
bank. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect a customer's personal
information.

Our infrastructure is vulnerable to unauthorized access, physical or
electronic computer break-ins, computer viruses and other disruptive problems.
Internet service providers have experienced, and may continue to experience,
interruptions in service as a result of the accidental or intentional actions of
Internet users, current and former employees and others. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. Security breaches relating to our
activities or the activities of third-party contractors that involve the storage
and transmission of proprietary information could damage our reputation and our
relationships with our content providers, advertisers and merchants. We also
could be liable to our content providers, advertisers and merchants for the
damages caused by such breaches or we could incur substantial costs as a result
of defending claims for those damages. We may need to expend significant capital
and other resources to protect against such security breaches or to address
problems caused by such breaches. Our security measures may not prevent
disruptions or security breaches.

WE MAY BE SUBJECT TO LIABILITY IF PRIVATE INFORMATION PROVIDED BY OUR USERS WERE
MISUSED

Our privacy policy discloses how we use individually identifiable information
that we collect. This policy is displayed and accessible throughout the
ARTISTdirect Network. Despite this policy, however, if third persons were able
to penetrate our network security or otherwise misappropriate our users'
personal information or credit card information, we could be subject to
liability. We could also be subject to liability for claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims, or other misuses of personal information, such as for unauthorized
marketing purposes. These claims could result in costly and time-consuming
litigation.

CHANGES IN LAWS OR REGULATIONS MAY ADVERSELY AFFECT OUR ABILITY TO COLLECT
DEMOGRAPHIC AND PERSONAL INFORMATION FROM USERS AND COULD AFFECT OUR ABILITY TO
ATTRACT ADVERTISERS

Legislatures and government agencies have adopted and are considering
adopting laws and regulations regarding the collection and use of personal
information obtained from individuals when accessing Web sites. For example,
Congress recently enacted the Children's Online Privacy Protection Act, which
restricts the ability of Internet companies to collect information from children
under the age of 13 without their parents' consent. In addition, the Federal
Trade Commission and state and local authorities have been investigating
Internet companies regarding their use of personal information. Our privacy
programs may not conform with laws or regulations that are adopted. In addition,
these legislative and regulatory initiatives may adversely affect our ability to
collect demographic and personal information from users, which could have an
adverse effect on our ability to provide advertisers with demographic
information.

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The European Union has adopted a directive that imposes restrictions on the
collection and use of personal data. The directive could impose restrictions
that are more stringent than current Internet privacy standards in the United
States. If this directive were applied to us, it could prevent us from
collecting data from users in European Union member countries or subject us to
liability for use of information in contravention of the directive. Other
countries have adopted or may adopt similar legislation. We could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if government authorities choose to investigate our privacy
practices.

WE HAVE A CONTINGENT LIABILITY AS THE RESULT OF A RESCISSION OFFER WE INTEND TO
MAKE DUE TO OUR ISSUANCES OF SECURITIES IN VIOLATION OF SECURITIES LAWS

We have issued shares or options to purchase shares of our common stock to
our employees and to artists and their managers and advisors. Due to the nature
of the persons who received these shares and options in addition to our
employees and the total number of shares and options issued to them and our
employees, the issuance of these shares and options did not comply with the
requirements of Rule 701 under the Securities Act of 1933, as amended, or any
other available exemptions from the registration requirements of Section 5 of
the Securities Act, and may not have qualified for any exemption from
qualification under California securities laws either.

As a result, we plan to make a rescission offer to all these persons pursuant
to a registration statement filed under the Securities Act and pursuant to
California securities law. In the rescission offer, we will offer to repurchase
from these persons all shares issued to these persons pursuant to option
exercises by these persons before the expiration of the rescission offer for an
amount equal to the purchase or exercise price paid for these issued shares,
plus interest at the rate of 7% per year from the date of issuance until the
rescission offer expires. The rescission offer will expire approximately 30 days
after the effectiveness of the rescission offer registration statement. Based
upon the number of options exercised through March 31, 2001, and assuming that
all such issued shares are tendered in the rescission offer, the out-of-pocket
cost to us would be approximately $2.2 million, plus interest.

In addition, we will also offer to repurchase all unexercised options issued
to these persons at 20% of the option exercise price times the number of option
shares, plus interest at the rate of 7% per year from the date the options were
granted. Based on the number of options outstanding as of March 31, 2001, and
assuming that none of these options are exercised prior to the end of the
rescission offer, and, further, that all such options are tendered in the
rescission offer, the cost to us in repurchasing such options would be
approximately $7.7 million, plus interest.

The Securities Act does not expressly provide that a rescission offer will
terminate a purchaser's right to rescind a sale of stock, which was not
registered under the Securities Act as required. Accordingly, should any
offerees reject the rescission offer, we may continue to be contingently liable
under the Securities Act for the purchase price of their shares and options
which were not issued in compliance with the Securities Act or California
securities laws. In this case, based on the number of shares and options issued
as of March 31, 2001, and assuming that all options are exercised, we could be
liable for a total amount of up to $40.5 million plus interest. However, in such
case we would receive a total amount of up to $38.3 million in proceeds from the
exercise of options, which could be used to offset our liability. If we are
required to repurchase all of the shares subject to the rescission offer or if
we incur any other liability with

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respect to rescission claims, our operating results and liquidity during the
period in which such repurchase or liability occurs could be adversely affected.

WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEB SITES OR PRODUCTS SOLD
THROUGH OUR WEB SITES

We may be liable to third parties for content published on our Web sites and
other Web sites where our syndicated content appears if the music, artwork, text
or other content available violates their copyright, trademark or other
intellectual property rights or if the available content is defamatory, obscene
or pornographic. Similar claims have been brought, sometimes successfully,
against Web site operators in the past. We also may be liable for content
uploaded or posted by our users on our Web sites, such as digitally distributed
music files, postings on our message boards, chat room discussions and
copyrightable works. In addition, we could have liability to some of our content
licensors for claims made against them for content available on our Web sites.
We also could be exposed to these types of claims for content that may be
accessed from our Web sites or via links to other Web sites or for products sold
through our Web site. While we have resolved all of these types of claims made
against us in the past, we may not be able to do so in the future. We intend to
implement measures to reduce exposure to these types of claims, but such
measures may not be successful and may require us to expend significant
resources. Any litigation as a result of defending these types of claims could
result in substantial costs and damages. Our insurance may not adequately
protect us against these types of claims or the costs of their defense or
payment of damages.

IF CURRENT STANDARDS TO MEASURE THE EFFECTIVENESS OF ADVERTISING ON THE INTERNET
DO NOT DEVELOP, OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS COULD BE ADVERSELY
IMPACTED

There are currently few well established standards to measure the
effectiveness of advertising on the Internet and other digital media, and the
absence of these standards could adversely impact our ability to attract and
retain advertisers. Currently available software programs that track Internet
usage and other tracking methodologies are rapidly evolving, but such standard
measurements may never develop. In addition, the development of such software or
other methodologies may not keep pace with our information needs, particularly
to support the growing needs of our internal business requirements and
advertising clients.

SOFTWARE PROGRAMS THAT PREVENT OR LIMIT THE DELIVERY OF ADVERTISING MAY
SERIOUSLY DAMAGE OUR ABILITY TO ATTRACT AND RETAIN ADVERTISERS

A number of "filter" software programs have been developed which limit or
prevent advertising from being delivered to an Internet user's computer. This
software could adversely affect the commercial viability of Internet
advertising. These programs attempt to blank out, or block, banner and other
advertisements. To date, such programs have not had a material adverse impact on
our ability to attract and retain advertisers or caused us to fail to meet the
terms of our advertising agreements. These programs may, however, have these
effects on us in the future. Widespread adoption of this type of software would
seriously damage our ability to attract and retain advertisers.

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WE MAY NEED TO CHANGE THE MANNER IN WHICH WE CONDUCT OUR BUSINESS IF GOVERNMENT
REGULATION INCREASES

There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues such as user privacy, pricing,
taxation, content, copyrights, distribution, security, and the quality of
products and services. Several telecommunications companies have petitioned the
Federal Communications Commission to regulate Internet service providers and
online services providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. Any imposition of access
fees could increase the cost of transmitting data over the Internet. In
addition, the growth and development of the market for online commerce may lead
to more stringent consumer protection laws, both in the United States and
abroad, that may impose additional burdens on us. The United States Congress has
enacted Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The law of the Internet, however,
remains largely unsettled, even in areas where there has been some legislative
action. Moreover, it may take years to determine the extent to which existing
laws relating to issues such as property ownership, libel and personal privacy
are applicable to the Web. Any new, or modifications to existing, laws or
regulations relating to the Web could adversely affect our business.

Prohibition and restriction of Internet content and commerce could reduce or
slow Internet use, decrease the acceptance of the Internet as a communications
and commercial medium and expose us to liability. Any of these outcomes could
have a material adverse effect on our business, results of operations and
financial condition. The growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business over the Internet.

THE INTERNET IS SUBJECT TO RAPID CHANGES, WHICH COULD RESULT IN SIGNIFICANT
ADDITIONAL COSTS

The market for Internet products and services is characterized by rapid
change, evolving industry standards and frequent introductions of new
technological developments. These new standards and developments could make our
existing or future products or services obsolete. Keeping pace with the
introduction of new standards and technological developments could result in
significant additional costs or prove difficult or impossible for us. The
failure to keep pace with these changes and to continue to enhance and improve
the responsiveness, functionality and features of our Web sites could harm our
ability to attract and retain users. Among other things, we will need to license
or develop leading technologies, enhance our existing services and develop new
services and technologies that address the varied needs of our users.

OUR NET SALES COULD BE ADVERSELY AFFECTED IF WE BECOME SUBJECT TO SALES AND
OTHER TAXES

If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on the sale of our products, our net sales
and results of operations could be harmed. We do not currently collect sales or
other similar taxes for physical shipments of goods into states other than
California and Florida. However, one or more states may seek to impose sales tax
collection obligations on companies, such as ARTISTdirect, which engage in or
facilitate online commerce. A number of proposals have been made at the state
and local level that would

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impose additional taxes on the sale of goods and services through the Internet.
Such proposals, if adopted, could substantially impair the growth of electronic
commerce and could adversely affect our opportunity to derive financial benefit
from electronic commerce. Moreover, if any state or foreign country were to
successfully assert that we should collect sales or other taxes on the exchange
of merchandise on its system, our results of operations could be adversely
affected. In addition, any operations in states outside California and Florida
could subject our shipments in such states to state sales taxes under current or
future laws.

Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been enacted by Congress. However, this
legislation, known as the Internet Tax Freedom Act, imposes only a moratorium
ending on October 21, 2001 on state and local taxes on electronic commerce where
such taxes are discriminatory and on Internet access unless such taxes were
generally imposed and actually enforced before October 1, 1998. Failure to renew
this legislation would allow various states to impose taxes on Internet-based
commerce.

OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET
AND THE AVAILABILITY OF INCREASED BANDWIDTH TO CONSUMERS

The success of our business will rely on the continued improvement of the
Internet as a convenient means of consumer interaction and commerce, as well as
an efficient medium for the delivery and distribution of music. Our business
will depend on the ability of our artists and consumers to conduct commercial
transactions with us, as well as to continue to upload and download music files,
without significant delays or aggravation that may be associated with decreased
availability of Internet bandwidth and access to our Web site. This will depend
upon the maintenance of a reliable network with the necessary speed, data
capacity and security, as well as timely development of complementary products,
such as high speed modems, for providing reliable Internet access and services.
The failure of the Internet to achieve these goals will reduce our ability to
generate significant revenue.

Our penetration of a broader consumer market will depend, in part, on
continued proliferation of high speed Internet access. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to experience
increased numbers of users, increased frequency of use and increased bandwidth
requirements, the Internet infrastructure may be unable to support the demands
placed on it. In addition, increased users or bandwidth requirements may harm
the performance of the Internet.

The Internet has experienced a variety of outages and other delays and it
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the level of traffic, and could
result in the Internet becoming an inconvenient or uneconomical source of music
and related products and merchandise which would cause our revenue to decrease.
The infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for the
products or services that we offer.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market rate risk for changes in interest rates is
related primarily to our investment portfolio. We have not used derivative
financial instruments in our investment portfolio. Our short-term investments
are comprised of U.S. government obligations and public corporate debt
securities. Interest rate fluctuations impact the carrying value of the
portfolio. We do not believe that the future market risks related to the above
securities will have material adverse impact on our financial position, results
of operations or liquidity.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in litigation relating to
claims arising out of our ordinary course of business. We are not presently
involved in any material legal proceedings.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

(d) USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES.

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3. Registrant's Certificate of Incorporation and Bylaws
(incorporated by reference to Exhibits 3.1 and 3.2 to Registrant's Form S-1 No.
333-87547).

(b) None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

ARTISTDIRECT, INC.
(Registrant)

By: /s/ James B. Carroll
-----------------------------------------
James B. Carroll
Executive Vice President,
Chief Financial Officer and Secretary

Dated: May 15, 2001