UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number: 000-30063

ARTISTdirect, INC.

(310) 443-5360
(Registrant’s telephone number, including area code)

Not Applicable
(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.

Yes [x] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). [  ]

As of September 30, 2004, the registrant had 3,502,117 shares of common stock, par value $0.01 per share, issued and outstanding.

Documents incorporated by reference: None.

ARTISTDIRECT, INC. AND SUBSIDIARIES

INDEX

2

ARTISTdirect, Inc. and Subsidiaries

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See accompanying notes to condensed consolidated financial statements.

4

ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

5

ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

6

ARTISTdirect, Inc. and Subsidiaries

See accompanying notes to condensed consolidated financial statements.

7

ARTISTdirect, Inc. and Subsidiaries

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See accompanying notes to condensed consolidated financial statements.

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ARTISTdirect, Inc. and Subsidiaries

1. BASIS OF PRESENTATION

Organization

     ARTISTdirect, Inc. (“ADI”) was formed on October 6, 1999 upon its merger with ARTISTdirect, LLC (the “Capital Reorganization”). The Capital Reorganization was only a change in the form of ownership of ADI. ARTISTdirect, LLC was organized as a California limited liability company and commenced operations on August 8, 1996. ARTISTdirect, LLC had a 99% ownership interest in ARTISTdirect Agency LLC, Kneeling Elephant Records, LLC and ARTISTdirect New Media, LLC (the “Affiliated Companies”) and has consolidated their results since inception.

     On May 31, 2001, the Company, through its wholly-owned subsidiary, ARTISTdirect Recordings, Inc., entered into an agreement to acquire a 50% equity interest in a co-venture with Frederick W. (Ted) Field to form a new record label, ARTISTdirect Records, LLC (“ARTISTdirect Records”). This transaction became effective as of June 29, 2001. In April 2002, ADI’s ownership position in ARTISTdirect Records decreased to 45% as a result of a sale of a 5% interest to BMG. However, ADI’s ownership position increased to 65% during 2002, as a result of ADI’s agreement to accelerate its funding commitment to ARTISTdirect Records in 2002.

     Effective September 30, 2004, the Company reorganized its operating structure by transferring its media and e-commerce business operations to a wholly-owned subsidiary, ARTISTdirect Internet Group, Inc., a Delaware corporation. This reorganization did not have any effect on the Company’s business operations or consolidated financial statements.

     Unless the context indicates otherwise, ARTISTdirect, Inc. and its subsidiaries are referred to herein as the “Company”.

     Business Activities

     The Company is a music entertainment company, headquartered in Los Angeles, California, that combines an on-line 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 specialty commerce and digital music services. Through the Company’s subsidiary, ARTISTdirect Records, the Company develops new musical artists and produces and distributes their recordings as an independent label utilizing both traditional channels and emerging Internet distribution channels.

Principles of Consolidation

     The accompanying financial statements include the consolidated accounts of ADI and its subsidiaries in which it has controlling interests. All significant intercompany accounts and transactions have been eliminated for all periods presented. ADI has recorded 100% of the losses attributable to ARTISTdirect Records from May 31, 2001 through April 30, 2002 based on ADI’s commitment to fund 100% of ARTISTdirect’s operations during that time. From May 1, 2002 through December 31, 2002, ADI recorded approximately 83% of the losses of ARTISTdirect Records as a result of BMG’s equity purchase and from an assumption of a portion of ADI’s funding commitment to the record label. For the year ended December 31, 2003, ADI recorded approximately 73% of the losses of ARTISTdirect Records. However, given that ADI did not have voting or operational control, even with its majority ownership position in ARTISTdirect Records, through December 31, 2003, ADI accounted for this investment under the equity method of accounting as income (loss) from equity investments in the consolidated statements of operations.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. ADI adopted FIN 46 as of December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated as of December 31, 2003, and the operations of ARTISTdirect Records have been consolidated beginning January 1, 2004. There was no change in the operating or business relationship between ADI and ARTISTdirect Records as a result of the adoption of FIN 46.

     As a result of the consolidation of the balance sheet of ARTISTdirect Records as of December 31, 2003, the Company’s statements of operations and cash flows for the three months and nine months ended September 30, 2004 are not directly comparable to the statements of operations and cash flows for the three months and nine months ended September 30, 2003.

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     The following is the adjustment resulting from the change to consolidation from equity accounting for ARTISTdirect Records, LLC effective December 31, 2003:

     The Company also recorded a cumulative effect of consolidation of ARTISTdirect Records, LLC of $5.255 million at December 31, 2003. This adjustment represents an increase in loans payable of $5.255 million at December 31, 2003, to reflect losses previously allocated to minority members (primarily BMG) of ARTISTdirect Records, LLC.

Going Concern

     The Company has incurred losses and negative cash flows from operations in every fiscal period since inception and had an accumulated deficit of $225.2 million at September 30, 2004 and $222.7 million at December 31, 2003. For the nine months ended September 30, 2004, the Company incurred a net loss of $2.5 million and negative operating cash flows of $3.4 million. For the year ended December 31, 2003, the Company incurred a net loss of $21.7 million and negative operating cash flows of $5.4 million. As of September 30, 2004, the Company had a net working capital deficiency of $10.1 million and a stockholders’ deficiency of $19.4 million. As of December 31, 2003, the Company had a net working capital deficiency of $9.5 million and a stockholders’ deficiency of $16.9 million.

     ADI’s operations to date and its loans to ARTISTdirect Records have been funded by the sale of preferred and common stock. ADI has funded a large portion of the operations of ARTISTdirect Records. Management expects the Company’s operating losses to continue for the near-term.

     Although the Company has limited cash resources available to fund its ongoing working capital requirements, the Company currently believes that it has adequate cash resources to maintain its operations at current levels through the remainder of 2004 and into early 2005. During 2003, the Company restructured its operations, terminated most of its staff and reduced operating costs, and has been attempting to raise additional funds through various means, although there can be no assurances that the Company will be successful in this regard. The 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. To the extent that the Company’s estimate of its cash flow requirements is inaccurate or the Company is unable to obtain the capital necessary to sustain its business operations on a timely basis and under acceptable terms and conditions, the Company may further reduce its operations and/or consider a formal or informal restructuring or reorganization.

     As a result of the conditions described above, the Company’s auditors have included an explanatory paragraph in their opinion on the Company’s December 31, 2003 consolidated financial statements indicating that there is 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.

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, including normal recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2004, the results of operations for the three months and nine months ended September 30, 2004 and 2003, and the cash flows for the nine months ended September 30, 2004 and 2003. The results for the three months and nine months ended September 30, 2004 are not necessarily indicative of the expected results for the full year or any future period. The balance sheet as of December 31, 2003 is derived from the Company’s audited financial statements. These financial statements should be read in conjunction with the

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consolidated financial statements and footnotes included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission.

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, allowances for bad debts, 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.

Loss Per Common Share

     The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share” and Securities and Exchange Commission Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options and warrants) 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 the calculation of diluted EPS.

     The calculation of diluted loss per share excludes approximately 1,019,000 and 780,000 of potential common shares as of September 30, 2004 and 2003, respectively, since the effect would be anti-dilutive.

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.

     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.

     For purpose of pro forma disclosures, the estimated fair value of the options is amortized to operations over the vesting period of the options or the expected period of benefit. The Company’s unaudited pro forma information is as follows:

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2. iMUSIC

     During 2002, the Company’s wholly-owned subsidiary, ARTISTdirect Digital, Inc., began operating a record label under the brand name iMusic. Operations consisted primarily of the sale of compact discs by artists signed to the iMusic record label. iMusic’s concept was to focus on the signing of established artists with a proven sales base and an ability to generally make records less expensively than developing artists. In addition, the Company expected that substantially less would be spent on marketing and promotion of these releases than on those of new artists. During the three months ended June 30, 2003, management of the Company decided to scale back the activity of its iMusic label in order to conserve capital. During the three months ended September 30, 2003, the Company executed an agreement with GC Music, pursuant to which the Company terminated its involvement in the business operations of iMusic and assigned its rights and obligations to six unreleased artists in exchange for a cash payment of $100,000, which was accounted for as a reduction to prior advances related to the six artists, and a profit interest in the projects. The Company retains the distribution rights to the albums previously released under the original terms of its distribution agreements with its other signed artists. The Company does not plan to sign any additional artists or release any additional albums domestically or internationally under the iMusic label and expects very minimal sales activity in the future.

3. LOSS FROM SALE AND ABANDONMENT OF PROPERTY AND EQUIPMENT

     During the nine months ended September 30, 2003, the Company determined that its fixed assets were impaired due to continuing losses, going concern issues, the delisting of its common stock from the NASDAQ Stock Market, and the likelihood that the majority of these assets would likely be abandoned in the near future. The Company determined that these factors were indicators of impairment and thus reduced the carrying amount of the fixed assets to their estimated fair value by recording a write-off of $2.225 million during the nine months ended September 30, 2003. The leasehold improvements were subsequently abandoned when the Company vacated the premises, and most of the Company’s remaining property and equipment was subsequently sold to third party liquidators for cash. This amount has been reported as a loss from sale and abandonment of property and equipment in the condensed consolidated statements of operations for the nine months ended September 30, 2003.

4. INVESTMENT IN ARTISTDIRECT RECORDS, LLC

     In May 2001, ADI entered into an agreement with Frederick W. (Ted) Field to become Chairman and Chief Executive Officer of ADI and through its wholly-owned subsidiary, ARTISTdirect Recordings, Inc., to form a new record label, ARTISTdirect Records, LLC (“ARTISTdirect Records”), in partnership with ADI. On June 29, 2001, ADI’s stockholders approved the employment of Mr. Field and the formation of the ARTISTdirect Records record label. ARTISTdirect Records was formed as a 50/50 co-venture between ADI and Mr. Field. Mr. Field is the Chief Executive Officer of ARTISTdirect Records. The primary business activity of ARTISTdirect Records is the sale of compact discs by artists signed to the record label.

     ADI initially committed to fund a total of $50.0 million to ARTISTdirect Records over five years at the rate of $15.0 million per year, subject to a limit of $33.0 million in any three year period. Any funding in excess of these amounts required the approval of ADI’s Board of Directors.

     In November 2001, ARTISTdirect Records agreed in principle to enter into a preliminary North America distribution agreement and worldwide license agreement with BMG Music, a wholly-owned partnership of Bertelsmann Music Group, Inc., the global music division of Bertelsmann AG (“BMG”). Under the terms of the agreement, BMG agreed to distribute the label’s releases in North America, and BMG licensed 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 ADI. As part of this transaction, BMG agreed to advance certain monies against net sales proceeds under the agreements and also assumed $5.0 million of ADI’s funding commitment to ARTISTdirect Records. As a result of the BMG equity purchase, ADI’s funding commitment was reduced to $45.0 million. In December 2002, BMG exercised its option to extend the term of the distribution and license agreement

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until September 2004. It is not currently anticipated that BMG will continue as the distributor for ARTISTdirect Records subsequent to September 30, 2004.

     Under the distribution and license agreements, BMG made non-returnable advances to ARTISTdirect Records of $2.5 million in 2001, $2.5 million in 2002 and $5.0 million in 2003 that are recoupable from net sales proceeds from ARTISTdirect Records’ artist repertoire. The loan advances bear interest at a rate of LIBOR plus 4%, and the principal and interest are not repayable until December 31, 2015, or upon such time as ARTISTdirect Records achieves certain defined levels of excess cash flow and available cash. As of September 30, 2004 and December 31, 2003, the unrecouped balance related to distribution advances from BMG was $8.9 million and $8.7 million, respectively.

     In August 2002, ADI’s Board of Directors approved an agreement (the “Accelerated Funding Agreement”) to accelerate up to $10.0 million of its funding commitment to ARTISTdirect Records. This funding was in addition to the $15.0 million that ADI was obligated to advance to ARTISTdirect Records in 2002 as part of the initial $50.0 million funding commitment. During 2002, ADI funded its $15.0 million commitment plus the additional $10.0 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 $10.0 million of accelerated funding was credited toward the satisfaction of ADI’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. ADI advanced the $2.75 million in 2003. ADI has funded a total of $33.0 million through September 30, 2004.

     ADI’s commitment to fund ARTISTdirect Records was subject to a guaranty for the benefit of BMG, wherein if ADI failed to meet its commitment, BMG had the right to enforce the guaranty or provide substitute financing that could have resulted in dilution of ADI’s interest in ARTISTdirect Records. Effective July 30, 2004, BMG and ADR executed an agreement to extinguish ADI’s obligations under this guaranty, including the remaining $12,000,000 funding obligation. As a result of the extinguishment of this financing obligation and the effect of a possible recapitalization of ARTISTdirect Records, ADI’s interest in ARTISTdirect Records would be reduced below 50%.

     As consideration for entering into the Accelerated Funding Agreement, ADI received an additional 20% interest in ARTISTdirect Records from Radar Records Holdings, L.L.C. (“RRH”), the entity through which Mr. Field owns his interest in ARTISTdirect Records, which resulted in an increase in ADI’s ownership share of ARTISTdirect Records from 45% to 65% and a decrease in Mr. Field’s ownership share from 50% to 30%. The Accelerated Funding Agreement also provided that any dilution from the issuance of equity interests in ARTISTdirect Records that would have been borne solely by ADI would be borne both by RRH and ADI pro rata with their then respective ownership interests. Furthermore, the Accelerated Funding Agreement also provided for RRH to guarantee a 25% minimum annual compounded return to be realized from ADI’s advances and equity interests in ARTISTdirect Records. Due to the uncertainty with respect to the realization of such rate of return, ADI has not recorded any amounts related to the 25% minimum annual compounded return in its consolidated financial statements.

     Because ADI did not have voting or operating control of ARTISTdirect Records, even with its majority ownership position, through December 31, 2003, it did not consolidate the results of ARTISTdirect Records; ADI recorded 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 ADI’s total funding commitment, ADI had committed to fund 100% of the operations of ARTISTdirect Records and had recorded 100% of the losses attributable to that venture from the inception of ARTISTdirect Records to April 30, 2002. From May 1, 2002 through December 31, 2003, ADI has recorded only its proportionate share, on the basis of remaining relative funding commitments, of the losses of ARTISTdirect Records. ADI has funded a total of $33.0 million of its funding commitment. ADI recognized $7.1 million of equity loss from ARTISTdirect Records for the nine months ended September 30, 2003. The loss for ARTISTdirect Records for the three months and nine months ended September 30, 2004 was $1.176 million and $3.479 million, respectively, before intercompany interest eliminations of $517,000 and $1.446 million, respectively.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. The Company adopted FIN 46 effective December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated as of December 31, 2003, and the operations of ARTISTdirect Records have been consolidated beginning January 1, 2004. There was no change in the operating or business relationship between ADI and ARTISTdirect Records as a result of the adoption of FIN 46.

     The carrying amount of ADI’s investment in ARTISTdirect Records at December 31, 2002 represents the difference between ADI’s investment and advances and ADI’s share of losses from ARTISTdirect Records. Through December 31, 2003, ADI continued to record the losses of ARTISTdirect Records. ADI recorded its loan advances to ARTISTdirect Records as additional equity investments. As of December 31, 2002, ADI’s share of losses exceeded the amount of ADI’s investment and advances at that date, resulting in a credit balance of approximately $7.7 million, which was classified as a liability on ADI’s consolidated balance sheet at December 31, 2002. As of December 31, 2003, the Company consolidated the balance sheet of ARTISTdirect Records.

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     ADI had no recorded investment in its loans to ARTISTdirect Records, as the carrying amount of the loans had been reduced to zero as a result of ADI recording its share of losses of ARTISTdirect Records during the years ended December 31, 2001, 2002 and 2003. ADI does not record interest income on the loans to ARTISTdirect Records. The interest expense of ARTISTdirect Records is eliminated in consolidation. As such, interest expense related to ADI is not included in allocating losses to the minority interest in ARTISTdirect Records.

     The loan advances provided to ARTISTdirect Records by ADI and BMG bear interest at a rate of LIBOR plus four percent and the principal and interest are not repayable until December 31, 2015 or upon such time as ARTISTdirect Records achieves certain defined levels of excess cash flow and available cash. As of September 30, 2004 and December 31, 2003, ARTISTdirect Records had loans payable to ADI of $33.0 million, which have been eliminated in consolidation, and to BMG of $4.75 million. In addition, as of September 30, 2004 and December 31, 2003, ARTISTdirect Records had accrued interest payable to ADI of $4.45 million and $3.0 million, respectively, which has been eliminated in consolidation, and to BMG of $654,000 and $447,000, respectively. During the nine months ended September 30, 2004 and the year ended December 31, 2003, Mr. Field loaned $2.479 million and $898,000, respectively, to ARTISTdirect Records.

     The loans from Mr. Field have been classified as bridge notes payable in the consolidated balance sheets at September 30, 2004 and December 31, 2003.

     During the three months ended September 30, 2003, ARTISTdirect Records significantly reduced its overhead costs and operating activities and terminated the majority of its staff while it continued to restructure its operations and seek additional capital. As of September 30, 2004, ARTISTdirect Records did not have sufficient working capital resources to conduct operations. ARTISTdirect Records will require additional capital in order to continue operations, and is continuing to pursue alternatives to raise additional capital. However, there can be no assurance that additional capital can be obtained on reasonable terms or at all. If additional funds are raised through the issuance of equity securities of ARTISTdirect Records, ADI’s percentage ownership in ARTISTdirect Records would be reduced. The failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of ADI’s investment in ARTISTdirect Records. In such event, ARTISTdirect Records may seek to divest all or certain of its assets in order to raise the capital necessary to sustain its business operations. Should this fail, ARTISTdirect Records may consider a formal or informal restructuring or reorganization, potentially resulting in a total loss of ADI’s investment in ARTISTdirect Records. ADI may also independently seek to divest all or a part of its ownership interest in ARTISTdirect Records.

5. BRIDGE NOTES PAYABLE

     As of December 31, 2003, ARTISTdirect Records had received $898,000 of loans from Ted Field and $1.150 million of loans from outside investors (including $100,000 from Jonathan V. Diamond, the Company’s President and Chief Executive Officer). During the nine months ended September 30, 2004, ARTISTdirect Records received an additional $2.479 million of loans from Mr. Field, bringing Mr. Field’s advances to a total of $3.377 million at September 30, 2004. The loans were obtained through the issuance of convertible promissory notes (the “Bridge Notes”). At September 30, 2004, total bridge notes outstanding aggregated $4,527,000. The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and will be converted into new equity of ARTISTdirect Records as part of its next equity financing.

     The $1.150 million of loans from outside investors has been presented as bridge notes payable in the consolidated balance sheets at September 30, 2004 and December 31, 2003.

     The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect Records at $0.01 per unit equivalent to the number of units of new equity into which their Bridge Notes are ultimately converted. The relative fair value of the warrants issued was $2.264 million (one-half of the amount funded by the investors in the Bridge Notes), which was recorded as a reduction to the carrying amount of the Bridge Notes and a credit to minority interest, and is being charged to operations as amortization of Bridge Note warrants over the specified term of the Bridge Notes.

     In addition, since the Bridge Notes are convertible into equity based on their face amount, this results in a beneficial conversion feature with a relative fair value of $2.264 million. Since the commitment date for the beneficial conversion feature is contingent upon the completion of ARTISTdirect Record’s next equity financing, which is uncertain, the fair value of the beneficial conversion feature will be charged to operations over the remaining life of the Bridge Notes at that time.

     During the three months and nine months ended September 30, 2004, ARTISTdirect Records recognized $274,000 and $709,000 as interest expense with respect to the amortization of the fair value of the warrants. Additional interest expense of $1.35 million will be recognized ratably in 2004, 2005 and 2006 over the remaining term of the Bridge Notes. As of September 30, 2004, the carrying amount of the Bridge Notes, including accrued interest of $301,000, was $3.476 million. As of December 31, 2003, the carrying amount of the Bridge Notes, including accrued interest of $67,000, was $1.294 million.

     A reconciliation of bridge notes payable issued by ARTISTdirect Records during 2004 and 2003 to amounts presented in the consolidated balance sheets at September 30, 2004 and December 31, 2003 is presented below. During the nine months ended September 30, 2004 (unaudited) and the year ended December 31, 2003, ARTISTdirect Records recorded costs with respect to such

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bridge notes as summarized below.

6. ARTIST ADVANCES

     As of December 31, 2003, ARTISTdirect Records had signed recording agreements with six artists and had advanced a total of $1.238 million through such date with respect to these artists. The amount of these advances is recoupable against royalties to be earned by the artists based on sales. However, given that most of the artists signed by ARTISTdirect Records have no previous track record, the advances have been expensed as incurred. As of December 31, 2003, ARTISTdirect Records was contractually committed in 2004 to additional minimum artist advances for three of the six artists of $1.5 million.

     During the nine months ended September 30, 2004, ARTISTdirect Records advanced approximately $447,000 pursuant to its contractual commitments, and cancelled its contract with one of the three artists, thus reducing its contractual obligation by $350,000. In addition, during the nine months ended September 30, 2004, ARTISTdirect Records entered into an assignment agreement with another entity involving another one of the three artists, further reducing its contractual obligations by approximately $88,000. Accordingly, at September 30, 2004, ARTISTdirect Records was contractually committed for the remainder of 2004 to additional minimum artist advances for one artist of approximately $615,000.

7. EQUITY-BASED TRANSACTIONS

     Effective January 1, 2004, the Company entered into a one-year consulting agreement with Keith Yokomoto, the Company’s former President and Chief Operating Officer, and a director of the Company during the nine months ended September 30, 2004, that provided for total compensation of $120,000. Effective January 9, 2004, the Company also issued to Mr. Yokomoto two non-qualified stock options to purchase 10,000 shares and 50,000 shares at $0.50 per share, which was not less than the fair market value on the date of grant, exercisable through January 9, 2011. The option for 10,000 shares was immediately vested upon issuance. The option for 50,000 shares vests in increments of 10,000 shares on February 1, 2004, March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004, based on the accomplishment of certain milestones by each respective date, which had not been attained

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as of September 30, 2004. Mr. Yokomoto resigned as a director of the Company effective October 22, 2004.

     Effective March 29, 2004, the Company issued to Robert N. Weingarten, the Company’s Chief Financial Officer, a stock option to purchase 120,000 shares at $0.50 per share, which was not less than the fair market value on the date of grant, exercisable through March 29, 2011. The option vests and becomes exercisable in a series of 36 successive equal monthly installments from March 29, 2004.

     Effective June 30, 2004, the Company settled a claim by a real estate broker by issuing a warrant to purchase 10,000 shares of common stock exercisable for a period of five years at $0.50 per share. The fair value of the warrant was determined to be $4,000, calculated pursuant to the Black-Scholes option-pricing model, and was charged to operations during the nine months ended September 30, 2004.

     Effective August 31, 2004, the Company issued a warrant to a consultant for services rendered to purchase 10,000 shares of common stock exercisable for a period of five years at $0.50 per share. The fair value of the warrant was determined to be $3,000, calculated pursuant to the Black-Scholes option-pricing model, and was charged to operations during the three months and nine months ended September 30, 2004.

     Effective September 29, 2004, the Company’s Board of Directors adopted the ARTISTdirect, Inc. 2004 Consultant Stock Plan (the “Plan”) in order for the Company to be able to compensate consultants, at the option of the Company, who provide bona fide services to the Corporation not in connection with capital raising or promotion of the Company’s securities. The Plan will expire on September 29, 2014, and will provide for the issuance of up to 500,000 shares of common stock to consultants at fair market value. The Company intends to file a Registration Statement on Form S-8 with the Securities and Exchange Commission to register the 500,000 shares of common stock for future issuance under the Plan.

     In May 2001, the Company granted to the Company’s Chairman three non-qualified stock options, which are not part of any stock option plan maintained by the Company, to purchase an aggregate of 444,480 shares of common stock at an exercise price of $7.50 per share. Options on 302,370 shares were exercisable immediately (the underlying shares pursuant to the exercise of this option vest over five years from the date of the option grant); options on 75,588 shares were exercisable in the event the 30-day average closing price of the Company’s common stock on NASDAQ equaled or exceeded $35.00 per share within three years from the grant date, and options on 66,522 shares were exercisable in the event the 30-day average closing price of the Company’s common stock on NASDAQ equaled or exceeded $70.00 per share within three years of the grant date. Since the options for 75,588 shares and 66,522 shares did not vest pursuant to their terms on or before June 29, 2004, they expired on such date.

8. RELATED PARTY TRANSACTIONS

     During the three months ended September 30, 2003, the Company significantly reduced its overhead costs and operating activities and terminated the majority of its staff while it continued to restructure its operations and seek additional capital. The Company also relocated its administrative offices to a site leased by a company owned by Ted Field. The Company sub-leases these offices on a month-to-month basis. During the three months and nine months ended September 30, 2004, the Company accrued $42,000 and $126,000, respectively, as rent expense in this regard.

     During the three months and nine months ended September 30, 2004, the Company incurred expenses of approximately $69,000 and $173,000, respectively, with respect to business development activities involving a private entity in which the Company’s President and Chief Executive Officer, Jonathan V. Diamond, has an economic interest. This matter has been reviewed and approved by the board of directors. These amounts have been included in general and administrative expense in the consolidated statements of operations for the three months and nine months ended September 30, 2004. The Company believes that it will derive future economic benefit from such expenditures.

9. SEGMENT INFORMATION AND CONCENTRATIONS

     Information with respect to the Company’s operating segments for the three months and nine months ended September 30, 2004 and 2003 is presented below. The Company operated primarily through three reportable segments: E-commerce operations (“E-commerce”), Media Operations (“Media”) and Record Label operations (“Record Labels”).

     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 record labels. Approximately 69% of revenues from E-commerce are generated from the products related to one music merchandising entity.

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     Record label operations in 2003 consisted primarily of the iMusic record label, the operations of which were substantially reduced in mid-2003 (see Note 2). Since the Company accounted for its interest in ARTISTdirect Records on the equity method of accounting during 2003, the operations of ARTISTdirect Records were not included in 2003. The Company commenced consolidating the operations of ARTISTdirect Records effective January 1, 2004.

     The factors for determining reportable segments were based on services 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, impairment losses, and minority interest). Included in EBITDA are direct operating expenses for the segment. The following table summarizes the revenue and EBITDA by segment for the three months and nine months ended September 30, 2004 and 2003 (unaudited). 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 the Company’s assets as of September 30, 2004 (unaudited) and December 31, 2003.

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

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

     This Quarterly 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 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. You should carefully consider the information in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission before making an investment decision with respect to our company. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Quarterly 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 Quarterly Report on Form 10-Q and in our other reports filed with the Securities and Exchange Commission 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 specialty commerce and digital music services.

     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 distribution 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.

     During the year ended December 31, 2003, we engaged veteran entertainment/media executive Jonathan V. Diamond to design and implement a broad-based restructuring plan, which included the restructuring of senior operating management, the termination of a majority of our staff, the implementation of a significant reduction in our overhead, and the reorganization of our operating business. Accordingly,, we entered into an employment agreement with Mr. Diamond to serve as our President and Chief Executive Officer through August 15, 2006. Mr. Field continues to serve as our Chairman of the Board.

     We initially committed to fund a total of $50.0 million to ARTISTdirect Records over five years at the rate of $15.0 million per year, subject to a limit of $33.0 million in any three year period. Any funding in excess of these amounts required the approval of our Board of Directors.

     In November 2001, ARTISTdirect Records agreed in principle to enter into a preliminary North America distribution agreement and worldwide license agreement with BMG Music, a wholly-owned partnership of Bertelsmann Music Group, Inc., the global music division of Bertelsmann AG (“BMG”). Under the terms of the agreement, BMG agreed to distribute the label’s releases in North America, and BMG licensed 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 us. As part of this transaction, BMG agreed to advance certain monies against net sales proceeds under the agreements and also assumed $5.0 million of our funding commitment to ARTISTdirect Records. As a result of the BMG equity purchase, our funding commitment was reduced to $45.0 million. In December 2002, BMG exercised its option to extend the term of the distribution and license agreement until September 2004. It is not currently anticipated that BMG will continue as the distributor for ARTISTdirect Records subsequent to September 30, 2004.

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     Under the distribution and license agreements, BMG made non-returnable advances to ARTISTdirect Records of $2.5 million in 2001, $2.5 million in 2002 and $5.0 million in 2003 that are recoupable from net sales proceeds from ARTISTdirect Records’ artist repertoire. The loan advances bear interest at a rate of LIBOR plus 4%, and the principal and interest are not repayable until December 31, 2015, or upon such time as ARTISTdirect Records achieves certain defined levels of excess cash flow and available cash. As of September 30, 2004 and December 31, 2003, the unrecouped balance related to distribution advances from BMG was $8.9 million and $8.7 million, respectively.

     In August 2002, our Board of Directors approved an agreement (the “Accelerated Funding Agreement”) to accelerate up to $10.0 million of its funding commitment to ARTISTdirect Records. This funding was in addition to the $15.0 million that we were obligated to advance to ARTISTdirect Records in 2002 as part of the initial $50.0 million funding commitment. During 2002, we funded our $15.0 million commitment plus the additional $10.0 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 $10.0 million of accelerated funding was credited toward the satisfaction of our 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. We advanced the $2.75 million in 2003. We have funded a total of $33.0 million through September 30, 2004.

     Our commitment to fund ARTISTdirect Records was subject to a guaranty for the benefit of BMG, wherein if we failed to meet our commitment, BMG had the right to enforce the guaranty or provide substitute financing that could have resulted in dilution of our interest in ARTISTdirect Records. Effective July 30, 2004, BMG and ARTISTdirect Records executed an agreement to extinguish our obligations under this guaranty, including the remaining $12,000,000 funding obligation. As a result of the extinguishment of this financing obligation and the effect of a possible recapitalization of ARTISTdirect Records, our interest in ARTISTdirect Records would be reduced below 50%.

     As consideration for entering into the Accelerated Funding Agreement, we received an additional 20% interest in ARTISTdirect Records from Radar Records Holdings, L.L.C. (“RRH”), the entity through which Mr. Field owns his interest in ARTISTdirect Records, which resulted in an increase in our ownership share of ARTISTdirect Records to 65% from 45% and a decrease in Mr. Field’s ownership share to 30% from 50%. The Accelerated Funding Agreement also provided that any dilution from the issuance of equity interests in ARTISTdirect Records that would have been borne solely by us would be borne both by RRH and us pro rata with our then respective ownership interests. Furthermore, the Accelerated Funding Agreement provided for RRH to guarantee a 25% minimum annual compounded return to be realized from our advances and equity interests in ARTISTdirect Records. Due to the uncertainty with respect to the realization of such rate of return, we have not recorded any amounts related to the 25% minimum annual compounded return in our consolidated financial statements.

     Because we did not have voting or operating control of ARTISTdirect Records, even with our majority ownership position, prior to 2003 we did not consolidate the results of ARTISTdirect Records; we recorded our share of losses based on the equity method of accounting as loss from equity investments in our 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 our total funding commitment, we had committed to fund 100% of the operations of ARTISTdirect Records and had recorded 100% of the losses attributable to that venture from the inception of ARTISTdirect Records to April 30, 2002. From May 1, 2002 through December 31, 2003, we have recorded only our proportionate share, on the basis of remaining relative funding commitments, of any losses of ARTISTdirect Records. We have funded a total of $33.0 million of our funding commitment. We recognized $7.1 million of equity loss from ARTISTdirect Records for the nine months ended September 30, 2003. The loss for ARTISTdirect Records for the three months and nine months ended September 30, 2004 was $1.176 million and $3.479 million before intercompany interest eliminations of $517,000 and $1.446 million, respectively.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. We adopted FIN 46 effective December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated as of December 31, 2003, and the operations of ARTISTdirect Records have been consolidated beginning January 1, 2004. There was no change in the operating or business relationship between ADI and ARTISTdirect Records as a result of the adoption of FIN 46.

     During the three months ended September 30, 2003, ARTISTdirect Records significantly reduced its overhead costs and operating activities and terminated the majority of its staff while it continued to restructure its operations and seek additional capital. As of September 30, 2004, ARTISTdirect Records did not have sufficient working capital resources to conduct operations. ARTISTdirect Records will require additional capital in order to continue operations, and therefore we are continuing to pursue alternatives to raise additional capital. However, there can be no assurance that additional capital can be obtained on reasonable terms or at all. If additional funds are raised through the issuance of equity securities of ARTISTdirect Records, our percentage ownership in ARTISTdirect Records would be reduced. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of our investment in ARTISTdirect Records. In such event, ARTISTdirect Records may seek to divest all or certain of its assets in order to raise the capital necessary to sustain its business operations. We may also independently seek to divest all or a part of our ownership interest in ARTISTdirect Records.

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Going Concern

     We have incurred losses and negative cash flows from operations in every fiscal period since inception and had an accumulated deficit of $225.2 million at September 30, 2004 and $222.7 million at December 31, 2003. For the nine months ended September 30, 2004, we incurred a net loss of $2.5 million and negative operating cash flows of $3.4 million. For the year ended December 31, 2003, we incurred a net loss of $21.7 million and negative operating cash flows of $5.4 million. As of September 30, 2004, we had a net working capital deficiency of $10.1 million and a stockholders’ deficiency of $19.4 million. As of December 31, 2003, we had a net working capital deficiency of $9.5 million and a stockholders’ deficiency of $16.9 million.

     Our operations to date and our loans to ARTISTdirect Records have been funded by the sale of our preferred and common stock. We have funded a large portion of the operations of ARTISTdirect Records. Management expects our operating losses to continue for the near-term.

     Although we have limited cash resources available to fund our ongoing working capital requirements, we currently believe that we have adequate cash resources to maintain our operations at current levels through the remainder of 2004 and into early 2005. During 2003, we restructured our operations, terminated most of our staff and reduced operating costs, and have been attempting to raise additional funds through various means, although there can be no assurances that we will be successful in this regard. The failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of our investment in ARTISTdirect Records. To the extent that our estimate of our cash flow requirements is inaccurate or we are unable to obtain the capital necessary to sustain our business operations on a timely basis and under acceptable terms and conditions, we may further reduce our operations and/or consider a formal or informal restructuring or reorganization.

     As a result of the conditions described above, our auditors have included an explanatory paragraph in their opinion on our December 31, 2003 consolidated financial statements indicating that there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies

     The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 on-going basis, we evaluate our estimates, including those related to bad debts, intangible assets, income taxes, and contingencies and litigation, among others. 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: revenue recognition, stock-based compensation, and impairment of long-lived assets and goodwill. These accounting policies are discussed in “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” contained in the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003, as well as the notes to the December 31, 2003 consolidated financial statements. There have not been any significant changes to these accounting policies since they were previously reported at December 31, 2003.

Statements of Operations

     Presented below are the statements of operations as reported for the three months and nine months ended September 30, 2003 and 2004. Also presented below are the statements of operations for the three months and nine months ended September 30, 2003 prepared on a pro forma basis reflecting the consolidation of ARTISTdirect Records for that period in order to provide a basis for comparison to the three months and nine months ended September 30, 2004. Comparisons between 2004 and 2003 have been made on both a pro forma and on an as reported basis.

     During the three months and nine months ended September 30, 2004, record label operations consisted of the operations of ARTISTdirect Records, which were not consolidated until 2004. During the three months and nine months ended September 30,

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2003, record label operations consisted of the operations of iMusic, which were significantly scaled back during mid-2003. The following information is unaudited.

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Results of Operations

Three Months Ended September 30, 2004 and 2003 (As Reported)

Net Revenue

     Net revenue increased by $536,000 or 61% to $1,415,000 for the three months ended September 30, 2004 as compared to $879,000 for the three months ended September 30, 2003. E-Commerce revenue increased by $62,000 or 8% to $793,000 for the three months ended September 30, 2004 as compared to $731,000 for the three months ended September 30, 2003, primarily due to an increase in the number of orders. Media revenue increased by $487,000 or 580% to $571,000 for the three months ended September 30, 2004 as compared to $84,000 for the three months ended September 30, 2003, as a result of an increase in the number of online advertisers and an increase in the cost per thousand (“CPM”) amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Record label revenue for the three months ended September 30, 2004 was $51,000 for both iMusic and ARTISTdirect Records, as compared to $64,000 of record label revenue for iMusic for the three months ended September 30, 2003 as a result of the scale-back of iMusic activities in mid-2003 and an increase in the reserve for product returns for both iMusic and ARTISTdirect Records in 2004. We expect to continue to focus our efforts on increasing media revenue during the remainder of 2004 and in 2005.

Cost of Revenue

     Total cost of revenue increased by $153,000 or 20% to $901,000 for the three months ended September 30, 2004 as compared to $748,000 for the three months ended September 30, 2003. Direct cost of product sales increased by $231,000 or 40% to $802,000 for the three months ended September 30, 2004 as compared to $571,000 for the three months ended September 30, 2003, as a result of an increase in advertising serving costs and commissions paid to third parties in conjunction with increased media revenue and an increase in artist recording advances by ARTISTdirect Records. Other cost of revenue decreased by $78,000 or 44% to $99,000 for the three months ended September 30, 2004 as compared to $177,000 for the three months ended September 30, 2003, as a result of the scale-back of record label operations. For the three months ended September 30, 2004 and 2003, we did not record any non-cash stock-based compensation.

Operating Expense

     Sales and Marketing. Sales and marketing expense decreased by $5,000 or 7% to $70,000 for the three months ended September 30, 2004 as compared to $75,000 for the three months ended September 30, 2003. The decrease was primarily attributable to a decrease in iMusic record label marketing expenses as a result of the scale-back of the operations of iMusic in mid-2003 and the absence of any new releases in 2004.

     General and Administrative. General and administrative expense decreased by $386,000 or 36% to $674,000 for the three months ended September 30, 2004 as compared to $1,060,000 for the three months ended September 30, 2003. This decrease was primarily attributable to decreases in payroll and related costs as a result of personnel reductions as part of the mid-2003 restructuring and occupancy costs relating to the termination of our office lease in 2003. Included in general and administrative expenses in 2004 were $69,000 of costs related to business development activities.

     Stock-based Compensation. Stock-based compensation expense was $3,000 for the three months ended September 30, 2004 as compared to $479,000 for the three months ended September 30, 2003. This decrease was due to the full amortization of stock-based compensation related to artist store agreements in 2003.

     Depreciation and Amortization. Depreciation and amortization expense decreased by $93,000 or 63% to $54,000 for the three months ended September 30, 2004 as compared to $147,000 for the three months ended September 30, 2003. This decrease was primarily due to the write-down of certain fixed assets, primarily leasehold improvements, during 2003.

Other Income and Expense

     Loss from Equity Investments. For the three months ended September 30, 2004, we did not have any loss from equity investments, as the results of ARTISTdirect Records were consolidated. The loss for ARTISTdirect Records for the three months ended September

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30, 2004 was $1,176,000 before intercompany interest elimination of $517,000. For the three months ended September 30, 2003, loss from equity investments of $64,000 related to the Company’s write-off of its investment in SnoCore LLC. The Company did not record any losses with respect to ARTISTdirect Records for the three months ended September 30, 2003. ARTISTdirect Records had a net loss of $1,866,000 for the three months ended September 30, 2003 before intercompany interest elimination of $448,000.

     Minority Interest. Minority interest share of the loss for the three months ended September 30, 2004 relating to the consolidation of ARTISTdirect Records during 2004 was $198,000. There was no minority interest during the three months ended September 30, 2003, as ARTISTdirect Records was accounted for under the equity method of accounting during 2003.

     Interest Income (Expense), Net. Interest expense for the three months ended September 30, 2004 was $165,000 as compared to interest income of $24,000 for the three months ended September 30, 2003. The net difference of $189,000 was due to lower available cash balances and the interest expense related to the bridge notes issued by ARTISTdirect Records in 2003 and 2004.

     Amortization of Bridge Note Warrants. Amortization of bridge note warrants for the three months ended September 30, 2004 was $274,000 as a result of the issuance of warrants in connection with bridge notes issued by ARTISTdirect Records in 2003 and 2004. There was no amortization of bridge note warrants for the three months ended September 30, 2003, as ARTISTdirect Records was accounted for under the equity method of accounting during 2003.

Net Loss

     As a result of the aforementioned factors, net loss decreased by $1,142,000 or 68%, to $528,000 for the three months ended September 30, 2004 as compared to $1,670,000 for the three months ended September 30, 2003.

Three Months Ended September 30, 2004 and 2003 (Pro Forma)

Net Revenue

     Net revenue increased by $432,000 or 44% to $1,415,000 for the three months ended September 30, 2004 as compared to $983,000 for the three months ended September 30, 2003. E-Commerce revenue increased by $62,000 or 8% to $793,000 for the three months ended September 30, 2004 as compared to $731,000 for the three months ended September 30, 2003, primarily due to an increase in the number of orders. Media revenue increased by $487,000 or 580% to $571,000 for the three months ended September 30, 2004 as compared to $84,000 for the three months ended September 30, 2003, as a result of an increase in the number of online advertisers and an increase in the CPM amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Record label revenue for the three months ended September 30, 2004 was $51,000 as compared to $168,000 for the three months ended September 30, 2003 as a result of the scale-back of ARTISTdirect Records and iMusic activities in mid-2003 and an increase in the reserve for product returns for both iMusic and ARTISTdirect Records in 2004. We expect to continue to focus our efforts on increasing media revenue during the remainder of 2004 and in 2005.

Cost of Revenue

     Total cost of revenue increased by $123,000 or 16% to $901,000 for the three months ended September 30, 2004 as compared to $778,000 for the three months ended September 30, 2003. Direct cost of product sales increased by $201,000 or 33% to $802,000 for the three months ended September 30, 2004 as compared to $601,000 for the three months ended September 30, 2003, as a result of an increase in advertising serving costs and commissions paid to third parties in conjunction with increased media revenue and an increase in artist recording advances by ARTISTdirect Records. Other cost of revenue decreased by $78,000 or 44% to $99,000 for the three months ended September 30, 2004 as compared to $177,000 for the three months ended September 30, 2003, as a result of the scale-back of record label operations. For the three months ended September 30, 2004 and 2003, we did not record any non-cash stock-based compensation.

Operating Expense

     Sales and Marketing. Sales and marketing expense decreased by $123,000 or 64% to $70,000 for the three months ended September 30, 2004 as compared to $193,000 for the three months ended September 30, 2003. The decrease was primarily attributable to a decrease in marketing expenses for both the iMusic and ARTISTdirect record labels as a result of the scale-back of their operations in mid-2003 and the absence of any new releases in 2004.

     General and Administrative. General and administrative expense decreased by $1,612,000 or 71% to $674,000 for the three months ended September 30, 2004 as compared to $2,286,000 for the three months ended September 30, 2003. This decrease was primarily attributable to decreases in payroll and related costs at both our company and at ARTISTdirect Records as a result of

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personnel reductions as part of the mid-2003 restructuring and occupancy costs relating to the termination of our office lease in 2003. Included in general and administrative expenses in 2004 were $69,000 of costs related to business development activities.

     Stock-based Compensation. Stock-based compensation expense was $3,000 for the three months ended September 30, 2004 as compared to $479,000 for the three months ended September 30, 2003. This decrease was due to the full amortization of stock-based compensation related to artist store agreements in 2003.

     Depreciation and Amortization. Depreciation and amortization expense decreased by $101,000 or 65% to $54,000 for the three months ended September 30, 2004 as compared to $155,000 for the three months ended September 30, 2003. This decrease was primarily due to the write-down of certain fixed assets, primarily leasehold improvements, during 2003.

Other Income and Expense

     Loss from Equity Investments. For the three months ended September 30, 2004 and 2003, we did not have any loss from equity investments related to ARTISTdirect Records, as the results of ARTISTdirect Records have been accounted for as if consolidated. The loss for ARTISTdirect Records for the three months ended September 30, 2004 was $1,176,000 before intercompany interest elimination of $517,000. For the three months ended September 30, 2003, loss from equity investments of $64,000 related to the Company’s write-off of its investment in SnoCore LLC. ARTISTdirect Records had a net loss of $1,866,000 for the three months ended September 30, 2003 before intercompany interest elimination of $448,000.

     Minority Interest. Minority interest share of the loss for the three months ended September 30, 2004 relating to the consolidation of ARTISTdirect Records was $198,000, as compared to $425,000 for the three months ended September 30, 2003.

     Interest Income (Expense), Net. Interest expense for the three months ended September 30, 2004 was $165,000 as compared to $116,000 for the three months ended September 30, 2003. The net difference of $49,000 was due to lower available cash balances and the interest expense related to the bridge notes issued by ARTISTdirect Records in 2003 and 2004.

     Amortization of Bridge Note Warrants. Amortization of bridge note warrants for the three months ended September 30, 2004 was $274,000 as compared to $52,000 for the three months ended September 30, 2003, as a result of the issuance of warrants in connection with bridge notes issued by ARTISTdirect Records in 2003 and 2004.

Net Loss

     As a result of the aforementioned factors, net loss decreased by $2,135,000 or 80%, to $528,000 for the three months ended September 30, 2004 as compared to $2,663,000 for the three months ended September 30, 2003.

Nine Months Ended September 30, 2004 and 2003 (As Reported)

Net Revenue

     Net revenue decreased by $1,175,000 or 26% to $3,379,000 for the nine months ended September 30, 2004 as compared to $4,554,000 for the nine months ended September 30, 2003. E-Commerce revenue decreased by $199,000 or 8% to $2,198,000 for the nine months ended September 30, 2004 as compared to $2,397,000 for the nine months ended September 30, 2003, primarily due to a reduction in the number of orders. Media revenue increased by $468,000 or 56% to $1,310,000 for the nine months ended September 30, 2004 as compared to $842,000 for the nine months ended September 30, 2003, as a result of an increase in the number of online advertisers and an increase in the CPM amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Included in media revenue for the nine months ended September 30, 2003 was $550,000 of sponsorship income from AT&T. Record label revenue for the nine months ended September 30, 2004 was $(129,000) for both iMusic and ARTISTdirect Records, as compared to $1,315,000 of record label revenue for iMusic for the nine months ended September 30, 2003 as a result of the scale-back of iMusic activities in mid-2003 and an increase in the reserve for product returns for both iMusic and ARTISTdirect Records in 2004. We expect to continue to focus our efforts on increasing media revenue during the remainder of 2004 and in 2005.

Cost of Revenue

     Total cost of revenue decreased by $426,000 or 12% to $3,076,000 for the nine months ended September 30, 2004 as compared to $3,502,000 for the nine months ended September 30, 2003. Direct cost of product sales increased by $308,000 or 13% to $2,689,000 for the nine months ended September 30, 2004 as compared to $2,381,000 for the nine months ended September 30, 2003, as a result of an increase in artist recording advances by ARTISTdirect Records. Other cost of revenue decreased by $701,000 or 64% to $387,000 for the nine months ended September 30, 2004 as compared to $1,088,000 for the nine months ended September 30, 2003,

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as a result of the scale-back of record label operations. For the nine months ended September 30, 2003, non-cash stock-based compensation was $33,000. We did not record any non-cash stock-based compensation for the nine months ended September 30, 2004.

Operating Expense

     Sales and Marketing. Sales and marketing expense decreased by $871,000 or 74% to $307,000 for the nine months ended September 30, 2004 as compared to $1,178,000 for the nine months ended September 30, 2003. The decrease was primarily attributable to a decrease in iMusic record label marketing expenses as a result of the scale-back of the operations of iMusic in mid-2003 and the absence of any new releases in 2004.

     General and Administrative. General and administrative expense decreased by $1,680,000 or 43% to $2,212,000 for the nine months ended September 30, 2004 as compared to $3,892,000 for the nine months ended September 30, 2003. This decrease was primarily attributable to decreases in payroll and related costs as a result of personnel reductions as part of the mid-2003 restructuring and occupancy costs relating to the termination of our office lease in 2003. Included in general and administrative expenses in 2004 were $173,000 of costs related to business development activities.

     Stock-based Compensation.. Stock-based compensation expense was $7,000 for the nine months ended September 30, 2004 as compared to $507,000 for the nine months ended September 30, 2003. This decrease was due to the full amortization of stock-based compensation related to artist store agreements in 2003.

     Depreciation and Amortization. Depreciation and amortization expense decreased by $684,000 or 76% to $216,000 for the nine months ended September 30, 2004 as compared to $900,000 for the nine months ended September 30, 2003. This decrease was primarily due to the write-down of certain fixed assets, primarily leasehold improvements, during 2003.

     Loss from Sale and Abandonment of Property and Equipment. During the nine months ended September 30, 2003, we determined that our fixed assets were impaired due to continuing losses, going concern issues, the delisting of our common stock from the NASDAQ Stock Market, and the likelihood that the majority of these assets would likely be abandoned in the near future. We determined that these factors were indicators of impairment and thus reduced the carrying amount of the fixed assets to their estimated fair value by recording a write-off of $2,225,000 during the nine months ended September 30, 2003.

Other Income and Expense

     Loss from Equity Investments. For the nine months ended September 30, 2004, we did not have any loss from equity investments, as the results of ARTISTdirect Records were consolidated. The loss for ARTISTdirect Records for the nine months ended September 30, 2004 was $3,479,000 before intercompany interest elimination of $1,446,000. For the nine months ended September 30, 2003, loss from equity investments consisted of $64,000 related to the Company’s write-off of its investment in SnoCore LLC and $7,050,000 related to our share of losses from ARTISTdirect Records. ARTISTdirect Records had a net loss of $12,258,000 for the nine months ended September 30, 2003 before intercompany interest elimination of $1,458,000.

     Minority Interest. Minority interest share of the loss for the nine months ended September 30, 2004 relating to the consolidation of ARTISTdirect Records during 2004 was $610,000. There was no minority interest during the nine months ended September 30, 2003, as ARTISTdirect Records was accounted for under the equity method of accounting during 2003.

     Interest Income (Expense), Net. Interest expense for the nine months ended September 30, 2004 was $436,000 as compared to interest income of $128,000 for the nine months ended September 30, 2003. The net difference of $564,000 was due to lower available cash balances and the interest expense related to the bridge notes issued by ARTISTdirect Records in 2003 and 2004.

     Forgiveness of Debt. Forgiveness of debt for the nine months ended September 30, 2004 was $482,000 as compared to $411,000 for the nine months ended September 30, 2003.

     The forgiveness of debt in 2004 related to the negotiation and settlement of certain vendor liabilities related to ARTISTdirect Records during the nine months ended September 30, 2004.

     During 2002, our Chairman’s employment agreement was amended whereby he agreed to defer his future salary until we raised new debt or equity financing of at least $20 million. During the nine months ended September 30, 2003, our Chairman’s employment agreement was further amended whereby all deferred and any future salary, except a base amount, would be waived, even if new debt or equity financing was raised. Accordingly, $411,000 of accrued compensation due to our Chairman was recorded as gain from forgiveness of debt in the condensed consolidated statement of operations for the nine months ended September 30, 2003.

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     Amortization of Bridge Note Warrants. Amortization of bridge note warrants for the nine months ended September 30, 2004 was $709,000 as a result of the issuance of warrants in connection with bridge notes issued by ARTISTdirect Records in 2003 and 2004. There was no amortization of bridge note warrants for the nine months ended September 30, 2003, as ARTISTdirect Records was accounted for under the equity method of accounting during 2003.

Net Loss

     As a result of the aforementioned factors, net loss decreased by $11,733,000 or 82%, to $2,492,000 for the nine months ended September 30, 2004 as compared to $14,225,000 for the nine months ended September 30, 2003.

Nine Months Ended September 30, 2004 and 2003 (Pro Forma)

Net Revenue

     Net revenue decreased by $2,454,000 or 42% to $3,379,000 for the nine months ended September 30, 2004 as compared to $5,833,000 for the nine months ended September 30, 2003. E-Commerce revenue decreased by $199,000 or 8% to $2,198,000 for the nine months ended September 30, 2004 as compared to $2,397,000 for the nine months ended September 30, 2003, primarily due to a reduction in the number of orders. Media revenue increased by $468,000 or 56% to $1,310,000 for the nine months ended September 30, 2004 as compared to $842,000 for the nine months ended September 30, 2003, as a result of an increase in the number of online advertisers and an increase in the CPM amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Included in media revenue for the nine months ended September 30, 2003 was $550,000 of sponsorship income from AT&T. Record label revenue for the nine months ended September 30, 2004 was $(129,000) as compared to $2,594,000 for the nine months ended September 30, 2003 as a result of the scale-back of ARTISTdirect Records and iMusic activities in mid-2003 and an increase in the reserve for product returns for both iMusic and ARTISTdirect Records in 2004. We expect to continue to focus our efforts on increasing media revenue during the remainder of 2004 and in 2005.

Cost of Revenue

     Total cost of revenue decreased by $2,147,000 or 41% to $3,076,000 for the nine months ended September 30, 2004 as compared to $5,223,000 for the nine months ended September 30, 2003. Direct cost of product sales decreased by $1,413,000 or 34% to $2,689,000 for the nine months ended September 30, 2004 as compared to $4,102,000 for the nine months ended September 30, 2003, as a result of a decrease in artist recording advances by ARTISTdirect Records. Other cost of revenue decreased by $701,000 or 64% to $387,000 for the nine months ended September 30, 2004 as compared to $1,088,000 for the nine months ended September 30, 2003, as a result of the scale-back of record label operations. For the nine months ended September 30, 2003, non-cash stock-based compensation was $33,000. We did not record any non-cash stock-based compensation for the nine months ended September 30, 2004.

Operating Expense

     Sales and Marketing. Sales and marketing expense decreased by $4,113,000 or 93% to $307,000 for the nine months ended September 30, 2004 as compared to $4,420,000 for the nine months ended September 30, 2003. The decrease was primarily attributable to a decrease in marketing expenses for both the iMusic and ARTISTdirect record labels as a result of the scale-back of their operations in mid-2003 and the absence of any new releases in 2004.

     General and Administrative. General and administrative expense decreased by $8,392,000 or 79% to $2,212,000 for the nine months ended September 30, 2004 as compared to $10,604,000 for the nine months ended September 30, 2003. This decrease was primarily attributable to decreases in payroll and related costs at both our company and at ARTISTdirect Records as a result of personnel reductions as part of the mid-2003 restructuring and occupancy costs relating to the termination of our office lease in 2003. Included in general and administrative expenses in 2004 were $173,000 of costs related to business development activities.

     Stock-based Compensation. Stock-based compensation expense was $7,000 for the nine months ended September 30, 2004 as compared to $507,000 for the nine months ended September 30, 2003. This decrease was due to the full amortization of stock-based compensation related to artist store agreements in 2003.

     Depreciation and Amortization. Depreciation and amortization expense decreased by $717,000 or 77% to $216,000 for the nine months ended September 30, 2004 as compared to $933,000 for the nine months ended September 30, 2003. This decrease was primarily due to the write-down of certain fixed assets, primarily leasehold improvements, during 2003.

     Loss from Sale and Abandonment of Property and Equipment. During the nine months ended September 30, 2003, we determined

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that our fixed assets were impaired due to continuing losses, going concern issues, the delisting of our common stock from the NASDAQ Stock Market, and the likelihood that the majority of these assets would likely be abandoned in the near future. We determined that these factors were indicators of impairment and thus reduced the carrying amount of the fixed assets to their estimated fair value by recording a write-off of $2,325,000 during the nine months ended September 30, 2003, including $2,225,000 at our company and $100,000 at ARTISTdirect Records.

Other Income and Expense

     Loss from Equity Investments. For the nine months ended September 30, 2004 and 2003, we did not have any loss from equity investments related to ARTISTdirect Records, as the results of ARTISTdirect Records have been accounted for as if consolidated. The loss for ARTISTdirect Records for the nine months ended September 30, 2004 was $3,479,000 before intercompany interest elimination of $1,446,000. For the nine months ended September 30, 2003, loss from equity investments of $64,000 related to the Company’s write-off of its investment in SnoCore LLC. ARTISTdirect Records had a net loss of $12,258,000 for the nine months ended September 30, 2003 before intercompany interest elimination of $1,458,000.

     Minority Interest. Minority interest share of the loss for the nine months ended September 30, 2004 relating to the consolidation of ARTISTdirect Records was $610,000, as compared to $425,000 for the nine months ended September 30, 2003.

     Interest Income (Expense), Net. Interest expense for the nine months ended September 30, 2004 was $436,000 as compared to $143,000 for the three months ended September 30, 2003. The net difference of $293,000 was due to lower available cash balances and the interest expense related to the bridge notes issued by ARTISTdirect Records in 2003 and 2004.

     Forgiveness of Debt. Forgiveness of debt for the nine months ended September 30, 2004 was $482,000 as compared to $411,000 for the nine months ended September 30, 2003.

     The forgiveness of debt in 2004 related to the negotiation and settlement of certain vendor liabilities related to ARTISTdirect Records during the nine months ended September 30, 2004.

     During 2002, our Chairman’s employment agreement was amended whereby he agreed to defer his future salary until we raised new debt or equity financing of at least $20 million. During the nine months ended September 30, 2003, our Chairman’s employment agreement was further amended whereby all deferred and any future salary, except a base amount, would be waived, even if new debt or equity financing was raised. Accordingly, $411,000 of accrued compensation due to our Chairman was recorded as gain from forgiveness of debt in the condensed consolidated statement of operations for the nine months ended September 30, 2003.

     Amortization of Bridge Note Warrants. Amortization of bridge note warrants for the nine months ended September 30, 2004 was $709,000 as compared to $52,000 for the nine months ended September 30, 2003, as a result of the issuance of warrants in connection with bridge notes issued by ARTISTdirect Records in 2003 and 2004.

Net Loss

     As a result of the aforementioned factors, net loss decreased by $15,058,000 or 86%, to $2,492,000 for the nine months ended September 30, 2004 as compared to $17,550,000 for the nine months ended September 30, 2003.

Liquidity and Capital Resources – September 30, 2004

Overview

     We have financed our activities during the past few years from the sale of our equity securities in March 2000 and prior. ARTISTdirect Records has relied primarily on advances from ARTISTdirect, Inc. and from BMG to fund its operations since inception in 2001. During the year ended December 31, 2003 and the nine months ended September 30, 2004, ARTISTdirect Records also received bridge loans aggregating $4,527,000 from Ted Field and from outside investors (see “Financing” below).

     As of September 30, 2004, on a consolidated basis, we had $765,000 of unrestricted cash and cash equivalents. We had a working capital deficiency of $10,125,000 at September 30, 2004, primarily because of the net liability to BMG of $8,855,000 and the bridge note liability of $1,371,000 at such date.

     During the year ended December 31, 2003, we restructured senior operating management and significantly reduced overhead and operating activities and terminated the majority of our staff. We do not expect to be able to make significant further reductions to operating expenses in 2004. During 2004, we are focusing on obtaining additional capital, as well as enhancing the operations and margins of the Media business.

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     As of September 30, 2004, ARTISTdirect Records did not have sufficient working capital resources to conduct operations and had therefore curtailed its operations. Since ARTISTdirect Records will require additional capital in order to continue operations, it is continuing to pursue alternatives to raise additional capital. However, there can be no assurances that additional capital can be obtained on reasonable terms or at all.

     As of December 31, 2003, ARTISTdirect Records had received $898,000 of loans from Ted Field and $1,150,000 of loans from outside investors (including $100,000 from Jonathan V. Diamond, our President and Chief Executive Officer). During the nine months ended September 30, 2004, ARTISTdirect Records received an additional $2,479,000 of loans from Mr. Field, bringing Mr. Field’s advances to a total of $3,377,000 at September 30, 2004. The loans were obtained through the issuance of convertible promissory notes (the “Bridge Notes”). At September 30, 2004, total bridge notes outstanding aggregated $4,527,000. The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and will be converted into new equity of ARTISTdirect Records as part of its next equity financing.

     The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect Records at $0.01 per unit equivalent to the number of units of new equity into which their Bridge Notes are ultimately converted. Since the Bridge Notes are convertible into equity based on their face amount, this results in a beneficial conversion feature. The relative fair value of the warrants issued was $2,264,000 (one-half of the amount funded by the investors in the Bridge Notes), which was recorded as a reduction to the carrying amount of the Bridge Notes and a credit to minority interest, and is being charged to operations as amortization of Bridge Note warrants over the specified term of the Bridge Notes.

     Operating. For the nine months ended September 30, 2004, net cash used in operating activities was $3,429,000, as compared to $4,634,000 for the nine months ended September 30, 2003. The decrease in net cash used in operating activities in 2004 as compared to 2003 was a result of the restructuring and scale-back of operations in mid-2003. ARTISTdirect Records was included in operating activities in 2004, but was not included in operating activities in 2003.

     Investing. For the nine months ended September 30, 2004, net cash provided by investing activities was $989,000, which consisted of the sale/maturity of short-term investments of $1,012,000, reduced by purchases of property and equipment of $23,000. For the nine months ended September 30, 2003, net cash provided by investing activities was $945,000, which consisted of the sale/maturity of short-term investments of $3,589,000 and the proceeds from the sale of property and equipment of $106,000, reduced by advances to ARTISTdirect Records of $2,750,000.

     Financing. For the nine months ended September 30, 2004, net cash provided by financing activities was $2,479,000, which consisted of the issuance of Bridge Notes by ARTISTdirect Records. For the nine months ended September 30, 2003, net cash provided by financing activities was $1,808,000, which consisted of a decrease in restricted cash.

Principal Commitments – ARTISTdirect, Inc. and ARTISTdirect Records, LLC

     A summary of our contractual cash obligations as of September 30, 2004 is as follows:

     At September 30, 2004, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Liquidity – ARTISTdirect, Inc. and ARTISTdirect Records, LLC

     We have a substantial working capital deficiency at September 30, 2004 and limited cash resources to fund our ongoing working capital requirements. However, we believe that we have adequate cash resources to maintain operations through the remainder of 2004 and into early 2005. We have reduced our operations and have divested certain of our assets in order to attempt to raise the capital necessary to sustain business operations, and we are exploring various alternatives to raise additional capital. There can be no

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assurance that additional capital can be obtained either by us or by ARTISTdirect Records on reasonable terms, in a timely manner or at all. Failure to raise additional capital could seriously harm the business of ARTISTdirect Records and impair the value of our investment in ARTISTdirect Records.

     If additional funds are raised through the issuance of equity securities by our company or by ARTISTdirect Records, the percentage ownership of current stockholders in our company and/or ARTISTdirect Records will be reduced. If we raise additional funds by issuing debt, we may be subject to limitations on how we conduct our operations, and any debt issued by ARTISTdirect Records may be senior to the obligations of ARTISTdirect Records to us. To the extent that our estimate of our cash requirements is inaccurate or we are unable to obtain the capital necessary to sustain our business operations on a timely basis and under acceptable terms and conditions, we may further reduce our operations and/or consider a formal or informal restructuring or reorganization.

     Due to our current financial condition, our auditors have included an explanatory paragraph in their reports on the 2003 consolidated financial statements of ARTISTdirect, Inc. and of ARTISTdirect Records, LLC stating that there is substantial doubt about our respective abilities to continue as going concerns.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We do not have any exposure to market risk for interest rate risk, foreign currency exchange risk, commodity price risk, or other similar market rate or price risks.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

     Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act of 1934 is accumulated and communicated to management, including its principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.

     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its principal executive and financial officers, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, the Company’s principal executive and financial officers concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Controls

     There were no changes in the Company’s internal controls or in other factors that could have significantly affected those controls subsequent to the date of the Company’s most recent evaluation.

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PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

     Effective August 31, 2004, the Company issued a warrant to a consultant for services rendered to purchase 10,000 shares of common stock exercisable for a period of five years at $0.50 per share.

     The warrant was issued without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended, based on certain representations made to the Company by the recipient.

ITEM 5. OTHER INFORMATION

     Effective October 18, 2004, Stephen M. Krupa, Benjamin S. A. Moody and Marc P. Geiger each resigned as a director of the Company. Effective October 22, 2004, Keith K. Yokomoto resigned as a director of the Company. The Company did not have any disagreements with such directors.

ITEM 6. EXHIBITS

          A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.

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SIGNATURES

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

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EXHIBIT INDEX

*Filed herewith

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