Overview:

The Company conducts its media business operations through an online music network appealing to music fans, artists and marketing partners. The ARTISTdirect Network is a network of websites offering multi-media content, music news and information, communities organized around shared music interests, music-related specialty commerce and digital music services.

The Company acquired MediaDefender, Inc., a privately-held Delaware corporation, ("MediaDefender") in July of 2005, which added media protection services to ArtistDirect's Internet operations. MediaDefender is the leading provider of anti-piracy solutions in the Internet-piracy-protection ("IPP") industry. Revenues related to anti-piracy activities declined in 2008 from 2007 and management anticipates a further decline in 2009. The industry wide reduction in technological anti-piracy services reflects a change by media conglomerates to explore alternative online distribution initiatives, including an ad supported free access to television programming and reduced costs or a subscription based model for digital music downloads. This decline in industry wide anti-piracy spending is also a reflection of general economic conditions, whereby media copyright holders attempt to maintain profitability through general costs cutting measures, which would include anti-piracy programs.

Recent Developments

Debt Restructing

Senior Debt Restructuring

Effective January 30, 2009, ARTISTdirect, Inc. (the "Company") entered into a First Amendment to Note and Warrant Purchase Agreement dated as of December 31, 2008 (the "Senior Amendment") with the holders of the Company's senior secured debt (the "Senior Note Holders"). Pursuant to the Senior Amendment, the Senior Note Holders agreed to extinguish all obligations by the Company under the Note and Warrant Purchase Agreement, dated July 28, 2005, and other documents entered into in connection with the senior secured debt transaction (the "Senior Debt Restructuring"), upon completion of the following: (1) $3,500,000 cash payment to the Senior Note Holders; (2) issuance of new subordinated notes, in the aggregate principal amount of $1,000,000, to the Senior Note Holders (the "New Notes"); (3) issuance of 9,000,000 restricted shares of the Company's common stock to the Senior Note Holders, which are subject to a lock-up period of 12 months; and (4) the conversion of all of the previously issued Subordinated Notes. The Senior Debt Restructuring was consummated as of January 30, 2009.

The New Notes are unsecured and bear interest at 6.0% per annum, beginning January 30, 2009. The principal and the interest accrued thereon are payable on the maturity date, January 30, 2014, and are subordinated to the senior indebtedness of the Company.

Additionally, in connection with the Senior Debt Restructuring, Trilogy Capital Partners, Inc. agreed to deliver to the Company for cancellation a warrant to purchase up to 433,333 shares of the Company's capital stock at an exercise price of $2.00 per share. Fifty percent of such warrants were beneficially owned by Dimitri Villard, the Company's Chief Executive Officer, who had acquired such warrants as part of the acquisition of 6,190,000 shares from Trilogy Capital Partners, Inc., which occurred on January 15, 2009.

Conversion of Subordinated Notes

In connection with the Senior Debt Restructuring, effective January 30, 2009, the Company entered into a Second Amendment to the Convertible Subordinated Note with holders of the Subordinated Notes representing no less than the majority of the current outstanding aggregate principal amount to provide for the immediate conversion of the Subordinated Notes (the "Subordinated Amendment"). The Subordinated Amendment also provides for the extinguishment of all obligations of the Company under the Subordinated Notes and related documents, including the Registration Rights Agreement among the Company and the holders. Such obligations included the outstanding principal amount and accrued and unpaid interest on the Subordinated Notes, accrued and unpaid late charges and amounts owed under the Registration Rights Agreement with the holders of the Subordinated Notes. Consummation of the transactions under the Subordinated Amendment occurred as of January 30, 2009.

Financing by Factoring Accounts Receivables

On January 30, 2009, the Company's two wholly-owned subsidiaries, ARTISTdirect Internet Group, Inc. ("ADIG") and MediaDefender each entered into an Accounts Receivable Purchase & Security Agreement (the "A/R Agreement") with Pacific Business Capital Corporation ("PBCC"), pursuant to which ADIG and MediaDefender agreed to sell and PBCC agreed to purchase qualified accounts receivable on a recourse basis. On January 30, 2009, PBCC purchased an aggregate of approximately $1,600,000 of unpaid receivables to be acquired by PBCC pursuant to the A/R Agreement, subject to a maximum aggregate amount of $3,000,000. The A/R Agreement is effective for twelve-months and automatically renews for successive 12-month periods unless terminated by written notice by either party 30 days prior to such successive period.

As collateral for the financing, PBCC received a first priority interest in all existing and future assets of the Company, ADIG and MediaDefender, tangible and intangible, including but not limited to, cash and cash equivalents, accounts receivable, inventories, other current assets, furniture, fixtures and equipment and intellectual property. In addition to the foregoing, the Company, ADIG and MediaDefender entered into cross guarantees of their respective obligations under the A/R Agreement.

Convertible short-term note to Director

On March 3, 2009, the Company issued a convertible note (the "Note") to Frederick W. Field, a director of the Company. The Note is in the principal amount of $200,000 with the principal amount and accrued interest at the rate of 5% per annum due on July 31, 2009. The Note is automatically convertible into shares of the Company's Common Stock at a price of $0.03 per share at such time as the Company has sufficient authorized shares.

The following table is a proforma presentation of the Consolidated Balance Sheet reflecting the above described Debt Restructuring as if it had occurred as of December 31, 2008.

                                                        December 31, 2008
                                                      Audited       Proforma
Assets:
Cash                                                $  2,262,000   $    12,000
Other current assets, net                              3,480,000     3,480,000
Property and equipment, net                            1,201,000     1,201,000
Other non-current assets, net                            546,000       153,000
                                                    $  7,489,000   $ 4,846,000

Liabilities and Stockholders' Equity (Deficiency)
Accounts payable and accrued expenses               $    921,000   $   971,000
Accrued interest and liquidated damages                8,890,000             -
New credit facility                                            -     1,250,000
Senior secured notes, net                             12,817,000             -
Subordinated convertible notes, net                   26,397,000             -
Other current liabilities                              1,228,000     1,183,000
                                                      50,253,000     3,404,000

New subordinated notes, net of discount                        -       270,000
Other long-term liabilities                              159,000       159,000
                                                         159,000       429,000

Net Stockholders' Equity (Deficiency), net           (42,923,000 )   1,013,000

                                                    $  7,489,000   $ 4,846,000

Management and Director Changes

Effective January 13, 2009, each of Randy Saaf and Octavio Herrera (each, an "Executive") entered into separate amendments (collectively, the "Amendments") to their respective Employment, Confidentiality and Noncompetition Agreements (collectively, the "Employment Agreements") dated as of July 28, 2005 with MediaDefender, Inc.. Under each of the Amendments, commencing January 1, 2009 the term of employment between each Executive and the MediaDefender were at-will, and either the MediaDefender or the Executive may terminate the applicable Employment Agreement upon five days' written notice, in which case such Executive shall have a period of 60 days from the effective date of termination to exercise all vested stock options. Effective February 15, 2009, MediaDefender, terminated the employment of Randy Saaf, Chief Executive Officer of MediaDefender, and Octavio Herrera, President of MediaDefender.

Effective February 1, 2009, Dimitri Villard, the Chairman of the Board of Directors, pursuant to a three year employment agreement, was appointed to serve as the Company's Chief Executive Officer. Prior to that date, Mr. Villard was the Company's interim Chief Executive Officer. Mr. Villard will receive base compensation equal to $25,000 per month subject to increases as determined by the Board of Directors, in its sole discretion. Mr. Villard was granted options to purchase 3,920,000 shares of the Company's stock at $0.03 per share vesting monthly over 36 months and will receive a bonus equal to 33% of the amount by which the Company's EBITDA exceeds a certain threshold amount as determined by the Company's Compensation Committee for such fiscal year.

Effective February 1, 2009, the Company and Rene Rousselet ("Executive") entered into an Employment Agreement pursuant to which Mr. Rousselet was employed to continue as the Company's Corporate Controller and Principal Accounting Officer. The employment is on an "at will basis." Mr. Rousselet will receive a salary of $14,583 per month subject to increases and a bonus as determined by the Board of Directors, in its sole discretion. Mr. Rousselet was granted options to purchase 560,000 shares of the Common Stock of the Company at $0.03 per share vesting monthly over 36 months commencing February 1, 2009. If Mr. Rousselet's employment is terminated without cause, Mr. Rousselet will receive his salary and vesting of options for an additional period of three months from the date of termination.

Acquisition of MediaSentry

The Company and its wholly owned subsidiary, MediaDefender entered into an Asset Purchase Agreement dated as of March 30, 2009 (the "Purchase Agreement") pursuant to which the Company through MediaDefender agreed to purchase from SafeNet, Inc. and MediaSentry, Inc. (collectively the "Sellers"), substantially all the assets of the MediaSentry operating unit (the "Acquired Assets"). In connection with the acquisition, MediaDefender acquired the receivables, equipment and intellectual property of MediaSentry as well as assumed substantially all the employees, offices and client contracts relating to MediaSentry. The purchase price of the Acquired Assets was $936,000 consisting of $136,000 in cash and a $800,000 one-year promissory note of the Company. The acquisition was consummated on March 30, 2009. The MediaSentry operating unit provides (a) comprehensive business and marketing intelligence services for digital media measurement and (b) services to globally detect, track and deter the unauthorized distribution of digital content.

Going Concern:

As a result of communications with the Staff of the Securities and Exchange Commission in 2006, in particular regarding the application of accounting rules and interpretations related to embedded derivatives associated with the Company's subordinated convertible notes payable issued in July 2005, the Company determined that it was necessary to restate previously issued financial statements. As a result, in December 2006, the Company was required to suspend the use of its then effective registration statement for the holders of its senior and subordinated indebtedness. In addition to this initial default, the Company has since entered into other events of default which continued to be in effect as of December 31, 2008.

As of December 31, 2008, approximately $12,994,000 principal amount was outstanding with respect to the Senior Financing, and approximately $27,658,000 principal amount was outstanding with respect to the Sub-Debt Financing. In addition, at December 31, 2008, approximately $2,415,000 was outstanding with respect to accrued registration delay liability to the holders of the Sub-Debt Financing and approximately $6,475,000 was outstanding with respect to accrued interest payable to the holders of the Senior Financing and the Sub-Debt Financing. The Senior Notes and the Subordinated Notes were due in June and July 2009, respectively.

As more fully described in recent developments, the Senior Financing and Sub-Debt Financing have been restructured. In accordance with the restructure, the Company paid $3,500,000 to the Senior Note Holders, issued new subordinated notes in the aggregate principal amount of $1,000,000 to the Senior Note Holders, issued 9,000,000 restricted shares of the Company's common stock to the Senior Note Holders, which are subject to a lock-up period of 12 months, and converted the Sub-Debt to equity. In order to obtain funds to accomplish the restructure, and to fund future operations, the Company obtained financing by factoring its accounts receivable.

As a result of the successful debt restructuring, the Company anticipates that it will have sufficient access to working capital from operations and the factoring of account receivable. However, because of the Companys' declining revenues, negative working capital, net loss, and uncertainties related to improving its operating results under current economic conditions, our independent auditors, in their report on the Companys' financial statements for the year ended December 31, 2008 expressed substantial doubt about the Companys' ability to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Accounting Policies:

The discussion and analysis of the Company's financial condition and results of operations is based upon its 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 the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to accounts receivable, tangible and intangible assets, warrant and derivative liabilities, income taxes, and contingencies and litigation, among others. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its consolidated financial statements:
revenue recognition, stock-based compensation, goodwill, intangible assets and long-lived assets, derivative instruments, income taxes and accounts receivable.

Revenue Recognition. The Company complies with the provisions of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", as amended by SAB No. 104, and recognizes revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is both fixed and determinable; and (iv) collectability is reasonably assured.

E-commerce revenue consists primarily of the gross amount of sales revenue paid by the customer for recorded music and merchandise sold via the Internet, including shipping fees, and is recognized when the products are shipped. The Company has a contract with a fulfillment house to service its music-related e-commerce activity. The Company records e-commerce revenue on a gross basis as the Company enters into the sale transactions with customers, establishes the prices of the products, chooses the suppliers of the products, assumes the risk of inventory loss and collects all amounts from the customers and assumes the credit risk. In certain circumstances, e-commerce revenue is subject to royalties, and such expense is recorded as part of cost of e-commerce revenue.

The Company records amounts charged to customers for shipping and handling in accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). Pursuant to EITF 00-10, the Company records amounts charged to customers for shipping and handling as revenue, and records the related costs incurred for shipping and handling to direct cost of product sales in the statement of operations.

Media revenue consists primarily of the sale of advertisements and sponsorships under short-term contracts. To date, the duration of the Company's advertising commitments has generally averaged from one to three months, although certain programs can last up to one year. The Company's online obligations typically include the guarantee of a minimum number of times ("impressions") that an advertisement appears in pages viewed by the users of the Company's online properties. Online advertising revenue is generally recognized as the impressions are served during the period in which the advertisement is displayed, provided that no significant obligations of the Company remain and collection of the resulting receivable is reasonably assured. To the extent that minimum guaranteed page deliveries are not met, recognition of the corresponding revenue is deferred until the guaranteed impressions are delivered.

The Company recognizes revenue for sponsorship arrangements over the period during which the advertising is provided, generally on a straight-line basis. The Company recognizes revenue for a banner impression deliverable as the banner impressions are delivered. The Company recognizes revenue for web-page sponsorships on a straight-line basis over the term of the sponsorship. The Company recognizes revenue for custom content when the content is provided to the customer.

Anti-piracy and file-sharing marketing services revenue is recognized on a monthly basis as services are provided to customers. Deferred revenue is recorded for customers who prepay the full, or any portion, of their respective contracts.

Stock-Based Compensation. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), a revision to SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 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, with the cost to be recognized as compensation expense in the Company's financial statements over the vesting period of the awards. Accordingly, the Company recognizes compensation cost for equity-based compensation for all new or modified grants issued after December 31, 2005. In addition, commencing January 1, 2006, the Company recognized the unvested portion of the grant date fair value of awards issued prior to adoption of SFAS No. 123R based on the fair values previously calculated for disclosure purposes over the remaining vesting period of the outstanding stock options and warrants.

The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services", and EITF 00-18, "Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees", whereas the value of the stock compensation is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instrument is complete.

Goodwill, Intangible Assets and Long-Lived Assets. Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), requires purchased intangible assets other than goodwill to be amortized over their useful lives unless these lives are determined to be indefinite.

SFAS No. 142 requires goodwill to be tested for impairment at least on an annual basis and more often under certain circumstances, and written down when impaired. An interim impairment test is required if an event occurs or conditions change that would more likely than not reduce the fair value of the reporting unit below the carrying value.

During the year ended December 31, 2008, the Company recorded a non-cash charge to operations aggregating $31,085,000 with respect to the impairment of the goodwill recognized in conjunction with the acquisition of MediaDefender in July 2005. This charge to operations was based on various factors and developments occurring in 2008, including continuing erosion in the demand for MediaDefender's core Internet anti-piracy services within the entertainment industry, the unexpected non-renewal by MediaDefender's largest customer in mid-2008, continuing deterioration of operating margins and valuation metrics, and the inability to implement new advertising initiatives on a large-scale basis.

Derivative Instruments. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), requires all derivatives to be recorded on the balance sheet at fair value. When multiple derivatives (both assets and liabilities) exist within a financial instrument, they are bundled together as a single hybrid compound instrument in accordance with SFAS No. 133 Implementation Issue No. B15, "Embedded Derivatives: Separate Accounting for Multiple Derivative Features Embedded in a Single Hybrid Instrument". The calculation of the fair value of derivatives utilizes highly subjective and theoretical assumptions that can materially affect fair values from period to period. The change in the fair value of the derivatives from period to period is recorded in other income (expense) in the statement of operations. As a result, the Company's financial statements are impacted quarterly based on factors such as the price of the Company's common stock and the principal amount of Sub-Debt Notes converted into common stock. Consequently, the Company's results of operations and financial position may vary from quarter to quarter based on factors other than those directly associated with the Company's operating revenues and expenses. The recognition of these derivative amounts does not have any impact on cash flows.

EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock ("EITF 00-19"), requires freestanding contracts that are settled in a company's own stock, including common stock warrants, to be designated as an equity instrument, an asset or a liability. When the ability to physically or net-share settle a conversion option or the exercise of freestanding options or warrants is deemed to be not within the control of the Company, the embedded conversion option or freestanding options or warrants may be required to be accounted for as a derivative liability. Under the provisions of EITF 00-19, a contract designated as an asset or a liability must be carried at fair value on a company's balance sheet, with any changes in fair value recorded in a company's results of operations.

The Company accounts for derivatives, including the embedded derivatives associated with the Sub-Debt Notes and the warrants issued in conjunction with the Senior Financing and the Sub-Debt Financing, at fair value, adjusted at the end of each reporting period to reflect any material changes, with any such changes included in other income (expense) in the statement of operations.

At the date of the conversion of Sub-Debt Notes into common stock or the principal repayment of Senior Notes, the pro rata portion of the related unamortized discount on debt and deferred financing costs is charged to operations and included in other income (expense). At the date of exercise of any of the warrants, or the conversion of Sub-Debt Notes into common stock, the pro rata portion of the fair value of the related warrant liability and/or embedded derivative liability is transferred to additional paid-in capital.

Income Taxes. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Accounts Receivable. The Company grants credit to its customers generally in the form of short-term trade accounts receivable. Accounts receivable are stated at the amount that management expects to collect from outstanding balances. When appropriate, management provides for probable uncollectible amounts through a provision for doubtful accounts and an adjustment to a valuation allowance. Management primarily determines the allowance based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer creditworthiness and current industry and economic trends. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. Concentrations of credit risk with respect to trade receivables generated by the Company's operations are generally limited. However, MediaDefender's customers consist primarily of large reputable companies in the music and entertainment industries.

Adoption of New Accounting Policies: . . .