SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

FORM 10-K

|X|   Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
      1934.

      For the fiscal year ended December 31, 2002

                                       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

                                 MEDIABAY, INC.

             (Exact Name of Registrant as Specified in Its Charter)

           Florida                                              65-0429858
 (State or other jurisdiction                               (IRS employer of
incorporation or organization)                             identification no.)

         2 Ridgedale Avenue                                        07927
          Cedar Knolls, NJ                                     --------------
---------------------------------------                          (Zip Code)
(Address of principal executive offices)

                                  973-539-9528

              (Registrant's Telephone Number, Including Area Code)

        Securities registered pursuant to Section 12(b) of the Act: None

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

                                  Common Stock
                                (Title of Class)

Indicate by check mark whether the Registrant: (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 filling requirements for
the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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-K or any
amendment to this Form 10-K. |X|

Indicate by check mark whether the Registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |_| No |X|

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 28, 2002 (the last business day of the Registrant's
most recently completed second quarter) was approximately $45,504,807.

As of April 10, 2003, there were 14,341,376 shares of the Registrant's Common
Stock outstanding.

                      Documents Incorporated by Reference:

                                      None

<PAGE>

                                 MEDIABAY, INC.

Form 10-K

Table of Contents

PART I

Item 1.  Description of Business                                               1

Item 2.  Description of Property                                              12

Item 3.  Legal Proceedings                                                    12

Item 4.  Submission of Matters to a Vote of Security Holders                  12

PART II

Item 5.  Market for Registrant's Common Equity and Related Stockholder
         Matters                                                              13

Item 6.  Selected Financial Data                                              13

Item 7.  Management's Discussion and Analysis of Financial Condition and

         Results of Operations                                                15

Item 7A. Quantitative and Qualitative Disclosures about Market Risk           31

Item 8.  Financial Statements and Supplementary Data                          31

Item 9.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure                                                 31

PART III

Item 10. Directors and Executive Officers                                     32

Item 11. Executive Compensation                                               35

Item 12. Security Ownership of Certain Beneficial Owners and Management       39

Item 13. Certain Relationships and Related Transactions                       42

Item 14. Controls and Procedures                                              44

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K      45

<PAGE>

The Company is restating its previously issued consolidated financial statements
as of December 31, 2000 and 2001 and for the years ended December 31, 1999, 2000
and 2001 to correct errors in the accounting treatment relating to previously
disclosed financing transactions. The amounts presented herein reflect the
restatement of these financial statements. The effects of this restatement on
the consolidated financial statements as of and for the years ended December 31,
2000 and 2001 are presented in Part II. Item 6 "Selected Financial Data" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 2 to Notes to the Consolidated Financial Statements of
this Form 10-K. The effects of this restatement on the consolidated financial
statements for the year ended December 31, 1999 and as of December 31, 1998 and
1999 are presented in Item 6 "Selected Financial Data."

PART I

Item 1. Description of Business

Forward-looking Statements

            Certain statements in this Form 10-K and in the documents
incorporated by reference in this Form 10-K constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical facts included in this
Report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected costs and plans and objectives
of our management for future operations are forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. These forward
looking statements involve certain known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any results, performances or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations, include,
without limitation, our history of losses; our ability to meet stock repurchase
obligations, anticipate and respond to changing customer preferences, license
and produce desirable content, protect our databases and other intellectual
property from unauthorized access, pay our trade creditor and collect
receivables; dependence on third-party providers, suppliers and distribution
channels; competition; the costs and success of our marketing strategies,
product returns and member attrition. Undue reference should not be placed on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to update any forward-looking statements.

Introduction

            MediaBay is a media company specializing in spoken audio content,
marketing and publishing, whose businesses include direct response and
interactive marketing, retail product distribution, media publishing and
broadcasting.

            Our content library consists of more than 50,000 hours of spoken
audio content. The majority of our content is acquired under license from the
rightsholders.

            Our customer base includes over 2.9 million spoken audio buyers who
have purchased via catalogs and direct mail marketing. We also have a total file
of 2.0 million e-mail addresses. Our old-time radio products are sold in over
7,000 retail locations including Costco, Target, Sam's Club, Barnes & Noble,
Borders, Amazon.com, and Cracker Barrel Old Country Stores.

            Our web sites receive more than 2 million unique monthly web site
visitors and are among the most heavily trafficked bookselling web sites on the
Internet. We serve more than 400,000 classic radio streams of our content on a
monthly basis to web site visitors at RadioSpirits.com and MediaBay.com.

Business Divisions

            We report financial results on the basis of four reportable
segments; Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or
"RSI") and MediaBay.com. A fifth division, Radio Classics, is aggregated with
Radio Spirits for financial reporting purposes. Except for corporate, each
segment serves a unique market segment within the spoken word audio industry.
The four segments serving the spoken word audio industry are as follows:

      o     Audio Book Club ("ABC") - is, we believe, the largest audiobook club
            with a total member file of approximately 2.5 million names;
            marketed via direct mail and the Internet at www.audiobookclub.com.


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      o     Radio Spirits ("Radio Spirits" or "RSI")- markets old-time radio
            programs to RSI catalog buyers through direct mail catalogs and, on
            a wholesale basis, to major retailers, including Costco, Target,
            Sam's Club, Barnes & Noble, Borders, Amazon.com and Cracker Barrel
            Old Country Stores, and via the Internet at www.radiospirits.com.

      o     MediaBay.com - provides the infrastructure and support for all of
            the Company's websites including www.Audiobookclub.com,
            www.RadioSpirits.com and www.MediaBayDownloads.com. MediaBay.com
            powers the Company's digital audio download service located at
            www.MediaBayDownloads.com which offers many of the Company's classic
            radio programs and audiobooks for purchase either via a secure
            digital download subscription service or on a pay per download
            basis, in either case, with desktop and mobile playback
            capabilities.

      o     RadioClassics ("RCI")- currently distributes three national
            "classic" radio programs collectively heard on more than 250 radio
            stations weekly and can also be heard on dedicated channels on both
            the Sirius Satellite Radio and XM Satellite Radio services.

Audio Book Club

            We believe that Audio Book Club is the largest membership-based club
of its kind. Our total member file, which includes active and inactive members,
has grown significantly from approximately 64,000 names at December 31, 1995 to
approximately 2.5 million names at December 31, 2002.

            In December 1998 and June 1999, MediaBay acquired its only two
competitors in the club segment of the audiobook market: The Columbia House
Audiobook Club from Time Warner and Sony and Doubleday's Audiobooks Direct club
from Bertelsmann.

            Our Audio Book Club is modeled after the "Book-of-the-Month Club".
Audio Book Club members can enroll in the club through the mail by responding to
direct mail advertisements, online through our web site or by calling us. We
typically offer new members four audiobooks at an introductory price of $.99 or
less. By enrolling, the member typically commits to purchase a minimum number of
additional audiobooks, typically one or two, at Audio Book Club's regular
prices, which generally range from $10.00 to $40.00 per audiobook. Our members
continue to receive member mailings and typically purchase audiobooks beyond
their minimum purchase commitment.

            We emphasize the timely introduction of new audiobook titles to our
catalogs and attempt to offer a balance between various genres and between
unabridged and abridged audiobooks, cassettes and compact discs to satisfy
differing member preferences.

            We have formed our first such specialty club for audiobooks, Audio
Passages, a Christian audiobook club.

            We engage in list rental programs to maximize the revenue generation
potential of these programs. As Audio Book Club's membership base and Radio
Spirits' catalog customer base continue to grow, we anticipate that our customer
and member lists will continue to be attractive to non-competitive direct
marketers as a source of potential customers.

            Audiobookclub.com currently receives over 1.6 million unique
visitors per month and is one of the most heavily trafficked bookselling web
sites on the Internet.

Marketing

            Since our inception, we have engaged in an aggressive marketing
program to expand our Audio Book Club member base. We devote significant efforts
to developing various marketing strategies in a concerted effort to increase
revenue and reduce marketing costs. We continually analyze the results of our
marketing activities in an effort to maximize sales, extend membership life
cycles, and efficiently target our marketing efforts to increase response rates
to our advertisements and reduce our per-member acquisition costs.


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            We have historically acquired new Audio Book Club members primarily
through direct mailings of member solicitation packages, acquisitions, Internet
advertising, and to a lesser extent from advertisements in magazines, newspapers
and other publications, package insert and telemarketing programs. We seek to
attract a financially sound and responsible membership base and target these
types of persons in our direct mail, Internet and other advertising efforts.

            We select lists of names of membership candidates based on the
extensive knowledge and experience we have gained which we believe are
characteristic of persons who are likely to join Audio Book Club, purchase
sufficient quantities of audiobooks to be a profitable source of sales for us
and remain long-term members. We analyze our existing mailing lists and our
promotional campaigns to target membership lists, which are more likely to yield
higher response rates. We have gained substantial knowledge relating to the use
of third-party mailing lists and believe we can target potential members
efficiently and cost effectively by using third-party mailing lists.

            Our Internet marketing program focuses on acquiring Audio Book Club
members through advertising agreements with other web sites that require payment
only when we enroll a bona fide member in Audio Book Club. This cost -per
-acquisition arrangement results in substantially lower marketing costs and
direct control over the cost of acquiring members. We have significantly reduced
our cost to acquire a member online as a result of our revised marketing
strategy. The cost to acquire a member in December 2002 was approximately $12 as
compared to over $50 in January of 2000. We have acquired approximately 360,000
members online, including approximately 96,000 members in 2002 and 58,000
members in 2001. Unlike traditional web retailers, our members have a purchase
obligation associated with their membership and there is a strong likelihood
that they will remain members and repeat buyers for a sustained period.

Member Retention and Recurring Revenue

            We encourage Audio Book Club members to purchase more than their
minimum purchase commitment by offering members selected promotions, spot
discounts and other incentives based on the volume of their purchases. Audio
Book Club members receive one mailing approximately every three weeks. Audio
Book Club mailings typically include a multi-page catalog which offers hundreds
of 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.

            In order to encourage members to maintain their relationship with
Audio Book Club and to maximize the long-term value of members, we seek to
provide friendly, efficient, and personalized service. Our goal is to simplify
the order process and to make members comfortable shopping via the Internet and
by mail order. Audio Book Club's membership club format makes it easy for
members to receive the featured selection without having to take any action.
Under the membership club reply system, the member receives the featured
selection unless he or she replies by the date specified on the order form by
returning the order form, calling us with a reply or replying online via our
Internet web site with a decision not to receive such selection. Members can
also use any of these methods to order additional selections from each catalog.

         We maintain a database of information on each name in our member file,
including number and genre of titles ordered, payment history and the marketing
campaign from which the member joined. We also maintain a lifetime value
analysis of each mailing list we use and each promotional campaign we undertake.

Supply and Production

         We have established relationships with substantially all of the major
audiobook publishers, including Random House Audio Publishing Group, Simon &
Schuster Audio, Harper Audio and Time Warner Audio Books for the supply of
audiobooks. As a club operator, we license a recording or a group of recordings
from the publisher for sale in a club format on a royalty or per copy basis and


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<PAGE>

subcontract the manufacturing, including duplicating and printing to a third
party.

            Our licensing agreements, many of which are exclusive, have one to
three-year terms, require us to pay an advance against future royalties upon
signing the license, permit us to sell audiobooks in our inventory at the
expiration of the term during a sell-off period and prohibit us from selling an
audiobook prior to the publisher's release date for each audiobook.
Substantially all of the license agreements permit us to make our own
arrangements for the packaging, printing and cassette duplication of audiobooks.
Substantially all of our license agreements permit us to produce and sell
audiobook titles in cassette and compact disc form.

Fulfillment and Customer Service

            Bookspan, formerly Doubleday Direct, currently provides order
processing and data processing services, warehousing and distribution services
for our Audio Book Club members. Bookspan's services include accepting member
orders, implementing our credit policies, inventory tracking, billing,
invoicing, cash collections and cash application and generating periodic
reports, such as reports of sales activity, accounts receivable aging, customer
profile and marketing effectiveness. Bookspan also provides us with raw data
from which we generate our own marketing and accounting reports using our
in-house management information systems department. Bookspan also packs and
ships the order, using the invoice as a packing list, to the club member.

            Members are billed for their purchases at the time their orders are
shipped and are required to make payment promptly. We generally allow members in
good standing to order up to fifty dollars of products on credit, which may be
increased if the member maintains a good credit history with us. We monitor each
member's account to determine if the member has made excessive returns.

            We have substantially reduced the number of SKUs (Stock Keeping
Units) in our inventory, resulting in fewer back orders on items ordered and
less delay in fulfilling orders. We have also extended the period of time
between when a catalog is mailed and when we ship the featured selection,
allowing members additional time to decline the featured selection if they
choose.

Radio Spirits

RSI Content

            RSI has exclusive rights to a substantial portion of its library of
popular old-time radio and classic video programs, including vintage comedy,
mystery, detective, adventure and suspense programs. RSI's library consists of
over 60,000 radio programs, most of which are licensed on an exclusive basis,
including:

      o     H.G. Wells' "War of the Worlds" broadcast;

      o     hit series, such as The Shadow, The Lone Ranger, Superman, Tarzan,
            Sherlock Holmes, The Life of Riley and Lights Out;

      o     recordings of stars, such as Bob Hope, Lucille Ball, Frank Sinatra
            and Jack Benny; and

      o     recordings of comedy teams, such as Abbott and Costello, Burns and
            Allen, and Martin and Lewis.

            RSI leverages the content of its old-time radio and classic video
library by entering into marketing and co-branding arrangements, which provides
RSI a means to repackage these programs. RSI offers the following collections,
among others:

      o     "The Greatest Old-Time Radio Shows of the 20th Century - selected by
            Walter Cronkite" - a collection of Mr. Cronkite's favorite old-time
            radio programs. RSI has entered into a license agreement to use Mr.
            Cronkite's name and likeness. This collection includes some of
            radio's most memorable programs, a spoken foreword by Mr. Cronkite
            and a companion informational booklet.


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      o     "The Smithsonian Collections" - a collection of old-time radio
            programs branded under this name. RSI has entered into an agreement
            with the Smithsonian Institution to produce a series of recordings
            of nostalgic radio programs to be sold through all major bookstore
            chains carrying audio programs. Each Smithsonian collection features
            a foreword by a recognized celebrity from radio's golden age such as
            George Burns, Jerry Lewis and Ray Bradbury.

Marketing

            RSI markets its library of old-time radio and video programs through
direct marketing, Internet, and retail channels. RSI's marketing efforts are
aimed at the direct marketing channel of distribution, via internally developed
catalogs, as well as through retail and online channels of distribution. RSI
produces several catalogs per year and mails them to its customer list and
selected third-party mailing lists three times per year. RSI has developed
wholesale distribution through several large, national book retailers, including
Barnes & Noble, Borders, and Waldenbooks; gift stores such as Cracker Barrel Old
Country Stores; and mass retailers like Costco, Sam's Club, and Target, as well
as on the Internet at Amazon.com. RSI also sells its products through its web
site at Radiospirits.com.

Direct Mail

            RSI maintains a total file of over 400,000 names of customers and
prospects. This list includes all customers to which RSI's radio and video
programs or catalogs have been mailed. RSI engages in list rental programs to
maximize the revenue generation potential of its customer list.

Broadcast

            RSI advertises its products on RadioClassics' nationally syndicated
old-time radio broadcast, which are broadcast weekly on over 250 radio stations.
Our old-time radio shows can also be heard on dedicated channels on both the
Sirius Satellite Radio and XM Satellite Radio services.

Internet

            RSI also sells its old-time radio programs in cassette and compact
disc direct to consumers through its web site, Radiospirits.com.
Radiospirits.com offers visitors the opportunity to listen to free programs in
streaming audio while they are prompted to buy our programs. Consumers may also
download old-time radio content from the Internet at both Radiospirits.com and
MediaBay.com. This service enables the secure delivery of old-time radio content
over the Internet for playback on personal computers and portable playback
devices.

Wholesale

            RSI also sells its radio programs on a wholesale basis through major
retailers and online retailers, including Costco, Target, Sam's Club, Barnes &
Noble, Borders, Amazon.com and Cracker Barrel Old Country Stores. RSI's products
are currently sold in approximately 7,000 retail locations.

            RSI markets its old-time radio and classic video programs to
wholesale customers through its in-house sales personnel, independent sales
representatives and through third-party distributors. RSI also engages in
cooperative advertising to induce retailers to purchase its products.

Supply and Production

            RSI has exclusive licensing rights to a substantial majority of its
old-time radio library. These rights have been principally acquired from the
original rightsholders (actors, directors, writers, producers or others) or
their estates. Engineers in our New Jersey facility use digital sound equipment
to improve the sound quality of RSI's old-time radio programs. RSI then
contracts with third-party manufacturers to duplicate and manufacture the
old-time radio cassettes and CDs, which it sells.

Fulfillment and Customer Service

            RSI uses a third-party fulfillment center to process and fill
orders. RSI only accepts credit card orders or advance payments from consumers
and requires wholesale customers to generally pay invoices within 60 to 90 days.
RSI maintains a toll-free customer service telephone hotline for these customers
and can also be contacted by mail and e-mail. RSI's policy is to accept returns
of damaged products sold on a retail basis. RSI accepts returns of unsold
products sold on a wholesale basis.


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<PAGE>

MediaBay.com

            MediaBay.com provides the infrastructure and support for all of the
Company's websites including www.Audiobookclub.com, www.RadioSpirits.com and
www.MediaBayDownloads.com. MediaBay.com powers the Company's digital audio
download service located at www.MediaBayDownloads.com which offers many of the
Company's classic radio programs and audiobooks for purchase either via a secure
digital download subscription service or on a pay per download basis, in either
case, with desktop and mobile playback capabilities

RadioClassics

            Our RadioClassics subsidiary produces and syndicates three national
"classic" radio programs: "When Radio Was" hosted by Stan Freberg, "Radio Movie
Classics" hosted by Jeffrey Lyons, and "Radio Super Heroes." These three
programs are broadcast on more than 250 radio stations in the United States. Our
library of old-time radio programs provides the content and the basis for these
programs.

            Our current syndicated radio shows provide an excellent forum to
introduce our old-time radio programs to existing and potential new listeners.
The syndication agreements also provide us with an average of 1 to 2 minutes per
hour for our own advertising and promotional use. We use this advertising and
promotional forum as a means to develop broader name recognition for Radio
Spirits and additional sales of old-time radio products from existing and first
time buyers as well. Our old-time radio content can also be heard on dedicated
channels on both the Sirius Satellite Radio and XM Satellite Radio services.

Competition

            Although we believe our Audio Book Club is the only business which
sells audiobooks in a club format and we believe we are the largest producer,
marketer and seller of old-time radio programs, we compete for discretionary
consumer spending with other mail order clubs and catalogs and other direct
marketers and traditional and on-line retailers that offer products with similar
entertainment value as audiobooks and old-time radio programs, such as music on
cassettes and compact discs, printed books, videos, and laser and digital video
discs. Many of these competitors are well-established companies, which have
greater financial resources.

            The audiobook and mail order industries are intensely competitive.
We compete with all other outlets through which audiobooks and other spoken word
content are offered, including:

      o     bookstores;

      o     audiobook stores which rent or sell only audiobooks;

      o     mail order companies that offer audiobooks for rental and sale
            through catalogs;

      o     web sites such as Amazon.com; and

      o     retail establishments such as convenience stores, video rental
            stores and wholesale clubs.

Intellectual Property

            We have several United States registered trademarks and service
marks for slogans and designs used in our advertisements, member mailings and
member solicitation packages, including the Audio Book Club logo "MediaBay,"
"Radio Spirits", "MediaBay.com," "audiobookclub.com" and the MediaBay logos. We
believe that our trademarks and service marks have significant value and are
important to our marketing. We also own or license the rights to substantially
all of our radio programs in our content library.

            We rely on trade secrets and proprietary know-how and employ various
methods to protect our ideas, concepts and membership database. In addition, we
typically obtain confidentiality agreements with our executive officers,
employees, list managers and appropriate consultants and service suppliers.


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Employees

            As of April 10, 2003, we had 50 full-time employees. Of these
employees, 5 served in corporate management; 28 served in operational positions
at our Audio Book Club operations; 5 served in operational positions at our
MediaBay.com operations and 12 served in operational positions at our old-time
radio operations. We believe our employee relations to be good. None of our
employees are covered by a collective bargaining agreement.

                                  RISK FACTORS

Risks Related to our Operations

Our products are sold in a niche market that is still evolving and may have
limited future growth potential.

            We believe that the market for audiobooks has expanded rapidly in
recent years. However, consumer interest in audiobooks and old time radio may
decline in the future, and growth trends in these markets may stagnate or
decline. The sale of audiobooks through mail order clubs and over the Internet
are emerging retail concepts, and audiobooks are still evolving as a niche
market. As is typically the case in an evolving industry, the ultimate level of
demand and market acceptance for our products is subject to a high degree of
uncertainty. A decline in the popularity of audiobooks and old time radio would
limit our future growth potential and negatively impact our future operating
results.

We may be unable to anticipate changes in consumer preference for our products
and may lose sales opportunities.

            Our success depends largely on our ability to anticipate and respond
to a variety of changes in the audiobook and old-time radio industries. These
changes include economic factors affecting discretionary consumer spending,
modifications in consumer demographics and the availability of other forms of
entertainment. The audiobook and old time radio markets are characterized by
changing consumer preferences, which could affect our ability to:

            o     plan for catalog offerings;

            o     introduce new titles;

            o     anticipate order lead time;

            o     accurately assess inventory requirements; and

            o     develop new product delivery methods.

            Although we evaluate many factors and attempt to anticipate the
popularity and life cycle of audiobook titles, the ultimate level of demand for
specific titles is subject to a high level of uncertainty. Sales of audiobook
titles typically decline rapidly after the first few months following release.
If sales of specific titles decline more rapidly than we expect, we could be
left with excess inventory, which we might be forced to sell at reduced prices.
If we fail to anticipate and respond to factors affecting the audiobook industry
in a timely manner, we could lose significant amounts of capital or potential
sales opportunities.

We may experience system interruptions, which affect access to our websites and
our ability to sell products over the Internet.

            Our future revenues may depend in part on the number of web site
visitors who join as Audio Book Club members and who make online purchases. The
satisfactory performance, reliability and availability of our web sites,
transaction-processing systems and network infrastructure are critical to our
ability to attract and retain visitors at our web sites. If we experience system
interruptions that prevent customers and potential customers from accessing our
web sites, consumer perception of our on-line business could be adversely
affected, and we could lose sales opportunities and visitor traffic.

We may not be able to license or produce desirable spoken word content, which
could reduce our revenues.


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            We could lose sales opportunities if we are unable to continue to
obtain the rights to additional audiobook libraries or selected audiobook
titles. We may not be able to renew existing license and supply arrangements for
audiobook publishers' libraries or enter into additional arrangements for the
supply of new audiobook titles.

If our third-party providers fail to perform their services properly, our
business and results of operations could be adversely affected.

            Third-party providers conduct all of our Audio Book Club customer
service operations, process orders and collect payments for us. If these
providers fail to perform their services properly, Audio Book Club members could
develop negative perceptions of our business, collections of receivables could
be delayed and our operations might not function efficiently.

If our marketing strategies to acquire new members are not successful, our costs
would increase, and we will not acquire as many members as we anticipate, which
would inhibit our sales growth.

            If our direct mail and other marketing strategies are not
successful, our per member acquisition costs may increase and we may acquire
fewer new members than anticipated. As a result, our operating results would be
negatively impacted and our sales growth would be inhibited.

The public may become less receptive to unsolicited direct mail campaigns.

            The success of our direct mail campaigns is dependent on many
factors including the public's acceptance of direct mail solicitations. Negative
public reception of direct mail solicitations will result in lower customer
acquisitions rates and higher customer acquisition costs and will negatively
impact operating results and sales growth.

Increased member attrition could negatively impact our future revenues and
operating results.

            Increases in membership attrition above the rates we anticipate
could materially reduce our future revenues. We incur significant up front
expenditures in connection with acquiring new members. A member may not honor
his or her commitment, or we may choose to terminate a specific membership for
several reasons, including failure to pay for purchases, excessive returns or
cancelled orders. As a result, we may not be able to fully recoup our costs
associated with acquiring new members. In addition, once a member has satisfied
his or her initial commitment to purchase additional audiobooks at regular
prices, the member has no further commitment to make purchases.

The closing of retail stores which carry our products could negatively impact
our wholesale sales of these products.

            Bankruptcy filings by major retailers may limit the number of
outlets for our old-time radio products. With fewer chains and stores available
as distribution outlets, competition for shelf space will increase and our
ability to sell our products could be impacted negatively. Moreover, our
wholesale sales could be negatively impacted if any of our significant retail
customers were to close a significant number of their locations or otherwise
discontinue selling our products.

If third parties obtain unauthorized access to our member and customer databases
and other proprietary information, we would lose the competitive advantage they
provide.

            We believe that our member file and customer lists are valuable
proprietary resources, and we have expended significant amounts of capital in
acquiring these names. Our member and customer lists, trade secrets, trademarks
and other proprietary information have limited protection. Third parties may
copy or obtain unauthorized access to our member and customer databases and
other proprietary know-how, trade secrets, ideas and concepts.

            Competitors could also independently develop or otherwise obtain
access to our proprietary information. In addition, we rent our lists for
one-time use only to third parties that do not compete with us. This practice
subjects us to the risk that these third parties may use our lists for
unauthorized purposes, including selling them to our competitors. Our
confidentiality agreements with our executive officers, employees, list managers
and appropriate consultants and service suppliers may not adequately


                                       8
<PAGE>

protect our trade secrets. If our lists or other proprietary information were to
become generally available, we would lose a significant competitive advantage.

If we are unable to pay our accounts payable in a timely manner, our suppliers
and service providers may refuse to supply us with products or provide services
to us.

            At December 31, 2002, we owed approximately $11.5 million to trade
and other creditors. Approximately $4.6 million of these accounts payable were
more than 60 days past due. If we do not make satisfactory payments to our
vendors they may refuse to continue to provide us products or services on
credit, which could interrupt our supply of products or services.

Higher than anticipated product return rates could reduce our future operating
results.

            We experienced product return rates of approximately 26%, 24%, and
26% during the years ended December 31, 2002, 2001 and 2000, respectively. If
members and customers return products to us in the future at higher rates than
in the past or than we currently anticipate, our net sales would be reduced and
our operating results would be adversely affected.

If we are unable to collect our receivables in a timely manner, it may
negatively impact our cash flow and our operating results.

            We are subject to the risks associated with selling products on
credit, including delays in collection or uncollectibility of accounts
receivable. If we experience significant delays in collection or
uncollectibility of accounts receivable, our liquidity and working capital
position could suffer and we could be required to increase our allowance for
doubtful accounts, which would increase our expenses.

Increases in costs of postage could negatively impact our operating results.

            We distribute millions of mailings each year, and postage is a
significant expense in the operation of our business. We do not pass on the
costs of member mailings and member solicitation packages. Even small increases
in the cost of postage, multiplied by the millions of mailings we conduct, would
result in increased expenses and would negatively impact our operating results.

We face significant competition from a wide variety of sources for the sale of
our products.

            We compete with other web sites, which offer similar entertainment
products or content, including digital download of spoken word content. New
competitors, including large companies, may elect to enter the markets for
audiobooks and spoken word content. We also compete for discretionary consumer
spending with mail order clubs and catalogs, other direct marketers and
retailers that offer products with similar entertainment value as audiobooks and
old time radio and classic video programs, such as music on cassettes and
compact discs, printed books, videos, and laser and digital video discs. Many of
these competitors are well-established companies, which have greater financial
resources that enable them to better withstand substantial price competition or
downturns in the market for spoken word content.

            The audiobook and mail order industries are intensely competitive.
We compete with all other outlets through which audiobooks and other spoken word
content are offered, including:

            o     bookstores;

            o     audiobook stores which rent or sell only audiobooks;

            o     mail order companies that offer audiobooks for rental and sale
                  through catalogs;

            o     web sites such as Amazon.com; and

            o     retail establishments such as convenience stores, video rental
                  stores and wholesale clubs.

Risks Related to Our Financial Condition

Our obligations to repurchase shares of our common stock in the future will
divert available cash from use in operations; and we may not have the funds
available to meet our obligations.


                                       9
<PAGE>

            We granted sellers in our acquisitions the right to sell back to us
shares of our common stock that we issued to them. Unless our common stock
satisfies specific price targets and/or trading volume requirements, these
rights could require us to purchase up to 305,000 shares in the future at a cost
to us of approximately $4.6 million as follows: (i) 25,000 shares at a cost of
$350,000 commencing December 31, 2003, (ii) 230,000 shares at a cost of
$3,450,000 commencing December 31, 2004 and (iii) 50,000 shares at a cost of
$750,000 commencing December 31, 2005. Even if we have the funds available to
meet those obligations, such payments will adversely affect our cash flow and
will divert cash from use in operations. We may not have sufficient funds to
meet these obligations to repurchase stock in the future, which could result in
the holders of these rights commencing lawsuits to enforce their rights.

Risks Related to Our Capital Structure

The Herrick family exerts significant influence over shareholder matters.

            Norton Herrick, Michael Herrick and Howard Herrick, their family
members and affiliates own approximately 40% of our outstanding common stock. As
significant shareholders and directors, they are able generally to direct our
affairs and exert significant influence over matters, which require director or
shareholder vote, including the election of directors, amendments to our
Articles of Incorporation or approval of the dissolution, merger, or sale of
MediaBay, our subsidiaries or substantially all of our assets. This
concentration of ownership by the Herrick family could delay or prevent a change
in our control, even when a change in control might be in the best interests of
other shareholders.

The terms of our debt impose restrictions on our business.

            As of December 31, 2002 we had approximately $4.6 million of debt
outstanding under our revolving line of credit and approximately $12.5 million
principal amount of debt outstanding and related accrued interest under
convertible promissory notes. Our line of credit restricts our ability to raise
financing for working capital purposes because it requires us to use any
proceeds from equity or debt financings, with limited exceptions, to repay
amounts outstanding under the credit agreement. In addition to limiting our
ability to incur additional indebtedness, our existing indebtedness under our
revolving line of credit limits or prohibits us from, among other things:

            o     merging into or consolidating with another corporation;

            o     selling all or substantially all of our assets;

            o     declaring or paying cash dividends; or

            o     materially changing the nature of our business.

We have to make substantial payments on our debt during 2003 and 2004 and may
not have the funds to do so.

            We are required to make monthly payments of principal on the line of
credit of $180,000 in April through June 2003; $190,000 in July through
September 2003, $200,000 in October through December 2003 and $225,000 in
January through March 2004. The remaining balance of $1.6 million under our line
of credit is due on April 30, 2004, an additional $10.0 million, including
accrued and unpaid interest, is due upon demand of the holders of certain
convertible promissory notes, which may be made at various times following
repayment of the line of credit and an additional $3.2 million under convertible
promissory notes is due on December 31, 2004. We might not have sufficient funds
to repay the debt, obtain other financing to replace the debt or obtain an
extension of its maturity. In addition, if an event of default occurs under the
convertible promissory notes or senior credit facility, the indebtedness would
become due and payable.


                                       10
<PAGE>

Our ability to use our net operating losses may be limited in future periods,
which could increase our tax liability.

            Under Section 382 of the Internal Revenue Code of 1986, utilization
of prior net operating losses is limited after an ownership change, as defined
in Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the long-term tax exempt rate. In the event we achieve profitable operations,
any significant limitation on the utilization of net operating losses would have
the effect of increasing our tax liability and reducing after tax net income and
available cash reserves. We are unable to determine the availability of net
operating losses since this availability is dependent upon profitable
operations, which we have not achieved in prior periods.

Our stock price has been and could continue to be extremely volatile.

            The market price of our common stock has been subject to significant
fluctuations since our initial public offering in October 1997. The securities
markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, the trading price of our common stock could be subject to significant
fluctuations in response to:

            o     our ability to maintain listing of our common stock on NASDAQ;

            o     actual or anticipated variations in our quarterly operating
                  results;

            o     announcements by us or other industry participants,

            o     factors affecting the market for spoken word content;

            o     changes in national or regional economic conditions;

            o     changes in securities analysts' estimates for us, our
                  competitors' or our industry or our failure to meet such
                  analysts' expectations; and

            o     general market conditions.

Substantially all shares of common stock are currently eligible for sale and
could be sold in the market in the near future, which could depress our stock
price.

            As of April 10, 2003, we have outstanding approximately 14.3 million
shares of common stock. Substantially all of our shares are currently freely
trading without restriction under the Securities Act of 1933, having been
registered for resale or held by their holders for over 2 years and are eligible
for sale under Rule 144(k). There are currently outstanding options and warrants
and other convertible securities to purchase approximately 27,552,215 shares of
our common stock at an average exercise price of $2.17 per share. A substantial
portion of these shares have been registered for resale. To the extent they are
exercised or converted, your percentage ownership will be further diluted and
our stock price could be further adversely affected. Moreover, as the underlying
shares are sold, the market price could drop significantly if the holders of
these restricted shares sell them or if the market perceives that the holders
intend to sell these shares.


                                       11
<PAGE>

Item 2. Description of Property

            We lease approximately 12,000 square feet of office space in Cedar
Knolls, New Jersey pursuant to a lease agreement that expires in August 2003 at
a monthly rate of $16,000. We have the option to renew the lease for an
additional three-year period.

            The Company entered into two ten-year leases on 7,000 square feet of
office and warehouse space in Bethel, Connecticut and 3,000 square feet of
warehouse space in Sandy Hook, Connecticut, respectively. Lease payments and
mandatory capital improvement payments, starting in 2004, are $4,000 per year
and $2,000 per year on the Bethel and Sandy Hook properties, respectively.

Item 3. Legal Proceedings

            We are not a party to any lawsuit or proceeding, which we believe is
likely to have a material adverse effect on us.

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

            An Annual Meeting of Shareholders was held on November 27, 2002, at
which time Mr. Michael Herrick and Mr. Roy Abrams were reappointed to serve as a
Class I directors until the Annual Meeting of Shareholders of the Company to be
held in 2005. Shareholder voting for these directors was as follows:

Director                      Votes For              Votes Withheld
--------                      ---------              --------------
Michael Herrick               13,772,495                 51,123
Roy Abrams (*)                13,695,267                128,351

(*)   In February 2003, Mr. Abrams resigned as a director.

            The following directors serve as directors for the term indicated
opposite their respective names:

Director                      Class                   Expiration of Term
--------                      -----                   ------------------
Norton Herrick                I                       2004
Paul Ehrlich                  I                       2004
Joseph Rosetti                I                       2004
Michael Herrick               II                      2005
Mark Hershhorn                II                      2005
Howard Herrick                III                     2003
Carl Wolf                     III                     2003

            In addition, at the annual meeting, the Company's shareholders
approved the Company's issuance of common stock upon the conversion of certain
convertible notes or equity securities and upon exercise of warrants previously
issued and which may be issued to affiliates of the Company as set forth in the
proxy statement relating to the annual meeting by a vote of 7,740,102 votes for,
147,286 votes against, 35,700 votes abstaining and 5,900,530 broker non-votes.


                                       12
<PAGE>

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

MediaBay's common stock has been quoted in the Nasdaq National Market under the
symbol "MBAY" since November 15, 1999. The following table shows the high and
low sales prices of our common stock as reported by the Nasdaq National Market.

                                                           High         Low
                                                           ----         ---

Fiscal Year Ended December 31, 2001
           First Quarter                                  $1.625       $.531
           Second Quarter                                   1.05         .50
           Third Quarter                                    1.06         .56
           Fourth Quarter                                    .99         .43

Fiscal Year Ended December 31, 2002
           First Quarter                                    3.50         .59
           Second Quarter                                   6.04        3.20
           Third Quarter                                    4.90         .77
           Fourth Quarter                                   1.63         .77

Fiscal Year Ended March 31, 2003
           First Quarter                                    1.27         .77

            On April 10, 2003 the last reported sale price of our common stock
on the Nasdaq National Market was $.84 per share. As of April 10, 2003, there
were approximately 148 record owners of our common stock. We believe that there
are more than 400 beneficial owners of our common stock.

Dividend Policy

            We have never declared or paid and do not anticipate declaring or
paying any dividends on our common stock in the near future. The terms of our
debt agreements prohibit us from declaring or paying any dividends or
distributions on our common stock. Any future determination as to the
declaration and payment of dividends will be at the discretion of our Board of
Directors and will depend on then existing conditions, including our financial
condition, results of operations, capital requirements, business factors and
other factors as our Board of Directors deems relevant.

Sales of Securities and Use of Proceeds

            During the three months ended December 31, 2002, we issued options
under our 2001 and 2000 Stock Incentive Plans to purchase a total of 915,000
shares of our common stock to officers, directors and consultants. We relied on
the exemptions provided by Section 4(2) of the Securities Act of 1933 in
connection with such issuances.

Equity Compensation Plan Table

            See Part III, Item 12.

Item 6. Selected Financial Data

            The Company is restating its previously issued consolidated
financial statements as of December 31, 2000 and 2001 and for the years ended
Decmber 31, 1999, 2000 and 2001 to correct errors in the accounting treatment
relating to previously disclosed financing transactions. The amounts presented
herein reflect the restatement of these financial statements. The effects of
this restatement on the consolidated financial statements as of and for the
years ended December 31, 2000 and 2001 are presented in Part II. Item 6
"Selected Financial Data" and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 2 to Notes to the
Consolidated Financial Statements of this Form 10-K. The effects of this
restatement on the consolidated financial statements for the year ended December
31, 1999 and as of December 31, 1998 and 1999 are presented in Item 6 "Selected
Financial Data."


                                       13
<PAGE>

            The balance sheet and statement of operations for the year ended
December 31, 1999 gives effect to the purchase of Doubleday Direct's Audiobooks
Direct club on June 15, 1999. Additionally, the balance sheet and statement of
operations data for the year ended December 31, 1998 gives effect to the
following transactions:

      o     The acquisition of Radio Spirits, Inc., the assets of an affiliated
            company, Buffalo Productions, Inc., and a 50% interest in a joint
            venture owned by the sole shareholder of Radio Spirits on December
            14, 1998.

      o     The acquisition of substantially all of the assets used by Metacom,
            Inc. in connection with its Adventures in Cassettes business on
            December 14, 1998.

      o     The acquisition of substantially all of the assets used by Premier
            Electronics Laboratories, Inc. in connection with its old-time radio
            and classic video businesses on December 14, 1998.


      o     The acquisition of substantially all of the assets of Columbia
            House's Audiobook Club on December 31, 1998.

            Beginning in January 1999, the Company was required to capitalize
direct response marketing costs for the acquisition of new members in accordance
with AICPA Statement of Position 93-7 "Reporting on Advertising Costs" and
amortizes these costs over the period of future benefit. Since 1999 was the
first year we capitalized new member acquisitions costs, we capitalized direct
response advertising expenditures in 1999 and did not amortize advertising from
1998 since it had been previously expensed as incurred.

            In the third quarter of 2001, we began to implement a series of
actions and decisions designed to improve gross profit margin, refine our
marketing efforts and reduce general and administrative costs. In connection
with the movement of the fulfillment of old-time radio products to a third party
provider, in the first quarter of 2002, we closed our old-time radio operations
in Schaumburg, Illinois and now run all of our operations, except for
fulfillment, from our corporate headquarters located in Cedar Knolls, New
Jersey. In the third quarter of 2001, as a result of the actions and decisions
made after our aforementioned review of our operations, we recorded $11.3
million of strategic charges. In addition to these strategic charges, we
recorded a charge of $2.0 million to write-off the entire carrying amount of our
cost method investment in I-Jam.

            During the fourth quarter of 2000, the Company reviewed long-lived
assets and certain related identifiable intangibles, including goodwill, for
impairment. As a result, in the fourth quarter of 2000, the Company determined
that the goodwill associated with certain acquired businesses was impaired and
recorded an impairment charge of $38.2 million.

            As a result of the series of strategic initiatives described above,
our operations have improved. Although realization of net deferred tax assets is
not assured, we have determined, based on our improved operations, that it is
more likely than not that a portion of our deferred tax asset relating to
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements will be realized in future periods.
Accordingly, in 2001, we reduced the valuation allowance for deferred tax assets
in the amount of $17.2 million and recorded an income tax benefit.

            As a result of the capitalization of direct response advertising
costs, recording of the goodwill write-off, the strategic charges and the income
tax benefit, as well as fluctuations in operating results depending on the
timing, magnitude and success of Audio Book Club new member advertising
campaigns, comparisons of our historical operating results from year to year may
not be meaningful.


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                                                                (1) Years Ended December 31,
                                                                  --------------------------------------------------------
                                                                                 (3)         (4)         (5)
                                                                               Restated    Restated    Restated
                                                                     1998        1999        2000        2001        2002
                                                                     ----        ----        ----        ----        ----
                                                                          (thousands, except per share data)

<S>                                                               <C>         <C>         <C>         <C>         <C>
Statement of Operations Data:
Net sales                                                           14,894      46,227      44,426      41,805      45,744
Cost of sales                                                        9,452      23,687      23,044      19,783      20,651
Cost of sales - write-downs                                             --          --          --       2,261          --
Advertising and promotion                                            8,910       8,118      11,023      11,922      10,156
Advertising and promotion - write-downs                                 --          --          --       3,971          --
General and administrative                                           3,330      10,762      14,406      11,483      11,168
Asset write-downs and strategic charges                                 --          --          --       7,044          --
Depreciation and amortization                                          367       6,812       7,984       5,156       1,314
Non-cash write-down of intangibles                                      --          --          --          --       1,224
Non-cash write-down of goodwill                                         --          --      38,226          --          --
                                                                  --------    --------    --------    --------    --------
              Operating (loss) income                               (7,165)     (3,152)    (50,257)    (19,815)      1,231
Interest income (expense), net                                         180      (6,271)     (2,940)     (2,790)     (2,974)
                                                                  --------    --------    --------    --------    --------
              Loss before income tax benefit (expense)
                  and extraordinary item                            (6,985)     (9,423)    (53,197)    (22,605)     (1,743)
Income tax benefit (expense)                                            --          --          --      17,200        (550)
                                                                  --------    --------    --------    --------    --------
              Loss before extraordinary item                        (6,985)     (9,423)    (53,197)     (5,405)     (2,293)
Extraordinary gain (loss) on early extinguishment
              of debt                                                   --         999      (2,152)         --          --
                                                                  --------    --------    --------    --------    --------
              Net loss                                              (6,985)     (8,424)    (55,349)     (5,405)     (2,293)
Dividends on preferred stock                                            --          --          --          --         217
                                                                  --------    --------    --------    --------    --------
              Net loss applicable to common shares                $ (6,985)   $ (8,424)   $(55,349)   $ (5,405)   $ (2,510)
                                                                  ========    ========    ========    ========    ========
Basic and diluted loss per share:
Basic and diluted loss before extraordinary item                  $  (1.13)   $  (1.15)   $  (4.18)   $  (0.39)   $  (0.18)
                                                                  ========    ========    ========    ========    ========
Basic and diluted loss applicable to common shares                $  (1.13)   $  (1.03)   $  (4.35)   $  (0.39)   $  (0.18)
                                                                  ========    ========    ========    ========    ========
Basic and diluted weighted average number of shares outstanding      6,188       8,205      12,718      13,862      14,086
                                                                  ========    ========    ========    ========    ========

<CAPTION>
                                                                                    (1) As of December 31,
                                                                  ---------------------------------------------------------
                                                                    (2)         (3)         (4)         (5)
                                                                  Restated    Restated    Restated    Restated
                                                                    1998        1999        2000        2001        2002
                                                                    ----        ----        ----        ----        ----
                                                                              (thousands, except per share data)
<S>                                                               <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Working capital (deficit)                                         $  6,571    $  1,599    $    313    $ (4,167)   $ (4,336)
Total assets                                                        64,339      93,973      49,932      44,452      48,619
Current liabilities                                                  8,231      20,275      17,103      15,491      18,984
Long-term debt                                                      38,095      36,134      15,340      15,849      14,680
Common stock subject to contingent put rights                        8,284       4,283       4,550       4,550       4,550
Stockholders' equity                                                 9,729      33,281      12,939       8,562      10,405
</TABLE>

      (1)   Restated to reflect a change in the accounting for warrants issued
            in December 1998, charges related beneficial conversion features
            within convertible notes, and the recording of compensation expense
            for warrants. See Note 2, Restatement, in the notes to the
            consolidated financial statements.

      (2)   Restated to reflect an original issue discount on long-term debt
            relating to accounting for warrants issued in a December 1998
            financing transaction of $1,905 and a corresponding increase in
            stockholders' equity

      (3)   Restated to reflect an increase in non-cash expenses and net loss
            applicable to common shares of $1,716, resulting in an increase of
            $0.21 in the loss per share. As previously reported, net loss and
            loss per share for the year ended December 31, 1999 were $6.7
            million and $0.82, respectively.

      (4)   Restated to reflect an increase in non-cash expenses and net loss of
            $701, resulting in an increase of $0.05 in the loss per share. As
            previously reported, net loss and loss per share for the year ended
            December 31, 2000 were $54.6 million and $4.30, respectively.

      (5)   Restated to reflect an increase in non-cash interest expense and net
            loss of $555, resulting in an increase of $0.04 in the loss per
            share. As previously reported, net loss and loss per share for the
            year ended December 31, 2001 were $4.9 million and $ 0.35,
            respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Restatement of Previously Issued Financial Statements

      As discussed in Note 2, Restatement of Previously Issued Financial
Statements, the Company has restated its financial statements as of December 31,
2001 and for the years ended December 31, 2001 and 2000 to correct errors in the
accounting treatment of certain previously disclosed financing transactions. The
Management's Discussion and Analysis of Financial Condition and Results of
Operations gives effect to this restatement.


                                       15
<PAGE>

Introduction

            We are a seller of spoken audio and nostalgia products, including
audiobooks and old-time radio shows, through direct response, retail and
Internet channels. Our content and products are sold in multiple formats,
including physical (cassette and compact disc) and secure digital download
formats.

            We report financial results on the basis of four business segments;
Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or "RSI") and
MediaBay.com. A fifth division, Radio Classics, is aggregated with Radio Spirits
for financial reporting purposes. Except for corporate, each segment serves a
unique market segment within the spoken word audio industry. In 2002, our Audio
Book Club segment had net sales of approximately $34.3 million, our Radio
Spirits segment had net sales of approximately $11.4 million, our MediaBay.com
segment had sales of approximately $0.2 million and we had eliminating
inter-segment sales of $0.2 million.

            In the third quarter of 2001, we began to implement a series of
actions and decisions designed to improve gross profit margin, refine our
marketing efforts and reduce general and administrative costs. Specifically, we
(i) reduced the number of items offered for sale at both its Radio Spirits and
Audio Book Club subsidiaries, (ii) moved fulfillment of our old-time radio
products to a third party fulfillment provider, (iii) limited our investment and
marketing efforts in downloadable audio due to lack of customer acceptance at
this time, and the limited number and high price point of digital audio download
players currently produced and (iv) refined our marketing of old-time radio
products and our marketing efforts to existing Audio Book Club members. In
connection with the movement of the fulfillment of old-time radio products to a
third party provider, in the first quarter of 2002, we closed our old-time radio
operations in Schaumburg, Illinois and now run all of our operations, except for
fulfillment, from our corporate headquarters located in Cedar Knolls, New
Jersey. In the third quarter of 2001, as a result of the actions and decisions
made after our aforementioned review of our operations, we recorded $11.3
million of write-downs and strategic charges, as described below. In addition to
these strategic charges, we recorded a charge of $2.0 million to write-off the
entire carrying amount of our cost method investment in I-Jam.

            During the fourth quarter of 2000, we reviewed long-lived assets and
certain related identifiable intangibles, including goodwill, for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121") due to a change in facts and circumstances. We determined that
the revised estimates of cash flows from certain of our acquired operations
would no longer be sufficient to recover the carrying value of goodwill
associated with these businesses. As a result, in the fourth quarter of 2000, we
determined that the goodwill associated with these businesses was impaired and
recorded an impairment charge of $38.2 million. The impairment charge was
measured as the difference between the carrying value of the goodwill and its
fair value, which was based upon discounted cash flows.

            As a result of the series of strategic initiatives, described above,
our operations have improved. Although realization of net deferred tax assets is
not assured, we have determined, based on our improved operations, that it is
more likely than not that a portion of our deferred tax asset relating to
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements will be realized in future periods.
Accordingly, in 2001 we reduced the valuation allowance for deferred tax assets
in the amount of $17.2 million and recorded an income tax benefit.

            During the fourth quarter of 2002, the Company reviewed the carrying
amounts of its intangible assets and determined, based on decisions made in the
fourth quarter of 2002, that the value of certain intangible assets could no
longer be supported by anticipated future operations. Specifically, the Company
made a strategic decision to no longer compete in the DVD market and accordingly
wrote off the value of certain video and DVD rights it had acquired in the
amount of $90. The Company made the decision in the fourth quarter of 2002 to no
longer pursue other companies, which may be infringing on the Freeny patent and
accordingly began discussions with E-Data regarding a re-negotiation of the
agreement between the two parties. On April 3, 2003, the parties concluded their
negotiations and the Company will be returning certain acquired rights to E-Data
in return for 25,000 shares of MediaBay common stock provided to E-Data in the
original transaction. Because the decision not to pursue possible infringers was
made in 2002 and the discussions with E-Data Commenced in 2002, the Company has
written-off the unamortized carrying value of the E-Data license, less the
market value of the 25,000 shares of MediaBay common stock to be returned to
MediaBay, which has been recorded as a receivable due from E-Data to the
Company. The Company has recorded a write-off of $148,000 in 2002. The Company
also made the strategic decision in the fourth quarter of 2002 to discontinue
future mailings to the Columbia House lists of members of other clubs, which
could not support the carrying value of the Columbia


                                       16
<PAGE>

House mailing agreement. Accordingly, in the fourth quarter of 2002, the Company
wrote off the remaining value of the Columbia House mailing agreement of $986.

            As a result of the recording of the goodwill write-off, the
strategic charges, the write-off of intangibles and the income tax benefit, as
well as fluctuations in operating results depending on the timing, magnitude and
success of Audio Book Club new member advertising campaigns, comparisons of our
historical operating results from year to year may not be meaningful.

Critical Accounting Policies

            Our discussion and analysis of our financial condition and results
of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis we evaluate our estimates including those
related to product returns, bad debts, the carrying value and net realizable
value of inventories, the recoverability of advances to publishers and other
rightsholders, the future revenue associated with deferred advertising and
promotion costs, investments, fixed assets, the valuation allowance provided to
reduce our deferred tax assets and valuation of goodwill and other intangibles.

            The Securities and Exchange Commission ("SEC") defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.

            Our significant accounting policies are described in Note 3 to the
Notes to Consolidated Financial Statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However the following policies are considered to be
critical within the SEC definition:

    Revenue Recognition

    The Company derives its principal revenue through sales of audiobooks,
    classic radio shows and other spoken word audio products directly to
    consumers principally through direct mail. The Company also sells classic
    radio shows to retailers either directly or through distributors. The
    Company derives additional revenue through rental of its proprietary
    database of names and addresses to non-competing third parties through
    list rental brokers. The Company also derives a small amount of revenue
    from advertisers included in its nationally syndicated classic radio
    shows. The Company recognizes sales to consumers, retailers and
    distributors upon shipment of merchandise. List rental revenue is
    recognized on notification by the list brokers of rental by a third party
    when the lists are rented. The Company recognizes advertising revenue upon
    notification of the airing of the advertisement by the media buying
    company representing the Company. Allowances for future returns are based
    upon historical experience and evaluation of current trends.

    We record reductions to our revenue for future returns and record an
    estimate of future bad debts arising from current sales in general and
    administrative expenses. These allowances are based upon historical
    experience and evaluation of current trends. If members and customers
    return products to us in the future at higher rates than in the past or
    than we currently anticipate, our net sales would be reduced and our
    operating results would be adversely affected. In November 2001, the
    Emerging Issues Task Force ("EITF") issued EITF No. 01-9, "Accounting for
    Consideration Given by a Vendor to a Customer (Including a Reseller of the
    Vendor's Products)", which addresses the income statement classification
    of certain credits, allowances, adjustments, and payments given to
    customers for the services or benefits provided. The Company adopted EITF
    No. 01-9 effective January 1, 2002, and, as such, has classified the cost
    of these sales incentives as a reduction of sales. The effect


                                       17
<PAGE>

    on sales of applying EITF No. 01-9 in 2002 was $118,000.

    Deferred Member Acquisition Costs

    We are required to capitalize direct response marketing costs for the
    acquisition of new members in accordance with AICPA Statement of Position
    93-7 "Reporting on Advertising Costs" and amortize these costs over the
    period of probable future benefits. In order to determine the amount of
    advertising to be capitalized and the manner and period over which the
    advertising should be amortized, we prepare estimates of probable future
    revenues arising from the direct-response advertising in excess of future
    costs to be incurred in realizing those revenues. If future revenue does
    not meet our estimates or if members buying patterns were to shift,
    adjustments to the amount and manner of amortization would be required. At
    December 31, 2002 we had deferred member acquisition costs of $7.4
    million, which is being amortized over the next thirty months.

     Accounts Receivable Valuation

    We record an estimate of our anticipated bad debt expense based on our
    historical experience. If the financial condition of our customers,
    including either individual consumers or retail chains, were to deteriorate,
    resulting in their inability to make payment to us, additional allowances
    would be required. For example, a one percent increase in returns as a
    percentage of gross sales for the year ended 2002, assuming a constant gross
    profit percentage and all other expenses unchanged, would have resulted in a
    decrease in net sales of $619,000 and a increase in net loss available to
    common shares of $340,000. A one percent increase in bad debt expenses as a
    percentage of net sales, assuming all other expenses were unchanged, would
    have resulted in an increase in general and administrative expenses and a
    corresponding increase in net loss available to common shares of $457,000.

    Income Taxes

    The ultimate realization of deferred tax assets is dependent on the
    generation of future taxable income during the periods in which temporary
    timing differences become deductible. As a result of a series of strategic
    initiatives, our operations have improved. Although realization of net
    deferred tax assets is not assured, management has determined, based on the
    Company's improved operations, that it is more likely than not that a
    portion of our deferred tax asset relating to temporary differences between
    the tax bases of assets or liabilities and their reported amounts in the
    financial statements will be realized in future periods. At December 31,
    2002, we have recorded a deferred tax asset in the amount of $16.2 million.
    Should we determine we would be able to realize deferred tax assets in the
    future in excess of the net recorded amount, an adjustment to our deferred
    tax asset would increase income in the period such determination is made.
    Likewise, should we determine that we will not be able to realize all or
    part of our net deferred tax asset in the future, an adjustment to the
    deferred tax asset would be charged to income in the period such
    determination is made.

    Goodwill

    Goodwill represents the excess of the purchase price over the fair value of
    net assets acquired in business combinations accounted for using the
    purchase method of accounting. In July 2001, the Financial Accounting
    Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets".
    SFAS No. 142 requires that an intangible asset that is acquired shall be
    initially recognized and measured based on its fair value. The statement
    also provides that goodwill should not be amortized, but shall be tested for
    impairment annually, or more frequently if circumstances indicate potential
    impairment, through a comparison of fair value to its carrying amount. At
    December 31, 2002, we had $9.9 million of goodwill, all of which relates to
    our Radio Spirits operations. The Company completed its initial transitional
    impairment test as of January 1, 2002 and its annual impairment test as of
    October 31, 2002 in connection with the annual budgeting and planning
    process, which did not result in an impairment loss. However, if conditions
    or circumstances were to


                                       18
<PAGE>

    change resulting in a deterioration of our Radio Spirits business, a future
    impairment of goodwill could be necessary.

Results of Operations

            The following table sets forth, for the periods indicated,
historical operating data as a percentage of net sales.

                                                           Year Ended
                                                          December 31,

                                                     2000     2001     2002
                                                     ----     ----     ----
Sales ............................................    100%     100%     100%
                                                     ====     ====     ====
Cost of sales ....................................     52       47       45
Cost of sales - write-downs ......................     --        5       --
Advertising and promotion ........................     25       29       22
Advertising and promotion - write-downs ..........     --       10       --
General and administrative expense ...............     32       27       24
Asset write-downs and strategic charges ..........     --       17       --
Depreciation and amortization expense ............     18       12        3
Non-cash write-down of intangibles ...............     --       --        3
Non-cash write-down of goodwill ..................     86       --       --
Interest expense, net ............................      7        7        7
Income tax expenses (benefit) ....................     --      (41)       1
Extraordinary loss on early extinguishment of debt      5       --       --
Net (loss) .......................................   (125)     (13)      (5)
Dividends on preferred stock .....................     --       --        0
Net (loss) applicable to common shares ...........   (125)     (13)      (5)

            Year ended December 31, 2002 compared with year ended December 31,
2001

            Sales for the year ended December 31, 2002 increased $3.9 million or
9.4% to $45.7 as compared to $41.8 million for the year ended December 31, 2001.
Audio Book Club increased sales by $2.5 million, principally due to an increase
in club membership as a result of the Company's marketing efforts to grow the
business. For the year ended December 31, 2002, the Audio Book Club attracted
approximately 294,000 members as compared to approximately 211,000 members who
joined the Audio Book Club during the year ended December 31, 2001. The increase
in Radio Spirits sales, of $1.3 million, is principally attributable to sales of
the World's Greatest Old-Time Radio continuity program, a marketing program
introduced in 2002, which is similar to our Audio Book Club and offers old-time
radio products.

            Cost of sales for the year ended December 31, 2002 was $20.7
million. Cost of sales for the year ended December 31, 2001 was $22.0 million,
of which $2.3 million represented a charge for the write-down of inventory in
the third quarter of 2001. Gross profit as a percentage of net sales for the
year ended December 31, 2002 was 55.0%, compared to 47.3% for 2001. Excluding
the write-down of inventory in the third quarter of 2001, gross profit as a
percentage of net sales was 52.7% for the year ended December 31, 2001. The
increase in gross profit is principally due to reduced product costs at both
Audio Book Club and Radio Spirits. The reduction in product costs is due to
better buying, combined purchasing at both Audio Book Club and Radio Spirits and
revisions in the mix of products and packaging at both Audio Book Club and Radio
Spirits.

            Advertising and promotion expenses for the year ended December 31,
2002 were $10.2 million. Advertising and promotion expenses for the year ended
December 31, 2001 were $15.9 million of which, $4.0 million represented
write-downs to deferred member acquisition costs. The decrease in reported
advertising costs is principally due to lower expenditures relating to Audio
Book Club new member acquisitions in 2002 as compared to 2001 and the write-down
of deferred member acquisition


                                       19
<PAGE>

costs in the third quarter of 2001 which resulted in lower amortization of new
member acquisition costs in 2002 and thus lower reported advertising expense in
2002.

            General and administrative expenses decreased $.3 million, or 2.7%,
to $11.2 million for the year ended December 31, 2002 from $11.5 million for the
prior comparable period. General and administrative expense decreases are
principally attributable to reductions at Radio Spirits partially offset by an
increase in bad debt expenses. Bad debt expenses increased $.3 million attendant
with an increase in net sales at Audio Book Club. Bad debt expense as a
percentage of net sales was 6.2% for the year ended December 31, 2002 as
compared to 6.1% for the year ended December 31, 2001. In February 2002, we
moved our Radio Spirits operation from Schaumburg, Illinois to our corporate and
Audio Book Club offices in Cedar Knolls, New Jersey. In addition to giving us
greater control over the operations, general and administrative expenses, other
than bad debt expense, for our Radio Spirits division for the year ended
December 31, 2002 declined by $.9 million as compared to the year ended December
31, 2001. At Radio Spirits, for the year ended December 31, 2002, we reduced
payroll and related costs by $.5 million, office expenses by $.1 million,
telephone expenses by .2 million and legal fees by $.1 million as compared to
the year ended December 31, 2001.

            Depreciation and amortization expenses decreased $3.9 million to
$1.3 million for the year ended December 31, 2002 from $5.2 million for the year
ended December 31, 2001. The decrease is principally attributable to the
adoption of SFAS No. 142 "Goodwill and Other Intangible Assets" in 2002 and, to
a lesser extent, certain intangible assets were fully amortized in 2001. SFAS
No. 142 requires that an intangible asset that is acquired shall be initially
recognized and measured based on its fair value. The statement also provides
that goodwill should not be amortized, but shall be tested for impairment
annually, or more frequently if circumstances indicate potential impairment,
through a comparison of fair value to its carrying amount. Existing goodwill
continued to be amortized through the year ended December 31, 2001 at which time
amortization ceased. The amount of goodwill amortized during the year ended
December 31, 2001 was $.5 million. Based on our review for goodwill impairment
in 2002, the Company did not recognize any goodwill impairment in 2002 in
accordance with SFAS No. 142.

            During the fourth quarter of 2002, the Company reviewed the carrying
amounts of its intangible assets and determined, based on decisions made in the
fourth quarter of 2002, that the value of certain intangible assets could no
longer be supported by anticipated future operations. Specifically, the Company
made a strategic decision to no longer compete in the DVD market and accordingly
wrote off the value of certain video and DVD rights it had acquired in the
amount of $90,000. The Company also made the strategic decision in the fourth
quarter of 2002 to discontinue future mailings to the Columbia House lists of
members of other clubs. Accordingly, in the fourth quarter of 2002, the Company
wrote off the unamortized value of the Columbia House mailing agreement of
$986,000.

            Interest expense for the year ended December 31, 2002 was $3.0
million for the year ended December 31, 2002 and $2.8 million for the year ended
December 31, 2001. Included in interest expense is the amortization of debt
discount resulting from the issuance of warrants and beneficial conversion
features related to certain of our financings. The amount amortized was $.7
million and $.6 million for the years ended December 31, 2002 and 2001,
respectively.

            Net loss before income taxes for the year ended December 31, 2002
was $1.7 million as compared to a net loss before income taxes for the year
ended December 31, 2001 of $22.6 million.

            As a result of the series of strategic initiatives described above,
our operations have improved. Although realization of net deferred tax assets is
not assured, we determined in 2001, based on our improved operations, that it is
more likely than not that a portion of our deferred tax asset relating to
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements will be realized in future periods.
Accordingly we reduced the valuation allowance for deferred tax assets in the
amount of $17.2 million and recorded an income tax benefit.


                                       20
<PAGE>

            During then year ended December 31, 2002, we utilized $550,000 of
the $17.2 million deferred tax asset recorded in 2001. Accordingly, we recorded
an income tax expense of $550,000.

            The Company accrued preferred stock dividends of $0.2 million on the
outstanding 25,000 shares of Series A Preferred stock, which were issued in
January 2002.

            Net loss applicable to common shares for the year ended December 31,
2002 was $2.5 million, or $.18 per diluted share of common stock as compared to
a net loss of $5.4 million, or $0.39 per diluted share of common stock for the
year ended December 31, 2001.

Year ended December 31, 2001 compared with year ended December 31, 2000

            Sales for the year ended December 31, 2001 decreased $2.6 million,
or 5.9%, to $41.8 million from $44.4 million for the year ended December 31,
2001. The decrease in sales is primarily attributable to more focused marketing
at Audio Book Club to concentrate on more profitable new members and
non-recurring I-Jam marketing revenue we recorded in 2000.

            Cost of sales for the year ended December 31, 2001 was $22.0
million, of which $2.3 million represented a charge for the write-down of
inventory in the third quarter of 2001. Excluding the write-down, cost of sales
for the year ended December 31, 2001 decreased $3.2 million, or 14.2%, to $19.8
million for the year ended December 31, 2001 from $23.0 million for the year
ended December 31, 2000. The decrease in cost of sales as a percentage of net
sales, is principally due to revisions in the merchandising of our products,
including increases in our selling prices and selection of products, which
contribute greater gross profit. As a result, gross profit as a percentage of
net sales, excluding the write-down, increased to 52.7% for the year ended
December 31, 2001 from 48.1% for the year ended December 31, 2000.

            Advertising and promotion expenses for the year ended December 31,
2001 was $15.9 million of which, $4.0 million represented write-downs to
deferred member acquisition costs as described below. Excluding the write-downs,
advertising and promotion expenses increased $0.9 million or 8.2%, to $11.9
million for the year ended December 31, 2001 compared to $11.0 million for the
year ended December 31, 2000. Actual amounts incurred for advertising and
promotion, net of settlements with certain vendors principally for unprofitable
Internet marketing campaigns, for the year ended December 31, 2001 were $8.2
million, a decrease of $6.1 million, from the amount incurred in the year ended
December 31, 2000 of $14.3 million. The difference between the amount expended
and the amount recorded as expense is due to amortization of previously
capitalized direct response advertising costs.

            General and administrative expenses decreased $2.9 million, or
20.3%, to $11.5 million for the year ended December 31, 2001 from $14.4 million
for the prior comparable period. General and administrative expense decreases
are principally attributable to decreases in bad debt expenses of $0.1 million
commensurate with the reduction in net sales, payroll and related costs due to
previously announced staff reductions and the inclusion in 2000 of non-cash
compensation expenses related to contingent warrants issued in 2000 of $0.5
million, office expenses of $0.2 million, telephone costs related to a reduction
in "800" service calls of $0.2 million, travel costs of $0.1 million, public
relations costs of $0.6 million and consulting services principally relating to
Internet maintenance and development of $0.4 million. Included in general and
administrative expenses in 2000 were $0.4 million of non-cash compensation
expense relating to contingent warrants issued in 2000. We also benefited from
settlements with certain vendors in 2001.

            As a result of the actions and decisions made after our
aforementioned review of our operations, we recorded $11.3 million of strategic
charges in 2001. These charges include the following:

      o     $2.2 million of inventory written down to net realizable value due
            to a reduction in the number of stock keeping units (SKU's);


                                       21
<PAGE>

      o     $2.4 million of write-downs of deferred member acquisition costs at
            Audio Book Club related to new member acquisition campaigns that
            have been determined to be no longer profitable and recoverable
            through future operations based upon historical performance and
            future projections;

      o     $1.9 million of write-downs to royalty advances paid to audiobook
            publishers and other license holders primarily associated with
            inventory titles that will no longer be carried and sold to members;

      o     $1.6 million of write-downs to deferred member acquisition costs at
            Radio Spirits related to old-time radio new customer acquisition
            campaigns that have been determined to be no longer profitable and
            recoverable through future operations based upon historical
            performance and future projections;

      o     a write-down of $0.7 million of customer lists acquired in the
            Columbia House Audiobook Club purchase due to the inability to
            recover this asset through future operations;

      o     $0.6 million of fixed assets of the old-time radio operations
            written down to net realizable value due to the closing of the
            Schaumburg, Illinois facility;

      o     $0.5 million of write-downs of royalty advances paid for
            downloadable licensing rights that are no longer recoverable due to
            the strategic decisions made;

      o     $0.4 million of write-downs of prepaid assets,

      o     $0.3 million of write-offs to receivables that are deemed
            uncollectible,

      o     $0.2 million of net write-offs of capitalized website development
            costs related to downloadable audio all of which are no longer
            recoverable due to the strategic changes in the business; and

      o     $0.5 million accrued for lease termination costs in connection with
            the closing of the Schaumburg, Illinois facility.

            Of these charges, $2.2 million related to inventory write-downs has
been recorded to costs of sales - strategic charges, $4.0 million has been
recorded to advertising and promotion - write-downs and the remaining $5.1
million has been recorded to asset write-downs and strategic charges.

            In addition to these strategic charges, we have recorded a charge of
$2.0 million to write-off the entire carrying amount of our investment in I-Jam.
This charge has been recorded to asset write-downs and strategic charges. We
have determined that an other than temporary decline in the value of this
investment has occurred, triggered by a strategic change in the direction of the
investee as a result of continued losses and operating deficiencies, along with
projected future losses.

            During the year ended December 31, 2002, the Company recorded the
following activity in its accrual for shutdown expenses related to the move from
Illinois to New Jersey:

         Beginning balance, January 1, 2002          $ 531
         Employee related costs                       (115)
         Lease termination costs                      (410)
                                                     -----
         Balance accrued at December 31, 2002        $   6
                                                     =====

            Depreciation and amortization expenses decreased $2.8 million to
$5.2 million for the year ended December 31, 2001 from $8.0 million for the year
ended December 31, 2000. The decrease is principally attributable to the
write-down of goodwill taken in the fourth quarter of 2000. During the fourth
quarter of 2000, we reviewed long-lived assets and certain related identifiable
intangibles, including goodwill, for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") due
to a change in facts and circumstances. In the fourth quarter of 2000, we made a
strategic decision to reduce spending on marketing to customers acquired in the
acquisitions of the Columbia House Audiobook Club, Doubleday Direct's Audiobooks
Direct and Adventures in Cassettes in order to focus its resources on more
profitable revenue sources. In addition, we sold the remaining inventory
acquired in its acquisition of Adventures in Cassettes and do not expect to
derive any future revenues associated with this business. Consequently, we
determined that the revised estimates of cash flows from such operations would
no longer be sufficient to recover the carrying value of goodwill associated
with these businesses. As a result, in the fourth quarter of 2000, we determined
that the goodwill associated with these businesses was impaired and recorded an
impairment charge of $38.2 million. The impairment charge was measured as the
difference between the carrying value of the goodwill and its fair value, which
was based upon discounted cash flows.


                                       22
<PAGE>

            Interest expense for the year ended December 31, 2001 decreased $0.2
million to $2.8 million as compared to net interest expense of $3.0 million for
the year ended December 31, 2000. The reduction in interest expense is due to a
lower average outstanding principal balance on our debt, as well as lower
interest rates on the portion of our debt, which has adjustable interest rates.
Included in interest expense is the amortization of debt discount resulting from
the issuance of warrants and beneficial conversion features related to certain
of our financings. The amount amortized was $0.6 million and $0.3 million for
the years ended December 31, 2001 and 2000, respectively.

            Net loss before income tax benefit for the year ended December 31,
2001 was $22.6 million as compared to a net loss before income taxes and an
extraordinary item in 2000 of $53.2 million for the year ended December 31,
2000.

            As a result of the series of strategic initiatives described above,
our operations have improved. Although realization of net deferred tax assets is
not assured, we have determined, based on our improved operations, that it is
more likely than not that a portion of our deferred tax asset relating to
temporary differences between the tax bases of assets or liabilities and their
reported amounts in the financial statements will be realized in future periods.
Accordingly we reduced the valuation allowance for deferred tax assets in the
amount of $17.2 million and recorded an income tax benefit.

            In April 2000, we repaid $20.3 million of our bank debt out of the
net proceeds from our follow-on primary offering. Accordingly, the Company
recorded an extraordinary loss of $2.2 million relating to the write-off of
deferred financing fees incurred in connection with such debt.

            Due, in part, to the reduction in the valuation allowance for
deferred tax assets offset by the strategic charges enumerated above, we had a
net loss of $5.4 million, or $0.39 per diluted share of common stock for the
year ended December 31, 2001, as compared to a net loss of $55.3 million or
$4.35 per diluted share of common stock for the year ended December 31, 2000.

Liquidity and Capital Resources

            Historically, we have funded our cash requirements through sales of
our equity and debt securities and borrowings from financial institutions and
our principal shareholders. We have implemented a series of initiatives to
increase cash flow. While these initiatives have successfully increased cash
provided by operating activities in 2002, there can be no assurance that we will
not require additional financing to repay debt or fund the expansion of
operations, acquisitions, working capital or other related uses. Management
believes that additional sources of capital are available if required.

            For the year ended December 31, 2002, our cash increased by $.3
million, as we had cash provided by operating and financing activities of $1.0
million and $0.4 million, respectively, and we had cash used in investing
activities of $1.1 million. Net cash provided by operating activities
principally consisted of our net loss applicable to common shares of $2.5
million, decreased by depreciation and amortization expenses of $1.3 million,
amortization of deferred financing costs and debt discount of $1.5 million,
utilization of our deferred tax asset resulting in an income tax expense of
$0.6, non-current accrued interest and dividends payable $0.5 million, decreases
in prepaid expenses of $1.1 million and increases in accounts payable and
accrued expenses of $4.0 million. Net cash provided by operations was reduced by
increases in accounts receivable of $2.6 million, inventories of $1.1 million,
royalty advances of $0.3 million and a net increase in deferred member
acquisition costs of $2.5 million.

            The decrease in prepaid expenses was principally the result of the
timing of direct mail campaigns in our Audio Book Club business. In 2001, we
incurred certain costs for a January 2002 campaign in December 2001. In 2002, we
mailed our campaign in December 2002 and not in January 2003. The increase in
accounts payable was principally due to increased advertising expenditures as
well as increases in fulfillment costs and inventory purchases as sales
increased. The increase in accounts receivable was primarily attributable to
higher net sales, principally at our Audio Book Club. The increase in
inventories is principally due to the expansion of wholesale sales at Radio
Spirits


                                       23
<PAGE>

requiring the maintenance of greater inventory. The increase in deferred member
acquisition cost is principally due to the expansion of our direct mail and
Internet advertising activities to attract new members to Audio Book Club.

            Cash used in investing activities was for the acquisition of fixed
assets and the acquisition of the assets used by Great American Audio in their
old-time radio business including the license to The Shadow programs and the
cash paid in connection with the acquisition of an exclusive field of use
license" ("License") to U.S., Canadian and European patents in the spoken audio,
E-book and print-on-demand markets from E-Data Corporation. In the fourth
quarter of 2002, the Company made a strategic decision to no longer pursue other
companies which may be infringing on the Freeny Patent and accordingly impaired
the value of this asset. The Company has reduced the carrying value of the asset
to its net realizable value based upon the value of 25,000 shares of the
Company's common stock to be returned by E-Data to the Company. Accordingly, the
Company has recognized a charge included in non-cash write-down of intangibles
of $148,000.

            During the year ended December 31, 2002, we repaid $1.6 million
under our senior credit facility.

            On January 18, 2002, Evan Herrick, the son of Norton Herrick, our
Chairman, a brother of Howard Herrick an Executive Vice President and Director
and the brother of Michael Herrick, a Director, exchanged $2.5 million principal
amount of a $3.0 million principal amount convertible note of MediaBay, Inc. in
exchange for 25,000 shares of Series A Preferred Stock of MediaBay, having a
liquidation preference of $2.5 million. The preferred share dividend rate of 9%
($9.00 per share) is the same as the interest rate of the note, and is payable
in additional preferred shares, shares of common stock of MediaBay or cash, at
the holder's option, provided that if the holder elects to receive payment in
cash, the payment will accrue until MediaBay is permitted to make the payment
under its existing credit facility. On December 31, 2002, Evan Herrick sold the
note to the N. Herrick Irrevocable ABC Trust of which Howard Herrick is the
trustee and Norton Herrick is the sole beneficiary.

            On February 22, 2002, as previously committed to on May 14, 2001,
Huntingdon Corporation, a business wholly owned by our chairman, purchased a
$500,000 principal amount convertible senior promissory note. The note is
convertible into shares of Common Stock at the rate of $1.82 of principal and/or
interest per share. This note was issued in consideration of a $0.5 million loan
made to us by Huntingdon.The Company recorded an original issue discount to the
note in the amount of $430,658 related to the warrants granted and the
beneficial conversion feature related to the note. The amount of the original
issue discount is being amortized over 16 months, through the earliest date upon
which the holder can demand repayment.

            In May 2002, an unaffiliated third party holder of our subordinated
debt converted $1.0 million principal amount of its convertible note into
200,000 shares of our common stock. At December 31, 2002, the principal amount
of the subordinated debt held by the unrelated third party was $3.2 million.

            During August and September of 2002, Huntingdon advanced $1.0
million to us, which was converted into a $1.0 million principal amount
convertible promissory note payable to Huntingdon (the "$1.0 Million Note") on
October 3, 2002. The $1.0 Million Note bears interest at the prime rate plus 2
1/2 %, is convertible into shares of common stock at a rate of $2.00 per share
and is due September 30, 2007, provided that the holder may make a demand for
repayment after the Company's existing credit facility is repaid. In connection
with the transaction, we issued to Huntingdon a ten-year warrant to purchase
250,000 shares of Common Stock at an exercise price of $2.00 per share (the
"Initial Warrant"). An original issue discount of $68,034 has been recorded and
is being amortized over 16 months, through the earliest date upon which the
holder can demand repayment.


                                       24
<PAGE>

            On October 10, 2002, we issued to Huntingdon an additional $150,000
principal amount convertible promissory note to Huntingdon (the "$150,000
Note"). The $150,000 Note is convertible into shares of Common Stock at a rate
of $2.00 per share. The remaining terms of the $150,000 Note are similar to
those of the $1.0 Million Note. Warrants to purchase 37,500 of shares of Common
Stock at an exercise price of $2.00 were also issued to Huntingdon. The
remaining terms of this warrant are similar to those of the Initial Warrant. An
original issue discount of $11,687 has been recorded and is being amortized over
16 months, through the earliest date upon which the holder can demand repayment.

            On November 15, 2002, we issued to Huntingdon an additional $350,000
principal amount convertible promissory note to Huntingdon (the "$350,000
Note"). The $350,000 Note is convertible into shares of Common Stock at a rate
of $1.25 per share. The remaining terms of the $350,000 Note are similar to
those of the $1.0 Million Note. At the time of the loan, warrants to purchase
140,000 of shares of Common Stock at an exercise price of $1.25 were also issued
to Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant. An original issue discount of $24,842 has been recorded and is
being amortized over 16 months, through the earliest date upon which the holder
can demand repayment.

            On October 3, 2002, each of the $2.5 million and $500,000 principal
amount convertible notes previously issued to Huntingdon were amended to, among
other things, extend the maturity date to September 30, 2007, provided that the
holder of either note may demand repayment of the note on or after our credit
facility is repaid. The $800,000 million principal amount convertible note
issued to Huntingdon was also amended on October 3, 2002 to, among other things,
extend the maturity date to September 30, 2007, provided that beginning on the
90th day after our credit facility is repaid the holder may demand repayment.

            Also on October 3, 2002, the $1.98 million principal amount
convertible promissory note previously issued to Norton Herrick and the $500,000
principal amount convertible promissory note issued to Evan Herrick, Norton
Herrick's son, were amended to, among other things, extend the maturity dates to
September 30, 2007; provided that the holder may demand repayment of the note on
or after October 31, 2004 and the holder of the $500,000 note may demand
repayment after December 31, 2004, in each case, if our credit facility has been
repaid.

            We received proceeds from the exercise of stock options and warrants
in the amount of $200,000 during the year ended December 31, 2002.

Indebtedness

            Following is a summary of the Company's indebtedness to its
creditors:

            Credit Facility

            As of April 10, 2003, the Company had $4,030,000 of indebtedness
outstanding under the Amended and Restated Credit Agreement dated as of October
3, 2002, as amended, by and among the Company and Radio Spirits, Inc. and Audio
Book Club, Inc., wholly-owned subsidiaries of the Company, as co-borrowers, and
ING (U.S.) Capital LLC, as administrative agent, and the other lenders named
therein (the "Credit Agreement"). The maturity date of the Credit Agreement is
April 30, 2004; provided however, that the Company is required to make monthly
payments of principal of $180,000 in April through June 2003, $190,000 in July
through September 2003, $200,000 in October through December 2003 and $225,000
in January through March 2004. The Company is not permitted to make any
additional borrowings under the Credit Agreement. The interest rate on the
credit facility is equal to the prime rate plus 2 1/2%. The Company granted the
lenders under the Credit Agreement a security interest in substantially all of
the Company's assets and the assets of its subsidiaries and pledged the stock of
its subsidiaries.

            The Company is required to maintain Minimum EBITDA, as defined
below, of the following:


                                       25
<PAGE>

                  o     $3,000,000 for the period beginning on January 1, 2001
                        and ending prior to March 31, 2003;

                  o     $4,000,000 for the period beginning on January 1, 2001
                        and ending prior to June 30, 2003;

                  o     $5,000,000 for the period beginning on January 1, 2001
                        and ending prior to September 30, 2003;

                  o     $6,000,000 for the period beginning on January 1, 2001
                        and ending prior to December 31, 2003.

                  o     $7,000,000 for the period beginning on January 1, 2001
                        and ending prior to March 31, 2004

                  Under the Credit Agreement, "EBITDA" means, for any period,
                  the sum of (i) net income, (ii) interest expense, (iii) income
                  tax expense, (iv) depreciation expense, (v) extraordinary and
                  nonrecurring losses and (vi) amortization expense, less
                  extraordinary and nonrecurring gains (in each case, determined
                  in accordance with generally accepted accounting principles)
                  plus adjustments for (x) the pro forma effect of any Permitted
                  Acquisition (as defined in the Credit Agreement) and (y)
                  non-cash stock compensation; provided that EBITDA shall be
                  adjusted for the effect of treating the Company's advertising
                  expense and new member acquisition costs as expensed as
                  incurred.

                  The Company was in compliance with this covenant at December
                  31, 2002.

            In addition to limiting the Company's ability to incur additional
indebtedness, the Credit Agreement prohibits the Company from, among other
things:

                  o     merging into or consolidating with another entity;

                  o     selling all or substantially all of its assets;

                  o     declaring or paying cash dividends; and

                  o     materially changing the nature of its business.

            We anticipate making the principal payments from cash flow generated
from operations.

            The balance of our bank debt, after making the above payments, of
$1.6 million is due April 30, 2004. We are currently seeking to refinance or
extend this debt. Historically we have been able to extend the maturity of this
debt.

            Notes Held by Norton Herrick

            Norton Herrick, the Company's Chairman and principal shareholder,
holds a $1,984,250 principal amount Convertible Senior Subordinated Promissory
Note due September 30, 2007, except that the holder has the right to demand
repayment of the unpaid principal balance of, and interest on, the note at any
time on or after the later of (i) October 31, 2004 and (ii) the date on which
the Company has repaid all of its obligations under the Credit Agreement. This
note is the remaining portion held by Norton Herrick of a $15 million
subordinated note entered into between Norton Herrick and MediaBay on December
31, 1998.

            Interest on this note accrues at the rate of 11% per annum and is
payable on a monthly basis, at the holder's option, in cash or common stock;
provided, however, that cash interest accrues until 10 days after the Company
has paid all of its obligations under the Credit Agreement. On October 3, 2002,
the note was amended to, among other things, provide that interest accrues on
unpaid interest at the interest rate of the note. This note is convertible into
shares of common stock at the rate of $.56 per share, subject to adjustment for
below conversion price issuances. This note is secured by a second lien on the
assets of Radio Spirits.


                                       26
<PAGE>

            The Company is prohibited from incurring additional indebtedness
(with exceptions), selling all or substantially all of its assets and materially
changing the nature of its business without the prior written consent of the
holder of this note.

            Notes held by Huntingdon Corporation

            Huntingdon Corporation, a company wholly owned by Norton Herrick,
holds the following promissory notes:

                  o     $2,500,000 principal amount Convertible Senior
                        Promissory Note (the "$2,500,000 Note") entered into on
                        May 14, 2001;

                  o     $800,000 principal amount Convertible Senior
                        Subordinated Promissory Note (the "$800,000 Note")
                        entered into on May 14, 2001;

                  o     $500,000 principal amount Convertible Senior Promissory
                        Note (the "$500,000 Note") entered into on February 22,
                        2002;

                  o     $1,000,000 principal amount Convertible Senior
                        Promissory Note (the "$1,000,000 Note") entered into on
                        October 3, 2002;

                  o     $150,000 principal amount Convertible Senior Promissory
                        Note (the "$150,000 Note") entered into on October 10,
                        2002; and

                  o     $350,000 principal amount Convertible Senior Promissory
                        Note (the "$350,000 Note") entered into on November 15,
                        2002.

            Each of the notes held by Huntingdon are due September 30, 2007,
provided that the holder has the right, at any time on or after the date on
which the Company has repaid all of its obligations under the Credit Agreement,
to demand repayment of the unpaid principal balance of and interest on the note;
provided, however that, with respect to the $800,000 Note, such demand can not
be made until the ninetieth (90th) day after the Company has repaid all of its
obligations under the Credit Agreement.

            Each of the $2,500,000 Note and $500,000 Note bears interest at an
annual rate equal to the prime rate plus 2%, the $800,000 Note bears interest at
the rate of 12% per annum and each of the $1,000,000 Note, $150,000 Note and
$350,000 Note bears interest at an annual rate equal to the prime rate plus 2
1/2%. Interest is payable under each note monthly, in arrears, in cash, or at
the holder's option, in lieu of cash, in shares of common stock or in kind,
provided, however, that cash interest accrues until 10 days after the Company
has paid all of its obligations under the Credit Agreement. Interest accrues on
unpaid interest under each note (since October 3, 2002 in the case of the
$2,500,000 Note, the $500,000 Note and the $800,000 Note) at the respective
interest rate of such note.

            The $2,500,000 Note, and the $800,000 Note are convertible into
shares of common stock at the rate of $.56 per share, subject to adjustment for
below conversion price issuances of securities. The $500,000 Note is convertible
at $1.82. Each of the $1,000,000 Note and the $150,000 Note is convertible into
shares of common stock at the rate of $2.00 per share, and the $350,000 Note is
convertible into shares of common stock at the rate of $1.25 per share.

            All of the notes held by Huntingdon are secured by a lien second to
the senior credit facility on substantially all of the assets of the Company and
its subsidiaries, other than inventory, receivables and cash of the Company and
its subsidiaries.

            The Company is prohibited from incurring indebtedness (with
exceptions), selling all or substantially all of its assets and materially
changing the nature of its business without the prior written consent of the
holder of the notes.


                                       27
<PAGE>

            Note held by N. Herrick Irrevocable ABC Trust (the "Trust")

            The Trust holds a $500,000 principal amount 9% Convertible Senior
Subordinated Promissory Note due September 30, 2007, except that the holder may
demand repayment of the unpaid principal balance and interest on the note,
commencing December 31, 2004, if the Company has repaid all of its obligations
under the Credit Agreement.

            This note is convertible into shares of common stock at the rate of
$.56 per share, subject to adjustment for below conversion price issuances of
securities. This note bears interest at the rate of 9% per annum. Interest is
payable monthly, in arrears, in cash or, at the holder's option, shares of
common stock; provided, however, that cash interest accrues until 10 days after
the Company has repaid its obligations under the Credit Agreement. After October
3, 2002, interest accrues on unpaid interest at the interest rate of the note.

            The Company is prohibited from incurring additional indebtedness
(with exceptions), selling all or substantially all of its assets and materially
changing the nature of its business without the prior written consent of the
holder of this note.

            Note held by ABC Investment LLC

            ABC Investment LLC is a third party, which holds a $3.2 million
principal amount Senior Subordinated Promissory Note due December 31, 2004. This
note is convertible into shares of common stock at the rate of $4.50 per share,
subject to adjustment for below conversion price issuances of securities. This
note bears interest at the rate of 9% per annum, quarterly, in arrears. The
Company is prohibited from incurring additional indebtedness (with exceptions),
selling all or substantially all of its assets and materially changing the
nature of its business without the prior written consent of the holder of this
note.

Commitments

            Indebtedness

            For debt outstanding at December 31, 2002 the loans mature as
follows:

        Year Ending December 31,

                2003 ....................................   $ 2,368,000
                2004 ....................................    15,247,000 (*)
                                                            -----------
                Total maturities, including debt discount
                of $567,000 .............................   $17,615,000
                                                            ===========

(*)   Principal amount of this debt is due on demand of the holders at various
      times during 2004 after we have repaid or refinanced our outstanding
      obligations under the Credit Agreement.

Real Estate Operating Leases

      The Company leases approximately 12,000 square feet of space in Cedar
Knolls, New Jersey pursuant to a lease agreement, which expires in August 2003
at a monthly rent of $16.

      In 1998, the Company entered into two ten-year leases on 7,000 square feet
of space in Bethel, Connecticut and 3,000 square feet in Sandy Hook,
Connecticut. Lease payments and mandatory capital improvement payments, starting
in 2004, are $4 per year and $2 per year on the Bethel and Sandy Hook
properties, respectively. The Company is currently sub-leasing this space.

      Minimum annual lease commitments including capital improvement payments
under non-cancelable operating leases are as follows:

                            Year ending December 31,

            2003........................................      $   133,000
            2004........................................            6,000
            2005........................................            6,000
            2006........................................            6,000
            2007........................................            6,000
            Thereafter..................................          112,000
                                                              -----------
            Total lease commitments.....................      $   169,000
                                                              ===========

      The Company has negotiated but not yet signed a sixty-six month extension
of its lease on its office space in Cedar Knolls, New Jersey. If, as expected
the lease is signed, the commitments would increase as follows:

                            Year Ending December 31,

            2003........................................      $   23,000
            2004........................................         162,000
            2005........................................         186,000
            2006........................................         192,000
            2007........................................         198,000
            Thereafter..................................         198,000
                                                              ----------
            Total increase in lease commitments.........      $  959,000
                                                              ==========


                                       28
<PAGE>

            Capitalized Leases

            Payments under capitalized lease obligations are $53,000, $53,000
and $18,000 for the years ending December 31, 2003, 2004 and 2005, respectively.

            Consulting Agreement

            On October 18, 2002, we entered into a consulting agreement with MEH
Consulting Services, Inc., ("MEH") a company wholly-owned by Michael Herrick,
our former CEO and the son of Norton Herrick. The agreement, effective January
1, 2003, provides, among other things that Mr. Herrick will provide consulting
and advisory services to MediaBay, that Mr. Herrick will devote a minimum of 30
hours per week and that Mr. Herrick will be under the direct supervision of our
Board of Directors. For his services, we have agreed to pay Mr. Herrick a fee of
$16,666 per month plus health insurance and other benefits applicable to our
officers to the extent such benefits may be provided under our benefit plans.

            Employment Agreements

            The Company has commitments pursuant to employment agreements with
its officers. The Company's minimum aggregate commitments under such employment
agreements are approximately $1.3 million, $.9 million and $.3 million during
2003, 2004 and 2005, respectively.

            Licensing Agreements

            The Company has numerous licensing agreements for both audiobooks
and old time radio shows with terms generally ranging from one to five years,
which require the Company to pay, in some instances, non-refundable advances
upon signing agreements, to be applied against future royalties. The Company's
minimum aggregate commitments under existing licensing agreements are $437,000,
$397,000 and $347,000 during 2003, 2004 and 2005, respectively.

            Obligations to Sellers in Our Acquisitions

            We granted to the sellers in certain of our acquisitions the right
to sell back to us shares of our common stock that we issued to them. Unless our
common stock satisfies specific price targets and/or trading volume
requirements, these rights could require us to purchase up to 305,000 shares in
the future at a cost to us of approximately $4.6 million as follows: (i) 25,000
shares at a cost of $350,000 commencing December 31, 2003, (ii) 230,000 shares
at a cost of $3,450,000 commencing December 31, 2004 and (iii) 50,000 shares at
a cost of $750,000 commencing December 31, 2005.

            Except as described above and upon a default or violation of a
covenant of any of the Company's debt, there are no provisions of any agreements
relating to these commitments, which could trigger argument for an early payout,
additional collateral support, change in terms, acceleration of maturity or the
creation of an additional financing obligation.

Recent Accounting Pronouncements

            In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities."
This interpretation defines when a business enterprise must consolidate a
variable interest entity. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The adoption of this statement is not expected to have a material effect on the
Company's financial position or results of operations.

            In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS 148"), "Accounting for Stock-Based Compensation -- Transition
and Disclosure, an amendment of FASB Statement 123" which amends SFAS No. 123.
This statement provides alternative methods of transition for a voluntary change
to the fair


                                       29
<PAGE>

value-based method of accounting for stock-based employee compensation and
amends the disclosure requirements of SFAS No. 123. The transition guidance and
annual disclosure provisions are effective for fiscal years ending after
December 15, 2002. The adoption of this statement will not have a material
effect on the Company's financial position or results of operations.

            In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation requires a
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. It also
enhances guarantor's disclosure requirements to be made in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.

            In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was
approved by the FASB. This statement is effective January 1, 2003. Among other
things, this statement requires that gains or losses on the extinguishment of
debt will generally be required to be reported as a component of income from
continuing operations and will no longer be classified as an extraordinary item.
Therefore, beginning in 2003, our prior financial statements will need to be
reclassified to include those gains and losses previously recorded as an
extraordinary item as a component of income from continuing operations.

            In July 2002, the FASB issued SFAS 146, "Accounting for Exit or
Disposal Activities". SFAS 146 requires the recognition of a liability for costs
associated with an exit plan or disposal activity when incurred and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", which allowed recognition at the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. The adoption of this statement is not anticipated to
have a material effect on the Company's financial position or results of
operations.

            In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement will not have a material
effect on the Company's financial position or results of operations.

Net Operating Losses

            Our net operating loss carryforwards expire beginning in 2018. Under
Section 382 of the Internal Revenue Code of 1986, utilization of prior net
operating losses is limited after an ownership change, as defined in Section
382, to an annual amount equal to the value of the corporation's outstanding
stock immediately before the date of the ownership change multiplied by the
long-term tax exempt rate. The additional equity financing we obtained in 2000
may result in an ownership change and, thus, may limit


                                       30
<PAGE>

our use of our prior net operating losses. In the event we achieve profitable
operations, any significant limitation on the utilization of net operating
losses would have the effect of increasing our tax liability and reducing net
income and available cash reserves. We are unable to determine the availability
of net operating losses since this availability is dependent upon profitable
operations, which we have not achieved in prior periods. We have provided a full
valuation allowance for our net operating loss carryforwards.

            Audit Committee Approval of Non-Audit Services

            In accordance with Section 10A(i)(2) of the Securities Exchange Act
of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company
is responsible for disclosing any non-audit services approved by the Company's
Audit Committee (the "Committee") to be performed by Deloitte & Touche LLP
("D&T"), the Company's external auditor. Non-audit services are defined as
services other than those provided in connection with an audit or a review of
the financial statements of the Company. During the year ended December 31,
2002, D&T was not engaged by the Company for any non-audit services.

Item 7A. Quantitative and Qualitative Disclosure of Market Risk

            We are exposed to market risk for the impact of interest rate
changes. As a matter of policy, we do not enter into derivative transactions for
hedging, trading or speculative purposes.

            Our exposure to market risk for changes in interest rates relate to
our long-term debt. As of April 10, 2003, interest on a portion of $9.0 million
of our long-term debt is payable at the rate of the prime rate plus 2.0% and
interest on a portion of $9.0 million of our long-term debt is payable at the
rate of the prime rate plus 2.5%. If the prime rate were to increase, our
interest expense would increase, however a hypothetical 10% change in interest
rates would not have had a material impact on our fair values, cash flows or
earnings for either 2002 or 2001. All of our other debt is at fixed rates of
interest.

Item 8. Financial Statements.

            The financial statements appear in a separate section of this report
following Part IV.

Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

            Not applicable.


                                       31
<PAGE>

                                    PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act

            The directors, executive officers and other key employees of our
company are as follows:

<TABLE>
<CAPTION>
Name                              Age      Position
<S>                               <C>      <C>
Norton Herrick                    64       Chairman and Director
Carl Wolf                         60       Co-Chairman and Director
Hakan Lindskog                    42       Chief Executive Officer
Howard Herrick                    38       Executive Vice President and Director
John F. Levy                      47       Executive Vice President and Chief Financial Officer
Stephen M. McLaughlin             36       Executive Vice President and Chief Technology Officer
Robert Toro                       38       Senior Vice President of Finance
Paul Ehrlich                      58       Director
Michael Herrick                   36       Director
Mark Hershhorn                    53       Director
Joseph Rosetti                    69       Director
</TABLE>

            Norton Herrick, 64, is our co-founder and has been Chairman and
Director since our inception. Mr. Herrick served as our President from our
inception until January 1996 and was Chief Executive Officer from January 1996
through January 2000. Mr. Herrick has been a private businessman for over 30
years. Mr. Herrick is the father of Michael Herrick, a director, and Howard
Herrick, our Executive Vice President and a director. Mr. Herrick has agreed to
resign as Chairman and be succeeded by Carl Wolf upon repayment or refinancing
of the senior credit facility or approval by the senior lenders.

            Carl T. Wolf, 60, as of November 2002 is our Co-Chairman. Mr. Wolf
has been a director of MediaBay since March 1998. Mr. Wolf is the managing
partner of the Lakota Investment Group. Mr. Wolf was formerly Chairman of the
Board, President and Chief Executive Officer of Alpine Lace Brands, Inc. 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. Mr. Wolf has agreed to become Chairman on the resignation of Norton
Herrick.

            Hakan Lindskog, 42, as of January 2002, is our Chief Executive
Officer. Mr. Lindskog joined MediaBay in July 2000 as Chief Operating Officer of
MediaBay and Chief Executive Officer for its Audio Book Club division and became
President of MediaBay in November 2001. Mr. Lindskog has 15 years management
experience in direct marketing, publishing and Internet consumer services.
Before joining our company, he was the former Executive Vice President and Chief
Operating Officer of RealHome.com, a free membership web service that provides
information and services regarding home buying and home ownership. Prior to
joining RealHome.com, Mr. Lindskog was Group Executive Vice President and Chief
Operating Officer of International Masters Publishers Group (IMP), a $740
million direct marketer, operating in 19 countries. Mr. Lindskog doubled revenue
of its U.S. subsidiary to $330 million and took net income from a $1 million
loss to a $33 million profit over a three-year period.

            Howard Herrick, 38, is our co-founder and has been our Executive
Vice President, Editorial Director and a director since our inception. Since
August 1993, Howard Herrick has been Vice President of the corporate general
partner of a limited partnership, which is a principal shareholder of The
Walking Company. Since 1988, Mr. Herrick has been an officer of The Herrick
Company, Inc. Mr. Herrick is also an officer of the corporate general partners
of numerous limited partnerships, which acquire, finance, market, manage and
lease office, industrial, motel and retail properties; and which acquire,
operate, manage, redevelop and sell residential rental properties. Mr. Herrick
is the son of


                                       32
<PAGE>

Norton Herrick, our Chairman, and brother of Michael Herrick, a director.

            John F. Levy, 47, joined us in November 1997 and has served as our
Executive Vice President and Chief Financial Officer since January 1998. Prior
to joining us, Mr. Levy had previously served as Chief Financial Officer of both
public and private entertainment and consumer goods companies. Mr. Levy is a
Certified Public Accountant with nine years experience with the national public
accounting firms of Ernst & Young, Laventhol & Horwath and Grant Thornton.

            Stephen M. McLaughlin, 36, has been our Executive Vice President and
Chief Technology Officer since February 1999. Prior to joining us, Mr.
McLaughlin was Vice President, Information Technology for Preferred Healthcare
Staffing, Inc., a nurse-staffing division of Preferred Employers Holdings, Inc.
Mr. McLaughlin co-founded and was a director, Chief Operating Officer and Chief
Information Officer of NET Healthcare, Inc., from 1997 until Preferred Employers
Holdings acquired it in August 1998. In 1994, Mr. McLaughlin founded FX Media,
Inc., an Internet and multimedia development company. As CEO of FX Media, he
served as senior software engineer for all of its projects. Mr. McLaughlin holds
a degree in Computer Science and Engineering from the Massachusetts Institute of
Technology and conducted research at the MIT Media and Artificial Intelligence
labs.

            Robert Toro, 38, has been our Senior Vice President of Finance since
July 1999, Chief Financial Officer of our Audio Book Club division since
November 2001 and an employee since April 1999. Before joining us, Mr. Toro was
Senior Vice President of AM Cosmetics Co. and had previously served in senior
financial positions in both public and private entertainment and publishing
companies. From 1992 through early 1997, Mr. Toro served in various senior
financial positions with Marvel Entertainment Group, Inc., a publicly traded
youth entertainment company. Mr. Toro is a Certified Public Accountant with six
years of experience with the national public accounting firm of Arthur Andersen
where he was employed immediately prior to joining Marvel Entertainment Group.

            Paul D. Ehrlich, 58, has been a director since May 2001. Mr. Ehrlich
is a Certified Public Accountant and tax and financial consultant. Since August
2000, Mr. Ehrlich has been a Partner with Edwards & Topple, LLP as well as
President of Paul D. Ehrlich, CPA, P.C., a tax and financial consulting
corporation. From 1981 to August 1, 2000, Mr. Ehrlich was a Shareholder, Tax
Specialist and Director of Personal Financial Services of Feldman Sherb & Co.,
P.C. Mr. Ehrlich has served on the Boards of Directors of several companies and
is a member of the American Institute of Certified Public Accountants, the New
York State Society of Certified Public Accountants (appointed committee member),
and the International Association for Financial Planning.

            Michael Herrick, 36, is our co-founder, has been a director since
our inception and was Chief Executive Officer from January 2000 through December
2002, was our Co-Chief Executive Officer from April 1998 to January 2000 and has
held various other offices with us since our 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 is a principal
shareholder of The Walking Company, a nationwide retailer of comfort and walking
footwear and related apparel and accessories. Mr. Herrick is a former member of
the Board of Directors of the Audio Publisher's Association. Mr. Herrick is
currently a principal with MEH Consulting Services, Inc., a business advisory
and consulting firm. Mr. Herrick is the son of Norton Herrick, our Chairman, and
brother of Howard Herrick, our Executive Vice President and a director. Mr.
Herrick received his B.A. degree from the University of Michigan.

            Mark P. Hershhorn, 53, has been a director since February 2003. Mr.
Hershhorn is currently President and CEO of CKS & Associates and CEO for Midwest
Real Estate Investment LLC, real estate development firms specializing in
renovation and rehabilitation of apartment buildings in urban areas. Mr.
Hershhorn was formerly President, CEO and a Director of National Media
Corporation, a publicly held transactional television marketing company. Prior
to National Media Corporation, Mr. Hershhorn served as Senior Vice President of
Food Operations and Joint Ventures for NutriSystems, Inc. Mr.


                                       33
<PAGE>

Hershhorn also served as Chief Financial Officer, Treasurer, Vice President and
Director of The Franklin Mint, a global direct marketing company operating in
ten countries. Mr. Hershhorn began his career at the accounting and auditing
firm of Price Waterhouse. Mr. Hershhorn is a member of the Graduate Executive
Board of the Wharton Graduate Division of the University of Pennsylvania and an
active participant in the Wharton School Mentoring program. He is also Vice
Chairman of the Board of Overseas and Executive Committee of the Rutgers
University Foundation, a member of the Rutgers University Board of Trustees,
Chairman of the Executive Committee of Rutgers University Scarlet R Club,
Chairperson of the Rutgers University Annual Fund, a member of the Dean's
Advisory Council for Rutgers College and a member of Rutgers University
President's Council. Mr. Hershhorn is also a Board Member and Chairman of the
Development Committee of Carelift International, a not-for-profit organization,
which rebuilds and outfits hospitals in Eastern European countries with current
medical technology and supplies. Mr. Hershhorn holds a Bachelor of Arts Degree
in Economics from Rutgers University where he was a Henry Rutgers Scholar in
Economics, and an MBA from the Wharton School of the University of Pennsylvania.

            Joseph R. Rosetti, 69, has been a director of MediaBay since
December 2002. Mr. Rosetti is President of SafirRosetti, an investigative and
security firm owned by Omnicom Group, Inc. Prior to forming SafirRosetti, Joseph
R. Rosetti was the Vice Chairman of Kroll Associates. As Vice Chairman, he had
responsibility for Corporate Security/Crisis Management, which provides industry
and professional organizations with preventive measures to combat corporate and
financial crimes. From 1971 to 1987 he had worldwide responsibility at IBM for
security programs in physical security, investigations, personnel security,
trade secret protection, information asset security, real and movable and
financial asset security and Department of Defense Security. Mr. Rosetti was a
member of the U.S. National Chamber of Commerce Crime Reduction Panel and was
Staff Director for the Conference of the National Commission on Criminal Justice
Standards and Goals, a member of the private Security Task Force to the National
Advisory Committee on Criminal Justice Standards and Goals and Chairman of the
American Management Association's Council on Crimes against Business. Prior to
joining IBM, Mr. Rosetti was the Northeast Director for the Law Enforcement
Assistance Administration of the U.S. Department of Justice and a Special Agent,
Group Supervisor, and Special Assistant to the Assistant Commissioner for
Compliance in the Intelligence Division, U.S. Treasury Department.

            Our Board of Directors is classified into three classes, each with a
term of three years, with only one class of directors standing for election by
the shareholders in any year. Norton Herrick, Paul Ehrlich and Joseph Rosetti
are Class I directors and will stand for re-election at the 2004 annual meeting
of shareholders. Michael Herrick and Mark Hershhorn are Class II directors and
stand for re-election at the 2005 annual meeting of shareholders. Howard Herrick
and Carl Wolf are Class III directors and stand for re-election at the 2003
annual meeting of shareholders. Our executive officers serve at the direction of
the Board and until their successors are duly elected and qualified.

Compliance with Section 16(a) of the Exchange Act

            Section 16(a) of the Exchange Act requires our officers, directors,
and persons who own more than 10% of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors, and greater than 10%
shareholders are required by Securities and Exchange Commission regulations to
furnish us with copies of all forms that they file pursuant to Section 16(a).

            Based solely upon our review of the copies of such forms that we
received, we believe that, during the year ended December 31, 2002, all filing
requirements applicable to our officers, directors, and greater than 10%
shareholders were complied with.


                                       34
<PAGE>

Item 11. Executive Compensation

            The following table discloses, for the periods indicated,
compensation paid to our Chief Executive Officer and each of the four most
highly compensated executive officers (the "Named Executives").

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                                            Long-Term
                                                                                                           Compensation
                                                                                                              Awards
                                                                                                            Securities
                                                                Annual Compensation                          Underlying
        Name and Principal Position                 Year                Salary          Bonus             Options/SAR's (#)
<S>                                                 <C>                <C>             <C>                      <S>
Michael Herrick                                     2002               $ 175,000       $ 50,000                      --
Chief Executive Officer (1)                         2001                 175,000         50,000                 150,000
                                                    2000                 154,167         50,000                 600,000

Hakan Lindskog                                      2002                 317,187         45,000                 200,000
President and Chief Operating Officer (1) (2)       2001                 264,063         50,000                 175,000
                                                    2000                 107,015             --                 150,000

John F. Levy                                        2002                 181,414         17,500                  50,000
Executive Vice President and Chief                  2001                 180,000         17,500                      --
Financial Officer                                   2000                 167,027         15,000                      --

Steven M. McLaughlin                                2002                 188,684             --                  10,000
Executive Vice President and Chief                  2001                 178,750             --                      --
Technology Officer                                  2000                 167,500         25,000                  35,000

Robert Toro                                         2002                 176,752         18,500                      --
Senior Vice President Finance                       2001                 159,087         17,500                  50,000
                                                    2000                 141,784         10,000                  20,000
</TABLE>

(1)   Effective January 1, 2003, Michael Herrick resigned as Chief Executive
      Officer and Hakan Lindskog was appointed Chief Executive Officer.

(2)   Mr. Lindskog joined MediaBay in June 2000.

            The following table discloses options granted during the fiscal year
ended December 31, 2002 to the Named Executives:


                                       35
<PAGE>

           Option/SAR Grants in Fiscal Year Ending December 31, 2002:

<TABLE>
<CAPTION>
                                                                                                           Potential
                                                                                                        Realizable Value
                                Number of        % of Total                                             At Assumed Annual
                                 Shares        Options Granted     Exercise                           Rates of Stock Price
                               Underlying      to Employees in      Price                                 Appreciation
Name                         Options Granted     Fiscal Year      ($/share)     Expiration Date          for Option Term
----                         ---------------     -----------      ---------     ---------------          ---------------
                                                                                                        5% ($)      10% ($)
                                                                                                        ------      -------
<S>                                <C>                      <C>         <C>          <C>                <C>          <C>
Michael Herrick                        --                   --             --              --               --           --

Hakan Lindskog                    100,000(1)                 8%         $1.25        10/18/08           23,751       71,643
                                  100,000(2)                 8%         $3.25        10/18/09              (7)          (7)

John F. Levy                       17,000(3)                 1%         $1.00         1/02/07              (7)          796
                                   17,000(4)                 1%         $1.50        11/10/07(3)           (7)          (7)
                                   16,000(5)                 1%         $2.00        11/10/08(4)           (7)          (7)

Steven M. McLaughlin               10,000(6)                 1%         $1.00         1/03/08(5)            --        1,869

Robert Toro                            --                   --             --              --               --           --
</TABLE>

(1)   These options vest on October 18, 2003

(2)   These options vest on October 18, 2004

(3)   These options vested on January 2, 2002

(4)   These options vested on November 10, 2002

(5)   These options vest on November 10, 2003

(6)   These options vested on January 3, 2003

(7)   These options do not have any realizable value based on the assumed annual
      rates of stock price appreciation presented in the table because the
      exercise price of the options was significantly greater than the market
      price of the common stock on the grant date and will exceed the assumed
      market price of the common stock on the expiration date of the option
      based on such assumed stock price appreciation.

            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, 2002. No options were exercised by any of
these executives during fiscal 2002.

Aggregated Option Exercises And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                 Number of Securities
                                Underlying Unexercised             Value of Unexercised In-the-Money
                             Options at December 31, 2002             Options at December 31, 2002
                             ----------------------------             ----------------------------
     Name                   Exercisable         Unexercisable       Exercisable         Unexercisable
<S>                             <C>                   <C>                <C>                   <C>
Michael Herrick                 850,000                    --                --                    --
Hakan Lindskog                   50,000               300,000            $9,500                    --
Steven McLaughlin               148,000                45,000             1,520                $1,900
John F. Levy                     84,000                16,000             3,230                    --
Robert Toro                     100,000                20,000             4,750                 3,800
</TABLE>


                                       36
<PAGE>

            The year-end values for unexercised in-the-money options represent
the positive difference 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. The closing sale price of our common stock on December 31, 2002
was $1.19.

Employment Agreements

            Effective as of October 22, 2002, we entered into an employment
agreement with Norton Herrick expiring January 15, 2004, which provides for an
annual base salary of $100,000 and such increases and bonuses as the Board of
Directors may determine from time to time. The employment agreement does not
require that Mr. Herrick devote any stated amount of time to our business and
activities and contains non-competition and non-solicitation provisions for the
term of the employment agreement and for two years thereafter. If Mr. Herrick's
employment is terminated under circumstances described in the employment
agreement, 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 us during the twelve months
prior to the date of termination.

            We entered into a two-year employment agreement with Carl Wolf on
November 15, 2002. The agreement provides for a base salary of $135,000 during
the first year of the agreement. Mr. Wolf's employment under the agreement
automatically terminates on November 14, 2004, unless prior to such date at
least 75% of our Board of Directors vote affirmatively to continue Mr. Wolf's
employment. Under the terms of the agreement, Mr. Wolf is required to devote at
least 20 hours per week to our business and activities. Pursuant to the
agreement, Mr. Wolf was granted options to purchase 570,000 shares of our common
stock. Of the total options granted, options with respect to 285,000 shares have
an exercise price of $1.25 and vest on November 15, 2003 and options with
respect to 285,000 shares have an exercise price of $3.25 and vest on November
15, 2004. In the event of termination of employment under circumstances
described in the employment agreement, including as a result of a change in
control, we will be required to provide severance pay equal to the lesser of Mr.
Wolf's base salary for the unexpired period of his employment under the
agreement or one year's base salary.

            We entered into a 39-month employment agreement with Hakan Lindskog
effective October 1, 2001. The agreement, as amended, provides for an annual
base salary of $306,250 in the first 12 months of his employment, an annual base
salary of $350,000 for October 1, 2002 through December 31, 2003 and an annual
base salary of $400,000 during 2004. Mr. Lindskog's agreement also provides for
a minimum bonus of $45,000 payable August 15, 2002, August 15, 2003 and August
15, 2004, and a bonus of $25,000 on March 31, 2003, in each case, if he is
employed by the Company on each such date. Mr. Lindskog may also receive
performance-based bonuses based on the Company achieving minimum adjusted EBITDA
(earnings before interest, taxes, depreciation and amortization) targets, as
defined in the agreement. These performance bonuses, if any, would be payable on
April 1, 2003, 2004 and 2005. Pursuant to the agreement as amended, we agreed to
grant to Mr. Lindskog options to purchase 200,000 shares of common stock. Of the
total options granted, options with respect to 100,000 shares have an exercise
price of $1.25 and vest on October 18, 2003 and options with respect to 100,000
shares have an exercise price of $3.25 and vest on October 18, 2004. In the
event of termination of employment under circumstances described in the
employment agreement, including as a result of a change in control, we will be
required to provide severance pay equal to the greater of 50% of the balance of
Mr. Lindskog's base salary for the unexpired period of his employment under the
agreement or his last six months base salary immediately prior to the
termination.

            We entered into a 38-month employment agreement with Howard Herrick
dated October 30, 2002. The agreement provides for an annual base salary of
$175,000 in the first year of the agreement and four percent increases in each
succeeding year. Mr. Herrick's agreement also provides for a minimum annual
bonus of $30,000. Pursuant to the agreement, we granted to Mr. Herrick options
to


                                       37
<PAGE>

purchase 100,000 shares of common stock with an exercise price of $1.00, which
immediately vested. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to the
greater of $525,000 or three times total compensation received by Mr. Herrick
during the twelve months prior to termination.

            We entered into a two-year employment agreement with John Levy
effective November 2001. The agreement provides for an annual base salary of
$180,000, in the first year of the agreement and an annual base compensation of
$190,000 in the second year of the agreement. Mr. Levy's agreement also provides
for a minimum bonus of $27,000 in the first year of the agreement and a minimum
bonus of $30,000 in the second year of the agreement. Pursuant to the agreement,
we granted to Mr. Levy options to purchase 50,000 shares of common stock. Of the
total options granted, options with respect to 17,000 shares have an exercise
price of $1.00 and vested on January 2, 2002; options with respect to 17,000
shares have an exercise price of $1.50 and vested on November 10, 2002 and
options with respect to 16,000 shares have an exercise price of $2.00 and vest
on November 10, 2003. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to
$100,000.

            We entered into a two-year employment agreement with Stephen
McLaughlin effective February 15, 2003. The agreement provides for an annual
base salary of $200,000, in the first year of the agreement and an annual base
compensation of $210,000 in the second year of the agreement. Mr. McLaughlin's
agreement also provides for a minimum bonus of $10,000 in the first year of the
agreement and a minimum bonus of $15,000 in the second year of the agreement.
Pursuant to the agreement, we granted to Mr. McLaughlin options to purchase
40,000 shares of common stock with an exercise price $1.50. Of the total options
granted, options with respect to 20,000 shares vest on February 15, 2004; and
options with respect to 20,000 vest on February 15, 2005. In the event of
termination of employment under circumstances described in the employment
agreement, including as a result of a change in control, we will be required to
provide severance pay equal to $100,000. In the event of termination of
employment under circumstances described in the employment agreement, including
as a result of a change in control, we will be required to provide severance pay
equal to 50% of the balance of Mr. McLaughlin's base salary for the unexpired
period of his employment under the agreement.

            We entered into a two-year employment agreement with Robert Toro
effective July 19, 2001. The agreement provided for an annual base salary of
$170,000 in the first year of the agreement and $185,000 in the second year of
the agreement. Mr. Toro's agreement also provided for a minimum bonus of $16,500
in the first year of the agreement and a minimum bonus of $18,000 in the second
year of the agreement. Pursuant to the agreement, we agreed to grant to Mr. Toro
options to purchase 40,000 shares of common stock at an exercise price of $1.00
per share. Of the total options granted, 20,000 vested on July 19, 2002 and
20,000 vest on July 19, 2003. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to Mr.
Toro's base salary for the unexpired period of his employment under the
agreement.

Stock Plans

            Our 1997 Stock Option Plan provides for the grant of stock options
to purchase up to 2,000,000 shares. As of April 10, 2003, options to purchase an
aggregate of 1,636,500 shares of our common stock have been granted under the
1997 plan.

            Our 1999 Stock Option Plan provides for the grant of to purchase
2,500,000 shares. As of April 10, 2003, options to purchase an aggregate of
911,850 shares of our common stock have been granted under the 1999 plan.


                                       38
<PAGE>

            Our 2000 Stock Incentive Plan provides for the grant of any or all
of the following types of awards: (1) stock options, which may be either
incentive stock options or non-qualified stock options, (2) restricted stock,
(3) deferred stock and (4) other stock-based awards. A total of 3,500,000 shares
of common stock have been reserved for distribution pursuant to the 2000 plan.
As of April 10, 2003, options to purchase an aggregate of 3,077,250 shares of
our common stock have been granted under the 2000 plan.

            Our 2001 Stock Incentive Plan provides for the grant of any or all
of the following types of awards: (1) stock options, which may be either
incentive stock options or non-qualified stock options, (2) restricted stock,
(3) deferred stock and (4) other stock-based awards. A total of 3,500,000 shares
of common stock have been reserved for distribution pursuant to the 2001 plan.
As of April 10, 2003, options to purchase an aggregate of 670,000 shares of our
common stock have been granted under the 2000 plan.

            As of April 10, 2002, of the options granted under our plans,
options to purchase 5,825,000 shares of our common stock have been granted to
our officers and directors as follows: Norton Herrick - 2,800,000 shares; Carl
Wolf 725,000 shares; Hakan Lindskog - 350,000 shares; Howard Herrick - 750,000
shares; John F. Levy - 100,000 shares; Robert Toro - 120,000 shares; Stephen
McLaughlin - 75,000 shares, Paul Ehrlich - 15,000; Shares; Michael Herrick -
850,000 shares; Mark Hershhorn -- 40,000 shares; Joseph Rosetti - 40,000 shares.

Item 12. Security Ownership of Certain Beneficial Owners and Management

            The following table details information regarding the Company's
existing equity compensation plans as of December 31, 2002:

<TABLE>
<CAPTION>
                                                                                                        (c)
                                                                                                Number of securities
                                                  (a)                        (b)              remaining available for
                                        Number of securities to       Weighted-average         future issuance under
                                        be issued upon exercise       exercise price of      equity compensation plans
                                        of outstanding options,     outstanding options,       (excluding securities
            Plan Category                 warrants and rights        warrants and rights      reflected in column (a))
-----------------------------------       -------------------        -------------------      ------------------------
<S>                                           <C>                          <C>                        <C>
Equity compensation plans approved
by security holders.................           6,294,600                   $ 4.39                     4,974,400
Equity compensation plans not
approved by security holders........           4,524,589                     4.47                            --
                                              ----------                   ------                     ---------
Total...............................          10,819,189                   $ 4.42                     4,974,400
                                              ==========                   ======                     =========
</TABLE>

            Note 1: See Note 10 to the Consolidated Financial Statements for a
further description of these plans.

            The following table sets forth information regarding the beneficial
ownership of common stock, based on information provided by the persons named
below in publicly available filings, as of April 10, 2003:

      o     each of MediaBay's directors and executive officers;

      o     all directors and executive officers of MediaBay as a group; and

      o     each person who is known by MediaBay to beneficially own more than
            five percent of our outstanding shares of common stock.


                                       39
<PAGE>

            Unless otherwise indicated, the address of each beneficial owner is
care of MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927.
Unless otherwise indicated, we believe that all persons named in the following
table have sole voting and investment power with respect to all shares of common
stock that they beneficially own.

            For purposes of this table, a person is deemed to be the beneficial
owner of the securities if that person can currently acquire such securities
upon the exercise of options, warrants or other convertible securities. In
determining the percentage ownership of the persons in the table above, we
assumed in each case that the person exercised and converted all options,
warrants or convertible securities which are currently held by that person and
which are currently exercisable, but that options, warrants or other convertible
securities held by all other persons were not exercised or converted.

<TABLE>
<CAPTION>
                                                        Number of Shares   Percentage of Shares
 Name and Address of Beneficial Owner                  Beneficially Owned    Beneficially Owned
<S>                                                        <C>                     <C>
Norton Herrick                                             17,915,945(1)           57.9%
Howard Herrick                                              9,559,782(2)           44.4
Michael Herrick                                             1,437,484(3)            9.5
Carl T. Wolf                                                  399,590(4)            2.8
Stephen M. McLaughlin                                         193,300(5)            1.3
Robert Toro                                                   100,000(6)              *
John F. Levy                                                   85,000(7)              *
Hakan Lindskog                                                 50,000(8)              *
Joseph Rosetti                                                 25,000(9)              *
Paul Ehrlich                                                   10,000(10)             *
Mark Hershhorn                                                      0(9)              0
                                                           ----------              ----
All directors and executive officers as a group
(11 persons)                                               29,287,641              76.2%
                                                           ==========              ====
</TABLE>

*     Less than 1%

(1)   Represents (a) 545,400 shares of common stock held by Norton Herrick, (b)
      488,460 shares of common stock held by Howard Herrick, Norton Herrick's
      son, (c) 285,000 shares held by M. Huddleston Enterprises, Inc., (d)
      2,800,000 shares of common stock issuable upon exercise of options, (e)
      928,701 shares of common stock issuable upon exercise of warrants, (f)
      2,302,500 shares of common stock issuable upon exercise of warrants held
      by Huntingdon Corporation, (g) 3,543,303 shares of common stock issuable
      upon conversion of convertible promissory notes held by Huntingdon
      Corporation and (h) 7,022,581 shares of common stock issuable upon
      conversion of convertible notes held by Huntingdon Corporation. Howard
      Herrick has irrevocably granted to Norton Herrick sole dispositive power
      with respect to the 488,460 shares of common stock held by Howard Herrick.
      Mr. Herrick is the sole stockholder of M. Huddleston Enterprises, Inc. and
      Huntingdon Corporation and has sole voting and dispositive power over the
      securities held by these corporations. Does not include the following
      shares as to which Mr. Herrick may be deemed to be the beneficial owner;
      (x) 363,265 shares of common stock held by Evan Herrick, Norton Herrick's
      son and (y) 447,350 shares of common stock held by Engelwood Investments
      LLC, a limited liability company owned by Betty Sutta, Norton Herrick's
      sister-in-law. In addition, does not include (i) 2,964,180 shares of
      common stock held by Norton Herrick Irrevocable ABC Trust (the "Trust"),
      (ii) 892,857 shares of common stock issuable upon conversion of a
      convertible promissory note held by the Trust, (iii) 4,464,285 shares of
      common stock issuable upon conversion of 25,000 shares of preferred stock
      held by the Trust, (iv) 46,229 shares which may become issuable to Mr.
      Herrick upon exercise of warrants which may be


                                       40
<PAGE>

      required to be issued to Mr. Herrick, (v) 750,000 shares of common stock
      issuable upon exercise of options held by Howard Herrick, Norton Herrick's
      son, and (vi) 587,484 shares of common stock and 850,000 shares of common
      stock issuable upon exercise of options held by Michael Herrick, Norton
      Herrick's son. See "Certain Relationships and Related Transactions."

(2)   Represents (a) 2,964,180 shares held by Norton Herrick Irrevocable ABC
      Trust (the "Trust"), (b) 488,460 shares of common stock held by Howard
      Herrick, (c) 750,000 shares of common stock issuable upon exercise of
      options, (d) 892,857 shares of common stock issuable upon conversion of
      convertible promissory notes held by the Trust and (e) 4,464,285 shares of
      common stock issuable upon conversion of 25,000 shares of Series A
      preferred stock held by the Trust. Howard Herrick is the sole trustee and
      Norton Herrick is the sole beneficiary of the Norton Herrick Irrevocable
      ABC Trust. The 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 488,460 shares of common stock held by Howard
      Herrick.

(3)   Represents 587,484 shares and 850,000 shares of common stock issuable upon
      exercise of options.

(4)   Represents 247,090 shares of common stock and 152,500 shares of common
      stock issuable upon exercise of options. Does not include options to
      purchase 570,000 shares of common stock issuable upon exercise of options.

(5)   Represents 300 shares and 193,000 shares of common stock issuable upon
      exercise of options. Does not include 40,000 shares of common stock
      issuable upon exercise of options.

(6)   Represents shares of common stock issuable upon exercise of options. Does
      not include 20,000 shares of common stock issuable upon exercise of
      options.

(7)   Represents 1,000 shares of common stock and 84,000 shares of common stock
      issuable upon exercise of options. Does not include 16,000 shares issuable
      upon exercise of options.

(8)   Represents shares of common stock issuable upon exercise of options. Does
      not include 300,000 shares issuable upon exercise of options.

(9)   Does not include 40,000 shares of common stock issuable upon exercise of
      options.

(10)  Represents shares of common stock issuable upon exercise of options. Does
      not include 10,000 shares of common stock issuable upon exercise of
      options.


                                       41
<PAGE>

Item 13. Certain Relationships and Related Transactions

            Companies wholly owned by Norton Herrick, our Chairman, have in the
past provided accounting, administrative, legal and general office services to
us at cost since our inception. Companies wholly owned by Norton Herrick have
also assisted us in obtaining insurance coverage without remuneration. We paid
or accrued to these entities $430,000, $88,000 and $133,000 for these services
during the years ended December 31, 2002, 2001 and 2000, respectively. In
addition, a company wholly owned by Norton Herrick provides us access to a
corporate airplane. We generally pay the fuel, fees and other costs related to
our use of the airplane directly to the service providers. For use of this
airplane, we paid rental fees of approximately $14,000 in each of 2002 and 2001,
respectively, and $25,000 in 1999 to Mr. Herrick's affiliate. We anticipate
obtaining similar services from time to time from companies affiliated with
Norton Herrick, and we will reimburse their costs in providing the services to
us.

            On January 18, 2002, Evan Herrick, a son of Norton Herrick, our
Chairman, and a brother of Howard Herrick, an Executive Vice President and
director and Michael Herrick, a director, exchanged $2.5 million principal
amount of a $3.0 million principal amount convertible note of MediaBay (the
"Note") for 25,000 shares of Series A Preferred Stock of MediaBay (the
"Preferred Shares"), having a liquidation preference of $2.5 million. The
Preferred Share dividend rate of 9% ($9.00 per share) is the same as the
interest rate of the Note, and is payable in additional Preferred Shares, shares
of common stock of MediaBay or cash, at the holder's option, provided that if
the holder elects to receive payment in cash, the payment will accrue until
MediaBay is permitted to make the payment under its existing credit facility.
The conversion rate of the Preferred Shares is the same as the conversion rate
of the Note. The Preferred Shares vote together with the Common Stock as a
single class on all matters submitted to stockholders for a vote, and certain
matters require the majority vote of the Preferred Shares. The holder of each
Preferred Share shall have a number of votes for each Preferred Share held
multiplied by a fraction, the numerator of which is the liquidation preference
and the denominator of which is $1.75. On December 31, 2002, Evan Herrick sold
the Note and Preferred shares to N. Herrick Irrevocable ABC Trust.

            As previously agreed to with us, if we required, on February 22,
2002, Huntingdon purchased a $500,000 principal amount convertible senior
promissory note due June 30, 2003 (the "February Note"). The February Note is
convertible into shares of Common Stock at the rate of $0.56 of principal and/or
interest per share. The February Note was issued in consideration of a $500,000
loan made by Huntingdon to us. As partial consideration for the loan and
pursuant to an agreement dated April 30, 2001, we granted to Huntingdon warrants
to purchase 250,000 of Common Stock at an exercise price of $0.56 per share. The
warrants are exercisable until May 14, 2011.

            On March 1, 2002, we acquired inventory and licensing agreements,
including the exclusive license to The Shadow radio programs. A payment of
$333,000 has been paid and additional payments of nine monthly installments of
$74,000 commenced on June 15, 2002. All of the required payments have been made
and the Company has satisfied its obligation. Norton Herrick, our chairman,
guaranteed the payments for no consideration from the Company.

            On October 3, 2002, the Company and Huntingdon entered into an
agreement pursuant to which Huntingdon agreed to loan the Company $1.5 million
(the "October Agreement").

            During August and September of 2002, Norton Herrick advanced $1.0
million to the Company, which was converted into a $1.0 million principal amount
convertible promissory note payable to Huntingdon (the "Initial Note") under the
October Agreement. The Initial Note bears interest at the prime rate plus 2 1/2
%, is convertible into shares of common stock at a rate of $2.00 per share and
is due September 30, 2007, except that the holder may make a demand for
repayment after the Company's existing credit facility is repaid. In connection
with the transaction, we issued to Huntingdon a ten-year warrant to purchase
250,000 shares of Common Stock at an exercise price of $2.00 per share (the
"Initial Warrant").


                                       42
<PAGE>

            Pursuant to the October Agreement, on October 10, 2002, we issued to
Huntingdon an additional $150,000 principal amount convertible promissory note
to Huntingdon (the "Second Note"). The Second Note is convertible into shares of
Common Stock at a rate of $2.00 per share. The remaining terms of the Second
Note are similar to those of the Initial Note. Warrants to purchase 37,500 of
shares of Common Stock at an exercise price of $2.00 were also issued to
Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant.

            Pursuant to the October Agreement, on November 15, 2002, we issued
to Huntingdon an additional $350,000 principal amount convertible promissory
note to Huntingdon (the "Third Note"). The Third Note is convertible into shares
of Common Stock at a rate of $1.25 per share. The remaining terms of the Third
Note are similar to those of the Initial Note. At the time of the loan, warrants
to purchase a number of shares of Common Warrants to purchase 140,000 of shares
of Common Stock at an exercise price of $1.25 were also issued to Huntingdon.
The remaining terms of this warrant are similar to those of the Initial Warrant.

            Pursuant to the October Agreement, each of the $2.5 million and
$500,000 principal amount convertible notes previously issued to Huntingdon were
amended to, among other things, extend the maturity date to September 30, 2007,
provided that the holder of either note may demand repayment of the note on or
after our credit facility is repaid. The $800,000 principal amount convertible
note issued to Huntingdon was also amended on October 3, 2002 to, among other
things, extend the maturity date to September 30, 2007, provided that beginning
on the 90th day after our credit facility is repaid the holder may demand
repayment.

            Also on October 3, 2002, the $1,984,000 principal amount convertible
promissory note previously issued to Norton Herrick and the $500,000 principal
amount convertible promissory note issued to Evan Herrick were amended to, among
other things, extend the maturity dates to September 30, 2007; except that the
holder may demand repayment of the note on or after October 31, 2004 if our
credit facility has been repaid.

            In connection with entering into the consulting agreement, we
entered into an indemnification agreement with MEH and Michael Herrick to
indemnify MEH and Mr. Herrick to the maximum extent permitted by the corporate
laws of the State of Florida or, if more favorable, our Articles of
Incorporation and By-Laws in effect at the time the agreement was executed,
against all claims (as defined in the agreement) arising from or out of or
related to or in connection with MEH's and Mr. Herrick's service under the
agreement or in any other capacity.

            On November 15, 2002, the Company entered into an agreement with
Norton Herrick pursuant to which Norton Herrick agreed to resign as Chairman
upon the lenders under the senior credit facility consent to such resignation or
the Company's repayment of the facility as to permit Carl Wolf to become
Chairman. As consideration, Mr. Herrick was given the right to nominate up to
four members of the Board of Directors of the Company and the Company agreed not
to increase the number of directors to more than seven members without Mr.
Herrick's consent.

            On November 15, 2002, in connection with entering into an employment
agreement with Norton Herrick, we entered into an indemnification agreement with
Mr. Herrick pursuant to which, we agreed to indemnify Mr. Herrick to the maximum
extent permitted by the corporate laws of the State of Florida or, if more
favorable, our Articles of Incorporation and By-Laws in effect at the time the
agreement was


                                       43
<PAGE>

executed, against all claims (as defined in the agreement) arising from or out
of or related to Mr. Herrick's services as an officer, director, employee,
consultant or agent of our company or any subsidiary or in any other capacity.

            In December 2002, Michael Herrick exercised options to purchase
150,000 shares of our common stock under an option granted to him on November
23, 2001, by delivering to us 60,976 shares of common stock previously issued to
him.

            In 2002, Norton Herrick advanced $372,000 to certain of our vendors
and professional firms as payment of amounts owed to them. As we make payments
to these vendors, the vendors repay the amounts advanced to them by Mr. Herrick.
Mr. Herrick received no interest or other compensation for advancing the monies.

            Companies affiliated with Norton Herrick may continue to provide
accounting and general and administrative services to us, provide us with access
to a corporate airplane and obtain insurance coverage for us at cost.

Item 14. Controls and Procedures

            Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the participation of
MediaBay's management, including the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that MediaBay's disclosure controls and procedures are effective to
ensure that information required to be disclosed by MediaBay in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were no significant changes in MediaBay's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.


                                       44
<PAGE>

                                     PART IV

            Item 15. Exhibits, Financial Statements Schedules and Reports on
Form 8-K

(a) Exhibits

3.1      Restated Articles of Incorporation of the Registrant. (1)

3.2      Articles of Amendment to Articles of Incorporation. (5)

3.3      Articles of Amendment to Articles of Incorporation. (6)

3.4      Articles of Amendment to Articles of Incorporation of the Registration
         filed with the Department of State of the State of Florida on January
         18, 2002. (11)

3.4      Amended and Restated By-Laws of the Registrant.

10.1     Employment Agreement between the Registrant and Norton Herrick.

10.2     Employment Agreement between the Registrant and Robert Toro. (12)

10.3     Employment Agreement between the Registrant and John Levy. (12)

10.4     Employment Agreement between our subsidiary and Hakan Lindskog. (12)

10.5     Employment Agreement between the Registrant and Carl Wolf

10.6     Employment Agreement between the Registrant and Howard Herrick (13)

10.7     Employment Agreement between the Registrant and Steven McLaughlin

10.8     Letter Agreement dated October 18, 2002 between Hakan Lindskog and the
         Registrant. (13)

10.9     Put Agreement, dated as of December 11, 1998, by and between the
         Registrant and Premier Electronic Laboratories, Inc. (3)

10.10    Registration and Shareholder Rights Agreement, dated as of December 30,
         1998, by and among the Registrant and The Columbia House Company, WCI
         Record Club Inc. and Sony Music Entertainment Inc. (3)

10.11    $3,200,000 Principal Amount 9% Convertible Senior Subordinated
         Promissory Note of the Registrant to ABC Investment, L.L.C. due
         December 31, 2004. (12)

10.12    Modification Letter, dated December 31, 1998, among Norton Herrick, the
         Registrant and Fleet National Bank (3)

10.13    Security Agreement, dated as of December 31, 1998, by and among the
         Registrant, Classic Radio Holding Corp. and Classic Radio Acquisition
         Corp. and Norton Herrick. (3)

10.14    1997 Stock Option Plan (1)

10.15    1999 Stock Incentive Plan (4)

10.16    2000 Stock Incentive Plan (7)

10.17    2001 Stock Incentive Plan (10)

10.18    Amended and Restated Credit Agreement dated as of April 30, 2001 (the
         "Credit Agreement"), among Registrant Audio Book Club, Inc. ("ABC"),
         Radio Spirits, Inc. ("RSI") and ING (U.S.) Capital LLC ("ING"). (9)

10.19    Form of Amended and Restated Security Agreement, dated as of April 30,
         2001 among Registrant, RSI, ABC, VideoYesteryear, Inc. ("VYI"),
         MediaBay.com, Inc. ("MBCI"), Audiobookclub.com ("ABCC"), ABC-COA
         Acquisition Corp. (abc-coa"), MediaBay Services, Inc. ("MSI"), ABC
         Investment Corp. ("AIC"), MediaBay Publishing, Inc. ("MPI"), Radio
         Classics, Inc. ("RCI") and ING. (9)


                                       45
<PAGE>

10.20    Form of Amended and Restated Intellectual Property Security Agreement,
         dated as of April 30, 2001 among Registrant, RSI, ABC, VYI, MBCI, ABCC,
         ABC-COA, MSI, AIC, MPI, RCI and ING. (9)

10.21    $1,984,250 principal amount 9% convertible senior subordinated
         promissory note of Registrant issued to Norton Herrick due December 31,
         2004. (9)

10.22    $500,000 principal amount 9% convertible senior subordinated promissory
         note of Registrant issued to N Herrick Irrevocable ABC Trust due
         December 31, 2004. (12)

10.23    $2,500,000 principal amount convertible senior promissory note of
         Registrant issued to Huntingdon Corporation ("Huntingdon") due
         September 30, 2002. (9)

10.24    $800,000 principal amount 12% convertible senior subordinated
         promissory note of Registrant issued to Huntingdon due December 31,
         2002. (9)

10.25    Form of Security Agreement dated as of April 30, 2001 between
         Registrant, the subsidiaries of Registrant set forth on Schedule 2
         annexed thereto and Huntingdon. (9)

10.26    $500,000 principal amount convertible senior promissory note of
         Registrant issued to Huntingdon due June 30, 2003. (12)

10.27    Consulting Agreement, dated as of October 18, 2002 and effective as of
         January 1, 2003 between MEH Consulting Services, Inc. (the
         "Consultant") and the Registrant. (13)

10.28    Amendment No. 2 to the Credit Agreement dated as of October 3, 2002.
         (11)

10.29    Loan Agreement dated October 3, 2002 between Huntingdon and the
         Registrant, as amended.

10.30    Agreement dated October 3, 2002 between Norton Herrick and the
         Registrant, among other things, amending the $1,984,250 principal
         amount note.

10.31    Agreement dated October 3, 2002 between Evan Herrick and the
         Registrant, among other things, amending a $500,000 principal amount
         note.

10.32    Letter Agreement between the Registrant and Norton Herrick entered into
         in November 2002.

10.33    Indemnification Agreement dated as of November 15, 2002 between the
         Registrant, MEH Consulting Services. Inc. and Michael Herrick.

10.34    Indemnification Agreement dated as of November 15, 2002 between the
         Registrant and Norton Herrick.

10.35    Amendment No. 3 to the Credit Agreement dated April 9, 2003.

21.1     Subsidiaries of the Company. (8)

23.1     Consent of Deloitte and Touche LLP.

99.1     Certification of Hakan Lindskog, Chief Executive Officer of MediaBay,
         Inc., pursuant to 18 U.S.C Section 1350, as Adopted pursuant to Section
         906 of the Sarbanes-Oxley Act of 2002

99.2     Certification of John Levy, Executive Vice President and Chief
         Financial Officer of MediaBay, Inc., pursuant to 18 U.S.C Section 1350,
         as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)      Incorporated by reference to the applicable exhibit contained in our
         Registration Statement on Form SB-2 (file no. 333-30665) effective
         October 22, 1997.

(2)      Incorporated by reference to the applicable exhibit contained in our
         Current Report on Form 8-K for reportable event dated December 14,
         1998.

(3)      Incorporated by reference to the applicable exhibit contained in our
         Annual Report on Form 10-K for the fiscal year ended December 31, 1998.

(4)      Incorporated by reference to the applicable exhibit contained in our
         Proxy Statement dated February 23, 1999.


                                       46
<PAGE>

(5)      Incorporated by reference to the applicable exhibit contained in our
         Quarterly Report on Form 10-QSB for the quarterly period ended June 30,
         1999.

(6)      Incorporated by reference to the applicable exhibit contained in our
         Registration Statement on Form SB-2 (file no. 333-95793) effective
         March 14, 2000.

(7)      Incorporated by reference to the applicable exhibit contained in our
         Proxy Statement dated May 23, 2000.

(8)      Incorporated by reference to the applicable exhibit contained in our
         Annual Report on Form 10-KSB for the year ended December 31, 2000.

(9)      Incorporated by reference to the applicable exhibit contained in our
         Quarterly Report on Form 10-QSB for the quarterly period ended March
         31, 2001.

(10)     Incorporated by reference to the applicable exhibit contained in our
         proxy statement dated September 21, 2001.

(11)     Incorporated by reference to the applicable exhibit contained in our
         Current Report on Form 8-K for reportable event dated January 18, 2002.

(12)     Incorporated by reference to the applicable exhibit contained in our
         Annual Report on Form 10-KSB for the year ended December 31, 2001.

(13)     Incorporated by reference to the applicable exhibit contained in the
         Quarterly Report on Form 10-Q for the quarterly period ended September
         30, 2002.

(b)      Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts and Reserves

(c)      Reports on Form 8-K filed during the quarter ended December 31, 2002.

         None.


                                       47
<PAGE>

                                 MediaBay, Inc.

                                    Form 10-K

                                     Item 8

                          Index to Financial Statements

<TABLE>
<S>                                                                            <C>
Independent Auditors' Report                                                   F-2

Consolidated Balance Sheets as of December 31, 2002 and 2001, as restated      F-3

Consolidated Statements of Operations for the years ended December 31, 2002,
2001, as restated, and 2000, as restated                                       F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001, as restated, and 2000, as restated                    F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001, as restated, and 2000, as restated                                       F-6

Notes to Consolidated Financial Statements                                     F-7

Schedule II-Valuation and Qualifying Accounts and Reserves                     S-1
</TABLE>


                                       F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
MediaBay, Inc.

            We have audited the accompanying consolidated balance sheets of
MediaBay, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2002. Our audits also included the financial statement schedule listed in
the index at Item 15-b. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on the financial statements and the financial statement
schedule based on our audits.

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

            In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of MediaBay, Inc. and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

            As discussed in Note 3 to the consolidated financial statements,
effective January 1, 2002, the Company changed its method of accounting for
goodwill and intangible assets upon adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets".

            As discussed in Note 2, the accompanying 2001 and 2000 financial
statements have been restated.


/S/ Deloitte & Touche LLP

Parsippany, New Jersey

April 15, 2003


                                       F-2
<PAGE>

                                 MEDIABAY, INC.
                           Consolidated Balance Sheets
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         December 31,
                                                                                      2002          2001
                                                                                   ----------    ----------
                                                                                                (As Restated,
                                                                                                 See Note 2)

                                            Assets
<S>                                                                                <C>           <C>
Current assets:
  Cash and cash equivalents ....................................................   $      397    $       64
  Accounts receivable, net of allowances for sales returns and doubtful
      accounts of $5,325 and $4,539 at December 31, 2002 and 2001,
      respectively .............................................................        7,460         4,798
  Inventory ....................................................................        5,244         4,061
  Prepaid expenses and other current assets ....................................          503         1,628
  Royalty advances .............................................................        1,044           773
                                                                                   ----------    ----------
    Total current assets .......................................................       14,648        11,324
Fixed assets, net ..............................................................          358           467
Deferred member acquisition costs ..............................................        7,396         4,868
Deferred income taxes ..........................................................       16,224        16,852
Other intangibles, net .........................................................          122         2,292
Goodwill .......................................................................        9,871         8,649
                                                                                   ----------    ----------
                                                                                   $   48,619    $   44,452
                                                                                   ==========    ==========
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable and accrued expenses ........................................   $   16,616    $   13,891
  Current portion -- long-term debt ............................................        2,368         1,600
                                                                                   ----------    ----------
    Total current liabilities ..................................................       18,984        15,491
                                                                                   ----------    ----------
Long-term debt, net of original issue discount of $567 and $1,215 at
    December 31, 2002 and 2001, respectively ...................................       14,680        15,849
                                                                                   ----------    ----------
Common stock subject to contingent put rights ..................................        4,550         4,550
                                                                                   ----------    ----------
Preferred Stock; no par value, authorized 5,000,000 shares; 25,000 shares and
    no shares issued and outstanding at December 31, 2002 and 2001,
    respectively ...............................................................        2,500            --
Common stock; no par value, authorized 150,000,000 shares; issued and
    outstanding 14,341,376 and 13,861,866 at December 31, 2002 and 2001,
    respectively ...............................................................       94,800        93,468
Contributed capital ............................................................        8,251         7,730
Accumulated deficit ............................................................     (95,146)       (92,636)
                                                                                   ----------    ----------
Total stockholders' equity .....................................................       10,405         8,562
                                                                                   ----------    ----------
                                                                                   $   48,619    $   44,452
                                                                                   ==========    ==========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       F-3
<PAGE>

                                 MEDIABAY, INC.
                      Consolidated Statements of Operations
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                        Years ended December 31,
                                                                                    2002           2001            2000
                                                                                               (As restated,   (As restated,
                                                                                                See Note 2)     See Note 2)
                                                                                  --------     -------------   -------------
<S>                                                                               <C>            <C>             <C>
Sales, net of returns, discounts and allowances of $16,195,
     $13,099 and $15,455 for the years ended December 31,
     2002, 2001 and 2000, respectively ........................................   $ 45,744       $ 41,805        $ 44,426
Cost of sales .................................................................     20,651         19,783          23,044
Cost of sales - write-downs ...................................................         --          2,261              --
Advertising and promotion .....................................................     10,156         11,922          11,023
Advertising and promotion write-downs .........................................         --          3,971              --
General and administrative ....................................................     11,168         11,483          14,406
Asset write-downs and strategic charges .......................................         --          7,044              --
Depreciation and amortization .................................................      1,314          5,156           7,984
Non-cash write-down of intangibles ............................................      1,224             --              --
Non-cash write-down of goodwill ...............................................         --             --          38,226
                                                                                  --------       --------        --------
      Operating income (loss) .................................................      1,231        (19,815)        (50,257)
Interest expense ..............................................................     (2,974)        (2,790)         (3,046)
Interest income ...............................................................         --             --             106
                                                                                  --------       --------        --------
      Loss before income tax (expense) benefit and
      extraordinary item ......................................................     (1,743)       (22,605)        (53,197)
Income tax (expense) benefit ..................................................       (550)        17,200              --
                                                                                  --------       --------        --------
      Loss before extraordinary item ..........................................     (2,293)        (5,405)        (53,197)
Extraordinary loss on early extinguishment of debt ............................         --             --          (2,152)
                                                                                  --------       --------        --------
      Net loss ................................................................     (2,293)        (5,405)        (55,349)
Dividends on preferred stock ..................................................        217             --              --
                                                                                  --------       --------        --------
      Net loss applicable to common shares ....................................   $ (2,510)      $ (5,405)       $(55,349)
                                                                                  ========       ========        ========

Basic and diluted loss per common share:
  Basic and diluted loss before extraordinary item ............................   $   (.18)      $   (.39)       $  (4.18)
  Extraordinary loss on early extinguishment of debt ..........................         --             --            (.17)
                                                                                  --------       --------        --------
      Basic and diluted loss per common share .................................   $   (.18)      $   (.39)       $  (4.35)
                                                                                  ========       ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

                                 MEDIABAY, INC.

                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 2002, 2001 and 2000
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                              Preferred   Preferred  Common      Common
                                                               stock --     stock     stock -    stock -
                                                              number of     no par   number of    no par   Contributed Accumulated
                                                                shares      value     shares      value      capital     deficit
                                                              ---------   ---------  ---------   --------  ----------- ------------
<S>                                                               <C>     <C>          <C>       <C>         <C>         <C>
Balance at January 1, 2000, as previously reported ........       --            --     $9,338    $ 58,743    $  3,455    $(30,166)
 Prior period adjustment, (See Note 2) ....................       --            --         --          --       2,965      (1,716)
                                                               -----      --------     ------    --------    --------    --------
Balance at January 1, 2000, as restated ...................       --            --      9,338      58,743       6,420     (31,882)
 Sale of common stock .....................................       --            --      3,650      32,850          --          --
 Fees and costs related to equity offerings ...............       --            --         --      (3,474)         --          --
 Contingent put activity ..................................       --            --         --        (267)         --          --
 Warrants granted for financing and consulting services ...       --            --         --          --         306          --
 Intrinsic value of warrants granted (As restated, see
 Note 2) ..................................................       --            --         --          --         442          --
 Beneficial conversion feature of debt issued (As restated,
 see Note 2) ..............................................       --            --         --          --          95          --
 Conversion of convertible notes (As restated, see Note 2)        --            --        874       5,616        (561)         --
 Net loss applicable to common shares (As restated, see
 Note 2) ..................................................       --            --         --          --          --     (55,349)
                                                               -----      --------     ------    --------    --------    --------

Balance at December 31, 2000 (As restated, see Note 2) ....       --            --     13,862      93,468       6,702     (87,231)
 Warrants granted for financing and consulting services ...       --            --         --          --         333          --
 Beneficial conversion feature of debt issued (As restated,
 see Note 2) ..............................................       --            --         --          --         695          --
 Net loss applicable to common shares (As restated, see
 Note 2) ..................................................       --            --         --          --          --      (5,405)
                                                               -----      --------     ------    --------    --------    --------
Balance at December 31, 2001, (As restated, see Note 2) ...       --            --     13,862      93,468       7,730     (92,636)
 Conversion of convertible debt to preferred stock ........       25      $  2,500         --          --          --          --
 Conversion of convertible notes ..........................       --            --        200       1,000         (49)         --
 Options and warrants granted for financing and consulting        --            --         --          --         659          --
 Exercise of options and warrants .........................       --            --        221         207          --          --
 Cancellation of warrants issued ..........................       --            --         --          --        (125)         --
 Stock issued to consultants ..............................       --            --         19          50          --          --
 Stock tendered as payment for exercise of options ........       --            --        (61)         --          --          --
 Stock and warrants issued in acquisition of Freeny patent        --            --        100          75          36          --
 Loss applicable to common shares .........................       --            --         --          --          --      (2,510)
                                                               -----      --------     ------    --------    --------    --------
Balance at December 31, 2002 ..............................       25      $  2,500     14,341    $ 94,800    $  8,251    $(95,146)
                                                               =====      ========     ======    ========    ========    ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

                                 MEDIABAY, INC.
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                    Years ended December 31,
                                                                                  2002            2001            2000
                                                                                              (As restated,  (As restated,
                                                                                               See Note 2)    See Note 2)
                                                                                --------      -------------  -------------
<S>                                                                             <C>             <C>             <C>
Cash flows from operating activities:
Net income (loss) applicable to common shares ...............................   $ (2,510)       $ (5,405)       $(55,349)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Non-cash compensation expense related to warrants issued ................         --              --             442
    Depreciation and amortization ...........................................      1,314           5,156           7,984
    Amortization of deferred member acquisition costs .......................      5,571           7,489           6,029
    Amortization of deferred financing costs and original issue discount ....      1,453           1,011             608
    Income tax expense (benefit) ............................................        550         (17,200)             --
    Asset write-downs and strategic charges .................................         --          13,276              --
    Non-cash write-down of goodwill and intangibles .........................      1,224              --          38,226
    Non-current accrued interest and dividends payable ......................        456              --              --
    Extraordinary loss on early extinguishment of debt ......................         --              --           2,152
    Changes in asset and liability accounts, net of acquisitions and asset
        write-downs and strategic charges:
      (Increase) decrease in accounts receivable, net .......................     (2,643)            321           3,476
      (Increase) decrease in inventory ......................................     (1,123)            365             495
      Decrease (Increase) in prepaid expenses and other current assets ......      1,106            (558)            251
      (Increase) decrease in royalty advances ...............................       (261)            590            (777)
      Increase in deferred member acquisition costs .........................     (8,099)         (3,748)         (9,313)
      Increase (decrease) in accounts payable and accrued expenses ..........      3,981          (3,360)            148
                                                                                --------        --------        --------
        Net cash provided by (used in) operating activities .................      1,019          (2,063)         (5,628)
                                                                                --------        --------        --------
Cash flows from investing activities:
  Purchase of fixed assets ..................................................       (111)           (188)           (873)
  Maturity of short-term investments ........................................         --              --             100
  Investment in I-Jam Multimedia LLC ........................................         --              --          (2,000)
  Additions to intangible assets ............................................         --            (110)             --
  Assets acquired, net of cash ..............................................     (1,000)             --          (1,250)
                                                                                --------        --------        --------
        Net cash used in investing activities ...............................     (1,111)           (298)         (4,023)
                                                                                --------        --------        --------
Cash flows from financing activities:
  Proceeds from issuance of notes payable - related parties .................      2,000           2,800           2,500
  Repayment of long-term debt ...............................................     (1,640)           (400)        (21,723)
  Increase in deferred financing costs ......................................       (149)           (473)           (203)
  Proceeds from exercise of stock options ...................................        214              --              --
  Proceeds from sale of common stock, net of costs ..........................         --              --          29,377
                                                                                --------        --------        --------
        Net cash provided by financing activities ...........................        425           1,927           9,951
                                                                                --------        --------        --------
Net increase (decrease) in cash and cash equivalents ........................        333            (434)            300
Cash and cash equivalents at beginning of year ..............................         64             498             198
                                                                                --------        --------        --------
Cash and cash equivalents at end of year ....................................   $    397        $     64        $    498
                                                                                ========        ========        ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2002, 2001 and 2000
                  (Dollars in thousands, except per share data)

(1) Organization

            MediaBay, Inc. (the "Company"), a Florida corporation, was formed on
August 16, 1993. MediaBay, Inc. is a seller of spoken audio products, including
audiobooks and old-time radio shows, through direct response, retail and
Internet channels. The Company markets audiobooks primarily through its Audio
Book Club. Its old-time radio programs are marketed through direct-mail
catalogs, over the Internet at RadioSpirits.com and, on a wholesale basis, to
major retailers.

(2) Restatement

            Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 2001, it was determined that the
Company had incorrectly accounted for warrants issued in December 1998 to its
Chairman, Norton Herrick, incorrectly did not record charges related to
beneficial conversion features for a convertible subordinated promissory note
issued in June 1999, two senior secured convertible notes issued in May 2001 and
convertible promissory notes issued from December 1999 to February 2000, and did
not record compensation expense for several warrants issued to Norton Herrick
during 1999 and 2000.

            On December 31, 1998, the Company and its chairman, Norton Herrick
("its Chairman"), agreed for its Chairman to provide bridge a $15,000 bridge
financing to the Company to assist the Company with the financing of its
acquisitions. The Company agreed to issue 500,000 warrants to its Chairman with
an exercise price of $12.00 and a life of five years. The warrants represent
additional consideration for the bridge loan. Accordingly, the warrants have
been valued at their fair value and the proceeds from the bridge loan have been
allocated on a relative fair value basis between the debt and the warrants in
accordance with Accounting Principles Board Opinion No. 14 ("APB 14"). This has
resulted in a discount on the debt and the resulting discount is being amortized
over the life of the loan in accordance with APB 14. This amortization is being
recorded as a yield adjustment within interest expense. The amounts of
additional interest expense that has been recorded in 1999, 2000, and 2001 is
$297, $163 and $131, respectively.

            In January 1999, the Company repaid $1,000 principal amount of the
note. A portion of the debt discount has also been extinguished. The
extinguishment loss amounted to $125.

            At various dates throughout 1999 and 2000, its Chairman sold $12,016
of his original $15,000 note to third party investors. Portions of the notes
sold were subsequently converted into common stock. The Company has reclassified
to paid-in capital a portion of the debt discount. The amount reclassified for
the years ended December 31, 1999 and 2000 is $234 and $562, respectively.

            The Company obtained a portion of the financing for the acquisition
of Audiobooks Direct by borrowing $4,350 from its Chairman by issuing a bridge
convertible senior subordinated promissory note in June 1999 and repaid the note
in July 1999. The note was issued with a conversion price below the market price
of the Company's common stock on the date of issuance. The Company has also
recognized a charge related to the beneficial conversion feature in accordance
with Emerging Issues Task Force No. 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios" ("EITF 98-5") in the amount of $1,405. A portion of the reacquisition
price includes the repurchase of the $1,124 intrinsic value of the beneficial
conversion feature at the extinguishment date. Accordingly, the Company has
recorded a gain on extinguishment of debt in accordance EITF 98-5 in the amount
of $1,124.

            The Company agreed under a June 11, 1998 letter agreement between
the Company and its Chairman to issue 125,000 warrants to its Chairman if the
$4,350 bridge loan made by its Chairman to the Company in June 1999 was
refinanced. The warrants were issued on September 30,


                                      F-7
<PAGE>

1999, following receipt of shareholder approval, and have an exercise price of
$8.41 per share based upon a formula set out in the letter agreement. As the
warrants were contingently issuable, the Company has determined that the
appropriate accounting for the warrants would be to record compensation expense
in accordance with APB 25, Accounting for Stock Issued to Employees. The Company
recorded additional compensation expense of $378 as measured on September 30,
1999, the date the warrants were issued.

            The Company agreed under a December 31, 1998 letter agreement
between the Company and its Chairman to issue up to 350,000 additional warrants
to its Chairman in the event it was able to obtain alternative financing to
replace the $15,000 note by September 30, 1999 and its Chairman is able to sell
the debt to third party investors. The warrants were issued at various times
throughout 1999 and 2000 and have an exercise price of $8.41 per share based
upon a formula set out in the letter agreement. As the warrants are contingently
issuable to its Chairman based upon his ability to resell the debt, the Company
has determined that the appropriate accounting for the warrants would be to
record compensation expense in accordance with APB 25. The Company has recorded
additional compensation expense of $585 and $442 in the 1999 and 2000 statements
of operations.

            On May 14, 2001, the Company issued to Huntingdon Corporation
("Huntingdon"), a company wholly owned by NH two senior secured convertible
notes in the amounts of $2,500 and $800 in consideration for loans made to the
Company by Huntingdon in those amounts. The transactions were accounted for in
accordance with Emerging Issues Task Force No. 00-27, "Application of Issue No.
98-5 to Certain Convertible Instruments". The Company has determined the
relative fair value of the warrants to be $433, and recorded this amount as a
deferred financing charge within prepaid expenses. The Company has reclassified
this amount as a debt discount. The Company has determined the additional debt
discount associated with the beneficial conversion feature. The amount of
additional discount recorded for this beneficial conversion feature at the
measurement date is $993. As a result, additional interest expense of $424 has
been recorded in the 2001 statement of operations.

            From December 1999 to February 2000, Evan Herrick, the son of Norton
Herrick and the brother of Michael Herrick, a MediaBay director, and Howard
Herrick, an executive vice president and director, loaned the Company $3,000 for
which he received $3,000 principal amount 9% convertible promissory notes due
December 31, 2004. The notes were originally convertible into shares of Mediabay
common stock at $11.125 per share. The Company has recorded additional interest
expense of $51 and $96 for the beneficial conversion feature as required by EITF
98-5 in the 1999 and 2000 statements of operations, respectively.

            The net impact of the restatement has reduced retained earnings by
$1,716 as of January 1, 2000.

As a result, the Company has restated its consolidated financial statements as
of December 31, 2001 and for the years ended December 31, 2001 and 2000 from the
amounts previously reported. A summary of the significant effects of the
restatement is as follows:

<TABLE>
<CAPTION>
                                                           December 31, 2001          December 31, 2000
                                                      -------------------------   -------------------------
                                                          As                          As
                                                      Previously                  Previously
                                                       Reported     As Restated    Reported     As Restated
                                                      ----------    -----------   ----------    -----------
<S>                                                   <C>           <C>           <C>           <C>
General and administrative                            $   11,483    $   11,483    $   13,964    $   14,406
Operating loss                                           (19,815)      (19,815)      (49,815)      (50,257)
Interest expense, net                                      2,235         2,790         2,681         2,940
Net loss applicable to common shares                      (4,850)       (5,405)      (54,648)      (55,349)
Basic and diluted loss per common share                     (.35)         (.39)        (4.30)        (4.35)
</TABLE>


                                      F-8
<PAGE>

As of December 31, 2001                          As
                                             Previously
                                              Reported       As Restated
Prepaid Expenses and Other Current Assets   $      1,831    $      1,628
Total Assets                                      45,003          44,452
Long-Term Debt                                    17,064          15,849
Contributed Capital                                4,094           7,730
Accumulated Deficit                              (89,664)        (92,636)
Total Stockholders' Equity                         7,898           8,562

(3) Significant Accounting Policies

Principles of Consolidation

            The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
have been eliminated.

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

            The carrying amount of cash, accounts receivable, accounts payable
and accrued expenses approximates fair value due to the short maturity of those
instruments.

            The fair value of long-term debt is estimated based on the interest
rates currently available for borrowings with similar terms and maturities. The
carrying value of the Company's long-term debt approximates fair value.

Inventory

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

Prepaid Expenses

            Prepaid expenses consist principally of deposits and other amounts
being expensed over the period of benefit. All current prepaid expenses will be
expensed over a period no greater than the next twelve months.

Fixed Assets, Net

            Fixed assets, consisting primarily of furniture, leasehold
improvements, computer equipment, and third-party web site development costs,
are recorded at cost. Depreciation and amortization, which includes the
amortization of equipment under capital leases, is provided by the straight-line
method over the estimated useful life of three years (the lease term) for
computer equipment and five years (the lease term) for sound equipment under
capital leases, five years for equipment, seven years for furniture and
fixtures, five years for leasehold improvements, and two years for Internet web
site development costs. Ongoing maintenance and other recurring charges are
expensed as incurred.

Other Intangibles, Net

            Intangible assets, principally consisting of customer lists, license
agreements, and mailing and non-compete agreements acquired in the Company's
acquisitions, are being amortized over their estimated useful life, which range
from three to seven years, on a straight-line basis.

Goodwill

            Goodwill represents the excess of the purchase price over the fair
value of net assets acquired in business combinations accounted for using the
purchase method of accounting. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets",
the Company ceased amortization of goodwill as of January 1, 2002. The Company
completed the transitional impairment test as of January 1, 2002, which did not
result in an impairment loss and performed its annual impairment test as of
October 31, 2002, which did not result in an


                                      F-9
<PAGE>

impairment loss. Prior to January 1, 2002, goodwill was amortized over the
estimated period of benefit not to exceed 20 years.

Long-Lived Assets

            Long-lived assets (excluding financial instruments and deferred tax
assets) and certain identifiable intangibles to be held and used are reviewed by
the Company for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Such circumstances
include, but are not limited to, a significant decrease in the market value of
an asset, a significant change in the extent or manner in which an asset is used
or a significant physical change in an asset, a significant adverse change in
legal factors or in the business climate that could affect the value of an
asset, or an adverse action or assessment by a regulator. If a review for
recoverability is necessary, the Company estimates the future cash flows
expected to result from the use of the asset. In performing these estimates, the
Company groups its assets at the lowest level for which there are identifiable
cash flows. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.
Any impairment loss recognized is measured as excess of carrying amount of the
asset over the fair value of the asset.

Revenue Recognition

            The Company derives its principal revenue through sales of
audiobooks, classic radio shows and other spoken word audio products directly to
consumers principally through direct mail. The Company also sells classic radio
shows to retailers either directly or through distributors. The Company derives
additional revenue through rental of its proprietary database of names and
addresses to non-competing third parties through list rental brokers. The
Company also derives a small amount of revenue from advertisers included in its
nationally syndicated classic radio shows. The Company recognizes sales to
consumers, retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on notification by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification of the airing of the advertisement by the media buying company
representing the Company. Allowances for future returns are based upon
historical experience and evaluation of current trends.

Shipping and Handling Revenue and Costs

            Amounts paid to the Company for shipping and handling by customers
is included in sales. Amounts the Company incurs for shipping and handling costs
are included in cost of sales. The Company recognizes shipping and handling
revenue upon shipment of merchandise. Shipping and handling expenses are
recognized on a monthly basis from invoices from the third party fulfillment
houses, which provide the services.

Cost of Sales

         Cost of sales includes the following:

            o     Product costs (including free audiobooks in the initial
                  enrollment offer to prospective members)

            o     Royalties to publishers and rightsholders

            o     Fulfillment costs, including shipping and handling

            o     Customer service

            o     Direct response billing, collection and accounts receivable
                  management

Cooperative Advertising and Related Selling Expenses

            In November 2001, the Emerging Issues Task Force ("EITF") issued
EITF No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer
(Including a Reseller of the Vendor's Products)", which addresses the income
statement classification of certain credits, allowances, adjustments, and
payments given to customers for the services or benefits provided. The Company
adopted EITF No. 01-9 effective January 1, 2002, and, as such, has classified
the cost of these sales incentives as a reduction of net sales. The effect on
net sales of applying EITF No. 01-9 in 2002 was $118.


                                      F-10
<PAGE>

General and Administrative Costs

            General and administrative costs include the following:

                  o     Bad debt

                  o     Payroll and related items

                  o     Commissions

                  o     Insurance

                  o     Office expenses

                  o     Telephone and postage

                  o     Public and investor relations

                  o     Dues and subscriptions

                  o     Rent and utilities

                  o     Travel and entertainment o Bank charges

                  o     Professional fees, principally legal and auditing fees

                  o     Consulting

            The Company records an estimate of its anticipated bad debt expense
based on historical experience.

Stock-Based Compensation

            The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued. SFAS 123, which prescribes the
recognition of compensation expense based on the fair value of options on the
grant date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming a hypothetical fair value method application. Had
compensation expense for the Company's stock options been recognized based on
the fair value on the grant date under SFAS 123, the Company's net loss and net
loss per share for the years ended December 31, 2002, 2001 and 2000 would have
been as follows:

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                         ------------------------------------
                                                           2002          2001           1999
                                                         ------------------------------------
<S>                                                      <C>           <C>           <C>
Net loss applicable to common shares, as reported        ($2,510)      ($5,405)      ($55,349)
Add: Stock-based employee compensation expense
   included in reported net income applicable to
   common shares, net of related tax effects                  --            --             --
Deduct: Total stock-based employee compensation
   expense determined under fair value based method
   for all awards, net of related tax effects             (1,245)         (163)       (18,537)
                                                         ------------------------------------

Pro forma net loss applicable to common shares            (3,755)       (5,568)       (73,886)
                                                         ====================================

Net loss per share:

Basic and diluted-as reported                            ($ 0.18)      ($ 0.39)      ($  4.35)
                                                         ====================================
Basic and diluted-pro forma                              ($ 0.27)      ($ 0.40)      ($  5.81)
                                                         ====================================
</TABLE>

Income Taxes

            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 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.

Deferred Member Acquisition Costs

            Promotional costs directed at current members are expensed on the
date the promotional materials are mailed. The cost of any premiums, gifts or
the discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Accordingly, the Company has capitalized direct
response advertising costs and amortizes these costs over the period of future
benefit (the average member life), which has been determined to be generally 30
months. The costs are being amortized on accelerated basis consistent with the
recognition of related revenue.


                                      F-11
<PAGE>

Royalties

            The Company is liable for royalties to licensors based upon revenue
earned from the respective licensed product. The Company pays certain of its
publishers and other rightsholders advances for rights to products. Royalties
earned on the sale of the products are payable only in excess of the amount of
the advance. Advances, which have not been recovered through earned royalties
are recorded as an asset. Advances not expected to be recovered through
royalties on sales are charged to royalty expense.

Use of Estimates

            The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. On an ongoing basis, management reviews its estimates
based on current available information. Changes in facts and circumstances may
result in revised estimates.

(4) Asset Write-Downs and Strategic Charges

            In the third quarter of 2001, the Company began to implement a
series of actions and decisions designed to improve gross profit margin, refine
its marketing efforts and reduce general and administrative costs. Specifically,
the Company reduced the number of items offered for sale at both its Radio
Spirits and Audio Book Club subsidiaries, has moved fulfillment of its old-time
radio products to a third party fulfillment provider, limited its investment and
marketing efforts in downloadable audio and refined its marketing of old-time
radio products and its marketing efforts to existing Audio Book Club members. In
connection with the movement of the fulfillment of old-time radio products to a
third party provider, the Company closed its old-time radio operations in
Schaumburg, Illinois in February 2002 and runs all of its operations from its
corporate headquarters located in Cedar Knolls, New Jersey. The Company has also
reviewed its general and administrative costs and has eliminated certain
activities unrelated to its old-time radio and Audio Book Club operations.

            As a result of these decisions in the third quarter of 2001, the
Company recorded $11,276 of strategic charges. These charges include the
following:

            o     $2,261 of inventory written down to net realizable value due
                  to a reduction in the number of stock keeping units (SKU's);

            o     $2,389 of write-downs to deferred member acquisition costs at
                  Audio Book Club related to new member acquisition campaigns
                  that have been determined to be no longer profitable and
                  recoverable through future operations based upon historical
                  performance and future projections;

            o     $1,885 of write-downs to royalty advances paid to audiobook
                  publishers and other license holders primarily associated with
                  inventory titles that will no longer be carried and sold to
                  members;

            o     $1,582 of write-downs to deferred member acquisition costs at
                  Radio Spirits related to old-time radio new customer
                  acquisition campaigns that have been determined to be no
                  longer profitable and recoverable through future operations
                  based upon historical performance and future projections;

            o     a write-down of $683 of customer lists acquired in the
                  Columbia House Audiobook Club purchase due to the inability to
                  recover this asset through future operations;

            o     $635 of fixed assets of the old-time radio operations written
                  down to net realizable value due to the closing of the
                  Schaumburg, Illinois facility;

            o     $464 of write-downs of royalty advances paid for downloadable
                  licensing rights that are no longer recoverable due to the
                  strategic decisions made;

            o     $357 of write-downs of prepaid assets,

            o     $297 of write-offs to receivables

            o     $192 of net write-offs of capitalized website development
                  costs related to downloadable audio all of which are no longer
                  recoverable due to the strategic changes in the business; and

            o     $531 accrued for lease termination costs in connection with
                  the closing of the Schaumburg, Illinois facility.


                                      F-12
<PAGE>

            Of these charges, $2,261 related to inventory write-downs has been
recorded to costs of sales - write-downs, $3,971 has been recorded to
advertising and promotion - write-downs and the remaining $5,044 has been
recorded to asset write-downs and strategic charges.

            In addition to these strategic charges, in 2001, the Company
recorded a charge of $2,000 to write-off the entire carrying amount of its cost
method investment in I-Jam. This charge has been recorded to asset write-downs
and strategic charges. The Company has determined that an other than temporary
decline in the value of this investment has occurred in 2001 triggered by a
strategic change in the direction of the investee as a result of continued
losses and operating deficiencies, along with projected future losses.

            During the year ended December 31, 2002, the Company recorded the
following activity in its accrual for shutdown expenses related to the move from
Illinois to New Jersey:

         Beginning balance, January 1, 2002          $ 531
         Employee related costs                       (115)
         Lease termination costs                      (410)
                                                     -----
         Balance accrued at December 31, 2002        $   6
                                                     =====

(5) Fixed Assets

            Fixed Assets consist of the following as of December 31,:

                                                                 2002     2001
             Capital leases, equipment and related
             software                                         $   813    $ 713
             Furniture and fixtures                                80       91
             Leasehold improvements                                73       56
             Web site development costs                            57       57
                                                              -------    -----
             Total                                              1,023      917
             Accumulated depreciation                            (665)    (450)
                                                              -------    -----
                                                              $   358    $ 467
                                                              =======    =====

Depreciation expense for the years ended December 31, 2002, 2001 and
2000 was $221, $601 and $684, respectively.

(6) Asset Acquisitions

            On March 1, 2002, the Company acquired inventory, licensing
agreements and certain other assets, used by Great American Audio in connection
with its old-time radio business, including the exclusive license to "The
Shadow" radio programs. The Company expended $379 in cash at closing, including
fees and expenses. Additional payments of nine monthly installments of $74
commenced on June 15, 2002. The Company estimates other costs related to the
asset purchase are approximately $297. The preliminary allocation of asset value
is as follows:

                     Other assets                    $    5
                     Net Inventory                       60
                     Royalty Advances (The Shadow)       10
                     Goodwill                         1,222
                                                     ------
                     Total                           $1,297
                                                     ======

            In July 2002, the Company contracted to obtain an "Exclusive Field
of Use License" ("License") to U.S. Patent No. 4,528,643 known as the "Freeny
Patent. The license also enables the Company, in certain instances, to pursue
infringers of the Freeny Patent in related fields, including the music download
market. The acquisition was finalized in November 2002.

            As consideration for the License, the Company issued to E-Data
Corporation ("E-Data") 100,000 shares of its common stock and a warrant to
purchase up to 50,000 shares of the Company's common stock at a price of $5.00
per share. The stock issued to E-Data was valued at the date of the closing of
the transaction at $75, based on the market


                                      F-13
<PAGE>

price of the stock at closing, and the warrant was valued at $4. The Company
also received a warrant to purchase 50,000 shares of E-Data common stock with an
exercise price of $.25. This warrant was valued at $1. The Company also incurred
legal and other acquisition costs of $102. The total value of the transaction
less the E-Data warrant received was recorded as an intangible asset with a
value of $180. In the fourth quarter of 2002, the Company made a strategic
decision to no longer pursue other companies which may be infringing on the
Freeny patent and accordingly impaired the value of this asset. The Company has
reduced the carrying value of the asset to its net realizable value based upon
the value of 25,000 shares to be returned by E-Data to the Company. Accordingly,
the Company has recognized a charge to general and adminstrative expenses of
$148.

(7) Goodwill and Other Intangibles

            In the fourth quarter of 2000, the Company made a strategic decision
to reduce spending on marketing to customers acquired in the Company's
acquisitions of the Columbia House Audiobook Club, Doubleday Direct's Audiobooks
Direct and Adventures in Cassettes in order to focus its resources on more
profitable revenue sources. In addition, the Company has sold the remaining
inventory acquired in its acquisition of Adventures in Cassettes and does not
expect to derive any future revenues associated with this business.
Consequently, the Company determined that the revised estimates of cash flows
from such operations would no longer be sufficient to recover the carrying value
of goodwill associated with these businesses. As a result, in the fourth quarter
of 2000, the Company determined that the goodwill associated with these
businesses was impaired and has recorded an impairment charge of $38,226. The
impairment charge was measured as the difference between the carrying value of
the goodwill and its fair value, which was based upon discounted cash flows. The
remaining balance of goodwill outstanding pertains to the Company's Radio
Spirits' business.

            In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The
Company adopted SFAS 142 on January 1, 2002. SFAS 142 changed the accounting for
goodwill and indefinite-lived intangible assets from an amortization method to
an impairment-only approach. Goodwill and indefinite-lived intangible assets are
tested for impairment annually or when certain triggering events require such
tests and are written down, with a resulting charge to operations, only in the
period in which the recorded value of goodwill and indefinite-lived intangible
assets is more than their fair value.

            In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets", the Company ceased amortization of goodwill as of January 1, 2002. The
following table presents annual results of the Company on a comparable basis:

<TABLE>
<CAPTION>
                                                        For the Year Ended December 31,
                                                      2002          2001          2000
                                                   ----------    ----------    ----------
<S>                                                <C>           <C>           <C>
Net loss:
Reported net loss applicable to common shares      $   (2,510)   $   (5,405)   $  (55,349)
Goodwill amortization                                      --           509         2,531
                                                   ----------    ----------    ----------
Adjusted net loss                                  $   (2,510)   $   (4,896)   $  (52,818)
                                                   ==========    ==========    ==========
Basic and diluted loss per common share:
Reported basic and diluted loss per common share   $     (.18)   $     (.39)   $    (4.35)
Goodwill amortization                                      --           .04           .20
                                                   ----------    ----------    ----------
Adjusted basic and diluted loss per common share   $     (.18)   $     (.35)   $    (4.15)
                                                   ==========    ==========    ==========
</TABLE>

            SFAS 142 requires the Company to perform an evaluation of whether
goodwill is impaired as of January 1, 2002, the effective date of the statement
for the Company. The Company completed the transitional impairment test as of
January 1, 2002, and its annual impairment test as of October 31, 2002, neither
of which resulted in an impairment loss. Any future impairment losses incurred
will be reported in operating results.


                                      F-14
<PAGE>

            The following is a reconciliation of changes in the carrying amounts
of goodwill for the Radio Spirits reportable segment for each of 2002 and 2001:

                                      2002     2001
Balance at January 1,               $8,649   $9,158
Goodwill acquired during the year    1,222       --
Amortization                            --      509
                                    ------   ------
Ending Balance                      $9,871   $8,649
                                    ======   ======

As of December 31, 2001, accumulated goodwill amortization was $1,518.

            During the fourth quarter of 2002, the Company reviewed the carrying
amounts of its intangible assets and determined, based on decisions made in the
fourth quarter of 2002, that the value of certain intangible assets could no
longer be supported by anticipated future operations. Specifically, the Company
made a strategic decision to no longer compete in the DVD market and accordingly
wrote off the value of certain video and DVD rights it had acquired in the
amount of $90. The Company also made the strategic decision in the fourth
quarter of 2002 to discontinue future mailings to the Columbia House lists of
members of other clubs which could not support the remaining carrying value of
the Columbia House mailing agreement. Accordingly, in the fourth quarter of
2002, the Company wrote off the remaining value of the Columbia House mailing
agreement of $986.

            Amortization of intangible assets was $1,093, $4,027 and $4,710 for
the years ended December 31, 2002, 2001 and 2000, respectively. The Company
estimates intangible amortization expenses of $108 and $9 in 2003 and 2004,
respectively.

            The following table presents details of other intangibles at
December 31, 2002 and December 31, 2001:

<TABLE>
<CAPTION>
                                       December 31,2002                         December 31, 2001
                              ---------------------------------        ----------------------------------
                                          Accumulated                             Accumulated
                                Cost      Amortization     Net          Cost      Amortization      Net
                                ----      ------------     ---          ----      ------------      ---
<S>                            <C>           <C>           <C>         <C>           <C>           <C>
Mailing Agreements             $  592        $  524        $ 68        $2,892        $1,362        $1,530
Customer Lists                  4,380         4,380          --         4,380         3,818           562
Non-Compete Agreements            200           151          49           200           110            90
Other                               5            --           5           110            --           110
                               ------        ------        ----        ------        ------        ------
Total Other Intangibles        $5,177        $5,055        $122        $7,582        $5,290        $2,292
                               ======        ======        ====        ======        ======        ======
</TABLE>

(8) Long-Term Debt

As of December 31,                                           2002        2001
Credit agreement, senior secured bank debt .............   $  4,540    $  6,180
Note to Seller of GAA assets ...........................        148          --
Subordinated debt ......................................      3,200       4,200

Related party notes and related accrued interest, net of
original issue discount ................................      9,160       7,069
                                                           --------    --------
                                                             17,048      17,449
Less: current maturities ...............................     (2,368)     (1,600)
                                                           --------    --------
                                                           $ 14,680    $ 15,849
                                                           ========    ========

Senior Credit Facility

            In April 2000, the Company repaid $20,293 of its senior credit
facility out of the net proceeds from the follow-on primary offering,
representing the remaining term portion of such debt. Accordingly, the Company
recorded an extraordinary loss of $2,152 relating to the write-off of deferred
financing fees incurred in connection with such debt. Also in April 2000, the
Company amended the terms of its remaining revolving debt


                                      F-15
<PAGE>

with its lenders to calculate the amount available to be borrowed based on a
formula of eligible receivables and inventory, as defined. In June 2000, the
Company paid down its bank debt by an additional $500.

            On April 30, 2001, the maturity date of the principal amount of the
senior credit facility was extended to September 30, 2002 with certain
conditions. On April 1, 2002, the maturity date of the principal amount of the
senior credit facility was extended to January 15, 2003 and on October 3, 2002
the maturity date of the principal amount was again extended to January 15, 2004
with certain conditions and prepayments. The Company is required to make monthly
payments of principal of $180 in April through June 2003, $190 in July through
September 2003 and $200 in October through December 2003.

            Since November 1999, the Company is not permitted to make any
additional borrowings under the Credit Agreement. The interest rate on the
credit facility is equal to the prime rate plus 2 1/2%. The weighted average
interest rate for the years ended December 31, 2002 and 2001 was 6.76% and
9.26%, respectively.

            On April 9, 2003 the maturity date of the principal amount of the
senior credit facility of $4,030 was extended to April 30, 2004 with certain
conditions. In addition to its scheduled principal payments through 2003, the
Company is required to make payments of $225 per month for the months of
January, February and March 2004.


            The Company was in compliance with its debt covenants at December
31, 2002.

Subordinated Debt

            In August 2002, ABC Investment LLC, a third party holder of
subordinated debt converted principal amount of $1,000 into 200,000 shares of
the Company's common stock. At December 31, 2002, the principal amount of the
subordinated debt held by ABC Investment LLC is $3,200. The note is convertible
into shares of common stock at the rate of $4.50 per share, subject to
adjustment for below conversion price issuances of securities. The note bears
interest at the rate of 9% per annum, quarterly, in arrears. The note is due
December 31, 2004. The Company is prohibited from incurring additional
indebtedness (with exceptions), selling all or substantially all of its assets
and materially changing the nature of its business without the prior written
consent of the holder of this note.

Related Party Debt

            NH Irrevocable ABC Trust

            From December 1999 to February 2000, Evan Herrick, a son of Norton
Herrick, the Company's Chairman, and a brother of Howard Herrick, an Executive
Vice President and director and Michael Herrick, a director loaned the Company
$3,000 for which he received $3,000 principal amount 9% convertible promissory
notes due December 31, 2004 (the "3,000 Note"). At the time of issuance of the
convertible notes, the Company's board of directors resolved to seek to replace
or refinance the convertible notes and accept a proposal for refinancing,
whether or not the refinancing was as favorable as the convertible notes. Such
refinancing could include, without limitation, a higher interest rate, lower
conversion price, issuance of equity securities and/or the payment of fees.

            In April and August 2000, the Company's Board of Directors
determined that reducing the conversion price of the $3,000 Note to the then
current market value of the Company's common stock would be more favorable to
the Company than accepting the alternatives available to the Company to
refinance or replace the notes. The Company revised the terms of the $3,000
Note. Evan Herrick waived interest on the notes from July 1, 2000 to December
31, 2000 and after December 31, 2000 agreed to accept payment of interest in
cash or common stock at the Company's option under certain circumstances.

            On May 14, 2001, the Company modified the conversion price of the
$3,000 Note to $.56, subject to adjustment for below conversion price issuances
of securities, as consideration for agreeing to permit additional debt and to
exchange the note for preferred stock if requested by the Company under
specified conditions.

            On January 18, 2002, Evan Herrick exchanged $2,500 principal amount
of the $3,000 Note in exchange for 25,000 shares of Series A Preferred Stock of
MediaBay (the "Preferred Shares"), having a liquidation preference of $2,500.
The Preferred Share dividend rate of 9% ($9.00 per share) is the same as the
interest rate of the Note, and is payable in additional Preferred Shares, shares
of common stock of MediaBay


                                      F-16
<PAGE>

or cash, at the holder's option, provided that if the holder elects to receive
payment in cash, the payment will accrue until MediaBay is permitted to make the
payment under its existing credit facility. The conversion rate of the Preferred
Shares is the same as the conversion rate of the Note. The Preferred Shares vote
together with the Common Stock as a single class on all matters submitted to
stockholders for a vote, and certain matters require the majority vote of the
Preferred Shares. The holder of each Preferred Shares shall have a number of
votes for each Preferred Share held multiplied by a fraction, the numerator of
which is the liquidation preference and the denominator of which is $1.75.

            On October 3, 2002, the remaining $500 principal amount convertible
promissory note issued to Evan Herrick was amended to, among other things,
extend the maturity dates to September 30, 2007; provided that the holder may
demand repayment of the note on or after October 31, 2004 and the holder of the
$500 note may demand repayment after December 31, 2004, in each case, if the
senior credit facility has been repaid.

            On December 31, 2002, Evan Herrick sold the Note and Preferred
shares to N. Herrick Irrevocable ABC Trust (the "Trust"). This note bears
interest at the rate of 9% per annum. Interest is payable monthly, in arrears,
in cash or, at the holder's option, shares of common stock; provided, however,
that cash interest accrues until 10 days after the Company has repaid its
obligations under the Credit Agreement. After October 3, 2002, interest accrues
on unpaid interest at the interest rate of the note.

            The Company is prohibited from incurring additional indebtedness
(with exceptions), selling all or substantially all of its assets and materially
changing the nature of its business without the prior written consent of the
holder of this note.

            Norton Herrick

            In January and February 2000, Norton Herrick sold $4,224 principal
amount of a note issued to him in December 1998 to two unaffiliated third
parties, which was converted into 379,662 shares of the Company's common stock.
Under a December 1998 letter agreement between he Company (the "December
Letter") and Norton Herrick, the Company issued to Norton Herrick warrants to
purchase an additional 98,554 shares of its common stock at an exercise price of
$8.41 per share. As no additional value is obtained by the Company in connection
with the resell of the debt, the Company has recorded non-cash additional
compensation expense of $442 in the 2000 statement of operations. The
compensation expense has been determined at the date each grant of warrants was
made.

            In August 2000, Mr. Herrick sold the remaining $2,776 principal
amount of the note issued to him in December 1998 to two unaffiliated third
parties. The terms of subordinated debt were modified so that the third parties
agreed to waive any interest due to them and convert the entire subordinated
debt by December 31, 2000. One of the unaffiliated third parties converted $792
principal amount of the note into 440,000 shares of the Company's common stock.
The third parties failed to pay Mr. Herrick the entire purchase price of the
note they purchased. In December 2000, the parties rescinded the transaction as
to $1,984 principal amount of the note, which was not converted or paid for. As
a result of these transactions under the December Letter, the Company issued to
Norton Herrick warrants to purchase an additional 18,480 shares of its common
stock at an exercise price of $8.41 per share. The warrants were not a cost of
the refinancing and were accounted for under APB 25, since the strike price was
in excess of market at the time the warrants were granted, no expense was
recorded.

            On May 14, 2001, the Company modified the $1,984 senior subordinated
convertible note held by Norton Herrick as consideration for Mr. Herrick's
consent to certain transactions described below, elimination of the variable
conversion price feature of the note and foregoing current cash interest until
MediaBay's revolving credit facility is repaid. The modified note is convertible
into common stock at a conversion rate of $0.56 per share. Mr. Herrick was
granted registration rights relating to the shares of common stock issuable upon
conversion of the notes and exercise of the warrants.


                                      F-17
<PAGE>

            On October 3, 2002, the $1,984 senior subordinated convertible note
previously issued to Norton Herrick was again amended to, among other things,
extend the maturity dates to September 30, 2007; provided that the holder may
demand repayment of the note on or after the later of (i) October 31, 2004 and
(ii) the date on which the senior credit facility has been repaid and to provide
that interest accrues on unpaid interest at the interest rate of the note.
Interest on this note accrues at the rate of 11% per annum and is payable on a
monthly basis, at the holders' option, in cash or common stock; provided,
however, that cash interest accrues until 10 days after the Company has paid all
of its obligations under the Credit Agreement. The Company is prohibited from
incurring additional indebtedness (with exceptions), selling all or
substantially all of its assets and materially changing the nature of its
business without the prior written consent of the holder of this note.

            Huntingdon Corporation

            On May 14, 2001 the Company issued a $2,500 secured senior
convertible note to Huntingdon Corporation ("Huntingdon"), a company wholly
owned by MediaBay's chairman, Norton Herrick, in consideration for loans made by
Huntingdon to the Company in the amount of $2,500 (the "2,500 Note"). The $2,500
Note is convertible into MediaBay common stock at a conversion rate of $0.56 per
share. The $2,500 Note, in certain respects, ranks pari passu with the current
revolving credit facility and has a security interest in all of the assets of
the Company, except inventory, receivables and cash. The $2,500 Note bears
interest at the prime rate plus 2.5%. Interest, at Huntingdon's option, (i) is
payable in-kind, (ii) is payable in shares of common stock or (iii) will accrue
until the revolving credit facility is repaid in full and, thereafter, payable
in cash.

            The Company also issued an $800 secured senior subordinated
convertible note to Huntingdon in consideration of $800 of advances made by
Huntingdon in December 2000 and February 2001 (the "$800 Note"). The $800 Note
bears interest at 12% per annum and interest, at Huntingdon's option, (i) is
payable in-kind, (ii) is payable in shares of common stock or (iii) will accrue
until the revolving credit facility is repaid in full and, thereafter, payable
in cash. The $800 Note is convertible into MediaBay common stock at a conversion
rate of $0.56 per share and is secured by a second security interest in all of
the assets of the Company, except inventory, receivables and cash.

            In connection with these transactions, Huntingdon was granted
ten-year warrants to purchase 1,650,000 shares of common stock at an exercise
price of $0.56 per share as consideration of the $800 Note and the $2,500 Note,
plus ten-year warrants to purchase an additional 250,000 shares of common stock
at an exercise price of $0.56 per share if Huntingdon loans the Company an
additional $500. Huntingdon was granted registration rights relating to the
shares of common stock issuable upon conversion of the notes and exercise of the
warrants.

            The issuance of the $2,500 Note and the $800 Note have been
accounted for in accordance with Emerging Issues Task Force No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments". The Company
has determined the relative fair value of the warrants and is amortizing this
amount over the life of the notes. The relative fair value of the warrants
amounted to $433. The Company has classified this amount as a debt discount. The
Company has determined the additional debt discount associated with the
beneficial conversion feature at the measurement date is $993. As a result
additional interest expense of $424 has been recorded in the 2001 statement of
operations.

            As previously agreed to with the Company, on February 22, 2002,
Huntingdon purchased a $500 principal amount convertible senior promissory note
due June 30, 2003 (the "February Note"). The February Note is convertible into
shares of Common Stock at the rate of $0.56 of principal and/or interest per
share. The February Note was issued in consideration of a $500 loan made by
Huntingdon to the Company. As partial consideration for the loan and pursuant to
an agreement dated April 30, 2001, the Company granted to Huntingdon warrants to
purchase 250,000 of Common Stock at an exercise price of $0.56 per share. The
warrants are exercisable until May 14, 2011. The Company has determined the
total debt discount relating to the issuance of the warrants and the beneficial
conversion feature of the February Note to be $431. The amount amortized to
interest expense in 2002 was $269.


                                      F-18
<PAGE>

            During August and September of 2002, Huntingdon advanced $1,000 to
the Company, which was converted into a $1,000 principal amount convertible
promissory note payable to Huntingdon (the "$1,000 Note") on October 3, 2002.
The $1,000 Note bears interest at the prime rate plus 2 1/2 %, is convertible
into shares of common stock at a rate of $2.00 per share and is due September
30, 2007, provided that the holder may make a demand for repayment after the
Company's existing credit facility is repaid. In connection with the
transaction, the Company issued to Huntingdon a ten-year warrant to purchase
250,000 shares of Common Stock at an exercise price of $2.00 per share (the
"Initial Warrant"). An original issue discount of $68 has been recorded and is
being amortized over 16 months, through the earliest date upon which the holder
can demand repayment

            On October 3, 2002, the Company and Huntingdon entered into an
agreement pursuant to which Huntingdon agreed to loan the Company $1,500 (the
"October Agreement").

            On October 10, 2002, the Company issued to Huntingdon an additional
$150 principal amount convertible promissory note to Huntingdon (the "$150
Note") in accordance with the October Agreement. The $150 Note is convertible
into shares of Common Stock at a rate of $2.00 per share. The remaining terms of
the $150 Note are similar to those of the $1,000 Note. Warrants to purchase
37,500 of shares of Common Stock at an exercise price of $2.00 were also issued
to Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant. An original issue discount of $12 has been recorded and is
being amortized over 16 months, through the earliest date upon which the holder
can demand repayment.

            On November 15, 2002, the Company issued to Huntingdon an additional
$350 principal amount convertible promissory note to Huntingdon (the "$350
Note") in accordance with the October Agreement. The $350 Note is convertible
into shares of Common Stock at a rate of $1.25 per share. The remaining terms of
the $350 Note are similar to those of the Initial Note. At the time of the loan,
warrants to purchase a number of shares of Common Warrants to purchase 140,000
of shares of Common Stock at an exercise price of $1.25 were also issued to
Huntingdon. The remaining terms of this warrant are similar to those of the
Initial Warrant. An original issue discount of $25 has been recorded and is
being amortized over 16 months, through the earliest date upon which the holder
can demand repayment.

            The Company has recorded original debt discount of $131 relating to
the $1,000 Note, the $150 Note and the $350 Note representing the value of the
Notes ascribed to the warrants granted. The Company has determined because the
conversion price was significantly higher than the market price on the dates of
grant, that there was no beneficial conversion feature.

            On October 3, 2002, each of the notes previously issued to
Huntingdon were amended to, among other things, extend the maturity date. Each
of the notes held by Huntingdon are due September 30, 2007, provided that the
holder has the right, at any time on or after the date on which the Company has
repaid all of its obligations under the Credit Agreement, to demand repayment of
the unpaid principal balance of and interest on the note; provided, however
that, with respect to the $800 Note, such demand can not be made after the
ninetieth (90th) day after the Company has repaid all of its obligations under
the Credit Agreement. All of the notes held by Huntingdon are secured by a lien
on substantially all of the assets of the Company and its subsidiaries, other
than inventory, receivables and cash of the Company and its subsidiaries.

            The Company is prohibited from incurring indebtedness (with
exceptions), selling all or substantially all of its assets and materially
changing the nature of its business without the prior written consent of the
holder of the notes.

            The future minimum loan payments are as follows:

         Year Ending December 31,

           2003 ............................................   $ 2,368
           2004 ............................................    15,247 (*)
                                                               -------
           Total maturities, including debt discount of $567   $17,615
                                                               =======

(*)   Principal amount of this debt is due on demand of the holders at various
      times during 2004 after the Company has repaid or refinanced its
      outstanding obligations under the Credit Agreement.


                                      F-19
<PAGE>

(9) Commitments and Contingencies

            Rent expense for the years ended December 31, 2002, 2001 and 2000
amounted to $291, $272 and $351, respectively.

            In 1998, the Company entered into two ten-year leases on 7,000
square feet of space in Bethel, Connecticut and 3,000 square feet in Sandy Hook,
Connecticut. Lease payments and mandatory capital improvement payments, starting
in 2004, are $4 per year and $2 per year on the Bethel and Sandy Hook
properties, respectively. The Company is currently sub-leasing this space.

Capital Equipment Leases

During the year ended December 31, 2002, the Company had three capital leases.
The Company leased computer equipment under a three-year lease, which expired in
June 2002. Total annual lease payments, including interest, were $55 and the
lease provided for a bargain purchase option of $14 at the end of the lease
term, which the Company exercised. Lease payments under this agreement in 2002,
including the lease buyout, were $42. Lease payments in 2001 and 2000 were $55
in each year. The Company also leases sound equipment under a 5-year lease,
which expires in May 2005. Total annual lease payments, including interest, are
$33 and the lease provides for a bargain purchase of $7. Lease payments under
this agreement were $33, $33 and $22 in 2002, 2001 and 2000, respectively. The
Company leases computer equipment under a three-year lease, which expires in
February 2005. The annual lease payments, including interest, are $21. Lease
payments under this agreement in 2002 were $18. The amount of equipment
capitalized under the three leases and included in fixed assets is $330 and net
of depreciation the fixed asset balance is $156 and $157 at December 31, 2002
and 2001, respectively. The obligations under the leases included in accounts
payable and accrued expenses on the consolidated balance sheets at December 31,
2002 and 2001 were $112 and $136, respectively.

         Minimum annual lease commitments under capital leases are as follows:

         2003                                        $  53
         2004                                           53
         2005                                           18
                                                     -----
         Total capital lease commitments             $ 124
                                                     =====

Real Estate Operating Leases

         The Company leases approximately 12,000 square feet of space in Cedar
Knolls, New Jersey pursuant to a lease agreement, which expires in August 2003
at a monthly rent of $16.

         In 1998, the Company entered into two ten-year leases on 7,000 square
feet of space in Bethel, Connecticut and 3,000 square feet in Sandy Hook,
Connecticut. Lease payments and mandatory capital improvement payments, starting
in 2004, are $4 per year and $2 per year on the Bethel and Sandy Hook
properties, respectively. The Company is currently sub-leasing this space.


         Minimum annual lease commitments including capital improvement payments
under non-cancelable operating leases are as follows:

                            Year ending December 31,

                   2003 ..........................      $133
                   2004 ..........................         6
                   2005 ..........................         6
                   2006 ..........................         6
                   2007 ..........................         6
                   Thereafter ....................        12
                                                        ----
                   Total lease commitments .......      $169
                                                        ====


                                      F-20
<PAGE>

Employment Agreements

            The Company has commitments pursuant to employment agreements with
its officers. The Company's minimum aggregate commitments under such employment
agreements are approximately $1,328, $911 and $262 during 2003, 2004 and 2005,
respectively.

Licensing Agreements

            The Company has numerous licensing agreements for both audiobooks
and old time radio shows with terms generally ranging from one to five years,
which require the Company to pay, in some instances, non-refundable advances
upon signing agreements, against future royalties. The Company is required to
pay royalties based on net sales. Royalty expenses were $3,243, $3,199 and
$2,483 for 2002, 2001 and 2000, respectively. Minimum advances required to be
paid under existing agreements for the next five years are as follows"

                   2003                                $  437
                   2004                                   397
                   2005                                   347
                   2006                                   200
                   2007                                    40
                                                       ------
                   Total                               $1,421
                                                       ======

Litigation

            The Company is not a defendant in any litigation. In the normal
course of business, the Company is subject to threats of litigation. The Company
does not believe that the potential impact of any threatened litigation, if
ultimately litigated, will have a material adverse effect on the Company.

(10) Stock Option and Stock Incentive Plans

            In June 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. In June 1998, the Company amended the 1997 Stock
Option Plan to authorize the grant of up to 2,000,000 shares of authorized but
unissued common stock.

            In March 1999, the Company's stockholders approved an amendment to
the Company's Articles of Incorporation adopting the Company's 1999 Stock
Incentive Plan. The 1999 Stock Incentive Plan provides for grants of awards of
stock options, restricted stock, deferred stock or other stock based awards. A
total of 2,500,000 shares of common stock have been reserved for issuance
pursuant to the plan.

            In June 2000, the Company's shareholders adopted the Company's 2000
Stock Incentive Plan, which provides for grants of awards of stock options,
restricted stock, deferred stock or other stock based awards. A total of
3,500,000 shares of common stock have been reserved for issuance pursuant to the
plan.

            In October 2001, the Company's shareholders adopted the Company's
2001 Stock Incentive Plan, which provides for grants of awards of stock options,
restricted stock, deferred stock or other stock based awards. A total of
3,500,000 shares of common stock have been reserved for issuance pursuant to the
plan.

            Options under the Company's option plans expire at various times
between 2003 and 2011. In accordance with the plans, options generally have
terms of 5 to 10 years and vest from grant date to three years.

            Stock option activity under the plans is as follows:

                                                   Weighted average
                                         Shares    exercise price
                                       ---------   --------------
Outstanding at January 1, 2000         3,013,950       $7.63
    Granted                            4,118,500        5.69
    Exercised                                 --          --
    Canceled                            (479,350)       6.35
                                      ----------       -----


                                      F-21
<PAGE>

Outstanding at December 31, 2000       6,653,100        6.52
    Granted                              898,000        1.23
    Exercised                                 --          --
    Canceled                          (1,561,750)       9.01
                                      ----------       -----
Outstanding at December 31, 2001       5,989,350        5.06
    Granted                            1,205,000        2.27
    Exercised                           (151,000)        .51
    Canceled                            (748,750)       6.95
                                      ----------       -----
Outstanding at December 31, 2002       6,294,600       $4.39
                                      ==========       =====

The per share weighted-average fair value of stock options granted during the
years ended December 31, 2002, 2001 and 2000 is as follows using an accepted
option-pricing model with the following assumptions and no dividend yield. The
shares were granted as follows:

<TABLE>
<CAPTION>
                        No. of        Exercise          Assumed        Risk-free     Fair Value
       Date             Shares          Price           Volatility   interest rate   per Share
       ----             ------          -----           ----------   -------------   ---------
<S>                       <C>            <C>            <C>             <C>             <C>
2000 Grants:
   First Quarter         931,000      $   10.42            100%           6.46%      $    9.78
   Second Quarter      2,950,500           4.37            100%           6.40%           3.04
   Third Quarter         113,000           3.32            100%           6.01%           1.63
   Fourth Quarter        124,000           3.94            100%           5.78%           2.31
                       ---------
Total                  4,118,500
                       =========

2001 Grants:
   First Quarter              --      $      --             --              --       $      --
   Second Quarter         84,000           2.07            165%           4.81%           0.12
   Third Quarter           6,000           2.00            165%           4.63%           0.14
   Fourth Quarter        808,000           1.14            165%           4.85%           0.19
                       ---------
Total                    898,000
                       =========

<CAPTION>

                         No. of       Exercise          Assumed         Risk-free    Fair Value
       Date              Shares         Price          Volatility     interest rate  per Share
       ----              ------         -----          ----------     -------------  ---------
<S>                       <C>            <C>            <C>             <C>          <C>
2002 Grants:
   First Quarter         250,000      $    2.70            159%           4.42%      $    1.25
   Second Quarter             --             --             --              --              --
   Third Quarter          40,000           4.44            159%           3.46%           3.31
   Fourth Quarter        915,000           2.06            159%           3.08%           0.87
                       ---------
                       1,205,000
                       =========
</TABLE>

            The following table summarizes information for options outstanding
and exercisable at December 31, 2002:

<TABLE>
<CAPTION>
                                                                      Options Exercisable
                                                                  -----------------------------
                          Options Outstanding       Weighted
 Range of                   Weighted Average         Average                 Weighted  Average
  Prices         Number  Remaining Life in Years  Exercise Price   Number      Exercise Price
  ------         ------  -----------------------  --------------  -------    -------------------
<S>            <C>                <C>                 <C>         <C>              <C>
$0.50-4.00     4,350,500          5.14                $2.97       3,327,000        $3.22
 4.13-8.00     1,284,750          2.38                 5.85       1,198,750         5.90
 8.13-14.88      659,350          5.28                10.92         659,350        10.92
-----------    ---------          ----                -----       ---------        -----
$0.50-14.88    6,294,600          4.59                $4.39       5,185,100        $4.82
===========    =========          ====                =====       =========        =====
</TABLE>

            At December 31, 2002, there were 364,500 additional shares available
for grant under the 1997 Plan, 1,508,150 additional shares available for grant
under the 1999 Plan, 351,750 additional shares available for grant under the
2000 Plan and 2,830,000 available for grant under the 2001 Plan. There was no
compensation expense recorded in connection with these plans in each of the
years ended December 31, 2002, 2001, and 2000.


                                      F-22
<PAGE>

(11) Warrants and Non-Plan Options

            In addition to the 677,500 warrants granted in 2002 described in
Note 8 above and the 50,000 warrants described in Note 6 above, during the year
ended December 31, 2002, the Company granted non-plan options and warrants to
purchase a total of 300,000 shares of the Company's common stock, none of which
vested in 2002, to consultants and advisors. During the year ended December 31,
2002, warrants to purchase 1,250,000 of the Company's common stock, including
the 300,000 warrants issued in 2002, were canceled and warrants to purchase
330,000 shares of the Company's common stock expired.

            During the year ended December 31, 2002, employee options to
purchase 1,000 shares of the Company's common stock and warrants to purchase
69,500 shares of the Company's common stock were exercised and the Company
received $241 as payment of the exercise prices. In addition, Michael Herrick, a
director, exercised options to purchase 150,000 shares of the Company's common
stock under an option granted to him on November 23, 2001, by delivering to the
Company 60,976 shares of common stock previously issued to him.

            The following table summarizes information for warrants and non-plan
options outstanding and exercisable at December 31, 2002:

<TABLE>
<CAPTION>
                                                                      Options Exercisable
                                                                  -----------------------------
                          Options Outstanding       Weighted
 Range of                   Weighted Average         Average                 Weighted  Average
  Prices         Number  Remaining Life in Years  Exercise Price    Number     Exercise Price
------------   --------- -----------------------  --------------  ---------  -------------------
<S>            <C>                <C>                 <C>         <C>              <C>
$0.10-4.00     2,718,500          7.43                $1.20       2,718,500        $1.20
$4.81-9.97     1,421,149          3.30                 8.59       1,336,149         8.69
$10.00-14.20     384,940          1.12                12.42         384,940        12.42
------------   ---------          ----                -----       ---------        -----
$0.10-14.20    4,524,589          5.60                $4.47       4,439,589        $4.43
============   =========          ====                =====       =========        =====
</TABLE>

(12) Common Stock Subject to Contingent Put Rights

            In connection with its various acquisitions, the Company granted the
sellers the right, under specified conditions, to sell back to the Company up to
an aggregate of 675,000 shares issued to the sellers in connection with the
various acquisitions. At December 31, 2002 and 2001, rights have terminated as
to 370,000 shares. The sellers have the right under certain conditions to sell
the remaining 305,000 shares of stock to the Company at prices ranging from
$14.00 to $15.00 per share at various times commencing in December 2003 and
expiring in December 2008, unless the rights are terminated earlier as a result
of the Company's stock meeting common stock price and/or performance targets
prior to exercise. If all of the rights were exercised prior to termination, the
maximum amount the Company would be required to pay for the repurchase of all of
the shares is approximately $4,550, payable as follows: (1) $350 commencing
December 2003; (2) $3,450 commencing December 2004; and (3) $750 commencing
December 2005.

(13) Equity

            In June 2000, the Company's stockholders approved an amendment to
the Company's Articles of Incorporation to increase the Company's authorized
common stock to 150,000,000 shares.

            The Company's Registration Statement on Form SB-2 for a follow-on
primary offering was declared effective by the Securities and Exchange
Commission on March 15, 2000. On March 20, 2000, the Company closed its offering
of 3,650,000 shares of Common Stock at a price of $9.00 per share for gross
proceeds of $32,850. The Company incurred expenses of $3,473 related to the
offering, including the underwriting discount and accountable expenses, legal
and accounting fees and printing expenses.

            The terms of the Company's debt agreements prohibit the Company from
declaring or paying any dividends or distributions on the Company's common
stock.


                                      F-23
<PAGE>

(14) Income Taxes

            The Company's income tax provision for the years ended December 31,
2002 and 2001 includes a Federal deferred tax expense of $550 and a Federal
deferred tax benefit of $17,200, respectively.

            Income tax expense (benefit) for the years ended December 31, 2002,
2001 and 2000 differed from the amount computed by applying the U.S. Federal
income tax rate of 34% and the state income tax rate of 7% to the pre-tax loss
as a result of the following:

<TABLE>
<CAPTION>
                                                                           Restated    Restated
                                                                 2002        2001        2000
                                                               --------    --------    --------
<S>                                                            <C>         <C>         <C>
Computed tax benefit                                           $   (797)   $ (9,268)   $(21,867)
Increase (decrease) in valuation allowance for Federal
and State deferred tax assets                                     1,347      (7,932)     21,867
                                                               --------    --------    --------
Income tax expense (benefit)                                   $    550    $(17,200)   $     --
                                                               ========    ========    ========
</TABLE>

            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. As a result of a series of strategic
initiatives, the Company's operations have improved. Although realization of net
deferred tax assets is not assured, management has determined, based on the
Company's improved operations, that it is more likely than not that a portion of
the Company's deferred tax asset relating to temporary differences between the
tax bases of assets or liabilities and their reported amounts in the financial
statements will be realized in future periods. Accordingly, in 2001, the Company
reduced the valuation allowance for deferred tax assets in the amount of $17,200
and recorded an income tax benefit.

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

Deferred tax assets:

                                                                     Restated
                                                           2002        2001
                                                         --------    --------
Federal and state net operating loss carry-forwards      $ 22,224    $ 19,148
Loss in I-Jam, LLC                                             85          85
Accounts receivable, principally due to allowance for
doubtful accounts and reserve for returns                   1,668       1,289
Inventory, principally due to reserve for obsolescence        475         927
Fixed assets/Intangibles                                   13,725      16,163
Beneficial conversion feature                                 (42)       (197)
                                                         --------    --------
Total net deferred tax assets                              38,135      37,415
Less valuation allowance                                  (21,911)    (20,563)
                                                         --------    --------
Net deferred tax assets                                  $ 16,224    $ 16,852
                                                         ========    ========

            The Company has approximately $55,141 of net operating loss
carry-forwards, which may be used to offset possible future earnings, if any, in
computing future income tax liabilities. The net operating losses will expire
between December 31, 2018 and December 31, 2022 for federal income tax purposes.
For state purposes, the net operating losses will expire at varying times
between 2006 and 2012, as the Company is subject to corporate income tax in
several states.

(15) Net Loss Per Share of Common Stock

            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 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.

            Basic and diluted loss per share were computed using the weighted
average number of shares outstanding for the years ended December 31, 2002, 2001
and 2000 of 14,086, 13,862 and 12,718, respectively.

            Common equivalent shares of 17,916 including 15,913 relating to
convertible subordinated debt and convertible preferred stock were not included
in the calculation of fully diluted shares because they were anti-dilutive.
Interest expense and dividends on the convertible subordinated debt and
convertible preferred stock that were not added back to net loss were $1,134 for
the year ended December 31, 2002.


                                      F-24
<PAGE>

            Common equivalent shares totaling 11,787, including 11,520 shares
associated with the conversion of $12,484 of convertible debt and the related
reduction in interest expense for the twelve-month period ended December 31,
2001 of $1,070, were not included in the computation of diluted loss per share
for the year ended December 31, 2001 because they would have been anti-dilutive.
Common equivalent shares not included in the computation of diluted loss per
share for the year ended December 31, 2000 was 473.

(16) Supplemental Cash Flow Information

            No cash has been expended for income taxes for the years ended
December 31, 2002, 2001 and 2000. Cash expended for interest was $766, $1,095
and $2,157 for the years ended December 31, 2002, 2001 and 2000, respectively.

            The Company had the following non-cash activities for the years
ended December 31, 2002, 2001, and 2000:

                                                         2002    2001     2000
                                                         ----    ----     ----
E-Data rights acquisition ............................  $   75  $   --   $   --
Conversions of subordinated notes into common shares .   1,000      --    5,616
Conversion of notes into preferred shares ............   2,500      --       --
Stock tendered as payment for exercise of options ....      75      --       --

(17) Related Party Transactions

            Companies wholly owned by Norton Herrick provided certain legal,
accounting, administrative and general office services to, and obtained
insurance coverage for, the Company. In connection with such services, the
Company paid or accrued to such entities the aggregate of $477, $88 and $133
during the years ended December 31, 2002, 2001 and 2000, respectively. In
addition, a company wholly owned by Norton Herrick provides the Company access
to a corporate airplane. The Company generally pays the fuel, fees and other
costs related to its use of the airplane directly to the service providers. For
the use of this airplane, the Company paid rental fees to Mr. Herrick's
affiliate of approximately $14 and $25 in 2001 and 2000, 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. The Company owed Norton Herrick $566
and $89 for services rendered but not paid for as December 31, 2002 and 2001,
respectively.

            Interest on subordinated debentures held by a third party in the
amount of $97 for the three months ended September 30, 2000 was advanced by a
company wholly-owned by the Herrick family in November 2000. In 2001, the same
company advanced an additional $97 in interest for the three months ended
December 31, 2000 to the same third party. The Company subsequently paid the
interest, and neither Mr. Herrick nor his wholly owned company received any
compensation for or profit from these transactions.

            In 2001, Glebe Resources. Inc., a company wholly owned by Norton
Herrick, on MediaBay's behalf, advanced a security deposit to a vendor in the
amount of $100. The advance was subsequently repaid and Glebe received no
compensation for and did not profit from this transaction.

            On October 18, 2002, the Company entered into a consulting agreement
with MEH Consulting Services, Inc., a company wholly-owned by Michael Herrick,
the Company's former CEO, a director and the son of Norton Herrick. The
agreement, effective January 1, 2003, provides, among other things that Mr.
Herrick will provide consulting and advisory services to MediaBay, that Mr.
Herrick will devote a minimum of 30 hours per week and that Mr. Herrick will be
under the direct supervision of the Company's Board of Directors. For his
services, the Company has agreed to pay Mr. Herrick a fee of $17 per month plus
health insurance and other benefits applicable to the Company's officers to the
extent such benefits may be provided under the Company's benefit plans.

            In 2002, Mr. Herrick advanced $372 to certain of the Company's
vendors and professional firms as payment of amounts owed to them. As the
Company makes payments to these vendors, the vendors repay the amounts advanced
by Mr. Herrick to him.

            See Notes 8 and 13 for other related party transactions.

(18) Recent Accounting Pronouncements

            In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." This interpretation defines when
a business enterprise must consolidate a variable interest entity. This
interpretation applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to entities in which an enterprise holds a


                                      F-25
<PAGE>

variable interest that it acquired before February 1, 2003. The adoption of this
statement is not expected to have a material effect on the Company's financial
position or results of operations.

            In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" ("SFAS 148") which amends SFAS No. 123. This statement provides
alternative methods of transition for a voluntary change to the fair value-based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of SFAS No. 123. The transition guidance and disclosure
requirements are effective for fiscal years ending after December 15, 2002. The
adoption of this statement will not have a material effect on the Company's
financial position or results of operations.

            In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This interpretation requires a
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. It also
enhances guarantor's disclosure requirements to be made in its interim and
annual financial statements about its obligations under certain guarantees it
has issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.

            In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections", was
approved by the FASB. This statement is effective January 1, 2003. Among other
things, this statement requires that gains or losses on the extinguishment of
debt will generally be required to be reported as a component of income from
continuing operations and will no longer be classified as an extraordinary item.
Therefore, beginning in 2003, the Company's prior financial statements will need
to be reclassified to include those gains and losses previously recorded as an
extraordinary item as a component of income from continuing operations.

            In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities". SFAS 146 requires the recognition of a liability for costs
associated with an exit plan or disposal activity when incurred and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", which allowed recognition at the
date of an entity's commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated by the Company
after December 31, 2002. The adoption of this statement is not anticipated to
have a material effect on the Company's financial position or results of
operations.

            In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement will not have a material
effect on the Company's financial position or results of operations.

(19) Segment Reporting

            For 2002, 2001 and 2000, the Company has divided its operations into
four reportable segments: Corporate, Audio Book Club ("ABC") a membership-based
club selling audiobooks in direct mail and on the Internet; Radio Spirits
("RSI") which produces, sells, licenses and syndicates old-time radio programs
and MediaBay.com a media portal offering spoken word audio content in secure
digital download formats. Segment operating income is total segment revenue
reduced by operating expenses identifiable with that business segment. Corporate
includes general corporate administrative costs, professional fees and interest
expenses. The Company evaluates performance and allocates resources among its
three operating segments based on operating income and opportunities for growth.
The Company did not expend any funds or receive any income in the years ended
December 31, 2002, 2001 and 2000 from its newest subsidiary RadioClassics.


                                      F-26
<PAGE>

            The accounting policies of the reportable segments are the same as
those described in Note 3. Inter-segment sales are recorded at prevailing sales
prices.

            The information presented for the years ended December 31, 2001 and
2000, have been restated, see Note 2, above.

Year ended December 31, 2002


<TABLE>
<CAPTION>
                                                           Corporate    ABC        RSI      MBAY.com   Inter-Seg.    Total
                                                           ---------    ---        ---      --------   ----------    -----
<S>                                                        <C>        <C>        <C>        <C>        <C>          <C>
Sales                                                      $     --   $ 34,342   $ 11,348   $    215   $     (161)  $ 45,744
(Loss) profit before non-cash write-down of
intangibles, depreciation, amortization
interest expense, income tax expense and
dividends on preferred stock                                 (3,233)     5,281      2,141       (436)          16      3,769
Depreciation and amortization                                    --      1,217         97         --           --      1,314
Interest expense                                              2,903         --         71         --           --      2,974
Non-cash write-down of intangibles                                       1,134         90                              1,224
Income tax (expense)                                                     (449)      (101)                               (550)
Dividends on preferred stock                                    217         --         --         --           --        217
Net (loss) income applicable to common shares                (6,353)     2,481      1,782       (436)          16     (2,510)
Total assets                                                     --     31,225     17,454         --          (60)    48,619
Purchase of fixed assets                                         --        100         11         --           --        111
</TABLE>

Year ended December 31, 2001

<TABLE>
<CAPTION>
                                                          Corporate     ABC        RSI      MBAY.com   Inter-Seg.    Total
                                                          ---------     ---        ---      --------   ----------    -----
<S>                                                        <C>        <C>        <C>        <C>        <C>          <C>
Sales                                                      $     --   $ 31,793   $ 10,021   $    249        ($258)  $ 41,805
(Loss) profit before asset write-downs and strategic
charges, depreciation, amortization, interest expense
and income tax benefit                                       (2,239)     2,058         15     (1,225)           8     (1,383)
Asset write-downs and strategic charges                       2,000      6,031      4,342        903           --     13,276
Depreciation and amortization                                    --      3,942        910        304           --      5,156
Interest expense                                              2,779         --         11         --           --      2,790
Income tax benefit                                               --     14,035      3,165         --           --     17,200
Net (loss) income applicable to common shares                (7,018)     6,120     (2,083)    (2,432)           8     (5,405)
Total assets                                                     --     27,740     16,785          3          (76)    44,452
Purchase of fixed assets                                         --         58        130         --           --        188
</TABLE>

Year ended December 31, 2000

<TABLE>
<CAPTION>
                                                           Corporate     ABC        RSI      MBAY.com   Inter-Seg.    Total
                                                           ---------     ---        ---      --------   ----------    -----
<S>                                                        <C>        <C>        <C>        <C>        <C>          <C>
Sales                                                      $     --   $ 31,442   $ 12,252   $  1,566   $     (834)  $ 44,426
(Loss) profit before depreciation, amortization, non-cash
write-down of goodwill, interest expense and extraordinary
loss on early extinguishment of debt                         (3,215)    (1,051)     1,150       (967)          36     (4,047)
Depreciation and amortization                                    --      6,586        970        428           --      7,984
Non-cash write-down of goodwill                                  --     36,792      1,434         --           --     38,226
Interest expense, net                                         2,931         --          9         --           --      2,940
Extraordinary loss on early extinguishment of debt            2,152         --         --         --           --      2,152
Net loss applicable to common shares                         (8,298)   (44,429)    (1,263)    (1,395)          36    (55,349)
Total assets                                                  2,000     28,179     18,431      1,498         (176)    49,932
Purchase of fixed assets                                         --        123        288        462           --        873
</TABLE>


                                      F-27
<PAGE>

(19) Quarterly Operating Data (Unaudited)

            Each of the quarters in the year ended December 31, 2001 and the
first three quarters in the year ended December 31, 2002 have been restated. See
Note 2 above. The following table presents selected unaudited operating data of
the Company for each quarter in the two year period ended December 31, 2002 both
as previously reported and as restated.

As Previously Reported

                    Year Ended
                December 31, 2002             1st       2nd      3rd
                                            Quarter   Quarter  Quarter
Sales                                       $ 9,480   $11,977  $11,267
Cost of sales                                 4,289     5,194    5,241
Net (loss) income applicable to common
  shares                                       (525)      553       27
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share      $ (0.04)  $  0.04  $   .00
Diluted earnings (loss) per common share    $ (0.04)  $  0.03  $   .00

As Restated, See Note 2

<TABLE>
<CAPTION>
                    Year Ended
                December 31, 2002               1st          2nd         3rd         4th
                                              Quarter      Quarter     Quarter     Quarter
<S>                                          <C>          <C>         <C>         <C>
Sales                                        $   9,480    $  11,977   $  11,267   $  13,020
Cost of sales                                    4,289        5,194       5,241       5,927
Net (loss) applicable to common shares            (759)         338        (187)     (1,902)(***)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share       $   (0.05)   $    0.02   $    (.01)  $    (.13)
Diluted earnings (loss) per common share     $   (0.05)   $    0.02   $    (.01)  $    (.13)
</TABLE>

As Previously Reported

<TABLE>
<CAPTION>
                    Year Ended
                December 31, 2001                 1st             2nd           3rd               4th
                                                Quarter         Quarter       Quarter           Quarter
<S>                                            <C>             <C>           <C>               <C>
Sales                                          $  9,601        $ 10,915      $  9,879          $ 11,410
Cost of sales                                     3,816           5,455         5,285             5,227
Cost of sales - write-downs                          --              --         2,261                --
Net income (loss)                                10,624(*)       (2,043)      (16,748)(**)        3,317(****)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share         $   0.77(*)     $  (0.15)     $  (1.21)(**)     $   0.24(****)
Diluted earnings (loss) per common share       $   0.58(*)     $  (0.15)     $  (1.21)(**)     $   0.12(****)

<CAPTION>

As Restated, See Note 2
                    Year Ended
                December 31, 2001                 1st              2nd            3rd                4th
                                                Quarter          Quarter        Quarter            Quarter
<S>                                            <C>              <C>            <C>                <C>
Sales                                          $   9,601        $  10,915      $   9,879          $  11,410
Cost of sales                                      3,816            5,455          5,285              5,227
Cost of sales - write-downs                           --               --          2,261                 --
Net income (loss)                                 10,591(*)        (2,151)       (16,955)(**)         3,110(****)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share         $    0.77(*)     $   (0.16)     $   (1.22)(**)     $    0.23(****)
Diluted earnings (loss) per common share       $    0.58(*)     $   (0.16)     $   (1.22)(**)     $    0.11(****)
</TABLE>

(*)    Includes a reduction in the valuation allowance for deferred tax assets
       in the amount of $13,000.

(**)   Includes asset write-downs and strategic charges in addition to cost of
       sales write-downs of $11,015.

(***)  Includes write-down of intangible assets of $1.2 million and income tax
       expense of $550 related to utilization of deferred tax asset.

(****) Includes a reduction in the valuation allowance for deferred tax assets
       in the amount of $4,200.


                                      F-28
<PAGE>

(20) Subsequent Events

            From January 1, 2003 to April 14, 2003, the Company issued options
to purchase 85,000 shares of its common stock to certain directors, employees
and consultants to the Company under its 2000 Stock Option plan. The Company
also cancelled options to purchase 5,000 shares of its common stock. The Company
also issued non-plan warrants to purchase 90,000 shares of its common stock to a
former employee and consultant at prices ranging from $1.50 to $3.00 per share
as part of non-complete agreements and has recorded the associated value of $58
on its first quarter 2003 balance sheet and is amortizing the value over the
remaining life ranging from 1 to 5 years.

            On April 9, 2003 the maturity date of the principal amount of the
senior credit facility of $4,030 was extended to April 30, 2004 with certain
conditions. In addition to its scheduled principal payments through 2003, the
Company is required to make payments of $225 per month for the months of
January, February and March 2004.


                                      F-29
<PAGE>

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              For the years ended December 31, 2002, 2001 and 2000

<TABLE>
<CAPTION>
                                                       Balance      Amounts                  Write-Offs
                                                      Beginning    Charged to    Amounts      Against     Balance End
                                                      of Period    Net Income    Acquired     Reserves    of Period
                                                      ---------    ----------    --------     --------    ---------
<S>                                                   <C>          <C>                  <C>  <C>          <C>
Allowances for sales returns and doubtful accounts:
Year Ended December 31, 2002                          $    4,539   $   18,793           --   $   18,007   $    5,325
Year Ended December 31, 2001                               4,516       15,496           --       15,473        4,539
Year Ended December 31, 2000                               5,911       18,038           --       19,433        4,516
</TABLE>


                                      S-1
<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.

                                              MEDIABAY, INC.


                                          By: /s/ John F. Levy
                                              -------------------------------
                                              John F. Levy,
                                              Executive Vice President and
                                              Chief Financial Officer

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

<TABLE>
<CAPTION>
          Signature                                     Title                                   Date
          ---------                                     -----                                   ----
<S>                             <C>                                                     <C>
      /s/ Norton Herrick
------------------------------
        Norton Herrick          Director and Chairman                                   April 15, 2003


        /s/ Carl Wolf
------------------------------
          Carl Wolf             Co-Chairman and Director                                April 15, 2003


      /s/ Hakan Lindskog
------------------------------  Chief Executive Officer
        Hakan Lindskog          (Principal Executive Officer)                           April 15, 2003


      /s/ Howard Herrick
------------------------------
        Howard Herrick          Director and Executive Vice President                   April 15, 2003


       /s/ John F. Levy
------------------------------  Executive Vice President and Chief  Financial  Officer
         John F. Levy           (Principal Financial and Accounting Officer)            April 15, 2003


       /s/ Paul Ehrlich
------------------------------
         Paul Ehrlich           Director                                                April 15, 2003


     /s/ Michael Herrick
------------------------------
       Michael Herrick          Director                                                April 15, 2003


------------------------------
        Mark Hershhorn          Director


------------------------------
        Joseph Rosetti          Director
</TABLE>


                                       48
<PAGE>

                  Certification of Principal Executive Officer

I, Hakan Lindskog, certify that:

            1. I have reviewed this annual report on Form 10-K of MediaBay,
Inc.;

            2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

            3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

            4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

            5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

            a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

            b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

            6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


            Date: April 16, 2003              /s/ Hakan Lindskog
                                           ------------------------------
                                              Chief Executive Officer


                                       49
<PAGE>

                  Certification of Principal Financial Officer

I, John F. Levy, certify that:

            1. I have reviewed this annual report on Form 10-K of MediaBay,
Inc.;

            2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

            3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this annual report;

            4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

            5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

            a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

            b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

            6. The registrant's other certifying officers and I have indicated
in this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.


            Date: April 16, 2003               /s/ John F. Levy
                                               --------------------------
                                               Chief Financial Officer


                                       50