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SECURITIES AND EXCHANGE COMMISSION

                         (Mark One)

OR

Commission file number 000-30063

ARTISTDIRECT, INC.

(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 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.

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, par value $0.01 per share, outstanding as of March 31, 2003: 3,461,742 shares.

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INDEX

     In this Report, the words “ARTISTdirect,” the “Company,” “we,” “us” and “our” collectively refer to ARTISTdirect, Inc.

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PART I:      FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS OF ARTISTDIRECT, INC.

ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

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ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTE 1 - THE COMPANY

ARTISTdirect, Inc. (the “Company”) was formed on October 6, 1999 upon its merger with ARTISTdirect, LLC. This merger 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 – GOING CONCERN

     The Company has incurred losses and negative cash flows from operations in every fiscal period since inception and has an accumulated deficit of $249 million as of March 31, 2003. For the quarter ended March 31, 2003, the Company incurred a net loss of $7.1 million and negative operating cash flows of $1.3 million. Additionally, the Company has been funding substantially all of the operations of ARTISTdirect Records, LLC, its record label joint venture. The Company’s operations to date and loans to ARTISTdirect Records, LLC have been funded by sales of its capital stock. Management expects its operating losses and the operating losses of ARTISTdirect Records, LLC to continue for the foreseeable future. The Company does not currently anticipate that available cash reserves will be sufficient to meet anticipated needs for working capital and capital expenditures over the next twelve months without additional capital. The Company is attempting to raise additional funding through the sale of its capital stock or membership interests in ARTISTdirect Records, LLC, but does not have any formal commitments as of the date of these financial statements. If such funding is not available, then the Company may not be able to fund its own operations or the operations of ARTISTdirect Records, LLC. In such event, the Company may seek to divest all or certain of its assets or the entire company in order to raise the capital necessary to sustain business operations. Should this fail the Company may be forced to cease operations and seek bankruptcy protection or undertake liquidation, potentially resulting in a total loss for stockholders. The conditions described above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3 – CRITICAL 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.

Liability associated with investments in affiliated companies

     Investments in affiliated companies in which the Company’s voting interest is greater than 20% and does not have a controlling financial interest, or in which the Company is able to exert significant influence in instances where the voting interest is less than 20%, are accounted for under the equity method of accounting. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of the net earnings or losses of the affiliates as they occur rather than as dividends or other distributions received. The Company’s share of losses is generally limited to the extent of the Company’s investment in and advances to the investee. However, the Company records losses in excess of its investment when funding commitments exist.

     The Company is accounting for its investment in ARTISTdirect Records, a limited liability company that was formed with Ted Field in July 2001, on the equity method of accounting since the Company does not have voting or operational control of the investee. The Company had committed to fund 100% of the operations of ARTISTdirect Records and has recorded 100% of the losses attributable to that venture from inception to April 30, 2002. From May 1, 2002, the Company’s funding commitment was reduced by the sale of 5% of ARTISTdirect Records’ equity to BMG and therefore the Company has recorded only its proportionate share, on the basis of relative funding commitments, of any losses of ARTISTdirect Records since that time. The Company has recorded a liability related to this investment as of March 31, 2003 and December 31, 2002 as the Company’s share of losses exceeded their advances as of these respective dates.

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     The Company records a valuation allowance on loans to ARTISTdirect Records in the period in which it appears that the loan is no longer collectible. To date, the Company has not recorded a valuation allowance on its loans to ARTISTdirect Records as the carrying amount of the loans has been reduced to zero as a result of the Company recording its share of losses of ARTISTdirect Records as of March 31, 2003 and December 31, 2002.

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, 2003 and results of its operations, stockholders’ equity (deficit) and cash flows for the three months ended March 31, 2003 and 2002. The results for the three months ended March 31, 2003 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 Form 10-K and Registration Statements on Form S-1, and all amendments thereto.

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 (“SAB”) No. 98. SFAS No.128 requires companies with complex capital structures to present basic and diluted earnings per share (“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. The number of potentially dilutive common share equivalents outstanding and excluded from diluted EPS because their effect is anti-dilutive as of March 31, 2003 and 2002 was approximately 780,000 and 840,000, respectively.

Revenue Recognition

     E-commerce revenue consist primarily of the gross amount of sales revenue paid by the customer for recorded music and merchandise sold via the Internet, including shipping fees, and is recognized when the products are shipped. The Company records e-commerce revenue on a gross basis as the Company enters into the sale transactions with customers, establishes the prices of the products, chooses the suppliers of the products, assumes the risk of inventory loss and collects all amounts from the customers and assumes the credit risk. E-commerce revenue is subject to amounts due to the respective artists based on their contracts, and such expense is recorded as part of direct cost of product sales.

     The Company records amounts charged to customers for shipping and handling in accordance with Emerging Issues Task Force 00-10, “Accounting for Shipping and Handling Fees and Costs.” Pursuant to EITF 00-10, the Company records amounts charged to customers for shipping and handling as revenue, and records the related costs incurred for shipping and handling to direct cost of product sales in the consolidated statements of operations. For the three months ended March 31, 2003 and 2002, the Company recorded $200,000 and $253,000, respectively, as revenue for shipping and handling fees charged to customers. For the three months ended March 31, 2003 and 2002, the Company recorded $168,000 and $239,000, respectively, of shipping and handling costs as direct cost of product sales in the consolidated statements of operations.

     Media revenue consists primarily of 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

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generally averaged from one to three months with certain programs lasting up to six months. The Company’s online 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 reasonably assured.

     The Company recognizes revenue for sponsorship arrangements, both online and offline, over the period during which the advertising is provided, generally on a straight-line basis. If the sponsorship arrangement is for the sponsorship of a specific event, the Company recognizes revenue when event occurs. The Company recognizes revenue separately for each element of integrated entertainment marketing packages that offer advertisers a combination of off-line concert and tour sponsorships that are supported by on-line banner advertising, web page sponsorships, emails to the Company’s customers and custom content. The Company determines the fair value of each deliverable based on the fair value of certain of the deliverables when sold on a stand-alone basis for cash consideration. The Company recognizes revenue for each deliverable as the services are provided. The Company recognizes revenue for the banner impression deliverable as the banner impressions are delivered. The Company recognizes revenue for the customer emails when the emails are sent. The Company recognizes revenue for web page sponsorships on a straight-line basis over the term of the sponsorship. The Company recognizes revenue for the custom content when the content is provided to the customer. The Company recognizes revenue for event sponsorships when the event has occurred.

     iMusic record label revenue consists primarily of the sale of compact discs by artists signed to iMusic, the brand name used by the Company for the record label operated by its wholly owned subsidiary ARTISTdirect Digital, Inc. The Company recognizes revenues upon the shipment of compact discs from its distributor to retailers and independent wholesalers and records appropriate reserves for product returns. At the time of the shipment of the product, the following criterion under Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When Right of Return Exists,” have been met: the seller’s price to the buyer is substantially fixed or determinable at the date of sale; the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; the buyer acquiring the product for resale has economic substance apart from that provided by the seller; the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; the amount of future returns can be reasonably estimated.

     The Company estimates the provision for returns on a quarterly basis by album based on the amount of time since the initial album release, the actual returns to date, the trend of sales activity (sales by the retailers and wholesalers) and the number of unsold units at retailers and wholesalers. Returns to the Company’s distributor are deemed to be returns to the Company. The iMusic record label revenues recorded for the three months ended March 31, 2003 are net of a provision for returns of $403,000.

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 non-employees in accordance with SFAS No. 123, which requires entities to recognize as expense over the service period the fair value of all stock-based awards on the date of grant and EITF 96-18, “Accounting for Equity Investments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, which addresses the measurement date and recognition approach for such transactions.

     Stock-based compensation included in cost of revenue represents the 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 operate their online commerce activities. The Company records the fair value of options and warrants granted to non-employees as compensation expense over the period of service. The Company determines the fair value of these options and warrants based on the Black-Scholes option pricing model.

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     Stock-based compensation included in operating expenses represents the amortization of non-cash compensation expense related to equity instruments granted to employees, directors, professional firms, artists and artist advisors. Compensation for equity grants to non-employees is recorded in the same manner as described above. The Company records stock compensation for employee option grants equal to the excess of the fair value of its common stock over the exercise price on the grant date. The Company records the compensation over the vesting period.

Pro forma information regarding net loss per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of such statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model. The assumptions used in the model and the weighted average fair value of each option granted for 2002 are as follows: risk free interest rate of 4%, volatility of 120%, dividend yield of 0% and a weighted average expected life of 5 years. There were no option grants in 2003.

For purpose of pro forma disclosures, the estimated fair value of the options is amortized into expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share amounts):

Impairment of Long-Lived Assets

     Impairment of long-lived assets is monitored on a continuing basis, and is assessed based on the undiscounted cash flows generated by the underlying assets. In the event the carrying amount of long-lived assets exceed the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value. There was no impairment of long-lived assets as of March 31, 2003 and December 31, 2002.

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. Some of the more significant estimates are allowance for sales return and inventory obsolescence, reserves on artist advances, allowances for bad debt, impairment of long-lived assets and goodwill, stock based compensation and the valuation allowance on deferred tax assets. Actual results could differ from those estimates.

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Recently Issued Accounting Pronouncements

     In November 2002, the FASB’s Emerging Issues Task Force (EITF) issued EITF 00-21 “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, separate contracts with the same entity or related parties that are entered into at or near the same time are presumed to have been negotiated as a package and should, therefore, be evaluated as a single arrangement in considering whether there are one or more units of accounting. That presumption may be overcome if there is sufficient evidence to the contrary. EITF 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The guidance in this Issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Alternatively, companies may elect to report the change in accounting as a cumulative-effect adjustment. Early application of this consensus is permitted. The adoption of this accounting pronouncement may have a significant impact on the Company’s financial statements.

     In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of SFAS No. 123 and APB Opinion No. 28, “Interim Financial Reporting,” to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the Notes to these Consolidated Financial Statements. The Company has implemented SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. The Company’s management has determined that they will continue to account for stock-based employee compensation in accordance with APB No. 25.

     In February 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entity’s activities through voting or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, or (c) the right to receive the expected residual returns of the entity if they occur. FIN 46 will have a significant effect on existing practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. In addition, FIN 46 contains detailed disclosure requirements. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The adoption of this pronouncement may have a significant impact on the Company’s consolidated financial statements due to the Company’s ownership in ARTISTdirect Records, L.L.C.

NOTE 4 – INVESTMENT IN ARTISTDIRECT RECORDS, LLC

     In May 2001, the Company entered into an agreement with veteran entertainment executive Frederick W. “Ted” Field to become Chairman and Chief Executive Officer of ARTISTdirect and form a new record label, ARTISTdirect Records, LLC, in partnership with ARTISTdirect. On June 29, 2001, ARTISTdirect stockholders approved the employment of Mr. Field and the formation of the record label. ARTISTdirect Records was formed as a 50/50 co-venture between ARTISTdirect and Mr. Field, with the Company providing a significant financial commitment.

     In November 2001, ARTISTdirect Records agreed in principle to enter into a preliminary North American distribution agreement and worldwide license agreement with BMG, the global music division of Bertelsmann AG. Under the terms of the agreement, BMG Distribution will distribute ARTISTdirect Records’ releases in North

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America, and BMG will license ARTISTdirect Records’ repertoire in territories throughout the world. In April 2002, the agreements with BMG were finalized including BMG’s purchase of 5% of the equity of ARTISTdirect Records from the Company. As part of this transaction, BMG agreed to assume $5.0 million of the Company’s funding commitment to ARTISTdirect Records. In December 2002, BMG exercised its option to extend the term of the distribution and license agreement until September 2004.

     The Company initially committed to the venture a total of $50 million over five years with the Company committing to fund up to $15.0 million per year, subject to a limit of $33 million in any three year period. Any funding in excess of these amounts would require the approval of the Company’s Board of Directors. As a result of the BMG equity purchase, the Company’s funding commitment was reduced to $45 million of which it has advanced $32.75 million as of March 31, 2003.

     In August 2002, the Company’s Board of Directors approved an agreement (the “Bridge Loan Agreement”) to accelerate up to $10 million of its funding commitment to ARTISTdirect Records. This funding was in addition to the $15 million that the Company was obligated to advance to ARTISTdirect Records in 2002 as part of the initial $50 million funding commitment. During 2002, the Company funded its $15 million commitment plus the additional $10 million bridge loan for total advances to the record label of $25.0 million in 2002 and $30.25 million from the inception of the record label through December 31, 2002. The $10 million of accelerated funding was credited toward the satisfaction of the Company’s overall funding commitment and funding obligation for 2003 resulting in a remaining funding commitment of $2.75 million for 2003 and $12.0 million for 2004. The Company’s commitment to fund ARTISTdirect Records is subject to a guaranty for the benefit of BMG. Should the Company fail to meet its commitment, BMG may choose to enforce the guaranty or provide substitute financing that could result in dilution of the Company’s interest in ARTISTdirect Records.

     As consideration for entering into the Bridge Loan Agreement and funding the additional $10 million, the Company received an additional 20% interest in ARTISTdirect Records from Radar Records Holdings, L.L.C. (“FieldCo,” the entity through which Mr. Field owns his interest in ARTISTdirect Records) which resulted in an increase in the Company’s ownership share of ARTISTdirect Records to 65% from 45% and a decrease in Mr. Field’s ownership share to 30% from 50%. The Bridge Loan Agreement also provides that any dilution from the issuance of equity interests in ARTISTdirect Records that would have been borne solely by the Company will be borne both by FieldCo and the Company pro rata with their then respective ownership interests. Furthermore, the Bridge Loan Agreement contains a provision designed to provide the Company with a minimum compound annual rate of return of 25% based upon the realized value of the Bridge Loan Agreement and the Equity Transfer, however, there can be no assurance that such rate of return will be realized. Consequently, the Company has not recorded any amounts related to the 25% minimum annual compounded return.

     ARTISTdirect Records will require additional capital during 2003, and therefore the Company is pursuing alternatives to raise additional capital for both itself and for ARTISTdirect Records. However, there can be no assurance that additional capital can be obtained by either the Company or by ARTISTdirect Records on reasonable terms or at all. If additional funds were raised through the issuance of equity securities of either the Company or ARTISTdirect Records, the percentage ownership of the stockholders in the Company and/or ARTISTdirect Records would be reduced. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of the Company’s investment in ARTISTdirect Records. In such event, the Company may seek to divest all or certain of its assets or the entire company in order to raise the capital necessary to sustain business operations. Should this fail the Company may be forced to cease operations and seek bankruptcy protection or undertake liquidation, potentially resulting in a total loss for stockholders.

     Because the Company does not have voting or operating control of ARTISTdirect Records, even with its majority ownership position, it does not consolidate the results of ARTISTdirect Records and it records its share of losses based on the equity method of accounting as loss from equity investments in its consolidated statements of operations. Prior to the completion of BMG’s purchase of a 5% interest in ARTISTdirect Records in April 2002 and BMG’s assumption of 10% of the Company’s total funding commitment, the Company had committed to fund 100% of the operations of ARTISTdirect Records and has recorded 100% of the losses attributable to that venture from the inception of ARTISTdirect Records to April 30, 2002. Since May 1, 2002, the Company has recorded only its proportionate share, on the basis of remaining relative funding commitments, of any losses of ARTISTdirect

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Records. The Company recognized $4.6 million and $8.4 million of equity loss from the record label for the three months ended March 31, 2003 and 2002, respectively.

     The Company charged ARTISTdirect Records $337,500 for each of the three months ended March 31, 2003 and 2002, for the reimbursement of overhead costs including rent and other occupancy costs and shared personnel. These amounts are reflected as a reduction in general and administrative expense in the Company’s consolidated statements of operations.

     The carrying amount of the Company’s investment in ARTISTdirect Records represents the difference between the Company’s investment and advances and the Company’s share of losses from ARTISTdirect Records. The Company continues to record the losses of ARTISTdirect Records to the extent it has additional funding commitments. The Company records its loan advances to ARTISTdirect Records as additional equity investments. As of March 31, 2003 and December 31, 2002, the Company’s share of losses exceeded the amount of the Company’s investment and advances to those dates, resulting in a credit balance of approximately $9.8 million and $7.7 million, respectively. Therefore, the carrying amounts have been classified as a liability on the Company’s balance sheet.

     The Company has no recorded investment in the loans to ARTISTdirect Records, as the carrying amount of the loans have been reduced to zero as a result of the Company recording its share of losses of ARTISTdirect Records as of March 31, 2003 and December 31, 2002. The Company does not record interest income on the loans to ARTISTdirect Records.

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     A rollforward of the Company’s net investment balance for the periods indicated is as follows:

     The income statements for ARTISTdirect Records, LLC for the three months ended March 31, 2003 and 2002 are as follows (amounts in thousands):

ARTISTdirect Records, LLC
Statements of Operations
(amounts in thousands)

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     The balance sheets for ARTISTdirect Records as of March 31, 2003 and December 31, 2002 are as follows (amounts in thousands):

ARTISTdirect Records, LLC
Balance Sheets
(amounts in thousands)

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NOTE 5 – SEGMENT INFORMATION

     As of March 31, 2003, the Company operates primarily through three reportable segments: E-commerce operations (“E-commerce”), Media operations (“Media”) and Record Label operations through its iMusic record label and its 65% equity interest in ARTISTdirect Records LLC, its co-venture with Ted Field. However, because the Company does not exert voting and operating control over ARTISTdirect Records, its results are not consolidated.

     Prior to December 2001, the Company also considered its talent agency business to be a segment, but the Company decided in December 2001 to exit this business and as a result it has been shown as a discontinued operation in the consolidated statements of operations. The segment data below has been restated for all periods to reflect the current segment structure.

     E-commerce revenue is generated from the sale of recorded music and music-related merchandise. Media revenue is generated from the sale of advertising and sponsorships, both online and offline. Record label revenue is generated from the sale of recorded music performed by artists signed to the Company’s wholly owned iMusic record label.

     The factors for determining reportable segments were based on service and products. Each segment is responsible for executing a unique marketing and business strategy. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on EBITDA (earnings or loss before interest, taxes, depreciation and amortization, including stock based compensation, and loss from impairment of goodwill). Included in EBITDA loss are direct operating expenses for the segment. The following table summarizes the revenue and EBITDA loss by segment for the three months ended March 31, 2003 and 2002. Corporate expenses consist of general operating expenses that are not directly related to the operations of the segments.

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The following table summarizes assets as of March 31, 2003 and December 31, 2002.

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     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 our unproven business model, increased competition in our industry, our ability to generate revenues from our record label, online product sales, advertising and other revenue streams, and our ability to increase visits to our Web site, to attract and retain artists, to adequately fund our operations and financial commitments, to offer compelling content, to fulfill on-line music and merchandise orders in a timely manner, to build brand recognition, to integrate acquisitions of technology and other businesses, to protect and/or obtain intellectual property rights, and 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 “Risk Factors” set forth in this report on 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 report on 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 a music entertainment company that combines an online music network and a record label to provide an integrated offering for music fans, artists and marketing partners. The ARTISTdirect Network (www.artistdirect.com) is a network of Web sites offering multi-media content, music news and information, community around shared music interests, music-related commerce and digital music services. We previously operated a record label, Kneeling Elephant Records, which ceased operations in June 2000. In May 2001, we entered into an agreement with veteran entertainment executive Frederick W. “Ted” Field to become our Chairman and Chief Executive Officer and form a new record label in partnership with us. On June 29, 2001, our stockholders approved the employment of Mr. Field and the formation of the record label, ARTISTdirect Records, LLC, as a 50/50 co-venture between ARTISTdirect and Mr. Field where we agreed to provide a significant financial commitment. Through our co-venture record label, we develop new musical artists and produce and distribute their recordings as an independent label utilizing both traditional channels and emerging Internet distribution channels. In addition to the formation of the record label and our financial commitment, we entered into a five-year employment agreement with Mr. Field and he joined our Board of Directors. Mr. Field also serves as the Chief Executive Officer of ARTISTdirect Records.

     In November 2001, we agreed in principle to sell a 5% equity interest in ARTISTdirect Records to BMG Entertainment in connection with entering into a North American distribution agreement and a worldwide licensing agreement with BMG. In April 2002, these agreements were formally executed. As part of this transaction, BMG agreed to assume $5 million of the Company’s funding commitment to ARTISTdirect Records. The Company recorded 100% of the losses attributable to ARTISTdirect Records from inception to April 30, 2002. From May 1, 2002, the Company began recording only its proportionate share, on the basis of relative funding commitments, of the losses of ARTISTdirect Records.

     In 2002, the Company agreed to accelerate an additional $10 million of funding to ARTISTdirect Records and as part of this agreement, the Company’s ownership interest in ARTISTdirect Records increased from 45% to 65% and the ownership interest of Ted Field decreased from 50% to 30%. This additional $10 million of funding was credited toward the satisfaction of the Company’s overall funding commitment and funding obligation for 2003 resulting in a remaining funding commitment of $2.75 million for 2003 and $12.0 million for 2004. During the three months

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ended March 31, 2003, the Company advanced to ARTISTdirect Records $2.5 million under its funding commitment and has advanced a total of $32.75 million as of March 31, 2003.

     In 2002, our wholly owned subsidiary ARTISTdirect Digital, Inc. began operating a record label under the brand name iMusic. iMusic focuses on the signing of established artists with a proven sales base and an ability to generally make records less expensively than developing artists. We utilize both traditional channels of distribution and emerging Internet distribution channels and generally spend substantially less on marketing and promotion of these releases than on those of new artists.

     Based upon our available cash resources and our anticipated requirements for working capital to continue our online operations, pursue our plan for the iMusic record label and meet our funding commitment to ARTISTdirect Records, we face substantial doubt about our ability to continue as a going concern. In order to address this concern, we intend to implement substantial cost reductions and have also been pursuing alternatives to raise additional capital both at ARTISTdirect and ARTISTdirect Records in order to continue the operations of both entities. See Liquidity and Capital Resources section for more detail.

     In December 2001, we decided to exit the talent agency business because we believed that our prospects for increasing the value of this business were limited and that there were potential conflicts of interests with our new co-venture record label. As a result, we have recorded the net results of this business segment as a discontinued operation in the consolidated statement of operations for all years presented. We completed the wind down of the agency business during 2002.

     The Company has significantly reduced its operating costs over the past two years including a reduction in staffing. We expect this to help us reduce our net loss going forward and conserve our cash resources given prevailing market conditions. We have incurred cumulative net losses of $249.1 million from inception to March 31, 2003, of which approximately $74.3 million represented stock-based compensation expense. Although we have significantly reduced our operating expenses, especially those related to our online operations, technology infrastructure and marketing, we expect our net losses to continue and to remain significant for the foreseeable future.

     We are committed to advance to ARTISTdirect Records an additional $250,000 in the remainder of 2003 and $12.0 million through 2006. The Company’s commitment to fund ARTISTdirect Records is subject to a guaranty for the benefit of BMG. Should the Company fail to meet its commitment, BMG may choose to enforce the guaranty or provide substitute financing that could result in dilution of the Company’s interest in ARTISTdirect Records.

     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. See “Risk Factors” 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 may not be meaningful and may not be accurate indicators of future performance.

     We have identified the following as critical accounting policies: revenue recognition, impairment of long-lived assets and equity grants to employees and non-employees. See discussion of these critical accounting policies below.

Critical Accounting Policies

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, income taxes, long-lived assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Revenue Recognition

     E-commerce revenue consist primarily of the gross amount of sales revenue paid by the customer for recorded music and merchandise sold via the Internet, including shipping fees, and is recognized when the products are shipped. We record e-commerce revenue on a gross basis as we enter into the sale transactions with customers, establish the prices of the products, choose the suppliers of the products, assume the risk of inventory loss and collect all amounts from the customers and assume the credit risk. E-commerce revenue is subject to amounts due to the respective artists based on their contracts, and such expense is recorded as part of direct cost of product sales.

     We record amounts charged to customers for shipping and handling in accordance with Emerging Issues Task Force 00-10, “Accounting for Shipping and Handling Fees and Costs.” Pursuant to EITF 00-10, the Company records amounts charged to customers for shipping and handling as revenue, and records the related costs incurred for shipping and handling to direct cost of product sales in the consolidated statements of operations. For the three months ended March 31, 2003 and 2002, we recorded $200,000 and $253,000, respectively, as revenue for shipping and handling fees charged to customers. For the three months ended March 31, 2003 and 2002, we recorded $168,000 and $239,000, respectively, of shipping and handling costs as direct cost of product sales in the consolidated statements of operations.

     Media revenue consists primarily of the sale of advertisements and sponsorships, both online and offline, under short-term contracts. To date, the duration of our advertising and sponsorship commitments has generally averaged from one to three months with certain programs lasting up to six months. Our online obligations typically include the guarantee of a minimum number of “impressions” or times that an advertisement appears in pages viewed by the users of our 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 reasonably assured.

     We recognize revenue for sponsorship arrangements, both online and offline, over the period during which the advertising is provided, generally on a straight-line basis. If the sponsorship arrangement is for the sponsorship of a specific event, we recognize revenue when event occurs. We recognize revenue separately for each element of integrated entertainment marketing packages that offer advertisers a combination of off-line concert and tour sponsorships that are supported by on-line banner advertising, web page sponsorships, emails to the our customers and custom content. We determine the fair value of each deliverable based on the fair value of certain of the deliverables when sold on a stand-alone basis for cash consideration. We recognize revenue for each deliverable as the services are provided. We recognize revenue for the banner impression deliverable as the banner impressions are delivered. We recognize revenue for the customer emails when the emails are sent. We recognize revenue for web page sponsorships on a straight-line basis over the term of the sponsorship. We recognize revenue for the custom content when the content is provided to the customer. We recognize revenue for event sponsorships when the event has occurred.

     iMusic record label revenue consists primarily of the sale of compact discs by artists signed to iMusic, the brand name used by us for the record label operated by its wholly owned subsidiary ARTISTdirect Digital, Inc. We recognize revenues upon the shipment of compact discs from its distributor to retailers and independent wholesalers and record appropriate reserves for product returns. At the time of the shipment of the product, the following criterion under Statement of Financial Accounting Standards (SFAS) No. 48, “Revenue Recognition When Right of Return Exists,” have been met: the seller’s price to the buyer is substantially fixed or determinable at the date of sale; the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; the buyer acquiring the product for resale has economic substance apart from that provided by the seller; the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; the amount of future returns can be reasonably estimated.

     We estimate the provision for returns on a quarterly basis by album based on the amount of time since the initial album release, the actual returns to date, the trend of sales activity (sales by the retailers and wholesalers) and the number of unsold units at retailers and wholesalers. Returns to our distributor are deemed to be returns to the Company. The iMusic record label revenues recorded for the three months ended March 31, 2003 are net of a provision for returns of $403,000.

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Stock-Based Compensation

     Stock-based compensation included in cost of revenue represents the 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 operate their online commerce activities. We record the fair value of options and warrants granted to non-employees as compensation expense over the period of service. We determine the fair value of these options and warrants based on the Black-Scholes option-pricing model.

     Stock-based compensation included in operating expenses represents the amortization of non-cash compensation expense related to equity instruments granted to employees, directors, professional firms, artists and artist advisors. Compensation for equity grants to non-employees is recorded in the same manner as described above. We record stock compensation for employee option grants equal to the excess of the fair value of its common stock over the exercise price on the grant date. We record the compensation over the vesting period.

Impairment of Long-Lived Assets

     We evaluate impairment of long-lived assets (which consist primarily of fixed assets) by comparing the projected future cash flows at the lowest level of discrete financial information, by its operating segments, to the carrying amount of the assets. In the event that projected future cash flows do not appear to be sufficient to recover the carrying amounts of the assets, the Company records an impairment charge to record the assets at their fair value. The fair value represents the discounted projected future cash flows.

Revenue

     We currently generate revenues from three sources: E-commerce, Media and iMusic record label. All of our revenue is generated in cash. For the three months ended March 31, 2003 and 2002 there was no 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 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, 2003 and 2002, E-Commerce revenue constituted approximately 48% and 94%, 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 six 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 ARTISTdirect 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, 2003 and 2002, media revenue constituted approximately 8% and 6%, respectively, of our total net revenue for those periods. Since most of our sponsorship and advertising contracts are short-term in nature, our advertising revenue is susceptible to significant fluctuation. In particular, our net revenue from advertising revenue has significantly decreased since the third quarter of 2000. This decrease is primarily due to advertisers spending less money on banner advertising. Due to the continued weak demand for online advertising, we do not expect our advertising revenues to increase significantly in the near future. During the three months ended March 31, 2003, AT&T Wireless accounted for 22%, Nintendo 13% and General Motors’ Saturn 12% of our total media revenue. No other advertiser accounted for more than 10% of our media revenue for that period.

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     iMusic Record Label Revenue. iMusic record label revenue consists primarily of the sale of compact discs by artists signed to the iMusic record label. The Company recognizes revenues upon the shipment of compact discs to retailers and independent wholesalers and records appropriate reserves for product returns. iMusic is the brand name used by the Company for the record label operated by its wholly owned subsidiary ARTISTdirect Digital, Inc.

     ARTISTdirect Records. ARTISTdirect Records generates revenue primarily from the sale of compact discs by artists signed to the record label. Because the Company is not deemed to have voting or operating control of ARTISTdirect Records, the Company accounts for this investment under the equity method of accounting as loss from equity investments in the consolidated statements of operations.

Cost of Revenue

     Direct cost of product sales consists primarily of the cost of merchandise sold, the amounts payable to artists for their share of net proceeds, online transaction costs, including credit card fees, warehousing and fulfillment charges and shipping costs. Direct cost of product sales also includes manufacturing costs and distribution fees payable related to the sales of the iMusic record label.

     Other cost of revenue consists primarily of online advertising serving and outside production costs, direct costs related to the organization of sponsorable activities, including payments to artists, Web site hosting and maintenance costs, online content and programming costs, customer service costs, and payroll and related expenses for staff involved in Web site maintenance and content programming.

     Stock-based compensation included in cost of revenue represents the 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 operate their online commerce activities. We currently do not intend to grant additional equity interests in the future related to obtaining e-commerce rights from artists.

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, 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.

     Stock-based Compensation. Stock-based compensation included in operating expenses represents the amortization of non-cash compensation expense related to equity (including compensation related to the rescission offer) granted to employees, directors, professional firms, and to artists and advisors in connection with the artists entering into contractual commitments to provide promotional services for their online commerce activities. For the three months ended March 31, 2003 and 2002, stock-based compensation expense of approximately $20,000 and $950,000, respectively, was recognized in operating expenses.

     We record stock compensation for employee option grants equal to the excess of the fair value of our common stock over the exercise price on the grant date. We record the compensation over the vesting period. For options and warrants granted to non-employees, we record as stock compensation the fair value of the options and warrants (using the Black-Scholes option pricing model) amortized over the related period of service. We may grant additional equity securities in the future to employees, directors, and others.

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     In December 2001, we completed a rescission offer to certain holders of stock options and shares of Common Stock purchased pursuant to stock options and recorded stock-based compensation expense of approximately $6.9 million. An additional $1.9 million was expensed during 2002 as the initial term of the service agreements related to the rescinded stock options continued into 2002. We did not record any compensation expense related to the shares and options of those holders who chose not to accept the rescission offer. The staff of the Securities and Exchange Commission has taken the position that a person’s federal right of rescission may survive the rescission offer. However, federal courts in the past have ruled that a person who rejects or fails to accept a rescission offer is precluded from later seeking similar relief. We believe that subsequent to the rescission offer, any rights to rescind will be contingent upon legal rulings, the outcome of which are not currently determinable. Accordingly, we will account for shares and options that were not rescinded in the rescission offer as if there is no right of rescission. In the event any rescissions occur subsequent to the expiration of the rescission offer in December 2001, we will account for those rescissions, if any, at the time those rescissions are completed.

     Depreciation and Amortization. Depreciation and amortization expense consists of the depreciation of fixed assets and the amortization of acquired intangible assets.

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 and equipment lease obligations.

Results of Operations - ARTISTdirect, Inc.

Three months ended March 31, 2003 and 2002

Net Revenue

     Net revenue increased 28% to $1.7 million for the three months ended March 31, 2003 from $1.3 million for the three months ended March 31, 2002. The increase was primarily due to the addition of iMusic record label revenue. iMusic record label revenue was $754,000 for the three months ended March 31, 2003. There was no activity for the iMusic record label during the three months ended March 31, 2002. E-Commerce revenue decreased 35% to $811,000 for the three months ended March 31, 2003 from $1.3 million for the three months ended March 31, 2002, primarily due to the closure of certain artist stores, and a reduction in our offering of exclusive music and merchandise that drove sales in 2002. Media revenue increased 65% to $134,000 for the three months ended March 31, 2003 from $81,000 for the three months ended March 31, 2002, primarily due to an increase in impression-based online advertising sales.

Cost of Revenue

     Direct cost of product revenue remained approximately constant at $1.0 million for the three months ended March 31, 2003 and 2002 with a decrease in e-commerce product and transaction costs being offset by an increase in iMusic manufacturing costs and distribution fees. Other cost of revenue decreased 39% to $515,000 for the three months ended March 31, 2003 from $851,000 for the three months ended March 31, 2002. This $336,000 decrease was primarily due to a decrease in web site hosting and maintenance costs partially offset by an increase in advances paid to artists signed under our iMusic record label. For the three months ended March 31, 2003, we recorded non-cash stock-based compensation charges of $20,000 compared to $950,000 for the three months ended March 31, 2002. Stock-based compensation expense relates primarily to the amortization of the estimated value of the options, using the Black-Scholes method, given to artists and their advisors in connection with the operation of their stores, and is amortized over the life of the associated contract periods. The decrease in expense is due to the termination of artist stores and the expiration of artist store agreements resulting in the full amortization of the related stock-based compensation in 2002. Our gross profit (loss) percentage improved to 10% in the first quarter of 2003 from – 112% in the first quarter of 2002.

Operating Expense

     Web Site Development. We incurred no web site development costs for the three months ended March 31, 2003 compared to $9,000 incurred during the three months ended March 31, 2002. This decrease was primarily attributable to a cessation of activity related to the enhancement of our Web sites.

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     Sales and Marketing. Sales and marketing expense increased 24% to $796,000 for the three months ended March 31, 2003 from $641,000 for the three months ended March 31, 2002. The increase was primarily attributable to the addition of iMusic record label marketing expenses in 2003. There was no marketing activity for the iMusic record label for the three months ended March 31, 2002.

     General and Administrative. General and administrative expense decreased 4% to $1.5 million for the three months ended March 31, 2003 from $1.6 million for the three months ended March 31, 2002. This decrease was primarily attributable to decreases in payroll and related costs and outside legal fees, partially offset by an increase in insurance costs.

     Stock-based Compensation. We recorded stock-based compensation expense of $14,000 for the three months ended March 31, 2003 compared with $714,000 for the three months ended March 31, 2002. This decrease was primarily due to the termination of artist promotion agreements in 2002 in connection with the completion of terms and closure of artist stores resulting in full-amortization of stock-based compensation expense in 2002.

     Depreciation and Amortization. Depreciation and amortization expense decreased 48% to $413,000 for the three months ended March 31, 2003 from $787,000 for the three months ended March 31, 2002. This decrease was primarily due to the full depreciation of certain fixed assets during 2002.

     Income (loss) from Equity Investments. Loss from equity investments for the three months ended March 31, 2003 was $4.6 million compared to $8.4 million for the three months ended March 30, 2002. The decrease in the loss during the first quarter of 2003 related to a decrease in loss of our record label venture, ARTISTdirect Records, for that period.

     See additional discussion and analysis of ARTISTdirect Records in the section “Results of Operation – ARTISTdirect Records, LLC” below.

     Interest Income and Expense. Interest income decreased 82% to $53,000 for the three months ended March 31, 2003 from $295,000 for the three months ended March 31, 2002. The decrease was due to lower available cash balances for the relevant period as well as lower interest rates.

Net Loss

     Net loss decreased $6.0 million, or 46%, to $7.1 million for the three months ended March 31, 2003, compared to $13.2 million for the three months ended March 31, 2002. The decrease in the net loss is primarily attributable to a $1.7 million decrease in the gross loss, a $65,000 decrease in general and administrative expense, a $700,000 decrease in the amortization of stock-based compensation, a $374,000 decrease in depreciation and amortization expense, a $3.8 million decrease in the loss from the Company’s equity investment in ARTISTdirect Records, and a $158,000 decrease in the income from the Company’s discontinued Agency division, partially offset by a $155,000 increase in sales and marketing expense and a $242,000 decrease in interest income.

Liquidity and Capital Resources – ARTISTdirect, Inc.

     As of March 31, 2003, we had $630,000 of unrestricted cash and cash equivalents and held $3.5 million in short-term investments.

     Net cash used in operating activities was $1.3 million for the three months ended March 31, 2003, compared with $4.7 million for the three months ended March 31, 2002. Net cash used in operating activities for each of these periods primarily consisted of net losses partially offset by add-backs for the loss from equity investments, stock-based compensation, and depreciation and amortization.

     Net cash provided by investing activities was $52,000 for the three months ended March 31, 2003, which resulted primarily from net sales of short-term investments of $2.6 million, offset by advances of $2.5 million to our record label venture. Net cash used in investing activities was $10.6 million for the three months ended March 31, 2002, which resulted primarily from advances of $8.8 million to our record label venture and net purchases of short-term investments of $1.8 million.

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     There was no cash provided by or used in financing activities for either the three months ended March 31, 2003 or 2002.

     As of March 31, 2003, our principal commitments consisted of our obligation to fund ARTISTdirect Records with approximately $12.0 million ($45 million commitment less $32.75 million advanced by us through March 31, 2003) and obligations outstanding under operating leases and employment contracts. A summary of our contractual cash obligations, excluding the record label funding commitment, as of March 31, 2003, is as follows:

(1)  During 2002, certain employment agreements were amended whereby certain executives agreed to defer all or a portion of their future salaries until the Company raised new debt or equity financing of at least $20 million. The contractual cash obligations under employment contracts shown above exclude any reduction for contractual deferrals. If the deferred amounts do not become payable, the Company’s cash obligations under employment agreements as shown above will be reduced by $750,000 during 2003, $1.0 million annually during 2004 and 2005 and by $500,000 during 2006.

     We currently anticipate that available cash resources, including short-term investments, will likely not be sufficient to meet anticipated needs for working capital and capital expenditures for the next twelve months without additional capital or a significant reduction of operating expenses that would likely include a shut-down or disposition of operations. Furthermore, ARTISTdirect Records will require capital in addition to that to be provided by us to continue its operations. We are in the process of implementing substantial cost reductions designed to allow us to operate as a going concern. However, there can be no assurance that these efforts will be sufficient to enable us to operate as a going concern on a sustained basis. We are also pursuing alternatives to raise additional capital in order to continue funding of ARTISTdirect and ARTISTdirect Records. There can be no assurance that additional capital can be obtained by either ARTISTdirect or by ARTISTdirect Records on reasonable terms, in a timely manner or at all. If additional funds are raised through the issuance of equity securities of either ARTISTdirect or ARTISTdirect Records, the percentage ownership of current stockholders in ARTISTdirect and/or ARTISTdirect Records will be reduced. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends, and any debt issued by ARTISTdirect Records may be senior to the obligations of ARTISTdirect Records to ARTISTdirect. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and ARTISTdirect, and impair the value of our investment in ARTISTdirect Records. In such event, we may seek to divest all or certain of our assets or the entire company in order to raise the capital necessary to sustain business operations. Should this fail, we may be forced to cease operations and seek bankruptcy protection or undertake liquidation, potentially resulting in a total loss for stockholders.

Results of Operations – ARTISTdirect Records, LLC

The following discussion of the results of operations of ARTISTdirect Records, LLC for the three months ended March 31, 2003 and 2002, is provided for additional information.

Net Revenue

     Net revenue for the three months ended March 31, 2003 and 2002 was $958,000 and $842,000, respectively. During the first quarter of 2003, ARTISTdirect Records released one album, The Blood Brothers’ Burn, Piano Island, Burn

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compared with one album released during the first quarter of 2002, Custom’s Fast. In addition, during the first quarter of 2003, additional units were shipped for a number of the label’s 2002 releases including most prominently Smilez and Southstar’s Crash the Party, which resulted in an increase in revenues.

Cost of Revenue

     Direct cost of product revenue includes manufacturing costs and distribution fees payable to BMG and the provision for artist advances and royalty expense. Manufacturing and distribution expenses for the three months ended March 31, 2003 and 2002 was $274,000 and $281,000, respectively. Advances and royalties include amounts paid to artists or producers signed to the label, costs paid for the recording of albums and royalties earned from the sales of such albums. Advances are typically recoupable against royalties earned by the artists or producers upon the sale of their albums. Advances and royalties, net of recoupment, for the three months ended March 31, 2003 and 2002, were $1.1 million and $3.2 million, respectively. The decrease was due primarily to a decrease in the signing and recording activity during the first quarter of 2003 compared with 2002 as well as an advance payment made during the first quarter of 2002 to a producer.

Operating Expenses

     Sales and Marketing. Sales and marketing expense represents costs of sales, marketing, promotion, publicity and video production related to ARTISTdirect Records’ albums released during the period as well as the related costs for setting up future releases. Sales and marketing expense for the three months ended March 31, 2003 and 2002 was $2.0 million and $2.2 million, respectively.

     General and Administrative. General and administrative expense represents payroll and related expenses, costs for travel & entertainment, outside legal fees and general office and communication expenses. General and administrative expense for the three months ended March 31, 2003 and 2002 was $3.1 million and $3.6 million, respectively. The decrease was due to primarily to decreases in payroll and related and outside legal expenses.

     Interest Expense. Interest expense represents the accrual of interest on loan advances made to ARTISTdirect Records from ARTISTdirect, Inc. and BMG. Interest expense for the three months ended March 31, 2003 and 2002 was $619,000 and $142,000, respectively. The increase is due to an increase in the total loan balance in the first quarter of 2003 compared with the first quarter of 2002.

Net Loss

     Net loss was $6.2 million and $8.5 million for the three months ended March 31, 2003 and 2002, respectively. Net loss was comprised of a gross loss of $388,000 and $2.6 million, total operating expenses of $5.2 million and $5.8 million, and interest expense of $619,000 and $142,000 for the three months ended March 31, 2003 and 2002, respectively.

Liquidity and Capital Resources – ARTISTdirect Records, LLC

     As of March 31, 2003, ARTISTdirect Records had no cash on hand. During the three months ended March 31, 2003, ARTISTdirect made loan advances to ARTISTdirect Records of $2.5 million for a total amount of loan advances of $32.75 million since inception. In addition, during the three months ended March 31, 2003, BMG made distribution advances of $2.0 million in conjunction with its North American distribution agreement and worldwide license agreement for a total of $7.0 million of distribution advances as of March 31, 2003. In April 2003, BMG advanced an additional $3.0 million of distribution advances as part of the initial distribution and license agreement.

     In order to continue its operations, ARTISTdirect Records will require capital within the next twelve months in addition to the $250,000 that is to be provided by ARTISTdirect in the remainder of 2003 under its overall funding commitment to ARTISTdirect Records. We are currently pursuing alternatives to raise additional capital in order to continue operations of ARTISTdirect Records. There can be no assurance that additional capital can be obtained by the Company on reasonable terms or at all. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records. In such event, we may seek to divest all or certain of our assets or the entire company in order to raise the capital necessary to sustain business operations. Should this fail, we may be forced to cease operations and seek bankruptcy protection or undertake liquidation, potentially resulting in a total loss for equity

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holders. If additional funds were raised through the issuance of equity securities, the percentage ownership of the Company’s current equity holders would be reduced.

RISK FACTORS

     Before investing in our company or deciding to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the Securities and Exchange Commission. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

We Face Substantial Doubt About Our Ability To Continue As A Going Concern Without Further Substantial Cost Reductions And/Or Additional Financing

     The report from our Independent Auditors for the year ended December 31, 2002 includes an explanatory paragraph that describes substantial doubt concerning our ability to continue as a going concern given our current available cash resources. In order to address this concern, we are implementing substantial cost reductions designed to allow us to operate as a going concern. However, there can be no assurance that these efforts will be sufficient to enable us to operate as a going concern on a sustained basis. In addition, we are pursuing alternatives to raise additional capital both at ARTISTdirect and ARTISTdirect Records in order to continue the operations of both entities. We do not have any formal commitments at this time and there can be no assurance that additional capital can be obtained either by ARTISTdirect or by ARTISTdirect Records on reasonable terms, in a timely manner or at all. If additional funds are raised through the issuance of equity securities of either ARTISTdirect or ARTISTdirect Records, the percentage ownership of current stockholders in ARTISTdirect and/or ARTISTdirect Records will be reduced. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends, and any debt issued by ARTISTdirect Records may be senior to the obligations of ARTISTdirect Records to ARTISTdirect. Failure to raise additional capital could seriously harm or result in the cessation of the business of ARTISTdirect Records and ARTISTdirect, and impair the value of our investment in ARTISTdirect Records. Cessation of the business of ARTISTdirect Records or ARTISTdirect could result in bankruptcy or liquidation, in either case potentially resulting in a total loss for stockholders of ARTISTdirect.

It Is Difficult To Evaluate Our Business And Prospects Because We Have A Limited Operating History And Rapidly Evolving Business

     Our limited operating history and rapidly evolving business make it difficult to evaluate our 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 and rapidly evolving. In particular, the Internet is constantly changing and we may need to modify our business model to adapt to these changes. In addition, our decision to focus a substantial portion of both our human and capital resources on our record label businesses, ARTISTdirect Records and iMusic, represents entry into a business new to us that entails significant uncertainty.

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 and income from ARTISTdirect Records and our iMusic record label 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;

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	•		sales of, or subscription fees for, digitally distributed music; and
	•		sales of music CDs by the ARTISTdirect Records and iMusic record labels.

     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 online features without charge, and we may not be able to generate sufficient revenue to pay for these features. In addition, it may take a significant amount of time for us to develop ARTISTdirect Records with Ted Field and our iMusic record label. 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, or our products and services do not achieve or sustain market acceptance, we may not be able to successfully operate our business.

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 $249.0 million as of March 31, 2003. For the three months ended March 31, 2003, and the year ended December 31, 2002, we incurred net losses of approximately $7.1 million and $48.2 million, respectively, which represented approximately 420% and 771%, 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 likely be unable to continue our operations.

Our Operating Results Will Likely Be 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, our operating results have in the past, and in the future may, fall below the expectations of securities analysts and investors. In this event, the trading price of our common stock may fall significantly.

Global Sales of Recorded Music Have Recently Declined and This Trend May Continue in the Future

     Based on data compiled by the International Federation of the Phonographic Industry (IFPI), global sales of recorded music declined 1.3% in value and 1.2% in units from 1999 to 2000, declined 5.0% in value and 6.5% in units from 2000 to 2001, and declined 9.2% in value and 11.2% in units in the first half of 2002 compared with the first half of 2001. The IFPI attributes this decline, in part, to widespread copying and illegal Internet downloading of music. This trend of declining sales of recorded music may continue in the future and could have a detrimental impact on revenue at our iMusic and ARTISTdirect Records labels.

If We Are Not Successful In Generating Revenue From The ARTISTdirect Records Co-Venture With Ted Field, Our Business And Financial Condition May Be Materially Adversely Affected

     In 2001, we decided to invest a significant amount of our resources in offline activities and in May 2001, we entered into an agreement with music and entertainment veteran, Ted Field, to develop and operate our record label co-venture, ARTISTdirect Records, and to hire Mr. Field as our Chairman of the Board and Chief Executive Officer. ARTISTdirect Records is a relatively new enterprise and faces significant challenges in developing and operating its planned business, including but not limited to the following:

	•		identifying and entering into recording agreements with artists for ARTISTdirect Records;
	•		hiring and retaining personnel for ARTISTdirect Records;
	•		producing and promoting new music recordings for artists signed to ARTISTdirect Records ;
	•		developing a recognized brand name in the music industry;

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	•		developing distribution channels for ARTISTdirect Records;
	•		integrating the ARTISTdirect Records operations with our existing operations;
	•		obtaining the capital necessary to sustain the ARTISTdirect Records operations; and
	•		generating ARTISTdirect Records revenue and achieving profitability.

     ARTISTdirect Records has a very limited operating history upon which to assess whether it will be able to meet all of the challenges required to successfully develop and operate its business. Accordingly, there can be no assurance that Mr. Field will be able to successfully operate ARTISTdirect Records. ARTISTdirect Records may be forced to curtail or cease operations if it is not able to obtain the capital necessary to sustain its operations, in which events the value of our investment in ARTISTdirect Records may be seriously impaired. If ARTISTdirect Records is not able to develop a successful business with revenue and profits, we will not receive the anticipated benefits of our investment in ARTISTdirect Records and our business, financial condition and results of operations would be materially and adversely affected.

There May Be A Significant Conflict Of Interest As A Result Of Ted Field’s Separate Ownership Interest In ARTISTdirect Records And His Dual Roles As Chief Executive Officer Of Both ARTISTdirect Records And The Company

     As of December 31, 2002, Mr. Field held options to purchase approximately 12.8% of the currently outstanding voting interests in the Company and also held 30% of the outstanding ownership interests in ARTISTdirect Records, the Company’s record label co-venture. By virtue of the difference in his ownership interests, Mr. Field would likely gain a greater personal benefit if opportunities were realized by ARTISTdirect Records rather than by the Company. Accordingly, there are potential conflicts of interest between the Company and Mr. Field. Although our employment agreement with Mr. Field precludes him from voting on behalf of the Company on matters concerning ARTISTdirect Records, Mr. Field will, by virtue of his authority as Chief Executive Officer of both the Company and ARTISTdirect Records, have substantial influence over the execution of any decisions made by the Company’s management and Board of Directors.

     As a result, Mr. Field could, through his day-to-day managerial decisions, take actions that are detrimental to the Company and favorable to ARTISTdirect Records. For instance, Mr. Field could decide to sign a particular artist to the ARTISTdirect Records record label instead of the iMusic record label. In addition, Mr. Field’s concurrent service as the Chief Executive Officer of both the Company and ARTISTdirect Records could allow Mr. Field to devote more time to ARTISTdirect Records than to the Company. Under the terms of the employment agreement with each entity, Mr. Field is required to devote at least 80% of his business time exclusively to the Company and ARTISTdirect Records. However, Mr. Field is allowed to devote all of that business time exclusively to ARTISTdirect Records as long as it does not adversely affect his performance under the terms of his employment agreement with the Company. While the Company does not expect that any of the foregoing events will occur, there can be no assurance that Mr. Field will always act in the best interests of the Company and its stockholders.

We Have Committed A Substantial Amount Of Our Available Cash To The ARTISTdirect Records Co-Venture With Ted Field And, As A Result, The Amount Of Cash That We Will Have Available To Operate Our Other Businesses Has Been Substantially Reduced

     The ARTISTdirect Records co-venture with Mr. Field represented a significant shift in the planned use of our cash resources. As of March 31, 2003, we had provided $32.75 million to ARTISTdirect Records, are obligated to provide an additional $250,000 in the remainder of 2003 and an additional $12.0 million from 2004 through July 2006. As of March 31, 2003, we had unrestricted cash and short-term investments totaling $4.2 million. Our commitment to fund ARTISTdirect Records is subject to a guaranty for the benefit of BMG. Should we fail to meet our commitment, BMG may choose to enforce the guaranty or provide substitute financing that could result in dilution of our interest in ARTISTdirect Records.

     Assuming payment of the $250,000 advance to ARTISTdirect Records during the remainder of 2003, we currently anticipate that available cash resources, including short-term investments, will likely not be sufficient to meet anticipated needs for working capital and capital expenditures for at least twelve months without additional capital. Furthermore, to continue its operations ARTISTdirect Records will require additional capital in 2003 beyond that to be provided by us.

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     We are currently pursuing alternatives to raise additional capital in order to continue the operations of ARTISTdirect and ARTISTdirect Records. There can be no assurance that additional capital can be obtained by either ARTISTdirect or by ARTISTdirect Records on reasonable terms, in a timely manner or at all. If additional funds are raised through the issuance of equity securities of either ARTISTdirect or ARTISTdirect Records, the percentage ownership of current stockholders in ARTISTdirect and/or ARTISTdirect Records will be reduced. If we raise additional funds by issuing debt, we may be subject to limitations on our operations, including limitations on the payment of dividends, and any debt issued by ARTISTdirect Records may be senior to the obligations of ARTISTdirect Records to ARTISTdirect. Failure to raise additional capital could seriously harm or result in the cessation of the business of ARTISTdirect Records and ARTISTdirect, and impair the value of our investment in ARTISTdirect Records. Cessation of the business of ARTISTdirect Records or ARTISTdirect could result in bankruptcy or liquidation, in either case potentially resulting in a total loss for stockholders of ARTISTdirect.

     See Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for more information on our liquidity and capital resources.

Our Equity Interest In ARTISTdirect Records May Be Significantly Diluted If We Are Unable To Meet Our Financing Commitment

     In the event that we fail to provide funding to ARTISTdirect Records as required under the terms of the operating agreement governing the co-venture, ARTISTdirect Records then has the right to secure substitute financing. Among other things, any advances made by us that are outstanding at the time will become subordinated to repayment of the substitute financing and we can be forced to divest certain of our equity interest in ARTISTdirect Records should the issuance of an equity interest to the substitute financier be required as a condition of the substitute financing.

If We Are Not Successful In Generating and Increasing Revenue From Our iMusic Record Label, Our Business And Financial Condition May Be Materially Adversely Affected

     During 2002, through our wholly owned subsidiary ARTISTdirect Digital, Inc., we launched a second record label, under the brand-name iMusic. The iMusic record label is a new operation and we will face significant challenges in developing and growing this operation, including but not limited to the following:

•		identifying and entering into recording agreements with artists for the iMusic record label;
•		producing and promoting music recordings for artists signed to the iMusic record label;
•		developing a recognized brand name in the music industry;
•		developing distribution channels for the iMusic record label; and
•		generating iMusic record label revenue and achieving profitability.