FORM 10-KSB

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
(Mark One)

|X|  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

     For the fiscal year ended December 31, 1997

                                       OR

|_|  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ________ to ___________

     Commission file number: 001-13469

                              Audio Book Club, Inc.

             (Exact name of Registrant as specified in its charter)

           Florida                                               65-0429858
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)

         2295 Corporate Boulevard, Suite 222, Boca Raton, Florida  33431
              (Address of principal executive offices)           (Zip code)

                                 (561) 241-1426
               (Registrant's telephone number including area code)

           Securities registered pursuant to Section 12(b) of the Act:

Title of Securities:                        Exchanges on which Registered:

Common Stock                                American Stock Exchange

        Securities registered pursuant to section 12(g) of the Act: None

     Check  whether  the issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes _X_ No ___

     Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not  contained in this form,  and will not be  contained,  to the best of
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. |X|

     State issuer's revenues for its most recent fiscal year. $15,119,093

     Indicate  the  number of  shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date.


<PAGE>


As of March 27,  1998 there were  6,153,920  shares of the  registrant's  common
stock, no par value, outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE: NONE

Transitional Small Business Disclosure Format (check one):

Yes ___:   No _X_

                                    PAGE -2-


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                              Audio Book Club, Inc.

                                    Index To
                          Annual Report on Form 10-KSB
                        For Year Ended December 31, 1997

<TABLE>
<S>                                                                                                              <C>
PART I..........................................................................................................  4

Item 1.  Business...............................................................................................  4

Item 2.  Description of Properties.............................................................................. 13

Item 3.  Legal Proceedings...................................................................................... 14

Item 4.  Submission of Matters to a Vote of Security Holders.................................................... 14

PART II......................................................................................................... 14

Item 5.  Market for Common Equity and Related Stockholder Matters............................................... 14

Item 6.  Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................................................... 16

Item 7.  Financial Statements .................................................................................. 22

Item 8.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................................................ 22

PART III........................................................................................................ 23

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................................................... 23

Item 10.  Executive Compensation................................................................................ 26

Item 11.  Security Ownership of Certain Beneficial Owners and Management........................................ 30

Item 12.  Certain Relationships and Related Transactions........................................................ 31

Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 33

SIGNATURES...................................................................................................... 35
</TABLE>


                                    PAGE -3-


<PAGE>


                                     PART I

Item 1. Business

Introduction

     The Company is a direct  marketer of audiobooks  through Audio Book Club, a
membership club which markets and sells audiobooks by mail and via the Internet.
The Company commenced  operations in January 1994 and undertook its first direct
mail  campaign in August  1994.  As of March 19,  1998,  Audio Book Club's total
member file  consisted of 306,798  names.  As of December  31, 1997,  Audio Book
Club's total  member file  consisted  of 262,032  names  compared to 154,653 and
64,398 names as of December 31, 1996 and 1995, respectively. The Company's total
member file has  increased by  approximately  376% from January 1, 1996 to March
19, 1998. The total member file consists of all members acquired by the Company,
including  active and inactive  members.  Since its  inception,  the Company has
engaged in an  aggressive  membership  recruitment  program to  establish a core
Audio Book Club member base and to  continually  expand  such member  base.  The
Company has acquired Audio Book Club members  primarily  through direct mailings
of  member   solicitation   packages,   online  computer  service  and  Internet
advertising,  advertisements in magazines, newspapers and other publications and
package insert programs.

     In March 1995,  the Company  established  an Internet web site which offers
visitors to the web site the  opportunity to join Audio Book Club,  execute club
transactions  online (if a member),  utilize the site's  search engine to locate
any of the site's  audiobook  selections  and sample  audio clips of many of the
site's  selections.  The  Company  believes  that  it  offers  one of  the  most
comprehensive  libraries of audiobook titles, as members may order virtually any
of the 68,000 published titles in existence  through the Company's  Internet web
site or "special order" service.

Audiobook Industry Overview

     Audiobooks  are  literary  works or  other  printed  materials  read by the
author,  a reader or a  celebrity  actor or an ensemble of readers or actors and
recorded  primarily on audio cassette and, to a lesser extent,  on compact disc.
Most hardcover books printed today are released simultaneously as audiobooks and
audiobook  versions of other  popular  books are released  from time to time, in
either an author-approved abridged version or an unabridged version. An abridged
audiobook is a condensed version of the printed book,  typically recorded on two
to six audio cassettes and three to six hours in length. An unabridged audiobook
is a  word-for-word  version of the printed book,  typically  recorded on six to
twelve audio cassettes and six to twelve hours in length.  Audiobook  publishers
have  traditionally  focused  their efforts on  publishing  abridged  audiobooks
because  they can be offered  at lower  prices  than  unabridged  versions  and,
therefore,  can be more  competitive with printed books and other forms of audio
cassette entertainment, such as music cassettes.

     Audiobooks  were  first  introduced  in 1985  and,  according  to the Audio
Publishers   Association   (the  "APA"),   sales  of  audiobooks   increased  to
approximately  $1.5 billion in 1995 from  industry  estimates of $250 million in
1988.  In  addition,  according  to  the  APA,  sales  of  audiobooks  increased
approximately  11.6% during 1996,  compared to an increase in printed book sales
of 1% during 1996. Simba Information, Inc., a reporter


                                    PAGE -4-


<PAGE>


of book information statistics,  forecasts sales by book clubs (audio and print)
to grow more aggressively than any other consumer book segment.

     Audiobooks  are  available  in all  genre  categories  including,  fiction,
non-fiction, mystery, suspense, biography, fantasy and science fiction, romance,
spiritual,   religion,   humor,  children's,   business,   self-improvement  and
motivational.  An industry source estimates that there were approximately 68,000
audiobook  titles in existence as of January  1998, as compared to 11,500 titles
in 1985, with approximately 7,500 titles published in 1996.

     The  Company  believes  that  consumers  of  audiobooks  include  those who
purchase  printed books,  as well as those who do not have time to read, as they
can be listened to while engaging in other activities,  such as driving, walking
or exercising,  and can be used by consumers who have  difficulty  reading.  The
Company also believes that  audiobooks  offer  exceptional  entertainment  value
because  they can be enjoyed  while  relaxing  at home in the same manner that a
person would watch television or listen to the radio.

     When  audiobooks  were  first   introduced,   they  were  available  almost
exclusively  in  libraries.   Currently,  bookstores  account  for  the  largest
percentage of retail audiobook sales, selling approximately 47% of audiobooks in
1995 according to the APA. Bookstores,  however,  typically devote limited shelf
space to audiobooks.  A survey conducted by Publishers  Weekly in 1994 indicates
that bookstores devote only an average of 71 square feet to audiobooks.  Because
of shelf  space  limitations,  bookstores  carry  only a  limited  number of the
approximately 68,000 published audiobook titles.

     Over the last  several  years,  audiobook  stores,  which rent or sell only
audiobooks, have opened. Audiobooks are also offered on a limited basis in other
retail  establishments  such as  convenience  stores,  video  rental  stores and
wholesale clubs (e.g.  Costco), as well as by several mail order companies which
offer audiobooks for rental and sale through their catalogs. Audiobooks are also
currently  offered through the limited number of audiobook member clubs, such as
Audio Book Club.

     The Company  believes that it is positioned to capitalize on  opportunities
in the  emerging  and  expanding  markets  for  audiobooks  because of its early
entrance  into,  and  knowledge  of, the audiobook  club  industry,  established
membership base and Internet web site,  knowledge of and experience in utilizing
mailing lists to target direct mail campaigns,  selection of available audiobook
titles,  established  relationships with major audiobook publishers and emphasis
on providing friendly, efficient customer service.

Strategy

     The Company's  strategy is to establish  Audio Book Club as the largest and
most  convenient  supplier  of  audiobooks  by mail  and via the  Internet.  Key
elements of the Company's strategy include:

     o    Expand Member Base.  The Company  believes  that it has  established a
          core Audio Book Club  member  base  which it  intends to  continue  to
          expand. The Company  anticipates that its advertising  activities will
          continue   to  consist   primarily   of  direct   mailings  of  member
          solicitation packages to prospective members whose names were obtained
          from  third-party  mailing lists. In addition,  the Company intends to
          increase its direct mail and Internet web site

                                    PAGE -5-


<PAGE>


          and online computer service marketing and advertising activities.  The
          Company also  intends to continue to test other forms of  advertising,
          including various magazine, newspaper and other print media, radio and
          package insert programs.

     o    Optimize Member Acquisition Marketing Activities.  The Company intends
          to continue to analyze its  database of results  obtained  from direct
          mail campaigns  (including the results obtained from each mailing list
          utilized)  and from print and other  advertising,  as well as Internet
          marketing.  The Company maintains a database of information  regarding
          each advertising  campaign,  including each  third-party  mailing list
          that was utilized in the campaign,  the quantity of names to which the
          promotional  mailings were sent,  the response rate and the per member
          acquisition  cost. The Company  believes that its emphasis on database
          management  improves  its ability to  efficiently  target  advertising
          campaigns,  thereby obtaining  increased  response rates and lower per
          member acquisition costs.

     o    Maximize  Per Member  Revenues.  The  Company  intends to  continue to
          analyze the results of its  advertising  activities and the purchasing
          habits  of its  members  to  maximize  sales  to  members  and  extend
          membership   life  cycles.   The  Company   maintains  a  database  of
          information  on each name in its  member  file,  including  number and
          genre of titles ordered,  payment  history,  the advertising  campaign
          from  which the  member  joined and a  lifetime  value  analysis.  The
          Company believes that such analyses and evaluations enable the Company
          to  efficiently  target  advertising  to  potential  members  who have
          characteristics  of persons  likely to join Audio Book Club,  purchase
          sufficient  quantities of audiobooks to be a profitable source for the
          Company and become long-term club members. The Company also intends to
          utilize such  information  to target and  establish  "niche"  clubs to
          capitalize on consumer  demand for  audiobooks in specific  genres and
          audiobooks by specific authors.

     o    Cost Containment.  The Company  continuously seeks to reduce its costs
          of  doing  business,   including  the  costs  associated  with  member
          acquisition,  catalog mailings and products. The Company believes that
          as it expands its membership base it will achieve increased  economies
          of scale in connection  with member  recruitment  advertising,  member
          mailings and order processing and product fulfillment,  and be able to
          order products and services in larger  quantities and,  therefore,  be
          able  to  negotiate   more   favorable   licensing,   purchasing   and
          manufacturing arrangements.

     o    International  Expansion.  The Company's long-term  objectives include
          expanding  Audio  Book  Club  internationally  into   English-speaking
          countries such as Canada and the United Kingdom, as well as into other
          countries with large English-speaking populations.

     Consistent  with its business plan, the Company may also seek to expand its
operations by acquiring  companies in businesses which the Company believes will
complement or enhance its business.  Any decision to make an acquisition will be
based upon a variety of factors,  including  the  purchase  price and  financial
terms of the  transaction,  the business  prospects and competitive  position of
services  provided and products  offered by the  acquisition  candidate  and the
extent to which any such acquisition would enhance the Company's prospects.

                                    PAGE -6-


<PAGE>


     The  Company's  strategy  is  subject  to change as a result of a number of
factors,  including  progress  or delays  in the  Company's  expansion  efforts,
success of the Company's member  recruitment  advertising,  results of continual
test marketing,  consumer  acceptance of new products,  the Company's ability to
identify suitable  acquisition  candidates and integrate any acquired businesses
into its operations and changes in market conditions, consumer buying habits and
consumer preferences. There can be no assurance that the Company will be able to
successfully implement its business strategy or otherwise expand its operations.

Audiobook Supply

     The Company has established  relationships  with  substantially  all of the
major  audiobook  publishers,  including  Random House Audio  Publishing,  Inc.,
Bantam Doubleday Dell Audio  Publishing,  Simon & Schuster Audio,  Harper Audio,
Time Warner Audio Books and Audio  Renaissance  Tapes. The Company has primarily
entered  into  non-exclusive   agreements  with  selected  audiobook  publishers
pursuant to which the publisher grants to the Company a license to duplicate the
recordings  and the  packaging  materials  relating  to each  audiobook  in such
publisher's  audiobook library,  including  audiobooks as to which the publisher
acquires  rights during the term of the agreement.  The Company also enters into
agreements  pursuant to which it receives  licenses to duplicate the  recordings
and packaging  materials relating to selected  audiobooks.  The Company believes
that its ability to enter into license  agreements with publishers enables it to
reduce the costs associated with obtaining its supply of audiobooks.

     Typically,  the  Company  pays to the  publisher a royalty for each copy it
sells  and  an  advance  on  its  royalty   obligations   in  exchange  for  the
non-exclusive  license. Such licensing agreements generally have one or two-year
terms,  permit the Company to sell audiobooks in the Company's  inventory at the
expiration of the term during a "sell-off"  period and prohibit the Company from
selling an audiobook prior to its release date.  Most of the license  agreements
permit  the  Company  to  arrange  for  the  packaging,  printing  and  cassette
duplication  of  audiobooks,  as  opposed  to the  publisher  arranging  for the
duplication.  The Company, to the extent it is able to do so on favorable terms,
enters into arrangements with the publisher's recording duplicator and packaging
supplier.

     In addition to entering  into  license  agreements,  the Company  purchases
certain audiobooks from publishers' inventories at a substantial discount to the
suggested  retail price.  The Company from time to time also  purchases  certain
previously   released  audiobooks  as  remainder  sales  from  publishers  at  a
substantial discount to wholesale prices, often below manufacturing cost.

                                    PAGE -7-


<PAGE>


Member Acquisition

     Since its  inception,  the Company has engaged in an aggressive  membership
recruitment  program  to  establish  a core  Audio  Book  Club  member  base and
continually  expand such member base.  The Company has acquired  Audio Book Club
members  primarily  through  direct  mailings of member  solicitation  packages,
online computer service and Internet  advertising,  advertisements in magazines,
newspapers  and other  publications  and package  insert  programs.  The Company
continually  analyzes the results of its  marketing  activities  in an effort to
maximize  sales,  extend  membership  life cycles,  and  efficiently  target its
marketing  efforts to increase response rates to its  advertisements  and reduce
its per member acquisition costs.

     Direct Mail

     The Company regularly engages in direct mail campaigns  designed to attract
potential  Audio Book Club  members.  The  Company  obtains  lists of names from
various  list  brokers  based  on  criteria  which  the  Company  believes  have
characteristics of persons likely to join Audio Book Club,  purchase  sufficient
quantities of  audiobooks  to be a profitable  source for the Company and become
long-term  members.  The Company  mails  member  solicitation  packages to those
persons it has  identified  for a specific  direct  mail  campaign.  Each member
solicitation  package contains a letter from Audio Book Club's editor explaining
the Audio Book Club concept and identifying the advantages of becoming a member,
an  easy-to-use  enrollment  form for the  prospective  member  to  complete,  a
brochure of audiobook titles and a self-addressed,  postage paid reply envelope.
The Company  believes that it has identified  numerous lists that have performed
well in the past and, as a result, expects that future response rates and member
acquisition costs should improve.

     Internet Web Site and Online Computer Service Advertising

     In March 1995,  the Company  established  an Internet web site which offers
visitors to the web site the  opportunity to join Audio Book Club,  execute club
transactions  online (if a member),  utilize  the web  site's  search  engine to
locate many of the web site's thousands of audiobook selections and sample audio
clips of any of the web site's selections.  The Company's web site also provides
additional  options,  such as alerting visitors when a new title of an author or
reader  previously  specified by the visitor is released and offering reviews of
selected titles.

     The Company's web site is updated  simultaneously  with the Audio Book Club
catalog to add new selections and the new current featured selection, as well as
to add new book cover  images and audio  clips to preview.  In March  1998,  the
Company  signed  an  agreement  to  utilize  on its web  site  Net  Perceptions'
GroupLens(TM) Recommendation Engine, an advanced tool designed to deliver highly
personalized  content.  The  integration  of this engine is intended to create a
personalized  audiobook buying  experience  customized for each individual user.
Once  users  have  logged  onto the  Company's  web site,  they will be  offered
audiobook selections which correspond to their previous buying patterns.

     The Company's web site currently has links from numerous search engines and
audiobook  related sites.  The web site is also linked to catalog  listing sites
offered by online computer and Internet services.

                                    PAGE -8-


<PAGE>


     Prior to June 1997,  the Company did not  actively  market its web site and
has only recently  conducted limited test marketing of its web site. The Company
has since  entered  into the  following  agreements  to  increase  its  Internet
presence:

(1)  An agreement with America Online, Inc., the world's leading online service.
     Under the agreement, in addition to impressions generated through a channel
     carriage,  the Company will receive impressions  throughout the AOL Service
     in  areas  such as Chat  and  E-mail,  as well  as such  areas  as  Instant
     Messenger, Timesavers and Net Find search terms on AOL.com. Audio Book Club
     will also be promoted  in both the "Auto & Travel"  and  "Books,  Music and
     Video"  departments  of both  the AOL  Service  and  the  AOL.com  Shopping
     Channels.

(2)  An agreement  with Excite,  Inc.,  (http//www.excite.com)  to promote Audio
     Book Club through Excite.com.  Under the agreement, Audio Book Club will be
     the exclusive  audiobook clubs  available to consumers  visiting the Excite
     site until at least August 31, 1999.

(3)  An agreement with AudioNet,  Inc. making the Company the exclusive retailer
     of  audiobooks  on AudioNet's  Web site  (http://www.audionet.com)  through
     December 31, 1999.

(4)  An agreement with go2net, Inc. making the Company the exclusive retailer of
     books   and    audiobooks   on   go2net's    MetaCrawler    search   engine
     (http://www.metacrawler.com)    and    StockSite    financial    Web   site
     (http://www.stocksite.com) through February 15, 1999.

(5)  A strategic alliance with CitySearch.com (http://www.CitySearch.com) making
     the  Company  the  exclusive  retailer,   through  December  31,  1998,  of
     audiobooks on  CitySearch.com  which includes the exclusive  sponsorship of
     the Books Area within the Arts & Entertainment area of every CitySearch.com
     domestic market (currently nine markets.)

(6)  An  agreement  with  GeoSystems  Global  Corp.,  the leader in  interactive
     mapping.  As part of the  agreement,  the Company  will receive a permanent
     link,   through   February   14,   1999  on  the   MapQuest(R)   Web   site
     (http://www.mapquest.com)  toolbar, an optional  jump/bridge page featuring
     "Road Trip Picks of the Week" and a  permanent  space in  TripQuest,  where
     MapQuest users access custom driving directions.

     In addition to the foregoing, the Company continues to explore arrangements
with additional Internet companies.

     The Company  continues to work to expand and improve its web site including
increasing the number of audiobook titles to select,  and audio clips to preview
through its search engine,  improving  recommendation  features and streamlining
the join process.

                                    PAGE -9-


<PAGE>


     Print Advertising

     The Company has from time to time placed  print  advertisements  in various
magazines  and other forms of print  media,  including  Forbes,  The New Yorker,
People,  Redbook and The  Saturday  Evening  Post.  Such  advertisements  either
contain a mail-in  enrollment  form with a listing of 25 to 50 audiobook  titles
from which to order or invite  the reader to call the  Company to join the club.
The Company also  advertises in catalogs which feature  advertisements  for mail
order catalogs.  The Company does not pay for the placement of an  advertisement
in these  catalogs,  but pays a fee based on the number of  inquiries  each such
catalog receives for the Audio Book Club catalog.

     The Company intends to continue to test various print media and analyze and
evaluate  the results of such  advertising  to  determine  the print media which
helps expand its membership base while reducing per member acquisition costs.

     Other Advertising Activities

     The Company  has in the past and will  continue in the future to test other
forms of advertising,  including radio,  television and package insert programs.
Package  insert  advertising  enables the Company to include  advertisements  or
inserts in  mailings  or product  shipments  made by a third  party to the third
party's customers to entice them to join Audio Book Club.

Audio Book Club

     Members

     As of March 19,  1998,  Audio Book Club's  total  member file  consisted of
306,798  names.  As of December  31,  1997,  Audio Book Club's total member file
consisted  of 262,032  names.  The total  member  file  consists  of all members
acquired by the Company,  including  currently active and inactive members.  The
Company seeks to attract a financially  sound and responsible  membership  base.
Accordingly,  the Company targets its direct mail and other advertising  efforts
to these types of persons.  Results of the Company's  membership survey indicate
that Audio Book Club members are typically time-constrained  individuals who are
unable  to read as much as they  would  like and are  concentrated  in the 30 to
65-year old age group.

     Audio  Book  Club  members  can  enroll  in the  club  through  the mail by
responding  to direct mail or print  media  advertisements,  online  through the
Company's  web site or by  calling  or  faxing  the  Company.  Audio  Book  Club
typically offers new members four audiobooks at a low  introductory  price ($.99
or less).  By  enrolling,  the member  commits to  purchase a minimum  number of
additional  audiobooks  (typically  two or four) at Audio  Book  Club's  regular
prices  which  generally  range from $10.00 to $35.00 per  audiobook,  which the
Company believes is comparable to and competitive with audiobook retailers.

     Audio Book Club encourages its members to purchase audiobooks,  in addition
to satisfying their minimum purchase commitment, by offering all members special
discount  pricing and other  incentives  based on the volume of their purchases.
Upon  enrollment,  the  Company  sends  to the new  member a  "welcome  package"
consisting of a membership guide with information concerning ordering,  payment,
returns, cancellation, discounts and the club's bonus point and advantage member
programs;  a  questionnaire;  a welcome  letter  from the club  director;  and a
"Member-Get-a-Member"  form which enables the member to receive free  audiobooks
for soliciting another person to join Audio Book Club.

                                    PAGE -10-


<PAGE>


     The  Company  engages in list  rental  programs  to  maximize  the  revenue
generation  potential of its  membership  list. As Audio Book Club's  membership
base grows, the Company anticipates that its list will become more attractive to
direct marketers as a source of potential customers.

     Member Mailings

     Audio Book Club members receive approximately 17 member mailings each year,
one mailing  approximately every three weeks. Audio Book Club mailings typically
include a 32-page catalog which,  together with the "more titles" insert, offers
approximately 500 titles,  including a "featured selection" which is usually one
of the most popular titles at the time of mailing;  "alternate selections" which
are best selling and other current  popular  titles;  and "backlist  selections"
which are  long-standing  titles that have  continuously  sold well. Each member
mailing also includes a negative  option reply form and a  "Member-Get-a-Member"
form. The Company has recently acquired  computer  graphics  equipment and hired
two computer  graphic  designers to design the creative  aspects of the catalogs
and related  materials  included in the member mailings.  The Company  contracts
with print shops to print the catalogs and related materials.

     Under the negative  option reply system,  the member  receives the featured
selection  unless he or she replies by the date  specified  on the reply card by
returning  the reply card,  calling the Company with a reply,  faxing a reply to
the  Company or  replying  online  via the  Company's  Internet  web site with a
decision not to receive such selection. Members can also use any of such methods
to order additional selections from each catalog.

     The Company's  Editorial  Director selects which titles to feature,  add to
and remove from each catalog after  consideration  of, among other  factors,  an
evaluation of the author,  audiobook content and production quality; the reader;
sales of the  author's  previous  audiobooks  and printed  books;  the  author's
reputation;  the audiobook's relation to a movie,  television show or other book
or audiobook;  as well as independent  publication reviews. The Company offers a
balance between unabridged and abridged  audiobooks  cassettes and compact discs
to satisfy differing member preferences. In addition, the Company emphasizes the
timely introduction of new audiobook titles to its catalogs.

     The Company also offers a "special  order" service which enables members to
call the Company and order virtually any of the  approximately  68,000 published
titles in existence, whether or not listed in the Company's member mailings.

     The Company intends to continue to test market complimentary products, such
as CD-Roms, videos, audio related products,  printed books, audio and electronic
equipment,  storage racks and cases and audio music  cassettes and compact discs
to  determine  which  products,  if any,  to add to its product  offerings.  The
Company  from time to time  offers  certain of such  products to Audio Book Club
members by including a promotional insert with its member mailings.

     The Company also includes inserts for products or services of non-competing
companies in product  shipments to  customers  and member  mailings for which it
receives a fee based on the number of shipments and mailings in which the insert
is included. In addition, the Company is evaluating  opportunities to enter into
joint venture arrangements


                                    PAGE -11-


<PAGE>


with  non-competing  companies to offer their products or services to Audio Book
Club members.

     Customer Service

     In order to encourage  members to maintain  their  relationship  with Audio
Book Club and to maximize the long-term value of a member,  the Company seeks to
provide  friendly,  efficient,  personalized  service.  The Company's goal is to
remove potential  barriers to making a purchase and to make members  comfortable
shopping via mail order and on the Internet.  Audio Book Club's  negative option
system  makes it easy for  members to receive  the  featured  selection  without
having to take any action.

     The Company  offers fast ordering  options,  including  (i) placing  orders
online through the Company's web site, (ii) calling the Company with an order on
its toll-free order hotline and (iii) faxing an order to the Company. Orders are
sent fourth class mail and are typically  delivered 10 to 14 days  following the
receipt by the  Company.  For an  additional  fee,  members can  receive  faster
delivery of an order either by priority delivery, which takes 3 to 5 days, or by
overnight delivery.

     Members are billed for their purchases at the time their orders are shipped
and are required to make payment promptly.  The Company generally allows members
in good  standing to order up to $50 of product on credit,  which  amount may be
increased if the member maintains a good credit history with the Company.

     The  Company's  policy is to accept  returns of damaged  products  and,  to
maintain  favorable customer  relations,  the Company generally accepts promptly
made returns of unopened products. The Company monitors each member's account to
determine if the member has made excessive  returns.  The Company's policy is to
either terminate a membership or change member status to positive option, if the
member makes three to five consecutive  returns of either audiobooks  ordered or
of featured selections received because the member did not return the reply card
on time.

Fulfillment, Warehousing and Distribution

     In October  1996,  the Company  entered  into an  agreement  with  National
Fulfillment Services ("NFS") pursuant to which NFS provides to the Company order
processing and data processing services.  Such services include accepting member
orders,  implementation  of the Company's credit policies,  inventory  tracking,
billing,  invoicing and generating  periodic  reports,  such as reports of sales
activity,   accounts   receivable,   aging   customer   profile  and   marketing
effectiveness.  The  Company's  agreement  with NFS expires on October 31, 1998,
unless earlier terminated by either party upon not less than 60 days notice.

     In November 1996, the Company entered into an agreement with R.R.  Donnelly
& Sons Company  ("Donnelly")  pursuant to which Donnelly provides to the Company
warehousing  and  distribution  services.  The  initial  term  of the  Company's
agreement with Donnelly  expires on October 31, 1998 and the agreement  provides
for automatic three-year  renewals,  provided that the Company may terminate the
agreement  upon notice  ranging from 60 days to six months  (depending  upon the
amount of  termination  payment) and Donnelly may terminate  the agreement  upon
notice of not less than six months.

     Customer  orders are sent  directly  to NFS where they are  processed,  and
invoices are  generated by NFS and sent directly to Donnelly.  Donnelly  locates
the ordered

                                    PAGE -12-


<PAGE>


audiobooks  from  inventory,  packs and ships the order,  using the invoice as a
packing list, to the Audio Book Club member.

Competition

     The audiobook and mail order club industries are intensely  competitive and
highly  fragmented.  The Company  competes  with  existing  audiobook  clubs for
prospective members. The Company is currently aware of two other negative option
audiobook clubs.

     The Company also competes with all other outlets  through which  audiobooks
are offered,  including  bookstores,  audiobook  stores(which  rent or sell only
audiobooks),  retail  establishments  such as convenience  stores,  video rental
stores and wholesale clubs (e.g.  Costco),  and mail order companies which offer
audiobooks for rental and sale through catalogs.  In addition,  the Company also
competes  with mail order clubs and  catalogs and other  direct  marketers  that
offer products with similar  entertainment  value as  audiobooks,  such as music
cassettes  and  compact  discs,  printed  books and  videos,  for  discretionary
consumer spending.

Intellectual Property

     The Company  holds two United  States  service mark  registrations  and has
applied for several  additional  service  marks  relating to slogans and designs
used in its advertisements, member mailings and member solicitation packages and
service  marks  relating  to an animated  character  used on the  Internet.  The
Company believes that its service marks have significant value and are important
to the marketing of Audio Book Club.

     The Company relies on trade secrets and proprietary  know-how,  and employs
various  methods,  to protect its ideas,  concepts and membership  database.  In
addition,  the Company  typically  obtains  confidentiality  agreements with its
executives officers,  employees,  list managers and appropriate  consultants and
service suppliers.

Employees

     As of March 27, 1998, the Company had 14 full-time employees,  of whom five
were in management and nine were in operational positions.  The Company believes
its employee relations to be good. None of the Company's employees is covered by
a collective bargaining agreement.

Item 2. Properties

     The Company  shares  office  space in Boca Raton,  Florida with The Herrick
Company, Inc., a company wholly-owned by Norton Herrick,  Chairman of the Board,
Chief Executive Officer and beneficially a principal shareholder of the Company,
pursuant to separate leases.  The Company leases 1,155 square feet of such space
pursuant to a lease agreement which expires in November 2000. The Company's rent
was $1,167 per month,  and  increased to $1,307 per month in December  1997.  On
July 1, 1997, the Company  entered into a new lease for additional  office space
in Florida. The Herrick Company, Inc. guaranteed the Company's obligations under
the  Company's  leases for its  Florida  office.  The Company has the option to
renew the lease for three-year periods on two occasions.

     The Company also subleases  1,550 square feet of space in  Morristown,  New
Jersey at an annual rent of $24,000 pursuant to a sublease agreement dated as of
January 1, 1995 between the Company and H. H. Realty Investors,  Inc., a company
wholly-owned by Michael Herrick,  Chief Operating Officer,  Vice Chairman of the
Board and a director of the Company,  Howard  Herrick,  Executive Vice President
and a director of the Company,  and Evan  Herrick,  a son of Norton  Herrick and
brother of Michael and Howard Herrick. In January, 1998, the Company amended the
sublease agreement to

                                    PAGE -13-


<PAGE>


provide for additional space at its New Jersey location for a total of 2,328
usable square feet. Minimum monthly rent under the amended lease is $2,900 per
month through December, 1998. The sublease relating to the New Jersey property
expires in December 1998, and may be extended if the master lease is extended.
H.H. Realty Investors, Inc. leases such property from an independent third
party. The Company believes that its leases are on commercially reasonable
terms.

Item 3. Legal Proceedings

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     No matters  were  submitted  during the fourth  quarter of the fiscal  year
covered by this report to a vote of security holders.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

     The Company's  Common Stock has been listed on The American  Stock Exchange
("AMEX") under the symbol "KLB" since October 27, 1997.

     The high and low sale prices  during the period  from  October 27, 1997 and
December 31, 1997 were $11.125 and $4.00, respectively.

     As of February 27, 1998,  there were 63 holders of record of the  Company's
Common  Stock.  In  addition,  the Company  believes  there are in excess of 300
beneficial owners of its Common Stock whose shares are held in "street name."

Dividend Policy

     The Company has never paid any dividends on its Common Stock, and the Board
of Directors  of the Company does not intend to declare or pay any  dividends on
its Common Stock in the  foreseeable  future.  The Board of Directors  currently
intends to retain all  available  earnings (if any)  generated by the  Company's
operations for the  development  and growth of its business.  The declaration in
the future of any cash or stock  dividends  on the  Common  Stock will be at the
discretion  of the Board of Directors and will depend upon a variety of factors,
including earnings,  capital  requirements and financial position of the Company
and general economic conditions at the time in question.  Moreover,  the payment
of cash dividends on the Common Stock in the future could be further  limited or
prohibited by the terms of financing  agreements that may be entered into by the
Company (e.g., a bank line of credit or an agreement relating to the issuance of
other debt  securities  of the Company) or by the terms of any  Preferred  Stock
that may be issued and then outstanding.

Sales of Securities and Use of Proceeds.

     In  September  1997,  the Company  amended  and  restated  its  Articles of
Incorporation  to provide  for,  among other items,  the increase in  authorized
shares of stock from 10,000 to 30,000,000, of which 25,000,000 are designated as
Common  Stock,  with no par value,  and  5,000,000  are  designated as Preferred
Stock,  with no par value.  Moreover,  in September 1997, the Company declared a
16,282 for 1 Common

                                    PAGE -14-


<PAGE>


Stock split which was effected in October 1997. The shares issued as a result of
the split were  issued  pursuant to an  exemption  from  registration  under the
Securities Act of 1933 (the "Act") by virtue of Section 2(3) of the Act.

     Immediately  prior to the  consummation  of the  Company's  initial  public
offering, the Company's Chairman,  Chief Executive Officer and founder converted
$5,975,200  of  indebtedness  owed to him under a loan  agreement  into  597,520
shares of common stock at a price per share equal to the initial  offering price
of the Common Stock.  The shares issued upon the conversion of the  indebtedness
were issued pursuant to an exemption under Section 4(2) of the Act.

     On October 27,  1997,  the Company  closed its initial  public  offering of
2,300,000  shares of Common Stock,  no par value, at a price of $10.00 per share
of Common Stock. These shares had been registered on the Company's  Registration
Statement on Form SB-2 (no. 333-30665). The gross proceeds of the offering prior
to any expenses, discounts and commissions were $23,000,000. The net proceeds to
the Company were $19,765,663.

     In connection  with the initial  public  offering,  the  underwriters  were
granted an  over-allotment  option for an  additional  345,000  shares of Common
Stock.  The  underwriters  partially  exercised their  over-allotment  option by
purchasing  110,000  shares from a minority  shareholder  (with holdings of less
than 5% of the Company's  common  stock.) In connection  with the initial public
offering,  the  Company  also  granted  to the  principal  underwriter  and  its
designees,  for nominal consideration,  warrants to purchase from the Company up
to 230,000 shares of Common Stock at a price of $16.50 per share for a period of
five years expiring, October 22, 2002.

     At  closing,  the  Company  used a portion of the  proceeds  of its initial
public  offering to repay in full the entire  outstanding  principal  balance of
$9,000,000  plus  accrued  interest  thereon of $56,167 the Company had borrowed
from a bank.  Since the date of the  closing  through  December  31,  1997,  the
Company  used  approximately  $1,900,000  of the  remaining  net proceeds of the
offering  for  membership  recruitment  advertising.  The Company  has  invested
$5,000,000 in a bank certificate of deposit bearing interest at 5.5% maturing on
May 2, 1998.  The  remaining  funds are being used to  implement  the  Company's
business plan and fund working  capital  requirements.  The Company  anticipates
using the net proceeds to fund additional  membership  recruitment  advertising,
Internet web site marketing and  development and for working capital and general
corporate purposes.

                                    PAGE -15-


<PAGE>


Item 6.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

     Overview

     Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995:  Certain  statements  contained in this Item 6 and  elsewhere in this Form
10-KSB constitute "forward looking statements" within the meaning of the Private
Securities  Litigation  Reform  Act of  1995.  Such  forward-looking  statements
involve a number of known and unknown  risks,  uncertainties  and other  factors
which may cause the actual  results,  performance or achievements of the Company
to be materially different from any future results,  performance or achievements
expressed  or implied by such  statements.  Such  factors  include,  but are not
limited  to,  the  Company's  limited  operating  history,  history  of  losses,
significant capital requirements,  ability to successfully  implement a strategy
of  continued  growth,   dependence  on  third-party  providers  and  suppliers,
competition and other risks described n the Company's  Registration Statement on
Form SB-2. The words "believe", "expect", "anticipate", "intend", and "plan" and
similar expressions identify forward-looking  statements.  Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of the date hereof.

     On October 27, 1997, the Company consummated its initial public offering of
Common Stock,  which, after deducting offering expenses of $3,234,337,  resulted
in net proceeds of $19,765,663.  The Company  immediately  used a portion of the
proceeds  to  repay  loans  from a bank in the  aggregate  principal  amount  of
$9,000,000 plus accrued interest thereon of $56,167.

     Immediately  prior  to the  consummation  of the  offering,  the  Company's
Chairman,   Chief  Executive  Officer  and  founder   converted   $5,975,200  of
indebtedness  owed to him under a loan  agreement  into 597,520 shares of common
stock at a price per share  equal to the  initial  offering  price of the Common
Stock.

     The Company is a direct  marketer of audiobooks  through Audio Book Club, a
membership  club which  markets and sells  audiobooks  by mail order and via the
Internet.  Since its  inception in January  1994,  the Company has engaged in an
aggressive  membership  recruitment  program to establish a core Audio Book Club
member base and continually  expand such member base. The Company's Internet web
site (www.audiobookclub.com)  offers visitors to the web site the opportunity to
join Audio Book Club, execute club transactions  on-line (if a member),  utilize
the site's search engine to locate any of the site's  audiobook  selections  and
sample audio clips of many of the site's selections.

     As of December  31, 1997,  the  Company's  total  member file  consisted of
262,032 names,  compared to 154,653 names as of December 31, 1996. The Company's
total member file has  increased by  approximately  307% from January 1, 1996 to
December 31, 1997. The total member file consists of all members acquired by the
Company, including active and inactive members.

     The Company  recognizes  sales  revenues  (gross  sales)  upon  shipment of
products, at which time customers are billed for the products ordered.  Revenues
consist primarily

                                    PAGE -16-


<PAGE>


of catalog  sales of  audiobooks  to members at regular club price plus shipping
and handling less applicable  discounts,  and to a lesser extent,  revenues from
new  member  enrollments.  New  member  enrollment  revenues  represent  the low
introductory  price (typically two to four audiobooks for $.99 or less) at which
the Company offers the introductory  audiobooks as an enticement for new members
to join Audio Book Club plus shipping and handling.

     Accounts  receivable  are recorded net of allowances  for sales returns and
doubtful  accounts.  The Company records returns,  discounts and allowances each
period in an amount  equal to actual  returns plus an  estimated  allowance  for
additional  returns  for sales made  during  such  period.  The  allowances  for
doubtful accounts and future sales returns are based upon historical  experience
and an evaluation of current trends. The Company's  allowances for sales returns
and doubtful accounts were $1,281,849 and $167,596, respectively, as of December
31, 1997.

     Cost  of  sales  includes  the  cost of  audiobooks  and  product  royalty,
shipping,  mailing and fulfillment  costs. The cost of sales of the introductory
audiobooks exceeds new member enrollment  revenues from such introductory offer.
The  Company's  gross profit margin has increased as catalog sales of audiobooks
to members account for a greater percentage of sales. The Company's gross profit
percentage has also increased due to new fulfillment arrangements at lower costs
and increased licensing of products which reduces overall production costs.

     The Company  expects to incur  significant  expenditures in connection with
its expansion  strategy  (including costs associated with new member recruitment
advertising,  member  retention  programs and expansion and  maintenance  of its
Internet web site) which will result in losses until such time as the Company is
able to further  increase  its  membership  base  revenue  to  support  both its
operations and continued  expansion  programs.  The Company anticipates that its
existing cash and  anticipated  cash flow from  operations will be sufficient to
satisfy its  contemplated  cash  requirements  for at least  twelve  months from
December 31, 1997.

     Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.

     The following  table sets forth certain  historical  financial data for the
Company as a percentage of net sales:

                                                          Year Ended December 31
                                                          ----------------------
                                                             1996        1997
                                                             ----        ----
Net sales                                                    100%        100%
                                                             ===         ===
Cost of sales                                                 77          55
Gross profit                                                  23          45
Advertising and promotion expense (for
acquisition and retention of members)                         98          68
General and administrative expense                            35          20
Interest expense, net                                          4           4
Net loss                                                    (115)        (49)

                                    PAGE -17-


<PAGE>


     Gross  Sales for the year ended  December  31,  1997 were  $15,119,093,  an
increase of  $6,775,789,  or 81%, as compared to  $8,343,304  for the year ended
December 31, 1996.  Such increase in gross sales was primarily  attributable  to
increased  sales of  audiobooks  resulting  from  expansion of Audio Book Club's
membership base and increased purchases from members.

     Returns, discounts and allowances for the year ended December 31, 1997 were
$5,040,939,  or 33% of gross sales,  as compared to $2,743,221,  or 33% of gross
sales for the year ended December 31, 1996.  The increase in returns,  discounts
and allowances was primarily the result of an increase in sales of audiobooks.

     Returns for the year ended  December 31, 1997 were  negatively  impacted by
two marketing decisions.  The Company, during the third quarter of 1997, offered
dual  featured  selections  to its members as a marketing  test in two mailings.
These  offerings  had  higher  price  points  than  typically  offered  with the
Company's single featured selections. The Company anticipated higher gross sales
for the dual featured  selections,  as well as  correspondingly  higher returns,
which the Company believed would result in higher net sales.  However the actual
return  experience for mailings with dual featured  selections  exceeded  return
rates for other mailings in 1997 and Company expectations.  The Company does not
currently anticipate offering dual featured selections in the future.

     Returns were also negatively affected by the timing of the Company's member
mailings.  The Company sends out seventeen mailings per year to its members. The
timing of the mailings is consistent  with  historical  Club industry  patterns,
that is mailings  occur every four weeks with the  exception of four  "seasonal"
mailings  that fall in between  the  regular  four week  periods.  This  pattern
results in eight periods when mailings are only two weeks apart. The returns for
mailings in these  concentrated  time frames exceed the Company's  normal return
rates.  The Company had a number of concentrated  mailings in the fourth quarter
of 1997. The Company has implemented a change to its member mailing schedule for
1998 whereby member mailings will be sent evenly every three weeks.

     Net  sales for the year  ended  December  31,  1997  were  $10,078,154,  an
increase of  $4,478,071,  or 80%, as compared to  $5,600,083  for the year ended
December  31,  1996.  The increase in net sales was  primarily  attributable  to
expansion of Audio Book Club's membership base and increased buying by members.

     Cost of sales for the year ended  December  31,  1997 were  $5,495,358,  an
increase of  $1,168,014,  or 27%, as compared to  $4,327,344  for the year ended
December 31, 1996,  primarily as a result of increased net sales.  Cost of sales
includes  the cost of  audiobooks  and product  royalty,  shipping,  mailing and
fulfillment costs.

     Cost of sales as a percentage of net sales for the year ended  December 31,
1997 declined from 78%, in the prior comparable  period,  to 55%, in the current
period. Conversely, gross profit increased $3,310,0570 or 260% to $4,582,796 for
the year ended  December  31,  1997,  from  $1,272,739  in the prior  comparable
period. Gross

                                    PAGE -18-


<PAGE>


profit as a percentage of net sales increased to 45% for the year ended December
31, 1997 from 23% for the year ended December 31, 1996.  The dramatic  reduction
in cost of goods sold as a percentage of net sales and the dramatic  improvement
in gross profit margin is principally attributable to a larger percentage of net
sales from  increasing  sales to  members  as  opposed to revenue  from sales of
audiobooks in connection with new member  enrollments at  substantially  reduced
prices; new fulfillment  arrangements at lower costs and increased  licensing of
products which reduces overall production costs.

     Advertising  and promotion  expenses (for  acquisition and retention of new
members)  increased  $1,373,489 or 25% to $6,843,250 for the year ended December
31, 1997 as compared to $5,469,761 in the prior comparable  period.  Included in
the advertising expense in 1997 is approximately $2,000,000 relating to a direct
mail campaign,  intended to attract new members, which was mailed to prospective
members  the last week of December  1997 with an  anticipated  delivery  date of
early  January  1998.  Total direct mail  expenses for the  solicitation  of new
members for the year ended December 31, 1997 was  approximately  $5,743,000,  an
increase of  approximately  $1,363,000  from the prior year.  Catalogs and other
advertising costs to Audio Book Club members increased approximately $10,000, on
a much higher number of pieces mailed.  This increase was controlled  because as
the number of pieces in each mailing increases, the cost of each piece declines.

     General and  administrative  expenses for the year ended  December 31, 1997
were $1,990,051,  or 20% of net sales, as compared to $1,948,821,  or 35% of net
sales for the year ended December 31, 1996. General and administrative  expenses
increased  $41,230 or 2% for the year ended December 31, 1997 as compared to the
year ended December 31, 1996.  During 1996, the Company  established a corporate
infrastructure  capable of supporting  operations in excess of its  then-current
level  of  operations.  As a  result,  the  Company  was  not  required  to hire
additional personnel and incur additional  administrative  expenses commensurate
with its increased level of operations.  Accordingly, general and administrative
expenses declined significantly as a percentage of net sales.

     Professional  fees for the year ended December 31, 1997 were  $226,504,  as
compared  to $99,093  for the year ended  December  31,  1996.  The  increase in
professional fees is principally attributable to increased legal, accounting and
other   professional   fees   associated   with  the  reporting  and  compliance
requirements of a public company.

     Depreciation and amortization  expense for the year ended December 31, 1997
was $8,334 as  compared  to $5,193 for the year ended  December  31,  1996.  The
increase in  depreciation  expense  resulted  from the  Company's  investment in
computer  equipment  during the quarter ended December 31, 1997 which allows the
Company to design and create its  catalogs  and  mailings  internally  which the
Company believes should result in substantial savings.

     Net  interest  expense  for the year  ended  December  31,  1997  increased
$224,368 to $435,508 from $211,140 in the prior comparable  period.  Included in
net interest  expense is interest income of $105,631 for the year ended December
31, 1997 an

                                    PAGE -19-


<PAGE>


increase of $97,993  from the year ended  December  31,  1996.  Interest  income
increased  due to the  investment  of the proceeds  from the  Company's  initial
public  offering.  On  September  15, 1997,  the Company  repaid the $800,000 of
outstanding  notes payable plus accrued interest in the amount of $10,082 to the
Company's Chief Operating Officer and Executive Vice President. The Company used
a portion of the proceeds of the initial public offering to repay the loans from
a major  bank in the  aggregate  principal  amount of  $9,000,000  plus  accrued
interest thereon of $56,167.  Accordingly,  as of December 31, 1997, the Company
has no outstanding interest bearing indebtedness.

     Primarily due to increased sales, significantly lower cost of goods sold as
a  percentage  of net sales and  correspondingly  higher gross  profit,  and the
ability to operate at higher  volumes  without  hiring  additional  personnel or
incurring  additional  administrative  expenses,  the loss  for the  year  ended
December 31, 1997,  declined by 24% or $1,540,418, from  $6,461,269 in the prior
comparable period to $4,920,851 for the year ended December 31, 1997.

     Liquidity and Capital Resources

     The  Company's  capital  requirements  have  been and will  continue  to be
significant  due to,  among  other  things,  costs  associated  with direct mail
campaigns, other new member recruitment advertising and building,  expanding and
maintaining an Internet web site. Historically,  the Company's cash requirements
have exceeded cash flows from operations.

     On October 27, 1997, the Company  received net proceeds of $19,765,663 from
its initial  public  offering of Common Stock.  The Company  immediately  used a
portion of the  proceeds to repay loans from a bank in the  aggregate  principal
amount of $9,000,000 plus accrued interest of $56,167.

     Immediately  prior  to the  consummation  of the  offering,  the  Company's
Chairman,   Chief  Executive  Officer  and  founder   converted   $5,975,200  of
indebtedness  owed to him under a loan  agreement  into 597,520 shares of Common
Stock at a price per share  equal to the  initial  offering  price of the Common
Stock.

     During the year ended  December  31, 1997,  the  Company's  cash  increased
$3,562,197  as the  Company  used  net cash of  $5,506,131  and  $5,192,335  for
operating  and  investing  activities,  respectively,  and had cash  provided by
financing activities of $14,260,663.

     For the year ended  December  31, 1997,  cash used in operating  activities
consisted of, in addition to the net loss, increases in receivables,  inventory,
current prepaid expenses,  royalty advances and prepaid expenses  non-current of
$1,187,286,  $863,714, $111,896, $32,078 and $48,219, respectively. The net cash
used in  operations  was  partially  reduced by a decrease  in amounts  due from
related  parties of $20,000  and an  increase  in  accounts  payable and accrued
expenses of $1,375,227.

     The increase in accounts receivable during the year ended December 31, 1997
is principally due to  significantly  higher sales. The increase in inventory is
principally due to higher sales and an expanded number of titles.

                                    PAGE -20-


<PAGE>


     Cash used in  investing  activities  during  1997 was  principally  for the
purchase of a short term  investment  to be held to maturity  consisting of bank
certificates  of deposit in the amount of  $5,000,000  bearing  interest at 5.5%
maturing on May 2, 1998 and of $100,000 bearing interest at 5.9% maturing on May
6, 1998.  The Company also  purchased  fixed  assets,  principally  for computer
equipment in the amount of $48,636.  In the fourth  quarter of 1997, the Company
invested in computer equipment which allows the Company to design and create its
catalogs  and mailings  internally  which should  result in  substantial  annual
savings.

     The Company  received cash proceeds from its initial public  offering after
payment of all associated offering costs of $19,765,663.

     During 1997, the Company entered into three-year employment agreements with
Michael Herrick and Howard Herrick,  two-year employment  agreements with Norton
Herrick and John Levy and a one-year employment  agreement with Jesse Faber. The
Company's   aggregate   commitments   under  such   employment   agreements  are
approximately  $646,000,  $472,000  and  $201,000  during  1998,  1999 and 2000,
respectively.

     Based on the Company's currently proposed plans and assumptions relating to
the implementation of its business plan (including the timing and success of its
direct  marketing  and  other  new  recruitment  advertising,  as  well  as  the
availability  and terms of attractive  acquisition  opportunities),  the Company
anticipates  that its existing cash and  anticipated  cash flow from  operations
will be sufficient to satisfy its  contemplated  cash  requirements for at least
twelve months from December 31, 1997.

New Accounting Standard

     In March 1997, the Financial  Accounting Standards Board issued a Statement
of Financial  Accounting  Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128  establishes  standards for computing and presenting  earnings per share
and applies to entities  with  publicly  held common  stock.  This  statement is
effective  for years  ending  after  December  15, 1997  Accordingly,  effective
December 31, 1997, the net loss per share  information  has been  calculated and
presented in accordance the provisions of SFAS No. 128 and as further prescribed
by the  relevant  Staff  Accounting  Bulletins  of the  Securities  and Exchange
Commission.  In  accordance  with the  provisions  of SFAS No. 128, net loss per
share for the year ended December 31, 1996 has also been restated.

                                    PAGE -21-


<PAGE>


Quarterly Fluctuations

     The Company's  operating  results vary from period to period as a result of
purchasing  patterns of members,  the timing,  costs,  magnitude  and success of
direct  mail  campaigns  and other new member  recruitment  advertising,  member
attrition,  the timing and popularity of new audiobook  releases,  the timing of
member catalog mailings and product returns. The timing of new member enrollment
varies depending on the timing, magnitude and success of new member advertising,
particularly  direct  mail  campaigns.  For fiscal  periods in which the Company
conducts significant direct mail campaigns, the Company's operating results will
be adversely  affected  because the increased  membership  acquisition  expenses
incurred may not generate  corresponding  revenues from such campaigns until the
following periods.

Item 7. Financial Statements

     The response to this item is submitted as a separate section of this report
commencing on page F-1 following Item 13.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure

     Not Applicable

                                    PAGE -22-


<PAGE>


                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act

     The directors and executive officers of the Company are as follows:

     Name         Age                     Position
Norton Herrick    59    Chief Executive Officer, Chairman of the Board and
                        Director
Michael Herrick   31    Chief Operating Officer, Vice Chairman of the Board and
                        Director
Jesse Faber       42    President and Director
Howard Herrick    33    Executive Vice President and Director
John F. Levy      42    Executive Vice President and Chief Financial Officer
Roy Abrams        54    Director
Carl Wolf         53    Director

     Norton Herrick

     Chief Executive  Officer,  Chairman of the Board and Director.  Director of
the Company  since its  inception.  President of the Company from its  inception
until January 1996.  Mr.  Herrick has been a private  investor for over 30 years
and is currently  Chairman and Chief Executive  Officer of The Herrick  Company,
Inc., a private investment firm he founded. Through his wholly-owned affiliates,
Mr. Herrick has owned and managed income producing properties,  including office
buildings,  shopping  centers  and  multi-family  apartment  complexes,  and has
completed  transactions  with  respect to  approximately  250  income  producing
properties  valued at an aggregate of approximately  $2 billion.  Mr. Herrick is
involved in the management of numerous  entities he formed to acquire,  finance,
manage and lease  office,  industrial  and retail  properties;  and to  acquire,
operate, manage,  redevelop and sell residential rental properties.  Mr. Herrick
serves  on the  advisory  board  of the  Make A Wish  Foundation,  the  advisory
committee  of the  National  Multi  Housing  Council and the  National  Board of
Directors for People for the American Way.

     Term of  Office:  Norton  Herrick  will stand for  re-election  at the 1998
annual meeting of shareholders.

                                    PAGE -23-


<PAGE>


     Michael Herrick

     Chief Operating Officer, Vice Chairman of the Board and Director.  Director
of the Company since its inception,  Michael Herrick co-founded the Company, has
been Vice  Chairman  of the  Board of the  Company  since  January  1996,  Chief
Operating  Officer of the Company since January 1997 and director of the Company
since its inception. Mr. Herrick has held various other offices with the Company
since its  inception.  Since  August 1993,  Michael  Herrick has been an officer
(since  January 1994,  Vice  President) of the  corporate  general  partner of a
limited partnership, which limited partnership is a principal shareholder of The
Walking  Company,  a  nationwide  retailer of comfort and walking  footwear  and
related apparel and  accessories.  Since May 1989, Mr. Herrick has been employed
by The Herrick Company,  Inc., and is currently one of its Vice Presidents.  Mr.
Herrick is also an officer of the corporate general partners of numerous limited
partnerships  which acquire,  finance,  manage and lease office,  industrial and
retail  properties;  and which  acquire,  operate,  manage,  redevelop  and sell
residential rental properties.

     Term of Office:  Michael  Herrick  will stand for  re-election  at the 1999
annual meeting of shareholders

     Howard Herrick

     Executive Vice  President and Director.  Howard Herrick has been a director
of the Company since its inception.  Howard  Herrick  co-founded the Company and
has been  Executive  Vice  President,  Editorial  Director and a director of the
Company since its  inception.  Since August 1993,  Howard  Herrick has been Vice
President  of the  corporate  general  partner of a limited  partnership,  which
limited  partnership is a principal  shareholder of The Walking  Company.  Since
1988,  Mr.  Herrick  has been an officer of The  Herrick  Company,  Inc.  and is
currently its President.

     Mr.  Herrick  is also an  officer  of the  corporate  general  partners  of
numerous limited partnerships which acquire,  finance,  manage and lease office,
industrial and retail properties;  and which acquire, operate, manage, redevelop
and sell residential rental properties.

     Term of  Office:  Howard  Herrick  will stand for  re-election  at the 2000
annual meeting of shareholders

     Jesse Faber

     President and Director.  Director  since October 27, 1997.  Jesse Faber has
been  President of the Company since  October 1996 and a director  since October
1997. From 1989 to October 1996, Mr. Faber was Senior Vice President and Partner
of AyerDirect,  a direct response  advertising  agency  wholly-owned by McManus,
Inc., one of the ten largest  advertising  and marketing  agencies in the world.
From 1984 to 1989, Mr. Faber was Management  Supervisor of Grey Direct, a direct
response advertising agency.

     Term of Office:  Jesse Faber will stand for  re-election at the 1998 annual
meeting of shareholders.

                                    PAGE -24-


<PAGE>


     John Levy

     John Levy has been Executive  Vice-President and Chief Financial Officer of
the Company since January 1, 1998, and an employee of the Company since November
1997.  Prior to joining  the  Company,  Mr. Levy was Senior  Vice  President  of
Tamarix Capital Corporation and had previously served as Chief Financial Officer
of both public and private  entertainment  and consumer goods companies.  During
1994, Mr. Levy served as Chief Financial Officer of the Continuum Group, Inc., a
publicly-held  record label which filed for  protection  under Chapter 11 of the
United States  Bankruptcy Code in 1995 after Mr. Levy had left the Company.  Mr.
Levy is a  Certified  Public  Accountant  with nine  years  experience  with the
national public accounting firms of Ernst & Young, Laventhol & Horwath and Grant
Thorton.

     Roy Abrams

     Director  Since  October 27,  1997.  Since April 1993 and from 1986 through
March  1990,  Mr.  Abrams has owned and  operated  Abrams  Direct  Marketing,  a
marketing  consulting  firm.  From April 1990 to April 1993, Mr. Abrams was Vice
President  of New  Business  Development  of  Getting to Know You,  Inc.,  a new
homeowner welcoming service. From 1981 through 1985, Mr. Abrams was President of
Margrace  Corporation,  a  publicly-held  direct  marketing  company.  From 1980
through  1981,  Mr.  Abrams was a director  of mail  order  marketing  of Hearst
Corporation, a publishing company. From 1976 to 1979, Mr. Abrams was employed by
Columbia House, a negative option and continuity direct marketing company,  most
recently as Vice President,  Merchandise and Continuity Marketing.  From 1975 to
1976, Mr. Abrams was director of Mail Order  Merchandise  Marketing for American
Express Company.

     Term of Office:  Roy Abrams will stand for  re-election  at the 1999 annual
meeting of shareholders.

     Carl Wolf

     Director.  Since March 1998.  Carl T. Wolf is the  managing  partner of the
Lakota  Investment  Group and  co-Chairman of the Board and Director of Saratoga
Beverage Group, Inc. Mr. Wolf was formerly Chairman of the Board,  President and
Chief Executive Officer of Alpine Lace Brands,  Inc.  ("Alpine Lace").  Mr. Wolf
founded  Alpine  Lace and its  predecessors  and had been  the  Chief  Executive
Officer of each of them since the  inception  of Alpine  Lace in 1983.  Mr. Wolf
became a director of Alpine Lace shortly  after its  incorporation  in February,
1986. Alpine Lace was sold to Land O' Lakes, Inc. in December 1997.

     Term of Office:  Carl Wolf will stand for  re-election  at the 2000  annual
meeting of shareholders.

     The Company has agreed that until  October 22, 2000, if so requested by the
representative  of the underwriters of its initial public  offering,  to use its
best efforts to nominate and elect a designee of the representative, (reasonably
acceptable to the Company),  to serve on the Company's  Board of Directors.  The
representative has not yet exercised its right to designate such a person.


                                    PAGE -25-


<PAGE>


Item 10. Executive Compensation

     The following  table discloses for the fiscal years ended December 31, 1996
and 1997,  compensation  paid to Norton  Herrick,  the Company's Chief Executive
Officer and each executive  officer of the Company who received salary and bonus
in excess of $100,000 during the fiscal year ended December 31, 1997 (the "Named
Executives").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                  Annual Compensation           Long Term Compensation
                                                  -------------------           ----------------------
                                                                                        Awards
                                                                                        ------
                                                                                Securities Underlying
   Name and Principal Position       Year           Salary         Bonus             Options/SAR's (#)
   ---------------------------       ----           ------         -----             -----------------
<S>                                  <C>           <C>             <C>                  <C>
Norton Herrick:                      1996          $     0-           -0-                   --
    Chief Executive Officer          1997            19,354           -0-                   --
Jesse Faber                          1996            15,062        25,000                   --
    President                        1997           128,417        40,000               50,000
Howard Herrick                       1996           102,000           -0-                   --
    Executive Vice President         1997           115,129           -0-                   --
</TABLE>

The  following  table  discloses  options  granted  during the fiscal year ended
December 31, 1997 to the Named Executives:

            OPTION/SAR GRANTS IN FISCAL YEAR ENDING DECEMBER 31, 1997

<TABLE>
<CAPTION>
                       Number of
                   Shares Underlying    % of Total Options Granted to    Exercise Price
      Name          Options Granted        Employees in Fiscal Year         ($/share)        Expiration Date
 ---------          ---------------        ------------------------         ---------        ---------------
<S>                     <C>                         <C>                      <C>
Jesse Faber             50,000                      100.0%                   $11.00          Five Years from
                                                                                                  Vesting(1)
</TABLE>

----------
(1)  On September 17, 1997, the Company granted to Mr. Faber options to purchase
     50,000  shares of Common  Stock at an  exercise  price equal to 110% of the
     initial  public  offering  price of the Common Stock which was in excess of
     fair  market  value on the date of grant.  Such  options  shall  vest as to
     one-fifth of the shares covered  thereby  annually over a five-year  period
     commencing on October 31, 1998, provided,  however, that such options shall
     terminate and be canceled if Mr. Faber is no longer employed by the Company
     prior  to the  date on which  such  options  vest.  Such  options  shall be
     exercisable  for a period of five  years  commencing  immediately  upon the
     applicable  vesting period,  provided,  however,  if Mr. Faber is no longer
     employed by the Company,  such  options  shall expire on the earlier of the
     date Mr.  Faber is no longer  employed  by the  Company  (or up to one year
     thereafter under certain circumstances) or five years following the date on
     which such options vest. The per share weighted-average fair value of stock
     options  granted  during the year ended  December 31, 1997 was $4.55 on the
     date of the grant  using the  Black-Scholes  option-pricing  model with the
     following  assumptions for the year ended December 31, 1997: risk free rate
     of return  5.56%;  option  life five  years  from date of  vesting;  and no
     dividend yield.

                                    PAGE -26-


<PAGE>


     The following table sets forth information concerning the number of options
owned by the  Named  Executives  and the value of any  in-the-money  unexercised
options  as of  December  31,  1997.  No  options  were  exercised  by the Named
Executives during fiscal 1997:

                           Aggregated Option Exercises
                        And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                   Number of Securities Underlying         Value of Unexercised In-the-
                  Unexercised Options at December         Money Options at December 31,
                              31, 1997                               1997(1)
                -----------------------------------     ----------------------------------
Name            Exercisable           Unexercisable     Exercisable          Unexercisable
-----------     -----------           -------------     -----------          -------------
<S>                  <C>                 <C>               <C>                    <C>
Jesse Faber          0                   50,000            $-0-                   $-0-
</TABLE>

----------
(1)  Year-end values for unexercised in-the-money options represent the positive
     spread  between the exercise  price of such options and the fiscal year end
     market value of the common stock. An Option is "in-the-money" if the fiscal
     year end fair market value of the Common Stock exceeds the option  exercise
     price.

Stock Option Plan

     In June 1997, the Company's  shareholders approved a stock option plan (the
"Option  Plan")  pursuant  to which  750,000  shares of Common  Stock  have been
reserved for  issuance  upon the  exercise of options  designated  as either (i)
options  intended to  constitute  incentive  stock  options  ("ISOs")  under the
Internal  Revenue Code of 1986,  as amended  (the  "Code") or (ii)  nonqualified
options.  ISOs may be granted under the Option Plan to officers and employees of
the  Company.  Non-qualified  options may be granted to  consultants,  directors
(whether or not they are employees), employees or officers of the Company.

     The purpose of the Option Plan is to encourage  stock  ownership by certain
directors,  officers and employees of the Company and other persons instrumental
to the success of the Company. The Option Plan is intended to qualify under Rule
16b-3 under the Securities Exchange Act of 1934. The Board of Directors,  within
the limitations of the Option Plan,  determines the persons to whom options will
be  granted,  the  number of shares to be covered by each  option,  whether  the
options  granted are  intended to be ISOs,  the duration and rate of exercise of
each option, the option purchase price per share and the manner of exercise, and
the time, manner and form of payment upon exercise of an option.

     ISOs granted  under the Option Plan may not be granted at a price less than
the fair market  value of the Common Stock on the date of grant (or 110% of fair
market  value in the case of persons  holding 10% or more of the voting stock of
the Company).  The aggregate  fair market value of shares for which ISOs granted
to any employee are  exercisable  for the first time by such employee during any
calendar  year  (under all stock  option  plans of the  Company  and any related
corporation) may not exceed $100,000. Options granted under the Option Plan will
expire not more than ten years from the date of grant (five years in the case of
ISOs granted to persons holding 10% or more of the voting stock of the Company).
All options granted under

                                    PAGE -27-


<PAGE>


the Option  Plan are not  transferable  during an  optionee's  lifetime  (unless
otherwise  provided in the option  agreement) but are  transferable  at death by
will or by the laws of descent and distribution. In general, upon termination of
employment  of an  optionee,  all options  granted to such person  which are not
exercisable  on the  date of such  termination  immediately  terminate,  and any
options  that  are  exercisable  terminate  90  days  following  termination  of
employment.

     Compensation of Directors

     In his  capacity  as a  director,  Mr.  Wolf has been  granted  options  to
purchase  22,500 shares of the  Company's  common stock at $5.00 per share (fair
market value at the date of grant) which vest and are exercisable  one-third on,
March  18,  1998 (the  "Grant  Date")  and  one-third  on the  first and  second
anniversaries  of such Grant Date.  In addition,  Mr. Wolf will  receive  annual
compensation of $5,000,  payable on the anniversary of his joining the Company's
Board of Directors.  Moreover, in March 1998 the Company sold Mr. Wolf an option
to  purchase  50,000  shares of Common  Stock  and,  the  right,  under  certain
circumstances, to purchase an additional option covering 25,000 shares of Common
Stock. See "Item 12-Certain Relationships and Related Transactions".

     Employment Agreements

     The Company has entered into a two-year employment agreement,  effective as
of October 22,  1997,  with Norton  Herrick  which  provides  for an annual base
compensation  of  $100,000  and  such  increases  and  bonuses  as the  Board of
Directors  may from  time to time  determine,  based on  criteria  that it deems
appropriate  at  such  time  but  which  it has not yet  been  established.  The
employment  agreement  does not require that Mr. Herrick devote any fixed amount
of time to the business and activities of the Company.  The employment agreement
contains a  provision  prohibiting  Mr.  Herrick  from,  on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or  participating  in any activities  which are in direct conflict with
the interests of the Company;  and from  soliciting or attempting to solicit the
business or patronage of any person, firm,  corporation,  company or partnership
which had previously been a customer of the Company,  for the purpose of selling
products and services  similar to those  provided by the Company during the term
of the employment agreement and for a period of two years thereafter.  There can
be no assurance,  however,  that a court will not enforce such provision or only
partially enforce such provision. The employment agreement also provides that if
Mr. Herrick's employment is terminated under certain circumstances, including as
a result of a change  in  control,  Mr.  Herrick  will be  entitled  to  receive
severance  pay  equal  to the  greater  of  $200,000  or  two  times  the  total
compensation  received by Mr.  Herrick from the Company during the twelve months
prior to the date of termination.

     The Company has entered into a three-year employment  agreement,  effective
October  22,  1997,  with  Michael  Herrick  which  provides  for an annual base
compensation  of  $125,000  and  such  increases  and  bonuses  as the  Board of
Directors  may from  time to time  determine,  based on  criteria  that it deems
appropriate  at  such  time  but  which  it has not yet  been  established.  The
employment  agreement  requires Mr. Herrick to devote  substantially  all of his
business time to the Company's  business and affairs.  The employment  agreement
contains a  provision  prohibiting  Mr.  Herrick  from,  on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or  participating  in any activities  which are in direct conflict with
the interests of the Company;  and from  soliciting or attempting to solicit the
business or patronage of any person, firm,  corporation,  company or partnership
which had previously been a customer of the Company,  for the purpose of selling
products and services

                                    PAGE -28-


<PAGE>


similar to those  provided  by the  Company  during  the term of the  employment
agreement and for a period of two years  thereafter.  There can be no assurance,
however,  that a court will not enforce such provision or only partially enforce
such  provision.  The employment  agreement also provides that if Mr.  Herrick's
employment is terminated under certain circumstances, including as a result of a
change in control,  Mr. Herrick will be entitled to receive  severance pay equal
to the greater of $375,000 or three times the total compensation received by Mr.
Herrick  from  the  Company  during  the  twelve  months  prior  to the  date of
termination.

     In September 1997, the Company entered into a one-year employment agreement
with Mr. Faber which provides for his employment through October 31, 1998, at an
annual base compensation of $140,000 and a bonus of $35,000, provided that he is
employed by the Company on October 31,  1998.  On September  17,  1997,  Company
granted to Mr.  Faber  options to purchase  50,000  shares of Common Stock at an
exercise price equal to 110% of the initial public  offering price of the Common
Stock.

     The Company has entered into a three-year employment agreement effective as
of October  22,  1997 with  Howard  Herrick  which  provides  for an annual base
compensation  of  $125,000  and  such  increases  and  bonuses  as the  Board of
Directors  may from  time to time  determine,  based on  criteria  that it deems
appropriate  at  such  time  but  which  it has not yet  been  established.  The
employment  agreement  requires Mr. Herrick to devote  substantially  all of his
business time to the Company's  business and affairs.  The employment  agreement
contains a  provision  prohibiting  Mr.  Herrick  from,  on his own behalf or on
behalf of any other person, persons, firms, partnership, corporation or company,
engaging or  participating  in any activities  which are in direct conflict with
the interests of the Company;  and from  soliciting or attempting to solicit the
business or patronage of any person, firm,  corporation,  company or partnership
which had previously been a customer of the Company,  for the purpose of selling
products and services  similar to those  provided by the Company during the term
of the employment agreement and for a period of two years thereafter.  There can
be no assurance,  however,  that a court will not enforce such provision or only
partially enforce such provision. The employment agreement also provides that if
Mr. Herrick's employment is terminated under certain circumstances, including as
a result of a change  in  control,  Mr.  Herrick  will be  entitled  to  receive
severance  pay  equal to the  greater  of  $375,000  or three  times  the  total
compensation received by the executive from the Company during the twelve months
prior to the date of termination.

     In November 1997, the Company entered into a two year employment  agreement
with John Levy which provides for an annual base  compensation  of $135,000,  in
the first year of the agreement and an annual base  compensation  of $150,000 in
the second year of the  agreement.  Mr.  Levy's  agreement  also  provides for a
minimum  bonus of $7,500 the first year of the  agreement and a minimum bonus of
$12,500, the second year of the agreement,  provided Mr. Levy is employed by the
Company on each such date..  As of January 1, 1998,  the Company  granted to Mr.
Levy options to purchase  30,000 shares of Common Stock at an exercise  price of
$11.00 per share (which  exceeded  fair market value on the date of grant).  The
options for 10,000  shares  vest at the end of the first year of the  employment
agreement  and options  for 20,000  shares vest at the end of the second year of
employment,  provided Mr. Levy is employed by the Company on the vesting  dates.
However, in the event of a change in control, all options shall immediately vest
and become exercisable.

                                    PAGE -29-


<PAGE>


Item 11. Security Ownership of Certain Beneficial Owners and Management

     The following  table sets forth certain  information  as of March 27, 1998,
based on information  obtained from the persons named below, with respect to the
beneficial  ownership  of shares of Common Stock by (i) each person known by the
Company to be the beneficial  owner of more than five percent of the outstanding
shares of Common Stock; (ii) each of the Company's executive officers, including
the  Named  Executives;  (iii)  each of the  Company's  directors;  and (iv) all
directors and executive officers as a group:

<TABLE>
<CAPTION>
      Name and Address of           Number of Shares             Percentage of Beneficial
     Beneficial Owners (1)       Beneficially Owned (2)                  Ownership
     ---------------------       ----------------------                 ----------
<S>                                 <C>                                    <C>
Norton Herrick                      3,691,100(3)                           60.0%
Howard Herrick                      3,691,100(4)                           60.0%
Michael Herrick                       488,460(5)                            7.9%
Jesse Faber                               -0-(6)                            -0-
John Levy                                 -0-(7)                            -0-
Roy Abrams                                -0-                               -0-
Carl Wolf                              57,500(8)                             *
All directors and executive         3,748,6000(3)(4)(5)(6)(7)(8)           60.4%
officers as a group
(7 persons)
</TABLE>

----------
*    Less than one (1%) percent.

(1)  The  address  for each named  individual  or group is in care of Audio Book
     Club,  Inc.,  2295  Corporate  Boulevard,  Suite 222, Boca Raton,  Florida,
     33431.

(2)  Unless otherwise indicated,  the Company believes that all persons named in
     the table have sole voting and investment  power with respect to all shares
     of Common  Stock  beneficially  owned by them. A person is deemed to be the
     beneficial  owner of securities  that can be acquired by such person within
     60 days of March  27,  1998  upon the  exercise  of  options,  warrants  or
     convertible  securities.  Each beneficial owner's  percentage  ownership is
     determined  by assuming that options,  warrants or  convertible  securities
     that are held by such person  (but not those held by any other  person) and
     which are exercisable  within 60 days of March 27, 1998 have been exercised
     and converted.

(3)  Represents (i) 2,714,180 shares held by N. Herrick Irrevocable ABC Trust of
     which Norton Herrick is the sole beneficiary and Howard Herrick is the sole
     trustee (the "N. Herrick Trust"),  (ii) 488,460 shares of Common Stock held
     by Howard  Herrick and (iii)  488,460  shares of Common  Stock held by M.E.
     Herrick Irrevocable Trust, of which Michael Herrick is the sole beneficiary
     and Howard Herrick is the sole trustee (the "M.E.H. Trust"). The N. Herrick
     Trust  agreement  provides  that Howard  Herrick shall have sole voting and
     dispositive  power over the shares  held by the trust.  Howard  Herrick has
     irrevocably  granted to Norton Herrick sole dispositive  power with respect
     to the shares of Common Stock held by Howard  Herrick on his own behalf and
     on behalf of the M.E.H. Trust.

(4)  Includes (i) the shares of Common Stock  referred to in footnote 3(i) above
     and footnote (5) below. Does not include options to purchase 100,000 shares
     of common stock  granted  February  12, 1998 at an exercise  price of $4.75
     (market value at date of grant).  Such shares to vest as to one-half of the
     shares covered thereby on

                                    PAGE -30-


<PAGE>


     February 9, 1999 and one-half on February 9, 2000 provided,  however,  that
     such options  shall  terminate  and be canceled if the officer is no longer
     employed by the Company prior to the date on which such options vest.  Such
     options  shall  be  exercisable  for a  period  of  five  years  commencing
     immediately upon vesting,  provided,  however,  if the officer is no longer
     employed by the  Company,  such  options  shall expire on the earlier of 90
     days following the date the officer is no longer employed by the Company or
     five years following the date on which such options vest.

(5)  Represents  shares held by the M.E.H.  Trust.  The M.E.H.  Trust  agreement
     provides that Howard Herrick shall have sole voting and  dispositive  power
     over the shares held by the M.E.H.  Trust and Howard Herrick has granted to
     Norton  Herrick sole  dispositive  power over the shares held by the M.E.H.
     Trust.  Does not include options to purchase 100,000 shares of common stock
     granted  February 12, 1998 at en exercise  price of $4.75  (market value at
     date of grant).  Such shares to vest as to  one-half of the shares  covered
     thereby on  February 9, 1999 and  one-half  on  February 9, 2000  provided,
     however,  that such options shall  terminate and be canceled if the officer
     is no  longer  employed  by the  Company  prior to the  date on which  such
     options vest.  Such options shall be exercisable for a period of five years
     commencing immediately upon vesting,  provided,  however, if the officer is
     no longer employed by the Company, such options shall expire on the earlier
     of 90 days  following  the date the  officer is no longer  employed  by the
     Company or five years following the date on which such options vest.

(6)  Does not include  options to purchase  50,000  shares of Common Stock which
     vest at various times commencing October 31, 1998.

(7)  Does not include  options to purchase  30,000  shares of Common Stock which
     vest at various times commencing January 1, 1999.

(8)  Represents  shares  issuable  upon  exercise of  options.  Does not include
     options to  purchase  15,000  shares of Common  Stock which vest at various
     times commencing March 18, 1999.

Item 12.  Certain Relationships and Related Transactions

     The  Company  has  entered  into a  sublease  agreement  with  H.H.  Realty
Investors,  Inc., a company  wholly-owned  by Michael  Herrick,  Chief Operating
Officer,  Vice  Chairman  of the Board and a  director  of the  Company,  Howard
Herrick,  Executive  Vice  President  and a director  of the  Company,  and Evan
Herrick,  a son of Norton  Herrick  and  brother of Michael  Herrick  and Howard
Herrick.  Pursuant to the agreement,  the Company subleased 1,550 square feet of
space in  Morristown,  New  Jersey at an annual  rent of  $24,000.  H.H.  Realty
Investors, Inc. leases such property from an independent third party. In January
1998, the Company amended the sublease agreement to provide for additional space
at its New Jersey  location.  Minimum  monthly  rent under the amended  lease is
$2,900 per month through December,  1998 and is subject to two extension periods
of five years each under certain conditions.

     On July 1, 1997,  the Company  entered into a new lease for office space in
Florida.  The Herrick Company,  Inc., a company  wholly-owned by Norton Herrick,
Chairman of the Board,  Chief Executive  Officer and a principal  shareholder of
the Company,  guaranteed the Company's obligations under the Company's lease for
its Florida office.

                                    PAGE -31-


<PAGE>


     On November 17, 1995, Norton Herrick entered into a loan agreement pursuant
to which Norton Herrick  agreed to loan the Company up to $8,000,000,  including
the $5,380,000  aggregate  amount of loans made to the Company by Norton Herrick
as of such  date.  The loan  agreement  was  subsequently  amended  to  increase
permitted  borrowings  by the Company of up to  $13,000,000  and Norton  Herrick
subsequently  assigned  his  rights  under  the  loan  agreement  to N.  Herrick
Irrevocable  ABC Trust,  of which  Norton  Herrick is the sole  beneficiary  and
Howard Herrick is the sole trustee (the "N. Herrick  Trust").  Borrowings  under
the loan agreement were non-interest bearing and were converted into equity upon
the consummation of the Initial Public Offering.  The loan agreement between the
Company and Norton Herrick was terminated on October 22, 1997.

     In May 1997, the Company used the proceeds from a $6,000,000 loan from Bank
of  America  National  Trust and  Savings  Association  (the  "Bank") to repay a
portion of the  outstanding  indebtedness  under the loan  agreement with the N.
Herrick Trust. On August 2, 1997, the Company borrowed an additional  $2,250,000
from the Bank to fund working capital.  The loan was to be due October 31, 1998,
and had an interest rate which was 1/2% under the Bank's  reference rate and was
payable monthly.

     On September 16, 1997, the Company borrowed an additional $750,000 from the
Bank to fund working capital.  The loan was also to be due October 31, 1998, and
had an  interest  rate which was 1/2% under the  bank's  reference  rate and was
payable monthly.

     The Common  Stock of the Company  owned by Norton  Herrick,  the  Chairman,
Chief Executive Officer and founder of the Company,  was pledged as security for
the loans.  Additionally,  in the event the Company failed to repay the loans at
maturity,  the personal  guarantee of the Company's  Chairman,  Chief  Executive
Officer and founder would have become effective.

     The Company used a portion of the proceeds of its initial  public  offering
to repay the loans from the Bank in the aggregate principal amount of $9,000,000
plus accrued interest thereon of $56,167.

     Immediately  prior to the consummation of its initial public offering,  the
N. Herrick Trust converted the outstanding $5,975,200 of indebtedness owed to it
by the Company under the loan agreement into 597,520 shares of Common Stock at a
price per share equal to the initial offering price of the Common Stock.

     On  May  12,  1997,   Howard  Herrick  entered  into  a  consolidation  and
restatement  of loan  agreements  with the  Company  relating  to the  aggregate
$400,000  loaned to the Company by Howard Herrick  (consisting of a $50,000 loan
made in June 1994 and a $350,000 loan made in February 1997).  Such  borrowings,
did not bear interest through July 31, 1997 and, thereafter, bore interest at an
annual rate equal to the greater of 10% or the prime rate  charged by  Citibank,
N.A. of New York ("Citibank").  This loan,  together with accrued interest,  was
repaid in September 1997.

     On May 12, 1997, the M.E. Herrick  Irrevocable Trust (the "M.E.H.  Trust"),
of which Michael Herrick is the sole  beneficiary and Howard Herrick is the sole
trustee,  entered  into  a loan  agreement  with  the  Company  relating  to the
aggregate  $400,000 loaned to the Company by the M.E.H.  Trust  (consisting of a
$50,000  loan made in June 1994 and a  $350,000  loan  made in May  1997).  Such
borrowings  did not bear interest  through July 31, 1997 and,  thereafter,  bore
interest at an annual rate equal to the greater of 10% or the prime rate charged
by Citibank.  This loan, together with accrued interest, was repaid in September
1997.

                                    PAGE -32-


<PAGE>


     Companies  wholly-owned by Norton Herrick have in the past provided certain
accounting,   administrative  and  general  office  services  to,  and  obtained
insurance coverage for, the Company at cost since the Company's  inception,  and
the Company paid to such entities for such services,  in the aggregate,  $38,928
and $60,000,  during the years ended  December 31, 1996 and 1997,  respectively.
The  Company  anticipates  obtaining  similar  services  from  time to time from
companies  affiliated  with  Norton  Herrick  for which it will  reimburse  such
companies' cost to provide such services to the Company.

     During 1997, Abrams Direct Marketing ("ADM"), a company wholly-owned by Roy
Abrams,  a director  designee of the  Company,  provided  independent  marketing
consulting  services to the Company and has been paid  approximately  $25,500 by
the  Company  for such  services.  In June  1997,  the  Company  entered  into a
consulting  agreement  with ADM  pursuant  to which ADM  assists  the Company in
connection with marketing  activities,  including  designing,  implementing  and
reviewing  the  results  of direct  marketing  campaigns  and  selecting  direct
marketing lists, on an as-needed basis at the rate of $250 per hour.

     On March 18, 1998, (the "Wolf Purchase Date") the Company sold to Carl Wolf
an option ("Wolf  Option") to purchase 50,000 shares of Common Stock at any time
commencing on the Wolf Purchase Date through the fifth  anniversary  of the Wolf
Purchase  Date at an  exercise  price of $5.00 per share  (market  value at Wolf
Purchase  Date.) The purchase price of the Wolf Option was $50,000.  The Company
and  Wolf  also  agreed  that,  if Wolf  continues  to serve  as an  active  and
participating member of the Company's Board of Directors for six months from the
Wolf Purchase Date, that Wolf shall have the right,  but not the obligation,  to
purchase an  additional  option  ("Additional  Wolf  Option") for an  additional
25,000  shares for $25,000.  The  Additional  Wolf Option shall have a five year
term from date of purchase of Additional  Wolf Option and shall have an exercise
price of $5.00 per share.

     The Company's  policy with respect to transactions  between the Company and
its officers,  directors and 5% or greater shareholders is that each transaction
will be on terms no less favorable than could be obtained from independent third
parties. Notwithstanding the foregoing, companies affiliated with Norton Herrick
may continue to provide certain  accounting,  administrative  and general office
services to, and obtain insurance coverage for, the Company at cost.

Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

       (a)    Exhibits

        *3.1  Articles of Incorporation, as amended, of the Company.

        *3.2  Bylaws, as amended, of the Company.

       *10.1  Agreement  between the Company and R.R.  Donnelly & Sons  Company,
              dated as of January 23, 1997.

       *10.2  Master Agreement for National Fulfillment Services,  Inc. dated as
              of October 25, 1996.

       *10.3  Loan Agreement  between the Company and M. E. Herrick  Irrevocable
              Trust, dated May 12. 1997.

       *10.4  Consolidation  and  Restatement  of Loan  Agreements  between  the
              Company and Howard Herrick, dated May 12, 1997.

       *10.5  Employment Agreement between the Company and Norton Herrick.

                                    PAGE -33-


<PAGE>


       *10.6  Employment Agreement between the Company and Michael Herrick.

       *10.7  Employment Agreement between the Company and Howard Herrick.

       *10.8  Employment  Agreement  between the Company and Jesse Faber,  dated
              June 6, 1997.

       *10.9  1997 Stock Option Plan

       *10.10 Marketing  Consulting  Agreement  between  the  Company and Abrams
              Direct marketing dated June 6, 1997.

       10.11  Employment  Agreement  dated November 10, 1997 between the Company
              and John Levy.

       *10.12 Underwriting Agreement dated October 27, 1997 between the Company,
              Marc Sinensky and L.H. Friend, Weinress, Frankson & Presson, Inc.

       10.13  Securities Purchase Agreement between the Company and Carl Wolf.

       27     Financial Data Schedule.

       (b)    Financial Statement Schedules

       Schedule II - Valuation and Qualifying Accounts and Reserves

       (c)    Reports on Form 8-K.

       No reports on Form 8-K were filed by the Company during its quarter ended
       December 31, 1997.

--------------------------------------------------------------------------------
*    Filed as an exhibit to the  Company's  Registration  Statement on Form SB-2
     (file no. 333-30665) and incorporated by reference thereto.

                                    PAGE -34-


<PAGE>


                              Audio Book Club, Inc.

                                   Form 10-KSB

                                     Item 7

                          Index to Financial Statements

                                                                            Page
                                                                            ----
Independent Auditors' Report                                                 F-2
Balance Sheet - December 31, 1997                                            F-3
Statements of Operations for the years ended
 December 31, 1996 and 1997                                                  F-4
Statements of Stockholders' (Deficiency) Equity
 for the Years ended December 31, 1996 and
 1997                                                                        F-5
Statements of Cash Flows for the years ended
 December 31, 1996 and 1997                                                  F-6
Notes to Financial Statements                                         F-7 - F-16

                                       F-1


<PAGE>


                          Independent Auditors' Report

The Board of Directors
Audio Book Club, Inc.

We have audited the  accompanying  balance sheet of Audio Book Club,  Inc. as of
December 31,  1997,  and the related  statements  of  operations,  stockholders'
(deficiency)  equity and cash flows for each of the years in the two-year period
ended December 31, 1997. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial  position of Audio Book Club,  Inc. as of
December 31, 1997, and the results of its operations and its cash flows for each
of the years in the two-year  period ended December 31, 1997 in conformity  with
generally accepted accounting principles.

                                           /s/ KPMG Peat Marwick LLP
                                           -------------------------------------
                                             KPMG Peat Marwick LLP

New York, New York
March 13, 1998

                                       F-2


<PAGE>


                              AUDIO BOOK CLUB, INC.

                                  Balance Sheet
                                December 31, 1997

         Assets

Current assets:
    Cash and cash equivalents                                      $  3,655,053
    Short term investment to be held to maturity                      5,143,699
    Accounts receivable, net of allowances for sales returns and
        doubtful accounts of $1,449,445                               1,783,456
    Inventory                                                         1,700,374
    Prepaid expenses                                                    111,896
    Royalty advances                                                    267,518
                                                                   ------------
         Total current assets                                        12,661,996

Prepaid expenses - non-current                                           48,219
Fixed assets, at cost, net of accumulated depreciation of
$16,547                                                                  59,805
                                                                   ------------
                                                                   $ 12,770,020
                                                                   ============
                     Liabilities and Stockholders' Equity

Current liabilities:
    Accounts payable                                                  2,776,544
    Accrued expenses                                                    240,124
                                                                   ------------
         Total current liabilities                                    3,016,668
                                                                   ------------
Commitments and contingencies
Stockholders' equity:
    Preferred Stock, no par value, authorized 5,000,000 shares;
        no shares issued and outstanding                                   --
    Common stock; no par value, authorized 25,000,000
        shares; 6,153,920 issued and outstanding                     25,741,063
    Contributed capital                                                 486,217
    Accumulated deficit                                             (16,473,928)
                                                                   ------------
         Total stockholders' equity                                   9,753,352
                                                                   ------------
                                                                   $ 12,770,020
                                                                   ============


                 See accompanying notes to financial statements.


                                       F-3


<PAGE>


                              Audio Book Club, Inc.

                            Statements of Operations

                                                     Years ended December 31,

                                                       1996            1997
                                                   ------------    ------------
Sales                                              $  8,343,304    $ 15,119,093
Returns, discounts and allowances                     2,743,221       5,040,939
                                                   ------------    ------------
         Sales, net                                   5,600,083      10,078,154
Cost of sales                                         4,327,344       5,495,358
                                                   ------------    ------------
         Gross profit                                 1,272,739       4,582,796
Expenses:
    Advertising and promotion (for acquisition
        and retention of members)                     5,469,761       6,843,250
    General and administrative                        1,948,821       1,990,051
    Professional fees                                    99,093         226,504
    Depreciation and amortization                         5,193           8,334
                                                   ------------    ------------
         Operating loss                              (6,250,129)     (4,485,343)
    Interest expense, net of interest income of
        $7,638 and $105,631 in
        1996 and 1997, respectively                     211,140         435,508
                                                   ------------    ------------
         Net loss                                    (6,461,269)     (4,920,851)
                                                   ============    ============
Net loss per share of common stock                 $      (1.95)   $      (1.29)
                                                   ============    ============

See accompanying notes to financial statements.


                                       F-4


<PAGE>


                              AUDIO BOOK CLUB, INC.

                 Statements of Stockholders' (Deficiency) Equity
                     Years Ended December 31, 1996 and 1997

<TABLE>
<CAPTION>
                                                             Common
                                                            stock; no          Contributed          Accumulated
                                                            par value            capital              deficit               Total
                                                           -----------         -----------         -----------          -----------
<S>                                                        <C>                     <C>             <C>                    <C>
Balance at December 31, 1995                               $       200              12,547          (5,091,808)          (5,079,061)
  Imputed interest on notes
  payable -- related parties)                                     --               218,778                --                218,778
  Net loss                                                        --                  --            (6,461,269)          (6,461,269)
                                                           -----------         -----------         -----------          -----------
Balance at December 31, 1996                                       200             231,325         (11,553,077)         (11,321,552)
  Imputed interest on notes
     payable - related parties                                    --               254,892                --                254,892
  Conversion of notes payable -
     related parties to common
     stock                                                   5,975,200                --                  --              5,975,200
  Proceeds from sale of common
     stock net of offering
     expenses of $3,234,337                                 19,765,663                --                  --             19,765,663
  Net loss                                                        --                  --            (4,920,851)          (4,920,851)
                                                           -----------         -----------         -----------          -----------
Balance at December 31, 1997                               $25,741,063             486,217         (16,473,928)           9,753,352
                                                           ===========         ===========         ===========          ===========
</TABLE>

See accompanying notes to financial statements.


                                       F-5


<PAGE>


                              AUDIO BOOK CLUB, INC.

                            Statements of Cash Flows
                     Years ended December 31, 1996 and 1997

<TABLE>
<CAPTION>
                                                                                                -----------------------------------
                                                                                                      Years ended December 31,
                                                                                                -----------------------------------
                                                                                                    1996                   1997
                                                                                                ------------           ------------
<S>                                                                                             <C>                      <C>
Cash flows from operating activities:
    Net loss                                                                                    $ (6,461,269)            (4,920,851)
    Adjustments to reconcile net loss to net cash used in
        operating activities:
        Depreciation and amortization                                                                  5,193                  8,334
        Imputed interest on notes payable - related parties                                          218,778                254,892
        Changes in asset and liability accounts:
           Decrease (increase) in accounts receivable, net                                             6,418             (1,187,826)
           Decrease in due from related party                                                           --                   20,000
           (Increase) in inventory                                                                  (383,689)              (863,714)
           Decrease (increase) in prepaid expenses                                                    63,341               (111,896)
           (Increase) in prepaid expenses - non-current                                                 --                  (48,219)
           (Increase) in royalty advances                                                           (235,440)               (32,078)
           Increase in accounts payable and accrued expenses                                       1,170,410              1,375,227
                                                                                                ------------           ------------
                  Net cash used in operating activities                                           (5,616,258)            (5,506,131)
                                                                                                ------------           ------------
Cash flows from investing activities:
        Purchase of short-term investment                                                               --               (5,143,699)
        Acquisition of fixed assets                                                                   (7,063)               (48,636)
                                                                                                ------------           ------------
        Net cash used in investing activities                                                         (7,063)            (5,192,335)
                                                                                                ------------           ------------
Cash flows from financing activities:
        Proceeds from issuance of notes payable - related parties                                  5,575,200                   --
        Repayment of notes payable - related parties                                                    --               (5,505,000)
        Proceeds from issuance of bank debt                                                             --                9,000,000
        Repayment of bank debt                                                                          --               (9,000,000)
        Proceeds of sale of common stock, net of offering costs                                         --               19,765,663
                                                                                                ------------           ------------
         Net cash provided by financing activities                                                 5,575,200             14,260,663
                                                                                                ------------           ------------
Net decrease (increase) in cash and cash equivalents                                                 (48,121)             3,562,197
Cash and cash equivalents at beginning of period                                                $    140,977                 92,856
                                                                                                ------------           ------------
Cash and cash equivalents at end of period                                                      $     92,856           $  3,655,053
                                                                                                ============           ============
</TABLE>

                 See accompanying notes to financial statements.


                                       F-6


<PAGE>


                              AUDIO BOOK CLUB, INC.

                          Notes to Financial Statements

                               December 31, 1997



     (1)  Organization

     Audio Book Club, Inc. (the "Company"), a Florida corporation, was formed on
August 16, 1993.  The Company is a direct  marketer of audiobooks  through Audio
Book Club, a membership  club which  markets and sells  audiobooks by mail order
and via the Internet.

     (2)  Significant Accounting Policies

     Cash and Cash Equivalents

     Securities  with  maturities  of three  months or less when  purchased  are
considered to be cash equivalents.

     Inventory

     Inventory,  consisting  primarily  of  audiocassettes  held for resale,  is
valued at the lower of cost (weighted average cost method) or market.

     Fixed Assets

     Fixed assets, consisting primarily of furniture and computer equipment, are
recorded at cost.  Depreciation is provided by the straight-line method over the
estimated useful life of five years.

     Revenue Recognition

     Revenue is recorded upon shipment of merchandise and simultaneous  billing.
Allowances for doubtful  accounts and future  returns are based upon  historical
experience and evaluation of current trends.

     Income Taxes

     Prior to October 22,  1997,  the Company had elected to be taxed as a small
business  corporation (S corporation) under Section 1362 of the Internal Revenue
Code. As a small business corporation, all federal income taxes, if any, are the
obligations of the stockholders.  Conversely, any losses incurred by the Company
may be used by the stockholders.

     As a result of the consummation of the Company's public offering  effective
on October 22, 1997,  the Company's S corporation  election  terminated  and the
Company ceased to be an S corporation.  Commencing  October 22, 1997 the Company
became taxable as an incorporated  entity (C  Corporation).  Accordingly  losses
incurred by the Company on or after  October 22, 1997 may be used by the Company
and not by the  stockholders to the extent  permitted under the Internal Revenue
Code. Conversely, future federal income taxes, if any, will be the obligation of
the Company.

     Income  taxes are  accounted  for under  the  asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amount of existing  assets and  liabilities  and their  respective tax
basis and operating loss and tax credit carryforwards.  A valuation allowance is
provided when it is more likely than not that some portion or

                                       F-7


<PAGE>


all of the  deferred  tax assets will not be  realized.  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 period that  includes  the  enactment
date.

     Advertising and Promotional Costs

     The Company expenses all production costs of advertising the first time the
advertising takes place. Direct-response advertising consists primarily of print
advertisements  and mailings to  individuals  that  include  order forms for the
Company's  products.  The capitalized  costs of the direct mail  advertising are
amortized in the month of publication of the magazine in which it appears or the
month in which the individual letters are mailed. As of December 31, 1997, costs
of all direct mail advertising have been expensed and accordingly, there were no
capitalized costs of direct mail advertising.

     Promotional  costs for new and current members are expensed on the date the
promotional materials are mailed.

     Royalties

     The Company is liable for royalties to licensors  based upon revenue earned
from the respective  licensed  product.  Royalties,  in excess of advances,  are
payable  based  on  contractual  terms.  Royalty  advances  not  expected  to be
recovered  through  royalties on sales are charged to royalty  expense.  For the
years ended  December 31, 1996 and 1997,  no  writedown of royalty  advances was
recorded.

     Use of Estimates

     Management of the Company has made  estimates and  assumptions  relating to
the  reporting  of assets  and  liabilities  and the  disclosure  of  contingent
liabilities to prepare these  financial  statements in conformity with generally
accepted  accounting   principles.   Actual  results  could  differ  from  those
estimates.

     Fair Value of Financial Instruments

     In  estimating  the fair value for financial  instruments,  the Company has
assumed  that the  carrying  amount of cash,  short-term  investments,  accounts
receivable,  accounts  payable  and  accrued  expenses  approximates  fair value
because of the short maturity of those instruments.

     Impact of New Accounting Pronouncements

     In March 1997, the Financial  Accounting Standards Board issued a Statement
of Financial  Accounting  Standards ("SFAS") No. 128, "Earnings per Share." SFAS
No. 128  establishes  standards for computing and presenting  earnings per share
and applies to entities  with  publicly  held common  stock.  This  statement is
effective  for years ending after  December  15,  1997.  Accordingly,  effective
December 31, 1997, the net loss per share  information  has been  calculated and
presented in accordance the provisions of SFAS No. 128 and as further prescribed
by the  relevant  Staff  Accounting  Bulletins  of the  Securities  and Exchange
Commission.  In  accordance  with the  provisions  of SFAS No. 128, net loss per
share for the year ended December 31, 1996 has also been restated.

                                       F-8


<PAGE>


     (3)  Short Term Investments to be Held to Maturity

     Short term investment to be held to maturity consists of a bank certificate
of deposit in the amount of $5,000,000  bearing interest at 5.5% maturing on May
2, 1998 and a bank  certificate  of deposit in the  amount of  $100,000  bearing
interest  at  5.9%  maturing  on May 6,  1998  plus  accrued  interest  on  both
certificates of deposit.

     (4)  Notes Payable - Related Parties

     Conversion of Related Party Debt

     On November 17, 1995,  the Company  executed a loan  agreement  with Norton
Herrick,  its  Chairman,  Chief  Executive  Officer and founder in the amount of
$8,000,000,  of which  $5,805,000  had been  granted  in the form of  unsecured,
non-interest bearing advances as of December 31, 1995.

     On February 6, 1997, the loan agreement was amended to increase the maximum
borrowing  amount to  $13,000,000  from  $12,000,000.  On May 12, 1997, the loan
agreement was further  amended to stipulate  that the loan does not and will not
bear interest,  and removed all  references to interest in prior  documents.(See
note 5)

     Immediately  prior to the  consummation  of the  Company's  initial  public
offering, the Company's Chairman, Chief Executive Officer, and founder converted
the outstanding  $5,975,200 of indebtedness owed to him under the loan agreement
into  597,520  shares of common  stock at a price per share equal to the initial
offering price of the common stock.  The loan agreement  between the Company and
Norton Herrick was terminated on October 22, 1997.

     Repayment of Related Party Debt

     In June 1994, the Company  received  $50,000 from both the Chief  Operating
Officer and Executive  Vice  President for a total of $100,000,  in exchange for
the Company issuing two notes payable of $50,000 each.

     In February 1997, the Company's Executive Vice President loaned the Company
an additional $350,000 pursuant to a loan agreement (the "1997 HH Loan"). On May
12, 1997, loans payable to the Company's Executive Vice President in the amounts
of $50,000 and $350,000 were  consolidated  via a consolidated and restated loan
agreement. The consolidated loan balance of $400,000 did not bear interest until
August 1, 1997,  after which time  interest was  calculated at an annual rate of
10%.

     On May 12, 1997, the Chief  Operating  Officer loaned the Company  $350,000
pursuant to a loan  agreement (the "1997 MEH Loan").  Borrowings  under the 1997
MEH Loan were  consolidated  via a loan  agreement with the $50,000 loan balance
originated in June of 1994.  The  consolidated  loan balance of $400,000 did not
bear interest until August 1, 1997,  after which time interest was calculated at
an annual rate of 10%.

     On September 15, 1997, the Company repaid the $800,000 of outstanding notes
payable plus accrued  interest in the amount of $10,082 to the  Company's  Chief
Operating Officer and Executive Vice President.

     In accordance  with Staff  Accounting  Bulletin  Topic 5:T, the Company has
imputed an  interest  cost on the  portion  of the  non-interest  bearing  notes
payable  to  related  parties  which  were  not  converted  to  equity  upon the
completion of the Company's initial

                                       F-9


<PAGE>


public offering.  The imputed rate used was based on the terms negotiated by the
Company for its bank debt and was 7.77% and 8.00% for the years  ended  December
31, 1996 and 1997,  respectively.  Interest  expense  imputed was  $218,778  and
$254,892 for the years ended December 31, 1996 and 1997, respectively.

     (5)  Bank Debt

     On May 9, 1997, the Company  borrowed  $6,000,000 from a major bank,  which
was used to repay a portion of the  outstanding  notes  payable to the Company's
Chairman,  Chief Executive Officer,  and founder.  The loan had a one-year term,
had an interest  rate which was 1/2% under the bank's  reference  rate which was
payable monthly.

     On August 2, 1997, the Company  borrowed an additional  $2,250,000 from the
same major bank to fund  working  capital.  The loan was to be due  October  31,
1998,  and had an interest rate which was 1/2% under the bank's  reference  rate
and which was payable monthly.

     On September 16, 1997, the Company borrowed an additional $750,000 from the
same major bank to fund working capital. The loan was also to be due October 31,
1998,  and had an interest rate which was 1/2% under the bank's  reference  rate
and was payable monthly.

     The portion of the outstanding  stock of the Company owned by the Chairman,
Chief  Executive  Officer,  and founder  was pledged as security  for the loans.
Additionally,  in the event the Company  failed to repay the loans at  maturity,
the personal  guarantee of the Company's  Chairman,  Chief Executive Officer and
founder would become effective.

     The Company used a portion of the proceeds of the initial  public  offering
to repay  the  loans  from a major  bank in the  aggregate  principal  amount of
$9,000,000 plus accrued interest thereon of $56,167.

     (6)  Commitments and Contingencies

     Leases - Related Parties

     Rent  expense  for  each of the  years  ended  December  31,  1996 and 1997
amounted to $38,000.

     On July 1, 1997,  the Company  entered  into a new lease for office  space.
Minimum monthly rent under the newly executed lease was $1,167 per month through
November,  1997, at which time the monthly rent  increased to $1,307.  The lease
expires on November  30, 2000 and is subject to two  extension  periods of three
years each. A company affiliated with the Chairman,  Chief Executive Officer and
founder has guaranteed the lease.

     The Company  sublets office space from an entity  wholly-owned  by officers
and directors of the Company.

                                      F-10


<PAGE>


     Minimum annual lease commitments under  noncancelable  operating leases are
as follows:

Year ending
December 31,               Amount
------------               ------
1998                     $ 50,484
1999                       15,684
2000                       14,377
                         --------
Total lease
commitments              $ 80,545
                         ========

     Employment Agreements

     The Company has commitments pursuant to employment  agreements with certain
of its  officers.  The Company's  aggregate  commitments  under such  employment
agreements are approximately  $646,000,  $472,000 and $201,000 during 1998, 1999
and 2000, respectively.

     (7)  Amended Articles of Incorporation

     In  September  1997,  the Company  amended  and  restated  its  Articles of
Incorporation  to provide  for,  among other items,  the increase in  authorized
shares of stock from 10,000 to 30,000,000, of which 25,000,000 are designated as
Common  Stock,  with no par value,  and  5,000,000  are  designated as Preferred
Stock, with no par value.

     (8)  Initial Public Offering

     The Company's  Registration  Statement on Form SB-2 for its initial  public
offering was declared  effective by the  Securities  and Exchange  Commission on
October 22, 1997.  On October 27, 1997,  the Company  closed its initial  public
offering of 2,300,000  shares of Common Stock,  with no par value, at a price of
$10.00 per share of Common Stock.  In connection with the public  offering,  the
underwriters  were granted an  over-allotment  option to purchase an  additional
345,000  shares of  Common  Stock,  exercisable  until  December  6,  1997.  The
underwriters  partially  exercised  their over  allotment  option by  purchasing
110,000 shares from a minority shareholder (with holdings of less than 5% of the
Company's common stock.) The Company incurred expenses of $3,234,337  related to
its initial public offering,  including  underwriting discounts and commissions,
legal and accounting fees,  printing expenses and other expenses Upon completion
of the  offering,  the  associated  costs were deducted from net proceeds of the
offering.

     (9)  Stock Option Plan

     On June 20, 1997, the Company adopted the 1997 Stock Option Plan,  pursuant
to which the  Company's  Board of  Directors  may  grant  stock  options  to key
employees of the Company.  The Plan authorizes  grants of options to purchase up
to 750,000 shares of authorized but unissued  common stock.  Under the Plan, the
Company may grant  incentive  and  non-qualified  stock  options.  The terms and
conditions of options  granted under the Plan may vary at the  discretion of the
Company's  Board of  Directors.  In  addition,  shares  issued  pursuant  to the
exercise of the options may be restricted as to their transferability.

                                      F-11


<PAGE>


     In September  1997, the Company  granted to an officer  options to purchase
50,000 shares of common stock at an exercise  price equal to 110% of the initial
public  offering  price per share of the Company's  common  stock.  Such options
shall  vest as to  one-fifth  of the  shares  covered  thereby  annually  over a
five-year period commencing on October 31, 1998,  provided,  however,  that such
options shall  terminate and be canceled if the officer is no longer employed by
the Company prior to the date on which such options vest.  Such options shall be
exercisable  for a period of five years  commencing  immediately  upon  vesting,
provided,  however,  if the officer is no longer  employed by the Company,  such
options shall expire on the earlier of 30 days following the date the officer is
no longer employed by the Company or five years following the date on which such
options vest.

     Stock  option  activity  during  the year  ended  December  31,  1997 is as
follows:


                                                                    Weighted
                                                                     average
                                                     Shares       exercise price
                                                     ------       --------------
Outstanding at the beginning of the period          $    --          $   --
    Granted                                          50,000           11.00
    Exercised                                            --              --
    Canceled                                             --              --
                                                    -------          ------
Outstanding at end of the year                       50,000          $11.00
                                                    =======          ======

     At December 31, 1997,  there were 700,000  additional  shares available for
grant under the Plan.

     The per share  weighted-average  fair value of stock options granted during
the year ended  December  31,  1997 was $4.55 on the date of the grant using the
Black-Scholes  option-pricing model with the following  assumptions for the year
ended December 31, 1997: risk free rate of return 5.56%;  option life five years
from date of vesting; and no dividend yield.

     The Company applies APB 25 in accounting for its Plan and, accordingly,  no
compensation  cost has been  recognized  for its stock  options in the financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock  options  under SFAS 123, the Company's net loss
per share would have been reduced to the amounts indicated below:

                                                                  Year ended
                                                               December 31, 1997

Net loss as reported                                              $(4,920,851)
Net loss adjusted for stock based
compensation costs                                                $(4,928,440)
Basic net loss per share adjusted for stock
based compensation costs                                               $(1.20)
Diluted  net loss per share adjusted for stock
based compensation costs                                               $(1.20)


                                      F-12


<PAGE>


     At December 31, 1997, the weighted  average  remaining  contractual life of
outstanding  options was eight  years.  At December  31,  1997,  no options were
exercisable.

     (10) Income Taxes

     Prior to October 22,  1997,  the Company had elected to be taxed as a small
business  corporation (S corporation) under Section 1362 of the Internal Revenue
Code. As a result of the consummation of the Company's public offering effective
on October 22, 1997,  the Company's S corporation  election  terminated  and the
Company ceased to be an S corporation.  Commencing  October 22, 1997 the Company
became taxable as an incorporated entity (C Corporation).

     Income tax benefit for the year ended  December 31, 1997  differed from the
amount  computed  by  applying  the U.S.  Federal  income tax rate of 34% to the
pre-tax loss as a result of the following:

Computed tax benefit at 34%                                         $(1,673,089)
Adjustment for partial-year C-corporation status                    $ 1,347,673
Adjusted computed tax benefit at 34%                                $  (325,416)
Increase in valuation allowance                                     $   325,416
  for Federal deferred tax asset                                     -----------
Income tax expense                                                  $      --
                                                                     ===========

     The tax  effect of  temporary  differences  that  give rise to  significant
portions of the deferred tax assets are as follows:

Deferred tax assets:

Federal and state net operating loss carryforwards                    $ 269,715
Accounts receivable, principally due to allowance                     $ 112,778
    for doubtful accounts and reserve for returns
Total gross deferred tax assets                                       $ 382,493
Less valuation allowance                                              $(382,493)
                                                                      ---------
Net deferred tax assets                                               $  -0-
                                                                      =========

     The Company has provided a valuation allowance of $382,493 for deferred tax
assets as of December 31, 1997. In assessing the  realizability  of deferred tax
assets,  management has  determined  that the Company does not have a history of
earnings  on  which to base  its  determination.  The  ultimate  realization  of
deferred tax assets is  dependent on the  generation  of future  taxable  income
during  the  periods  in  which  those  temporary  timing   differences   become
deductible. The Company's limited operating history does not allow management to
make a judgment regarding future taxable income over those periods.

                                      F-13


<PAGE>


     The Company has approximately  $606,000 of net operating loss carryforwards
which may be used to offset  possible  future  earnings,  if any,  in  computing
future income tax liabilities.

     (11) Net Loss Per Share of Common Stock

     During March,  1997,  the Financial  Accounting  Standards  Board  ("FASB")
released  Statement of Financial  Accounting  Standards No. 128,  :"Earnings per
Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share and is effective  for financial  statements  for both interim
and annual periods after December 15, 1997. Accordingly,  effective December 31,
1997, the  accompanying  net loss per share  information has been calculated and
presented  in  accordance  with  the  provisions  of  SFAS  128  and as  further
prescribed by the relevant  Staff  Accounting  Bulletins of the  Securities  and
Exchange Commission.

     Basic net loss per share is computed by dividing  net loss by the  weighted
average  number of common shares  outstanding  during the  applicable  reporting
periods.  The  computation  of  diluted  net loss per  share is  similar  to the
computation of basic net loss per share except that the denominator is increased
to  include  the  number  of  additional  common  shares  that  would  have been
outstanding if the dilutive  potential  common shares had been issued.  However,
the  Company's  computation  of dilutive  net loss per share does not assume any
conversion  or exercise of securities  as their effect is  antidilutive  for all
periods presented.

     The weighted  average used in the net loss per share  computations  for the
years ended December 31, 1997 and 1996 were 3,820,027 and 3,256,400.

     Common equivalent  shares that could potentially  dilute basic earnings per
share in the future and that were not  included  in the  computation  of diluted
loss per share because of  antidilution  were 50,000 for the year ended December
31, 1997 and -0- for the year ended December 31, 1996.

     (12) Supplemental Cash Flow Information

     No cash has been expended for income taxes for the years ended December 31,
1996 and 1997.  Cash  expended  for interest was none and $286,246 for the years
ended December 31, 1996 and 1997, respectively.

     During the years  ended  December  31,  1996 and 1997,  the  Company  had a
noncash  financing  activity related to the recognition of imputed interest on a
portion  of the notes  payable -  related  parties  of  $218,778  and  $254,892,
respectively.

     Immediately  prior to the  consummation  of the  Company's  initial  public
offering, the Company's Chairman, Chief Executive Officer, and founder converted
the outstanding  $5,975,200 of  indebtedness  owed to him into 597,520 shares of
common stock at a price per share of $10.00.

     (13) Related Party Transactions

     Companies  wholly-owned  by Norton  Herrick  provided  certain  accounting,
administrative  and general office services to, and obtained  insurance coverage
for, the

                                      F-14


<PAGE>


Company  at cost in  1997,  and the  Company  paid  to such  entities  for  such
services, in the aggregate $38,928 and $60,000,  during the years ended December
31, 1996 and 1997,  respectively.  The  Company  anticipates  obtaining  similar
services from time to time from  companies  affiliated  with Norton  Herrick for
which it will  reimburse  such  companies'  cost to provide such services to the
Company.

     During 1997, Abrams Direct Marketing ("ADM"), a company wholly-owned by Roy
Abrams,  a director  designee of the  Company,  provided  independent  marketing
consulting  services to the Company and has been paid  approximately  $25,500 by
the  Company  for such  services.  In June  1997,  the  Company  entered  into a
consulting  agreement  with ADM  pursuant  to which ADM  assists  the Company in
connection with marketing  activities,  including  designing,  implementing  and
reviewing  the  results  of direct  marketing  campaigns  and  selecting  direct
marketing lists, on an as-needed basis at the rate of $250 per hour.

     (14) Subsequent Events

     (a)  Leases

     In January,  1998, the Company amended a sublease  agreement to provide for
additional  space at its New Jersey  location.  Minimum  monthly  rent under the
amended lease is $2,900 per month through  December,  1998 and is subject to two
extension periods of five years each under certain conditions.

     (b)  Stock Options

     In January,  1998,  the Company  granted to an officer  options to purchase
30,000 shares of common stock at an exercise  price equal to 110% of the initial
public  offering  price per share of the Company's  common  stock.  Such options
shall vest as to one-third of the shares covered  thereby on January 1, 1999 and
two-thirds  on  January  1, 2000  provided,  however,  that such  options  shall
terminate  and be canceled  if the officer is no longer  employed by the Company
prior to the date on which such options vest.  Such options shall be exercisable
for a period  of five  years  commencing  immediately  upon  vesting,  provided,
however, if the officer is no longer employed by the Company, such options shall
expire on the  earlier of 90 days  following  the date the  officer is no longer
employed by the Company or five years  following  the date on which such options
vest.

     In January,  1998,  the Company  granted to a  consultant  to the  Company,
options to purchase  5,000 shares of common stock at an exercise  price equal to
the market  value of the common stock on February 2, 1998.  Such  options  shall
vest one year after date of the grant provided, however, that such options shall
terminate  and be canceled if the  individual  is no longer a consultant  to the
Company. Such options shall be exercisable for a period of five years commencing
immediately  upon  vesting,  provided,  however,  if the  officers are no longer
employed by the  Company,  such  options  shall expire on the earlier of 90 days
following the date the individual  officer is no longer  employed by the Company
or five years following the date on which such options vest.

     On February 12, 1998, the Company  granted to each of two officers  options
to purchase  100,000  shares of common  stock at an exercise  price equal to the
market  value of the common stock on the date of the grant.  Such options  shall
vest as to  one-half  of the  shares  covered  thereby on  February  9, 1999 and
one-half  on  February  9,  2000  provided,  however,  that such  options  shall
terminate and be canceled if the officers are

                                      F-15


<PAGE>


no longer  employed by the Company prior to the date on which such options vest.
Such  options  shall  be  exercisable  for a  period  of five  years  commencing
immediately  upon  vesting,  provided,  however,  if the  officers are no longer
employed by the  Company,  such  options  shall expire on the earlier of 90 days
following the date the individual  officer is no longer  employed by the Company
or five years following the date on which such options vest.

     (c)  Internet Marketing Agreements

     Subsequent  to year end, the Company  entered  into a series of  agreements
with various  Internet  companies  to provide  permanent  placements  and banner
advertisements  throughout  their Web Sites.  Each of these  agreements  require
monthly  payments and provide for termination of the agreement by the Company at
its option.  The  agreements  provide for  guaranteed  impressions  and, in some
cases, provide for additional guarantees. If the Company chooses to maintain all
the  agreements  through  December  31, 1998,  total  payments in 1998 under the
agreements would be approximately $2,800,000.

     Board of Directors

     On March 18,  1998,  Carl T. Wolf was  elected  to the  Company's  Board of
Directors.  Mr. Wolf has been granted  options to purchase  22,500 shares of the
Company's  common  stock at  $5.00  per  share  which  vest and are  exercisable
one-third  on, March 18, 1998 (the "Grant  Date") and one-third on the first and
second  anniversaries  of such Grant Date.  In addition,  Mr. Wolf shall receive
annual  compensation  of $5,000,  payable on the  anniversary of his joining the
Company's Board of Directors.

     Also on March 18,  1998,the  Company sold to Mr. Wolf an option to purchase
50,000 shares of Common Stock. Such options immediately vest and are exercisable
at an exercise  price of $5.00 per share and have a five year term. The purchase
price of the option was $50,000.

                                      F-16


<PAGE>


                                   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. Audio Book Club, Inc.

                                     By: /s/ Michael Herrick
                                         ---------------------------------------
Date:  March 27, 1998                    Michael Herrick, Vice Chairman of the
                                         Board and Chief Operating Officer

         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.


                                 /s/ Norton Herrick
Date:  March 27, 1998            -----------------------------------------------
                                 Norton Herrick, Chairman of the Board and Chief
                                 Executive Officer

                                 /s/ Michael Herrick
Date:  March 27, 1998            -----------------------------------------------
                                 Michael Herrick, Vice Chairman of the Board
                                 and Chief Operating Officer

                                 /s/ Jesse Faber
Date:  March 27, 1998            -----------------------------------------------
                                 Jesse Faber, President and Director

                                 /s/ Howard Herrick
Date:  March 27, 1998            -----------------------------------------------
                                 Howard Herrick, Executive Vice President
                                 and Director

                                 /s/ John F. Levy
Date:  March 27, 1998            -----------------------------------------------
                                 John F. Levy, Executive Vice President
                                 and Chief Financial Officer (Principal
                                 Financial and Accounting Officer)

                                 /s/ Roy Abrams
Date:  March 27, 1998            -----------------------------------------------
                                 Roy Abrams, Director


Date:                            -----------------------------------------------
                                 Carl Wolf, Director


                                       35


<PAGE>


                              AUDIO BOOK CLUB, INC.

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                 for the years ended December 31, 1996 and 1997

<TABLE>
<CAPTION>
                                                       Balance            Amounts             Write-Offs          Balance
                                                       Beginning          Charged to          Against             End of
                                                       of Period          Net Income          Reserves            Period
                                                       ---------          ----------          --------            ------
<S>                                                    <C>                <C>                 <C>                 <C>
Allowances for Sales Returns and Doubtful Accounts:

Year Ended December 31, 1996                           $703,923           $3,610,621          $3,482,875          $  831,669
                                                       --------           ----------          ----------          ----------

Year Ended December 31, 1997                           $831,669           $6,073,746          $5,455,970          $1,449,445
                                                       --------           ----------          ----------          ----------
</TABLE>

                                       S-1