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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K



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|X Box |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------

OR



|Box |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from  
to    .
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

Commission file number 000-30063ARTISTDIRECT, INC.(Exact name of registrant as specified in its charter)

|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or Other Jurisdiction
of Incorporation or Organization) |  | 95-4644384
(I.R.S. Employer
Identification No.)

5670 Wilshire Boulevard, Suite 200, Los Angeles, California 90036(Address of principal executive offices) (Zip code)



Registrants telephone number, including area code: (323) 634-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value


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 Box  No  Box

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

Based on the closing sale price of March 15, 2002, the aggregate market
value of the approximately 2.2 million shares of voting stock of the
registrant held by nonaffiliates of the registrant on such date was
approximately $23.0 million. For purposes of such calculation, only executive
officers, board members and beneficial owners of more than 10% of the Companys
outstanding Common Stock are deemed to be affiliates.

As
of March 15, 2002, there were 3,460,608 shares
of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on May 30, 2002, as filed with the
Securities Exchange Commission pursuant to the Securities Exchange Act of 1934,
as amended, are incorporated by reference in Part III of this Report.



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TABLE OF CONTENTS



|              |                                                                                               |                                                                                  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS                                                    
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|              |                                                                                               | INDEPENDENT AUDITORS REPORT                                                    
|              |                                                                                               | CONSOLIDATED BALANCE SHEETS                                                     
|              |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS                                           
|              |                                                                                               | CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS AND STOCKHOLDERS EQUITY (DEFICIT)
|              |                                                                                               | CONSOLIDATED STATEMENT OF CASH FLOWS                                            
|              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                      
|EXHIBIT INDEX
|EXHIBIT 10.33
|EXHIBIT 10.34
|EXHIBIT 23.1 



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ARTISTDIRECT INC.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

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|         |  | ITEM 2.  |  | PROPERTIES                                                                            |  |      | 28 | 
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|         |  | ITEM 3.  |  | LEGAL PROCEEDINGS                                                                     |  |      | 28 | 
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|         |  | ITEM 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  |      | 28 | 
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|         |  | ITEM 5.  |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS             |  |      | 28 | 
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|         |  | ITEM 6.  |  | SELECTED FINANCIAL DATA                                                               |  |      | 29 | 
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|         |  | ITEM 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
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|         |  | ITEM 7A. |  | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK                            |  |      | 42 | 
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|         |  | ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  |      | 42 | 
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|         |  | ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  |      | 42 | 
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|         |  | ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS                                                      |  |      | 42 | 
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|         |  | ITEM 11. |  | EXECUTIVE COMPENSATION                                                                |  |      | 42 | 
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|         |  | ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  |      | 42 | 
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|         |  | ITEM 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  |      | 42 | 
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|         |  | ITEM 14. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K                      |  |      | 43 | 





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This report contains forward-looking statements that include, but are not
limited to, statements concerning projected revenues, expenses, gross profit
and income, the need for additional capital, and the success of pending
litigation. These forward-looking statements are 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, seeks, estimates, may, will
and variations of these words 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. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result of various
factors. The section entitled Risk Factors set forth at the end of Part I,
Item 1 of this report, the Managements Discussion and Analysis of Financial
Condition and Results of Operations in Part II, Item 7 of this report and
similar discussions in our other filings with the Securities and Exchange
Commission (SEC) discuss some of the important risk factors that may affect
our business, results of operations and financial condition. You should
carefully consider those risks in addition to the other information in this
report and in our other filings with the SEC before deciding to invest in our
company or to maintain or increase your investment. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason.




PART I




ITEM 1. BUSINESS

OVERVIEW

We are a music entertainment company that combines an online music network
and a record label to provide an integrated offering for music fans, artists
and marketing partners. The ARTISTdirect Network (www.artistdirect.com) is a
network of Web sites offering multi-media content, music news and information,
community around shared music interests, music-related commerce and digital
music services. Through our co-venture record label, ARTISTdirect Records, we
develop new musical artists and produce and distribute their recordings as an
independent label utilizing both traditional channels and emerging Internet
distribution channels.

The ARTISTdirect Network features our proprietary music schema, enabling
users to access digital music by artist, genre or time period, a music search
engine and database containing information on more than 100,000 artists, a
popular music-oriented online community, a retail commerce offering that
includes official artist stores, and the ability for users to download and
listen to music and view music videos and other broadband programming.



| |  |  | Music Schema  a recently added feature that allows users to
navigate a large catalog of music by artist, genre or time period
(e.g. 60s Rock), facilitating both quick access to music known to
the user and the discovery of music that may be new to the user.
The music schema currently provides short music clips accompanied by
information about the artist and related artists and music. The
music schema is designed to function with full song files at such
time as we are able to enter into music licensing agreements on
terms acceptable to us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Ultimate Band List
(UBL)  a comprehensive online music
search engine and resource for music information. The UBL provides
information on more than 100,000 artists across numerous musical
genres, featuring news, concert information, artist biographies,
album reviews, contests, promotions, music samples and downloads.
The UBL also offers links to numerous other Web sites in the online
music community;                                                                                                                                        
|
| |  |  | iMusic  a music-oriented online community providing chats,
message boards and fan clubs relating to specific artists and
general music topics. iMusic allows fans to communicate with others
around the world to share interests and commentary about their
favorite music and artists. iMusic also serves as a platform for
fans to interact directly with their favorite artists through hosted
chats and fan conferences that we organize periodically;                                                                                                      





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| |  |  | The ARTISTdirect Superstore  a retail site offering a wide
selection of music titles and artist merchandise. The ARTISTdirect
Superstore includes official stores for a number of artists,
including *NSYNC, Blink-182 and Metallica; and,                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Downloads  a feature that enables users to download and
listen to music from a variety of artists. In addition, users can
download broadband programming, including a variety of current music
videos and other programs produced exclusively by ARTISTdirect and
featuring popular artists.

During 2001, we formed a new record label company, ARTISTdirect Records,
LLC, as a co-venture between our wholly-owned subsidiary, ARTISTdirect
Recordings, Inc., and Radar Records Holdings, LLC, an entity wholly owned by
our Chief Executive Officer, Frederick W. (Ted) Field. Mr. Field also serves
as the Chief Executive Officer of ARTISTdirect Records. ARTISTdirect Records
will develop new musical artists, and produce and distribute their recordings
as an independent label utilizing both traditional channels and emerging
Internet distribution channels, including our own online music network.
ARTISTdirect Records will generate revenue primarily from the sale of compact
discs by artists signed to the label. We believe that ARTISTdirect Records will
allow us to strengthen our position as a music entertainment company by
developing proprietary content that we can exploit to create value for our
shareholders.

In December 2001, we decided to exit the music talent agency business
because we believed that our prospects for increasing the value of this
business were limited and that there were potential conflicts of interests with
our new co-venture record label. As a result, we have classified this segment
of our business as a discontinued operation in our consolidated statement of
operations for all periods presented. We expect the wind up of operations of
the agency business to be completed in the first half of 2002.

INDUSTRY BACKGROUND

THE MUSIC INDUSTRY

Music is one of the most popular forms of entertainment worldwide and a
multi-billion dollar consumer industry. In addition, the music industry
generates substantial advertising, sponsorship, promotional and merchandise
revenue related to music events and individual artists. The music industry
identifies artists and develops, promotes and distributes their content. The
high cost associated with development, promotion and distribution has led
artists to rely on third parties such as record labels, merchandisers and
talent agents to represent their interests. The experience of the typical
music consumer has been fragmented and inefficient. Music consumers have had
to search a variety of media to find music news and information and have had to
purchase compact discs, tickets and merchandise through different retail
channels. Until recently, consumers were unable to legitimately purchase
digital music online, and recently introduced services provide restricted
access to limited catalogs of music. Goods, such as apparel and other artist
merchandise, have been difficult to find and frequently available only at
concerts or selected retail outlets. For music fans, opportunities to interact
with their favorite artists and fellow enthusiasts have been limited.

INTERNET OPPORTUNITY

The Internet has emerged as a platform that allows millions of people
worldwide to deliver and receive information rapidly, create virtual
communities around shared interests and engage in electronic commerce. This
has made the Internet an important new medium for music, dramatically altering
the way consumers search for, discover, listen to and purchase music. The
Internet offers:



| |  |  | efficient reach to a growing worldwide audience;                                      
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | convenient access to a vast offering of musical content and services;                 
|
| |  |  | flexibility to tailor products and services to consumer interests and market dynamics;
|
| |  |  | a market for the digital distribution of music;                                       

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| |  |  | the potential for consumer personalization of the music experience; and                           
| | - |  | --------------------------------------------------------------------------------------------------
|
| |  |  | timely collection of customer preferences and demographics
for targeted advertising and promotion.

Artists have begun to view the Internet as a platform to gain greater
control over the programming, promotion and distribution of their music and
related merchandise and to communicate directly with their fans. Many
consumers have adopted the Internet to locate music information, share
interests and discover and buy music. We believe that the features of the
Internet and the common demographics of music consumers and Internet users
represent an opportunity for the music industry to develop new digital music
services that meet consumer demand in new and different ways. Artists will
have the opportunity to exert greater control over the programming, promotion
and distribution of their music and consumers will be able to search for,
discover and purchase music and related merchandise and content at a single
destination.

RECORD LABEL OPPORTUNITY

Consolidation of the music industry has resulted in significant
concentration of music sales among five major music companies, BMG, EMI, Sony
Music (a division of Sony Corporation), Universal Music Group (a division of
Vivendi Universal), and Warner Music Group (a division of AOL Time Warner).
While these companies have extensive resources to develop, market and
distribute an artists music, some artists prefer to provide their services to
smaller labels where they may represent a more significant portion of the
labels business and, therefore, be afforded more attention and focused
resources. We also believe that artists are attracted to a label that has
significant, integrated online resources to directly assist the artist in
exploiting opportunities to reach consumers outside the traditional channels of
retail distribution.

OUR SOLUTION

BENEFITS TO ARTISTS

By operating both an online music network and an independent record label,
we are able to work with artists to develop, produce and distribute their music
and provide them with a platform to develop their presence on the Web. Our
benefits to artists include:

Full-Service Record Label.We are able to develop, produce and distribute
an artists recorded music through our label, ARTISTdirect Records. By
focusing our resources on artists and repertoire (A&R), marketing and
promotion, we are able to assist an artist in the critical elements of finding
and developing an audience for their music. By distributing our releases
through BMG, we provide broad reach to retail distribution channels both
domestically and globally.

Online Media Network. We are able to offer artists access to an online
media platform to create, present, promote and distribute their content.
Features include auto-publishing tools, content management, and capabilities
for advertising and direct marketing and electronic commerce. With continuing
advances in broadband technology and standards for digital music distribution,
we believe these artist sites can become a significant platform for the full
range of artists content, commerce, digital distribution and community
activities on the Internet.

Closer Relationships with Fans. Artist-specific Web sites promote greater
fan affinity and loyalty by directly linking artists and fans. Artists can use
these Web sites to provide content and products to fans, including artist news,
concert information, music and video programming, exclusive chats, ticket
giveaways and fan club activities. Artists can also solicit the views of fans
on new music, live performances and music videos. A better understanding of
their fans enables artists to develop relevant content, promote their music
more effectively and create new revenue opportunities.

New Revenue Opportunities. We provide artists with a number of incremental
revenue opportunities, including music and related merchandise sales,
advertising and direct marketing. Our online music network
increases consumer access to artist merchandise that was previously generally
available only at concert venues or selected retail locations. We also assist
artists in developing original merchandise items for sale to their fans. In

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addition, through our Entertainment Marketing business, we are able to present
artists with revenue from advertising and sponsorship in connection with their
music recordings, live performances and Internet activities.

Direct Marketing Opportunities. Fans have an opportunity to provide
identifying information that allows the artists to develop consumer databases.
Artists use this database information to communicate news, upcoming music
releases, live appearances or online events that are targeted to a particular
fan base. Data may also be used to develop artist-approved targeted
advertising and marketing opportunities. Artists have access to detailed
information about how many people visited their sites, listened to or
downloaded their music and purchased compact discs. We maintain artist
databases and share revenue generated through their use with the artist.

New Platform for Digital Distribution. The Internet represents an
important new platform for digital music distribution. As the music industry
develops new services that provide secure digital distribution and meet the
demands of consumers, we intend to make such services available through the
ARTISTdirect Network. In addition, we intend to provide artists signed to
ARTISTdirect Records with the opportunity to generate incremental revenue from
digital music distribution.

BENEFITS TO CONSUMERS

Our ARTISTdirect Network offers an extensive destination for the music
consumer. Our benefits to consumers include:

Direct Connection to Artists. Consumers have access to content
specifically created or endorsed by their favorite artists, as well as artist
news and concert information, music, merchandise, special promotions and other
benefits. Special promotions have included opportunities to meet artists,
concert ticket giveaways, trips to live concerts, online fan conferences with
artists, exclusive music downloads and exclusive videos. Consumers can
interact with artists and offer direct feedback on new releases, concert
performances and videos.

Comprehensive Music Resource. The ARTISTdirect Network includes
comprehensive resources for searching, discovering and enjoying music content.
These resources include a search engine and database of more than 100,000
artists covering a wide variety of musical genres, organized links to other
Internet music resources, news, concert information, artist biographies, album
reviews, contests and promotions, music samples and downloads. Our music
schema is designed to provide access to a complete catalog of music that can be
searched by artist, genre or time period.

Rich Community Features. Our community features provide chats, and
message boards relating to both specific artists and more general music topics.
Our site enables fans around the world to share interests and commentary about
their favorite music and artists and facilitates their discovery of new music.
These features also serve as a platform for fans to interact directly with
their favorite artists through hosted chats and fan conferences.

Comprehensive Shopping Destination. The ARTISTdirect Network brings
together many of the disparate elements of the music shopping experience.
Music consumers can purchase and pre-order a full range of recorded music and
shop for artist-related merchandise, including some items available only
through ARTISTdirect. In addition, our content, downloadable music, and
special promotions enhance the consumer experience.

BUSINESS STRATEGY

Our objective is to be a leading music entertainment company, producing
and distributing new music, providing artist services and reaching music fans
through a comprehensive online music network. Our strategy is to:

Build Our Record Label. We believe that there is a significant opportunity
to establish ARTISTdirect Records as an important independent record label. We
intend to sign high potential artists capable of delivering commercially
successful new music releases in the near term. We also intend to effectively
market and promote our
releases to create consumer demand and to achieve broad retail distribution in
both domestic and international markets through our agreement with BMG
Entertainment, one of the five major music companies.

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Build Brand Awareness. We intend to establish ARTISTdirect as a leading
brand for music entertainment. We intend to use both online and offline
marketing channels to reach consumers and promote the ARTISTdirect brand name.
We believe that the establishment of ARTISTdirect Records will provide a
significant new platform for branding as we begin to issue new releases under
the ARTISTdirect Records name.

Enhance The Experience of Our Online Users. We intend to add features and
content to the ARTISTdirect Network to enhance our users experience. We plan
to help our users discover new music by providing personalization tools,
targeted recommendations, digital downloads and streaming audio and video. In
addition, we plan to offer one or more digital music subscription services
either directly or under agreements with third-party providers of such
services.

Exploit Our Unique Assets. We intend to exploit our uniquely integrated
assets, broad reach and experienced, artist-oriented management team to
differentiate ourselves from companies with less comprehensive offerings. For
example, we aim to:



| |  |  | offer selected artists a range of services, including
development, marketing and promotion through our record label;
online programming, promotion and distribution through the
ARTISTdirect Network; and inclusion in our entertainment marketing
initiatives;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop branded live events and tours sponsored by
advertisers and merchants; and                                                                                                                                                                              
|
| |  |  | enable advertisers and merchants to deliver their messages to
the audience of the entire ARTISTdirect Network or to targeted
audiences within the ARTISTdirect Network.                                                                                        

ARTISTdirect BUSINESS UNITS

ARTISTdirect Network. The ARTISTdirect Network is comprised of our Media
and E-commerce operations. Our Media operations include our content-oriented
web sites and our entertainment marketing initiatives. Revenue from Media
operations is generated from the sale of online advertising and integrated
marketing solutions. E-commerce operations include our ARTISTdirect
Superstore, offering a comprehensive selection of music CDs and broad range of
artist merchandise, as well as artist-specific offerings of exclusive music and
merchandise. We also offer advance tickets to selected concerts through an
arrangement with Ticketmaster. Revenue from E-commerce operations is generated
primarily from the sale of music CDs and artist merchandise.

ARTISTdirect Records.In 2001, we formed a new record label company,
ARTISTdirect Records, LLC, as a co-venture between our wholly-owned subsidiary,
ARTISTdirect Recordings, Inc., and Radar Records Holdings, LLC, an entity
wholly owned by our Chief Executive Officer, Mr. Field. Mr. Field serves as
the Chief Executive Officer of ARTISTdirect Records. ARTISTdirect Records will
develop new musical artists, and produce and distribute their recordings as an
independent label utilizing both traditional channels and emerging Internet
distribution channels, including our own online music network. We believe
ARTISTdirect Records will allow us to strengthen our position as a music
entertainment company by developing proprietary content that we can exploit to
create value for our shareholders.

Through December 31, 2001, ARTISTdirect Records had signed recording
agreements with 7 artists and has hired 27 employees to work for the label. In
November 2001, ARTISTdirect Records entered into a North American distribution
agreement and worldwide license arrangement with BMG, the global music division
of Bertelsmann AG. Under the terms of the agreement, BMG Distribution will
distribute the ARTISTdirect Records releases in North America, and BMG will
license ARTISTdirect Records repertoire in territories throughout the world.
BMG has entered into a preliminary agreement to acquire a minority stake in
ARTISTdirect Records and provide certain funding for the label, subject to the
execution of definitive documents.

Through March 15, 2002, ARTISTdirect Records had signed recording
agreements with an additional three artists, for a total of ten, and had
increased employee headcount to 46.

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INFRASTRUCTURE AND OPERATIONS

TECHNOLOGY

Our infrastructure is designed to be integrated, scalable, reliable and
secure. The software that we use supports the acquisition, management and
publication of content on our Web sites. Our Web sites and servers for
content, applications, database and electronic commerce are currently hosted by
CNP, Inc. at their co-location service provider, IX2 Networks, LLC, in Los
Angeles, California. Our operations depend on these companies ability to
protect their systems against fire, power loss, telecommunications failure,
break-ins and other events. These companies provide comprehensive facilities
management services, including human and technical monitoring of all production
servers 24 hours per day, seven days per week. All Web sites, servers, and
systems are monitored continuously. Weekly backups are stored at a remote
location.

Our current e-commerce system is based on SAP software with certain
enhancements provided to us by Pandesic, LLC, a joint venture between Intel and
SAP that wound up operations in January 2001. Upon Pandesics cessation of
operations, we received the source code and executables for the e-commerce
system that had been provided previously by Pandesic and implemented SAPs
software in house under a two-year license from SAP that expires in December
2002. In August 2001, we entered into a one-year agreement with CNP, Inc.,
formerly Amplified Holdings, Inc., whereby we outsourced the majority of our
technology requirements to CNP, including, but not limited to, hosting,
e-commerce, content management, and content publication. The agreement
automatically renews for successive one-year periods unless either party gives
the other party notice of non-renewal before the end of the term in progress.
CNP will provide hosting and professional services, and technology development
during the term of the agreement. As part of the agreement, CNP licensed its
proprietary hosted platform technology to us for our Web sites. In addition to
the support provided by CNP, we maintain a small Information Technology
department for our internal administrative needs.

ORDER PROCESSING AND FULFILLMENT

Our Web sites include an ordering system that is designed to facilitate
convenient online purchasing of pre-recorded music and merchandise. Customers
can add items to their shopping cart while surfing our Web sites. At any
time they can securely checkout, at which time they need to register (if they
are new customers), or enter a username and password to retrieve previously
saved billing, shipping and credit card information. We verify orders submitted
for credit card payment for fraud detection and sufficient funds before we
release them for fulfillment. We also accept alternative modes of payment, such
as checks and money orders. Credit card numbers are encrypted, and all
customer, commerce and transactional data are stored in secure databases
protected by firewalls. The transmission of information over the Internet uses
Secure Socket Layer security technology verified by VeriSign.

Alliance Entertainment. In August 1998, we entered into a five-year agreement
with Alliance Entertainment Corp. to be our primary supplier of music and
music-related information for our ARTISTdirect Superstore. Alliance owns the
All Music Guide, a comprehensive source of artist and album information that is
supplied to our users through its integration into our network. Alliance
fulfills compact discs ordered by our customers and we pay Alliance the
wholesale cost plus a fulfillment fee. In addition, Alliance provides
warehouse space and fulfillment services pursuant to an oral agreement that
Alliance may terminate at any time for a majority of the music-related
merchandise that we offer which allows the consolidated shipping of customer
orders for both music and merchandise. We have integrated our order processing
system with Alliances information systems to assist in fulfillment tracking,
inventory management and customer service. Almost all of the music titles
available for sale on our Web sites are purchased by us from inventory held by
Alliance.

Old Glory.In November 2001, we entered into a six-month agreement with Old
Glory Boutique Distributing Inc. (Old Glory) to be a wholesale supplier of
music-related merchandise and provide fulfillment services for the
products for which it sells to us. The agreement shall automatically renew for
two one-year periods unless either party gives notice of its intent not to
renew no less than 90 days before the end of the initial or any extended term.

Giant. We entered into a four-year agreement with Giant Merchandising in
April 1999 to supply merchandise on a wholesale basis for both our
ARTISTchannels and the ARTISTdirect Superstore.

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If we are unable to renew our agreements with these suppliers when they expire,
on favorable terms or at all, or if Alliance ceases to provide fulfillment
services for merchandise, our business could be adversely affected.

CUSTOMER SERVICE

In June 2001, we entered into a two-year agreement with AEC One-Stop
Group, Inc. (Alliance Entertainment) to provide customer support services for
our Web sites consumers and respond to customer inquiries, orders and other
requests made by phone, fax, e-mail and regular mail. Prior to entering into
the agreement with Alliance, we provided customer service with an internal
staff of customer service representatives.

SALES AND MARKETING

ADVERTISING SALES

We sell entertainment marketing solutions, including advertising and
sponsorships, to a variety of advertisers seeking to reach one or more of the
distinct demographic audiences viewing content in the ARTISTdirect Network or
attending a live event that we organize or are affiliated with. Components of an entertainment
marketing solution may include, among other things, title sponsorship of an
event or concert tour, promotion in marketing materials for an event or tour,
signage and presence at live events, contests to promote consumer registration
for sponsor services, and banner ads or content sponsorship on the ARTISTdirect
Network. In addition, advertisers may choose single elements such as targeted
or run-of-network banners on our Web sites. Pricing is negotiated based upon
the size of the target audience, the duration and intensity of the campaign,
the number of elements involved, and payments to third parties, such as
artists, to secure their services. Our strategy is to expand the number of
advertisers using our entertainment marketing solutions and specifically
increase our penetration of national, consumer-oriented brand advertisers. We
derive a significant portion of our revenue from the sale of advertising. For
the years ended December 31, 2001 and 2000, advertising represented 28% and
34%, respectively, of revenue. AT&T Wireless accounted for 20% and 7% of our
advertising revenues for the year ended December 31, 2001 and 2000,
respectively. During the same periods, Universal Music Group accounted for 17%
and 16% of our advertising revenue.

MARKETING AND PROMOTION

We use a number of methods to create awareness of the ARTISTdirect Network
and drive traffic to our Web sites, with the most prominent being the
use of paid placements on other online Web sites. We have focused much of our online
advertising on specific artists, contests, promotions and other events designed
to attract interest to our sites. We have also used print and radio advertising
to create brand awareness for ARTISTdirect and to promote special events taking
place on the ARTISTdirect Network. In addition, we participate in the
sponsorship of live music and other industry events that provide prominent
visibility for ARTISTdirect and maintain a public relations program to
facilitate communication with the press and obtain speaking engagements for our
senior executives. We also use e-mail direct marketing to communicate with
registered users of the ARTISTdirect Network. Campaigns have included direct
notification of special merchandise offers, live artist chats, music downloads
and non-scheduled live performances.

COMPETITION

The market for the online promotion and distribution of music and
music-related products and services is relatively new, highly competitive and
rapidly changing. There are a large number of Web sites competing for the
attention and spending of consumers and advertisers, and we expect that number
to increase, because there are few barriers to entry to Internet commerce. In
addition, the competition for advertising revenue, both on Web sites and in
more traditional media, is intense. We compete as follows:



| |  |  | for music consumers and advertisers with providers of music
information, community and content such as MTV, America Online, MSN,
Yahoo!, Listen.com and various other companies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | with major online music retailers such as Amazon.com and
CDnow in selling music and merchandise;                                                                                

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| |  |  | for music consumers and artist relationships with traditional
music industry companies, including BMG Entertainment, a unit of
Bertelsmann AG, EMI Music, a unit of EMI Group, Sony Music
Entertainment, a unit of Sony Corporation, Warner Music Group, a
unit of AOL Time Warner, and Universal Music Group, a unit of
Vivendi Universal. Some of these companies have recently
established online presences to promote and distribute the music and
tours of their respective artists;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | for music consumers and advertisers with publishers and
distributors of traditional media, such as television, radio and
print, including MTV, CMT, Rolling Stone and Spin and their Internet
affiliates; and                                                                                                                                                                                                                                                                            
|
| |  |  | with traditional retailers targeting music consumers,
including Tower Records and Virgin Megastore and their Internet
affiliates, in selling music and merchandise.                                                                                                                                                                                                                                                                                                                      

Some of our competitors have agreed to work together to offer music over
the Internet, and we may face increased competitive pressures as a result. For
example, Universal Music Group and Sony Music have formed a joint venture to
operate pressplay, a subscription music service that offers consumers both
downloads and on-demand streaming. In addition, RealNetworks, AOL Time Warner,
Bertelsmann AG and EMI Group formed MusicNet, a digital music subscription
platform featuring on-demand downloads and streaming.

We believe that we are able to compete primarily on the bases of:



| |  |  | our integrated offering of both online and offline assets,
including the ARTISTdirect Network and
ARTISTdirect Records;
| | - |  | -----------------------------------------------------------------------------------------------------------------------
|
| |  |  | the breadth and quality of our search, database and the community features of our site;                                
|
| |  |  | the variety, availability and price of music-related merchandise on our sites;                                         
|
| |  |  | the ease of use and consumer acceptance of the ARTISTdirect Network; and                                               
|
| |  |  | the ability to effectively promote our brands.                                                                         

Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Many of our current and
potential competitors in the Internet and music entertainment businesses may
have substantial competitive advantages over us, including:



| |  |  | longer operating histories;                                        
| | - |  | -------------------------------------------------------------------
|
| |  |  | significantly greater financial, technical and marketing resources;
|
| |  |  | greater brand name recognition;                                    
|
| |  |  | larger existing customer bases; and                                
|
| |  |  | more popular content or artists.                                   

These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and to devote greater
resources to the development, promotion and sale of their products or
services than we can. Web sites maintained by our existing and potential
competitors may be perceived by consumers, artists, talent management companies
and other music-related vendors or advertisers as being superior to ours. In
addition, we may not be able to maintain or increase our Web site traffic
levels, purchase inquiries and number of click-thrus on our online
advertisements. Further, our competitors may experience greater growth in
these areas than we do. Increased competition could result in advertising
price reduction, reduced margins or loss of market share, any of which could
harm our business.

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GOVERNMENTAL REGULATION

The laws and regulations that govern our business change rapidly.
Although our operations are currently based in California, the United States
government and the governments of other states and foreign countries have
attempted to regulate activities on the Internet. The following are some of
the evolving areas of law that are relevant to our business:

CONTENT REGULATION

Federal, state and foreign governments have adopted and proposed laws
governing the content of material transmitted over the Internet. These include
laws relating to obscenity, indecency, libel and defamation. For example, the
Child Online Protection Act, or COPA, prohibits and imposes criminal penalties
and civil liability on anyone communicating material harmful to minors through
the Internet for commercial purposes, unless access to such material is blocked
to minors under age 17. The Third U.S. Circuit Court of Appeals has upheld a
preliminary injunction precluding enforcement of COPA. In November 2001, the
U.S. Supreme Court heard an appeal but no decision has been issued yet. We
could be liable if the injunction against COPA is lifted and if content
delivered by us or placed on our Web sites violates COPA.

PRIVACY LAW

The state of privacy law is unsettled, and rapidly changing. Current and
proposed federal, state and foreign privacy regulations and other laws
restricting the collection, use and disclosure of personal information could
limit our ability to use the information in our databases to generate revenues.
In late 1998, the Childrens Online Privacy Protection Act, or COPPA, was
enacted, mandating that measures be taken to safeguard minors under the age of
13. The FTC promulgated regulations implementing COPPA on October 21, 1999
which became effective on April 21, 2000. The principal COPPA requirement is
that individually identifiable information about minors under the age of 13 not
be collected, used or displayed without first obtaining informed parental
consent that is verifiable in light of present technology. The FTC final
regulations create a sliding scale of permissible methods for obtaining such
consent. Consent for internal use of the individually identifiable information
of children under the age of 13 can be obtained through e-mail plus an
additional safeguard, such as confirming consent with a delayed e-mail,
telephone call, or letter. Obtaining verifiable consent from a childs parent
to share that childs information with a third party or enable the child to
publicly distribute the information by, for example, allowing unrestricted
access to a chat room or message board is significantly more burdensome. The
temporary sliding scale implementation is due to expire on April 21, 2002,
although the FTC is seeking to extend the implementation period until April 21,
2004.

The FTC has required that parental consent for such higher risk activities
be verified by more secure methods than e-mail, such as a credit card in
connection with a transaction, print-and-sign forms, toll-free numbers staffed
by trained operators, or digital signatures. Complying with the new
requirements is costly and will likely dissuade some of our customers. While we
are attempting to be fully compliant with the FTC requirements, our efforts may
not be entirely successful. In addition, at times we rely upon outside vendors
to maintain data-collection software, and there can be no assurance that they
will at all times comply with our instructions to comply with COPPA. If our
methods of complying with COPPA are inadequate, we may face litigation with the
FTC or individuals, which would adversely affect our business.

Moreover, we have posted a Private Policy pertaining to all users and
visitors to our Web site. By doing so, we have subjected ourselves to the
jurisdiction of the FTC. Should any of our business practices be found to
differ
from our Private Policy, we could be subject to sanctions and penalties
from the FTC. It is also possible that users or visitors could try to recover
damages in a civil action as well.

LAWS GOVERNING SENDING OF UNSOLICITED COMMERCIAL E-MAIL

We typically provide our customers and other visitors to our Web-sites
with an opportunity to opt-in, or agree to receive e-mailings from us. While
there is no federal regulation yet, California and a number of other states
regulate the sending of e-mails for commercial purposes to third-parties where
there is no preexisting business relationship. Further, several states give
Internet service providers (ISPs) a private right of action against those

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who
send large e-mailings across their servers in contravention of the ISPs posted
policy. There is no guarantee that we will always be fully compliant in all of
our communications at all times. Our failure to comply with applicable state
laws regarding these types of e-mails could result in significant fines, actual
or statutory damages, and injunctive actions.



| |  | CONFORMANCE TO E-COMMERCE STATUTORY REQUIREMENTS FOR FORMATION OF
CONTRACTS
| |  | ---------------------------------------------------------------------------

We conduct e-commerce on our Web-sites, and through affiliated Web-sites.
The applicable law on online formation of contracts has been unsettled and is
evolving. On June 30, 2000, the federal government enacted the E-Sign
statute, which in limited cases permits online formation of contracts.
Similarly, on January 1, 2000, California adopted a standard version of the
Uniform Electronic Transactions Act (UETA), which also permits electronic
signatures and record-keeping for certain types of contracts. We attempt to
comply with these laws, but there is no guarantee that we will be successful.
Judicial interpretation of their application could result in customer contracts
being set aside or modified. In that case, our e-commerce revenue could be
materially adversely affected.

SALES TAX

The tax treatment of goods sold over the Internet is currently unsettled.
We collect sales taxes for goods shipped to California and Florida, where we
have a physical presence. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods through
the Internet. Such proposals, if adopted, could substantially impair the
growth of electronic commerce and could adversely affect our opportunity to
derive financial benefit from electronic commerce. While the Internet Tax
Freedom Act has placed a moratorium on new state and local taxes on Internet
commerce, the tax moratorium will expire on November 1, 2003 and may not
continue. Failure to renew this legislation in the future would allow various
states to impose taxes on Internet-based commerce, which could adversely affect
our business.

ONLINE CONTESTS AND SWEEPSTAKES

We conduct online promotional contests and sweepstakes. No purchase is
necessary to participate. Our official rules, with all material terms,
conditions of eligibility, dates of participation, methods of entry and
limitations, if any, along with the odds and prize offerings, are posted on our
Web sites. In order to comply with New York and Florida state law, our prizes
are limited in value to less than $5,000, or we must comply with those states
registration and bonding requirements. While we attempt to comply with the law
of all fifty state jurisdictions, we may not be uniformly successful, and
foreign jurisdictions may attempt to regulate or ban our promotional contests.
In that event, we could lose an effective tool for increasing and keeping
visitors to our Web site, and our business could be adversely affected.

INTELLECTUAL PROPERTY

OUR PROPRIETARY RIGHTS

Copyrighted material that we develop, as well as our service marks and
domain names relating to the ARTISTdirect, UBL or iMusic brands, and other
proprietary rights are important to our business prospects. We seek to protect
our common-law trademarks through federal registration, but these actions may
be inadequate. Where consultants develop copyrighted content for us, our
general policy is to use written agreements prior to content
creation to obtain ownership of that content. In addition, we principally rely
upon trademark, copyright, trade secret and contract law to protect our
proprietary rights. We generally enter into confidentiality agreements,
work-made-for-hire contracts and intellectual property licenses with our
employees, consultants and corporate partners, respectively, as part of our
efforts to control access to and distribution of our technologies, content and
other proprietary information.

Despite our efforts to protect our proprietary rights from unauthorized
use or disclosure, parties may attempt to disclose or use our customer lists,
Web site content, service marks, domain names or confidential commercial data.
The steps that we have taken may not prevent misappropriation of our
proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights at

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all, or as
fully as in the United States. If third parties were to use or otherwise
misappropriate our copyrighted materials, trademarks or other proprietary
rights without our consent or approval, our competitive position could be
harmed, or we could become involved in costly and distracting litigation to
enforce our rights.



| |  | OUR WEB SITES FEATURE CONTENT THAT IS COPYRIGHTED BY MULTIPLE
THIRD-PARTIES
| |  | ---------------------------------------------------------------------------

A copyright gives the owner divisible rights, including those of
performance, reproduction and distribution. The music featured by us is
typically comprised of copyrighted works owned, controlled or administered by
multiple third parties, including record labels, artists, songwriters, music
publishers and performance rights and licensing organizations such as The Harry
Fox Agency, Broadcast Music Inc. and the American Society of Composers, Authors
and Publishers. Each song often has multiple copyright owners, who control
rights which may include performance, reproduction and distribution rights in
the musical composition comprised of the lyrics and music, as well as with
the sound recording of the artists interpretation of the musical
composition. In the case of music videos, there are separate copyrights to the
visual content, as well as synchronization rights for integrating the music
and video. We, or our artists, may have different licensing arrangements with
some or all of these parties to perform, reproduce and distribute works
depending upon how the song or music video is used by us.

Our Web sites, depending upon the specific musical work, may offer audio
streaming of part or all of an entire song or Web casting, or the downloading
of an entire song in MP3 or other compressed audio formats. Full-length
streaming only occurs in special instances after obtaining an oral license from
the record label or band manager for the sound recording. In that case, an
ASCAP or BMI blanket music license is also obtained by us or by our artists for
rights to perform the associated underlying musical composition. Where we
offer full-length downloads of songs in MP3 or other compressed audio formats,
we seek to obtain the rights to transmit, reproduce and perform the sound
recording in writing from the person or entity owning or controlling
copyrights in such sound recording. With respect to rights in the musical
compositions embodied in such sound recordings offered for download, we seek
to clear rights in musical composition in one of the following three ways:



| |  |  | a license agreement with the publisher, writer or other owner
of such copyright in the musical composition;                                      
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a waiver of any fees or royalties that would otherwise be
required for such use; or                                                                
|
| |  |  | a representation and warranty from the owner of the
copyrights in the sound recording that no mechanical royalties are
owed to any third parties.

In the event that the foregoing steps are insufficient to clear rights, or
we otherwise fail to obtain rights, we could be exposed to claims of copyright
infringement, with attendant disruption to our operations and liability
including potential statutory or actual damages and loss of profits
attributable to infringement, plus payment of attorneys fees to the claimant
and entry of an injunction.

There are other situations, such as a limited 30-second sample of a song
that is streamed, where we use content relying upon a sub-license from an
artists record label. However, the laws in this area are uncertain, and we
may be forced to obtain additional licenses or may be prevented from third
party content use, and may further be liable to pay actual or statutory
damages, profits attributable to any alleged infringement, as well as
attorneys fees.
Our licensing arrangements for third-party content vary from formal
contracts to informal agreements based on the promotional nature of the
content. In some cases we pay a fee to the licensor for use of the sound
recording, musical composition or music video and in other cases the use is
free. We also use other third-party content, including photographs, artist
names, likenesses and concert reviews. While it is our general policy to obtain
a written release or license for such use, in many instances we rely only upon
an oral license for such use. We rely upon our positive working relationships
with copyright owners to obtain licenses on favorable terms. Any changes in
the nature or terms of these arrangements, including any requirement that we
pay significant fees for the use of the content, could have a negative impact
on the availability of content or our business.

For example, the Copyright Office recently opined that additional
royalties, besides those collected for musical compositions by ASCAP or BMI,
are due for Webcasted music that is selected by or on behalf of the

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recipient
pursuant to 17 U.S.C. sec. 114(j)(7). If upheld, that ruling would prevent us
from expanding our service to permit users to play a requested song via our Web
site without paying additional royalties.

LINKING AND FRAMING OF THIRD-PARTY WEB SITES

We link to and frame third-party Web sites of our artists without
express written permission to do so. In addition, in the past we have provided
a search feature to allow users to find music residing elsewhere on the
Internet. Those practices are controversial, and have, in instances not
involving us, resulted in litigation. Various claims, including trademark and
copyright infringement, unfair competition, and commercial misappropriation, as
well as infringement of the right of publicity may be asserted against us as a
result of these practices. The law regarding linking and framing remains
unsettled; it is uncertain as to how existing laws, especially trademark and
copyright law, will be applied by the judiciary to the Internet. Also,
Congress is increasingly active in passing new laws related to the Internet,
and there is uncertainty as to the impact of future potential laws, especially
those involving domain names, databases and privacy.

DEFAMATION OR CONTRIBUTORY INFRINGEMENT

Our Web sites feature live chat, or interactive on-line discussion
groups made up of our customers. We do not censor such comments in advance and
it is possible that a customer could use our Web sites as a forum to make
false, misleading or disparaging remarks about others. Such on-line comments
could lead to claims for defamation or infringement. As to libel claims
brought in the United States, we believe that we qualify for safe harbor
protection for third-party postings under 47 U.S.C. sec. 230(c)(1). However,
other countries, notably the United Kingdom, may impose such liability, and it
is possible we could be sued there for third-party postings. Separately, our
Web sites allow consumers to use our personal Web publishing tools to post
samples of their works. Such postings could be misused to post unlicensed
copyrighted content of others. We have obtained limited safe-harbor protection
under the recently-enacted Digital Millennium Copyright Act against liability
for infringing material of which we do not have control and knowledge.

EMPLOYEES

As of December 31, 2001, we had 46 full-time employees. None of our
employees is represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.

RISK FACTORS

You should carefully consider the risks described below, together with all
of the other information included in this Annual Report on Form 10-K. If any
of the following risks actually occurs, our business, financial condition or
operating results could be materially and adversely affected. In such case,
the trading price of our common stock could decline, and you may lose part or
all of your investment.

RISKS RELATED TO OUR BUSINESS



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

Our limited operating history and rapidly evolving business make it
difficult to evaluate our prospects or to accurately predict our future revenue
or results of operations. Our revenue and income potential are unproven, and
our business model is constantly and rapidly evolving. In particular, the
Internet is constantly changing and we may need to modify our business model to
adapt to these changes, including our recent decision to focus a significant
amount of resources on off-line businesses such as ARTISTdirect Records, our
record label co-venture with Ted Field.



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

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Our model for conducting business and generating revenue is new and
unproven. Our success will depend primarily on our ability to generate revenue
and income from our co-venture record label and from multiple sources through
the ARTISTdirect Network, including:



| |  |  | online sales of music and related merchandise;                      
| | - |  | --------------------------------------------------------------------
|
| |  |  | sales of advertising and sponsorships;                              
|
| |  |  | marketing our database of consumer information and preferences;     
|
| |  |  | sales of, or subscription fees for, digitally distributed music; and
|
| |  |  | sales of music CDs by our record label.                             

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



| |  | WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE LOSSES AND NEGATIVE
CASH FLOW FOR THE FORSEEABLE FUTURE
| |  | ------------------------------------------------------------------------------------------------------------

To date, we have not been profitable on an annual or quarterly basis and
have incurred accumulated losses of approximately $193.8 million as of December
31, 2001. For the years ended December 31, 2001 and December 31, 2000, we
incurred net losses of approximately $69.9 million and $59.3 million,
respectively, which represented approximately 671% and 317%, respectively, of
our revenue for those periods. We expect our operating losses and negative cash
flow to continue for at least the near future. We will need to generate
significant additional revenue to achieve profitability. Consequently, it is
possible that we may never achieve profitability, and even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future. If we do not achieve or sustain profitability in
the future, then we will likely be unable to continue our operations.

OUR OPERATING RESULTS WILL LIKELY BE UNPREDICTABLE

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



| |  | IF WE ARE NOT SUCCESSFUL IN GENERATING REVENUE FROM A CO-VENTURE RECORD
LABEL WITH TED FIELD, OUR BUSINESS AND FINANCIAL CONDITION MAY BE
MATERIALLY ADVERSELY AFFECTED
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | identifying and entering into recording agreements with artists for the record label;
| | - |  | -------------------------------------------------------------------------------------

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| |  |  | hiring and retaining personnel for the record label;                                
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | producing and promoting new music recordings for artists signed to the record label;
|
| |  |  | developing a recognized brand name in the music industry;                           
|
| |  |  | developing distribution channels for the record label;                              
|
| |  |  | integrating the record labels operations with our existing operations; and         
|
| |  |  | generating record label revenue and achieving profitability.                        

The record label has a very limited operating history upon which to assess
whether it will be able to meet all of the challenges required to successfully
develop and operate its business. Accordingly, there can be no assurance that
Mr. Field will be able to successfully operate the label. If the record label
is not able to develop a successful business with revenue and profits, we will
not receive the anticipated benefits of our investment in the record label and
our business, financial condition and results of operations would be materially
and adversely affected.



| |  | THERE MAY BE A SIGNIFICANT CONFLICT OF INTEREST AS A RESULT OF TED
FIELDS SEPARATE OWNERSHIP INTEREST IN ARTISTDIRECT RECORDS LLC AND HIS
DUAL ROLES AS CHIEF EXECUTIVE OFFICER OF BOTH THE RECORD LABEL AND THE
COMPANY
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 15, 2002, Mr. Field held options to purchase approximately
11% of the outstanding voting interests in the Company and also held
approximately 50% of the outstanding ownership interests in ARTISTdirect
Records LLC, the Companys record label venture. By virtue of the difference
in his ownership interests, Mr. Field would likely gain a greater personal
benefit if opportunities are capitalized on by ARTISTdirect Records rather than
by the Company. Accordingly, there are potential conflicts of interest between
the Company and Mr. Field. Although our employment agreement with Mr. Field
precludes him from voting on behalf of the Company on matters concerning
ARTISTdirect Records, Mr. Field will, by virtue of his authority as Chief
Executive Officer of both the Company and ARTISTdirect Records, have
substantial influence over the execution of any decisions made by the Companys
Board of Directors.

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



| |  | WE HAVE COMMITTED A SUBSTANTIAL AMOUNT OF OUR AVAILABLE CASH TO THE
RECORD LABEL CO-VENTURE WITH TED FIELD AND, AS A RESULT, THE AMOUNT OF
CASH THAT WE WILL HAVE AVAILABLE TO OPERATE OUR OTHER BUSINESS HAS BEEN
SUBSTANTIALLY REDUCED
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The record label co-venture with Mr. Field represents a significant shift
in the planned use of our cash resources. We are obligated to provide as much
as $50 million to the record label over the next five years. Subject to this
overall limit, we are obligated to advance as much as $15 million per year to
the record label and could provide funding in excess of $15 million per year
with the approval of the Companys Board of Directors. As of December 31,
2001, we had approximately $46.5 million in cash and short-term investments.
While we currently

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believe this amount of cash is adequate to fund our
obligations to the record label and our existing businesses for at least the
next 12 months, if the record label is not successful, or if there is a material
delay in anticipated cash flow from the record label, there can be no assurance
that our existing cash resources will be adequate to enable us to successfully
operate our other businesses or to become cash flow positive at any time in the
foreseeable future. If this occurs, we will need to raise additional capital
to continue operating our businesses. There can be no assurance that we will
be able to raise this additional funding at all or on reasonably acceptable
terms if it is needed in the future. If we are unable to successfully raise
any necessary funding, our ability to successfully operate our business would
be materially adversely affected. See Liquidity and Capital Resources on
pages 38-39 for more information on our liquidity and capital resources.



| |  | OUR EQUITY INTEREST IN THE RECORD LABEL CO-VENTURE MAY BE SIGNIFICANTLY
DILUTED IF WE ARE UNABLE TO MEET OUR FINANCING COMMITMENT
| |  | ---------------------------------------------------------------------------------------------------------------------------------

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



| |  | WE MAY NOT BE ABLE TO SECURE ADDITIONAL FINANCING TO MEET OUR FUTURE
CAPITAL NEEDS
| |  | ----------------------------------------------------------------------------------

We currently anticipate that our available cash resources will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next 12 months, including our significant
financial commitment to the record label co-venture with Ted Field. There can
be no assurance, however, that the underlying assumed levels of revenue and
expenses will prove to be accurate. If our available cash and cash flows from
operations are insufficient to meet our anticipated needs for working capital
and capital expenditures, we will need to raise additional funds to continue
our operations, fund our record label joint venture, market our sites, develop
new or enhanced services and respond to competitive pressures. In light of the decline in our stock price since our initial
offering and the recent extreme volatility in the capital markets, we may be
unable to obtain any required additional financing on terms favorable to us, if
at all. If adequate funds are not available on acceptable terms, we may be
unable to fund the expansion of our record label joint venture, successfully
market our sites, develop or enhance services or respond to competitive pressures, any of which could have a
material adverse effect on our business. If we raise additional funds through
the issuance of equity securities, our stockholders may experience dilution of
their ownership interest, and the newly-issued securities may have rights
superior to those of the common stock. If we raise additional funds by issuing
debt, we may be subject to limitations on our operations, including limitations
on the payment of dividends.



| |  | WE DO NOT CURRENTLY EXPECT ONLINE ADVERTISING TO GROW SIGNIFICANTLY IN
THE NEAR FUTURE AND AS A RESULT, OUR BUSINESS MAY BE ADVERSELY AFFECTED
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------

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



| |  |  | respond to and anticipate fluctuations in the demand for, and
pricing of, online advertising;                                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | develop and maintain key advertising relationships and
compete for advertisers with Internet and traditional media
companies;
|
| |  |  | conduct successful selling and marketing efforts aimed at advertisers;                                                       
|
| |  |  | successfully develop, sell and execute entertainment marketing solutions;                                                    
|
| |  |  | increase the size of our audience and the amount of time that our audience spends on our Web sites;                          

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| |  |  | accurately measure the size and demographic characteristics of our audience;               
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | offer advertisers the means to effectively target their advertisements to our audience; and
|
| |  |  | increase the amount of revenue per advertisement.                                          

Our failure to achieve one or more of these objectives could impair our
ability to increase advertising revenue, which could adversely affect our
business. In addition to the above factors, general economic conditions, as
well as economic conditions specific to online advertising, electronic commerce
and the music industry, could affect our ability to increase our advertising
revenue. In particular, the growth of online advertising has recently
declined, which has had, and in the future may continue to have, a significant
adverse effect on our revenue from online advertising. We do not currently
expect online advertising to grow significantly in the near future. In the
past, we have traditionally relied on a limited number of customers for our
advertising revenue. For instance, for the year ended December 31, 2001, AT&T
Wireless accounted for 20% of our media revenue for that period and Universal
Music Group accounted for 17%. We expect that our media revenue from Universal
Music Group will be significantly less, in absolute dollar amount, in the
future, which could have a material adverse impact on our advertising revenue
and our business, financial condition and results of operations.



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

Our future depends in part on an increase in the use of the Internet and
other forms of digital media for advertising. The Internet advertising market
is relatively new and rapidly evolving, and we cannot yet gauge the
effectiveness of advertising on the Internet as compared to traditional media.
As a result, demand for Internet advertising is uncertain. Many advertisers
have little or no experience using the Internet for advertising purposes. The
adoption of Internet advertising, particularly by companies that have
historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business, exchanging information and
advertising products and services. Such customers may find advertising on the
Internet to be undesirable or less effective than traditional advertising media
for promoting their products and services. In particular, online advertising
revenue has significantly decreased. If the Internet advertising market fails
to grow, our business could be adversely affected. In addition, the market for
advertising on other forms of digital media, such as broadband distribution, is
even less developed than Internet advertising, and if that market does not
develop, our growth may be limited.



| |  | WE DEPEND UPON ARTISTS TO GENERATE ELECTRONIC COMMERCE REVENUE AND
TRAFFIC TO OUR WEB SITES
| |  | -------------------------------------------------------------------------------------------

We believe that the future success of our online e-commerce business
depends in part on our ability to maintain our existing artist relationships
and to establish additional relationships with artists. During 2001, we
modified the agreements with many of our artists to simplify the relationship
between the artists and us. Our business would be adversely affected by any of
the following:



| |  |  | our inability to establish relationships with new artists and
offer their music and merchandise for sale to our customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the loss of popularity of artists for whom we sell music and merchandise;                                                 
|
| |  |  | increased competition to maintain existing relationships with artists; and                                                
|
| |  |  | non-renewals or non-conversions of certain of our current agreements with artists.                                        

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

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artists
official online stores if our agreements with these artists terminate and are
not renewed or converted. Most of our current artist contracts have a term of
three years, and most of these agreements expire in 2002. Upon expiration,
artists may decide not to renew these contracts on reasonable terms, if at all.
We plan to negotiate new agreements with some of our existing artists and
terminate existing agreements with some of our other artists. Our inability to
negotiate new agreements or to terminate existing agreements may have an
adverse impact on our business. In the past, we have offered our artists
options to purchase our common stock. Options were intended to provide artists
with an additional incentive to actively promote their Web sites and the
ARTISTdirect Network. We do not currently intend to offer artists options or other equity
incentives in the future and this may impair our efforts to sign new artists.
If we cannot maintain our current relationships with artists or sign agreements
with new artists, our user base would likely diminish and our ability to
generate revenues from electronic commerce would be seriously harmed.



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

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



| |  |  | reduced access to content controlled by record labels, music publishers and artists;
| | - |  | ------------------------------------------------------------------------------------
|
| |  |  | diminished technical expertise and creativity of our production staff; and          
|
| |  |  | inability to anticipate and capitalize on trends in music.                          



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

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



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

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



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

The market for the online promotion and distribution of music and related
merchandise is highly competitive and rapidly changing. There are a
significant number of Web sites promoting and distributing music and related
merchandise that compete for the attention and spending of consumers,
advertisers and users. We face competitive pressures from numerous actual and
potential competitors. Our competitors include America Online, MSN, Yahoo!,
Listen.com, Amazon.com, CDnow, MTV, other web sites and traditional music
companies.

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Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Some of our
competitors have announced agreements to work together to offer music over the
Internet, and we may face increased competitive pressures as a result. Many of
our current and potential competitors in the Internet and music entertainment
businesses may have substantial competitive advantages relative to us,
including:



| |  |  | longer operating histories;                                        
| | - |  | -------------------------------------------------------------------
|
| |  |  | significantly greater financial, technical and marketing resources;
|
| |  |  | greater brand name recognition;                                    
|
| |  |  | larger existing customer bases; and                                
|
| |  |  | more popular content or artists.                                   

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



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

We rely to a large extent on timely distribution by third parties. We have
historically relied substantially on one vendor, Alliance Entertainment, to
fulfill and distribute our orders for music and related merchandise. During
the years ended December 31, 2001 and December 31, 2000, virtually all of our
orders for music and related merchandise were fulfilled by Alliance. In
November 2001, we entered into an agreement with another third party, Old Glory
Boutique Distributing Inc., to provide fulfillment services for certain
merchandise not being carried and fulfilled with Alliance. We purchase almost
all of our compact discs from Alliance and a substantial portion of our
music-related merchandise from a limited number of artist licensees or
wholesalers including Giant Merchandising, Old Glory and several other vendors.
Our contracts with Alliance, Giant and Old Glory expire in August 2003, April
2003 and April 2003, respectively. Our business could be significantly
disrupted if Alliance, Old Glory, Giant or other vendors were to terminate,
fail to renew or breach their agreements or suffer adverse developments that
affect their ability to supply products to us. If, for any reason, Alliance,
Old Glory, Giant or other vendors are unable or unwilling to supply products to
us in sufficient quantities and in a timely manner, we may not be able to
secure alternative suppliers, on acceptable terms in a timely manner, or at
all.



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

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



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

We have experienced and expect to continue to experience seasonal
fluctuations in our online sales. These seasonal patterns will cause quarterly
fluctuations in our operating results. In particular, a disproportionate
amount

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



| |  | OUR RECORD LABEL BUSINESS IS SUBJECT TO UNPREDICTABLE FLUCTUATIONS, WHICH
COULD ADVERSELY AFFECT OUR OPERATING RESULTS
| |  | ----------------------------------------------------------------------------------------------------------------------

We expect that our co-venture record label will experience significant
fluctuations in revenue and income based, in part, on the release schedule for
artists signed to the label and the subsequent sales of the released CDs. It
is inherently difficult to predict the sales for any particular CD and,
therefore, operating results for any given period may be significantly higher
or lower than another given period. To the extent that the record label
results are significantly lower than expected for any given period, this could
adversely affect our overall operating results and would likely cause our stock
price to fall.



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

Our ability to attract and retain artists, users, advertisers and
merchants for our online network depends on the performance, reliability and
availability of our Web sites and network infrastructure. The maintenance and
operation of substantially all of our Internet communications hardware and
servers have been outsourced to CNP, Inc. (formerly Amplified Holdings, Inc.)
and its providers. We have periodic maintenance windows, and we experience
outages from to time caused by temporary problems in our own systems or
software or in the systems or software of these third parties. While we have
implemented procedures to improve the reliability of our systems, these
interruptions may continue to occur from time to time. Our users also depend
on third party Internet service providers and Web site operators for access to
our Web sites. These entities have experienced significant outages in the
past, and could experience outages, delays and other difficulties due to system
failures in the future which are unrelated to our systems, but which could
nonetheless adversely affect our business.



| |  | WE RELY ON CNP, INC. FOR EXTENSIVE TECHNOLOGY SUPPORT AND ANY DISRUPTION
OF OUR OUTSOURCING AGREEMENT WOULD ADVERSELY AFFECT OUR OPERATIONS
| |  | -------------------------------------------------------------------------------------------------------------------------------------------

In August 2001, we entered into a one-year agreement with CNP, Inc.
whereby we outsourced the majority of our technology requirements, including,
but not limited to, hosting, e-commerce, content management and content
publication. Our Web sites and servers for content, applications, database and
e-commerce are currently hosted by CNP at their co-location service provider,
IX2 Networks, LLC, in Los Angeles, California. Our agreement with CNP
automatically renews for successive one-year periods unless either party gives
the other party notice of non-renewal before the end of the term in progress.
There can be no assurance that our agreement with CNP will be renewed at the
end of its current term. In addition, CNP is a private company with limited
capital resources and there can be no assurance that CNP will continue in
operation or do so at a level sufficient to be able to provide us with adequate
support under the agreement. Should CNP breach its obligations to us under the
agreement, we would be entitled to either enter into an agreement with another
third party or bring back in house the hosting, publishing and management of
our websites. However, this could result in disruptions of our systems and
greater expenditures, thereby adversely affecting our operations and financial
results.



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

Computer viruses, electronic break-ins or similar disruptive events could
disrupt our online services. System disruptions could result in the
unavailability or slower response times of our Web sites, which would reduce
the number of advertisements delivered or commerce conducted on our Web sites
and lower the quality of our users experience. Service disruptions could
adversely affect our revenue and, if they were prolonged, would seriously

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harm
our business and reputation. Our business interruption insurance may not be
sufficient to compensate us for losses that may occur as a result of these
interruptions.



| |  | IF WE DO NOT MANAGE OUR OPERATIONS, WE MAY NOT BE ABLE TO OPERATE OUR
BUSINESS EFFECTIVELY
| |  | ------------------------------------------------------------------------------------------

Since our inception in August 1996, we have rapidly and significantly
expanded and changed our operations. We expect further significant changes,
particularly as a result of the record label co-venture and other potential
opportunities. This process has strained, and we expect that it will continue
to strain, our management, operations, systems and financial resources. In
2001, we reduced our headcount to conserve cash and may further reduce
headcount in the future. At the same time, we have expanded staff associated
with the record label co-venture. Accordingly, to manage our operations and
personnel, we must improve and effectively utilize our existing operational,
management, marketing and financial systems and maintain close coordination
among our technical, finance, marketing, sales and production staffs. In
addition, we may also need to increase the capacity of our software, hardware
and telecommunications systems on short notice. We also will need to manage an
increasing number of complex relationships with users, strategic partners,
advertisers and other third parties, especially in light of certain functions
being outsourced. Our failure to manage growth could disrupt our operations
and ultimately prevent us from generating the revenue we expect.



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

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



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

We rely upon registered trademark rights in the United States for our
commercial use of the ARTISTdirect, UBL, Ultimate Band List, and iMusic brand
names and their respective associated domain names, and the ARTISTdirect logo.
We seek to protect our trademarks, copyrights and other proprietary rights by
registration and other means, but these actions may be inadequate. We have
trademark applications pending in several jurisdictions, but our registrations
may not be accepted or may be preempted by third parties and/or we may not be
able to register our trademarks in all jurisdictions in which we intend to do
business. We generally enter into confidentiality or license agreements with
our employees, consultants and corporate partners, and generally control access
to and distribution of our proprietary information. The steps we have taken
may not prevent misappropriation of our proprietary rights, particularly in
foreign countries where laws or law enforcement practices may not protect our
proprietary rights as fully as in the United States. If third parties were to
use or otherwise misappropriate our copyrighted materials, trademarks or other
proprietary rights without our consent or approval, our competitive position
could be harmed, or we could become involved in litigation to enforce our
rights. In addition, policing unauthorized use of our content, trademarks and
other proprietary rights could be very expensive, difficult or impossible,
particularly given the global nature of the Internet.



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

The music content available on the ARTISTdirect Network is typically
comprised of copyrighted works owned or controlled by multiple third parties.
Most of the content on our artist-specific Web sites is either owned or
licensed by the artist. On other parts of the ARTISTdirect Network, depending
on the nature of the content and how

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we use the music content, we typically
license such rights from publishers, record labels, performing rights societies
or artists. We frequently either do not have written contracts or have
short-term contracts with copyright owners, and, accordingly, our access to
copyrighted content depends upon the willingness of such parties to continue to
make their content available. If the fees for music content increase
substantially or if significant music content becomes unavailable, our ability
to offer music content could be materially limited. We have not obtained a
license for some of the content offered on the ARTISTdirect Network, including
links to other music-related sites and thirty-second streamed song samples,
because we believe that a license is not required under existing law. However,
this area of law remains uncertain and may not be resolved for a number of
years. When this area of law is resolved, we may be required to obtain licenses
for such content, alter or remove the content from our Web sites and be forced
to pay potentially significant financial damages for past conduct.



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

Third parties may assert trademark, copyright, patent and other types of
infringement or unfair competition claims against us. If we are forced to
defend against any such claims, whether they are with or without merit or are
determined in our favor, we may face costly litigation, loss of access to, and
use of, content, diversion of technical and management personnel, or product
shipment delays. As a result of such a dispute, we may have to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may be unavailable on terms
acceptable to us, or at all. While we have resolved all such disputes in the
past, we may not be able to do so in the future. If there is a successful
claim of infringement against us and we are unable to develop non-infringing
technology or license the infringed or similar technology or content on a
timely basis, it could harm our business. In addition, we rely on third
parties to provide services enabling our online product sales transactions,
including credit card processing, order fulfillment, shipping and customer
service. We could become subject to infringement actions by third parties based
upon our use of intellectual property provided by our third-party providers.
It is also possible that we could become subject to infringement actions based
upon the content licensed from third parties. Any such claims or disputes
could subject us to costly litigation and the diversion of our financial
resources and technical and management personnel. Further, if our efforts to
enforce our intellectual property rights are unsuccessful or if claims by third
parties against ARTISTdirect, the UBL and iMusic are successful, we may be
required to change our trademarks, alter or remove content, pay financial
damages, or alter our business practices. These changes of trademarks,
alteration of content, payment of financial damages or alteration of practices
may adversely affect our business.

WE MAY BE UNABLE TO ACQUIRE NECESSARY WEB DOMAIN NAMES

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



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

Our relationships with consumers would be adversely affected and we may be
subject to claims for damage if the security measures that we use to protect
their personal information, especially credit card numbers, are ineffective. We
rely on security and authentication technology that we license from third
parties to perform real-time credit card authorization and verification with
our bank. We cannot predict whether events or developments will result in a
compromise or breach of the technology we use to protect a customers personal
information. Our infrastructure may be vulnerable to unauthorized access,
physical or electronic computer break-ins, computer viruses and other
disruptive problems. Internet service providers have experienced, and may
continue to experience, interruptions in service as a result of the accidental
or intentional actions of Internet users, current and former employees and
others. Anyone who is able to circumvent our security measures could
misappropriate proprietary

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information or cause interruptions in our
operations. Security breaches relating to our activities or the activities of
third-party contractors that involve the storage and transmission of
proprietary information could damage our reputation and our relationships with
our content providers, advertisers and merchants. We also could be liable to
our content providers, advertisers and merchants for the damages caused by such
breaches or we could incur substantial costs as a result of defending claims
for those damages. We may need to expend significant capital and other
resources to protect against such security breaches or to address problems
caused by such breaches. Our security measures may not prevent disruptions or
security breaches.



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

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



| |  | LAWS OR REGULATIONS MAY ADVERSELY AFFECT OUR ABILITY TO COLLECT
DEMOGRAPHIC AND PERSONAL INFORMATION FROM USERS, OR TO DISPLAY CERTAIN
CONENT ON OUR SITES, AND COULD AFFECT OUR ABILITY TO ATTRACT ADVERTISERS
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

In addition, legislatures and government agencies have adopted and are
considering adopting additional laws and regulations governing the content of
material transmitted over the Internet. These include laws relating to
obscenity, indecency, libel and defamation. For example, the Child Online
Protection Act, or COPA, prohibits and imposes criminal penalties and civil
liability on anyone communicating material harmful to minors through the
Internet for commercial purposes, unless access to such material is blocked to
minors under age 17. The Third U.S. Circuit Court of Appeals has upheld a
preliminary injunction precluding enforcement of COPA. We could be liable if
the injunction against COPA is lifted and if content delivered by us or placed
on our Web sites violates COPA. Such a result may adversely affect our ability
to attract users under age 17 and, consequently, may adversely affect our
ability to attract advertisers.



| |  | WE MAY CONTINUE TO HAVE CONTINGENT LIABILITY DUE TO OUR ISSUANCES OF
SECURITIES IN VIOLATION OF SECURITIES LAWS
| |  | ---------------------------------------------------------------------------------------------------------------

24



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

As a result, in November 2001,we made a rescission offer to all these
persons pursuant to a registration statement filed under the Securities Act and
pursuant to applicable state securities law. In the rescission offer, we
offered to repurchase from these persons all shares purchased by these persons
pursuant to option exercises by these persons before the expiration of the
rescission offer for an amount equal to the purchase or exercise price paid for
these purchased shares, plus interest from the date of purchase until the
expiration of the rescission offer, at the current statutory rate per year
mandated by the state in which the shares were purchased, or at 7% per year if
a private placement exemption was available in a particular state or if the
shares were otherwise issued in compliance with state law (less any amounts
received by those persons who had already sold their shares). We also offered
to repurchase all unexercised options granted to these persons at 20% of the
option exercise price times the number of option shares, plus interest from the
date the options were granted until the rescission offer expires, at the
current statutory rate per year mandated by the state in which the options were
granted, or at 7% per year if a private placement exemption was available in
a particular state or if the options were otherwise granted in compliance with
state law. The rescission offer was completed in December 2001. 83,403 shares
and 636,740 options were tendered in the rescission offer and the cost to us of
repurchasing such shares and options was approximately $10.2 million.

The Securities Act does not expressly provide that a rescission offer will
terminate a purchasers right to rescind a sale of stock that was not
registered under the Securities Act as required. Accordingly, we may continue
to be contingently liable under the Securities Act to any offerees that
rejected the rescission offer. In addition, it is possible that offerees may
claim that the consideration offered to them in the rescission offer was
insufficient, in which case we may have additional liability.



| |  | OUR COMMON STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN
SUBSTANTIAL LOSSES FOR INDIVIDUAL STOCKHOLDERS
| |  | --------------------------------------------------------------------------------------------------------------

The market prices of Internet-related stocks, including our common stock,
have been volatile and we expect that they will continue to be volatile. In
particular, our common stock may be subject to significant fluctuations in
response to a variety of factors, including but not limited to:



| |  |  | general economic conditions;                                                                                                      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | actual or anticipated variations in quarterly operating results;                                                                  
|
| |  |  | changes in financial estimates by securities analysts;                                                                            
|
| |  |  | failure to meet analyst predictions and projections;                                                                              
|
| |  |  | changes in market valuations of media and online e-commerce companies;                                                            
|
| |  |  | new products or services offered by us or our competitors;                                                                        
|
| |  |  | announcements of significant acquisitions, strategic
partnerships, joint ventures or capital commitments by us or our
competitors;
|
| |  |  | additions or departures of key personnel;                                                                                         
|
| |  |  | our sales of common stock or other securities in the future; and                                                                  

25



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| |  |  | other events or factors, many of which are beyond our control.
| | - |  | --------------------------------------------------------------

In addition, the average trading volume of our common stock has been
extremely low in the past. As a result, our stock price may be susceptible to
significant volatility on a day-to-day basis, depending on the number of shares
traded on any given day. Due to these factors, you may not be able to sell
your stock at or above the price you paid for it, which could result in
substantial losses.

RISKS RELATED TO OUR INDUSTRY



| |  | WE MAY BE SUED FOR CONTENT AVAILABLE OR POSTED ON OUR WEBSITE OR PRODUCTS
THROUGH OUR WEB SITES OR FOR LINKING AND FRAMING OF THIRD-PARTY WEB SITES
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

We may be liable to third parties for content published on our Web sites
and other Web sites where our syndicated content appears if the music, artwork,
text or other content available violates their copyright, trademark or other
intellectual property rights or if the available content is defamatory, obscene
or pornographic. Similar claims have been brought, sometimes successfully,
against Web site operators in the past. We also may be liable for content
uploaded or posted by our users on our Web sites, such as digitally distributed
music files, postings on our message boards, chat room discussions and
copyrightable works. In addition, we could have liability to some of our
content licensors for claims made against them for content available on our Web
sites. We also could be exposed to these types of claims for content that may
be accessed from our Web sites or via links to other Web sites or for products
sold through our Web site. While we have resolved all of these types of claims
made against us in the past, we may not be able to do so in the future. We
intend to implement measures to reduce exposure to these types of claims, but
such measures may not be successful and may require us to expend significant
resources. Any litigation as a result of defending these types of claims could
result in substantial costs and damages. Our insurance may not adequately
protect us against these types of claims or the costs of their defense or
payment of damages. We link to and frame third-party Web sites of our artists
without express written permission to do so. In addition, in the past we have
provided a search feature to allow users to find music residing elsewhere on
the Internet. Those practices are controversial, and have, in instances not
involving us, resulted in litigation. Various claims, including trademark and
copyright infringement, unfair competition, and commercial misappropriation, as
well as infringement of the right of publicity may be asserted against us as a
result. The law regarding linking and framing remains unsettled; it is
uncertain as to how existing laws, especially trademark and copyright law, will
be applied by the judiciary to the Internet. Also, Congress is increasingly
active in passing new laws related to the Internet, and there is uncertainty as
to the impact of future potential laws, especially those involving domain
names, databases and privacy.



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

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



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

There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be
adopted in the future, however, that address issues such as user privacy,
pricing, taxation, content, copyrights, distribution, security, and the quality
of products and services. Several telecommunications companies have petitioned
the Federal Communications Commission to regulate Internet service providers
and online services providers in a manner similar to long distance telephone
carriers and to impose access fees on these companies. Any imposition of
access fees could increase the cost of transmitting data over the Internet. In
addition, the growth and development of the market for online commerce may lead
to more stringent

26



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consumer protection laws, both in the United States and abroad, that may impose
additional burdens on us. The United States Congress has enacted Internet laws
regarding childrens privacy, copyrights, taxation and the transmission of
sexually explicit material. The law of the Internet, however, remains largely
unsettled, even in areas where there has been some legislative action.
Moreover, it may take years to determine the extent to which existing laws
relating to issues such as property ownership, libel and personal privacy are
applicable to the Web. Any new, or modifications to existing, laws or
regulations relating to the Web could adversely affect our business.
Prohibition and restriction of Internet content and commerce could reduce or
slow Internet use, decrease the acceptance of the Internet as a communications
and commercial medium and expose us to liability. Any of these outcomes could
have a material adverse effect on our business, results of operations and
financial condition. The growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business over the Internet.



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

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



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

If one or more states or any foreign country successfully asserts that we
should collect sales or other taxes on our sale of products over the Internet,
our net sales and results of operations could be harmed. We do not currently
collect sales or other similar taxes for physical shipments of goods into
states other than California and Florida. However, one or more states may seek
to impose sales tax collection obligations on companies, such as ARTISTdirect,
which engage in or facilitate online commerce. A number of proposals have been
made at the state and local level that would impose additional taxes on the
sale of goods and services through the Internet. Such proposals, if adopted,
could substantially impair the growth of electronic commerce and could
adversely affect our opportunity to derive financial benefit from electronic
commerce. Moreover, if any state or foreign country were to successfully
assert that we should collect sales or other taxes on the exchange of
merchandise on its system, our results of operations could be adversely
affected. In addition, any operations in states outside California and Florida
could subject our shipments in such states to state sales taxes under current
or future laws. Congress has enacted legislation limiting the ability of the
states to impose taxes on Internet-based transactions. This legislation, known
as the Internet Tax Freedom Act, imposes a moratorium ending on November 1,
2003 on state and local taxes on electronic commerce where such taxes are
discriminatory and on Internet access unless such taxes were generally imposed
and actually enforced before October 1, 1998. Failure to renew this
legislation in the future would allow various states to impose taxes on
Internet-based commerce.



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

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

27



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Our penetration of a broader consumer market will likely depend, in part, on
continued proliferation of high speed Internet access. The Internet has
experienced, and is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. As the Internet continues to
experience increased numbers of users, increased frequency of use and increased
bandwidth requirements, the Internet infrastructure may be unable to support
the demands placed on it. In addition, increased users or bandwidth
requirements may harm the performance of the Internet. The Internet has
experienced a variety of outages and other delays and it could face outages and
delays in the future. These outages and delays could reduce the level of
Internet usage as well as the level of traffic, and could result in the
Internet becoming an inconvenient or uneconomical source of music and related
products and merchandise which would cause our revenue to decrease. The
infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for the
products or services that we offer.




ITEM 2. PROPERTIES

Our principal corporate offices are located in Los Angeles, California
where we lease approximately 64,000 square feet under a lease that expires in
2010. We have sub-leased approximately 30,000 square feet of our space to a
third party under a sub-lease agreement that is subject to a termination option
anytime after April 30, 2004. We expect that our current space will
accommodate our needs for the foreseeable future.




ITEM 3. LEGAL PROCEEDINGS

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




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

None.




PART II




ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION

ARTISTdirects common stock is listed for quotation on the Nasdaq National
Market under the symbol ARTD. The following table sets forth, for the periods
indicated, the high and low closing sale prices for our common stock as
reported by Nasdaq since our initial public offering which was completed in
March 2000:

|               |  |         |       |        |  |   |       | 
|-------------- |  | ------- | ----- | ------ |  | - | ----- | 
|2000           |  | HIGH(1) |       | LOW(1)
|               |  |         |       |       
|Second Quarter |  | $       | 82.50 |        |  | $ | 27.50 | 
|              
|              
|              
|              
|Third Quarter  |  |         | 38.75 |        |  |   | 11.25 | 
|              
|              
|              
|              
|Fourth Quarter |  |         | 15.00 |        |  |   | 3.44  | 
|              
|              
|              
|              
|               |  |         |       |        |  |   |       | 
|              
|              
|              
|              
|2001           |  |         |       |        |  |   |       | 
|              
|              
|              
|              
|First Quarter  |  | $       | 10.00 |        |  | $ | 4.06  | 
|              
|              
|              
|              
|Second Quarter |  |         | 7.80  |        |  |   | 3.30  | 
|              
|              
|              
|              
|Third Quarter  |  |         | 7.00  |        |  |   | 4.90  | 
|              
|              
|              
|              
|Fourth Quarter |  |         | 14.87 |        |  |   | 5.50  | 



---

|(1) |  | All numbers are adjusted to reflect a one-for-ten reverse stock split in
July 2001.
|--- |  | -----------------------------------------------------------------------------------

28



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##### Table of Contents



On March 15, 2002, the closing sale price for our common stock as reported
by Nasdaq was $10.51 per share.

HOLDERS

As of March 15, 2002, there were 249 holders of record of our common stock.

DIVIDENDS

We have never paid any cash dividends on our common stock and we have no current plans to do so.

SALES OF UNREGISTERED SECURITIES

None.




ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data with respect to ARTISTdirects
consolidated statements of operations for the years ended and consolidated
balance sheets as of December 31, 2001, 2000, 1999, 1998, and 1997 are derived
from the audited Consolidated Financial Statements of the Company. The
following information should be read in conjunction with the Consolidated
Financial Statements of the Company and the related notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K.

|                                                                                                                                                                      |  |                                       |     |      |  |      |       |      |  |      |         |     |  |   |         |  |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | --- | ---- |  | ---- | ----- | ---- |  | ---- | ------- | --- |  | - | ------- |  |  | - | ------ | 
|TABLE OF SELECTED FINANCIAL DATA                                                                                                                                      |  | Fiscal Year Ended December 31        
|                                                                                                                                                                      |  |                                      
|                                                                                                                                                                      |  | (in thousands, except per share data)
|                                                                                                                                                                      |  |                                       |     |      |  |      |       |      |  |      |         |     |  |   |         |  |  |   |        | 
|                                                                                                                                                                      |  | 1997                                  |     | 1998 |  | 1999 |       | 2000 |  | 2001
|                                                                                                                                                                      |  |                                       |     |      |  |      |       |      |  |     
|Net Sales or Operating Revenues(1)                                                                                                                                    |  | $                                     | 914 |      |  | $    | 2,665 |      |  | $    | 8,970   |     |  | $ | 18,730  |  |  | $ | 10,421 | 
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|Loss from continuing operations                                                                                                                                       |  |                                       | 657 |      |  |      | 5,689 |      |  |      | 57,826  |     |  |   | 61,499  |  |  |   | 69,927 | 
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|Loss from continuing operations
per common share                                                                                                                      |  |                                       |    |      |  |      |      |      |  |      | 17.16   | (2) |  |   | 27.52   |  |  |   | 19.50  | 
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|Total Assets                                                                                                                                                          |  |                                       | 314 |      |  |      | 3,412 |      |  |      | 97,830  |     |  |   | 117,762 |  |  |   | 59,873 | 
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|                                                                                                                                                                     
|Long term obligations and
redeemable preferred stock
(including long term debt,
capital leases, and redeemable
preferred stock as defined in
Rule 5-02.28 of Reg S-X) |  |                                       |    |      |  |      | 5,135 |      |  |      | 112,390 |     |  |   | 12,308  |  |  |   | 903    | 



|(1) |  | Net sales exclude revenues from the Agency business, which is being
classified as a discontinued operation for all periods presented. This segment
was discontinued in December 2001.                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The loss from continuing operations per common share is for the period
from October 1, 1999 through December 31, 1999. The Company was merged
into a C corporation on October 6, 1999. Consequently, there is no loss
per share before that date, as the Company was an LLC.




ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The following discussion should be read in conjunction with our consolidated
financial statements and the notes to those financial statements included
elsewhere in this Annual Report. The following discussion contains
forward-looking statements based on our current expectations, estimates and
projections about our industry, managements beliefs and certain assumptions
made by us. Words such as anticipates, expects, intends, plans,
believes, may, will or similar expressions are intended to identify
forward-looking statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or
circumstances, including any underlying assumptions, are forward-looking
statements. Such statements include, but are not limited to, statements
concerning our unproven business model, increased competition in its industry,
our ability to generate revenues from

29



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our record label, online product sales, advertising and other revenue streams,
ability to increase visits to our site, ability to attract and retain artists,
ability to adequately fund our operations and financial commitments, ability to
offer compelling content, ability to fulfill on-line music and merchandise
orders in a timely manner, ability to build brand recognition, ability to
integrate acquisitions of technology and other businesses, ability to protect
and/or obtain intellectual property rights, and ability to manage growth. Such
statements are not guarantees of future performance and are subject to 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. Factors that
could cause or contribute to the differences are discussed in Risk Factors
and elsewhere in this Annual Report on Form 10-K. You should carefully consider
those risks, in addition to the other information in this Annual Report and in
our other filings with the SEC, before deciding whether or not to increase or
maintain your investment in ARTISTdirect. We undertake no obligation to revise
or update publicly any forward-looking statements for any reason. The
information contained in this Annual Report 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 Annual Report and in our other filings with the SEC that discuss our
business in greater detail.

OVERVIEW

We are a music entertainment company that combines an online music network and
a record label to provide an integrated offering for music fans, artists and
marketing partners. The ARTISTdirect Network (www.artistdirect.com) is a
network of Web sites offering multi-media content, music news and information,
community around shared music interests, music- related commerce and digital
music services. We previously operated a record label, Kneeling Elephant
Records, which ceased operations in June 2000. In May 2001, we entered into an
agreement with veteran entertainment executive Ted Field to become our Chairman
and Chief Executive Officer and form a new record label in partnership with us.
On June 29, 2001, our stockholders approved the employment of Mr. Field and
the formation of the record label, ARTISTdirect Records, LLC, as a 50/50
co-venture between ARTISTdirect and Mr. Field where we agreed to provide a
significant financial commitment. Through our co-venture record label, we
develop new musical artists and produce and distribute their recordings as an
independent label utilizing both traditional channels and emerging Internet
distribution channels. In addition to the formation of the record label and
our financial commitment, we entered into a five-year employment agreement with
Mr. Field and he joined our Board of Directors. Mr. Field also serves as the
Chief Executive Officer of the record label.

In November 2001, the Company agreed in principle to sell a 5% equity interest
in the joint venture to BMG Entertainment in connection with a worldwide
distribution agreement that was entered into with them. This transaction is
subject to the execution of definitive agreements. As part of the distribution
agreement, BMG agreed to advance certain monies against net sales proceeds. As
part of the purchase of equity, BMG agreed to assume a portion of our funding
commitment to the operations of the joint venture. However, as of December 31,
2001, definitive agreements had not been finalized and the sale of equity to
BMG had not been completed. Due to our commitment to fully fund the operations
of the joint venture, we have recorded 100% of the losses of the co-venture.
If the sale of equity to BMG is completed, we plan to record our pro rata share
of the losses of the co-venture based on the relative funding commitments
between BMG and us.

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

As part of the Companys overall cost-cutting measures implemented in 2001, we
significantly reduced our operating costs. In particular, during the year
ended December 31, 2001, we laid off 137 employees. We expect this to help us
reduce our net loss going forward and conserve our cash resources given
prevailing market conditions. We have incurred cumulative net losses of $193.8
million from inception to December 31, 2001, of which approximately $69.3
million represented stock-based compensation expense. While we have
significantly reduced our operating expenses, especially those related to our
online operations, technology infrastructure and marketing, we expect our net
losses to continue and to remain significant for the foreseeable future. We are
committed to spend

30



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up to $50 million over five years developing the new record label with Ted
Field. We have a limited operating history on which to base an evaluation of
our business and prospects. Our prospects must be considered in light of the
risks, expenses, and difficulties encountered by companies in their early stage
of development, particularly companies in new and rapidly evolving markets.
See Risk Factors for a more complete description of the many risks we face.
Our business is evolving rapidly, and therefore we believe that
period-to-period comparisons of our operating results may not be meaningful and
may not be accurate indicators of future performance.

RESCISSION OFFER

In December 2001, we completed a rescission offer in which we rescinded
the purchase of 83,403 shares of our common stock purchased upon the exercise
of options and the issuance of vested and unvested unexercised options to
purchase 636,740 shares of our common stock. The shares of stock were
repurchased at prices ranging from $12.40 to $40.00 per share and the
unexercised options that were rescinded had exercise prices ranging from $12.40
to $140.00 per share. In aggregate, we paid $10.2 million, which we funded
from our available cash balances. As a result of the rescission offer, the
number of our fully diluted shares was reduced to 3,460,608 as of
December 31, 2001.

REVERSE STOCK SPLIT

In July 2001, we completed a one-for-ten reverse
stock split of our Common Stock. Accordingly, unless otherwise
specified, all references to the Company's Common Stock herein
reflect the one-for-ten reverse stock split.

CRITICAL ACCOUNTING POLICIES

The Companys discussion and analysis of its financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to bad debts, intangible
assets, income taxes, and contingencies and litigation. The Company bases its
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. The Company
believes the following critical accounting policies affect its more significant
judgements and estimates used in the preparation of its consolidated financial
statements.

Revenue Recognition

E-Commerce revenue includes the sale of music and related merchandise, such as
apparel, collectibles and accessories, through the ARTISTdirect shopping mall
of our network. We recognize the gross amount of product sales and shipping
revenue upon shipment of the item and record appropriate reserves for product
returns. We have experienced seasonality with respect to our online product
sales. In particular, our e-commerce sales in the fourth quarter have, on
average, been higher than in other quarters. We believe that this trend may
continue for the foreseeable future.

Media revenue consists primarily of sales of banner advertisements and
sponsorships. In sales of banner advertisements, we principally earn revenue
based on the number of impressions or times an advertisement appears on pages
viewed within our Web sites. Our banner advertising commitments generally range
from one to six months. Banner advertising revenue is generally recognized as
the impressions are served during the period in which the advertisement is
displayed, provided that no significant obligations of ARTISTdirect remain and
collection of the resulting receivable is reasonably assured. We typically
guarantee a minimum number of impressions to the advertiser. To the extent that
minimum guaranteed page deliveries are not met, we defer recognition of the
corresponding revenue until the guaranteed impressions are delivered. We also
sell to advertisers sponsorship of a Web page or event for a specified period
of time. We recognize sponsorship revenue over the period in which the
sponsored page or event is displayed. To the extent that committed obligations
under sponsorship agreements are not met, revenue recognition is deferred until
the obligations are met.

Stock Based Compensation

Stock-based compensation included in cost of revenue represents the
amortization of non-cash compensation expense related to vendor warrants and
stock options granted to artists and their advisors in connection with entering
into contractual commitments to operate their online commerce activities. We
record the fair value of options/warrants granted to non-employees as
compensation expense over the period of service. We determine the fair value
of the options/warrants based on the Black-Scholes option pricing model.

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

Impairment of Long-Lived Assets and Goodwill

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

REVENUE

Prior
to our decision to exit the music talent agency business, we generated revenue
from three sources: E-Commerce, Media and Agency. In December 2001, we decided
to exit the Agency business and expect to fully wind up operations during the
first half of 2002. Therefore, the results of the Agency business have been
shown in our financial statements as a discontinued operation. Prior to June
30, 2000, we generated revenue from our Kneeling Elephant Record Label. This
revenue is shown in our financial statements as other revenue. Substantially
all of our revenue is generated in cash. For the year ended December 31, 2001
there was no barter revenue and approximately 1% of our revenue for the year
ended December 31, 2000 was barter revenue.

E-Commerce Revenue. E-Commerce revenue includes the sale of music and
related merchandise, such as apparel, collectibles and accessories, through the
ARTISTdirect shopping mall of our network. We recognize the gross amount of
product sales and shipping revenue upon shipment of the item and record
appropriate reserves for product returns. We have experienced seasonality with
respect to our online product sales. In particular, our e-commerce sales in
the fourth quarter have, on average, been higher than in other quarters. We
believe that this trend may continue for the foreseeable future. For the years
ended December 31, 2001 and 2000, e-commerce revenue was $7.5 million and $12.2
million, respectively, which constituted approximately 72% and 65%,
respectively, of our total net revenue from continuing operations for those
periods.

Media Revenue. Media revenue consists primarily of sales of banner
advertisements and sponsorships. In sales of banner advertisements, we
principally earn revenue based on the number of impressions or times an
advertisement appears on pages viewed within our Web sites. Our banner
advertising commitments generally range from one to six months. Banner
advertising revenue is generally recognized as the impressions are served
during the period in which the advertisement is displayed, provided that no
significant obligations of ARTISTdirect remain and collection of the resulting
receivable is reasonably assured. We typically guarantee a minimum number of impressions
to the advertiser. To the extent that minimum guaranteed page deliveries are
not met, we defer recognition of the corresponding revenue until the guaranteed
impressions are delivered. We also sell to advertisers sponsorship of a Web
page or event for a specified period of time. We recognize sponsorship revenue
over the period in which the sponsored page or event is displayed. To the
extent that committed obligations under sponsorship agreements are not met,
revenue recognition is deferred until the obligations are met. For the years
ended December 31, 2001 and December 31, 2000, media revenue was $2.9 million
and $6.3 million, respectively, which constituted approximately 28% and 34%,
respectively, of our total net revenue from continuing operations for those
periods. Since most of our sponsorship and advertising contracts are
short-term in nature, our advertising revenue is susceptible to significant
fluctuation. In particular, our net revenue from advertising revenue has
significantly decreased since the third quarter of 2000. This decrease is
primarily due to advertisers spending less money on advertising in
general and on banner advertising in particular. In
addition, we have been focusing our sales efforts on integrated marketing
solution packages

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that offer advertisers a combination of off-line concert and tour
sponsorships that are supported by online banner advertising and custom content
areas. These deals can take over six months to put together due to their
complex nature. Accordingly, we do not expect our advertising revenue to
increase significantly in the near future. During the year ended December 31,
2001, AT&T Wireless accounted for 20% and Universal Music Group accounted for
17% of our total media revenue. No other advertiser accounted for more than
10% of our media revenue for that period.

Agency Revenue. Revenue from the ARTISTdirect Agency, which we decided to
dispose of in December 2001 and is shown as a discontinued operation in our
financial statements, consisted primarily of commissions generated on tour and
event bookings of artists represented by the agency. Agency revenue was
recognized at the time the artist was paid. Agency revenue fluctuated
depending on touring schedules of major artists represented by the agency. For
the years ended December 31, 2001 and December 31, 2000, agency revenue was
$1.0 million and $2.9 million, respectively.

Other Revenue. Prior to June 30, 2000, revenue from Kneeling Elephant
Records was generated from overhead advances from RCA, which provided
all the funding for that record label. We discontinued our Kneeling Elephant Records operation after
June 30, 2000.

ARTISTdirect Records.
We expect that ARTISTdirect Records will generate revenue primarily from
the sale of compact discs by artists signed to the record label. Since
ARTISTdirect Records is a co-venture between our wholly-owned subsidiary,
ARTISTdirect Recordings, Inc., and Radar Records Holdings, LLC, any income or
loss generated by ARTISTdirect Records will be accounted for under the equity
method of accounting as income or loss from equity investments in the statement
of operations.

COST OF REVENUE

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

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

Stock-based compensation included in cost of revenue represents
the amortization of non-cash compensation expense related to vendor warrants
and stock options granted to artists and their advisors in connection with
entering into contractual commitments to operate their online commerce
activities. In connection with the amortization of vendor warrants and artist
stock options granted through December 31, 2001, we recorded non-cash
compensation expense of approximately $8.4 million for the year ended December
31, 2001 and approximately $7.5 million for the year ended December 31, 2000.
We currently do not intend to grant additional equity interests in the future
related to obtaining e-commerce rights from artists. Since the quarter ended
December 31, 1999, our cost of revenue has exceeded our net revenue primarily
as a result of changes in our operations along with the increase in
amortization of vendor warrants and artist stock options. We expect this trend
to continue for at least 2002 as we fully amortize the remaining prepaid stock
based compensation.

OPERATING EXPENSE

Web Site Development. Web site development expense consists primarily of
expenses incurred to update the content and design of our Web sites and
underlying technology infrastructure. These expenses primarily include
payments to third-party service vendors and personnel costs. The
implementation of Emerging Issues Task Force No. 00-02, Accounting for Website
Development Costs, effective July 1, 2000, did not have a material impact on
our consolidated financial statements.

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

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

Stock-based Compensation. We recorded a total of $69.3 million of
stock-based compensation expense for the period from inception through December
31, 2001 in connection with equity granted to employees, directors,
professional firms, artists and artist advisors during this period. We recorded
amortization of stock-based compensation expense of approximately $12.4 million
during the year ended December 31, 2001 and approximately $5.1 million during
the year ended December 31, 2000. We may grant additional equity securities in
the future to employees, directors, and others. In December 2001, we completed
a rescission offer to certain holders of stock options and shares purchased
pursuant to stock options and recorded stock based compensation expense of
approximately $6.9 million. The compensation expense recorded for the
repurchase of unexercised stock options (vested and unvested) from employees
was the sum of the intrinsic value at the original measurement date (less any
expense related to the intrinsic value recorded up to the acceptance of the
rescission offer) and the amount of cash paid to the holder that exceeded the
lesser of the intrinsic value at the original measurement date or immediately
prior to settlement (the settlement date being the closing date of the 30-day
period for the rescission offer). This amount of $4.6 million was recorded as
stock based compensation expense immediately upon the closing date of the
rescission offer. The compensation that was recorded for the repurchase of
unexercised non-employee options (vested and unvested) was calculated as the
difference between the amount of cash paid for the repurchase of the options
and the fair value of the options on the closing date of the rescission offer.
The fair value of the options was determined using the Black-Scholes
option-pricing model over the remaining life of the options. This compensation
amount is being amortized over the remaining period for which services will be
provided. Compensation expense of $1.1 million relating to the repurchase of
non-employee options was recognized in 2001 and an additional $900,000 will be
expensed in 2002.

The unamortized portion of stock based compensation expense at the time of
repurchase related to the initial grant of the options to the non-employees
shall continue to be amortized over the remaining service period related to the
original option grants. In 2001, $10.6 million of such expense was recognized
in stock based compensation. Of this amount, $1.8 million related to services
to be performed in 2002 as a result of the related service agreement being
cancelled in 2001. The remaining unamortized balance at December 31, 2001 of
$2.7 million has been reclassified from unearned compensation to prepaid
stock-based compensation (as the equity instruments are no longer outstanding) in the balance
sheet and will be recorded as expense in 2002, which is the remaining service
period related to the original option grants. The key assumptions used in the
Black Scholes option pricing model for the purpose of the calculation were: a
risk free rate of 6%; a volatility factor of 95% in December 2001; no expected
dividends; and an expected life which is equal to the remaining contractual
life of the options as of December 2001.

The compensation charge for the repurchase of shares issued pursuant to
the exercise of options (by employees and non-employees) was calculated as the
difference between the amount of cash paid for the repurchase of the shares
(which includes the exercise proceeds and accrued interest) and the fair value
of the shares on the date the repurchase was accepted. The compensation charge
related to shares repurchased from employees was $195,000 and was recorded as
stock based compensation in 2001. The compensation charge related to the
non-employee option exercises was $2.1 million in 2001 of which $1.1 million
was recorded in 2001, and $1.0 million will be recorded in 2002.

We did not record any compensation expense related to the shares and
options of those holders who chose not to accept the rescission offer. The
staff of the Securities and Exchange Commission has taken the position that a
persons federal right of rescission may survive the rescission offer.
However, federal courts in the past have ruled that a person who rejects or
fails to accept a rescission offer is precluded from later seeking similar
relief. We believe that subsequent to the rescission offer, any rights to
rescind will be contingent upon legal rulings, the outcome of which are not
currently determinable. Accordingly, we will account for shares and options
that were not rescinded in the rescission offer as if there is no right of
rescission. In the event any rescissions occur subsequent to

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the expiration of the rescission offer in December 2001, we will account
for those rescissions, if any, in the manner described above at the time those
rescissions are completed.

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

Depreciation and Amortization. Depreciation and amortization expense
consists of the depreciation of fixed assets and the amortization of acquired
intangible assets. The acquisitions of iMusic, Mjuice and the minority
interest of the UBL were accounted for using the purchase method of accounting
and, accordingly, the purchase prices were allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their fair
value on the acquisition dates. Substantially the entire purchase price of
these transactions is attributable to the acquired intangible assets. As a
result, the aggregate excess purchase price over the net tangible assets
allocated to goodwill was $20.6 million and was being amortized over five
years, the expected estimated average useful life of these assets. We recorded
write-downs of $11.4 million of goodwill during the year ended December 31,
2001. The remaining net goodwill balance at December 31, 2001 is approximately
$800,000. The non-cash charges relating to depreciation of our fixed assets and
the portion of goodwill allocated to identifiable intangible assets, if any,
will continue to affect our reported operating results in the future periods.

We evaluate impairment of long-lived assets (which consist primarily of
fixed assets) and goodwill by comparing the projected future cash flows at the
lowest level of discrete financial information, our operating segments, to
the carrying amount of the assets. In the event that projected future cash
flows do not appear to be sufficient to recover the carrying amounts of the
assets, we record an impairment charge to record the assets at their fair
value. The fair value represents the discounted projected future cash flows.
The impairment write-downs of goodwill in 2001 were $11.4 million. The Company
recorded a write-down of $4.4 million of the remaining goodwill related to the
Mjuice acquisition, as the technology acquired in this acquisition was
abandoned in the first quarter of 2001. The Company recorded a write-down of
$7.0 million for goodwill related to the iMusic acquisition and the UBL
minority interest acquisition. The write-down represented an adjustment to
fair value of these assets based on the projected future cash flows of the
Media segment.

INTEREST INCOME AND EXPENSE

Interest income consists of earnings on our cash and cash equivalents, and
interest expense consists of interest associated with capital lease agreements.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2001 AND 2000

NET REVENUE

Net revenue from continuing operations for the year ended December 31,
2001 decreased to $10.4 million from $18.7 million for the year ended December
31, 2000, which represented a decrease of 44%. The decrease was due to
decreases in e-commerce, media and other revenue.

E-commerce revenue for the year ended December 31, 2001 decreased to $7.5
million from $12.2 million for the year ended December 31, 2000, a decrease of
38% primarily as a result of fewer sales orders, decreased interest in certain
of our top-selling artists and an overall weaker retail environment.

Advertising and other revenue decreased to $2.9 million for the year
ended December 31, 2001 from $6.3 million for the year ended December 31, 2000,
a decrease of 54% primarily as a result of a decrease in the number of online
advertisers, and a reduction in the sales of non-impression based sponsorships.

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COST OF REVENUE

Direct cost of product sales. Direct cost of product sales decreased to
$6.1 million for the year ended December 31, 2001 from $10.4 million for the
year ended December 31, 2000, which represented a decrease of 41%. This $4.3
million decrease corresponded with the decrease in online product sales revenue
and was primarily attributable to a $2.9 million decrease in product costs and
a $1.4 million decrease in transaction costs.

Other cost of revenue. Other cost of revenue decreased to $5.7 million
for the year ended December 31, 2001, from $8.1 million for the year ended
December 31, 2000, which represented a decrease of 29%. This $2.4 million
decrease was due to a $1.4 million decrease in payroll costs due to a reduction
in headcount and a $1.0 million decrease in content programming and related
costs due to the termination of our efforts to create broadband programming.

Stock-based compensation. For the year ended December 31, 2001, we
recorded non-cash stock-based compensation charges of $8.4 million compared to
$7.5 million for the year ended December 31, 2000, which represented an
increase of 11%. The stock-based compensation expense relates primarily to the
amortization of the estimated value of the options, using the Black-Scholes
option pricing model, given to artists in connection with the operation of
their stores and is amortized over the life of the associated contracts.
During 2001, $1.5 million of the expense related to the early closure of
certain of the artist stores and approximately $900,000 related to the
rescission offer completed in December 2001. In 2001, we reclassified the
remaining amount of unearned compensation from the equity section to an asset,
as the equity instruments were no longer outstanding after the rescission offer
was completed. As of December 31, 2001, $2.9 million of prepaid compensation
expense remains to be amortized, all of which will be recorded as stock-based
compensation expense in 2002.

OPERATING EXPENSE

Web Site Development. Web site development expense decreased to $3.7
million for the year ended December 31, 2001, from $5.4 million for the year
ended December 31, 2000, which represented a decrease of 31%. This decrease
was primarily attributable to a $2.1 million decrease in fees paid to third
party service vendors relating to the development of our Web site and an
approximate $600,000 decrease in programming development costs offset by an
increase of $1.0 million in internal payroll and related costs.

Sales and Marketing. Sales and marketing expense decreased to $5.7
million for the year ended December 31, 2001 from $25.6 million for the year
ended December 31, 2000, which represented a decrease of 78%. The decrease was
primarily attributable to a significant decrease in our online advertising
expenditures, as well as lower payroll and related costs.

General and Administrative. General and administrative expense decreased
to $14.8 million for the year ended December 31, 2001 from $17.6 million for
the year ended December 31, 2000, which represented a decrease of 16%. This
decrease was primarily attributable to salary and benefit savings associated
with the reduction in staff in 2001 and overall cost savings in travel and
entertainment, communications, computer supplies and outside services offset by
a $1.5 million provision recorded against a receivable from one of the major
record labels, to be settled in the form of cash or content, that was
determined to be impaired.

Stock-based Compensation. We recorded stock-based compensation expense of
$12.4 million for the year ended December 31, 2001 in connection with stock
issuances to employees, directors, professional firms, artists and advisors for
promotional services, which represented an increase of 145% from the $5.1
million expense for the comparable period in 2000. Stock-based compensation in
2001 included $6.1 million of expense related to the rescission offer completed
in December 2001, as well as $300,000 for the early closure of artists stores
and termination of the related promotion agreements. The expense during the
year ended December 31, 2000 reflected a credit to stock-based compensation of
$6.6 million related to stock appreciation rights granted to certain executives
of the Company as a result of a reduction in the valuation of the Companys
underlying common stock as compared with December 31, 1999. This credit was
offset by $11.7 million of stock-based compensation expense related to options
granted to employees, professional firms, artists and advisors. As of December
31, 2001, $1.7 million of prepaid compensation expense remains to be amortized,
all of which will be recorded as stock-based compensation expense in 2002.

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Depreciation and Amortization. Depreciation and amortization expense
increased to $6.5 million for the year ended December 31,
2001 from $6.2 million
for the year ended December 31, 2000, which represented an increase of 4%.
This increase was primarily due to an increase in depreciation of fixed assets
and leasehold improvements offset by a decrease in the amortization of
intangible assets as a result of the write-off in 2001 of goodwill associated
with the acquisitions of iMusic, Mjuice and the minority interest in UBL.

INTEREST INCOME

Interest income decreased to $3.6 million for the year ended December 31,
2001 from $6.0 million for the year ended December 31, 2000, which represented
a decrease of 40%. The decrease is due to lower average cash balances held
during 2001 compared with 2000 and lower average interest rates.

LOSS FROM EQUITY INVESTMENTS

Loss from equity investments increased to $9.0 million for the year ended
December 31, 2001 from $235,000 for the year ended December 31, 2000. The
increase is due primarily to the $8.6 million equity loss recognized from
ARTISTdirect Records, the Companys record label co-venture. Included in the
equity loss were $3.2 million of advances paid to artists, which are recoupable
from future royalties earned on record sales. However, given that the artists
signed by the venture have no previous track record, the venture has provided
for 100% of the advances made. The Company recognized 100% of the ventures
loss due to its commitment to fund 100% of its operations as of December 31,
2001.

DISCONTINUED OPERATIONS

Income
from discontinued operations, which related to the activity of our
music talent agency business that we decided to exit in December 2001, decreased to $47,000 for the year
ended December 31, 2001 from $2.2 million for the year ended December 31, 2000,
which represented a decrease of 98%. The decrease is due to a decline in
touring activity in 2001 among the Agencys most popular touring artists
resulting in a $1.9 million decline in tour commission revenues in 2001
compared with the prior year.

NET LOSS

Net loss increased to $69.9 million for the year ended December 31, 2001,
compared to $59.3 million for the year ended December 31, 2000, which
represented an increase of $10.6 million or 14%. The increase in the net loss
is primarily attributable to a $2.5 million increase in gross loss, primarily
as a result of lower Media revenues, a $7.3 million increase in stock-based
compensation, an $11.4 million loss from the impairment of goodwill, an $8.8
million increase in loss from equity investments, a $2.4 million decrease in
interest income and a $2.1 million decrease in income from discontinued
operations partially offset by a $1.6 million decrease in
website development costs,
a $19.9 million decrease in sales and marketing expenses and a $2.8 million
decrease in general and administrative expenses.

EBITDA loss decreased to $25.7 million for the year ended December 31,
2001, compared to $48.0 million for the year ended December 31, 2000, which
represented an improvement of $22.4 million or 47%. The decrease in EBITDA
loss is primarily attributable to a $1.5 million decrease in EBITDA loss from
our E-commerce segment, a $9.9 million decrease in the EBITDA loss from our
Media segment and a $10.8 million reduction in our Corporate expenses in 2001
compared with 2000.

YEARS ENDED DECEMBER 31, 2000 AND 1999

NET REVENUE

Net revenue for the year ended December 31, 2000 increased to $18.7
million from $9.0 million for the year ended December 31, 1999, which
represented an increase of 109%. The increase was due to increases in
e-commerce and media revenue.

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E-commerce revenue for the year ended December 31, 2000, increased 130% to
$12.2 million from $5.3 million for the year ended December 31, 1999, primarily
as a result of an increase in the number of ARTIST channels that were operated.

Media revenue increased $3.4 million, or 117%, to $6.3 million for the
year ended December 31, 2000, from $2.9 million for the year ended December 31,
1999, primarily as a result of an increase in the number of advertisers,
increased page views generated by our Web sites plus a significant increase in
the number of advertisers, primarily in sales of non-impression based
sponsorships.

COST OF REVENUE

Direct cost of product sales. Direct cost of product sales increased to
$10.4 million for the year ended December 31, 2000 from $5.1 million for the
year ended December 31, 1999, which represented an increase of 104%. This $5.3
million increase corresponded with the increase in online product sales revenue
and was primarily attributable to a $3.7 million increase in product and
royalty costs payable to our vendors and artists and a $1.6 million increase in
transaction costs.

Other cost of revenue. Other cost of revenue increased to $8.1 million
for the year ended December 31, 2000, from $2.9 million for the year ended
December 31, 1999, which represented an increase of 175%. This $5.2 million
increase was primarily due to increases in Web site hosting and maintenance
costs.

Stock-based compensation. For the year ended December 31, 2000, we
recorded non-cash stock-based compensation charges of $7.5 million compared to
$1.8 million for the year ended December 31, 1999. The stock-based
compensation expense relates primarily to the amortization of the estimated
value of the options, using the Black-Scholes option pricing model given to
artists in connection with the operation of their stores and is amortized over
the life of the associated contract periods.

OPERATING EXPENSE

Web Site Development. Web site development expense increased to $5.4
million for the year ended December 31, 2000, from $1.8 million for the year
ended December 31, 1999, which represented an increase of 196%. This increase
was primarily attributable to increased fees paid to third party service
vendors relating to the continued development of our Web site, as well as an
increase in the development costs of programming.

Sales and Marketing. Sales and marketing expense increased to $25.6
million for the year ended December 31, 2000 from $13.2 million for the year
ended December 31, 1999, which represented an increase of 94%. The increase
was primarily attributable to a significant increase in our online advertising
expenditures, as well as increased offline advertising.

General and Administrative. General and administrative expense increased
to $17.6 million for the year ended December 31, 2000 from $9.5 million for the
year ended December 31, 1999, which represented an increase of 86%. This
increase was primarily attributable to increases in personnel and related
expenses, facilities and outside professional services expenses.

Stock-based Compensation. We recorded stock-based compensation expense of
$5.1 million for the year ended December 31, 2000 in connection with stock
issuances to employees, directors, professional firms, artists and advisors for
promotional services, which represented a decrease of 83% for the comparable
period in 1999. Stock-based compensation for the comparable period in 1999 was
$30.3 million, primarily in connection with stock issuances to employees,
directors and professional firms. The expense during the year ended December
31, 2000 reflected a credit to stock-based compensation of $6.6 million related
to stock appreciation rights granted to certain executives of the Company as a
result of a reduction in the valuation of the Companys underlying common stock
as compared with December 31, 1999. This credit was offset by $11.7 million of
amortization of stock-based compensation expense related to options granted to
employees, professional firms, artists and advisors.

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Depreciation and Amortization. Depreciation and amortization expense
increased to $6.2 million for the year ended December 31, 2000 from
approximately $2.5 million for the year ended December 31, 1999, which
represented an increase of 149%. This increase was primarily attributable to
the amortization of the goodwill associated with the acquisition of iMusic,
Mjuice and the minority interest in the UBL, as well as an increase in
depreciation of fixed assets and amortization of leasehold improvements.

INTEREST INCOME

Interest income increased to $6.0 million for the year ended December 31,
2000 from $281,000 for the year ended December 31, 1999, which represented an
increase of 2,024%. The increase is due to interest earned on higher cash
balances resulting from the proceeds we received from our initial public
offering in March 2000 and the Series C redeemable preferred shares issued in
December 1999 and January 2000.

DISCONTINUED OPERATIONS

Income from discontinued operations increased to $2.2 million for the year
ended December 31, 2000 from $22,000 for the year ended December 31, 1999. The
increase is due to an increase in touring activity in 2000 among the Agencys
most popular touring artists resulting in a $1.6 million increase in tour
commission revenues in 2000 compared with the prior year.

NET LOSS

Net loss increased to $59.3 million for the year ended December 31, 2000,
compared to $57.8 million for the year ended December 31, 1999, which
represented an increase of 3%. The $1.5 million increase in the net loss is
primarily attributable to a $6.5 million increase in gross loss due to
stock-based compensation related to artist store agreements, a $3.5 million
increase in website development, a $12.4 million increase in sales and
marketing expense, a $8.2 million increase in general and administrative
expense and a $3.7 million increase in depreciation and amortization expense,
partially offset by a $25.2 million decrease in the amortization of stock-based
compensation, a $5.7 million increase in interest income and a $2.1 million
increase in income from the discontinued agency operations.

LIQUIDITY AND CAPITAL RESOURCES

On March 31, 2000, we completed our IPO and raised net proceeds of
approximately $52.4 million through the sale of 500,000 (after giving effect to
our one-for-ten reverse stock split in July 2001) common shares. In addition, we raised an
aggregate of $97.5 million of gross proceeds through the sale of
7,000,291 shares
of Series C preferred stock in December 1999 and January 2000. In May 1999, we
issued 3,750,000 shares of Series B preferred securities in exchange for an
aggregate purchase price of $15.0 million. In April 2001, we completed a
partial self-tender offer for 200,000 of our outstanding shares at a price per
share of $12.50. Our out-of-pocket costs, including expenses associated with
the tender offer, were approximately $2.7 million, which we funded from our
existing cash and cash equivalents. During the second half of 2001, we also
purchased approximately 40,000 shares for a total of $234,000 under an open
market share repurchase program. As of December 31, 2001, we had $28.0 million
of cash and cash equivalents and held $18.5 million in short-term investments.

Net cash used in operating activities was $22.2 million for the year
ended December 31, 2001, and $35.1 million and $26.0 million for the years
ended December 31, 2000 and 1999, respectively. Net cash used in operating
activities for each of these periods primarily consisted of net losses
partially offset by non-cash items such as stock-based compensation and
depreciation and amortization.

Net cash provided by investing activities was $11.6 million for the year
ended December 31, 2001, which resulted from $18.0 million of proceeds from the
maturity/sale of short-term investments partially offset by a $5.3 million of
investment in our record label joint venture. Net cash used in investing
activities was $46.3 million for the year ended December 31, 2000, and
consisted primarily of the purchase of short-term investments of $36.4 million,
fixed asset purchases and leasehold improvements to our corporate offices of
$7.5 million and $2.0 million

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relating to the acquisition of Mjuice.com, Inc. Net cash used in
investing activities was $4.4 million for the year ended December 31, 1999 and
consisted primarily of fixed asset purchases of $3.5 million.

Net cash used in financing activities was $12.9 million for the year ended
December 31, 2001 and consisted of payments made for the rescission of certain
shares and options issued to employees, artists, advisors and professional
firms of $10.2 million and the repurchase of common stock of $2.7 million. Net
cash provided by financing activities was $63.7 million for the year ended
December 31, 2000 which was principally attributable to the proceeds of our
initial public offering in March 2000 in which we raised approximately $52.4
million, net of underwriters discounts and offering costs, and $10.4 million
raised from the sale of Series C preferred stock in January 2000, net of
offering costs. Net cash provided by financing activities was $97.6 million
for the year ended December 31, 1999 as a result of proceeds from the issuance
of $82.3 million of Series C preferred shares in December 1999 and $15.0
million of Series B preferred shares in May 1999.

As of December 31, 2001 our principal commitments consisted of our
obligation to fund the record label venture of approximately $44.7 million ($50
million commitment less $5.3 million funded as of December 31, 2001) and
obligations outstanding under operating leases and employment contracts. We
are required to fund up to $15.0 million per year to the record label and could
provide in excess of that amount with the approval of the Companys Board of
Directors. Our overall funding commitment is currently expected to be reduced
by $5.0 million in conjunction with BMG's proposed equity
investment in ARTISTdirect Records.

A summary of our contractual cash obligations, excluding the record label
funding commitment described in the above paragraph, as of December 31, 2001 is as follows:

|                             |                                                                         |       |                                      |        |  |           |           |           |         |         |         |       |       |   |       |       |  |   |       |       | 
|---------------------------- | ----------------------------------------------------------------------- | ----- | ------------------------------------ | ------ |  | --------- | --------- | --------- | ------- | ------- | ------- | ----- | ----- | - | ----- | ----- |  | - | ----- | ----- | 
|                             |                                                                         |       | Payments Due by Period(in thousands)
|                             |                                                                         |       |                                     
|                             |                                                                         |       |                                      |        |  |           | Less than |           | Between |         | Between |       | After
|Contractual cash obligations |                                                                         | Total |                                      | 1 year |  | 2-3 years |           | 4-5 years |         | 5 years
|                             |                                                                         |       |                                      |        |  |           |           |           |         |        
|Operating Leases             |                                                                         | $     | 15,530                               |        |  | $         | 1,777     |           |         | $       | 3,502   |       |       | $ | 3,502 |       |  | $ | 6,749 |      
|                            
|                            
|                            
|                            
|Employment contracts         |                                                                         |       | 7,059                                |        |  |           | 1,809     |           |         |         | 3,000   |       |       |   | 2,250 |       |  |   |      |      
|                             |                                                                         |      
|                             | Total
contractual cash obligations (excluding record label commitments) |       | $                                    | 22,589 |  |           | $         | 3,586     |         |         | $       | 6,502 |       |   | $     | 5,752 |  |   | $     | 6,749 | 
|                             |                                                                         |      

We currently anticipate that our available cash resources (which included
cash of $28.0 million and short-term investments of $18.5 million as of
December 31, 2001) will be sufficient to meet our anticipated cash needs for
working capital and capital expenditures for at least the next 12 months.
There can be no assurance, however, that the underlying assumed levels of
revenues and expenses will prove to be accurate. If we are unsuccessful in
generating sufficient cash flow from operations, we may need to raise
additional funds in future periods through public or private financings, or
other arrangements to fund our operations and our commitment to fund the record
label. In addition, if our Board of Directors approves funding for the record
label in excess of our maximum annual obligation of $15 million, our need to raise
additional funds might be accelerated. If any additional financing is needed,
we might not be able to raise capital on reasonable terms or at all. Failure
to raise capital when needed could seriously harm our business and operating
results. If additional funds were raised through the issuance of equity
securities, the percentage of ownership of our stockholders would be reduced.
Furthermore, these equity securities might have rights, preferences or
privileges senior to our common stock. We currently do not have any plans for
future equity offerings.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS
No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 specifies criteria that intangible assets
acquired in

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a business combination must meet to be recognized and reported separately
from goodwill. SFAS No. 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121
and subsequently, SFAS No. 144 after its adoption.

The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and
SFAS No. 142 is effective January 1, 2002. Goodwill and intangible assets
determined to have an indefinite useful life acquired in a purchase business
combination completed after June 30, 2001, but before SFAS No. 142 is adopted
in full, are not amortized. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment prior to the full adoption of SFAS No. 142.

Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS No. 141 for recognition separate
from goodwill. The Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period after
adoption. If an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS No. 142 within the first interim
period. Impairment is measured as the excess of carrying value over the fair
value of an intangible asset with an indefinite life. Any impairment loss will
be measured as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle in the first interim period.

In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to
those reporting units as of January 1, 2002. The Company will then have up to
six months from January 1, 2002 to determine the fair value of each reporting
unit and compare it to the carrying amount of the reporting unit. To the
extent the carrying amount of a reporting unit exceeds the fair value of the
reporting unit, an indication exists that the reporting unit goodwill may be
impaired and the Company must perform the second step of the transitional
impairment test. The second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. In the second
step, the Company must compare the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill, both of which
would be measured as of the date of adoption. The implied fair value of
goodwill is determined by allocating the fair value of the reporting unit to
all of the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after this allocation is
the implied fair value of the reporting unit goodwill. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Companys statement of income.

As of the date of adoption of SFAS No. 142, the Company will have
unamortized goodwill in the amount of approximately $800,000, which will be
subject to the transition provisions of SFAS No. 142. Amortization expense
related to goodwill was $2.1 million, $3.6 million and $2.8 million for the
years ended December 31, 1999, 2000 and 2001, respectively. Because of the
extensive effort needed to comply with adopting SFAS No. 141 and No. 142, it is
not practicable to reasonably estimate the impact of adopting the Statements on
the Companys financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment losses as
the cumulative effect of a change in accounting principle.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. The
Company is required to adopt SFAS No. 143 on January 1, 2003.

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In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. This Statement requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset. SFAS No. 144 requires companies
to separately report discontinued operations and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. Assets to
be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.




ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements and schedule, as listed under Item
14, appear in a separate section of this Annual Report on Form 10-K beginning
on page F-1.




ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL
                 DISCLOSURE

None.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The sections titled Executive Officers of the Company, Directors and
Nominees and Compliance with Section 16(a) of the Exchange Act appearing in
the Companys Proxy Statement for the 2002 Annual Meeting of Stockholders is
incorporated herein by reference.




ITEM 11. EXECUTIVE COMPENSATION

The section titled Executive Compensation and Related Information
appearing in the Companys Proxy Statement for the 2002 Annual Meeting of
Stockholders is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section titled Principal Stockholders appearing in the Companys
Proxy Statement for the 2002 Annual Meeting of Stockholders is incorporated
herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The section titled Certain Transactions appearing in the Companys Proxy
Statement for the 2002 Annual Meeting of Stockholders is incorporated herein by
reference.

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PART IV




ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



| | (a)(1). |  | FINANCIAL STATEMENTS
| | ------- |  | --------------------

ARTISTdirect financial statements appear in a separate section of this
Annual Report on Form 10-K beginning on the pages referenced below:

|                                                                                                   |  |  |     | 
|-------------------------------------------------------------------------------------------------- |  |  | --- | 
|ARTISTdirect, Inc. and Subsidiaries Consolidated Financial Statements
Independent Auditors Report |  |  | F-2 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Consolidated Balance Sheets                                                                        |  |  | F-3 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Consolidated Statements of Operations                                                              |  |  | F-4 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Consolidated Statements of Changes in Members and Stockholders Equity (Deficit)                  |  |  | F-5 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Consolidated Statements of Cash Flows                                                              |  |  | F-6 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Notes to Consolidated Financial Statements                                                         |  |  | F-7 | 



| | (2) |  | FINANCIAL STATEMENT SCHEDULE
| | --- |  | ----------------------------

ARTISTdirect financial statement schedule appears in a separate section of
this Annual Report on Form 10-K on the pages referenced below. All other
schedules have been omitted as they are not applicable, not required or the
information is included in the consolidated financial statements or the notes
thereto.



| | (3) |  | EXHIBITS
| | --- |  | --------

3.1 Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.

3.2 Amended and Restated Bylaws of the Registrant. Incorporated by reference to
Exhibit 3.2 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.

3.3 Certificate of Amendment of the Third Amended and Restated Certificate of
Incorporation. Incorporated by reference to Exhibit 3.3 in the Registrants
Quarterly Report on Form 10-Q filed on August 14, 2001.

4.1 See Exhibits 3.1 and 3.2 for provisions of the Registrants Certificate of
Incorporation and Bylaws determining the rights of holders of the Registrants
common stock. See Exhibits 4.3 and 10.4 for the rights of holders of registration
rights.

4.2 Specimen common stock certificate. Incorporated by reference to Exhibit 4.2
in the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment No.s
1  7 thereto.

4.3 Registration Rights Letter Agreement dated May 31, 2001 between the
Registrant and Frederick W. Field. Incorporated by reference to Exhibit 3 filed
in connection with the Registrants Definitive Proxy Statement on June 11,
2001.

10.1+ BMI Music Performance Agreement for the UBL, dated October 9, 1998.
Incorporated by reference to Exhibit 10.3 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.

10.2+ Database, On-Line Internet Retail Store and Consumer Direct Fulfillment
Services Agreement, dated as of August 15, 1998, between AEC One Stop Group,
Inc. and the UBL, as amended. Incorporated by reference to

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Exhibit 10.6 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.

10.3 Securities Purchase Agreement, dated July 28, 1998, among the Registrant,
the UBL, Constellation Venture Capital, L.P. and Constellation Ventures (BVI),
Inc. Incorporated by reference to Exhibit 10.7 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.

10.4 Third Amended and Restated Registration Rights Agreement, dated as of
November 12, 1999, among the Registrant and the other parties who are
signatories thereto, as amended. Incorporated by reference to Exhibit 10.8 in
the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment No.s
1  7 thereto.

10.5 UBL Exchange, Contribution and Distribution Agreement, dated May 18, 1999.
Incorporated by reference to Exhibit 10.9 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.

10.6 Issuance, Noncompetition and Nonsolicitation Agreement, dated as of
January 1, 1996, between the Registrant and Keith Yokomoto. Incorporated by
reference to Exhibit 10.13 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.7 Issuance Agreement, dated as of January 1, 1998, between the Registrant,
Marc Geiger, Donald Muller, and L&G Associates One. Incorporated by reference
to Exhibit 10.14 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as amended
by Amendment No.s 1  7 thereto.

10.8 Deferred Compensation Agreement, dated as of April 1, 1998, by and between
Keith Yokomoto and the Registrant dated July 1, 1998. Incorporated by
reference to Exhibit 10.16 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.9 Employment Agreement, dated as of July 28, 1998, between Marc Geiger and
the Registrant. Incorporated by reference to Exhibit 10.19 in the Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.

10.10 Employment Agreement, dated as of July 28, 1998, between Don Muller and
the Registrant. Incorporated by reference to Exhibit 10.20 in the Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.

10.11 1999 Employee Stock Purchase Plan. Incorporated by reference to Exhibit
10.21 in the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment No.s
1  7 thereto.

10.12 1999 Employee Stock Option Plan. Incorporated by reference to Exhibit
10.22 in the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment No.s
1  7 thereto.

10.13 1999 Artist and Artist Advisor Stock Option Plan. Incorporated by
reference to Exhibit 10.23 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.14 1999 Artist Stock Option Plan. Incorporated by reference to Exhibit 10.24
in the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment No.s
1  7 thereto.

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10.15+ ADNM Merchandiser Agreement, dated as of April 1, 1999, between Giant
Merchandising and ARTISTdirect New Media, LLC. Incorporated by reference to
Exhibit 10.26 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.

10.16+ UBL Merchandiser Agreement, dated as of April 1, 1999, between Giant
Merchandising and ARTISTdirect New Media, LLC. Incorporated by reference to
Exhibit 10.28 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.

10.17 5670 Wilshire Boulevard Office Lease, as amended. Incorporated by
reference to Exhibit 10.47 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.18 Form of Directors Indemnification Agreement. Incorporated by reference
to Exhibit 10.29 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as amended
by Amendment No.s 1  7 thereto.

10.19 Form of Officers Indemnification Agreement. Incorporated by reference
to Exhibit 10.30 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as amended
by Amendment No.s 1  7 thereto.

10.20+ ARTISTdirect  Cisneros Television Group Memorandum of Understanding
dated as of November 15, 1999 between the Registrant and Lakeport Overseas Ltd.
Incorporated by reference to Exhibit 10.40 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.

10.21 Form of Series C Preferred Stock Purchase Agreement. Incorporated by
reference to Exhibit 10.45 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.22 Warrant dated December 24, 1999, issued to Yahoo! Incorporated by
reference to Exhibit 10.46 in the Registrants Registration Statement on Form
S-1 initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.

10.23 Operating Agreement of ARTISTdirect Records, LLC dated May 31, 2001 by
and among ARTISTdirect Records, LLC, ARTISTdirect Recordings, Inc. and Radar
Records Holdings, LLC. Incorporated by reference to Appendix B filed in
connection with the Registrants Definitive Proxy Statement on June 11, 2001.

10.24 Loan and Security Agreement dated May 31, 2001 by and between
ARTISTdirect Records, LLC and ARTISTdirect Recordings, Inc. Incorporated by
reference to Appendix C filed in connection with the Registrants Definitive
Proxy Statement on June 11, 2001

10.25 Employment Agreement dated May 31, 2001 by and between the Registrant and
Frederick W. Field. Incorporated by reference to Exhibit 1 filed
in connection with the Registrants Definitive Proxy Statement on
June 11, 2001.

10.26 Employment Agreement dated May 31, 2001 by and between ARTISTdirect
Records, LLC and Frederick W. Field. Incorporated by reference to Exhibit 2
filed in connection with the Registrants Definitive Proxy Statement on June
11, 2001.

10.27 Letter Agreement dated May 31, 2001 by and among the Registrant,
ARTISTdirect Records, LLC, ARTISTdirect Recordings, Inc., Frederick W. Field
and Radar Records Holdings, LLC. Incorporated by reference to Exhibit 4 filed
in connection with the Registrants Definitive Proxy Statement on June 11,
2001.

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10.28 Agreement to Extend Initial Period of Employment, dated as of April 27,
2001, between Marc Geiger and the Registrant. Incorporated by reference to
Exhibit 10.53 in the Registrants Registration Statement on Form S-1 initially
filed on November 22, 2000 (Registration No. 333-50576), as amended by
Amendment No.s 1  5 thereto.

10.29 Amendment to Employment Agreement, dated as of July 1, 2001, between Marc
Geiger and the Registrant. Incorporated by reference to Exhibit 10.54 in the
Registrants Registration Statement on Form S-1 initially filed on November 22,
2000 (Registration No. 333-50576), as amended by Amendment No.s 1  5 thereto.

10.30 Employment Agreement, dated as of July 1, 2001, between Keith Yokomoto
and the Registrant. Incorporated by reference to Exhibit 10.55 in the
Registrants Registration Statement on Form S-1 initially filed on November 22,
2000 (Registration No. 333-50576), as amended by Amendment No.s 1  5 thereto.

10.31+ Hosting and Development Agreement, dated August 14, 2001, between CNP,
Inc. (formerly Amplified Holdings, Inc.) and the Registrant. Incorporated by
reference to Exhibit 10.56 in the Registrants Registration Statement on Form
S-1 initially filed on November 22, 2000 (Registration No. 333-50576), as
amended by Amendment No.s 1  5 thereto.

10.32+ Agreement dated as of July 19, 2000 between the Registrant and
Ticketmaster Online-City Search, Inc. Incorporated by reference to Exhibit
10.57 in the Registrants Registration Statement on Form S-1 initially filed on
November 22, 2000 (Registration No. 333-50576), as amended by Amendment No.s 1
- 5 thereto.

10.33 Unit Purchase Agreement dated as of October 31, 2001, among ARTISTdirect
Records, LLC ARTISTdirect Recordings, Inc., Radar Records Holdings, LLC, BMG
Music, the Registrant, and Frederick W. Field.

10.34+ Short Form Distribution and
Foreign License Agreement dated as of
October 31, 2001, between ARTISTdirect Records, LLC. and BMG Music d/b/a BMG
Entertainment.

21.1 Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1
in the Registrants Registration Statement on Form S-1 initially filed on
November 22, 2000 (Registration No. 333-50576), as amended by Amendment No.s 1
 5 thereto.

23.1 Consent of KPMG LLP with respect to ARTISTdirect, LLC and subsidiaries.

24.1 Powers of Attorney. See page 47 of this Annual Report on Form 10-K.

99.1 Mjuice.com, Inc. 1999 Stock Option Plan, as assumed by Registrant.
Incorporated by reference to Exhibit 99.3 in the Registrants Registration
Statement on Form S-8 filed on January 4, 2001.

99.2 Audio Explosion, Inc. 1998 Stock Option Plan, as assumed by Registrant.
Incorporated by reference to Exhibit 99.4 in the Registrants Registration
Statement on Form S-8 filed on January 4, 2001.

99.3 Offer to Purchase, dated February 26, 2001. Incorporated by reference to
Exhibit (a)(1)(A) filed in connection with the Registrants Schedule TO-I on
February 26, 2001.

+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.



| | (b) |  | EXHIBITS ON FORM 8-K
| | --- |  | --------------------

No Current Reports on Form 8-K were filed during the quarter ended
December 31, 2001.

46



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                     |  |                    |  |                                                                     
|-------------------- |  | ------------------ |  | --------------------------------------------------------------------
|                     |  | ARTISTDIRECT, INC.
|                    
|                    
|                    
|                    
|                     |  |                    |  |                                                                     
|                    
|                    
|                    
|                    
|                     |  |                    |  |                                                                     
|                    
|                    
|                    
|                    
|Date: March 29, 2002 |  | By:                |  | /s/ FREDERICK W. FIELD                                              
|                     |  |                    |  |                                                                     
|                     |  |                    |  | Frederick W.
Field
Chief Executive Officer and Chairman of the Board
|                    
|                    
|                    
|                    
|                     |  |                    |  |                                                                     

We, the undersigned officers and directors of ARTISTdirect, Inc., do
hereby constitute and appoint Frederick W. Field and James B. Carroll, and each
of them, our true and lawful attorneys-in-fact and agents, each with full power
of substitution and resubstitution, for him and in his name, place and stead,
in any and all capacities, to sign any and all amendments to this Report, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

|                                               |  |                                                                                                   |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                             |  | Date          
|                                               |  |                                                                                                   |  |               
|                                               |  |                                                                                                   |  |               
|/s/ FREDERICK W.  FIELDFrederick W.  Field     |  | Chief Executive Officer and
Chairman of the Board
(Principal Executive
Officer)                   |  | March 29, 2002
|                                              
|/s/ MARC P.  GEIGERMarc P.  Geiger             |  | Vice Chairman                                                                                     |  | March 29, 2002
|                                              
|/s/ KEITH YOKOMOTOKeith Yokomoto               |  | President and Chief Operating Officer                                                             |  | March 29, 2002
|                                              
|/s/ JAMES B.  CARROLLJames B.  Carroll         |  | Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |  | March 29, 2002
|                                              
|/s/ ALLEN D.  LENARDAllen D.  Lenard           |  | Director                                                                                          |  | March 29, 2002
|                                              
|/s/ CLIFFORD H.  FRIEDMANClifford H.  Friedman |  | Director                                                                                          |  | March 29, 2002
|                                              
|/s/ DARA KHOSROWSHAHIDara Khosrowshahi         |  | Director                                                                                          |  | March 29, 2002
|                                              
|/s/ BENJAMIN MOODYBenjamin Moody               |  | Director                                                                                          |  | March 29, 2002
|                                              
|/s/ STEPHEN M. KRUPAStephen M. Krupa           |  | Director                                                                                          |  | March 29, 2002
|                                              
|/s/ LEE MASTERSLee Masters                     |  | Director                                                                                          |  | March 29, 2002

47



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##### Table of Contents



ARTISTDIRECT, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                      |                                                                                   |  |      |     | 
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                      |                                                                                   |  | PAGE
|                                                                      |                                                                                   |  |     
|ARTISTdirect, Inc. and Subsidiaries Consolidated Financial Statements |                                                                                   |  |      |    
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Independent Auditors Report                                                      |  |      | F-2 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Consolidated Balance Sheets                                                       |  |      | F-3 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Consolidated Statements of Operations                                             |  |      | F-4 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Consolidated Statements of Changes in Members and Stockholders Equity (Deficit) |  |      | F-5 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Consolidated Statements of Cash Flows                                             |  |      | F-6 | 
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Notes to Consolidated Financial Statements                                        |  |      | F-7 | 

F-1



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors
ARTISTdirect, Inc.

We have audited the accompanying consolidated balance sheets of ARTISTdirect,
Inc. (and its predecessor company ARTISTdirect, LLC) and subsidiaries (the
Company) as of December 31, 2000 and 2001 and the related consolidated
statements of operations, changes in members and stockholders equity
(deficit) and cash flows for each of the years in the three year period ended
December 31, 2001. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ARTISTdirect, Inc. and
subsidiaries as of December 31, 2000 and 2001 and the results of its operations
and its cash flows for each of the years in the three year period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

/s/ KPMG LLP

Los Angeles, CA
February 11, 2002

F-2



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##### Table of Contents






ARTISTDIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |          |        | 
|----------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------- | ------------ | ------ | ------------ | ------ | -------- | ------ | 
|                                                            |                                                                                                                                                                                                       |                             |         | December 31, |        | December 31,
|                                                            |                                                                                                                                                                                                       |                             |         | 2000         |        | 2001        
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |             
|Assets                                                      |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|Current assets:                                             |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Cash and cash equivalents                                                                                                                                                                             |                             | $       | 51,457       |        |              | $      | 28,024   |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Short term investments                                                                                                                                                                                |                             |         | 36,368       |        |              |        | 18,518   |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accounts receivable, net                                                                                                                                                                              |                             |         | 948          |        |              |        | 346      |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Prepaid stock based compensation                                                                                                                                                                      |                             |         |             |        |              |        | 4,645    |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Other prepaid expenses and current assets                                                                                                                                                             |                             |         | 3,218        |        |              |        | 1,390    |       
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | Total current assets        |         |              | 91,991 |              |        |          | 52,923 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Property and equipment, net                                 |                                                                                                                                                                                                       |                             | 9,057   |              |        |              | 6,077  |         
|                                                           
|                                                           
|                                                           
|                                                           
|Investments in affiliated companies                         |                                                                                                                                                                                                       |                             | 85      |              |        |              | 80     |         
|                                                           
|                                                           
|                                                           
|                                                           
|Goodwill and intangibles, net                               |                                                                                                                                                                                                       |                             | 15,018  |              |        |              | 788    |         
|                                                           
|                                                           
|                                                           
|                                                           
|Other assets, net                                           |                                                                                                                                                                                                       |                             | 1,611   |              |        |              | 5      |         
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | $                           | 117,762 |              |        | $            | 59,873 |         
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|Liabilities, Redeemable Securities and Stockholders Equity |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|Current liabilities:                                        |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accounts payable                                                                                                                                                                                      |                             |         | 2,257        |        |              |        | 251      |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accrued expenses                                                                                                                                                                                      |                             |         | 5,186        |        |              |        | 4,018    |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Loans and notes payable                                                                                                                                                                               |                             |         | 178          |        |              |        | 254      |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Deferred revenue                                                                                                                                                                                      |                             |         | 34           |        |              |        | 36       |       
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | Total current liabilities   |         |              | 7,655  |              |        |          | 4,559  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Investment in record label joint venture                    |                                                                                                                                                                                                       |                             |        |              |        |              | 3,027  |         
|                                                           
|                                                           
|                                                           
|                                                           
|Long term liabilities                                       |                                                                                                                                                                                                       |                             | 1,530   |              |        |              | 903    |         
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | Total liabilities           |         |              | 9,185  |              |        |          | 8,489  | 
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|Redeemable securities:                                      |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Redeemable common securities, $.01 par value. Authorized
10,800,000 shares. Liquidation preference and redemption value of
$10,778 and $0 in 2000 and 2001, respectively                              |                             |         | 10,778       |        |              |        |         |       
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | Total redeemable securities |         |              | 10,778 |              |        |          |       | 
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|Stockholders equity:                                       |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Common stock, $.01 par value. Authorized 150,000,000 shares; issued
3,779,608 and 3,783,510 in 2000 and 2001, respectively; outstanding
3,779,608 and 3,460,608 shares in 2000 and 2001, respectively |                             |         | 379          |        |              |        | 379      |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Treasury stock, 322,902 shares in 2001                                                                                                                                                                |                             |         |             |        |              |        | (3,442   | )     
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Additional paid-in-capital                                                                                                                                                                            |                             |         | 200,690      |        |              |        | 207,832  |       
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Unearned compensation                                                                                                                                                                                 |                             |         | (20,364      | )      |              |        | (745     | )     
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accumulated deficit                                                                                                                                                                                   |                             |         | (82,906      | )      |              |        | (152,786 | )     
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Unrealized gain on available for sale investments                                                                                                                                                     |                             |         |             |        |              |        | 146      |       
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | Total stockholders equity  |         |              | 97,799 |              |        |          | 51,384 | 
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         
|                                                            |                                                                                                                                                                                                       | $                           | 117,762 |              |        | $            | 59,873 |         
|                                                            |                                                                                                                                                                                                       |                             |         |              |        |              |        |         

See accompanying notes to consolidated financial statements.

F-3



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##### Table of Contents






ARTISTDIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |        |         |  
|--------------------------------------------------------------- | ------------------------------------- | -------------------------------------------- | --------- | ----------------------- | ------- | ---- | --------- | ------ | ------- | - | --------- | ------ | ------- | -
|                                                                |                                       |                                              |           | YEAR ENDED DECEMBER 31,
|                                                                |                                       |                                              |           |                        
|                                                                |                                       |                                              |           | 1999                    |         | 2000 |           | 2001  
|                                                                |                                       |                                              |           |                         |         |      |           |       
|Net revenue:                                                    |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | E-Commerce                            |                                              | $         | 5,282                   |         |      | $         | 12,160 |         |   | $         | 7,542  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Media                                 |                                              |           | 2,910                   |         |      |           | 6,326  |         |   |           | 2,879  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Other                                 |                                              |           | 778                     |         |      |           | 244    |         |   |           |       |        
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Total net revenue                            |           |                         | 8,970   |      |           |        | 18,730  |   |           |        | 10,421  |  
|                                                               
|                                                               
|                                                               
|                                                               
|Cost of revenue:                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Direct cost of product sales          |                                              |           | 5,091                   |         |      |           | 10,381 |         |   |           | 6,137  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Other cost of revenue                 |                                              |           | 2,948                   |         |      |           | 8,103  |         |   |           | 5,728  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Stock-based compensation              |                                              |           | 1,769                   |         |      |           | 7,545  |         |   |           | 8,405  |        
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Total cost of revenue                        |           |                         | 9,808   |      |           |        | 26,029  |   |           |        | 20,270  |  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                       | Gross loss                                   |           |                         | (838    | )    |           |        | (7,299  | ) |           |        | (9,849  | )
|                                                               
|                                                               
|                                                               
|                                                               
|Operating expenses:                                             |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Website development                   |                                              |           | 1,815                   |         |      |           | 5,364  |         |   |           | 3,726  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Sales and marketing                   |                                              |           | 13,222                  |         |      |           | 25,623 |         |   |           | 5,726  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | General and administrative            |                                              |           | 9,469                   |         |      |           | 17,632 |         |   |           | 14,842 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Stock-based compensation              |                                              |           | 30,304                  |         |      |           | 5,067  |         |   |           | 12,415 |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Depreciation and amortization         |                                              |           | 2,509                   |         |      |           | 6,248  |         |   |           | 6,512  |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Loss from impairment of goodwill      |                                              |           |                        |         |      |           |       |         |   |           | 11,444 |        
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Loss from operations                         |           |                         | (58,157 | )    |           |        | (67,233 | ) |           |        | (64,514 | )
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Income/(loss) from equity investments |                                              |           | 50                      |         |      |           | (235   | )       |   |           | (8,998 | )      
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Interest income, net                  |                                              |           | 281                     |         |      |           | 5,969  |         |   |           | 3,585  |        
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Loss from continuing operations before taxes |           | $                       | (57,826 | )    |           | $      | (61,499 | ) |           |        | (69,927 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Income taxes                                                    |                                       |                                              |          |                         |         |      |          |        |         |   |          |       
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Loss from continuing operations              |           | $                       | (57,826 | )    |           | $      | (61,499 | ) |           | $      | (69,927 | )
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |                                       | Income from discontinued operations          |           |                         | 22      |      |           |        | 2,191   |   |           |        | 47      |  
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       | Net loss                                     |           | $                       | (57,804 | )    |           | $      | (59,308 | ) |           | $      | (69,880 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Interest on rescission offer                                    |                                       |                                              | 237       |                         |         |      | 532       |        |         |   | 691       |       
|                                                               
|                                                               
|                                                               
|                                                               
|Dividends on redeemable preferred securities                    |                                       |                                              | 1,414     |                         |         |      | 963       |        |         |   |          |       
|                                                               
|                                                               
|                                                               
|                                                               
|Beneficial conversion feature on redeemable preferred stock     |                                       |                                              |          |                         |         |      | 24,375    |        |         |   |          |       
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|Net loss attributable to common shareholders                    |                                       | $                                            | (59,455   | )                       |         | $    | (85,178   | )      |         | $ | (70,571   | )     
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|Basic and diluted loss per share from continuing operations     |                                       | $                                            | (17.16    | )                       |         | $    | (27.52    | )      |         | $ | (19.50    | )     
|                                                               
|                                                               
|                                                               
|                                                               
|Basic and diluted income per share from discontinued
operations |                                       |                                              | 0.02      |                         |         |      | 0.69      |        |         |   | 0.01      |       
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                | Basic and diluted loss per share      |                                              | $         | (17.14                  | )       |      | $         | (26.83 | )       |   | $         | (19.49 | )      
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       
|                                                               
|                                                               
|                                                               
|                                                               
|Weighted average common shares outstanding                      |                                       |                                              | 1,417,746 |                         |         |      | 3,175,126 |        |         |   | 3,620,161 |       
|                                                                |                                       |                                              |           |                         |         |      |           |        |         |   |           |       

See accompanying notes to consolidated financial statements

F-4



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##### Table of Contents






ARTISTDIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS AND STOCKHOLDERS EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         |         |  
|---------------------------- | -------------------------------------------------------------------------- |  | ------------ | --------- | -------- | - | ------- | --- | ---------- | - | -------- | ------ | ------------ | - | -------- | ------- | ----------- | - | ------ | ------- | - | - | -------------- | ------- | - | - | -------- | ------- | - | - | ---------- | --- |  | - | ------- | ------- | -
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   | Unrealized |     |  |   |        
|                             |                                                                            |  | Common Stock |           |          |   |         |     | Additional |   |          |        |              |   |          |         |             |   |        |         |   |   | gain on avail. |         |   |   |         
|                             |                                                                            |  |              |           | Treasury |   | Paid In |     | Members'   |   | Unearned |        | Accumulated  |   | for sale |         | Total      
|                             |                                                                            |  | Shares       |           | Amount   |   | Stock   |     | Capital    |   | Interest |        | Compensation |   | Deficit  |         | investments |   | Equity
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |       
|Balance at December 31, 1998 |                                                                            |  |             |           |          | $ |        |     |            | $ |         |        |              | $ |         |         |             | $ | 3,872  |         |   | $ | (502           | )       |   | $ | (6,806   | )       |   | $ |           |     |  | $ | (3,436  | )      
|                            
|                            
|                            
|                            
|                             | Issuance of securities                                                     |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        | 13,859  |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 13,859  |  
|                            
|                            
|                            
|                            
|                             | Issuance of options/warrants                                               |  |              |          |          |   |         |    |            |   |          |        |              |   |          |        |             |   |        | 51,202  |   |   |                | (51,202 | ) |   |          |        |   |   |            |     |  |   |         |        |  
|                            
|                            
|                            
|                            
|                             | Variable equity interests                                                  |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        | 16,470  |   |   |                | (16,470 | ) |   |          |        |   |   |            |     |  |   |         |        |  
|                            
|                            
|                            
|                            
|                             | Amortization of unearned compensation                                      |  |              |          |          |   |         |    |            |   |          |        |              |   |          |        |             |   |        |        |   |   |                | 31,198  |   |   |          |        |   |   |            |     |  |   |         | 31,198  |  
|                            
|                            
|                            
|                            
|                             | Payment of preferred dividend                                              |  |              |          |          |   |         |    |            |   |          |        |              |   |          |        |             |   |        | (85     | ) |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (85     | )
|                            
|                            
|                            
|                            
|                             | Conversion of preferred return to common securities                        |  |              |          |          |   |         |    |            |   |          |        |              |   |          |        |             |   |        | 355     |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 355     |  
|                            
|                            
|                            
|                            
|                             | Accrual of dividends to preferred members                                  |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        | (1,414  | ) |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (1,414  | )
|                            
|                            
|                            
|                            
|                             | Accretion of redeemable stock                                              |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        | (184    | ) |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (184    | )
|                            
|                            
|                            
|                            
|                             | Conversion to C corporation                                                |  |              | 1,369,900 |          |   |         | 137 |            |   |          |       |              |   |          | 42,926  |             |   |        | (84,075 | ) |   |                |        |   |   |          | 41,012  |   |   |            |     |  |   |         |        |  
|                            
|                            
|                            
|                            
|                             | Payment of preferred dividend by C corporation                             |  |              |           |          |   |         |    |            |   |          |       |              |   |          | (191    | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (191    | )
|                            
|                            
|                            
|                            
|                             | Exercise of stock option                                                   |  |              | 17,667    |          |   |         | 2   |            |   |          |        |              |   |          | 669     |             |   |        |         |   |   |                |        |   |   |          |         |   |   |            |     |  |   |         | 671     |  
|                            
|                            
|                            
|                            
|                             | Conversion of preferred return to common stock
as a C corporation          |  |              | 21,300    |          |   |         | 2   |            |   |          |        |              |   |          | 765     |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         | 767     |  
|                            
|                            
|                            
|                            
|                             | Accrual for securities subject to rescission offer                         |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (6,740  | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (6,740  | )
|                            
|                            
|                            
|                            
|                             | Notes issued to shareholders                                              |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (741    | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (741    | )
|                            
|                            
|                            
|                            
|                             | Net loss                                                                   |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        |        |   |   |                |        |   |   |          | (57,804 | ) |   |            |     |  |   |         | (57,804 | )
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         |        
|Balance at December 31, 1999 |                                                                            |  | 1,408,867    |           |          | $ | 141     |     |            | $ |         |        |              | $ | 36,688   |         |             | $ |       |         |   | $ | (36,976        | )       |   | $ | (23,598  | )       |   | $ |           |     |  | $ | (23,745 | )      
|                            
|                            
|                            
|                            
|                             | Issuance of securities upon initial public offering, net
of offering costs |  |              | 500,000   |          |   |         | 50  |            |   |          |       |              |   |          | 52,385  |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 52,435  |  
|                            
|                            
|                            
|                            
|                             | Issuance of securities for acquisition                                     |  |              | 86,604    |          |   |         | 9   |            |   |          |       |              |   |          | 2,850   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 2,859   |  
|                            
|                            
|                            
|                            
|                             | Issuance of securities for employee stock purchase plan                    |  |              | 6,758     |          |   |         | 1   |            |   |          |       |              |   |          | 39      |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 40      |  
|                            
|                            
|                            
|                            
|                             | Series C redeemable preferred stock offering costs                         |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (4,800  | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (4,800  | )
|                            
|                            
|                            
|                            
|                             | Issuance/cancellation of options/warrants                                  |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (1,372  | )           |   |        |        |   |   |                | 1,372   |   |   |          |        |   |   |            |     |  |   |         |        |  
|                            
|                            
|                            
|                            
|                             | Exercise of stock options                                                  |  |              | 40,907    |          |   |         | 4   |            |   |          |       |              |   |          | 1,549   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 1,553   |  
|                            
|                            
|                            
|                            
|                             | Amortization of unearned compensation                                      |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        |        |   |   |                | 15,240  |   |   |          |        |   |   |            |     |  |   |         | 15,240  |  
|                            
|                            
|                            
|                            
|                             | Variable
equity interests                                                  |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (6,645  | )           |   |        |        |   |   |                |         |   |   |          |        |   |   |            |     |  |   |         | (6,645  | )
|                            
|                            
|                            
|                            
|                             | Issuance
of stock appreciation rights/options                              |  |              |          |          |   |         |    |            |   |          |       |              |   |          | 2,992   |             |   |        |        |   |   |                |         |   |   |          |        |   |   |            |     |  |   |         | 2,992   |  
|                            
|                            
|                            
|                            
|                             | Variable equity interests                                                  |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (6,645  | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (6,645  | )
|                            
|                            
|                            
|                            
|                             | Issuance of stock appreciation rights/options                              |  |              |          |          |   |         |    |            |   |          |       |              |   |          | 2,992   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 2,992   |  
|                            
|                            
|                            
|                            
|                             | Issuance of stock for settlement agreement                                 |  |              |          |          |   |         |     |            |   |          |       |              |   |          | 1,025   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 1,025   |  
|                            
|                            
|                            
|                            
|                             | Accrual of dividends to preferred shareholders                             |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (963    | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (963    | )
|                            
|                            
|                            
|                            
|                             | Conversion
of redeemable preferred stock to common shares                  |  |              | 1,719,428 |          |   |         | 172 |            |   |          |       |              |   |          | 118,516 |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 118,688 |  
|                            
|                            
|                            
|                            
|                             | Conversion
of redeemable common shares to common shares                    |  |              | 17,044    |          |   |         | 2   |            |   |          |       |              |   |          | 2,350   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 2,352   |  
|                            
|                            
|                            
|                            
|                             | Accrual for securities subject to rescission offer                         |  |              |          |          |   |         |    |            |   |          |       |              |   |          | (3,924  | )           |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | (3,924  | )
|                            
|                            
|                            
|                            
|                             | Net loss                                                                   |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        |        |   |   |                |        |   |   |          | (59,308 | ) |   |            |     |  |   |         | (59,308 | )
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         |        
|Balance at December 31, 2000 |                                                                            |  | 3,779,608    |           |          | $ | 379     |     |            | $ |         |        |              | $ | 200,690  |         |             | $ |       |         |   | $ | (20,364        | )       |   | $ | (82,906  | )       |   | $ |           |     |  | $ | 97,799  |        
|                            
|                            
|                            
|                            
|                             | Cancellation of options/warrants                                           |  |              |          |          |   |         |    |            |   |          |        |              |   |          | (2,362  | )           |   |        |        |   |   |                | 2,362   |   |   |          |        |   |   |            |     |  |   |         |        |  
|                            
|                            
|                            
|                            
|                             | Amortization of unearned compensation                                      |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        |        |   |   |                | 14,547  |   |   |          |        |   |   |            |     |  |   |         | 14,547  |  
|                            
|                            
|                            
|                            
|                             | Repurchase of common stock                                                 |  |              | (239,499  | )        |   |         |     |            |   |          | (2,734 | )            |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         | (2,734  | )
|                            
|                            
|                            
|                            
|                             | Issuance of securities for employee stock purchase plan                    |  |              | 3,902     |          |   |         |     |            |   |          |       |              |   |          | 17      |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         | 17      |  
|                            
|                            
|                            
|                            
|                             | Completion of rescission offer                                             |  |              | (83,403   | )        |   |         |    |            |   |          | (708   | )            |   |          | 9,487   |             |   |        |        |   |   |                |        |   |   |          |        |   |   |            |     |  |   |         | 8,779   |  
|                            
|                            
|                            
|                            
|                             | Reclassification of unearned compensation to prepaid                       |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                | 2,710   |   |   |          |         |   |   |            |     |  |   |         | 2,710   |  
|                            
|                            
|                            
|                            
|                             | Unrealized gain or loss on available for sale investments                  |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            | 146 |  |   |         | 146     |  
|                            
|                            
|                            
|                            
|                             | Net loss                                                                   |  |              |          |          |   |         |    |            |   |          |       |              |   |          |        |             |   |        |        |   |   |                |        |   |   |          | (69,880 | ) |   |            |     |  |   |         | (69,880 | )
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         |        
|Balance at December 31, 2001 |                                                                            |  | 3,460,608    |           |          | $ | 379     |     |            | $ | (3,442   | )      |              | $ | 207,832  |         |             | $ |       |         |   | $ | (745           | )       |   | $ | (152,786 | )       |   | $ | 146        |     |  | $ | 51,384  |        
|                             |                                                                            |  |              |           |          |   |         |     |            |   |          |        |              |   |          |         |             |   |        |         |   |   |                |         |   |   |          |         |   |   |            |     |  |   |         |        

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents






ARTISTDIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |         |        |        |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | ------ | ----------------------- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        | YEAR ENDED DECEMBER 31,
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                        
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        | 1999                    |         | 2000    |        | 2001  
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |       
|Cash flows from operating activities:                |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                                           |                                                   | $                                                        | (57,804                                             | )      |                         | $       | (59,308 | )      |        | $       | (69,880 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Income from discontinued operations                                                                |                                                   |                                                          | 22                                                  |        |                         |         | 2,191   |        |        |         | 47      |       
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                     | Loss from continuing operations                                                                    |                                                   |                                                          | (57,826                                             | )      |                         |         | (61,499 | )      |        |         | (69,927 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments
to reconcile loss from continuing operations to net cash
used in operating activities: |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Depreciation and amortization                     |                                                          |                                                     | 2,509  |                         |         |         | 6,248  |        |         |         | 6,512  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | (Income)/loss from equity investments             |                                                          |                                                     | (50    | )                       |         |         | 235    |        |         |         | 8,998  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Loss on sale of equipment                         |                                                          |                                                     |       |                         |         |         |       |        |         |         | 34     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Loss from impairment of goodwill                  |                                                          |                                                     |       |                         |         |         |       |        |         |         | 11,444 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Allowance for doubtful accounts and sales returns |                                                          |                                                     | 29     |                         |         |         | 341    |        |         |         | 1,131  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Write-off of investment                           |                                                          |                                                     | 250    |                         |         |         |       |        |         |         |       |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Stock based compensation                          |                                                          |                                                     | 32,073 |                         |         |         | 12,612 |        |         |         | 20,820 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    | Changes in operating assets and liabilities:      |                                                          |                                                     |        |                         |         |         |        |        |         |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   | Accounts receivable                                      |                                                     |        | (571                    | )       |         |        | (288   | )       |         |        | 647    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   | Prepaid expenses and other current assets                |                                                     |        | (6,628                  | )       |         |        | 3,638  |         |         |        | 328    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   | Other assets                                             |                                                     |        | (2,054                  | )       |         |        | 2,476  |         |         |        | 241    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   | Accounts payable, accrued expenses and other liabilities |                                                     |        | 6,384                   |         |         |        | (1,032 | )       |         |        | (2,449 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   | Deferred revenue                                         |                                                     |        | (120                    | )       |         |        | (19    | )       |         |        | 2      |        
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                     |                                                                                                    |                                                   |                                                          | Net cash used in continuing operations              |        |                         | (26,004 | )       |        |        | (37,288 | )       |        |        | (22,219 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                    |                                                   |                                                          | Net cash provided by discontinued operations        |        |                         | 22      |         |        |        | 2,191   |         |        |        | 47      |  
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                     |                                                                                                    |                                                   |                                                          | Net cash used in operating activities               |        |                         | (25,982 | )       |        |        | (35,097 | )       |        |        | (22,172 | )
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Cash flows from investing activities:                |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                                                |                                                   |                                                          | (3,513                                              | )      |                         |         | (7,523  | )      |        |         | (840    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the sales of equipment                                                               |                                                   |                                                          |                                                    |        |                         |         |        |        |        |         | 60      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Sale/maturity (purchase) of short-term investments, net                                            |                                                   |                                                          |                                                    |        |                         |         | (36,368 | )      |        |         | 17,996  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of programming rights                                                                     |                                                   |                                                          | (675                                                | )      |                         |         |        |        |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid for acquisitions                                                                         |                                                   |                                                          | (237                                                | )      |                         |         | (2,015  | )      |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investments in affiliated companies                                                                |                                                   |                                                          | (30                                                 | )      |                         |         | (250    | )      |        |         | (279    | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment
in ARTISTdirect Records                                                                 |                                                   |                                                          |                                                    |        |                         |         |        |        |        |         | (5,300  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investments in trademarks                                                                          |                                                   |                                                          |                                                    |        |                         |         | (120    | )      |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Distribution of earnings from equity investment                                                    |                                                   |                                                          | 33                                                  |        |                         |         |        |        |        |         | 5       |       
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                     |                                                                                                    |                                                   |                                                          | Net cash (used in) provided by investing activities |        |                         | (4,422  | )       |        |        | (46,276 | )       |        |        | 11,642  |  
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Cash flows from financing activities:                |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase of common stock                                                                         |                                                   |                                                          |                                                    |        |                         |         |        |        |        |         | (2,734  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Rescission purchases of common stock and options                                                   |                                                   |                                                          |                                                    |        |                         |         |        |        |        |         | (10,186 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from employee stock purchase plan                                                         |                                                   |                                                          |                                                    |        |                         |         | 40      |        |        |         | 17      |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of preferred dividends                                                                     |                                                   |                                                          | (276                                                | )      |                         |         |        |        |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of notes to shareholders                                                                   |                                                   |                                                          |                                                    |        |                         |         | (741    | )      |        |         |        |       
|                                                     | Proceeds from exercise of stock options                                                            |                                                   |                                                          | 671                                                 |        |                         |         | 1,553   |        |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of preferred securities                                                     |                                                   |                                                          | 97,188                                              |        |                         |         | 15,224  |        |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of Series C redeemable preferred stock offering costs                                      |                                                   |                                                          |                                                    |        |                         |         | (4,800  | )      |        |         |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from initial public offering, net of offering costs paid                                  |                                                   |                                                          |                                                    |        |                         |         | 52,435  |        |        |         |        |       
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Net cash provided by (used in) financing activities  |                                                                                                    |                                                   | 97,583                                                   |                                                     |        |                         | 63,711  |         |        |        | (12,903 | )      
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                                   | 67,179                                                   |                                                     |        |                         | (17,662 | )       |        |        | (23,433 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of period     |                                                                                                    |                                                   | 1,940                                                    |                                                     |        |                         | 69,119  |         |        |        | 51,457  |        
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Cash and cash equivalents at end of period           |                                                                                                    | $                                                 | 69,119                                                   |                                                     |        | $                       | 51,457  |         |        | $      | 28,024  |        
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|Supplemental disclosure of cash flow information:    |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid during the period for interest                                                           |                                                   | $                                                        | 11                                                  |        |                         | $       | 43      |        |        | $       | 11      |       
|                                                     |                                                                                                    |                                                   |                                                          |                                                     |        |                         |         |         |        |        |         |        

F-6



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##### Table of Contents






ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

ORGANIZATION

ARTISTdirect, Inc. (the Company) was formed on October 6, 1999 upon its
merger with ARTISTdirect, LLC (the Capital Reorganization). The Capital
Reorganization was only a change in the form of ownership of the Company.
ARTISTdirect, LLC was organized as a California limited liability company and
commenced operations on August 8, 1996. ARTISTdirect, LLC had a 99% ownership
interest in ARTISTdirect Agency LLC, Kneeling Elephant Records, LLC and
ARTISTdirect New Media, LLC (Affiliated Companies) and has consolidated their
results since inception. In February 1999, Ultimate Band List, LLC (UBL)
acquired the remaining 80% of iMusic, Inc., a Washington corporation, that it
did not already own. On May 18, 1999, ARTISTdirect, LLC entered into an
agreement with UBL and the Affiliated Companies whereby units in ARTISTdirect,
LLC were exchanged for the membership interests of UBL and the Affiliated
Companies (Exchange Transaction). The acquisition of the minority interest in
UBL was accounted for under purchase accounting. On May 31, 2001, the Company,
through its wholly-owned subsidiary, ARTISTdirect Recordings, Inc., agreed to
acquire a 50% equity interest in a joint 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.

PRINCIPLES OF CONSOLIDATION

The accompanying financial statements include the consolidated accounts of
the Company and its subsidiaries in which it has controlling interests in the
form of voting and operating control. All significant intercompany accounts
and transactions have been eliminated for all periods presented. UBL generated
losses on its operations for all periods prior to the Companys purchase of the
minority interest in UBL. Due to the full funding of those losses by the
Company and its members, none of the losses generated by UBL during the periods
presented have been allocated to the minority holders. With respect to
ARTISTdirect Records, the Company has recorded 100% of the losses attributable
to that venture based on the Companys commitment to fund 100% of its
operations. However, given that the Company is not deemed to have voting or
operating control, the Company accounts for these losses on the equity method
of accounting as income (loss) from equity investments in its
consolidated statements of
operations.

LIQUIDITY

The Company has relied on various equity financings to fund its operations
in the past. During 2001, the Company entered into a record label joint
venture and as of December 31, 2001 had funded approximately $5.3 million for
the operations of this venture. The Company is committed to fund up to an
additional $44.7 million for the operations of this venture through June 2006
and up to $15 million in any one year, which may be increased
with the approval of the Companys Board of Directors. The Company believes
that its available cash resources will be sufficient to meet its anticipated
cash needs for working capital and the funding obligations for the record label
joint venture for at least the next 12 months.



|2. |  | CAPITAL REORGANIZATION AND
REVERSE STOCK SPLITS
|-- |  | -----------------------------------------------

The common units and redeemable preferred units outstanding immediately
prior to the Capital Reorganization were converted into common stock and
redeemable preferred stock of the C corporation. Each common and preferred
unit converted into one share of common and preferred stock, respectively.

On March 21, 2000, and July 5, 2001, the Company effected a 1 for 4
reverse stock split and a 1 for 10 reverse stock split (the Reverse Stock
Splits), respectively. The outstanding common securities, options and
warrants have been retroactively adjusted to reflect the Reverse Stock Splits.
All discussion of equity amounts in the following footnotes reflects the effect
of the Capital Reorganization and Reverse Stock Splits.

F-7



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)



|3. |  | CRITICAL ACCOUNTING POLICIES
|-- |  | ----------------------------

CASH EQUIVALENTS

Cash equivalents consist of investments, which are readily convertible
into cash and have maturities of three months or less at the time of purchase.

SHORT TERM INVESTMENTS

The Companys investments were classified as held-to-maturity through
December 31, 2001 as the Company had the intent and ability to hold the
securities to maturity. The securities were stated at amortized cost, adjusted
for amortization of premiums and accretion discounts to maturity. Effective
December 31, 2001, the Company classified the investments as available-for-sale
and has recorded the investments at fair value, with the difference between
amortized cost and fair value being recorded as a component of stockholders
equity. The Company invests primarily in fixed income securities with
maturities of one year or less at the time of purchase.

DEPRECIATION

Depreciation is provided using the straight-line method over the following
estimated useful lives:

|                                |  |                                                            
|------------------------------- |  | -----------------------------------------------------------
|Computer equipment and software |  | 3 years                                                    
|                               
|                               
|                               
|                               
|Furniture and fixtures          |  | 7 years                                                    
|                               
|                               
|                               
|                               
|Leasehold improvements          |  | Lesser of estimated
useful life or life of
lease (10 years)

REVENUE RECOGNITION

E-commerce
revenue consists primarily of the gross amount of sales revenue
paid by the customer for recorded music and merchandise sold via the Internet,
including shipping fees, and is recognized when the products are shipped. The
Company processes customer orders and payments, obtains merchandise from
merchandisers and manufacturers, obtains music from a third party distributor,
and contracts for warehousing, fulfillment, and customer service. The Company
takes title to all products sold and bears the risk of loss for collections and
non-delivery subject to any recourse against the shipper. E-commerce revenue
is subject to amounts due to the respective artists based on their contracts,
and such expense is recorded as part of direct cost of product sales.

The Company records amounts charged to customers for shipping and handling
in accordance with Emerging Issues Task Force 00-10, Accounting for Shipping
and Handling Fees and Costs. Pursuant to EITF 00-10, the Company records
amounts charged to customers for shipping and handling as revenue, and records
the related costs incurred for shipping and handling to direct cost of product
sales in the consolidated statements of operations. For the years ended
December 31, 1999, 2000 and 2001, the Company recorded $832,000, $1.9 million
and $1.5 million, respectively, as revenue for shipping and handling fees
charged to customers. For the years ended December 31, 1999, 2000 and 2001,
the Company recorded $845,000, $1.6 million and $1.1 million, respectively, of
shipping and handling costs as direct cost of product sales in the consolidated
statements of operations.

Media revenue consists primarily of the sale of advertisements and
sponsorships, both online and offline, under short-term contracts. To date,
the duration of the Companys advertising and sponsorship commitments has
generally averaged from one to three months. The Companys online obligations
typically include the guarantee of a minimum number of impressions or times
that an advertisement appears in pages viewed by the users of the Companys
online properties. Online advertising revenue is generally recognized as the
impressions are served during the period in which the advertisement is
displayed, provided that no significant obligations of the Company remain and
collection of the resulting receivable is reasonably assured. The Company
records a reserve for contracts in which the guarantee of a minimum number of
impressions are not met. There were no such instances as of December 31, 1999,
2000 and 2001. Revenue generated from offline advertising and sponsorships is
recognized ratably over the terms of the sponsorship agreements.

F-8



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

The Company in the past has entered into several contracts with
advertisers whereby the parties exchanged online and offline advertising. This
revenue was recognized as trade and barter. Trade and barter is valued based
upon similar cash transactions, which have been entered into within six months
prior to the respective trade and barter agreement. Trade and barter revenue
was $98,000, $309,000 and $0 for years ended December 31, 1999, 2000 and 2001,
respectively.

Other
revenue represents overhead advances to the Companys former record
label and was recognized as revenue evenly over the period covered by
the advances.

COST OF REVENUE

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

DISCONTINUED OPERATIONS

The
Company has accounted for its music talent agency division as a discontinued
operation in accordance with Accounting Principles Board (APB) No. 30,
Accounting for Discontinued Operations, and recorded the net results of this
business segment in a single line entitled Income (loss) from discontinued
operations in the consolidated statements of operations for the years ended December 31,
1999, 2000 and 2001. Agency commission revenue is recognized in accordance
with the terms of the representation agreements between the Company and its
clients. Revenue is generally recorded upon payment for the performance of
services or delivery of materials created by the artists represented.

INVENTORIES

Inventories, included in prepaid expenses and other current assets,
consist of music-related merchandise and amounts advanced for inventory on
behalf of artists and are stated at the lower of cost or net realizable value.
Cost is determined using the first-in, first-out method.

INCOME TAXES

Prior to the Capital Reorganization, the Company was treated as a limited
liability company for federal and state income tax reporting purposes whereby
income (or losses) of the Company was reported in the individual income tax
returns of the Companys members. After the Capital Reorganization, the
Company began accounting for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

F-9



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

WEBSITE DEVELOPMENT COSTS

Website development costs consist primarily of third-party development
costs and payroll and related expenses for in-house Web site development costs
incurred in the start-up and production of the Companys content and services.
These costs are expensed as incurred. The implementation of Emerging Issues
Task Force No. 00-02 Accounting for Website Development Costs, effective July
1, 2000, did not have a material impact on the consolidated financial
statements.

ADVERTISING COSTS

Advertising costs are expensed as incurred and totaled $7.7 million, $14.7
million and $2.7 million during the years ended December 31, 1999, 2000 and
2001, respectively.

INTANGIBLE ASSETS

Intangible assets consist almost entirely of goodwill resulting from the
excess of the purchase price over the net assets acquired from the acquisition
of a minority interest in the UBL, and the acquisitions of iMusic, Inc. and
Mjuice.com, Inc. Intangible assets were being amortized over a 5-year period.
The carrying amount of intangible assets is net of accumulated amortization of
$2.1 million, $5.7 million and $8.3 million as of December 31, 1999, 2000 and
2001, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL

The Company periodically reviews the carrying amounts of long-lived assets
to determine whether current events or circumstances warrant adjustments to
such carrying amounts. An impairment adjustment is necessary in the event the
net book value of such long-lived assets and related goodwill exceeds the
future undiscounted cash flows attributable to such assets. In such an event,
the loss is measured by the amount that the carrying value of such assets
exceeds their fair value. Considerable management judgment is necessary to
estimate the fair value of assets; accordingly, actual results could vary
significantly from such estimates.

In 2001, the Company determined that the remaining goodwill associated
with the acquisition of Mjuice was fully impaired due to the Companys decision to
wind down the related operation. The Company recorded a loss from impairment
of the goodwill from the Mjuice transaction of $4.5 million. In addition, the
Company determined that there was insufficient basis to support the entire
carrying amount of goodwill associated with the 1999 acquisitions of iMusic and
UBL based upon the projected undiscounted future cash flows related to the
underlying assets of these goodwill amounts. Online advertising and
promotions, which have been the primary source of revenue derived from these
assets, declined significantly during 2001 affecting the value of these assets,
and the Company cannot reasonably estimate if or when these revenues will
recover. As a result, the Company recorded a loss from impairment of the
goodwill from these transactions of $7.0 million based on current estimates of
discounted cash flows. For the year ended December 31, 2001, the Company
recorded an aggregate $11.4 million loss from impairment of goodwill. Both of
these write-downs were reflected in the Media segment operations.

CONCENTRATION OF CREDIT RISK AND SUPPLIER RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, short-term
investments and trade accounts receivable. The Company places its cash and
short- term investments in high credit quality instruments. Cash balances at
certain financial institutions may exceed the FDIC insurance limits. The
Company performs ongoing credit evaluations of its customers but does not
require collateral. Exposure to losses on receivables is principally dependent
on each customers financial condition. The Company monitors its exposure to
credit losses and maintains allowances for anticipated losses.

The Company purchases a large percentage of its music-related merchandise
inventory from a limited number of suppliers. The Company is subject to risk
in the event that any of the suppliers is unable to fulfill their orders.

F-10



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments, which include cash,
short-term investments, accounts receivable, accounts payable and accrued
expenses, approximate fair value because of the short maturity of these
instruments.

INVESTMENTS IN AFFILIATED COMPANIES

Investments in affiliated companies in which the Companys voting interest
is 20% to 50%, or in which the Company is able to exert significant influence
in instances where the voting interest is less than 20%, are accounted for
under the equity method of accounting. Under this method, the investment,
originally recorded at cost, is adjusted to recognize the Companys share of
the net earnings or losses of the affiliates as they occur rather than as
dividends or other distributions received. The Companys share of losses is
generally limited to the extent of the Companys investment in, advances to and
commitments for the investee.

The Company is accounting for its investment in ARTISTdirect Records, a 50/50
joint venture with Ted Field that was formed in July 2001, on the equity method
of accounting. However, the Company has recorded 100% of the
ventures losses
for the year ended December 31, 2001 since it is committed under the venture
agreement to fund 100% of the operations.

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, etc.) as if they had been
converted at the beginning of the periods presented. Potential common shares
that have an anti-dilutive effect (i.e., those that increase income per share
or decrease loss per share) are excluded from diluted EPS. Dividends to
preferred shareholders and interest on the rescission offer balance are added
to the net loss in determining the net loss attributable to common
shareholders. Prior to the Capital Reorganization on October 6, 1999 (see Note
2), the Company was organized as a limited liability company and had not issued
common stock. Accordingly, no historical loss per share information is
included in the attached financial statements for periods prior to October 6,
1999.

Included in net loss attributable to common shareholders for the year
ended December 31, 2000 is the effect of the beneficial conversion feature of
the Series C redeemable preferred stock that converted into common shares as of
March 31, 2000 in connection with the initial public offering. The value of
the beneficial conversion feature was calculated based on the $24.00 per share
difference between the initial public offering price of $120.00 and the
effective conversion price of $96.00 multiplied by the 1,015,625 shares of
common stock issued to the Series C shareholders.

The diluted loss per share excludes approximately 760,000, 980,000 and
820,000 securities as of December 31, 1999, 2000 and 2001, respectively, since
the impact 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

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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

Conjunction with Selling, Goods or Services, which addresses the
measurement date and recognition approach for such transactions.

The Company recognizes compensation expense related to variable awards in
accordance with FIN 28. For fixed awards, the Company recognizes expense over
the vesting period or the period of service.

Stock-based compensation is comprised of sales and marketing expense of
$8.5 million, $2.2 million and $6.3 million for the years ended December 31,
1999, 2000 and 2001, respectively, and general and administrative expense of
$21.8 million, $2.9 million and $6.1 million for the years ended December 31,
1999, 2000 and 2001, respectively.

COMPREHENSIVE
INCOME

The Companys only component of other comprehensive income is the
unrealized gain on available for sale securities, which was $146,000 as of
December 31, 2001. This amount has been recorded as a separate component of
stockholders equity.

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 include the allowance for bad debts, impairment of long-lived
assets, stock-based compensation and the valuation allowance on deferred tax
assets. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS
No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142).
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations. SFAS No. 141 specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS No. 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.

The Company adopted the provisions of SFAS No. 141 as of July 1, 2001,
and SFAS No. 142 is effective January 1, 2002. Goodwill and intangible
assets determined to have an indefinite useful life acquired in a purchase
business combination completed after June 30, 2001, but before SFAS No. 142
is adopted in full, are not amortized. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 continued to
be amortized and tested for impairment prior to the full adoption of SFAS No.
142.

Upon adoption of SFAS No. 142, the Company is required to evaluate its
existing intangible assets and goodwill that were acquired in purchase
business combinations, and to make any necessary reclassifications in order
to conform with the new classification criteria in SFAS No. 141 for
recognition separate from goodwill. The Company will be required to reassess
the useful lives and residual values of all intangible assets acquired, and
make any necessary amortization period adjustments by the end of the first
interim period after adoption. If an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS No.
142 within the first interim period. Impairment is measured as the excess of
carrying value over the fair value of an intangible asset with an indefinite
life. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in
the first interim period.

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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with SFAS No. 142s transitional goodwill impairment
evaluation, the Statement requires the Company to perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of January 1, 2002. The Company will
then have up to six months from January 1, 2002 to determine the fair value
of each reporting unit and compare it to the carrying amount of the reporting
unit. To the extent the carrying amount of a reporting unit exceeds the fair
value of the reporting unit, an indication exists that the reporting unit
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. The second step is required to be completed as
soon as possible, but no later than the end of the year of adoption. In the
second step, the Company must compare the implied fair value of the reporting
unit goodwill with the carrying amount of the reporting unit goodwill, both
of which would be measured as of the date of adoption. The implied fair
value of goodwill is determined by allocating the fair value of the reporting
unit to all of the assets (recognized and unrecognized) and liabilities of
the reporting unit in a manner similar to a purchase price allocation, in
accordance with SFAS No. 141. The residual fair value after this allocation
is the implied fair value of the reporting unit goodwill. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the Companys statement of income.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of the date of adoption of SFAS No. 142, the Company will have
unamortized goodwill in the amount of approximately $800,000, which will be
subject to the transition provisions of SFAS No. 142. Amortization expense
related to goodwill was $2.8 million and $3.6 million for the years ended
December 31, 2001, and 2000, respectively. Because of the extensive effort
needed to comply with adopting SFAS No. 141 and No. 142, it is not
practicable to reasonably estimate the impact of adopting the Statements on
the Companys financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment losses
as the cumulative effect of a change in accounting principle.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to
record the fair value of an asset retirement obligation as a liability in the
period in which it incurs a legal obligation associated with the retirement
of tangible long-lived assets that result from the acquisition, construction,
development and/or normal use of the assets. The Company also records a
corresponding asset that is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage
of time and changes in the estimated future cash flows underlying the
obligation. The Company is required to adopt SFAS No. 143 on January 1,
2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. This Statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. SFAS No. 144
requires companies to separately report discontinued operations and extends
that reporting to a component of an entity that either has been disposed of
(by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.

F-13



---



##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)



|4. |  | SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
|-- |  | -----------------------------------------------------------------

Significant non-cash investing and financing activities are reflected in
the following table:

|                                                                                |                                   |                            |        |                         |        |      |         |        |       |   |        |   |   | 
|------------------------------------------------------------------------------- | --------------------------------- | -------------------------- | ------ | ----------------------- | ------ | ---- | ------- | ------ | ----- | - | ------ | - | - | 
|                                                                                |                                   |                            |        | YEAR ENDED DECEMBER 31,
|                                                                                |                                   |                            |        |                        
|                                                                                |                                   |                            |        | 1999                    |        | 2000 |         | 2001  
|                                                                                |                                   |                            |        |                         |        |      |         |       
|Cash paid for acquisitions:                                                     |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Fair value of net assets acquired |                            | $      | 2,463                   |        |      | $       | 5,077  |       |   | $      |  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Net liabilities assumed           |                            |        | (185                    | )      |      |         | (203   | )     |   |        |  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Common units/stock issued         |                            |        | (2,168                  | )      |      |         | (2,859 | )     |   |        |  |  
|                                                                                |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|                                                                                |                                   | Cash paid for acquisitions |        | $                       | 110    |      |         | $      | 2,015 |   |        | $ |  | 
|                                                                                |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|Issuance of common securities for minority interests in affiliated companies:   |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Issuance of common securities     |                            | $      | 13,922                  |        |      | $       |       |       |   | $      |  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Acquisition costs  cash paid     |                            |        | 127                     |        |      |         |       |       |   |        |  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Net assets acquired               |                            |        | (938                    | )      |      |         |       |       |   |        |  |  
|                                                                                |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|                                                                                |                                   | Goodwill                   |        | $                       | 13,111 |      |         | $      |      |   |        | $ |  | 
|                                                                                |                                   |                            |        |                         |        |      |         |        |       |   |        |  
|Accrual of dividends on redeemable preferred securities                         |                                   | $                          | 1,414  |                         |        | $    | 963     |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Securities subject to potential rescission offer                                |                                   | $                          | 6,740  |                         |        | $    | 3,924   |        |       | $ | 691    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Accretion on redeemable stock                                                   |                                   | $                          | 184    |                         |        | $    |        |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Issuance/cancellation of options/warrants                                       |                                   | $                          | 51,202 |                         |        | $    | (1,372  | )      |       | $ | (2,362 | )
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Appreciation (depreciation) of variable equity interests                        |                                   | $                          | 16,470 |                         |        | $    | (6,645  | )      |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Conversion of preferred return to common securities                             |                                   | $                          | 1,122  |                         |        | $    |        |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Issuance of shares to officer                                                   |                                   | $                          | 875    |                         |        | $    |        |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Notes issued to shareholders                                                    |                                   | $                          | 741    |                         |        | $    |        |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Conversion of redeemable common stock to common stock                           |                                   | $                          |       |                         |        | $    | 2,352   |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Issuance of stock appreciation rights/options                                   |                                   | $                          |       |                         |        | $    | 2,992   |        |       | $ |       |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Conversion of redeemable preferred stock and accrued dividends to common
Shares |                                   | $                          |       |                         |        | $    | 118,688 |        |       | $ |       |  



|5. |  | SHORT TERM INVESTMENTS
|-- |  | ----------------------

The Companys short-term investments consist of the following:

|                                      |                   |   |                   |        |                   |   |        |        |           |   |        |        |  |   |        |        | 
|------------------------------------- | ----------------- | - | ----------------- | ------ | ----------------- | - | ------ | ------ | --------- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |                   |   | December 31, 2000 |        | December 31, 2001
|                                      |                   |   |                   |        |                  
|                                      |                   |   | Fair              |        |                   |   |        |        | Fair      |   |        |        | 
|                                      |                   |   | Market            |        | Amortized         |   | Market |        | Amortized
|                                      |                   |   | Value             |        | Cost              |   | Value  |        | Cost     
|                                      |                   |   |                   |        |                   |   |        |        |          
|                                      |                   |   | (in thousands)   
|                                     
|                                     
|                                     
|                                     
|U.S. corporate and bank debt          |                   | $ | 30,361            |        |                   | $ | 30,362 |        |           | $ | 16,526 |        |  | $ | 16,380 |       
|                                     
|                                     
|                                     
|                                     
|U.S. government and agencies          |                   |   | 4,001             |        |                   |   | 4,002  |        |           |   | 1,992  |        |  |   | 1,992  |       
|                                     
|                                     
|                                     
|                                     
|International corporate and bank debt |                   |   | 2,003             |        |                   |   | 2,004  |        |           |   |       |        |  |   |       |       
|                                      |                   |   |                   |        |                   |   |        |        |           |   |        |        |  |   |        |       
|                                      | Total investments |   | $                 | 36,365 |                   |   | $      | 36,368 |           |   | $      | 18,518 |  |   | $      | 18,372 | 
|                                      |                   |   |                   |        |                   |   |        |        |           |   |        |        |  |   |        |       



|6. |  | PROPERTY AND EQUIPMENT
|-- |  | ----------------------

Property and equipment are recorded at cost and consist of the following:

|                                |  |                |        |      |  |   |        |  
|------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                |  | DECEMBER 31,  
|                                |  |               
|                                |  | 2000           |        | 2001
|                                |  |                |        |     
|                                |  | (IN THOUSANDS)
|                               
|                               
|                               
|                               
|Computer equipment and software |  | $              | 7,845  |      |  | $ | 8,342  |  
|                               
|                               
|                               
|                               
|Furniture and fixtures          |  |                | 1,747  |      |  |   | 1,710  |  
|                               
|                               
|                               
|                               
|Leasehold improvements          |  |                | 2,542  |      |  |   | 2,674  |  
|                                |  |                |        |      |  |   |        |  
|                                |  |                | 12,134 |      |  |   | 12,726 |  
|                               
|                               
|                               
|                               
|Less accumulated depreciation   |  |                | (3,077 | )    |  |   | (6,649 | )
|                                |  |                |        |      |  |   |        |  
|Property and equipment, net     |  | $              | 9,057  |      |  | $ | 6,077  |  
|                                |  |                |        |      |  |   |        |  

F-14



---



##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)



|7. |  | ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURN RESERVE
|-- |  | --------------------------------------------------------

A summary of the activity of the allowance for doubtful accounts for the
periods indicated is reflected in the following table:

|                                |  |   |                         |   |      |   |      |   |  |   |       |   | 
|------------------------------- |  | - | ----------------------- | - | ---- | - | ---- | - |  | - | ----- | - | 
|                                |  |   | YEAR ENDED DECEMBER 31,
|                                |  |   |                        
|                                |  |   | 1999                    |   | 2000 |   | 2001
|                                |  |   |                         |   |      |   |     
|Balance, beginning of period    |  | $ | 81                      |   |      | $ | 89   |   |  | $ | 389   |  
|                               
|                               
|                               
|                               
|Provision for doubtful accounts |  |   | 385                     |   |      |   | 653  |   |  |   | 1,503 |  
|                               
|                               
|                               
|                               
|Amounts charged off             |  |   | (377                    | ) |      |   | (353 | ) |  |   | (308  | )
|                                |  |   |                         |   |      |   |      |   |  |   |       |  
|Balance, end of period          |  | $ | 89                      |   |      | $ | 389  |   |  | $ | 1,584 |  
|                                |  |   |                         |   |      |   |      |   |  |   |       |  

A summary of the activity of the reserve for sales returns for the periods
indicated is reflected in the following table:

|                             |  |                         |      |      |  |      |      |   |  |   |      |  
|---------------------------- |  | ----------------------- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                             |  | YEAR ENDED DECEMBER 31,
|                             |  |                        
|                             |  | 1999                    |      | 2000 |  | 2001
|                             |  |                         |      |      |  |     
|Balance, beginning of period |  | $                       | 13   |      |  | $    | 34   |   |  | $ | 75   |  
|                            
|                            
|                            
|                            
|Provision for sales returns  |  |                         | 180  |      |  |      | 244  |   |  |   | 248  |  
|                            
|                            
|                            
|                            
|Amounts charged off          |  |                         | (159 | )    |  |      | (203 | ) |  |   | (312 | )
|                             |  |                         |      |      |  |      |      |   |  |   |      |  
|Balance, end of period       |  | $                       | 34   |      |  | $    | 75   |   |  | $ | 11   |  
|                             |  |                         |      |      |  |      |      |   |  |   |      |  



|8. |  | ACCRUED EXPENSES
|-- |  | ----------------

Accrued expenses are comprised of the following:

|                            |                        |   |                |       |      |   |       |       | 
|--------------------------- | ---------------------- | - | -------------- | ----- | ---- | - | ----- | ----- | 
|                            |                        |   | DECEMBER 31,  
|                            |                        |   |               
|                            |                        |   | 2000           |       | 2001
|                            |                        |   |                |       |     
|                            |                        |   | (IN THOUSANDS)
|Accrued cost of sales       |                        | $ | 1,924          |       |      | $ | 979   |      
|                           
|                           
|                           
|                           
|Accrued payroll and related |                        |   | 1,391          |       |      |   | 1,015 |      
|                           
|                           
|                           
|                           
|Programming rights          |                        |   | 682            |       |      |   | 100   |      
|                           
|                           
|                           
|                           
|Accrued professional fees   |                        |   | 317            |       |      |   | 677   |      
|                           
|                           
|                           
|                           
|Accrued advertising costs   |                        |   | 170            |       |      |   | 457   |      
|                           
|                           
|                           
|                           
|Other accrued expenses      |                        |   | 702            |       |      |   | 790   |      
|                            |                        |   |                |       |      |   |       |      
|                            | Total accrued expenses |   | $              | 5,186 |      |   | $     | 4,018 | 
|                            |                        |   |                |       |      |   |       |      



|9. |  | INVESTMENT IN ARTISTDIRECT RECORDS, LLC
|-- |  | ---------------------------------------

In May 2001, the Company entered into an agreement with Ted Field to
become Chairman and Chief Executive Officer of ARTISTdirect and form a new
record label ARTISTdirect Records, in partnership with ARTISTdirect. The
record label, which commenced operations in July 2001, is a 50/50 co-venture
between ARTISTdirect and Mr. Field, with the Company providing a significant
financial commitment. The Company is required to provide funding of up to $50
million through June 2006. As of December 31, 2001, the Company had funded
$5.3 million of this amount to the record label. Due to the Companys
commitment to fund the operations of the joint venture, the Company records
100% of the losses of the joint venture. For the year ended December 31, 2001,
the Company recorded losses of $8.6 million from the joint venture. The
carrying amount of the investment is a credit balance of approximately $3.0
million as of December 31, 2001, as the Companys share of losses exceeded

F-15



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

the amount of the Companys investment and advances to date. Therefore,
the investment balance is less than $0 and has been classified in the
liabilities section of the balance sheet.

In November 2001, ARTISTdirect Records entered into a preliminary North
America distribution agreement and worldwide license agreement with BMG, the
global music division of Bertelsmann AG. Under the terms of the agreement, BMG
Distribution will distribute the labels releases in North America, and BMG
will license ARTISTdirect Records repertoire in territories throughout the
world. The agreement is subject to the negotiation of definitive agreements.
During 2001, BMG made a distribution advance of $2.5 million. BMG has also
agreed to acquire a minority stake in ARTISTdirect Records and provide certain
funding for the label. As of December 31, 2001, the purchase of equity by BMG
had not been completed.

As of December 31, 2001, ARTISTdirect Records had signed recording
agreements with seven artists and advanced a total of $3.2 million in artist
advances and recording costs. The amount of these advances is recoupable
against royalties to be earned by the artists based on sales. However, given
that the artists signed by the label have no previous track record, the venture
has accrued a provision for 100% of the advances expended. As of December 31,
2001, ARTISTdirect Records is contractually committed to additional artist
advances of approximately $2.0 million, which are expected to be paid during
2002.

A summary income statement for ARTISTdirect
Records for the period ended December 31, 2001 is as follows:

|                           |                      |   |       |              |  | 
|-------------------------- | -------------------- | - | ----- | ------------ |  | 
|                           |                      |   |       | (Unaudited) 
|                           |                      |   |       | PERIOD ENDED
|                           |                      |   |       | DECEMBER 31,
|                           |                      |   |       | 2001        
|                           |                      |   |       |             
|                           |                      |   |       | (thousands) 
|Revenues                   |                      | $ |      |             
|                          
|                          
|                          
|                          
|Cost of revenues           |                      |   |      |             
|                           |                      |   |       |             
|                           | Gross profit         |   |       |             | 
|                          
|                          
|                          
|                          
|Provision for advances     |                      |   | 3,174 |             
|                          
|                          
|                          
|                          
|Sales and marketing        |                      |   | 799   |             
|                          
|                          
|                          
|                          
|General and administrative |                      |   | 4,549 |             
|                          
|                          
|                          
|                          
|Depreciation               |                      |   | 2     |             
|                           |                      |   |       |             
|                           | Loss from operations |   |       | 8,524        | 
|                          
|                          
|                          
|                          
|Interest expense, net      |                      |   | 126   |             
|                           |                      |   |       |             
|Net loss                   |                      | $ | 8,650 |             
|                           |                      |   |       |             

The assets and liabilities of ARTISTdirect Records at December 31, 2001 were
not significant. The Company charged ARTISTdirect Records $200,000 for the
reimbursement of overhead costs incurred in 2001. This amount is reflected as
a reduction in general and administrative expense in the Companys consolidated
statement of operations.



|10. |  | INVESTMENTS IN OTHER AFFILIATED COMPANIES
|--- |  | -----------------------------------------

As of December 31, 1999, 2000 and 2001, the Company had a 45% ownership in
SnoCore, LLC, and accounts for the investment under the equity method. The
Company recorded income of $50,000, $15,000 and $48,000 for this investment for
the years ended December 31, 1999, 2000 and 2001, respectively. The Company
received distributions of $33,000, $0 and $5,000 from the investee during the
years ended December 31, 1999, 2000 and 2001, respectively.

F-16



---



##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

During the year ended December 31, 2000, the Company entered into a joint
venture, ARTISTdirect Latin America, LLC in which the Company holds a 50%
ownership interest. The Company accounts for the investment under the equity
method. The Company made an initial investment of $250,000 during the year
ended December 31, 2000 and an additional investment of $395,000 in 2001. The
Company recorded its share of losses of $250,000 and $395,000 for this
investment for the years ended December 31, 2000 and 2001, respectively.



|11. |  | DISCONTINUED OPERATIONS
|--- |  | -----------------------

In December 2001, the Company made the decision to exit the music talent agency
business and as a result this segment has been classified as a discontinued
operation in the consolidated statement of operations for years ended December
31, 1999, 2000 and 2001 and its net results are reflected as Income from
discontinued operations. The Agency business did not have any significant
net assets or liabilities associated with it and no gain or loss has been or is
expected to be recognized related to its disposal. The wind up of operations
of the Agency business is expected to be completed in the first half of 2002.
A summary of the income statement of the Agency business segment is as follows:

|                           |                                     |   |                         |     |      |   |       |       |  |   |       |     | 
|-------------------------- | ----------------------------------- | - | ----------------------- | --- | ---- | - | ----- | ----- |  | - | ----- | --- | 
|                           |                                     |   | YEAR ENDED DECEMBER 31,
|                           |                                     |   |                        
|                           |                                     |   | 1999                    |     | 2000 |   | 2001 
|                           |                                     |   |                         |     |      |   |      
|Agency commission revenues |                                     | $ | 1,304                   |     |      | $ | 2,946 |       |  | $ | 1,043 |    
|                          
|                          
|                          
|                          
|Cost of revenues           |                                     |   | 432                     |     |      |   | 513   |       |  |   | 642   |    
|                           |                                     |   |                         |     |      |   |       |       |  |   |       |    
|                           | Gross profit                        |   |                         | 872 |      |   |       | 2,433 |  |   |       | 401 | 
|                           |                                     |   |                         |     |      |   |       |       |  |   |       |    
|                          
|                          
|                          
|                          
|General and administrative |                                     |   | 850                     |     |      |   | 242   |       |  |   | 354   |    
|                           |                                     |   |                         |     |      |   |       |       |  |   |       |    
|                           | Income from discontinued operations |   | $                       | 22  |      |   | $     | 2,191 |  |   | $     | 47  | 
|                           |                                     |   |                         |     |      |   |       |       |  |   |       |    



|12. |  | LINE OF CREDIT
|--- |  | --------------

In 1997, the Company obtained a $250,000 line of credit with a financial
institution. The line was increased to $500,000 during 1998, to $2.0 million
in February 1999 and to $5.0 million in November 1999. The line of credit is
guaranteed by certain officers and stockholders of the Company and bears
interest, which is payable monthly, at a base rate as defined in the lending
agreement plus 1%. No balance outstanding on the line of credit as of December
31, 1998 and the line of credit was terminated at the Companys option in
September 1999 and reinstated in October 1999. As of December 31, 1999, there
was no balance outstanding on the line of credit. In March 2000, the line of
credit expired.



|13. |  | ACQUISITIONS
|--- |  | ------------

In February 1999, the Company acquired the remaining 80% of iMusic, Inc.
that it did not own. The consideration paid for the acquisition included
$110,000 in cash, redeemable common units of UBL equal to 2% of its membership
interests and the assumption of approximately $180,000 of liabilities. The
value of the redeemable common units given was approximately $2.2 million. The
acquisition has been accounted for as a purchase and the operations of iMusic,
Inc. has been included from the date of acquisition. The Company recorded
goodwill of approximately $2.4 million as a result of this acquisition.

In May 1999 the Company acquired the 40.29% minority interest in the UBL
in exchange for common interests in ARTISTdirect, LLC. The value of the
consideration given was approximately $13.9 million, which was based on the
value of the equity given, using the pricing of third party equity contributed
at or around the time of the purchase transaction; the transaction has been
accounted for as a purchase. Due to the full funding of the losses of UBL by
the Company and its members prior to the purchase of the minority interest,
none of the losses generated by UBL during the periods presented have been
allocated to the minority holders. The Company recorded goodwill of
approximately $13.1 million as a result of this acquisition.

F-17



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

In August 2000, ARTISTdirect acquired all of the outstanding capital stock
of Mjuice.com, Inc., a company involved in the development and distribution of
the secure digital distribution of MP3-formatted music. The Company issued
90,000 of its common shares and common share equivalents in exchange for all
the outstanding equity of Mjuice.com, Inc. The total purchase consideration
for Mjuice.com was approximately $5.1 million, which includes cash paid of
approximately $2.0 million. The acquisition was accounted for as a purchase,
with $5.0 million being recorded as goodwill, of which the remaining net
balance of $4.5 million was written off in March 2001.

The pro forma results of operations assuming the above transactions had
occurred at the beginning of the following periods are as follows:

|                                  |  |                         |        |      |  |   |           | 
|--------------------------------- |  | ----------------------- | ------ | ---- |  | - | --------- | 
|                                  |  | (unaudited)            
|                                  |  | YEAR ENDED DECEMBER 31,
|                                  |  |                        
|                                  |  | 1999                    |        | 2000
|                                  |  |                         |        |     
|                                  |  | (IN THOUSANDS)         
|Revenues                          |  | $                       | 10,337 |      |  | $ | 18,730    | 
|                                  |  |                         |        |      |  |   |           | 
|Net loss                          |  | $                       | 62,470 |      |  | $ | 62,165    | 
|                                  |  |                         |        |      |  |   |           | 
|Pro forma loss per share          |  |                         |        |      |  | $ | 27.30     | 
|                                  |  |                         |        |      |  |   |           | 
|Pro forma weighted average shares |  |                         |        |      |  |   | 3,227,325 | 
|                                  |  |                         |        |      |  |   |           | 

The remaining
unamortized balance of goodwill at December 31, 2001 is
$788,000, which reflects the $11.4 million in writeoffs
for impairment of goodwill recorded in 2001.



|14. |  | INCOME TAXES
|--- |  | ------------

Income taxes differ from the amount computed using a tax rate of 35% as a
result of the following (amounts in thousands):

|                                                                |                   |   |               |   |              |   |              |   |  |   |         |   | 
|--------------------------------------------------------------- | ----------------- | - | ------------- | - | ------------ | - | ------------ | - |  | - | ------- | - | 
|                                                                |                   |   | PERIOD FROM   |   |              |   |              |   |  |   |        
|                                                                |                   |   | OCTOBER 6, to |   | YEAR ENDED   |   | YEAR ENDED  
|                                                                |                   |   | DECEMBER 31,  |   | DECEMBER 31, |   | DECEMBER 31,
|                                                                |                   |   | 1999          |   | 2000         |   | 2001        
|                                                                |                   |   |               |   |              |   |             
|Computed expected tax benefit                                   |                   | $ | (8,259        | ) |              | $ | (20,758      | ) |  | $ | (24,474 | )
|                                                               
|                                                               
|                                                               
|                                                               
|State and local income taxes, net of federal income tax benefit |                   |   | (977          | ) |              |   | (3,200       | ) |  |   | (3,298  | )
|                                                               
|                                                               
|                                                               
|                                                               
|FAS 109 implementation                                          |                   |   | (9,227        | ) |              |   |             |   |  |   |        |  
|                                                               
|                                                               
|                                                               
|                                                               
|Goodwill amortization/write-off                                 |                   |   | 271           |   |              |   | 1,240        |   |  |   | 4,371   |  
|                                                               
|                                                               
|                                                               
|                                                               
|Other                                                           |                   |   | 27            |   |              |   | (303         | ) |  |   | 13      |  
|                                                               
|                                                               
|                                                               
|                                                               
|Increase in valuation allowance                                 |                   |   | 18,165        |   |              |   | 23,021       |   |  |   | 23,388  |  
|                                                                |                   |   |               |   |              |   |              |   |  |   |         |  
|                                                                | Total tax benefit |   | $             |  |              |   | $            |  |  |   | $       |  | 
|                                                                |                   |   |               |   |              |   |              |   |  |   |         |  

F-18



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31, 2000 and
2001 are presented below:

|                                            |                                          |                         |         |              |   |              |         |        |   | 
|------------------------------------------- | ---------------------------------------- | ----------------------- | ------- | ------------ | - | ------------ | ------- | ------ | - | 
|                                            |                                          |                         |         | DECEMBER 31, |   | DECEMBER 31,
|                                            |                                          |                         |         | 2000         |   | 2001        
|                                            |                                          |                         |         |              |   |             
|Deferred tax assets:                        |                                          |                         |         |              |   |              |         |       
|                                           
|                                           
|                                           
|                                           
|                                            | Net operating loss carry forwards        |                         | $       | 23,165       |   |              | $       | 37,961 |  
|                                           
|                                           
|                                           
|                                           
|                                            | Amortization of stock based compensation |                         |         | 19,817       |   |              |         | 28,944 |  
|                                           
|                                           
|                                           
|                                           
|                                            | Other                                    |                         |         | 1,331        |   |              |         | 2,572  |  
|                                            |                                          |                         |         |              |   |              |         |       
|Total deferred tax assets                   |                                          |                         | 44,313  |              |   |              | 69,477  |       
|                                           
|                                           
|                                           
|                                           
|Less  valuation allowance                  |                                          |                         | (41,186 | )            |   |              | (64,574 | )     
|                                            |                                          |                         |         |              |   |              |         |       
|Net deferred assets                         |                                          |                         | 3,127   |              |   |              | 4,903   |       
|                                            |                                          |                         |         |              |   |              |         |       
|Deferred tax liability  state income taxes |                                          |                         | (3,127  | )            |   |              | (4,903  | )     
|                                            |                                          |                         |         |              |   |              |         |       
|                                            |                                          | Net deferred tax assets |         | $            |  |              |         | $      |  | 
|                                            |                                          |                         |         |              |   |              |         |       

At December 31, 2001, the Company had net operating loss carry forwards
totaling approximately $86.6 million for Federal income tax purposes expiring
beginning in 2019 and California state net operating loss carry forwards of
$86.6 million expiring beginning in 2007. Due to the uncertainty surrounding
the realization of the benefits of its tax attributes, including net operating
loss carry forwards in future tax returns, the Company has recorded a valuation
allowance against its deferred tax assets as of December 31, 2000 and 2001 of
$41.2 million and $64.6 million, respectively.

In assessing the potential realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the Company attaining future taxable income during the
periods in which those temporary differences become deductible. In addition,
Internal Revenue Code Section 382 substantially restricts the ability of a
Corporation to utilize existing net operating losses in the event of an
ownership change. Therefore, the Companys net operating losses for Federal
income tax purposes may be limited due to changes in ownership.



|15. |  | SIGNIFICANT CONTRACTS
|--- |  | ---------------------

The Company entered into a settlement agreement with an employee in
connection with the termination of his employment in October 1997. Pursuant to
this agreement, the employee received a severance payment of $175,000 that was
paid in full in 1999. As part of the settlement agreement, the individual
received an option to purchase the lesser of 10,000 securities or 2.5% of the
shares offered to the public upon an initial public offering at an exercise
price that will be set at the completion of the initial public offering
pursuant to the provision defined in the settlement agreement. The employee
exercised the purchase option of 10,000 shares. The Company recorded
compensation expense of $1,025,000 for the year ended December 31, 2000, which
represented the difference between the fair value of the common stock and the
amount paid.

For the years ended December 31, 1999, 2000 and 2001, the Company incurred
legal expenses of approximately $1.1 million, $464,000 and $364,000,
respectively, for legal services provided by Lenard & Gonzalez LLP and its
successor firm, Lenard, Brisbin & Klotz LLP. Allen Lenard, one of the
Companys directors, was Managing Partner of Lenard & Gonzalez LLP and is
managing partner of Lenard, Brisbin & Klotz LLP.

In connection with the issuance of Series C Preferred shares, the Company
entered into strategic relationships with four record labels. Under the terms
of these agreements, the Company has the right to purchase certain content
related to each of the respective companies artists on terms generally made
available to other online music companies. Under one of the agreements, the
Company provided marketing and promotional services on its network and
recognized advertising and sponsorship revenues of $1.0 million and $500,000 in
the years ended December 31, 2000 and 2001, respectively. During 2001, the
Company determined that the collectibility of this receivable, to be
settled in the
form of cash or content, was impaired. Consequently, a
provision for $1.5 million was recorded and is included in general and
administrative expenses.

In December 1999, the Company entered into an advertising and promotion
agreement with Yahoo! pursuant to which the Company purchases media placement
on Yahoo! in return for certain promotional considerations. The Company
recorded the expense related to the amounts paid to Yahoo! for advertising and
promotion services over the term of the agreement as services or promotions
were received. On November 7, 2000, the Company amended this agreement such
that it was terminated as of December 31, 2000. Yahoo! delivered certain
additional page views containing the Companys banners on various Yahoo!
properties through June 30, 2001. Under the amendment, the

F-19



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

Company has no additional payment obligations to Yahoo!. In connection
with the original agreement, the Company issued Yahoo! warrants to purchase
33,926 shares of common stock . The exercise price for 16,963 of the warrants
is $139.30, and the exercise price for the remaining warrants is $120.00. The
expense related to the warrants was fully amortized as of June 30, 2001.

In April 2000, the Company entered into an agreement with a landlord for
office space for a term of ten years. In connection with the agreement, the
Company issued warrants to purchase 6,250 shares of common stock at $139.30 per
share. The expense related to the warrants is being amortized over the term of
the agreement.

In February 2002, the Company amended an existing agreement with
Ticketmaster pursuant to which the Company agreed to purchase online
advertising totaling $2.0 million from Ticketmaster and in conjunction became
entitled to certain non-exclusive opportunities to pre-sell tickets on the
ARTISTdirect website. The term of the amended agreement expires in April 2003.



|16. |  | REDEEMABLE SECURITIES
|--- |  | ---------------------

From July through December 1998, the Company issued redeemable preferred
units for proceeds of $4.9 million. These preferred units were converted into
12.8 million Series A ARTISTdirect, LLC redeemable preferred securities
pursuant to the Exchange Transaction, and were converted into
3,207,815 shares of
Series A Redeemable Preferred Stock (Series A Preferred) pursuant to the
Capital Reorganization. The Series A Preferred shares carried a 10% cumulative
annual dividend. The liquidation preference and redemption value of the Series
A Preferred shares was approximately $5.0 million as of December 31, 1999. The
Series A Preferred shares and accrued dividend were converted to common shares
upon the closing of the initial public offering.

On February 17, 1999, the Company issued 17,044 redeemable common shares
(Redeemable Stock) for the purchase of the remaining 80% of iMusic, Inc. The
holder of the Redeemable Stock had the right to redeem the Redeemable Stock
upon the earlier of an initial public offering or February 17, 2002 at a
redemption value of $2.8 million. The holder chose not to redeem the shares.
The accreted value of $2.4 million was included in redeemable common securities
in the balance sheet as of December 31, 1999 and was converted to common shares
upon the completion of the initial public offering in March 2000.

On
May 18, 1999, the Company issued 3,750,000 Series B redeemable preferred
shares (Series B Preferred) for proceeds of $15 million. The Series B
Preferred shares had the same redemption terms as the Series A Preferred
shares, and had an original conversion price of $40.00 per share. The Series B
Preferred shares had liquidation preference over all other classes of shares.
The Series B Preferred shares and accrued dividends were converted to common
shares upon the closing of the initial public offering in March 2000.

In December 1999, the Company issued 5,905,374 Series C redeemable
preferred shares (Series C Preferred) for proceeds of $82.2 million and in
January 2000, the Company issued an additional 1,094,917 Series C Preferred
shares for proceeds of $15.2 million. The total sum of $97.5 million was
raised through the sale of shares to six music and media companies: Universal
Music Group, BMG Entertainment, Sony Music Entertainment, Time Warner Inc., an
affiliate of Cisneros Television Group and Yahoo! The Series C Preferred shares
had the same redemption terms as the Series A and Series B Preferred shares and
had an initial conversion price of $13.928 per share. The Series C Preferred
shares were converted to 1,015,625 common shares upon the closing of the
initial public offering. The conversion rate was .145 common shares for each
Series C Preferred share based on the offering price and pursuant to the Series
C shareholder agreement.

Included in redeemable common securities are amounts related to options
and securities subject to a potential rescission offer. The Company issued
shares or options to purchase shares to employees, artists and advisors. The
issuance of these shares or options did not fully comply with certain
requirements under the Securities Act, or available exemptions there under, and
as a result the Company made a rescission offer to all these persons pursuant
to a registration statement to be filed under the Securities Act and pursuant
to California securities law.

In December 2001, the Company completed a rescission offer in which it
rescinded the purchase of 83,403 shares of its common stock purchased upon the
exercise of options and the issuance of vested and unvested

F-20



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

unexercised options to purchase 636,740 shares of common stock. The
shares of stock were repurchased at prices ranging from $12.40 to $40.00 per
share and the unexercised options that were rescinded had exercise prices
ranging from $12.40 to $140.00 per share. In aggregate, the Company paid $10.2
million to rescind the shares and options.

As a result of the completion of the rescission offer, the Company
recorded stock compensation expense of $6.9 million in 2001, and an additional
$1.9 million of compensation will be recorded in 2002 (this compensation amount
is related to future services which will be performed in 2002). The $6.9
million of compensation expense recognized in 2001 consisted of $859,000
reflected in cost of revenues and $6.1 million included in operating expenses
as stock-based compensation. The $859,000 in compensation expense included in
cost of revenues consisted of the following: $155,000 related to the
repurchase of shares of common stock issued to non-employees pursuant to option
exercises, $700,000 related to the repurchase of unexercised options held by
non-employees. These amounts were included in cost of revenues as the
underlying options were granted in conjunction with store agreements, and the
expense has been recorded in 2001 as the services have been performed as of
December 31, 2001. The $6.1 million in expense included in operating expenses
consisted of the following: $900,000 related to the repurchase of shares of
common stock issued to non-employees pursuant to option exercises (for
promotional services), $195,000 related to the repurchase of shares of common
stock issued to employees pursuant to option exercises, $350,000 related to the
repurchase of unexercised options held by non-employees (for promotional
services), $3.8 million for the amount of cash paid to repurchase unexercised
options issued to employees and $840,000 related to the acceleration of
unamortized compensation related to compensatory option grants to employees.
These amounts were recorded as expense in 2001 as the related services have
been performed as of December 31, 2001.

The Company will record $1.9 million in compensation expense in 2002 as
this amount relates to future services to be provided under store and promotion
agreements. Of the $1.9 million, $900,000 will be reflected in cost of
revenues and $1.0 million will be reflected in operating expenses.

The Company has reclassified $2.7 million of unearned compensation
(related to the original option grants subject to the rescission offer) as of
the date of the closing of the rescission offer to prepaid stock-based
compensation in the balance sheet, as the underlying equity instruments are no
longer outstanding as a result of the rescission of the instruments in December
2001.

In the event that a holder of options or shares subject to the rescission
offer did not rescind their shares or options, the holders right to rescission
may survive the rescission offer.



|17. |  | MEMBERS AND STOCKHOLDERS EQUITY
|--- |  | ---------------------------------

COMMON STOCK

In March 2000, the Company completed an intial public offering in which it
sold 500,000 shares for total proceeds, net of offering costs, of $52.4
million.

In April 2001, the Company completed a tender offer in which it
repurchased 200,000 shares of common stock for a total cost of $2.5 million.
The repurchased shares are reflected as treasury stock in the balance sheet as
of December 31, 2001.

In May 2001, the Company authorized the purchase of up to $2 million worth
of the Companys common stock. The stock repurchase program has been
implemented through purchases in the open market or in privately negotiated
transactions depending on market conditions and other factors. As of December
31, 2001, the Company had repurchased 39,499 shares of common stock for an
aggregate purchase price of approximately $234,000. This repurchase is
separate from the Companys tender offer described above, and is reflected as
treasury stock in the balance sheet as of December 31, 2001.

MEMBER DISTRIBUTIONS

The Company made distributions to members of $741,000 in 1999.

F-21



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

VARIABLE EQUITY INTERESTS

During 1998, the Company issued common units, which were converted to
common shares upon the conversion of the Company to a C Corporation in October
1999, to certain executive employees and its outside legal counsel in
connection with services rendered and to be rendered. These units were
accounted for as stock appreciation rights (Appreciation Rights), and as a
result of these transactions, the Company recognized stock based compensation
expense of $16.3 million during the year ended December 31, 1999. The Company
recorded a credit to stock based compensation in the amount of $6.6 million for
the year ended December 31, 2000 as a result of the decline in the value of the
Companys common shares from December 31, 1999 to March 31, 2000, the date on
which the Appreciation Rights were settled.

WARRANTS

During 1999, the Company issued warrants to purchase 35,967 shares of
common stock at $40.00 per share to two vendors from whom it purchases
merchandise (merchandisers). The value of the warrants was $864,000, of
which $168,000, $262,000 and $322,000 was recognized as stock based
compensation in cost of revenues for the years ended December 31, 1999, 2000
and 2001, respectively. The remaining unamortized value of the warrants of is
being amortized as cost of revenues over the next two years in conjunction with
the remaining term of the related agreements.

In December 1999, the Company issued warrants to purchase 33,926 shares of
common stock at $120.00 and $139.30 per share in connection with an advertising and promotion
agreement. All of the warrants are exercisable as of December 31, 2001. The value of the warrants
upon issuance was $2.0 million. These warrants were being accounted for as
variable instruments under EITF 96-18 up through June 30, 2001, when
performance under the agreement was completed and a measurement date was
reached. Due to the decrease in fair value of the Companys common stock, the
value of the warrants was reduced to $66,000 as of June 30, 20001. The related
expense for the years ended December 31, 1999, 2000 and 2001 was $18,000,
$28,000 and $20,000, respectively. The warrants expire in December 2002.

In January 2000, the Company issued warrants to purchase 6,250 shares of
common stock in connection with an office lease. The warrants, which expire in
January 2005, were exercisable upon grant, and none have been exercised as of
December 31, 2001. The warrants were valued at $568,000 and are being
amortized over the term of the related lease. During the years ended December
31, 2000 and 2001, $47,000 and $57,000, respectively, has been recorded as
stock based compensation expense each year.

The estimated fair values of the warrants was determined using the
Black-Scholes option pricing model. The key assumptions used in the model for
the purpose of the calculation were: a risk free rate of 6% in 1999 and 6.4% in
2000; a volatility factor of 81% in 1999, 100% in January 2000, 120% in June
2000 and 180% in June 2001; no expected dividends; and an expected life which
is equal to the contractual life of the warrants.

PREFERRED DIVIDENDS

On May 18, 1999, the Company paid to the Series A redeemable preferred
securities holders the accrued dividends to that date of $355,000 in the form
of 8,863 common shares, as well as a cash payment of $85,000.

On October 6, 1999, the Company paid to the Series A and B redeemable
preferred stockholders the accrued dividends to that date of $767,000 in the
form of 21,300 shares of common stock , as well as a cash payment of $191,000.

Upon the conversion of the Series A, B and C Preferred shares to common
shares, accrued dividends of $963,000 were converted into 8,021 common shares.

F-22



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

PURCHASE OF SHARES BY OFFICER

In September 1999, the Companys Chief Financial Officer purchased 11,182
shares of common securities from certain officer stockholders for an aggregate
purchase price of $400,000. The difference between the purchase price and the
fair value of the securities as of the date of the transaction has been
reflected as stock-based compensation. The amount of stock-based compensation
aggregated $875,000 for the year ended December 31, 1999. The Company
determined the fair value of the securities based on the growth of the
Companys operations and recent equity transactions with third parties.

EQUITY TRANSFER

In March 2000, the founders of the Company entered into a series of
transactions whereby two employees and an outside legal counsel would receive
the appreciation on the Companys common stock above $139.28 per share through
the third day of trading after the initial public offering. Additionally, the
two employees and outside legal counsel received stock options on the third day
of trading after the initial public offering with an exercise price of $139.28.
There was no expense charge for the appreciation rights and stock options
granted to the two employees, as the stock price was below $139.28 per share on
the third day of trading and the exercise price on the stock options was
greater than the fair value of the Companys common stock on the date of grant.
The fair value of the appreciation rights and stock options granted to the
outside legal counsel was $2,029,000 and was recorded as expense for the year
ended December 31, 2000, as the grants related to past services. The stock
option grants to the outside legal counsel are reflected as option grants under
the Advisor Plan (see discussion in Note 18).



|18. |  | OPTIONS
|--- |  | -------

In July 1998, the Company implemented the 1998 Unit Option Plan (which was
subsequently amended and replaced by the 1999 Employee Stock Option Plan),
which has reserved 725,593 shares of the Companys common stock for issuance to
employees, non-employee members of the board of directors and consultants.
This share reserve automatically increases on the first trading day in January
each calendar year by an amount equal to two percent (2%) of the total number
of shares of our common stock outstanding on the last trading day of December
in the prior calendar year, but in no event will this annual increase exceed
87,500 shares. No option may have a term in excess of 10 years. The options
generally vest within three years. As of December 31, 2001, 524,438 shares
remained available for future option grant.

The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, Interpretation No. 44, and other related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price.

Summary stock option activity for 1999 Employee Stock Option Plan during
the years ended December 31, 1999, 2000 and 2001 is as follows:

|                                         |           |  |                     |          |          |   |          |       | 
|---------------------------------------- | --------- |  | ------------------- | -------- | -------- | - | -------- | ----- | 
|                                         |           |  | OPTIONS OUTSTANDING
|                                         |           |  |                    
|                                         |           |  |                     |          |          |   | WEIGHTED
|                                         |           |  |                     |          |          |   | AVERAGE 
|                                         |           |  | NUMBER OF           |          | EXERCISE
|                                         |           |  | SHARES              |          | PRICE   
|                                         |           |  |                     |          |         
|Outstanding options at December 31, 1998 |           |  | 35,672              |          |          | $ | 15.20    |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 344,906  |          |   |          | 36.00 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     | (5,875   | )        |   |          | 34.00 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (125     | )        |   |          | 36.00 | 
|                                         |           |  |                     |          |          |   |          |      
|Outstanding options at December 31, 1999 |           |  | 374,578             |          |          |   | 34.06    |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 319,709  |          |   |          | 81.64 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     | (3,181   | )        |   |          | 13.72 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (124,802 | )        |   |          | 46.18 | 
|                                         |           |  |                     |          |          |   |          |      
|Outstanding options at December 31, 2000 |           |  | 566,304             |          |          |   | 58.36    |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 35,687   |          |   |          | 7.50  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     |         |          |   |          |      | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (418,836 | )        |   |          | 44.78 | 
|                                         |           |  |                     |          |          |   |          |      
|Outstanding options at December 31, 2001 |           |  | 183,155             |          |          | $ | 79.51    |      
|                                         |           |  |                     |          |          |   |          |      

F-23



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

During the year ended December 31, 1999 the Company issued 750 options to
consultants, resulting in a weighted average fair value per option of $102.67,
and a total value of $77,000. The Company recorded this amount as stock based
compensation for the year ended December 31, 1999, as the services had been
performed.

In February 2000, the Company accelerated the vesting of 11,480 stock
options granted to an executive of the Company. The resulting compensation
expense of $964,000, which represented the difference between the fair value of
the Companys common stock on the date of modification and the exercise price,
was recorded during the year ended December 31, 2000.

In May 2001, the Company granted an officer non-qualified stock options,
which are not part of any stock option plan maintained by the Company, to
purchase 444,480 shares of common stock at an exercise price of $7.50 per
share. Of the 444,480 option shares, 302,370 are exercisable immediately (the
underlying shares pursuant to the exercise of this portion of the options vest
over five years from the date of the option grant), 75,588 are exercisable in
the event the 30-day average closing price of the Companys common stock on
NASDAQ equals or exceeds $35.00 per share within three years from the grant
date, and 66,522 are exercisable in the event the 30-day average closing price
of the Companys common stock on NASDAQ equals or exceeds $70.00 per share
within three years of the grant date. The two options that are not exercisable
upon grant shall also become exercisable in the event of a de-listing of the
Companys common stock from NASDAQ and a subsequent re-listing, a change in
control of the Company or an involuntary termination of the officer (within
three years of the date of grant).

In September 2001, the Company granted options to purchase 35,687 shares
of its common stock at an exercise price of $7.50 per share to outside legal
counsel. The fair value of the stock options granted to the outside legal
counsel was $171,000 and was recorded as stock based compensation during 2001
as the grant related to past services.

If the Company had elected to recognize compensation cost based on the
fair value at the date of grant, consistent with the method as prescribed by
SFAS No. 123, net loss for the years ended December 31, 1999, 2000 and 2001
would have changed to the pro forma amounts indicated below:

|          |             |  |                         |        |      |  |      |        |  |  |   |        | 
|--------- | ----------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|          |             |  | YEAR ENDED DECEMBER 31,
|          |             |  |                        
|          |             |  | 1999                    |        | 2000 |  | 2001
|          |             |  |                         |        |      |  |     
|          |             |  | (IN THOUSANDS)         
|Net loss: |             |  |                         |        |      |  |      |        |  |  |   |       
|         
|         
|         
|         
|          | As reported |  | $                       | 57,804 |      |  | $    | 59,308 |  |  | $ | 69,880 | 
|         
|         
|         
|         
|          | Pro forma   |  | $                       | 58,200 |      |  | $    | 64,600 |  |  | $ | 77,300 | 
|          |             |  |                         |        |      |  |      |        |  |  |   |       

The fair value of options granted during 1999 was determined using a
minimum value-pricing model with the following assumptions: risk-free interest
rate of 6.0% and an expected life of five years. The fair value of options
granted during the years ended December 31, 2000 and 2001 was determined using
a Black-Scholes option pricing model with the following assumptions: risk free
rate of 6.38%, a volatility factor of 100% in 2000 and 180% in 2001, no
expected dividends and an expected life of five years. The weighted average
fair values of the options on the date of grant were $55.60, $58.30 and $6.05
per share for the options granted in 1999, 2000 and 2001, respectively.

F-24



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information regarding options outstanding
and options exercisable at December 31, 200l:

|                |  |        |              |      |                     |         |                     |        |          |       |          |  |          |        |  |  |          |         |  |  |   |        | 
|--------------- |  | ------ | ------------ | ---- | ------------------- | ------- | ------------------- | ------ | -------- | ----- | -------- |  | -------- | ------ |  |  | -------- | ------- |  |  | - | ------ | 
|                |  |        |              |      | Options Outstanding |         | Options Exercisable
|                |  |        |              |      |                     |         |                    
|                |  |        |              |      |                     |         |                     |        | Weighted |       |          |  |          |        |  |  |          |         |  |  |  
|                |  |        |              |      |                     |         |                     |        | Average  |       | Weighted |  |          |        |  |  | Weighted
|                |  |        |              |      | Number              |         | Remaining           |        | Average  |       | Number   |  | Average 
|                |  |        |              |      | of                  |         | Contractual         |        | Exercise |       | of       |  | Exercise
|Exercise prices |  | shares |              | Life |                     | Price   |                     | shares |          | Price
|                |  |        |              |      |                     |         |                     |        |          |      
|                |  | $      | 7.50         |      |                     | 43,687  |                     |        |          | 6.59  |          |  | $        | 7.50   |  |  |          | 41,770  |  |  | $ | 7.50   | 
|               
|               
|               
|               
|                |  |        | 12.40        |      |                     | 2,270   |                     |        |          | 3.58  |          |  |          | 12.40  |  |  |          | 2,270   |  |  | $ | 12.40  | 
|               
|               
|               
|               
|                |  |        | 20.00        |      |                     | 300     |                     |        |          | 5.76  |          |  |          | 20.00  |  |  |          | 125     |  |  | $ | 20.00  | 
|               
|               
|               
|               
|                |  |        | 25.00        |      |                     | 347     |                     |        |          | 5.76  |          |  |          | 25.00  |  |  |          | 145     |  |  | $ | 25.00  | 
|               
|               
|               
|               
|                |  |        | 30.00        |      |                     | 6,122   |                     |        |          | 5.76  |          |  |          | 30.00  |  |  |          | 2,551   |  |  | $ | 30.00  | 
|               
|               
|               
|               
|                |  |        | 36.00        |      |                     | 439     |                     |        |          | 4.78  |          |  |          | 36.00  |  |  |          | 439     |  |  | $ | 36.00  | 
|               
|               
|               
|               
|                |  |        | 40.00        |      |                     | 37,700  |                     |        |          | 5.44  |          |  |          | 40.00  |  |  |          | 19,897  |  |  | $ | 40.00  | 
|               
|               
|               
|               
|                |  |        | 120.00       |      |                     | 22,608  |                     |        |          | 5.18  |          |  |          | 120.00 |  |  |          | 13,816  |  |  | $ | 120.00 | 
|               
|               
|               
|               
|                |  |        | 139.30       |      |                     | 69,682  |                     |        |          | 5.25  |          |  |          | 139.30 |  |  |          | 40,648  |  |  | $ | 139.30 | 
|                |  |        |              |      |                     |         |                     |        |          |       |          |  |          |        |  |  |          |         |  | 
|                |  | $      | 7.50-$139.30 |      |                     | 183,155 |                     |        |          | 5.60  |          |  | $        | 79.51  |  |  |          | 121,661 |  |  | $ | 70.33  | 
|                |  |        |              |      |                     |         |                     |        |          |       |          |  |          |        |  |  |          |         |  | 

In June 1999 and as amended in October 1999 and March 2000 the Company
adopted the 1999 Artist and Artist Advisor Stock Option Plan (the Advisor
Plan). The Advisor Plan has reserved 222,500 shares of common stock for
issuance to artists for whom the Company maintains ARTIST channels and their
agents, business managers, attorneys and other advisors. This share reserve
will automatically increase on the first trading day in January each calendar
year by an amount equal to one percent (1%) of the total number of shares of
our common stock outstanding on the last trading day of December in the prior
calendar year, but in no event will this annual increase exceed 37,500 shares.
As of December 31, 2001, 186,964 shares remained available for future option
grants. The options expire seven years from the date of grant. Vesting
generally varies between one to three years, as specifically stated in each
advisors option agreement. In January 2000, the vesting of certain options
was accelerated such that these options grants vested immediately.

Summary stock option activity for the Advisor Plan options during the
years ended December 31, 1999, 2000 and 2001 is as follows:

|                                         |           |  |                     |         |          |   |          |        | 
|---------------------------------------- | --------- |  | ------------------- | ------- | -------- | - | -------- | ------ | 
|                                         |           |  | OPTIONS OUTSTANDING
|                                         |           |  |                    
|                                         |           |  |                     |         |          |   | WEIGHTED
|                                         |           |  |                     |         |          |   | AVERAGE 
|                                         |           |  | NUMBER OF           |         | EXERCISE
|                                         |           |  | SHARES              |         | PRICE   
|                                         |           |  |                     |         |         
|Outstanding Options at December 31, 1998 |           |  |                    |         |          |   |         |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 99,956  |          |   | $        | 39.24  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     |        |          |   |          |       | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     |        |          |   |          |       | 
|                                         |           |  |                     |         |          |   |          |       
|Outstanding Options at December 31, 1999 |           |  | 99,956              |         |          |   | 39.24    |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 33,302  |          |   |          | 139.28 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     | (13,547 | )        |   |          | 40.00  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (375    | )        |   |          | 40.00  | 
|                                         |           |  |                     |         |          |   |          |       
|Outstanding Options at December 31, 2000 |           |  | 119,336             |         |          |   | 67.05    |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     |        |          |   |          |       | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     |        |          |   |          |       | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (83,800 | )        |   |          | 43.23  | 
|                                         |           |  |                     |         |          |   |          |       
|Outstanding Options at December 31, 2001 |           |  | 35,536              |         |          | $ | 123.29   |       
|                                         |           |  |                     |         |          |   |          |       

The weighted average fair value of options granted under the Advisor Plan
was $93.40 and $66.50 per option, resulting in a total value for options
granted of $9.7 million and $2.1 million for the years ended December 31, 1999
and 2000, respectively. Of the $2.1 million in option fair value in 2000, $1.8
million was expensed immediately, as it related to past services.
Consequently, $9.7 million and $300,000 for 1999 and 2000, respectively, of
total value for options granted has been recorded as unearned compensation in
the statement of changes in members and stockholders equity (deficit) and is
being amortized over the term of the artists and advisors option agreement.

F-25



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information regarding options outstanding
and options exercisable at December 31, 2001:

|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |   |        | 
|-------------- | - | ------------- |  | ------------------- | ------ | ------------------- |  | --------- | ---- | -------- |  | -------- | ------ |  |  | -------- | ------ |  |  | - | ------ | 
|               |   |               |  | OPTIONS OUTSTANDING |        | OPTIONS EXERCISABLE
|               |   |               |  |                     |        |                    
|               |   |               |  |                     |        |                     |  | WEIGHTED  |      |          |  |          |        |  |  |          |        |  |  |  
|               |   |               |  |                     |        |                     |  | AVERAGE   |      | WEIGHTED |  |          |        |  |  | WEIGHTED
|               |   |               |  |                     |        |                     |  | REMAINING |      | AVERAGE  |  |          |        |  |  | AVERAGE 
|               |   |               |  | NUMBER              |        | CONTRACT            |  | EXERCISE  |      | NUMBER   |  | EXERCISE
|EXERCISE PRICE |   | OF SHARES     |  | LIFE                |        | PRICE               |  | OF SHARES |      | PRICE   
|               |   |               |  |                     |        |                     |  |           |      |         
|               | $ | 36.00         |  |                     | 1,250  |                     |  |           | 4.78 |          |  | $        | 36.00  |  |  |          | 1,250  |  |  | $ | 36.00  | 
|              
|              
|              
|              
|               |   | 40.00         |  |                     | 4,422  |                     |  |           | 4.69 |          |  |          | 40.00  |  |  |          | 4,339  |  |  |   | 40.00  | 
|              
|              
|              
|              
|               |   | 139.28        |  |                     | 29,864 |                     |  |           | 5.25 |          |  |          | 139.28 |  |  |          | 29,864 |  |  |   | 139.28 | 
|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |  
|               | $ | 36.00-$139.28 |  |                     | 35,536 |                     |  |           | 5.16 |          |  | $        | 123.29 |  |  |          | 35,453 |  |  | $ | 123.49 | 
|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |  

In June 1999 and as amended in October 1999, the Company adopted the 1999
Artist Stock Plan (the Artist Option Plan), which has reserved 475,593 shares
of common stock for issuance to artists for whom the Company maintains ARTIST
channels. This share reserve will automatically increase on the first trading
day in January each calendar year by an amount equal to two percent (2%) of the
total number of shares of our common stock outstanding on the last trading day
of December in the prior calendar year, but in no event will this annual
increase exceed 87,500 shares. As of December 31, 2001, 451,719 shares
remained available for future option grants. The options expire seven years
from the date of grant. Vesting generally varies between one to three years, as
specifically stated in each artists option agreement. In January 2000, the
vesting of certain options was accelerated such that these options vested
immediately.

Summary stock option activity for the Artist Option Plan during the years
ended December 31, 1999, 2000 and 2001 is as follows:

|                                         |           |  |                     |          |          |   |          |        | 
|---------------------------------------- | --------- |  | ------------------- | -------- | -------- | - | -------- | ------ | 
|                                         |           |  | OPTIONS OUTSTANDING
|                                         |           |  |                    
|                                         |           |  |                     |          |          |   | WEIGHTED
|                                         |           |  |                     |          |          |   | AVERAGE 
|                                         |           |  | NUMBER OF           |          | EXERCISE
|                                         |           |  | SHARES              |          | PRICE   
|                                         |           |  |                     |          |         
|Outstanding Options at December 31, 1998 |           |  |                    |          |          |   |         |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 226,406  |          |   | $        | 40.00  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     | (11,792  | )        |   |          | 40.00  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     |         |          |   |          |       | 
|                                         |           |  |                     |          |          |   |          |       
|Outstanding Options at December 31, 1999 |           |  | 214,614             |          |          |   | 40.00    |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     | 46,938   |          |   | $        | 134.09 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     | (24,177  | )        |   |          | 40.00  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (15,000  | )        |   |          | 40.00  | 
|                                         |           |  |                     |          |          |   |          |       
|Outstanding Options at December 31, 2000 |           |  | 222,375             |          |          | $ | 59.86    |       
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |                     |         |          |   |          |       | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |                     |         |          |   |          |       | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled  |  |                     | (198,501 | )        |   |          | 57.07  | 
|                                         |           |  |                     |          |          |   |          |       
|Outstanding Options at December 31, 2001 |           |  | 23,874              |          |          | $ | 83.15    |       
|                                         |           |  |                     |          |          |   |          |       

The weighted average fair value of the options granted under the Artist
Option Plan was $83.30 and $99.70 per option, resulting in a total value for
options granted of $20.6 million and $4.7 million for the years ended December
31, 1999 and 2000, respectively, which has been recorded as unearned
compensation in the statement of changes in members and stockholders equity,
and is being amortized over the service period of the related artist
agreements.

The following table summarizes information regarding options outstanding
and options exercisable at December 31, 2001:

|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |   |        | 
|-------------- | - | ------------- |  | ------------------- | ------ | ------------------- |  | --------- | ---- | -------- |  | -------- | ------ |  |  | -------- | ------ |  |  | - | ------ | 
|               |   |               |  | OPTIONS OUTSTANDING |        | OPTIONS EXERCISABLE
|               |   |               |  |                     |        |                    
|               |   |               |  |                     |        |                     |  | WEIGHTED  |      |          |  |          |        |  |  |          |        |  |  |  
|               |   |               |  |                     |        |                     |  | AVERAGE   |      | WEIGHTED |  |          |        |  |  | WEIGHTED
|               |   |               |  |                     |        |                     |  | REMAINING |      | AVERAGE  |  |          |        |  |  | AVERAGE 
|               |   |               |  | NUMBER              |        | CONTRACT            |  | EXERCISE  |      | NUMBER   |  | EXERCISE
|EXERCISE PRICE |   | OF SHARES     |  | LIFE                |        | PRICE               |  | OF SHARES |      | PRICE   
|               |   |               |  |                     |        |                     |  |           |      |         
|               | $ | 40.00         |  |                     | 13,499 |                     |  |           | 4.66 |          |  | $        | 40.00  |  |  |          | 11,114 |  |  | $ | 40.00  | 
|              
|              
|              
|              
|               |   | 139.28        |  |                     | 10,375 |                     |  |           | 5.20 |          |  |          | 139.28 |  |  |          | 5,250  |  |  |   | 139.28 | 
|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |  
|               | $ | 40.00-$139.28 |  |                     | 23,874 |                     |  |           | 4.90 |          |  | $        | 83.15  |  |  |          | 16,364 |  |  | $ | 71.86  | 
|               |   |               |  |                     |        |                     |  |           |      |          |  |          |        |  |  |          |        |  |  |  

F-26



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Total compensation expense related to the Advisor Plan and the Artist
Option Plan (excluding the impact of the rescission offer) was $12.4 million,
$10.2 and $10.6 million for the years ended December 31, 1999, 2000 and 2001,
respectively, of which $1.6 million, $7.3 million and $7.2 million,
respectively, was included in cost of revenue, and $10.8 million, $2.9 million
and $3.4 million, respectively, was included in operating expenses. The
compensation expense for 2001 reflected $1.5 million and $300,000 included in
cost of sales and operating expenses, respectively, as a result of the service
agreements underlying the option grants being terminated in 2001. The related
unamortized compensation was recognized in 2001 as all services were deemed to
have been provided as of December 31, 2001.

The estimated fair values of the options granted under the Advisor Plan
and the Artist Option Plan was determined using the Black-Scholes option
pricing model. The key assumptions used in the model for the purpose of the
calculation were: a risk free rate of 6.0%, a volatility factor of 80%, no
expected dividends and an expected life of seven years for options granted in
1999; and a risk free rate of 6.4%, a volatility factor ranging from 80% to
150%, no expected dividends and an expected life of seven years (the
contractual term of the options) for options granted in 2000.

For the year ended December 31, 1999, the addition to unearned
compensation of $67.7 million was comprised of the issuance of options under
the Artist Option Plan and Advisor Plan with a fair value of $30.3 million; the
issuance of compensatory options granted under the 1999 Employee Stock Option
Plan with a fair value of $17.9 million; options granted to non-employees under
the 1999 Employee Stock Option Plan with a fair value of $77,000; warrants
granted to suppliers with a fair value of $864,000; warrants granted for
advertising services with a fair value of $2.0 million; and an increase in the
value of the variable equity interests of $16.5 million.

For the year ended December 31, 2000, the decrease to unearned
compensation of $1.4 million was comprised of additions of $5.7 million, which
were offset by reductions of $7.1 million. The additions were a result of the
grant of options under the Artist Option Plan and Advisor Plan with a fair
value of $4.9 million; warrants granted to the landlord with a fair value of
$568,000; and the issuance of compensatory options under the 1999 Employee
Stock Option Plan with a fair value of $210,000. The reductions were a result
of the cancellation of options under the Artist Option Plan and Advisor Plan
with an unamortized balance of $1.3 million on the cancellation date; a
decrease in the value of the unamortized portion of the variable equity
interest of $600,000; a decrease in the value of warrants accounted for as
variable instruments of $1.9 million; and the cancellation of unvested
compensatory employee options with a remaining unamortized value of $3.3
million as a result of terminations in 2000.

For the year ended December 31, 2001, the decrease in unearned
compensation of $2.4 million was a result of the cancellation of unvested
compensatory employee options.

In October 1999, the Company adopted the 1999 Employee Stock Purchase Plan
that has reserved 75,000 shares of common stock for issuance under this plan.
This share reserve automatically increases on the first trading day in January
each calendar year, by an amount equal to one percent (1%) of the total number
of our common stock outstanding on the last trading day of December in the
prior calendar year, but in no event will this annual increase exceed 25,000
shares. Terms of the plan permit eligible employees to purchase common stock
through payroll deduction of up to 15% of each employees compensation. The
accumulated deductions will be applied to the purchase of shares on each
semi-annual purchase date at a purchase price per share equal to 85% of the
fair market value per share on the participants entry date into the offering
period or the semi-annual purchase date, whichever is lower. Pursuant to the
provisions of APB No. 25, shares issued to employees under this plan are
considered noncompensatory. During the years ended December 31, 2000 and 2001,
6,758 shares and 3,902 shares, respectively, were issued under this plan for
total proceeds of $40,000 and $17,000, respectively.



|19. |  | 401(K) PLAN
|--- |  | -----------

In February 1999 and as amended in January 2000, the Company adopted the
Cash or Deferred Profit Sharing Plan and Trust under Section 401(k) of the
Internal Revenue Code (the 401(k) Plan). Under the 401(k) Plan,

F-27



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (continued)

participating employees may defer a percentage (not to exceed 15%) of
their eligible pretax earnings up to the Internal Revenue Services annual
contribution limit. All employees of the Company age 21 years or older who
complete three months of service are eligible to participate in the 401(k)
Plan. The Company does not match participants contributions to the 401(k)
Plan. Accordingly, there is no expense for the years ended December 31, 1999,
2000 and 2001.



|20. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------

LEASE COMMITMENTS

Future minimum lease payments under operating leases for facilities and
certain equipment, including leases entered into subsequent to December 31,
2001, are as follows as of the years ended December 31:

|           |       |   |                |        | 
|---------- | ----- | - | -------------- | ------ | 
|           |       |   | (IN THOUSANDS)
|          
|          
|          
|          
|2002       |       | $ | 1,777          |       
|          
|          
|          
|          
|2003       |       |   | 1,756          |       
|          
|          
|          
|          
|2004       |       |   | 1,746          |       
|          
|          
|          
|          
|2005       |       |   | 1,746          |       
|          
|          
|          
|          
|2006       |       |   | 1,746          |       
|          
|          
|          
|          
|Thereafter |       |   | 6,759          |       
|           |       |   |                |       
|           | Total |   | $              | 15,530 | 
|           |       |   |                |       

In conjunction with our office space lease, the Company has posted a
letter of credit for the benefit of the landlord in the amount of approximately
$2.25 million. If the Company is not in default of its lease obligations, the
amount of the letter of credit reduces annually by 20% ($451,627) beginning in
May 2002. The Company has entered into a sublease with a third party for a portion
of its main facility. The sublease provides for monthly payments of
approximately $55,000 through April 2004 and is recorded as a credit to general
and administrative expense.

Rent expense under operating leases for the years ended December 31, 1999,
2000 and 2001 for the Company was $341,000, $1,735,000 and $1,961,000,
respectively.

EMPLOYMENT CONTRACTS

Future payments under employment contracts are as follows for the years
ended December 31:

|     |       |   |                |       | 
|---- | ----- | - | -------------- | ----- | 
|     |       |   | (IN THOUSANDS)
|2002 |       | $ | 1,809          |      
|    
|    
|    
|    
|2003 |       |   | 1,500          |      
|    
|    
|    
|    
|2004 |       |   | 1,500          |      
|    
|    
|    
|    
|2005 |       |   | 1,500          |      
|    
|    
|    
|    
|2006 |       |   | 750            |      
|     |       |   |                |      
|     | Total |   | $              | 7,059 | 
|     |       |   |                |      

RECORD
LABEL

The
Company is committed to fund up to $44.7 million to its record label
joint venture through June 2006.

LITIGATION

The Company is subject to various pending and threatened legal actions,
which arise in the normal course of business. The Companys management
believes that the impact of such litigation will not have a material adverse
impact on its financial position or results of operations.



|21. |  | REPORTABLE SEGMENTS
|--- |  | -------------------

As of December 31, 2001, the Company operates primarily through three
reportable segments: E-commerce operations (E-commerce), Media Operations
(Media) and Record Label operations through its 50% equity interest in
ARTISTdirect Records LLC, its co-venture with Ted Field. However, since the
Company only owns

F-28



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##### Table of Contents



ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

50% of the record label venture and does not exert voting and operating
control over it, the results are not consolidated. Prior to June 2000, the
Company considered Kneeling Elephant Records to be its Record Label
segment. Kneeling Elephant generated revenue advances
under an agreement with RCA. However, given its relative immateriality, these
activities have been re-classified in prior periods as Other.

In prior years, the Company also considered its Talent Agency business to
be a segment, but the Company decided in December 2001 to exit this business
and as a result it has been shown as a discontinued operation in the
consolidated statements of operations. The Company also previously considered
Digital Music to be a separate segment; however, this business has not
developed as quickly as initially anticipated and is at least currently no
longer considered a separate reportable segment. The segment data below has
been restated for all periods to reflect the current segment structure.

E-commerce revenue is generated from the sale of recorded music and
music-related merchandise. Media revenue is generated from the sale of
advertising and sponsorships, both online and offline.

The factors for determining reportable segments were based on service and
products. Each segment is responsible for executing a unique marketing and
business strategy. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The Company
evaluates performance based on EBITDA (earnings or loss before interest, taxes,
depreciation and amortization, including stock based compensation, and loss
from impairment of goodwill). Included in EBITDA are direct operating expenses
for the segment. The following table summarizes the revenue and EBITDA by
segment for the years ended December 31, 1999, 2000 and 2001. Corporate
expenses consist of general operating expenses which are not directly related
to the operations of the segments.

|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |         |         |   | 
|------------------------------------- | ------------------- | ------------------------------------- | ------- | ------- | ----------------------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | - | 
|                                      |                     |                                       |         |         | YEAR ENDED DECEMBER 31,
|                                      |                     |                                       |         |         |                        
|                                      |                     |                                       |         |         | 1999                    |   | 2000    |         | 2001   
|                                      |                     |                                       |         |         |                         |   |         |         |        
|                                      |                     |                                       |         |         | (IN THOUSANDS)         
|Net Revenue:                          |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | E-commerce          |                                       | $       | 5,282   |                         |   | $       | 12,160  |         |   | $       | 7,542   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Media               |                                       |         | 2,910   |                         |   |         | 6,326   |         |   |         | 2,879   |        
|                                     
|                                     
|                                     
|                                     
|                                      | Other               |                                       |         | 778     |                         |   |         | 244     |         |   |         |        |        
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                      |                     | $                                     | 8,970   |         |                         | $ | 18,730  |         |         | $ | 10,421  |        
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|EBITDA:                               |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | E-commerce          |                                       | $       | (2,756  | )                       |   | $       | (4,103  | )       |   | $       | (2,605  | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Media               |                                       |         | (12,330 | )                       |   |         | (16,809 | )       |   |         | (6,908  | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Other               |                                       |         | (257    | )                       |   |         | (262    | )       |   |         |        |        
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                      |                     |                                       | (15,343 | )       |                         |   | (21,174 | )       |         |   | (9,513  | )      
|                                     
|                                     
|                                     
|                                     
|                                      | Corporate           |                                       |         | (8,121  | )                       |   |         | (26,866 | )       |   |         | (16,086 | )      
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                      |                     | $                                     | (23,464 | )       |                         | $ | (48,040 | )       |         | $ | (25,599 | )      
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                     
|                                      |                     |                                       |         |         | YEAR ENDED DECEMBER 31,
|                                      |                     |                                       |         |         |                        
|                                      |                     |                                       |         |         | 1999                    |   | 2000    |         | 2001   
|                                      |                     |                                       |         |         |                         |   |         |         |        
|                                      |                     |                                       |         |         | (IN THOUSANDS)         
|Reconciliation of EBITDA to Net Loss: |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | EBITDA per Segments |                                       | $       | (23,464 | )                       |   | $       | (48,040 | )       |   | $       | (25,599 | )      
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Stock-based compensation              |         |         | (32,073                 | ) |         |         | (12,612 | ) |         |         | (20,820 | )
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Depreciation and amortization         |         | (2,509  | )                       |   |         | (6,248  | )       |   |         | (6,512  | )      
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Amortization of vendor prepaid        |         |         | (111                    | ) |         |         | (333    | ) |         |         | (139    | )
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Loss from impairment of goodwill      |         |         |                        |   |         |         |        |   |         |         | (11,444 | )
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Income (loss) from equity investments |         |         | 50                      |   |         |         | (235    | ) |         |         | (8,998  | )
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Interest income, net                  |         |         | 281                     |   |         |         | 5,969   |   |         |         | 3,585   |  
|                                     
|                                     
|                                     
|                                     
|                                      |                     | Income from discontinued operations   |         |         | 22                      |   |         |         | 2,191   |   |         |         | 47      |  
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        
|                                      |                     | Net Loss                              |         | $       | (57,804                 | ) |         | $       | (59,308 | ) |         | $       | (69,880 | )
|                                      |                     |                                       |         |         |                         |   |         |         |         |   |         |        

F-29



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##### Table of Contents



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

ARTISTDIRECT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|        |            |   |              |        |      |   |        |        | 
|------- | ---------- | - | ------------ | ------ | ---- | - | ------ | ------ | 
|        |            |   | DECEMBER 31,
|        |            |   |             
|        |            |   | 2000         |        | 2001
|        |            |   |              |        |     
|Assets: |            |   |              |        |      |   |        |       
|       
|       
|       
|       
|        | Corporate  |   | $            | 98,882 |      |   | $      | 56,426 | 
|       
|       
|       
|       
|        | E-commerce |   |              | 9,394  |      |   |        | 498    | 
|       
|       
|       
|       
|        | Media      |   |              | 9,486  |      |   |        | 2,949  | 
|        |            |   |              |        |      |   |        |       
|        |            | $ | 117,762      |        |      | $ | 59,873 |       
|        |            |   |              |        |      |   |        |       

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.

As of December 31, 2001, the Company had advanced $5.3 million to its
record label venture, ARTISTdirect Records and recorded losses of approximately
$8.6 million for the year ended December 31, 2001. See Note 9 for further
discussion.



|22. |  | QUARTERLY RESULTS OF OPERATIONS
|--- |  | -------------------------------

The following table sets forth unaudited quarterly results of operations
for the eight most recent quarters ended December 31, 2001. This unaudited
quarterly information has been derived from the Companys unaudited financial
statements and, in the Companys opinion, includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the periods covered. The operating results for any quarter are
not necessarily indicative of the operating results for any future period.

|                                           |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |              |         |       |       |   |         |       |       |   |         |       |       |   |         |       |       |  
|------------------------------------------ | ---------------------------- | ----- | ------- | ------------------------------------- | ------ | -------- | ------- | ------------- | ----- | ------------ | ------- | --------- | ----- | -------- | ------- | ------------- | ----- | ------------ | ------- | ----- | ----- | - | ------- | ----- | ----- | - | ------- | ----- | ----- | - | ------- | ----- | ----- | -
|                                           |                              |       |         | QUARTER ENDED                        
|                                           |                              |       |         |                                      
|                                           |                              |       |         | MARCH 31,                             |        | JUNE 30, |         | SEPTEMBER 30, |       | DECEMBER 31, |         | MARCH 31, |       | JUNE 30, |         | SEPTEMBER 30, |       | DECEMBER 31,
|                                           |                              |       |         | 2000                                  |        | 2000     |         | 2000          |       | 2000         |         | 2001      |       | 2001     |         | 2001          |       | 2001        
|                                           |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |             
|                                           |                              |       |         | (IN THOUSANDS, EXCEPT FOR SHARE DATA)
|                                          
|                                          
|                                          
|                                          
|Net revenue                                |                              | $     | 3,952   |                                       |        | $        | 4,671   |               |       | $            | 4,511   |           |       | $        | 5,596   |               |       | $            | 3,128   |       |       | $ | 2,739   |       |       | $ | 1,989   |       |       | $ | 2,565   |      
|                                          
|                                          
|                                          
|                                          
|Gross profit (loss)                        |                              |       | (2,258  | )                                     |        |          | (1,317  | )             |       |              | (2,283  | )         |       |          | (1,441  | )             |       |              | (2,152  | )     |       |   | (1,558  | )     |       |   | (2,063  | )     |       |   | (4,076  | )    
|                                          
|                                          
|                                          
|                                          
|Loss from continuing operations            |                              |       | (11,535 | )                                     |        |          | (14,733 | )             |       |              | (17,963 | )         |       |          | (17,268 | )             |       |              | (17,096 | )     |       |   | (10,908 | )     |       |   | (19,432 | )     |       |   | (22,491 | )    
|                                          
|                                          
|                                          
|                                          
|Income (loss) from discontinued operations |                              |       | 348     |                                       |        |          | 730     |               |       |              | 888     |           |       |          | 225     |               |       |              | 14      |       |       |   | (42     | )     |       |   | 71      |       |       |   | 4       |      
|                                           |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |              |         |       |       |   |         |       |       |   |         |       |       |   |         |      
|Net loss                                   |                              |       | (11,187 | )                                     |        |          | (14,003 | )             |       |              | (17,075 | )         |       |          | (17,043 | )             |       |              | (17,082 | )     |       |   | (10,950 | )     |       |   | (19,361 | )     |       |   | (22,487 | )    
|                                          
|                                          
|                                          
|                                          
|Net loss attributed to common
shareholders |                              |       | (36,747 | )                                     |        |          | (14,274 | )             |       |              | (16,921 | )         |       |          | (17,236 | )             |       |              | (17,246 | )     |       |   | (11,123 | )     |       |   | (19,557 | )     |       |   | (22,645 | )    
|                                          
|                                          
|                                          
|                                          
|Basic and diluted loss per share:          |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |              |         |       |       |   |         |       |       |   |         |       |       |   |         |      
|                                          
|                                          
|                                          
|                                          
|                                           | From continuing operations   |       |         | (24.89                                | )      |          |         | (4.07         | )     |              |         | (4.68     | )     |          |         | (4.62         | )     |              |         | (4.56 | )     |   |         | (3.06 | )     |   |         | (5.50 | )     |   |         | (6.45 | )    
|                                          
|                                          
|                                          
|                                          
|                                           | From discontinued operations |       |         | 0.23                                  |        |          |         | 0.20          |       |              |         | 0.23      |       |          |         | 0.06          |       |              |         | 0.00  |       |   |         | (0.01 | )     |   |         | 0.02  |       |   |         | 0.00  |      
|                                           |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |              |         |       |       |   |         |       |       |   |         |       |       |   |         |      
|                                           |                              | Total |         | $                                     | (24.66 | )        |         | $             | (3.87 | )            |         | $         | (4.45 | )        |         | $             | (4.56 | )            |         | $     | (4.56 | ) |         | $     | (3.07 | ) |         | $     | (5.48 | ) |         | $     | (6.45 | )
|                                           |                              |       |         |                                       |        |          |         |               |       |              |         |           |       |          |         |               |       |              |         |       |       |   |         |       |       |   |         |       |       |   |         |      

F-30



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##### Table of Contents






EXHIBIT INDEX

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                     
|3.1         |  | Amended and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration
No. 333-87547), as amended by Amendment No.s 1  7 thereto.                                                                                                               
|           
|           
|           
|           
|3.2         |  | Amended and Restated Bylaws of the Registrant. Incorporated by reference
to Exhibit 3.2 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.                                                                                                                                     
|           
|           
|           
|           
|3.3         |  | Certificate of Amendment of the Third Amended and Restated Certificate of
Incorporation. Incorporated by reference to Exhibit 3.3 in the
Registrants Quarterly Report on Form 10-Q filed on August 14, 2001.                                                                                                                                                                                       
|           
|           
|           
|           
|4.1         |  | See Exhibits 3.1 and 3.2 for provisions of the Registrants Certificate
of Incorporation and Bylaws determining the rights of holders of the
Registrants common stock. See Exhibits 4.3 and 10.4 for the rights of holders of
registration rights.                                                                                                                                                 
|           
|           
|           
|           
|4.2         |  | Specimen common stock certificate. Incorporated by reference to Exhibit
4.2 in the Registrants Registration Statement on Form S-1 initially filed
on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.                                                                                                                                                 
|           
|           
|           
|           
|4.3         |  | Registration Rights Letter Agreement dated May 31, 2001 between the
Registrant and Frederick W. Field. Incorporated by reference to Exhibit 3
filed in connection with the Registrants Definitive Proxy Statement on
June 11, 2001.                                                                                                                                                                
|           
|           
|           
|           
|10.1+       |  | BMI Music Performance Agreement for the UBL, dated October 9, 1998.
Incorporated by reference to Exhibit 10.3 in the Registrants Registration
Statement on Form S-1 initially filed on September 22, 1999 (Registration
No. 333-87547), as amended by Amendment No.s 1  7 thereto.                                                                                                               
|           
|           
|           
|           
|10.2+       |  | Database, On-Line Internet Retail Store and Consumer Direct Fulfillment
Services Agreement, dated as of August 15, 1998, between AEC One Stop
Group, Inc. and the UBL, as amended. Incorporated by reference to Exhibit
10.6 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.
|           
|           
|           
|           
|10.3        |  | Securities Purchase Agreement, dated July 28, 1998, among the Registrant,
the UBL, Constellation Venture Capital, L.P. and Constellation Ventures
(BVI), Inc. Incorporated by reference to Exhibit 10.7 in the Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.                     
|           
|           
|           
|           
|10.4        |  | Third Amended and Restated Registration Rights Agreement, dated as of
November 12, 1999, among the Registrant and the other parties who are
signatories thereto, as amended. Incorporated by reference to Exhibit 10.8
in the Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment
No.s 1  7 thereto.      
|           
|           
|           
|           
|10.5        |  | UBL Exchange, Contribution and Distribution Agreement, dated May 18,
1999. Incorporated by reference to Exhibit 10.9 in the Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.                                                                                                        
|           
|           
|           
|           
|10.6        |  | Issuance, Noncompetition and Nonsolicitation Agreement, dated as of
January 1, 1996, between the Registrant and Keith Yokomoto. Incorporated
by reference to Exhibit 10.13 in the
Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.                                                  





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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                    
|           
|           
|           
|           
|10.7        |  | Issuance Agreement, dated as of January 1, 1998, between the Registrant,
Marc Geiger, Donald Muller, and L&G Associates One. Incorporated by
reference to Exhibit 10.14 in the Registrants Registration Statement on
Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.    
|           
|           
|           
|           
|10.8        |  | Deferred Compensation Agreement, dated as of April 1, 1998, by and
between Keith Yokomoto and the Registrant dated July 1, 1998.
Incorporated by reference to Exhibit 10.16 in the Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.
|           
|           
|           
|           
|10.9        |  | Employment Agreement, dated as of July 28, 1998, between Marc Geiger and
the Registrant. Incorporated by reference to Exhibit 10.19 in the
Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment
No.s 1  7 thereto.                                        
|           
|           
|           
|           
|10.10       |  | Employment Agreement, dated as of July 28, 1998, between Don Muller and
the Registrant. Incorporated by reference to Exhibit 10.20 in the
Registrants Registration Statement on Form S-1 initially filed on
September 22, 1999 (Registration No. 333-87547), as amended by Amendment
No.s 1  7 thereto.                                         
|           
|           
|           
|           
|10.11       |  | 1999 Employee Stock Purchase Plan. Incorporated by reference to Exhibit
10.21 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.                                                                                              
|           
|           
|           
|           
|10.12       |  | 1999 Employee Stock Option Plan. Incorporated by reference to Exhibit
10.22 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.                                                                                                
|           
|           
|           
|           
|10.13       |  | 1999 Artist and Artist Advisor Stock Option Plan. Incorporated by
reference to Exhibit 10.23 in the Registrants Registration Statement on
Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.                                                                               
|           
|           
|           
|           
|10.14       |  | 1999 Artist Stock Option Plan. Incorporated by reference to Exhibit
10.24 in the Registrants Registration Statement on Form S-1 initially
filed on September 22, 1999 (Registration No. 333-87547), as amended by
Amendment No.s 1  7 thereto.                                                                                                  
|           
|           
|           
|           
|10.15+      |  | ADNM Merchandiser Agreement, dated as of April 1, 1999, between Giant
Merchandising and ARTISTdirect New Media, LLC. Incorporated by reference
to Exhibit 10.26 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.            
|           
|           
|           
|           
|10.16+      |  | UBL Merchandiser Agreement, dated as of April 1, 1999, between Giant
Merchandising and ARTISTdirect New Media, LLC. Incorporated by reference
to Exhibit 10.28 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.             
|           
|           
|           
|           
|10.17       |  | 5670 Wilshire Boulevard Office Lease, as amended. Incorporated by
reference to Exhibit 10.47 in the Registrants Registration Statement on
Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.                                                                               
|           
|           
|           
|           
|10.18       |  | Form of Directors Indemnification Agreement. Incorporated by reference
to Exhibit 10.29 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.                                                                                    
|           
|           
|           
|           
|10.19       |  | Form of Officers Indemnification Agreement. Incorporated by reference
to Exhibit 10.30 in the Registrants Registration Statement on Form S-1
initially filed on September 22, 1999 (Registration No. 333-87547), as
amended by Amendment No.s 1  7 thereto.                                                                                     
|           
|           
|           
|           
|10.20+      |  | ARTISTdirect  Cisneros Television Group Memorandum of Understanding
dated as of November 15, 1999 between the Registrant and Lakeport Overseas
Ltd. Incorporated by reference to Exhibit 10.40 in the                                                                                                                                             





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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                      
|           
|           
|           
|           
|            |  | Registrants
Registration Statement on Form S-1 initially filed on September 22, 1999
(Registration No. 333-87547), as amended by Amendment No.s 1  7 thereto.                                                                                                                                                                                     
|           
|           
|           
|           
|10.21       |  | Form of Series C Preferred Stock Purchase Agreement. Incorporated by
reference to Exhibit 10.45 in the Registrants Registration Statement on
Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.                                                                              
|           
|           
|           
|           
|10.22       |  | Warrant dated December 24, 1999, issued to Yahoo! Incorporated by
reference to Exhibit 10.46 in the Registrants Registration Statement on
Form S-1 initially filed on September 22, 1999 (Registration No.
333-87547), as amended by Amendment No.s 1  7 thereto.                                                                                 
|           
|           
|           
|           
|10.23       |  | Operating Agreement of ARTISTdirect Records, LLC dated May 31, 2001 by
and among ARTISTdirect Records, LLC, ARTISTdirect Recordings, Inc. and
Radar Records Holdings, LLC. Incorporated by reference to Appendix B filed
in connection with the Registrants Definitive Proxy Statement on June 11,
2001.                                            
|           
|           
|           
|           
|10.24       |  | Loan and Security Agreement dated May 31, 2001 by and between
ARTISTdirect Records, LLC and ARTISTdirect Recordings, Inc. Incorporated
by reference to Appendix C filed in connection with the Registrants
Definitive Proxy Statement on June 11, 2001                                                                                              
|           
|           
|           
|           
|10.25       |  | Employment Agreement dated May 31, 2001 by and between the Registrant
and Frederick W. Field. Incorporated by reference to Exhibit 1
filed in connection with the Registrants Definitive Proxy Statement
on June 11, 2001                                                                                                                           
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|10.26       |  | Employment Agreement dated May 31, 2001 by and between ARTISTdirect
Records, LLC and Frederick W. Field. Incorporated by reference to Exhibit
2 filed in connection with the Registrants Definitive Proxy Statement on
June 11, 2001.                                                                                                               
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|10.27       |  | Letter Agreement dated May 31, 2001 by and among the Registrant,
ARTISTdirect Records, LLC, ARTISTdirect Recordings, Inc., Frederick W.
Field and Radar Records Holdings, LLC. Incorporated by reference to
Exhibit 4 filed in connection with the Registrants Definitive Proxy
Statement on June 11, 2001.                                         
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|           
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|10.28       |  | Agreement to Extend Initial Period of Employment, dated as of April 27,
2001, between Marc Geiger and the Registrant. Incorporated by reference
to Exhibit 10.53 in the Registrants Registration Statement on Form S-1
initially filed on November 22, 2000 (Registration No. 333-50576), as
amended by Amendment No.s 1  5 thereto.              
|           
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|10.29       |  | Amendment to Employment Agreement, dated as of July 1, 2001, between
Marc Geiger and the Registrant. Incorporated by reference to Exhibit 10.54
in the Registrants Registration Statement on Form S-1 initially filed on
November 22, 2000 (Registration No. 333-50576), as amended by Amendment
No.s 1  5 thereto.                               
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|10.30       |  | Employment Agreement, dated as of July 1, 2001, between Keith Yokomoto
and the Registrant. Incorporated by reference to Exhibit 10.55 in the
Registrants Registration Statement on Form S-1
initially filed on November 22, 2000 (Registration No. 333-50576),
as amended by Amendment No.s 1  5 thereto.                                         
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|10.31+      |  | Hosting and Development Agreement, dated August 14, 2001, between CNP,
Inc. (formerly Amplified Holdings, Inc.) and the Registrant. Incorporated
by reference to Exhibit 10.56 in the Registrants Registration Statement
on Form S-1 initially filed on November 22, 2000 (Registration No.
333-50576), as amended by Amendment No.s 1  5 thereto.
|           
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|10.32+      |  | Agreement dated as of July 19, 2000 between the Registrant and
Ticketmaster Online-City Search, Inc. Incorporated by reference to Exhibit
10.57 in the Registrants Registration Statement on Form S-1 initially
filed on November 22, 2000 (Registration No. 333-50576), as amended by
Amendment No.s 1  5 thereto.                               





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##### Table of Contents



|            |  |                                                                                                                                                                                                                                                 
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|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                                                     
|            |  |                                                                                                                                                                                                                                                 
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|10.33       |  | Unit Purchase Agreement dated as of October 31, 2001, among ARTISTdirect
Records, LLC ARTISTdirect Recordings, Inc., Radar Records Holdings, LLC,
BMG Music, the Registrant, and Frederick W. Field.                                            
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|10.34+      |  | Short Form Distribution and Foreign License Agreement dated as of
October 31, 2001, between ARTISTdirect Records, LLC. and BMG Music d/b/a
BMG Entertainment.                                                                                   
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|21.1        |  | Subsidiaries of the Registrant. Incorporated by reference to Exhibit 21.1
in the Registrants Registration Statement on Form S-1 initially filed on
November 22, 2000 (Registration No. 333-50576), as amended by Amendment
No.s 1  5 thereto.
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|23.1        |  | Consent of KPMG LLP with respect to ARTISTdirect, LLC and subsidiaries.                                                                                                                                                                         
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|24.1        |  | Powers of Attorney. Included on signature page.                                                                                                                                                                                                 
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|99.1        |  | Mjuice.com, Inc. 1999 Stock Option Plan, as assumed by Registrant.
Incorporated by reference to Exhibit 99.3 in the Registrants Registration
Statement on Form S-8 filed on January 4, 2001.                                                   
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|99.2        |  | Audio Explosion, Inc. 1998 Stock Option Plan, as assumed by Registrant.
Incorporated by reference to Exhibit 99.4 in the Registrants Registration
Statement on Form S-8 filed on January 4, 2001.                                              
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|99.3        |  | Offer to Purchase, dated February 26, 2001. Incorporated by reference to
Exhibit (a)(1)(A) filed in connection with the Registrants Schedule TO-I
on February 26, 2001.                                                                        



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|+ |  | Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406 under the Securities Act. In accordance
with Rule 406, these confidential portions have been omitted from this exhibit
and filed separately with the Commission.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------