UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Commission File Number: 000-30063

10900 Wilshire Boulevard, Suite 1400, Los Angeles, California 90024
(Address of principal executive offices, including Zip Code)
Registrant’s telephone number, including area code: (310) 443-5360

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 þ No o

     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 o

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

     As of March 29, 2005, the aggregate market value of the voting common stock held by non-affiliates of the Registrant was approximately $2,500,000, based on the closing price per share of $0.79 for the Registrant’s common stock as reported on the OTC Bulletin Board on such date.

     As of March 29, 2005, there were 3,502,117 shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding.

     Documents incorporated by reference: None

ARTISTDIRECT INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

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     This Annual Report on Form 10-K for the fiscal year ended December 31, 2004 contains” forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements that include the words “believes”, “expects”, “anticipates”, or similar expressions. These forward looking statements may include, among others, statements concerning the Company’s expectations regarding its business, growth prospects, revenue trends, operating costs, working capital requirements, competition, results of operations and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The forward-looking statements in this Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed or implied by the forward-looking statements contained herein.

     Each forward-looking statement should be read in context with, and with an understanding of, the various disclosures concerning the Company and its business made elsewhere in this Annual Report on Form 10-K for the fiscal year ended December 31 ,2004, as well as other public reports filed with the United States Securities and Exchange Commission. Investors should not place undue reliance on any forward-looking statement as a prediction of actual results of developments. Except as required by applicable law or regulation, the Company undertakes no obligation to update or revise any forward-looking statement contained in this Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004.

PART I

ITEM 1. BUSINESS

OVERVIEW

We are an online music entertainment company that provides 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, advertising sponsorships, music-related specialty commerce and digital music services.

The ARTISTdirect Network consists of our music search engine and database containing information on more than 100,000 artists, retail e-commerce offering a wide selection of artist merchandise and music, our proprietary music guide that enables users to browse music by artist, genre or time period, a music-oriented online community and the ability for users to download and listen to music and view music videos.

	•	ARTISTdirect.com — a comprehensive online music search engine and resource for music information. ARTISTdirect.com 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. Artistdirect.com also offers links to numerous other Web sites in the online music community;
	•	Community — a music-oriented online community providing message boards relating to general music topics. The Community area allows fans to communicate with others around the world to share interests and commentary about their favorite music and artists;
	•	The ARTISTdirect Shopping area — a retail site offering a wide selection of music titles and artist and lifestyle merchandise:
	•	Music Streaming and Downloads and Video — a feature that enables users to stream, download and listen to music from a variety of artists.
	•	Video — Users can view a variety of current music videos featuring popular and emerging artists.
	•	Music Guide — a 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 guide is designed to function with either short music clips or with full song files at such time as we are able to enter into music licensing agreements on terms acceptable to us;

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RECENT EVENTS

We underwent significant changes during the fiscal year ended December 31, 2004 as described below:

     Completion of Disposition of Assets

     Sale of ARTISTdirect Recordings to Radar Records Holdings

     Effective July 30, 2004, ARTISTdirect, Inc. (“ADI”) entered into a Termination Agreement with BMG Music (“BMG”) and ARTISTdirect Records which extinguished all of ADI’s obligations under its funding guaranty, including the remaining $12.0 million funding obligation to ARTISTdirect Records, LLC (“ARTISTdirect Records”).

     Effective as of December 31, 2004, ADI entered into a Transfer Agreement with ARTISTdirect Recordings, Inc., a Delaware corporation and a wholly-owned subsidiary of ADI (“ARTISTdirect Recordings”), and Radar Records Holdings, Inc. (“Radar Records”), a Delaware corporation wholly-owned by ADI’s Chairman, Frederick W. Field, pursuant to which ADI was obligated to sell its common stock in ARTISTdirect Recordings to Radar Records for $115,000 in cash. ARTISTdirect Recordings owned a 65% membership interest in ARTISTdirect Records.

     On February 28, 2005, ADI completed the sale of 100% of the common stock of ARTISTdirect Recordings to Radar Records pursuant to the Transfer Agreement, as a result of which ADI no longer had any equity or other economic interest in ARTISTdirect Records, and Radar Records became the owner of a majority of the membership interests in ARTISTdirect Records and also acquired the receivable reflecting the $33.0 million of loan advances previously provided to ARTISTdirect Records by ADI. In conjunction with this transaction, at February 28, 2005, ADI wrote-off the intercompany balance due from ARTISTdirect Records ($80,000 at December 31, 2004), which was eliminated in consolidation. Radar Records acquired the common stock of ARTISTdirect Recordings subject to the rights of BMG. Radar Records also agreed to offer to investors who had provided bridge funding to ARTISTdirect Records, excluding Frederick W. Field and entities related or controlled by him, the right to acquire proportional shares (based on the amount of bridge funding made by each bridge investor in ARTISTdirect Records) of the common stock of ARTISTdirect Recordings on the same terms and conditions as set forth in the Transfer Agreement.

     As a result of the disposition of ADI’s interest in ARTISTdirect Records effective February 28, 2005, ADI estimates that its will recognize a net non-cash gain in its consolidated statement of operations for the three months ended March 31, 2005 of approximately $21 million (unaudited), primarily as a result of the elimination of the liabilities of ARTISTdirect Records.

     Discontinued Operations — iMusic

     Effective November 23, 2004, pursuant to a Trademark Assignment and Purchase Agreement dated as of November 12, 2004, the Company sold all of its rights, title and interest in and to certain trademarks, service markets and trade names, in certain countries of the world, that consist of or incorporate the term “iMusic” (the “Marks”), including domain names that consist of or incorporate the term iMUSIC (the “Domain Names”) and goodwill related to such marks or trade names, to Apple Computer, Inc. for a cash payment of $500,000. The Marks and Domain Names that the Company sold did not have any carrying value on the Company’s books. As a result of the foregoing, during December 2004, the Company ceased the sale of products under the iMusic label and discontinued the operations of the iMusic record label.

     Departure of Directors

     Effective as of October 18, 2004, Stephen M. Krupa, Benjamin S. A. Moody and Marc P. Geiger each resigned from the Board of Directors. Mr. Krupa and Mr. Moody were the only members of the Company’s Audit Committee. Effective November 29, 2004, pursuant to the Company’s Bylaws, the present directors of ADI elected Eric Pulier to fill a vacant seat on the Board of Directors, to serve until his successor is duly elected and qualified, or until his earlier resignation or removal as a director. Subsequently, effective January 18, 2005, pursuant to the Company’s Bylaws, the current directors of ADI elected Teymour Boutros-Ghali and Dimitri Villard to fill two vacant seats on the Board of Directors, each to serve until his successor is duly elected and qualified, or until his earlier resignation or removal as a director.

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ARTISTdirect BUSINESS SEGMENTS

The ARTISTdirect Network is comprised of our Media and E-commerce operations.

Media. Our Media operations include our content-oriented web sites, a collection of third party music sites and our entertainment marketing initiatives. Revenue from Media operations is generated from the sale of online advertising and integrated marketing solutions. We market and sell advertising on a cost-per-impression (CPM) basis to advertising agencies and directly to various companies as part of their marketing programs. Customers may purchase advertising space for the entire ARTISTdirect Network, or they may tailor advertising based on music genre (e.g., jazz, country, rock music) or based on functionality (e.g., directing advertising to customers using music download features or broadband-only features of the ARTISTdirect Network). Since we are increasingly aware of websites outside the ARTISTdirect Network that are frequently visited by artists and music fans, we have also offered our customers advertising space on behalf of third party music-related websites.

E-Commerce. E-commerce operations consist of the sale of recorded music and artist-related merchandise. Most of our sales come from our ARTISTdirect Shopping area, which offers a comprehensive selection of music CDs and broad range of artist and lifestyle merchandise.

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. During 2005, the management of our web sites and servers for content, applications, database and electronic commerce is handled internally. Our servers are maintained at IX2 Networks, LLC, a co-location facility in Los Angeles, California. Our operations depend on our and IX2’s ability to protect our systems against fire, power loss, telecommunications failure, break-ins and other events. All web sites, servers, and systems are monitored and periodic backups are stored at our downtown data center.

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, implemented SAP’s software in house under a two-year license from SAP. In December 2002, our two-year license expired and we entered into a perpetual license agreement with SAP.

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. This agreement is now month-to-month. Alliance owns the All Music Guide, a comprehensive source of artist and album information that is supplied to our users primarily through its integration into the UBL. 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. We purchase almost all of the music titles available for sale on our web sites from inventory held by Alliance.

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Benn Co. (formerly 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 was renewed for a one-year period in May 2002 and automatically renewed for an additional year in May 2003. In December 2002, this agreement was assigned from Old Glory to Benn Co., LLC. This agreement is now month-to-month.

If we are unable to continue our agreements with these suppliers, 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. This agreement is now month-to-month.

SALES AND MARKETING

ADVERTISING SALES

We sell advertising and sponsorships to companies seeking to reach one or more of the distinct demographic audiences viewing content in the ARTISTdirect Network. Advertisers may choose single elements such as targeted or run-of-network banners or sponsorship of fixed placement on our web sites. Pricing is negotiated based upon the size of the target audience, the duration and intensity of the campaign and the size and placement of the advertisement. For the years ended December 31, 2002, 2003 and 2004, advertising revenue represented approximately 16%, 25% and 42%, respectively, of total net revenue. In 2004, advertising revenue increased approximately 83% over the previous year.

MARKETING AND PROMOTION

We use a number of methods to create awareness of the ARTISTdirect Network and drive traffic to our web sites. We have focused much of our marketing activity on e-mail direct marketing to communicate with registered users of specific artists and the ARTISTdirect Network. Campaigns have included direct notification of special merchandise offers, contests, promotions and music downloads.

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 in selling music and merchandise;
	•	for music consumers and artist relationships with traditional music industry companies, including Sony BMG Music Entertainment, EMI Music, a unit of EMI Group, Warner Music Group, and Universal Music Group, a unit of Vivendi. 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.

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Our competitors have worked together to offer music over the Internet, and we may face increased competitive pressures as a result. For instance, RealNetworks, Time Warner, Bertelsmann AG and EMI Group formed MusicNet, a digital music subscription platform featuring on-demand downloads and streaming. Various retailers such as BestBuy have cooperated to distribute music through the iTunes platform.

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

	•	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; and
	•	the ease of use and consumer acceptance of the ARTISTdirect Network.

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-throughs 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.

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. On March 6, 2003, the Third U.S. Circuit Court of Appeals issued a ruling that COPA restricts free speech because it is not narrowly focused is enough to only target pornography, and is therefore unconstitutional. The Department of Justice could appeal this ruling to the U.S. Supreme Court.

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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. While the temporary “sliding scale implementation was due to expire on April 21, 2002, on October 31, 2001, the FTC extended the implementation period through April 21, 2005.

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 privacy 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 privacy 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. The federal government recently signed the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM) designed to limit unsolicited commercial e-mail commonly referred to as “spam.” In addition, 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 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 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

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Internet Tax Freedom Act (ITFA) has placed a moratorium on new state and local taxes on Internet commerce, the tax moratorium expired on November 1, 2003 and has not been re-enacted. At least some state legislatures that will convene during early 2004 have indicated that they will move to expand their sales taxes to cover Internet commerce, if the ITFA is not reinstated. Imposing state sales taxes on Internet-based commerce would 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 or UBL 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 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:

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a license agreement with the publisher, writer or other owner of such copyright in the “musical composition”;

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	•	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 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 site features a community area where visitors can post comments We do not censor such comments 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.

SEASONALITY

The seasonality of our e-commerce segment affects our revenue. Our CDs and other online goods are most often purchased during the holiday season and also during the summer months, traditionally when artists go on tour.

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EMPLOYEES

As of March 31, 2005, we had 15 full-time employees and five part-time consultants. 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

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

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.

We Have A History Of Operating Losses And Anticipate Losses And Negative Cash Flow For The Foreseeable Future

The Company has incurred losses and negative cash flows from operations in every fiscal period since inception and has an accumulated deficit of $226.0 million as of December 31, 2004. For the year ended December 31, 2004, the Company incurred a net loss of $3.3 million (including $2.2 million from discontinued operations) and negative operating cash flows of $3.5 million. As of December 31, 2004, the Company had a net working capital deficiency of $18.4 million (including liabilities of discontinued operations held for disposal of $18.9 million, almost all of which were liquidated effective February 28, 2005) and a stockholders’ deficiency of $20.3 million. Through December 31, 2003, ADI had funded substantially all of the operations of ARTISTdirect Records. Effective July 30, 2004, ADI’s remaining $12.0 million funding obligation to ARTISTdirect Records was extinguished, and effective February 28, 2005, ADI sold all of its interest in ARTISTdirect Records to Radar Records for a cash payment of $115,000.

During 2003, the Company restructured its operations, laid off most of its staff and reduced operating costs. Subsequently, management has continued its efforts to improve and expand operations and cash flows at its online music network. However, it is uncertain whether the Company’s available cash resources will be sufficient to meet anticipated capital requirements over the next twelve months. If sufficient capital is not available, then the Company may not be able to fund its operations. To the extent that the Company is unable to obtain the capital necessary to fund its future cash requirements on a timely basis and/or under acceptable terms and conditions, the Company will not have sufficient cash resources to maintain operations, and the Company may consider a formal or informal restructuring or reorganization. The conditions described above raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

Based on data compiled by RIAA, The Recording Industry Association of America, after declining for four consecutive years, the number of CDs shipped domestically from record companies to retail distribution channels rose 5.3 percent, a 2.7 percent increase in value, in 2004, compared to the previous year. When compared to year-end numbers five years ago, the number of overall units shipped to retail in 2004 is down 21 percent. The decline, in sales had been due in part, to widespread copying and illegal Internet downloading of music, according to the RIAA. If the overall trend continues, it may affect our ecommerce business and have a material affect on our revenues.

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If We are Unable To Grow Our Online Advertising Significantly In The Near Future, 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 advertising agencies and direct marketing departments;
	•	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;
	•	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.

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 have spent and 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.

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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!, Amazon.com, MTV, other web sites and traditional music companies.

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

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

These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to develop, promote and sell their products or services than we can. 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 and If We Cannot Secure Alternate Suppliers, Our Business May Be Harmed

We rely to a large extent on timely distribution by third parties. During 2004, we relied on two vendors, Alliance Entertainment, and Benn Co. (formerly Old Glory Boutique Distributing, Inc.) to fulfill and distribute our orders for music and related merchandise. During the year ended December 31, 2004, approximately 93% and 7%, respectively, of our total customer orders were fulfilled by Alliance and Benn Co., respectively. We purchase a significant portion of our artist-licensed merchandise from Benn Co. and most all of our compact discs from Alliance. Our contracts with Alliance and Benn Co. expired in August 2003 and April 2003, respectively, and we now operate with these vendors on a month-to-month basis. Our business could be significantly disrupted if Alliance or Benn Co. were to terminate or breach their agreements or suffer adverse developments that affect their ability to supply products to us. If, for any reason, Alliance, Benn Co. 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 Alliance and we have occasionally experienced an unusually high volume of orders, which resulted in shipping delays to our customers. These delays did not have a material adverse effect, however, our failure to deliver products to our customers in a timely and accurate manner in the future could harm our reputation, our relationship with customers, the ARTISTdirect brand and our results of operations.

Our Business Is Subject To Seasonality, Which Could Adversely Affect Our Operating Results

We have experienced and expect to continue to experience seasonal fluctuations in our online sales. These seasonal patterns will cause quarterly fluctuations in our operating results. In particular, a disproportionate amount of our online sales have been realized during the fourth calendar quarter and during the summer months, traditionally when artists go on tour. Due to our limited operating history,

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it is difficult to predict the seasonal pattern of our online sales and the impact of such seasonality on our business and operating results. Our seasonal online sales patterns may become more pronounced, strain our personnel, warehousing, and order shipment activities and cause our operating results to be significantly less than expected for any given period. This would likely cause our stock price to fall.

We May Be Subject To System Disruptions, Which Could Reduce Our Revenue

Our ability to attract and retain artists, users, advertisers and merchants for our online network depends on the performance, reliability and availability of our Web sites and network infrastructure. Our own staff performs the maintenance and operation of substantially all of our Internet communications hardware and servers. We have periodic maintenance windows, and we experience outages from time to time caused by temporary problems in our own systems or software. 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.

Computer Viruses, Electronic Break-Ins Or Similar Disruptive Events Could Disrupt Our Online Services

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

The Loss Of Key Personnel, Including Ted Field or Jonathan Diamond, Could Adversely Affect Our Business Because These Individuals Are Important To Our Business

Our future success depends to a significant extent on the continued services of our senior management, particularly Ted Field and Jonathan Diamond. The loss of either 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. Recent changes in corporate governance and securities laws and regulations, such as the Sarbanes-Oxley Act of 2002, could make it more difficult for us to attract and retain qualified executive officers or qualified members of our Board of Directors, particularly to serve on our audit committee.

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 other 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

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

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 or the UBL 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.

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 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.

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Laws Or Regulations May Adversely Affect Our Ability To Collect Demographic And Personal Information From Users, Or To Display Certain Content 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 U.S. Supreme Court has maintained a preliminary injunction precluding enforcement of COPA, pending the decision on questions of COPA’s constitutionality that the U.S. Supreme Court remanded to the Third U.S. Circuit Court of Appeals. 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 Certain Unregistered Securities

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 (the “Securities Act”), 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 them pursuant to option exercises 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, resulting in 83,403 shares and 636,740 options being tendered in the rescission offer at a cost to us to repurchase such shares and options of 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.

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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.

We May Need To Change The Manner In Which We Conduct Our Business If Government Regulation Increases

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

The Internet Is Subject To Rapid Changes, Which Could Result In Significant Additional Costs

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

Our Net Sales Could Be Adversely Affected If We Become Subject To Sales And Other Taxes

If one or more states or any foreign country successfully asserts that we should collect sales or other taxes on 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

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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.

ITEM 2. PROPERTIES

     Our principal corporate offices are located in Los Angeles, California, where we sub-lease approximately 2,000 square feet of office space from Radar Pictures Inc., a company owned by our Chairman, Frederick W. Field. During 2003, we terminated a lease on approximately 64,000 feet of office lease that we had previously occupied.

ITEM 3. LEGAL PROCEEDINGS

     In June 2003, we initiated discussions with our landlord regarding the potential termination or restructuring of an office lease that had a term through April 2010. On June 24, 2003, the landlord filed suit against us for unlawful detainer of our premises and in July 2003 the landlord drew down the entire remaining $1.35 million letter of credit that we had provided as a security deposit in conjunction with the execution of the original lease. In September 2003, we reached an agreement to terminate our lease with the landlord. In conjunction with the termination, we issued to the landlord a warrant to purchase 200,000 shares of the Company’s common stock exercisable at $0.50 per share through September 8, 2008. In October 2003, the legal proceedings against the Company were dismissed with prejudice.

     The Company is periodically 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 any such litigation will not have a material adverse impact on the Company’s financial position or results of operations.

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

     There were no matters submitted to a vote of security holdings during the fourth quarter of the fiscal year ended December 31, 2004.

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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 Over-The-Counter Bulletin Board under the symbol “ARTD” since May 9, 2003 and was listed on the Nasdaq National Market prior to that date. The following table sets forth the high and low closing sale prices for our common stock as reported by America Online for 2003 and 2004:

HOLDERS

     As of March 29, 2005, the Company had 237 common shareholders of record, excluding 1,145,403 shares held in “street name” by brokerage firms and other nominees who hold shares for multiple investors. The Company estimates that it has a total of approximately 3,000 beneficial common shareholders as of March 29, 2005.

DIVIDENDS

     To date, the Company has not declared or paid any dividends on its common stock. The payment by the Company of dividends, if any, is within the discretion of the board of directors and will depend on the Company’s earnings, if any, its capital requirements and financial condition, as well as other relevant factors. The board of directors does not intend to declare any dividends in the foreseeable future but instead intends to retain earnings for use in the Company’s business operations.

EQUITY COMPENSATION PLAN INFORMATION

     See “ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS — Equity Compensation Plan Information” for information regarding the number of outstanding and reserved options, warrants and other derivative securities under our equity compensation plans.

SALES OF UNREGISTERED SECURITIES

     In September 2003, we issued a warrant to purchase 200,000 shares of common stock at $0.50 per share as partial consideration for an office lease termination. In December 2003, we issued 40,000 shares of common stock to a consultant for services rendered which were valued at $0.50 per share. We made such issuances in reliance upon Section 4(2) of the Securities Act. The parties to whom securities were issued in connection with the foregoing, made an informed investment decision based upon negotiation with us and were provided with access to material information regarding our company. We believe that the party that acquired our securities pursuant to the foregoing had knowledge and experience in financial matters such that such party was capable of evaluating the merits and risks of acquisition of our securities. All certificates representing the shares issued pursuant to the foregoing bear an appropriate legend restricting the transfer of such shares, except in accordance with the Securities Act.

     In September 2003, we issued an option to purchase 259,659 shares of common stock at $0.85 per share, the approximate fair market value of the stock at such time, to Jonathan V. Diamond in connection with his appointment as our President. The option may

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be exercisable until August 15, 2010. 75% of the common stock underlying the options are subject to a repurchase right at $0.85 per share by the Company upon his termination of employment. This repurchase right lapses in three equal installments such that, the repurchase right will lapse entirely upon the third anniversary of his employment. On March 29, 2005, the Board of Directors granted Mr. Diamond a stock option for an additional 200,341 shares, exercisable at $0.79 per share (the current market price on the date of grant) for seven years, vesting monthly over the remaining term of employment contract which is through August 15, 2006. We made such issuance in reliance upon Section 4(2) of the Securities Act.

     From May 2003 through December 31, 2003, ARTISTdirect Records had issued and sold from time to time, an aggregate of $2.048 million in convertible notes (the “Bridge Notes”) to eight individual investors. Of such amount, $898,000 was sold to our Chairman, Ted Field and $100,000 to Jonathan V. Diamond, our President and Chief Executive Officer. During the year ended December 31, 2004, an additional $2.778 million of Bridge Notes were sold to Ted Field. The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and are convertible into new preferred equity of ARTISTdirect Records as part of its next equity financing. The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect Records at $0.01 per unit equivalent to the number of units of new equity into which their Bridge Notes are ultimately converted. We made issuances of such notes and warrants in reliance upon Section 4(2) of the Securities Act. The parties to whom securities were issued in connection with the foregoing, made an informed investment decision based upon negotiation with us and were provided with access to material information regarding our company. We believe that the parties that acquired our securities pursuant to the foregoing had knowledge and experience in financial matters such that each such party was capable of evaluating the merits and risks of acquisition of our securities.

     Effective January 9, 2004, we issued to Keith Yokomoto, our former President and Chief Operating Officer, two non-qualified stock options to purchase 10,000 shares and 50,000 shares at $0.50 per share, which was not less than the fair market value on the date of grant, exercisable through January 9, 2011. The option for 10,000 shares was immediately vested upon issuance. The option for 50,000 shares vests in increments of 10,000 shares on February 1, 2004, March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004, based on the accomplishment of certain milestones by each respective date, which had not been attained as of March 31, 2004.

     Effective March 29, 2004, we issued to Robert N. Weingarten, our Chief Financial Officer, a stock option to purchase 120,000 shares at $0.50 per share, which was not less than the fair market value on the date of grant, exercisable through March 29, 2011. The option vests and becomes exercisable in a series of 36 successive equal monthly installments upon the optionee’s completion of service measured from March 29, 2004. On March 29, 2005, the Board granted Mr. Weingarten an additional stock option for 110,000 shares, exercisable at $0.79 (the current market price on the date of grant) for seven years, vesting monthly over three years.

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

     Effective March 29, 2005, we issued stock options for 92,000 shares each, exercisable at $0.79 per share (the current market price on the grant date) for seven years, fully vested on date of issuance, to Ted Field, Eric Pulier, Dimitri Villard and Teymour Boutros-Ghali and Nicholas Turner.

     The stock options were issued without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended, based on certain representations made to ADI by the recipients.

REPURCHASES

     The Company did not repurchase any of its equity securities during the years ended December 31, 2003 and 2004.

ITEM 6. SELECTED FINANCIAL DATA

     The following selected financial data with respect to the Company’s consolidated statements of operations for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 and consolidated balance sheets as of December 31, 2000, 2001, 2002, 2003 and 2004 are derived from the audited consolidated financial statements of the Company. The following information should be read in

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conjunction with the consolidated financial statements of the Company and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

TABLE OF SELECTED FINANCIAL DATA

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

     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 on Form 10-K. 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 business model, competition in the industry, online product sales, advertising and other revenue streams, our ability to increase visits to our web site, our ability to adequately fund our operations and financial commitments, our ability to offer compelling content, our ability to fulfill on-line music and merchandise orders in a timely manner, our ability to build brand recognition, our ability to integrate acquisitions of technology and other businesses, our ability to protect and/or obtain intellectual property rights, and our 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

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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. Except as required by law or regulation, we undertake no obligation to revise or update publicly any forward-looking statements for any reason. The information contained in this Annual Report on Form 10-K 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 on Form 10-K and in our other filings with the Securities and Exchange Commission that discuss our business.

GENERAL

     We are a music entertainment company that features an online music network appealing to music fans, artists and marketing partners. The ARTISTdirect Network (www.artistdirect.com) is a network of Web-sites offering multi-media content, music news and information, community around shared music interests, music-related specialty commerce and digital music services.

ARTISTdirect Records, LLC

     In May 2001, we entered into an agreement with veteran entertainment executive Frederick W. (Ted) Field to become our Chairman and Chief Executive Officer and form a new record label in partnership with us. On June 29, 2001, our stockholders approved the employment of Mr. Field and the formation of the record label, ARTISTdirect Records, LLC, as a 50/50 co-venture between ARTISTdirect and Radar Records Holdings, LLC, a company owned by Mr. Field (“Radar Records”), where we agreed to provide a significant financial commitment. In addition to the formation of the record label and our financial commitment, we entered into a five-year employment agreement with Mr. Field to serve as Chairman and Chief Executive Officer. Mr. Field also serves as the Chief Executive Officer of ARTISTdirect Records.

     During the year ended December 31, 2003, we restructured senior operating management and significantly reduced overhead and operating activities at the parent company level and laid off the majority of our staff. In conjunction with this restructuring, effective September 29, 2003, we entered into an employment agreement with Jonathan V. Diamond to serve as our President and Chief Executive Officer through August 15, 2006.

     We initially committed to fund a total of $50.0 million to ARTISTdirect Records over five years at the rate of $15.0 million per year, subject to a limit of $33.0 million in any three year period. Any funding in excess of these amounts required the approval of our Board of Directors. We funded a total of $33.0 million through December 31, 2003.

     In November 2001, ARTISTdirect Records agreed in principle to enter into a preliminary North America distribution agreement and worldwide license agreement with BMG Music, a wholly-owned partnership of Bertelsmann Music Group, Inc., the global music division of Bertelsmann AG (“BMG”). Under the terms of the agreement, BMG agreed to distribute the label’s releases in North America, and BMG licensed ARTISTdirect Records’ repertoire in territories throughout the world. In April 2002, the agreements with BMG were finalized, including BMG’s purchase of 5% of the equity of ARTISTdirect Records from us. As part of this transaction, BMG agreed to advance certain monies against net sales proceeds under the agreements and also assumed $5.0 million of our funding commitment to ARTISTdirect Records. As a result of the BMG equity purchase, our funding commitment was reduced to $45.0 million. Our commitment to fund ARTISTdirect Records was subject to a guaranty for the benefit of BMG. If we failed to meet our commitment, BMG had the right to choose to enforce the guaranty or provide substitute financing that could have resulted in dilution of our interest in ARTISTdirect Records.

     In December 2002, BMG exercised its option to extend the term of the distribution and license agreement until September 2004. BMG did not renew its distribution agreement and license agreement upon its expiration in September 2004.

     Under the distribution and license agreements, BMG made non-refundable advances to ARTISTdirect Records of $2.5 million in 2001, $2.5 million in 2002 and $5.0 million in 2003 that are recoupable from net sales proceeds from ARTISTdirect Records’ artist repertoire pursuant to a defined calculation on a monthly basis. As of December 31, 2002, 2003 and 2004, the unrecouped balances related to distribution advances from BMG were $4.1 million, $8.7 million and $8.9 million, respectively.

     In August 2002, our Board of Directors approved an agreement (the “Accelerated Funding Agreement”) to accelerate up to $10.0 million of its funding commitment to ARTISTdirect Records. This funding was in addition to the $15.0 million that we were obligated to advance to ARTISTdirect Records in 2002 as part of the initial $50.0 million funding commitment. During 2002, we funded our $15.0 million commitment plus the additional $10.0 million bridge loan for total advances to the record label of $25.0 million in 2002 and $30.25 million from the inception of the record label through December 31, 2002. The $10.0 million of

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accelerated funding was credited toward the satisfaction of our overall funding commitment and funding obligation for 2003, resulting in a remaining funding commitment of $2.75 million for 2003 and $12.0 million for 2004. We advanced the $2.75 million during 2003.

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

     Because we did not have voting or operating control of ARTISTdirect Records, even with our majority ownership position, through December 31, 2003 we did not consolidate the results of ARTISTdirect Records; we recorded our share of losses based on the equity method of accounting as loss from equity investments in our consolidated statements of operations. Prior to the completion of BMG’s purchase of a 5% interest in ARTISTdirect Records in April 2002 and BMG’s assumption of 10% of our total funding commitment, we had committed to fund 100% of the operations of ARTISTdirect Records and had recorded 100% of the losses attributable to that venture from the inception of ARTISTdirect Records to April 30, 2002. From May 1, 2002 through December 31, 2002, we have recorded only our proportionate share, on the basis of remaining relative funding commitments, of any losses of ARTISTdirect Records. We have funded a total of $33.0 million of our funding commitment. We recognized $8.6 million, $29.2 million and $9.3 million of equity loss from ARTISTdirect Records for the years ended December 31, 2001, 2002 and 2003, respectively. The loss for ARTISTdirect Records for the year ended December 31, 2004 was $4.881 million before intercompany interest elimination of $2.011 million.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. FIN 46 defines when a company should evaluate “controlling financial interest”, and thus consolidation, based on factors other than voting rights, and requires that a new “risks and rewards” model be applied in these situations. We adopted FIN 46 as of December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated beginning as of December 31, 2003, and the operations of ARTISTdirect Records were consolidated beginning with the year ended December 31, 2004. There was no change in the operating or business relationship between ADI and ARTISTdirect Records as a result of the adoption of FIN 46.

     During the three months ended September 30, 2003, ARTISTdirect Records significantly reduced its overhead costs and operating activities and laid off the majority of its staff while it continued to restructure its operations and seek additional capital. During 2003, ARTISTdirect Records relied on a loan advance from us of $2.75 million and bridge loans from Mr. Field and outside investors aggregating $2.048 million to fund its operations. As of December 31, 2003, ARTISTdirect Records did not have sufficient working capital resources to conduct operations. During 2004, ARTISTdirect Records relied on bridge loans from Mr. Field of $2.778 million to fund its reduced level of operations. Through December 31, 2004, Mr. Field had provided bridge funding to ARTISTdirect Records aggregating $3.676 million, including $898,000 in 2003 and $2.778 million in 2004.

     Effective July 30, 2004, we entered into a Termination Agreement with BMG and ARTISTdirect Records which extinguished all of our obligations under our funding guaranty, including the remaining $12.0 million funding obligation to ARTISTdirect Records.

     On February 28, 2005, we completed the sale of 100% of the common stock of ARTISTdirect Recordings to Radar Records pursuant to a Transfer Agreement for a cash payment of $115,000, as a result of which we no longer had an equity or other economic interest in ARTISTdirect Records, and Radar Records became the owner of a majority of the membership interests of ARTISTdirect Records and also acquired the receivable reflecting the $33.0 million of loan advances previously provided to ARTISTdirect Records by ADI. In conjunction with this transaction, at February 28, 2005, ADI wrote-off the intercompany balance due from ARTISTdirect Records ($80,000 at December 31, 2004), which was eliminated in consolidation. Radar Records acquired the common stock of ARTISTdirect Recordings subject to the rights of BMG. Radar Records also agreed to offer to investors who had provided bridge funding to ARTISTdirect Records, excluding Frederick W. Field and entities related or controlled by him, the right to acquire proportional shares (based on the amount of bridge funding made by each bridge investor in ARTISTdirect Records) of the common stock of ARTISTdirect Recordings on the same terms and conditions as set forth in the Transfer Agreement.

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     The amount of consideration received by us was determined with reference to various factors, including, but not limited to, our future business plans and intention to focus on our internet and web-site operations, ARTISTdirect Record’s current limited capital resources and substantially reduced level of operations, ARTISTdirect Record’s future business plans and capital requirements and the likelihood of obtaining such capital on a timely basis and under reasonable terms and conditions, the unpaid costs that we have advanced ARTISTdirect Records to date, and would be required to continue to advance ARTISTdirect Records in the future, and the probability of our obtaining a return on our investment to date of $33.0 million in ARTISTdirect Records.

     As a result of the existence of various conflicts of interest with respect to this transaction, full disclosure of these conflicts of interest was made to our Board of Directors and the required approval by the disinterested members of our Board of Directors was obtained prior to the closing of the transaction.

     As a result of the sale of all of our interest in ARTISTdirect Recordings to Radar Records effective February 28, 2005, we have accounted for our interest in ARTISTdirect Records as a discontinued operation at December 31, 2004 in accordance with SFAS No. 144. Accordingly, we have restated our consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2002 and 2003 to reflect such accounting treatment, and the assets and liabilities of ARTISTdirect Records have been classified as “held for sale”.

     As a result of the disposition of our interest in ARTISTdirect Records effective February 28, 2005, we estimate that we will recognize a net non-cash gain in our consolidated statement of operations for the three months ended March 31, 2005 of approximately $21 million (unaudited), primarily as a result of the elimination of the liabilities of ARTISTdirect Records.

     A summary of ADI’s pro forma consolidated balance sheet at December 31, 2004, assuming that the disposition of ADI’s interest in ARTISTdirect Records had been accomplished effective December 31, 2004, is presented below.

iMusic Record Label

     During 2002, we began operating a record label under the brand name iMusic through our wholly-owned subsidiary, ARTISTdirect Digital, Inc. Operations consisted primarily of the sale of compact discs by artists signed to the iMusic record label. iMusic’s concept was to focus on the signing of established artists with a proven sales base and an ability to generally make records less expensively than developing artists. In addition, we expected that substantially less would be spent on marketing and promotion of these releases than on those of new artists. During the three months ended June 30, 2003, we decided to scale back the activity of its iMusic label in order to conserve capital. During the three months ended September 30, 2003, we executed an agreement with GC Music, pursuant to which we assigned its rights and obligations to six unreleased artists in exchange for a cash payment of $100,000 as a reduction to prior advances related to the six artists and a profit interest in the projects. We retained the distribution rights to the albums previously released under the original terms of our distribution agreements with our other signed artists, but we did not intend to sign any additional artists or release any additional albums domestically or internationally under the iMusic label and therefore expected very minimal sales activity subsequent to the transaction. At December 31, 2004, we have provided a sufficient reserve for remaining contract obligations and estimated product returns.

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     Effective November 23, 2004, pursuant to a Trademark Assignment and Purchase Agreement dated as of November 12, 2004, we sold all of our rights, title and interest in and to certain trademarks, service markets and trade names, in certain countries of the world, that consist of or incorporate the term “iMusic” (the “Marks”), including domain names that consist of or incorporate the term iMUSIC (the “Domain Names”) and goodwill related to such marks or trade names, to Apple Computer, Inc. for a cash payment of $500,000. The Marks and Domain Names that we sold did not have any carrying value on our books.

     As a result of the foregoing, during December 2004, we ceased the sale of products under the iMusic label and discontinued the operations of the iMusic record label. Accordingly, we have accounted for the operations of iMusic as a discontinued operation for all periods presented and have restated our consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2002 and 2003 to reflect the termination of the business operations of iMusic.

GOING CONCERN

     We have incurred losses and negative cash flows from operations in every fiscal period since inception and have an accumulated deficit of $226.0 million as of December 31, 2004. For the year ended December 31, 2004, we incurred a net loss of $3.3 million (including $2.2 million from discontinued operations) and negative operating cash flows of $3.5 million. As of December 31, 2004, we had a net working capital deficiency of $18.4 million (including liabilities of discontinued operations held for disposal of $18.9 million, almost all of which were liquidated effective February 28, 2005) and a stockholders’ deficiency of $20.3 million. Through December 31, 2003, we had funded substantially all of the operations of ARTISTdirect Records. Effective July 30, 2004, our remaining $12.0 million funding obligation to ARTISTdirect Records was extinguished, and effective February 28, 2005, we sold all of our interest in ARTISTdirect Records to Radar Records for a cash payment of $115,000.

     During 2003, we restructured our operations, laid off most of our staff and reduced operating costs. Subsequently, management has continued its efforts to improve and expand operations and cash flows at its online music network. However, it is uncertain whether our available cash resources will be sufficient to meet anticipated capital requirements over the next twelve months. If sufficient capital is not available, then we may not be able to fund our operations. To the extent that we are unable to obtain the capital necessary to fund our future cash requirements on a timely basis and/or under acceptable terms and conditions, we will not have sufficient cash resources to maintain operations, and we may consider a formal or informal restructuring or reorganization.

     As a result of the conditions described above, our auditors have included an explanatory paragraph in their 2004 report on our financial statements indicating that there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     A summary of how we conduct our business is presented below.

REVENUE

     We had revenues from continuing operations from two sources at December 31, 2004: e-commerce and media. During 2002, 2003 and 2004, the Company also had revenues from its iMedia record label, which has been classified as a discontinued operation for all periods presented.

     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.

     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 we have no significant remaining obligations and collection of the resulting receivable is probable. We typically guarantee a minimum number of impressions to the advertiser. To the extent that minimum guaranteed page deliveries are not met, we defer recognition of the corresponding revenue until the guaranteed impressions are delivered. We also sell to advertisers the 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

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displayed. To the extent that committed obligations under sponsorship agreements are not met, revenue recognition is deferred until the obligations are met. Since most of our sponsorship and advertising contracts are short-term in nature, our advertising revenue is susceptible to significant fluctuation.

     Record Label Revenue. Record label revenue consisted of the sale of compact discs by artists under contract to the iMusic record label in 2002, 2003 and 2004, and to ARTISTdirect Records in 2004. We recognized revenues upon the shipment of compact discs to retailers and independent wholesalers and recorded appropriate reserves for product returns. We have accounted for our iMusic record label and our interest in ARTISTdirect Records, LLC as discontinued operations for all periods presented. Accordingly, the Company has restated its consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2002 and 2003.

COST OF REVENUE

     Direct cost of product sales consists of the cost of merchandise sold, the amounts payable to artists for their share of net proceeds, online transaction costs, including credit card fees, warehousing and fulfillment charges and shipping costs. Direct cost of product sales also includes manufacturing costs and distribution fees payable. Other cost of revenue consists primarily of web-site hosting and maintenance costs, online content programming costs, online advertising serving costs, record royalties payable to artists and payroll and related expenses for staff involved with the Web-site. 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.

OPERATING EXPENSES

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

     Sales and Marketing. Sales and marketing expense consists primarily of advertising, marketing and promotion expenses incurred to promote our Web-sites, as well as 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, insurance, travel and other general corporate expenses.

     Provision for Doubtful Accounts. Provision for doubtful accounts consists of provisions related to uncollectible receivables.

     Stock-based Compensation. We record stock-based compensation expense (exclusive of amounts recorded within cost of revenue) in connection with equity granted to employees, directors, professional firms, artists and artist advisors during this period. We may grant additional equity securities in the future to employees, directors and others. 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. There were no intangible assets on the balance sheet at December 31, 2003 or 2004.

     Impairment of long-lived assets is monitored on a continuing basis, and is assessed based on the undiscounted cash flows generated by the underlying assets. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value.

     Loss from Sale and Abandonment of Property and Equipment. Loss from sale and abandonment of property and equipment consists of the costs associated with the sale and abandonment of the property and equipment and leasehold improvements at our former offices. We determined that these assets were impaired during 2003 as a result of various factors. Accordingly, we reduced the carrying amount of these assets to their estimated fair value by recording a charge to operations during 2003. The leasehold improvements were subsequently abandoned when the Company vacated the premises, and most of the remaining assets were sold to third party liquidators for cash. This amount has been reported as a loss from sale and abandonment of property and equipment in the consolidated statement of operations for the year ended December 31, 2003.

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CRITICAL ACCOUNTING POLICIES

     We have identified the following as critical accounting policies: revenue recognition, stock-based compensation, impairment of long-lived assets and income taxes.

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

Revenue Recognition

     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. We record e-commerce revenue on a gross basis as we enter into sale transactions with customers, establish the prices of the products, choose the suppliers of the products, assume the risk of inventory loss and collect all amounts from the customers and assume the credit risk. E-commerce revenue is subject to amounts due to the respective artists based on their contracts, and such expense is recorded as part of direct cost of product sales.

     We record amounts charged to customers for shipping and handling in accordance with Emerging Issues Task Force No. 00-10, “Accounting for Shipping and Handling Fees and Costs”. Pursuant to EITF No. 00-10, we record amounts charged to customers for shipping and handling as revenue, and the related costs incurred for shipping and handling are recorded to direct cost of product sales in the consolidated statements of operations.

     Media revenue consists primarily of the sale of advertisements and sponsorships, both online and offline, under short-term contracts. To date, the duration of our advertising and sponsorship commitments has generally averaged from one to three months, with certain programs lasting up to six months. Our online obligations typically include the guarantee of a minimum number of times (“impressions”) that an advertisement appears in pages viewed by the users of our online properties. Online advertising revenue is generally recognized as the impressions are served during the period in which the advertisement is displayed, provided that we have no significant remaining obligations and collection of the resulting receivable is reasonably assured. To the extent that minimum guaranteed page deliveries are not met, recognition of the corresponding revenue is deferred until the guaranteed impressions are delivered.

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

     Record label revenue consisted of the sale of compact discs by artists signed to iMusic and ARTISTdirect Records. We recognized revenue upon the shipment of compact discs from our distributor to retailers and independent wholesalers and recorded appropriate reserves for product returns. At the time of the shipment of the product, the following criterion under Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists”, had been met: the seller’s price to the buyer was substantially fixed or determinable at the date of sale; the buyer had paid the seller, or the buyer was obligated to pay the seller and the obligation was not contingent on resale of the product; the buyer’s obligation to the seller would not be changed in the

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event of theft or physical destruction or damage of the product; the buyer acquiring the product for resale had economic substance apart from that provided by the seller; the seller did not have significant obligations for future performance to directly bring about resale of the product by the buyer; and the amount of future returns could be reasonably estimated.

Stock-Based Compensation

     We account for stock-based employee compensation in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25 and FASB Interpretation No. 44 “, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 46”), and comply 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 our stock and the exercise price on the measurement date. We account 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 No. 96-18, “Accounting for Equity Investments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, which addresses the measurement date and recognition approach for such transactions.

     We recognize compensation expense related to variable awards in accordance with FIN 28. For fixed awards, we recognize expense over the vesting period or the period of service.

     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 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.

Impairment of Long-Lived Assets

     Impairment of long-lived assets is monitored on a continuing basis, and is assessed based on the undiscounted cash flows generated by the underlying assets. In the event that the carrying amount of long-lived assets exceeds the undiscounted future cash flows, then the carrying amount of such assets is adjusted to their fair value.

Income Taxes

     We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. In the event we determine that we would be able to realize our deferred tax assets in the future in excess of our recorded amount, an adjustment to the deferred tax assets would be credited to operations in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to operations in the period such determination was made.

     Presented below are the Company’s consolidated statements of operations for the years ended December 31, 2002, 2003 and 2004.

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     The Company evaluates the performance of its business segments based on earnings or loss before interest, taxes, depreciation and amortization, including stock-based compensation, impairment losses, and minority interest (“EBITDA”). Included in EBITDA are direct operating expenses for each segment. The following table summarizes net revenue and EBITDA by segment for the years ended December 31, 2002, 2003 and 2004. Corporate expenses consist of general operating expenses that are not directly related to the operations of the segments. The segment data presented below has been restated for all periods to reflect the segment structure at December 31, 2004.

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RESULTS OF OPERATIONS

Overview:

     During the year ended December 31, 2003, we restructured senior operating management and significantly reduced overhead and operating activities at the parent company level and laid off the majority of our staff. In addition, during the year ended December 31, 2003, ARTISTdirect Records significantly reduced its overhead costs and operating activities and laid off the majority of its staff while it continued to restructure its operations and seek additional capital. Subsequently, we have continued our efforts to improve and expand operations and cash flows at our online music network.

     During 2005, we intend to focus on increasing revenue from our Media operations business segment, which generates revenues from the sale of online advertising and sponsorships to companies seeking to reach one or more of the distinct demographic audiences viewing content in the ARTISTdirect Network. We market and sell advertising on a cost-per-impression (CPM) basis to advertising agencies and directly to various companies as part of their marketing programs. Customers may purchase advertising space on the entire ARTISTdirect Network, or they may tailor advertising based on music genre or functionality. For the years ended December 31, 2002, 2003 and 2004, advertising revenue represented approximately 16%, 25% and 42%, respectively, of total net revenue. In 2004, advertising revenue increased approximately 83% over the previous year. In 2005, we expect that advertising revenue will continue to increase to in excess of 50% of total net revenue.

     We have recorded 100% of the losses attributable to ARTISTdirect Records from May 31, 2001 through April 30, 2002 based on our commitment to fund 100% of its operations up to that time. From May 1, 2002 through December 31, 2002, we recorded approximately 83% of the losses of ARTISTdirect Records as a result of BMG’s equity purchase and their assumption of a portion of our funding commitment to the record label. For the year ended December 31, 2003, we recorded approximately 73% of the losses of ARTISTdirect Records. However, given that we did not have voting or operating control, even with our majority ownership position in ARTISTdirect Records, through December 31, 2003, we accounted for this investment under the equity method of accounting as income (loss) from equity investments in our consolidated statements of operations.

     In February 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities. FIN 46 defines when a company should evaluate “controlling financial interest”, and thus consolidation, based on factors other than voting rights, and requires that a new “risks and rewards” model be applied in these situations. We adopted FIN 46 effective December 31, 2003. As a result of the adoption of FIN 46, the balance sheet of ARTISTdirect Records was consolidated beginning as of December 31, 2003, and the operations of ARTISTdirect Records were consolidated beginning with the year ended December 31, 2004. There was no change in the operating or business relationship between ADI and ARTISTdirect Records as a result of the adoption of FIN 46. In addition, as a result of the consolidation of ARTISTdirect Records as of December 31, 2003, we recorded a one-time charge to operations of $5.255 million in 2003 resulting from the cumulative effect on prior years of this change in accounting method.

     On February 28, 2005, we completed the sale of our interest in ARTISTdirect Recordings to Radar Records. ADI has accounted for its interest in ARTISTdirect Records as a discontinued operation at December 31, 2004 in accordance with SFAS No. 144. Accordingly, the Company has restated its consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2002 and 2003 to reflect such accounting treatment, and the assets and liabilities of ARTISTdirect Records have been classified as “held for sale”.

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     During December 2004, we discontinued the operations of our iMusic record label and have therefore accounted for the operations of iMusic as a discontinued operation for all periods presented. Accordingly, we have restated our consolidated financial statements as of December 31, 2003 and for the years ended December 31, 2002 and 2003 to reflect the termination of the business operations of iMusic.

YEARS ENDED DECEMBER 31, 2004 AND 2003

     NET REVENUE

     Net revenue for the year ended December 31, 2004 increased to $5.143 million, from $4.632 million for the year ended December 31, 2003, an increase of $511,000 or 11%.

     E-commerce revenue decreased to $2.994 million for the year ended December 31, 2004, from $3.459 million for the year ended December 31, 2003, a decrease of 13% or $465,000, primarily as a result of lower traffic to the web-site, fewer sales orders and a decline in demand for music and licensed artist merchandise in 2004. During the years ended December 31, 2003 and 2004, approximately 45% and 70%, respectively, of revenues from E-commerce were generated from the products related to one music merchandising entity.

     Media revenue increased to $2.149 million for the year ended December 31, 2004, from $1.173 million for the year ended December 31, 2003, an increase of 83% or $976,000, as a result of an increase in the number of online advertisers and an increase in the CPM amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Included in media revenue for the year ended December 31, 2003 was $550,000 of sponsorship income from AT&T Wireless. During the year ended December 31, 2004, most of our media revenues were generated by one outside sales organization which represented us with respect to advertising and sponsorship sales on our web-site. This relationship is continuing in 2005.

     COST OF REVENUE

     Direct Cost of Product Sales. Direct cost of product sales increased to $3.034 for the year ended December 31, 2004, from $2.552 million for the year ended December 31, 2003, an increase of $482,000 or 19%, primarily as a result of efforts to increase web-site traffic.

     Other Cost of Revenue. Other cost of revenue decreased to $518,000 for the year ended December 31, 2004, from $1.034 million for the year ended December 31, 2003, a decrease of $516,000 million or 50%, primarily as a result of a decrease in customer service fees for e-commerce and a shift in the media advertising sales function from an internal department to an outside firm.

     Stock-Based Compensation. For the year ended December 31, 2004, we did not record any stock-based compensation. For the year ended December 31, 2003, we recorded non-cash stock-based compensation charges of $33,000. Stock-based compensation expense relates primarily to the amortization of the estimated value of stock options, calculated pursuant to the Black-Scholes option-pricing model, previously issued to artists and their advisors in connection with the operation of their stores and is amortized over the life of the associated contracts.

     OPERATING EXPENSES

     Web-Site Development. For the year ended December 31, 2004, we did not record any web-site development expense. Web-site development expense was $5,000 for the year ended December 31, 2003.

     Sales and Marketing. Sales and marketing expense decreased to $167,000 for the year ended December 31, 2004, from $410,000 for the year ended December 31, 2003, a decrease of $243,000 or 59%, primarily as a result of the expiration of the Ticketmaster agreement in 2003.

     General and Administrative. General and administrative expense decreased to $2.676 million for the year ended December 31, 2004, from $4.134 million for the year ended December 31, 2003, a decrease of $1.458 million or 35%. This decrease was primarily attributable to decreases in payroll and related costs as a result of the personnel reductions as part of the mid-2003 restructuring and occupancy costs relating to the termination of our office lease in 2003. Included in general and administrative expenses in 2004 were $204,000 of costs related to business development activities.

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     Provision for Doubtful Accounts. The provision for doubtful accounts increased to $110,000 for the year ended December 31, 2004, from $83,000 for the year ended December 31, 2003, primarily as a result of a higher level of uncollectible accounts receivable related to increased advertising revenues in 2004.

     Stock-Based Compensation. We recorded stock-based compensation expense of $7,000 for the year ended December 31, 2004, as compared to $527,000 for the year ended December 31, 2003 in connection with previous stock-based compensation issued to employees, directors, professional firms, artists and advisors for promotional services. The decrease was due to the amortization period for the previously-issued stock-based compensation having been completed prior to 2004.

     Depreciation and Amortization. Depreciation and amortization expense decreased to $223,000 for the year ended December 31, 2004, from $1.014 million for the year ended December 31, 2003, a decrease of $791,000 or 78%. This decrease was primarily due to the write-down and abandonment of property and equipment during 2003.

     Loss from Sale and Abandonment of Property and Equipment and Impairment of Goodwill. For the year ended December 31, 2004, we did not record any loss from sale and abandonment of property and equipment. During the year ended December 31, 2003, we recorded a loss from the sale and abandonment of property and equipment of $2.225 million. This loss was mainly as a result of vacating our office space following the termination of our lease.

     LOSS FROM EQUITY INVESTMENT

     We did not have any loss from equity investments for the year ended December 31, 2004. The loss from equity investments was $64,000 for the year ended December 31, 2003. This equity loss related to our investment in SnoCore, LLC.

     INTEREST INCOME, NET

     For the year ended December 31, 2004, net interest income was $29,000, as compared with net interest income of $146,000 for the year ended December 31, 2003. This net decrease in interest cost of $117,000 is primarily due to lower average cash balances held during 2004 as compared with 2003.

     FORGIVENESS OF DEBT BY OFFICER

     During 2002, our Chairman’s employment agreement was amended whereby he agreed to defer his future salary until we raised new debt or equity financing of at least $20 million. During the three months ended June 30, 2003, our Chairman’s employment agreement was further amended whereby all deferred and any future salary, except a base amount, would be waived, even if new debt or equity financing is raised. Accordingly, during the year ended December 31, 2003, $411,000 of accrued compensation due to our Chairman was recorded as gain from forgiveness of debt in the consolidated statement of operations.

     GAIN FROM SALE OF TRADENAME

     Effective November 23, 2004, pursuant to a Trademark Assignment and Purchase Agreement dated as of November 12, 2004, we sold all of our rights, title and interest in and to certain trademarks, service markets and trade names, in certain countries of the world, that consist of or incorporate the term “iMusic” (the “Marks”), including domain names that consist of or incorporate the term iMUSIC (the “Domain Names”) and goodwill related to such marks or trade names, to Apple Computer, Inc. for a cash payment of $500,000. The Marks and Domain Names that we sold did not have any carrying value on our books.

     DISCONTINUED OPERATIONS

     We recorded a loss from equity investments 100% of the loss of ARTISTdirect Records through April 30, 2002 due to our commitment to fund 100% of its operations. From May 1, 2002 through December 31, 2002, we recorded approximately 83% of the loss of ARTISTdirect Records based on our relative share of the remaining funding commitment to ARTISTdirect Records. For the year ended December 31, 2003, we recorded approximately 73% of the losses of ARTISTdirect Records. For the year ended December 31, 2003, we recorded $9.256 million as our relative share of the loss of ARTISTdirect Records.

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     For the year ended December 31, 2004, we consolidated the operations of ARTISTdirect Records, and recorded a related loss from discontinued operations of $2.111 million.

     For the year ended December 31, 2004, the operations of the iMusic record label generated a loss of $137,000, as compared to $298,000 for the year ended December 31, 2003.

     A summary of the results of operations of ARTISTdirect Records and the iMusic record label for the years ended December 31, 2004 and 2003 is presented below.

     CUMULATIVE EFFECT OF CONSOLIDATION OF ARTISTDIRECT RECORDS, LLC

     As a result of the consolidation of ARTISTdirect Records as of December 31, 2003, we recorded a one-time charge to operations of $5.255 million in 2003 resulting from the cumulative effect on prior years of the change in accounting method from equity to consolidation.

     NET LOSS

     As a result of the foregoing factors, net loss decreased to $3.311 million for the year ended December 31, 2004, as compared to $21.701 million for the year ended December 31, 2003, a decrease of $18.390 million or 85%.

YEARS ENDED DECEMBER 31, 2003 AND 2002

     NET REVENUE

     Net revenue for the year ended December 31, 2003 decreased to $4.632 million, from $5.637 million for the year ended December 31, 2002, a decrease of $1.005 million or 18%.

     E-commerce revenue decreased to $3.459 million for the year ended December 31, 2003, from $4.713 million for the year ended December 31, 2002, a decrease of 27% or $1.254 million, primarily as a result of lower traffic to the web-site, fewer sales orders and a decline in demand for music and licensed artist merchandise in 2003. During the years ended December 31, 2002 and 2003, approximately 25% and 45%, respectively, of revenues from E-commerce were generated from the products related to one music merchandising entity.

     Media revenue increased to $1.173 million for the year ended December 31, 2003, from $924,000 for the year ended December 31, 2002, an increase of 27% or $249,000, as a result of an increase in the number of online advertisers and an increase in the CPM amounts earned from the sales of impression and non-impression based advertising and offline sponsorships. Included in media revenue for the year ended December 31, 2003 was $550,000 of sponsorship income from AT&T Wireless.

     COST OF REVENUE

     Direct Cost of Product Sales. Direct cost of product sales decreased to $2.552 million for the year ended December 31, 2003, from $3.593 million for the year ended December 31, 2002, a decrease of $1.041 million or 29%, primarily as a result of the decrease in E-commerce revenues in 2003.

     Other Cost of Revenue. Other cost of revenue decreased to $1.034 million for the year ended December 31, 2003, from $2.738 million for the year ended December 31, 2002, a decrease of $1.704 million or 62%, primarily as a result of a decrease in web-site hosting and maintenance costs due to a reduction in headcount and a restructuring of our third party service provider agreements.

     Stock-Based Compensation. For the year ended December 31, 2003, we recorded non-cash stock-based compensation charges of $33,000 as compared to $3.084 million for the year ended December 31, 2002, a decrease of $3.051 million or 99%. Stock-based compensation expense relates primarily to the amortization of the estimated value of stock options, calculated pursuant to the Black-Scholes option-pricing model, previously issued to artists and their advisors in connection with the operation of their stores and is amortized over the life of the associated contracts. The decrease in stock-based compensation in 2003 is primarily due to completion of most of the amortization of stock-based compensation during 2002 as a result of the terms of a number of artist agreements expiring during 2002. The approximately $3.1 million in stock-based compensation expense in 2002 consists of $2.1 million related to option

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grants to artists and advisors, $900,000 in compensation expense related to the rescission for which services were being provided by artists and advisors in 2002, and $79,000 of expense related to warrants granted to suppliers.

     OPERATING EXPENSE

     Web-Site Development. Web-site development expense decreased to $5,000 for the year ended December 31, 2003, from $53,000 for the year ended December 31, 2002, a decrease of $48,000 or 91%, primarily as a result of lower fees paid to third party service vendors relating to the enhancement of our web-site.

     Sales and Marketing. Sales and marketing expense decreased to $410,000 million for the year ended December 31, 2003, from $1.760 million for the year ended December 31, 2002, a decrease of $1.350 million or 77%, primarily as a result of a decrease in online advertising expenditures resulting from the restructuring of our agreement with Ticketmaster and lower marketing, payroll and related costs.

     General and Administrative. General and administrative expense decreased to $4.134 million for the year ended December 31, 2003, from $7.323 million for the year ended December 31, 2002, a decrease of $3.189 million or 44%. This decrease was primarily attributable to a decrease in payroll costs associated with the reduced headcount of approximately $2.3 million and an approximately $1.2 million decrease in outside services and insurance costs.

     Provision for Doubtful Accounts. The provision for doubtful accounts increased to $83,000 for the year ended December 31, 2003, from $42,000 for the year ended December 31, 2002, as a result of higher level of uncollectible accounts receivable related to advertising revenues in 2003.

     Stock-Based Compensation. We recorded stock-based compensation expense of $527,000 for the year ended December 31, 2003 in connection with previous stock-based compensation issued to employees, directors, professional firms, artists and advisors for promotional services, a decrease of $1.370 million or 72% from the $1.897 million expense for the year ended December 31, 2002. Stock-based compensation represented the remaining amortization of such prepaid compensation paid in prior years. The decrease in stock-based compensation in 2003 was primarily due to the amortization period for most of such stock-based compensation being completed in 2002.

     Depreciation and Amortization. Depreciation and amortization expense decreased to $1.014 million for the year ended December 31, 2003, from $2.814 million for the year ended December 31, 2002, a decrease of $1.8 million or 64%. This decrease was primarily due to the write-down and abandonment of property and equipment during 2003.

     Loss from Sale and Abandonment of Property and Equipment and Impairment of Goodwill. During the year ended December 31, 2003, we recorded a loss from the sale and abandonment of property and equipment of $2.225 million. This loss was mainly as a result of vacating our office space following the termination of our lease. During the year ended December 31, 2002, we recorded a loss on impairment of goodwill related to the write-off of the remaining goodwill associated with our online operations of $788,000. This write-down was recorded due to declines in advertising revenue on the Network and the determination that there was insufficient basis to support the carrying amounts of goodwill based upon the projected undiscounted future cash flows related to the underlying Network assets.

     LOSS FROM EQUITY INVESTMENT

     Loss from equity investments was $16,000 for the year ended December 31, 2002, as compared to $64,000 for the year ended December 31, 2003. This equity loss related to our investment in SnoCore, LLC.

     INTEREST INCOME, NET

     For the year ended December 31, 2003, net interest income was $146,000, as compared with net interest income of $748,000 for the year ended December 31, 2002. This net decrease in interest cost of $602,000 is primarily due to lower average cash balances held during 2003 as compared with 2002.

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     FORGIVENESS OF DEBT BY OFFICER

     During 2002, our Chairman’s employment agreement was amended whereby he agreed to defer his future salary until we raised new debt or equity financing of at least $20 million. During the three months ended June 30, 2003, our Chairman’s employment agreement was further amended whereby all deferred and any future salary, except a base amount, would be waived, even if new debt or equity financing is raised. Accordingly, during the year ended December 31, 2003, $411,000 of accrued compensation due to our Chairman was recorded as gain from forgiveness of debt in the consolidated statement of operations.

     DISCONTINUED OPERATIONS

     We recorded a loss from equity investments 100% of the loss of ARTISTdirect Records through April 30, 2002 due to our commitment to fund 100% of its operations. From May 1, 2002 through December 31, 2002, we recorded approximately 83% of the loss of ARTISTdirect Records based on our relative share of the remaining funding commitment to ARTISTdirect Records. For the year ended December 31, 2003, we recorded approximately 73% of the losses of ARTISTdirect Records. For the years ended December 31, 2002 and 2003, we recorded $29.236 million and $9.256 million, respectively, as our relative share of the loss of ARTISTdirect Records. The decrease in the loss was due to a reduced level of activity at ARTISTdirect Records in 2003 as compared to 2002.

     Income from the discontinued operations of the agency business was $147,000 for the year ended December 31, 2002. The Company did not have any income (loss) from the discontinued operations of the agency business for the year ended December 31, 2003.

     For the year ended December 31, 2003, the operations of the iMusic record label generated a loss of $298,000, as compared to $1,380,000 for the year ended December 31, 2002.

     A summary of the results of operations of ARTISTdirect Records and the iMusic record label for the years ended December 31, 2003 and 2002 is presented below.

     CUMULATIVE EFFECT OF CONSOLIDATION OF ARTISTDIRECT RECORDS, LLC

     As a result of the consolidation of ARTISTdirect Records as of December 31, 2003, we recorded a one-time charge to operations of $5.255 million in 2003 resulting from the cumulative effect on prior years of the change in accounting method from equity to consolidation.

     NET LOSS

     As a result of the foregoing factors, net loss decreased to $21.701 million for the year ended December 31, 2003, as compared to $48.192 million for the year ended December 31, 2002, a decrease of $26.491 million or 55%.

ARTISTDIRECT RECORDS, LLC

     A summary of the operations of ARTISTdirect Records for the years ended December 31, 2002, 2003 and 2004, which has been accounted for as a discontinued operation for all periods presented, is as follows:

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iMUSIC RECORD LABEL

     A summary of the operations of the iMusic record label for the years ended December 31, 2002, 2003 and 2004, which has been accounted for as a discontinued operation for all periods presented, is as follows:

LIQUIDITY AND CAPITAL RESOURCES

     We have financed our activities during the past few years from the sale of our equity securities. As of December 31, 2004, we had $1,156,000 of unrestricted cash and cash equivalents. We had a working capital deficiency of $18.438 million at December 31, 2004, primarily because of the consolidation of ARTISTdirect Records, which had liabilities of $18.768 million at such date. Effective February 28, 2005, we sold 100% of our interest in ARTISTdirect Records for a cash payment of $115,000, as a result of which we no longer had any equity or other economic interest in ARTISTdirect Records. As a result of the disposition of our interest in ARTISTdirect Records effective February 28, 2005, the liabilities of ARTISTdirect Records were eliminated from our balance sheet at that date.

     During 2003, we restructured our operations, laid off most of our staff and reduced operating costs. Subsequently, we have been attempting to improve and expand operations and cash flows at our online music network. However, it is uncertain whether our available cash resources will be sufficient to meet anticipated capital requirements over the next twelve months. If sufficient capital is not available, then we may not be able to fund our operations. To the extent that we are unable to obtain the capital necessary to fund our future cash requirements on a timely basis and/or under acceptable terms and conditions, we will not have sufficient cash resources to maintain operations, and we may consider a formal or informal restructuring or reorganization.

     As a result of the conditions described above, our auditors have included an explanatory paragraph in their 2004 report on our financial statements indicating that there is substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     Operating. Net cash used in operating activities was $11.161 million, $5.423 million and $3.473 million for the years ended December 31, 2002, 2003 and 2004, respectively. Net cash used in continuing operations was $10.116 million, $5.139 million and $625,000 for the years ended December 31, 2002, 2003 and 2004, respectively. Net cash used in discontinued operations was $1.045 million, $284,000 and $2.848 million for the years ended December 31, 2002, 2003 and 2004, respectively. Net cash used in operating activities for each of these periods consisted primarily of net losses, partially offset by non-cash items such as loss from equity investments, stock-based compensation, depreciation and amortization, and loss from impairment of goodwill and sale and abandonment of property and equipment.

     Investing. Net cash provided by investing activities was $957,000 for the year ended December 31, 2004, which consisted of the proceeds from the sale/maturity of short-term investments of $1.012 million, offset by $55,000 of purchases of property and

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equipment. Net cash provided by investing activities was $2.425 million for the year ended December 31, 2003, which consisted primarily of the proceeds from the sale/maturity of short-term investments of $5.045 million, partially offset by our advance to ARTISTdirect Records of $2.75 million and the proceeds from the sales of equipment of $123,000. Net cash used in investing activities for the year ended December 31, 2002 was $12.8 million, which consisted primarily of our advances to ARTISTdirect Records of $25.0 million, partially offset by the proceeds from the sale/maturity of short-term investments of $12.316 million and purchases of property and equipment of $381,000.

     Financing. Net cash provided by financing activities was $2.953 million for the year ended December 31, 2004, which consisted of a reduction in restricted cash of $175,000 and the issuance of bridge notes by ARTISTdirect Records of $2.778 million. Net cash provided by financing activities was $1.807 million for the year ended December 31, 2003, which consisted of a reduction in restricted cash of $1.807, of which approximately $1.3 million was paid out to our landlord in conjunction with the termination of our facilities lease. Net cash provided by financing activities was $855,000 for the year ended December 31, 2002, which was primarily a result of the release of restricted cash related to two letters of credit held by third parties related to our office lease and e-commerce credit card processor.

PRINCIPAL COMMITMENTS

     At December 31, 2004, we did not have any material commitments for capital expenditures. As of December 31, 2004, excluding liabilities associated with ARTISTdirect Records, our principal commitments consisted of funding commitments as summarized below.

OFF-BALANCE SHEET ARRANGEMENTS

     At December 31, 2004, we did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”), a revision to SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS 123R supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS 123R requires that the Company measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. The cost will be recognized as compensation expense over the vesting period of the awards. The Company is required to adopt SFAS 123R effective January 1, 2006. Under this method, the Company will begin recognizing compensation cost for equity-based compensation for all new or modified grants after the date of adoption. In addition, the Company will recognize the unvested portion of the grant date fair value of awards issued prior to adoption based on the fair values previously calculated for disclosure purposes over the remaining vesting period of the outstanding options and warrants. The Company is currently evaluating the potential effect that the adoption of SFAS 123R will have on the Company’s financial statement presentation and disclosures.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment to APB Opinion No. 29” (“SFAS 153”). SFAS 153 amends Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions”, to require that exchanges of nonmonetary assets be measured and accounted for at fair value, rather than at carryover basis, of the assets exchanged. Nonmonetary exchanges that lack commercial substance are exempt from this requirement. SFAS 153 is effective for nonmonetary exchanges entered into in fiscal periods beginning after June 15, 2005. The Company does not routinely enter into nonmonetary exchanges. Accordingly, the Company does not expect that the adoption of SFAS 153 will have a significant effect on the Company’s financial statement presentation or disclosures.

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ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

     The Company does not have any market risk with respect to such factors as commodity prices, equity prices and other market changes that affect market risk sensitive investments.

     The Company does not have any foreign currency risk, as its revenues and expenses are denominated and settled in United States dollars.

Interest Rate Risk

     The Company is not exposed to any interest rate risk through its assets and liabilities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our consolidated financial statements appear in a separate section of this Annual Report on Form 10-K following Item 15. Such information is incorporated herein by reference.

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

     Effective February 6, 2004, we dismissed KPMG LLP (“KPMG”) as our independent accountant. The dismissal of KPMG was recommended by our Audit Committee and approved by our Board of Directors.

     KPMG’s reports on our financial statements for the years ended December 31, 2001 and 2002 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except that KPMG’s report, dated February 14, 2003, for the years ended December 31, 2002 and 2001 contained an explanatory paragraph stating that “the Company has incurred substantial operating losses and negative cash flows from operations to date and has funding commitments related to its record label joint venture. The Company needs additional capital to fund its operations and the operations of the record label joint venture. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.”

     During the years ended December 31, 2001 and 2002, and the period from January 1, 2003 through February 6, 2004, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KPMG, would have caused KPMG to make reference to the subject matter of the disagreements in connection with its reports on the our financial statements. In addition, none of the events described in Item 304(a)(1)(v) of Regulation S-K occurred during such periods.

     Effective February 17, 2004, we retained Gumbiner Savett Inc. (“GS”) as our independent accountant. The retention of GS was recommended by our Audit Committee and approved by our Board of Directors.

     During the years ended December 31, 2002 and 2003, and the subsequent interim period from January 1, 2004 through February 16, 2004, we did not, nor did anyone on our behalf, consult with GS regarding either: (i) the application of accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on our financial statements, and no written report or oral advice was provided that GS concluded was an important factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement as defined at Item 304(a)(1)(iv) or a reportable event as defined at Item 304 (a)(1)(v) of Regulation S-K.

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ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

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

     We carried out an evaluation, under the supervision and with the participation of our management, including its principal executive officer and financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon and as of the date of that evaluation, our principal executive officer and financial officer concluded that there were material weaknesses in our internal controls, including those which relate to the segregation of duties and the review, approval and reconciliation of accounting data and entries. The Company is addressing these issues by reviewing and revising its internal accounting policies and procedures, expanding the resources allocated to the accounting department, and reviewing its accounting and management information systems software.

(b) Changes in Internal Controls

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

ITEM 9B. OTHER INFORMATION

     Effective as of December 31, 2004, ARTISTdirect, Inc. (“ADI”), entered into a Transfer Agreement with ARTISTdirect Recordings, Inc., a Delaware corporation and a wholly-owned subsidiary of ADI (“ARTISTdirect Recordings”), and Radar Records Holdings, Inc. (“Radar Records”), a Delaware corporation wholly-owned by ADI’s Chairman, Frederick W. Field, pursuant to which ADI was obligated to sell its common stock in ARTISTdirect Recordings to Radar Records for $115,000 in cash. ARTISTdirect Recordings owned a 65% membership interest in ARTISTdirect Records, LLC (“ARTISTdirect Records”).

     On February 28, 2005, ADI completed the sale of 100% of the common stock of ARTISTdirect Recordings to Radar Records pursuant the Transfer Agreement, as a result of which ADI no longer had any equity or other economic interest in ARTISTdirect Records, and Radar Records became the owner of a majority of the membership interests in ARTISTdirect Records and also acquired the receivable reflecting the $33.0 million of loan advances previously provided to ARTISTdirect Records by ADI.

     This transaction was reported in a Current Report on Form 8-K filed with the Securities and Exchange Commission on March 4, 2005.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors and Executive Officers

     The following table sets forth certain information regarding our directors and executive officers as of March 29, 2005:

     Our executive officers are elected by the Board of Directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of the directors or executive officers.

     The Company’s Certificate of Incorporation provides for a classified Board of Directors consisting of three classes of directors with staggered three-year terms, with each class as nearly equal in number as possible as determined by the Board. The Board currently consists of five persons. Mr. Field is a member of Class I. Mr. Diamond and Mr. Pulier have been designated as members of Class II. Mr. Butros-Ghali and Mr. Villard have been designated as members of Class III.

     The Class I director’s term expired at the 2004 annual meeting. The Class II directors’ terms expire at the 2005 annual meeting. The Class III director’s term expired at the 2003 annual meeting.

     The following is a brief description of the background of our directors and executive officers during the past five years.

     Frederick W. Field. Mr. Field has served as our Chairman of the Board since June 2001 and served as our Chief Executive Officer from June 2001 until September 2003. Mr. Field also currently serves as Chief Executive Officer of ARTISTdirect Records, LLC and as Chairman of the Board and Chief Executive Officer of Radar Pictures, Inc., a film production company. From 1990 to 2001, Mr. Field served as Co-Chairman of Interscope Records, a music production company. From 1979 to 1997, Mr. Field served as Chairman of the Board and Chief Executive Officer of Interscope Communications, Inc.

     Jonathan V. Diamond. Mr. Diamond has served our Chief Executive Officer and director since September 2003. From January 2003 to the present, he has also served as the Chairman, Chief Executive Officer and a director of YouthStream Media Networks, Inc., a publicly-traded company. He was the co-founder of N2K, Inc. and served as its Vice Chairman and Chief Executive Officer through its 1999 merger with CDnow, Inc., an e-commerce company. He continued to serve as Chairman of the combined company until its sale to Bertelsmann Music Group in August 2000. Mr. Diamond was a co-founder of GRP Records, an independent music label acquired by MCA in 1990. Mr. Diamond holds an M.B.A. from the Columbia University Graduate School of Business and a B.A. in Economics and Music from the University of Michigan Honors College.

     Robert N. Weingarten. Mr. Weingarten was appointed Chief Financial Officer and Secretary of the Company in January 2004. From July 1992 to present, Mr. Weingarten has been the sole shareholder of Resource One Group, Inc., a financial consulting and advisory company. From February 2003 to present, he has served as the Chief Financial Officer of YouthStream Media Networks, Inc., a publicly traded company. Since 1979, Mr. Weingarten has served as a consultant to numerous public companies in various stages of development, operation or reorganization. Mr. Weingarten received an M.B.A. Degree in Finance from the University of Southern California in 1975 and a B.A. Degree in Accounting from the University of Washington in 1974. Mr. Weingarten currently serves as President, Chief Financial Officer and Chairman of the Board of Directors of Aries Ventures Inc. and as Chief Financial Officer of Resource Ventures, Inc., both of which are public companies. Mr. Weingarten was retained to assist in the restructuring of the predecessor to both such companies in November 1998, and was an officer of such predecessor company when it filed for reorganization under Chapter 11 of the United States Bankruptcy Code in December 1999 and successfully confirmed its Plan of Reorganization in March 2000.

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     Teymour Boutros-Ghali. Mr. Boutros-Ghali has served as a director since January 18, 2005. From January 2002 to present, Mr. Boutros-Ghali has served as the Managing Partner of Monitor Ventures, an early stage venture investor and advisory firm that is part of the Monitor Group, a global strategy consulting firm and merchant bank with almost $2 billion under management. From January 2000 to January 2002, he worked as an independent consultant for Monitor Group and Digital Evolution. He also served as the Chief Executive Officer for AllBusiness from April 1997 to January 2000. For the past five years Mr. Boutros-Ghali has served as a director for various private companies. From June 2004 to present he has served as a director for Hydropoint Data Systems. From 2001 to 2002, and 2001 to 2003, Mr. Boutros-Ghali served as a director for Switchouse and Digital Evolution, respectively. Mr. Boutris-Ghali received S.M. and a Ph.D. Degrees from the Massachusetts Institute of Technology in 1982 and 1980, respectively. He also received B.A. and M.A. Degrees in Electrical Engineering from Cambridge University in 1976.

     Dimitri Villard. Mr. Villard has served as a director since January 18, 2005. Mr. Villard also currently serves as President and a director of Pivotal BioSciences, Inc. a position he has held since September 1998. In addition, since January 1982 to present, he has served as President and director of Byzantine Productions, Inc. Previously, Mr. Villard was a director at the investment banking firm of SG Cowen and affiliated entities, a position he held from January 1997 to July 1999. Mr. Villard received a B.A. Degree in Government from Harvard University in 1964. Mr. Villard currently serves as a director of Dax Solutions, Inc., an entertainment industry digital asset management venture, a position he has held since May 2004. He is also a member of the Executive Committee of the Los Angeles chapter of the Tech Coast Angels, a private venture capital group.

     Eric Poulier. Mr. Poulier has served as a director since November 29, 2004. Currently, Mr. Poulier serves as the Executive Chairman of SOA Software, Inc., a position which he has held since 2001. From 1998 to 2000, Mr. Poulier also served as a Director for MPOD, Inc. In addition, he has served as a Director for various companies such as Gluecode, Inc. and CTM Center for Telecom management. Mr. Pulier has been a pioneer in the software and digital interactive industries for over 15 years. He has been instrumental in establishing ground-breaking technology companies in several sectors including media management (IVT), Professional Services (US Interactive), voice systems (VoiceTap), and peer-to-peer networking (Mediator). Mr. Poulier received a B.A. Degree from Harvard University in 1988.

     Nicholas Turner. Mr. Turner has served as our Executive Vice President since January 1, 2005. Mr. Turner has over twenty years experience as a senior level executive and entrepreneur in the entertainment and new media industries. Mr. Turner has been a professional recording musician, artist manager, record producer, new media pioneer and record label marketing executive, as well as charity event creator and fundraiser. Mr. Turner has extensive expertise in guiding companies through the transition from the analog to digital world. During the last ten years, Mr. Turner has held senior executive positions with various companies, including N2K, Inc. and CDnow, Inc., with responsibility for marketing and revenue generation activities.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

     The members of our Board of Directors, our executive officers and persons who hold more than 10% of our outstanding common stock are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 which require them to file reports with respect to their ownership of our common stock and their transactions in such common stock. Based upon (i) the copies of Section 16(a) reports which we received from such persons for their 2004 fiscal year transactions in our common stock and their holdings of our common stock, and (ii) the written representations received from one or more of such persons that no annual Form 5 reports were required to be filed by them for the 2004 fiscal year, Mr. Weingarten filed a late Form 3 report and Mr. Yokomoto filed a late Form 4 report covering one transaction. Other than the foregoing instances, we believe that the reporting requirements under Section 16(a) for such fiscal year were met in a timely manner by our other directors, executive officers and greater than ten percent beneficial owners.

Code of Ethics

     The Company has adopted a written Code of Business Conduct and Ethics, which applies to every Director and Officer and member of senior management, including the Company’s Chief Executive Officer and Chief Financial Officer. A copy of the Company’s Code of Ethics is available to any shareholder that requests a copy, and has been filed as an exhibit to the Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003. Such request should be addressed to the attention of the Secretary of the Company and mailed to the Company’s corporate offices. Any amendment to or waiver of the Code of Business Conduct and Ethics will be disclosed promptly following the date of such amendment or waiver pursuant to a Form 8-K filing with the Securities and Exchange Commission.

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Changes in Procedures to Nominate Directors

     Since the date of the Company’s last disclosures pursuant to Item 7(d)(s)(ii)(G) of Schedule 14A of the Securities Exchange Act of 1934, as amended, there have been no material changes to the procedures by which security holders may recommend nominees to the Company’s Board of Directors.

ITEM 11. EXECUTIVE COMPENSATION

Summary of Cash and Certain Other Compensation

     The following table provides certain summary information concerning the compensation earned by ARTISTdirect’s Chief Executive Officer and each of the three other most highly compensated executive officers of ARTISTdirect whose salary and bonus for the 2004 fiscal year was in excess of $100,000, for services rendered in all capacities to ARTISTdirect and its subsidiaries for the fiscal years ended December 31, 2002, 2003 and 2004. No other executive officers who would have otherwise been includable in such table on the basis of salary and bonus earned for the 2004 fiscal year has been excluded by reason of his or her termination of employment or change in executive status during that year. The listed individuals shall be hereinafter referred to as the named executive officers.

     SUMMARY COMPENSATION TABLE

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Stock Options

          In September 2003, we issued warrants to purchase 200,000 shares of common stock at $0.50 per share as partial consideration for an office lease termination. In December 2003, we issued 40,000 shares of common stock to a consultant for services rendered which were valued at $0.50 per share. We made such issuances in reliance upon Section 4(2) of the Securities Act. The parties to whom securities were issued in connection with the foregoing, made an informed investment decision based upon negotiation with us and were provided with access to material information regarding our company. We believe that each party that acquired our securities pursuant to the foregoing had knowledge and experience in financial matters such that such party was capable of evaluating the merits and risks of acquisition of our securities. All certificates representing the shares issued pursuant to the foregoing bear an appropriate legend restricting the transfer of such shares, except in accordance with the Securities Act.

          Effective September 29, 2003, the Company entered into an employment agreement with Jonathan V. Diamond to serve as the Company’s President and Chief Executive Officer through August 15, 2006. In conjunction with the employment agreement, the Company granted Mr. Diamond a non-plan, non-qualified stock option to purchase 259,659 shares of common stock exercisable through August 15, 2010 at $0.85 per share, which was the approximate fair market value of the common stock on the date of grant. Upon the termination of Mr. Diamond’s employment with the Company prior to the expiration of his employment agreement, 75% of the common stock underlying the option is subject to a repurchase right by the Company at $0.85 per share. The repurchase right lapses in three equal annual installments such that it will have lapsed in its entirety on the third anniversary of Mr. Diamond’s employment by the Company. We made such issuance in reliance upon Section 4(2) of the Securities Act.

          From May 2003 through December 31, 2003, ARTISTdirect Records issued and sold from time to time, an aggregate of $2.048 million in convertible notes (the “Bridge Notes”) to nine individual investors. Of such amount, $898,000 of these notes was sold to our Chairman, Ted Field and $100,000 to Jonathan V. Diamond, our President and Chief Executive Officer. During 2004, ARTISTdirect Records issued and sold an additional $2.777 million in convertible notes to Ted Field. The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and are convertible into preferred equity of ARTISTdirect Records as part of its next equity financing. The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect Records at $0.01 per unit equivalent to the number of units of new equity into which their Bridge Notes are ultimately converted. We made the issuances of such notes and warrants in reliance upon Section 4(2) of the Securities Act. The parties to whom the securities were issued in connection with the foregoing made an informed investment decision based upon negotiation with us and were provided with access to material information regarding ARTISTdirect Records. We

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believe that the parties that acquired our securities pursuant to the foregoing had knowledge and experience in financial matters such that each such party was capable of evaluating the merits and risks of acquisition of our securities.

          Effective January 9, 2004, the Company issued to Mr. Yokomoto two non-qualified stock options to purchase 10,000 shares and 50,000 shares exercisable at $0.50 per share, which was not less than the fair market value on the date of grant, through January 9, 2011. The option for 10,000 shares was immediately vested upon issuance. The option for 50,000 shares was scheduled to vest in increments of 10,000 shares on February 1, 2004, March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004, based on the accomplishment of certain milestones by each respective date, which were not attained. Accordingly, the option for 50,000 shares did not vest and thus expired .

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

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

          The stock options were issued without registration in reliance upon the exemption afforded by Section 4(2) of the Securities Act of 1933, as amended, based on certain representations made to ADI by the recipients.

Option Grants in 2004

          The following table sets forth certain information regarding stock options granted to the Company’s executive officers during the year ended December 31, 2004.

(2) During the year ended December 31, 2004, the Company granted options to management and employees to purchase an aggregate of 120,000 shares of common stock exercisable at $0.50 per share. The fair market value on the date of grant was $0.35 per share.

(3) Amounts represent hypothetical gains that could be achieved for the respective options if such options appreciate based on the fair market value on the date of grant and if exercised at the end of the option term. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company’s estimate or projection of future common stock price growth. These amounts represent certain assumed rates of

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appreciation in the value of the Company’s common stock from the fair market value on the date of grant. Actual gains, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in the table may not necessarily be achieved.

Aggregated Option Fiscal Year-End Value

     The following table provides information, with respect to the named executive officers, concerning unexercised stock options held by them at December 31, 2004. None of the named executive officers exercised any stock options during 2004.

AGGREGATED FISCAL YEAR-END OPTION VALUES

Employment Contracts, Termination of Employment and Change in Control Arrangements

     ARTISTdirect has entered into employment agreements with its current and former executive officers as follows:

Frederick W. Field

     In May 2001, ARTISTdirect entered into an employment agreement and stock option agreements with Frederick W. Field to serve as Chairman of the Board and Chief Executive Officer. The employment agreement generally provided for the following:

•	Mr. Field is paid an annual base salary of $500,000, plus bonus pool participation.

•	The term of the agreement expires May 31, 2006.

•	The employment agreement provides that if ARTISTdirect terminates Mr. Field’s employment other than for cause, disability or death, or Mr. Field terminates his employment for good reason, he will receive a lump sum payment equal to the amount of his annual base salary for:

	(1)	50% of the remaining term of the employment agreement if the termination occurs within the first 3 years of his employment,
	(2)	12 months if the termination occurs in the fourth year of his employment, or
	(3)	the full remaining term of the employment agreement if the termination occurs in the fifth year of his employment.

•

The above payments also will be made if Mr. Field terminates his employment by written notice upon the commencement of any arbitration proceeding to determine whether or not his employment with ARTISTdirect Records may be terminated for good reason and Mr. Field’s employment with ARTISTdirect Records is terminated for good reason.

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•

If Mr. Field terminates his employment by written notice upon the commencement of any arbitration proceeding to determine whether or not his employment with ARTISTdirect Records may be terminated for cause and Mr. Field remains employed at ARTISTdirect Records because the arbitrator determines that ARTISTdirect Records is not entitled to terminate Mr. Field’s employment for cause, then the above payments will be made, but the applicable pay period will be reduced by 50%.

     ARTISTdirect also granted Mr. Field three non-plan, non-qualified stock options to purchase 444,480 shares of common stock at an exercise price of $7.50 per share, under the following stock option agreements:

•

One of the stock option agreements generally provides that Mr. Field’s right to purchase 302,370 shares is immediately exercisable subject to a right of repurchase, and vests in a series of 60 successive equal monthly installments from June 29, 2001. The vesting fully accelerates upon a change of control or upon Mr. Field’s cessation of service with ARTISTdirect pursuant to an involuntary termination. An involuntary termination includes (i) ARTISTdirect’s termination of Mr. Field’s employment for reasons other than for cause, (ii) a cessation of services pursuant to Mr. Field’s permanent disability or death and (iii) Mr. Field’s voluntary resignation for good reason, as set forth in the employment agreement. Permanent disability exists if Mr. Field becomes unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that is expected to result in death or has lasted or can be expected to last for a continuous period of at least 12 months. In addition, if Mr. Field terminates his employment upon written notice in connection with the commencement of any arbitration proceeding to determine whether or not his employment with ARTISTdirect Records may be terminated for cause and Mr. Field remains employed at ARTISTdirect Records because the arbitrator determined that ARTISTdirect Records was not entitled to terminate Mr. Field’s employment for cause, then 50% of the then unvested option shares will automatically accelerate so that they are immediately fully vested and exercisable.

•

A second stock option agreement generally provides that Mr. Field’s right to purchase 75,588 shares vests and becomes exercisable upon the occurrence prior to June 29, 2004 of any one of the following events: (i) the 30-day average closing sale price of ARTISTdirect’s common stock or the consideration paid per share in an acquisition of ARTISTdirect reaches a minimum of $35.00 per share; (ii) ARTISTdirect’s common stock is re-listed on The Nasdaq National Market following a delisting; (iii) a change of control occurs; or (iv) Mr. Field’s service with ARTISTdirect ceases pursuant to an involuntary termination. If none of the foregoing events occurs by June 29, 2004, then the option will terminate and none of the option shares subject to the second stock option agreement will vest or become exercisable by Mr. Field. This option terminated on June 29, 2004

•

The third stock option agreement generally provides that Mr. Field’s right to purchase 66,522 shares vests and becomes exercisable upon the occurrence prior to June 29, 2004 of any one of the following events: (i) the 30-day average closing sale price of ARTISTdirect’s common stock or the consideration paid per share in an acquisition of ARTISTdirect reaches a minimum of $70.00 per share; (ii) ARTISTdirect’s common stock is re-listed on The Nasdaq National Market following a delisting; (iii) a change of control occurs; or (iv) Mr. Field’s service with ARTISTdirect ceases pursuant to an involuntary termination. If none of the foregoing events occurs by June 29, 2004, then the option will terminate and none of the option shares subject to the third option agreement will vest or become exercisable by Mr. Field. This option terminated on June 29, 2004.

     All three stock options expire no later than May 30, 2008. All three stock options may also terminate prior to the expiration date as follows: (i) upon the later of the 12 month anniversary of Mr. Field’s cessation of service or the expiration of Mr. Field’s initial five-year employment term with ARTISTdirect if Mr. Field’s employment with ARTISTdirect ceases pursuant to an involuntary termination; (ii) upon the earlier of the 12 month anniversary of Mr. Field’s cessation of service or the expiration of Mr. Field’s initial five-year employment term with ARTISTdirect if Mr. Field terminates his employment pursuant to a termination with justification; (iii) upon the earlier of the 90-day anniversary of Mr. Field’s cessation of service or the expiration date of the stock option if Mr. Field ceases to remain in ARTISTdirect’s service for any reason other than an involuntary termination or a termination with justification; (iv) immediately if ARTISTdirect terminates Mr. Field’s employment for cause; (v) upon the earlier of the 12 month anniversary of Mr. Field’s death or the expiration date of the stock option if Mr. Field ceases to remain in ARTISTdirect’s service due to his death; and (vi) upon the latter of the 12 month anniversary of Mr. Field’s cessation of service with ARTISTdirect or the expiration of Mr. Field’s initial five-year employment term with ARTISTdirect if Mr. Field ceases to remain in ARTISTdirect’s service due to his permanent disability.

     In addition, Mr. Field also serves as the Chief Executive Officer of ARTISTdirect Records. Mr. Field has a five-year employment agreement with ARTISTdirect Records, pursuant to which he is paid an annual base salary of $1,000,000 plus certain benefits. If Mr. Field terminates his employment with ARTISTdirect Records for good reason, he will receive a lump sum payment equal to the amount of his annual base salary for (i) 50% of the remaining term of the employment agreement if the termination occurs within the first 3 years of his employment, (ii) 12 months if the termination occurs in the fourth year of his employment or (iii) the full remaining

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term of the employment agreement if the termination occurs in the fifth year of his employment. ARTISTdirect Records may not terminate Mr. Field’s employment other than for cause or due to his disability or death.

     From July 16, 2002, Mr. Field has elected to defer salary that he would have earned under his employment agreements with ARTISTdirect and ARTISTdirect Records. In December 2002, ARTISTdirect and ARTISTdirect Records amended Mr. Field’s employment agreements to provide that the amount of Mr. Field’s deferred salary, net of applicable tax withholdings, will be paid in a cash lump sum by ARTISTdirect and ARTISTdirect Records, respectively, within thirty days after the consummation of a private financing of at least $20,000,000 or, if earlier, the occurrence of (i) a merger, consolidation, sale of fifty percent (50%) or more of the voting securities or sale of all or substantially all of the assets of ARTISTdirect or ARTISTdirect Records, respectively, (ii) Mr. Field’s attainment of age 65, or (iii) the termination of Mr. Field’s employment with ARTISTdirect or ARTISTdirect Records, respectively.

     In May 2003, Mr. Field agreed to reduce his annual salary under his employment agreements with ARTISTdirect and ARTISTdirect Records to $28,080 under each agreement. Mr. Field’s employment agreement was further amended whereby all deferred salary totaling approximately $411,000 and $822,000, respectively, was waived, even if new debt or equity financing is raised.

     As described below, Mr. Diamond replaced Mr. Field as Chief Executive Officer of the Company effective September 29, 2003.

Jonathan V. Diamond

     Effective September 29, 2003, the Company entered into an employment agreement with Jonathan V. Diamond to serve as the Company’s President and Chief Executive Officer through August 15, 2006, which provided for the following:

•

Mr. Diamond will be paid an annual salary of $185,000 and a discretionary bonus of up to $50,000 and a formula-based bonus of up to $50,000 determined by the Board of Directors, pro rated for any partial fiscal year. Mr. Diamond also received a signing bonus of $4,315 and a car allowance of $650 per month.

•	The agreement provided for the payment of salary for eighteen months after the date of termination (or, if a shorter period, the remaining term under his employment agreement) and full vesting of his stock option if the termination was:

	(1)	other than due to a disability,
	(2)	other than for “cause,” such as the commission of a felony, material dishonesty against ARTISTdirect, or gross negligence in the performance of duties,
	(3)	other than due to Mr. Diamond’s death, or
	(4)	for “good reason,” such as an adverse change of duties, a reassignment of location, or a material breach of ARTISTdirect’s obligations to Mr. Diamond.

•

The agreement also provided that if Mr. Diamond’s employment was terminated for cause or disability, or he resigned for other than good reason, he would be prohibited, for a period of the later of one year after the early termination of his employment, or the expiration of the term of his employment agreement, from attempting to hire any ARTISTdirect employees.

•

Mr. Diamond also received a stock option to purchase 259,659 shares of common stock exercisable until August 15, 2010 at $0.85 per share, the approximate fair market value of the stock at such time. Upon the termination of Mr. Diamond’s employment with the Company prior to the expiration of his employment agreement, 75% of the common stock underlying the option is subject to a repurchase right by the Company at $0.85 per share. The repurchase right lapses in three equal annual installments such that it will have lapsed in its entirety on the third anniversary of Mr. Diamond’s employment by the Company. .

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Keith Yokomoto

     Effective December 31, 2003, Keith Yokomoto, the Company’s former President and Chief Operating Officer, entered into a Termination Agreement and Mutual General Release. Mr. Yokomoto subsequently resigned as a director of the Company on October 22, 2004. Mr. Yokomoto’s July 2001 employment agreement, which had an initial term extending through June 30, 2006, provided for an annual salary of $500,000 plus certain benefits, and a commencement advance of $300,000, representing a pre-payment of $60,000 against any monies that would otherwise become payable to Mr. Yokomoto under the Company’s executive performance bonus pool for each year of the initial five-year term of the employment agreement. The employment agreement also provided that under certain conditions, Mr. Yokomoto would receive a payment of $350,000 plus one year’s salary upon the termination of his employment with the Company. In consideration for Mr. Yokomoto terminating his employment agreement as an officer of the Company effective as of December 31, 2003 and waiving all rights to $1.25 million of remaining compensation under the employment agreement, the Company paid Mr. Yokomoto his accrued but unpaid salary at the rate of $500,000 per year through December 31, 2003 aggregating $412,847 and his accrued but unused vacation pay through December 31, 2003 aggregating $76,924, and Mr. Yokomoto repaid the Company the unearned portion of the commencement advance of $150,000.

     Effective January 1, 2004, the Company entered into a one-year consulting agreement with Mr. Yokomoto that provided for total compensation of $120,000. Effective January 9, 2004, the Company also issued to Mr. Yokomoto two non-qualified stock options to purchase 10,000 shares and 50,000 shares exercisable at $0.50 per share, which was not less than the fair market value on the date of grant, through January 9, 2011. The option for 10,000 shares was immediately vested upon issuance. The option for 50,000 shares was scheduled to vest in increments of 10,000 shares on February 1, 2004, March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004, based on the accomplishment of certain milestones by each respective date, which were not attained. Accordingly, the option for 50,000 shares did not vest and thus expired.

Marc Geiger

     Effective May 31, 2003, Marc P. Geiger, the Company’s former Vice Chairman of the Board of Directors and President — Artist Services, resigned as an officer of the Company. Mr. Geiger subsequently resigned as a director of the Company on October 18, 2004. Mr. Geiger’s July 2001 amended employment agreement, which had an initial term extending through June 30, 2006, provided for an annual salary of $500,000 plus certain benefits. The amended employment agreement also provided that under certain conditions, Mr. Geiger would receive a payment of $1,000,000 plus one year’s salary upon the termination of his employment with the Company. In February 2001, the Company loaned Mr. Geiger $150,000, with interest at 7%. The term of the loan was initially one year, but was extended in September 2001 to five years commensurate with the amendment of Mr. Geiger’s employment agreement in July 2001. Mr. Geiger was obligated to repay the loan in five equal annual principal payments of $30,000, along with accrued interest to date, beginning in September 2002. In consideration for Mr. Geiger terminating his employment agreement effective as of the date of his resignation as an officer and waiving all rights to compensation under the employment agreement, the Company paid Mr. Geiger his accrued compensation and benefits of approximately $184,000, and Mr. Geiger repaid the $150,000 loan plus accrued interest to the Company.

Nicholas Turner

     Effective January 1, 2005, the Company entered into a one-year consulting agreement with Nicholas Turner to serve as the Company’s Executive Vice President with a base annual salary of $120,000 per year plus certain benefits. In conjunction with the consulting agreement, the Company granted Mr. Turner a non-plan, non-qualified stock option to purchase 92,000 shares of common stock at an exercise price of $0.79 per share, which was the approximate fair market value of the common stock on the date of grant, vesting monthly over a period of two years.

Compensation Committee Interlocks and Insider Participation

     The Compensation Committee of the Board of Directors consisted of Mr. Krupa and Mr. Moody, who each resigned from the Board of Directors effective October 18, 2004. Neither of these individuals was an officer or employee of the Company at any time during 2003 or 2004. Since that date, the full board has been acting in lieu of committees until new board committees are formed, which is expected to occur sometime in 2005. Mr. Diamond and Mr. Weingarten are also executive officers of YouthStream Media Networks, Inc., a publicly-traded company. No current executive officer of the Company has ever served as a member of the board of directors or compensation committee of any other entity that has or has had one or more executive officers serving as a member of the Company’s Board of Directors or Compensation Committee.

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Director Compensation

     Directors who are not employees of ARTISTdirect do not currently receive any cash compensation from ARTISTdirect for their service as members of our Board of Directors or any Board committee. However, directors are reimbursed for all reasonable travel and out-of-pocket expenses incurred by them in attending Board and committee meetings. All directors are eligible to participate in the ARTISTdirect 1999 Employee Stock Option Plan.

Meetings and Committees of the Board of Directors

     The Board of Directors held two meetings during the year ended December 31, 2004; all other matters were handled by unanimous written consent. The Board of Directors had an Audit Committee and a Compensation Committee until certain Directors resigned in October 2004. Since that time, the full board has been acting in lieu of committees until new board committees are formed, which is expected to occur sometime in 2005.

     Each Director attended or participated in 75% or more of the aggregate of (i) the total number of meetings of the Board and (ii) the total number of meetings held by all committees of the Board of Directors on which such Director served during the year ended December 31, 2004.

Compensation Committee

     The Compensation Committee reviews and approves the compensation and benefits of our key executive officers, administers our employee benefit plans and makes recommendations to the Board of Directors regarding such matters. The Compensation Committee held four meetings during the year ended December 31, 2004.

Audit Committee

     The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the selection of the Company’s independent auditors, the scope of the annual audits, fees to be paid to the auditors, the performance of the auditors, services provided by the auditors and the Company’s accounting practices.

     The Audit Committee held two meetings during the year ended December 31, 2004. Since there was substantial turnover in the composition of the Company’s Board of Directors in late 2004, an Audit Committee had not been formed at December 31, 2004, and an “audit committee financial expert” had therefore not been designated. The Company will seek to add a person to its Board of Directors in 2005 qualified to serve as an “audit committee financial expert”.

Long-Term Incentive Plans

     The Company does not have any long-term incentive plans.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information known to ARTISTdirect with respect to the beneficial ownership of ARTISTdirect’s common stock as of March 22, 2005 by (i) all persons who are beneficial owners of five percent (5%) or more of ARTISTdirect’s common stock, (ii) each current director, (iii) the executive officers named in the Summary Compensation Table of the Executive Compensation section of this Form 10-K and (iv) all current directors and executive officers as a group. As of March 29, 2005, there were 3,502,117 shares of common stock outstanding. Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the shares beneficially owned, subject to community property laws, where applicable.

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Equity Compensation Plan Information

     The following table provides information as of December 31, 2004 with respect to the shares of our common stock that may be issued under our existing equity compensation plans. The table does not include information with respect to shares subject to

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outstanding options granted under equity compensation plans assumed by ARTISTdirect in connection with mergers and acquisitions of the companies that originally granted those options.

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2004 Consultant Stock Plan

     Effective September 29, 2004, the Company’s Board of Directors adopted the ARTISTdirect, Inc. 2004 Consultant Stock Plan (the “Consultant Plan”) in order for the Company to be able to compensate consultants, at the option of the Company, who provide bona fide services to the Company not in connection with capital raising or promotion of the Company’s securities. The Consultant Plan will expire on September 29, 2014, and provides for the issuance of up to 500,000 shares of common stock to consultants at fair market value. On January 13, 2005, the Company filed a Registration Statement on Form S-8 with the Securities and Exchange Commission to register the 500,000 shares of common stock for future issuance under the Consultant Plan. As of December 31, 2004, no shares had been issued under the Consultant Plan.

1999 Employee Stock Option Plan

     The 1999 Employee Stock Option Plan became effective on October 6, 1999 in connection with our conversion from ARTISTdirect, LLC into ARTISTdirect, Inc. All options to purchase membership units in the limited liability company which were outstanding at the time of such conversion were assumed by the corporation and converted into options for shares of our common stock. The number of shares subject to each assumed and converted option was equal to the number of membership units in the limited liability company which were subject to that option immediately prior to the conversion, and the exercise price per share remained the same as the per unit exercise price in effect under the option at the time of conversion. Except for the conversion of the securities subject to the option into shares of our common stock, each option will continue to be governed by the terms of the agreement evidencing that option at the time of our conversion into a corporation.

     The 1999 Employee Stock Option Plan is a non-shareholder approved plan under which options may be granted to employees, non-employee members of our Board of Directors, and consultants and other independent advisors in our employ or service. The number of shares of common stock issuable over the term of the 1999 Employee Stock Option Plan was initially 650,000 shares and increased by 69,235 shares and 70,042 shares on January 1, 2003 and 2004, respectively, for a total of 940,462 shares on December 31, 2004 (subject to adjustment for certain changes in our capital structure). The share reserve will automatically increase on the first trading day in January each calendar year by an amount equal to 2% of the total number of shares of our common stock outstanding on the last trading day in December in the immediately preceding calendar year, but in no event will any such annual increase exceed 87,500 shares.

     All option grants under the 1999 Employee Stock Option Plan will have an exercise price per share equal to the fair market value per share of our common stock on the grant date. Each option will vest in installments over the optionee’s period of service with ARTISTdirect. The options will vest on an accelerated basis in the event ARTISTdirect is acquired and those options are not assumed or replaced by the acquiring entity. The options that were granted while we were a limited liability company, however, will terminate in the event ARTISTdirect is acquired and those options are not assumed by the acquiring entity (unless their vesting is accelerated by our Compensation Committee). Each option will have a maximum term (not to exceed 10 years) set by the plan administrator (our Compensation Committee) at the time of grant, subject to earlier termination following the optionee’s cessation of employment. All options are non-statutory options under the Federal tax law, unless they are incentive stock options granted to employees.

1999 Artist Stock Option Plan

     The 1999 Artist Stock Option Plan became effective on October 6, 1999 in connection with our conversion from ARTISTdirect, LLC into ARTISTdirect, Inc. All options to purchase membership units in the limited liability company which were outstanding at the time of such conversion were assumed by the corporation and converted into options for shares of our common stock. The number of shares subject to each assumed and converted option was equal to the number of membership units in the limited liability company which were subject to that option immediately prior to the conversion, and the exercise price per share remained the same as the per unit exercise price in effect under the option at the time of conversion. Except for the conversion of the securities subject to the option into shares of our common stock, each option will continue to be governed by the terms of the agreement evidencing that option at the time of our conversion into a corporation.

     The 1999 Artist Stock Option Plan is a non-shareholder approved plan under which options were granted to performing artists who provided products and services through the ARTISTchannel web-sites we operate and maintain for them pursuant to ARTISTchannel agreements. The number of shares of common stock issuable over the term of the 1999 Artist Stock Option Plan was initially 400,000 shares and increased by 69,235 shares and 70,042 shares on January 1, 2003 and 2004, respectively, for a total of 690,462 shares as of December 31, 2004 (subject to adjustment for certain changes in our capital structure). The share reserve will automatically increase on the first trading day in January each calendar year by an amount equal to 2% of the total number of shares of our common stock

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outstanding on the last trading day in December in the immediately preceding calendar year, but in no event will any such annual increase exceed 87,500 shares.

     All option grants under the 1999 Artist Stock Option Plan have an exercise price per share equal to the fair market value per share of our common stock on the grant date. Each option vests in installments over the period the optionee’s ARTISTchannel agreement remains in effect. The options will vest on an accelerated basis in the event ARTISTdirect is acquired and those options are not assumed or replaced by the acquiring entity. Each option has a maximum term (not to exceed 10 years) set by the plan administrator (our Compensation Committee) at the time of grant, subject to earlier termination following the termination of the optionee’s ARTISTchannel agreement. All options are non-statutory options under the Federal tax law.

1999 Artist and Artist Advisor Stock Option Plan

     The 1999 Artist and Artist Advisor Stock Option Plan became effective on October 6, 1999 in connection with our conversion from ARTISTdirect, LLC into ARTISTdirect, Inc. All options to purchase membership units in the limited liability company which were outstanding at the time of such conversion were assumed by the corporation and converted into options for shares of our common stock. The number of shares subject to each assumed and converted option was equal to the number of membership units in the limited liability company which were subject to that option immediately prior to the conversion, and the exercise price per share remained the same as the per unit exercise price in effect under the option at the time of conversion. Except for the conversion of the securities subject to the option into shares of our common stock, each option will continue to be governed by the terms of the agreement evidencing that option at the time of our conversion into a corporation.

     The 1999 Artist and Artist Advisor Stock Option Plan is a non-shareholder approved plan under which options were granted to performing artists and their attorneys, business managers, agents and other advisors who provided services to us. The number of shares of common stock issuable over the term of the 1999 Artist and Artist Advisor Stock Option Plan was initially 185,000 shares and increased by 34,617 shares and 35,021 shares on January 1, 2003 and 2004, respectively to a total of 329,638 shares as of December 31, 2004 (subject to adjustment for certain changes in our capital structure). The share reserve will automatically increase on the first trading day in January each calendar year by an amount equal to 1% of the total number of shares of our common stock outstanding on the last trading day in December in the immediately preceding calendar year, but in no event will any such annual increase exceed 37,500 shares.

     All option grants under the 1999 Artist and Artist Advisor Stock Option Plan have an exercise price per share equal to the fair market value per share of our common stock on the grant date. Each option vests in installments over the optionee’s period of service with ARTISTdirect. The options will vest on an accelerated basis in the event ARTISTdirect is acquired and those options are not assumed or replaced by the acquiring entity. Each option has a maximum term (not to exceed 10 years) set by the plan administrator (our Compensation Committee) at the time of grant, subject to earlier termination following the termination of the optionee’s service for cause. All options are non-statutory options under the Federal tax law.

     Share issuances under the 1999 Employee Stock Option Plan, the 1999 Artist Stock Option Plan and the 1999 Artist and Artist Advisor Stock Option Plan will not reduce or otherwise affect the number of shares of common stock available for issuance under the 1999 Employee Stock Purchase Plan, and share issuances under 1999 Employee Stock Purchase Plan will not reduce or otherwise affect the number of shares of common stock available for issuance under the 1999 Employee Stock Option Plan, the 1999 Artist Stock Option Plan and the 1999 Artist and Artist Advisor Stock Option Plan.

1999 Employee Stock Purchase Plan

     In October 1999, the Company adopted the 1999 Employee Stock Purchase Plan that initially reserved 50,000 shares of common stock for issuance under this plan. This plan was approved by the Company’s shareholders. As of December 31, 2004, this plan currently had reserved for issuance 150,000 shares, of which 137,831 shares remained available for future issuances. This share reserve automatically increases on the first trading day in January each calendar year, by an amount equal to 1% of the total number of shares of the Company’s 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 are 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 non-compensatory. During the years ended December 31, 2000, 2001, 2002, 2003 and 2004, 6,758 shares, 3,902 shares, 1,134 shares, 375 shares and 0 shares, respectively, were issued under this plan.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Sale of ARTISTdirect Recordings to Radar Records Holdings

     Effective as of December 31, 2004, ARTISTdirect, Inc. (“ADI”), entered into a Transfer Agreement with ARTISTdirect Recordings, Inc., a Delaware corporation and a wholly-owned subsidiary of ADI (“ARTISTdirect Recordings”), and Radar Records Holdings, Inc. (“Radar Records”), a Delaware corporation wholly-owned by ADI’s Chairman, Frederick W. Field, pursuant to which ADI was obligated to sell its common stock in ARTISTdirect Recordings to Radar Records for $115,000 in cash. ARTISTdirect Recordings owned a 65% membership interest in ARTISTdirect Records, LLC (“ARTISTdirect Records”).

     On February 28, 2005, ADI completed the sale of 100% of the common stock of ARTISTdirect Recordings to Radar Records pursuant the Transfer Agreement, as a result of which ADI no longer had any equity or other economic interest in ARTISTdirect Records, and Radar Records became the owner of a majority of the membership interests in ARTISTdirect Records and also acquired the receivable reflecting the $33.0 million of loan advances previously provided to ARTISTdirect Records by ADI. In conjunction with this transaction, at February 28, 2005, ADI wrote-off the intercompany balance due from ARTISTdirect Records ($80,000 at December 31, 2004), which was eliminated in consolidation. Radar Records acquired the common stock of ARTISTdirect Recordings subject to the rights of BMG. Radar Records also agreed to offer to investors who had provided bridge funding to ARTISTdirect Records, excluding Frederick W. Field and entities related or controlled by him, the right to acquire proportional shares (based on the amount of bridge funding made by each bridge investor in ARTISTdirect Records) of the common stock of ARTISTdirect Recordings on the same terms and conditions as set forth in the Transfer Agreement.

     Bridge Notes Payable

     As of December 31, 2003 and 2004, ARTISTdirect Records had outstanding loans of $898,000 and $3.676 million, respectively, due to Ted Field and $1.150 million of loans due to outside investors (including $100,000 from Jonathan V. Diamond, the Company’s President and Chief Executive Officer). The total loans of $4.825 million at December 31, 2004 were obtained through the issuance of convertible promissory notes (the “Bridge Notes”). The Bridge Notes accrue interest at 8% per annum, are due two years from the date of issuance, and are convertible into new preferred equity of ARTISTdirect Records as part of its next equity financing. The holders of the Bridge Notes also received warrants with a term of five years to purchase additional equity of ARTISTdirect.

     Sub-lease with Company Owned by Frederick W. Field

     During 2003, the Company relocated its administrative offices to an office leased by Radar Pictures, Inc., a company owned by Frederick W. Field. The Company sub-leases these offices on a month-to-month basis. During the years ended December 31, 2003 and 2004, the Company accrued $56,000 and $168,000, respectively, to Radar Pictures, Inc. as rent and facilities usage expense. The Company paid Radar Pictures, Inc. the accrued rent through December 31, 2004 of $224,000 on February 28, 2005.

     Termination Agreements

     During the year ended December 31, 2003, we entered into agreements with Keith Yokomoto and Marc Geiger to terminate their positions as officers of the Company. See the section above titled “Employment Contracts, Termination of Employment and Change in Control Arrangements” for information on these agreements.

     Yokomoto Consulting Agreement.

     On January 1, 2004, we entered into a consulting agreement with Keith Yokomoto, a former director, to provide services on a part-time basis for the year ended December 31, 2004. See the section above titled “Employment Contracts, Termination of Employment and Change in Control Arrangements” for information on this agreement.

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     Diamond Employment Agreement

     In September 2003, we entered into an employment agreement with Jonathan Diamond in connection with his appointment as our chief executive officer. See the section above titled “Employment Contracts, Termination of Employment and Change in Control Arrangements” for information on this agreement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     KPMG LLP was the Company’s independent registered public accounting firm for the year ended December 31, 2002 and for the interim period ended September 30, 2003. Gumbiner Savett Inc. was the Company’s independent registered public accounting firm for the years ended December 31, 2003 and 2004. A summary of payments to such accounting firms during the years ended December 31, 2003 and 2004 is as follows:

(2) Consists of the preparation of federal and state corporate income tax returns for the Company and federal and state partnership income tax returns for ARTISTdirect Records, LLC.

(3) Consists of tax advisory services relating to local property and sales tax issues and to the Company’s federal net operating loss carryforward.

Pre-Approval Policies and Procedures:

     The Audit Committee meets periodically to review and approve the scope of the services to be provided to us by our independent registered public accounting firm, as well to review and discuss any issues that may arise during an engagement. The Audit Committee considers various issues with respect to the services to be provided by our independent registered public accounting firm, including the complexity of any engagement, its expected cost, the knowledge and expertise of the independent registered public accounting firm’s staff, any complex or unusual accounting or disclosure issues, new accounting pronouncements, and the capability and adequacy of our financial staff and financial reporting systems.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     (1) FINANCIAL STATEMENTS

ARTISTdirect, Inc. and Subsidiaries Consolidated Financial Statements

     (2) FINANCIAL STATEMENT SCHEDULES

     Financial statement 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

     A list of exhibits required to be filed as part of this Annual Report on Form 10-K is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.

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SIGNATURES

     Pursuant to the requirements of 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.

     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.

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ARTISTDIRECT, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
ARTISTdirect, Inc.

We have audited the accompanying consolidated balance sheets of ARTISTdirect, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2004 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficiency) and cash flows for the years then ended. 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 consolidated financial position of ARTISTdirect, Inc. and subsidiaries as of December 31, 2003 and 2004, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, as of December 31, 2003, the Company changed its method of accounting for its investment in its record label joint venture, ARTISTdirect Records, LLC.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1, the Company has incurred substantial operating losses and negative cash flows from operations to date. As of December 31, 2004, the Company has a net working capital deficiency of $18,438,000 and stockholders’ deficiency of $20,259,000. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ GUMBINER SAVETT INC.

Santa Monica, California
March 1, 2005

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ARTISTDIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)

See accompanying notes to consolidated financial statements.

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ARTISTDIRECT, INC. AND SUBSIDIARIES

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