Tapeworm's genesis occurred during Nine Inch Nails recording sessions following The Downward Spiral tours circa 1996. While working on Nine Inch Nails material, Danny Lohner and Charlie Clouser, both Nine Inch Nails live band members, would often come up with ideas that Reznor felt did not fit in with his vision for the band. Tapeworm developed as an outlet for this material—a democratic group in which Lohner and Clouser could act as equals with Reznor, as opposed to Nine Inch Nails, in which Reznor maintained sole artistic control.
As time went on, Tapeworm evolved into a supergroup, with guest musicians such as Maynard James Keenan, Page Hamilton, and Phil Anselmo recording material ostensibly to be used by the group. In 1999 Lohner reported that three tracks had been completed, and described the various materials featuring Anselmo as "heavy NIN-meets-Pantera" and "mellow Pink Floyd The Wall-type songs", and the material featuring Keenan as "psychedelic, groove-oriented verses and anthemic choruses."
Tommy Victor recorded material with the band as well, and later told Rolling Stone that the continued delays on Tapeworm contributed to his decision to take a hiatus from music, as well as accusing Reznor of giving his Tapeworm guitar contribution to Marilyn Manson.
In a statement issued to MTV News, Reznor reflected on his collaborations with Keenan:
It has been an interesting experiment for Maynard and I to peek around in each other's heads, shining flashlights in some shadowy corners ... We've realized we're each in somewhat similar places in our respective lives and outlook, so it's been great to collaborate on that level.
By 2001, long-time Nine Inch Nails collaborator Alan Moulder had tracked "more than an album's worth" of demos. Moulder further described the rough tracks as "very unlike The Fragile" and were a deviation from most Nine Inch Nails material. By 2002, Clouser had left Nine Inch Nails and was no longer associated with Tapeworm. The group, which now consisted of Reznor, Lohner, Keenan, and Atticus Ross, booked time in a recording studio in hopes of producing an album. An official website, tapeworm.net (now offline), was created to showcase pictures from various recording sessions, including images of Josh Freese behind a drum kit.
In September 2003, Lohner told Kerrang! magazine that the album was "ready to mix" but had been held up by legal issues stemming from conflicts between Reznor and Keenan's record labels. The Tapeworm material was reported numerous times as completion neared, most notably by MTV News and Kerrang!, and was slated to be released on Reznor's Nothing Records label. Initial recording sessions for the band were staged in the Nothing Studios in New Orleans, though were later reported as being moved to Southern Tracks Studios in Atlanta, Georgia.
In 2004, Reznor announced that Tapeworm was "dead for the foreseeable future", citing label issues, Keenan's A Perfect Circle obligations, and Reznor's own waning enthusiasm for the project. Reznor summarized the project's demise by saying "the bottom line is this: if the music had been great, all of this probably could have been worked out." During an interview with digg founder Kevin Rose in 2009, Reznor further commented that he thought the material was not as good as could have been given his and Keenan's respective backgrounds and it was unlikely that the material would ever surface, but went on to say that he would like for the two of them to work together again at some point in the future.