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, 2001

                                       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
 Cedar Knolls, NJ                                               07927
 (Address of principal executive offices)                     (Zip Code)

                                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)

Check  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 [_]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure  will 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]

The aggregate  market value of the voting and  non-voting  common equity held by
non-affiliates as of March 25, 2002 was approximately  $30,846,493.  As of March
25, 2002, there were 13,875,602 shares of the issuer'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                                            15

Item 3.   Legal Proceedings                                                  16

Item 4.   Submission of Matters to a Vote of Security Holders                16

PART II

Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters                                                16

Item: 6.  Selected Financial Data                                            17

Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                19

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk         28

Item 8.   Financial Statements and Supplementary Data                        28

Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                                28

PART III

Item 10.  Directors and Executive Officers                                   29

Item 11.  Executive Compensation                                             32

Item 12.  Security Ownership of Certain Beneficial Owners
          and Management                                                     35

Item 13.  Certain Relationships and Related Transactions                     37

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports
          on Form 8-K                                                        40



<PAGE>

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 express
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  creditors  and  collect
receivables and successfully  implement our acquisition strategy,  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,  Inc. is a leading 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.

     Our content  library  consists of more than  50,000  hours of spoken  audio
content including audiobooks,  old-time radio shows and other unique spoken word
content.  The majority of our content is acquired  under license from the rights
holders  enabling us to manufacture the product giving us  significantly  better
product margins than other companies.

     Our customer base  includes  over 2.6 million  spoken audio buyers who have
purchased  via catalogs and direct mail  marketing.  We also  currently  have an
additional 2.2 million e-mail  addresses of spoken audio buyers and  enthusiasts
online.  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 and  nostalgia  video  streams of our
content  on a  monthly  basis  to web  site  visitors  at  RadioSpirits.com  and
MediaBay.com.

     In November 2001, our intellectual property rights related to the radio and
video  programs in our content  library  were  appraised  at $40.6  million by a
reputable  independent  appraisal  firm and, in January 2002 our Audio Book Club
and Radio Spirits  membership and customer lists were appraised at $24.0 million
by the same independent appraisal firm.


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<PAGE>


Business Divisions

     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.  The four segments
serving the spoken word audio industry are as follows:

     o    Audio Book Club  ("ABC") - the  largest  membership-based  club of its
          kind with  approximately 2 million  members;  marketed via direct mail
          and the  Internet  at  www.audiobookclub.com.  Audio  Book Club is the
          largest audiobook club; having acquired Doubleday's  Audiobooks Direct
          and the Columbia House Audiobook Club.

     o    Radio Spirits ("Radio  Spirits" or "RSI")-  old-time radio and classic
          video  programs  marketed to over 600,000 RSI catalog  buyers  through
          direct mail  catalogs  and, on a wholesale  basis,  to more than 7,000
          major retailers, including Costco, Target, Sam's Club, Barnes & Noble,
          Borders,  Amazon.com,  Cracker  Barrel  Old  Country  Stores  and  the
          Internet at www.radiospirits.com.

     o    MediaBay.com   -   our   content-rich    media   portal   located   at
          www.MediaBay.com  offers our extensive  library of premium spoken word
          audio content in secure digital download formats.

     o    Radio  Classics  ("RCI")-  the  distribution  of  our  three  national
          "classic" radio programs which are collectively heard on more than 500
          traditional  radio stations in more than 350 markets by over 3 million
          listeners weekly. We plan to distribute our old-time radio programming
          across multiple digital distribution platforms including digital cable
          television,  satellite  television  (DBS),  satellite  radio  and  the
          Internet.  We are currently in discussions with numerous  companies in
          this  space  regarding  the  carriage  of  our  programming  on  their
          satellite and cable systems.

Audio Book Club

     We believe that we are a leading  seller of audiobooks in the world through
our Audio Book Club,  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  2.0
million names at December 31, 2001.

     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  two or four,  at Audio Book  Club's  regular
prices,  which generally range from $10.00 to $35.00 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  created  our first such  specialty  club for  audiobooks  based on
consumer  preferences  which we have identified  from our extensive  database of
member  information.  This first  specialty club,  Audio  Passages,  a Christian
Audiobook Club, was launched in the second quarter of 2000. We are exploring the
possibility  of  launching  additional  specialty  clubs,  featuring  a specific
interest, such as self-help, religion, mystery and Spanish language audiobooks.


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<PAGE>


     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

     Audiobookclub.com  provides  visitors the  opportunity to become members of
our Audio Book Club and provides  our members with the ability to order  online,
audiobooks   offered  through  our  catalog.   Audiobookclub.com   has  acquired
approximately  275,000  members  online,  including  58,000 members in 2001, and
19,000  members  online in January and February of 2002.  We have  significantly
reduced our cost to acquire a member online  dramatically in 2001 as a result of
our revised  marketing  strategy.  The cost to acquire a member in December 2001
was   approximately   $12  as   compared   to  over  $50  in  January  of  2000.
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.

     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 or "CPA" arrangement results in substantially lower marketing costs
and direct control over the cost of acquiring  members.  These  agreements  have
resulted  in  a  cost  to  acquire  new  members  on  the  Internet,   which  is
approximately 50% lower than our offline cost. 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.

     We also use push-marketing programs consisting of targeted e-mail campaigns
to our existing e-mail address database of over 2.2 million e-mail addresses.

Member Retention and Recurring Revenue

     We encourage  Audio Book Club members to purchase  more than their  minimum
purchase  commitment  by offering  members  discount  pricing on their  featured
selection audiobook 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

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<PAGE>


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.    Each   member   mailing   also   includes   an   order   form   and   a
"Member-Get-a-Member" form.

     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,  faxing a reply to us 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  membership  club,  our Audio Book Club enjoys a cost of goods
advantage  over  traditional  audiobook  retailers.  Retailers  and other online
booksellers  purchase  audiobooks  from  the  finished  inventory  of  either  a
publisher  or a  third-party  distributor.  As a club  operator,  we  license  a
recording or group of recordings from the publisher for sale in a club format on
a  royalty  or per copy  basis  and  subcontract  the  manufacturing,  including
duplicating and printing to a third party. As a result of the improved economies
of scale achieved from our acquisitions of Columbia  House's  Audiobook Club and
Doubleday  Direct's  Audiobooks  Direct club, we have achieved  significant cost
savings in the production of audiobooks.

     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.  Some of our  license
agreements grant us digital rights to the titles as well.

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.

     For our Audio Book Club members, we offer fast ordering options,  including
placing orders online through our web site and calling us with an order.  Orders
are sent fourth-class  mail and are typically  delivered 10 to 14 days following
our  receipt of orders.  For an  additional  fee,  members  can


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<PAGE>


receive  faster  delivery of an order either by priority  delivery,  which takes
three to five days, or by overnight delivery.

     Members are billed for their purchases at the time their orders are shipped
and are required to make payment  promptly.  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.

     Our policy is to accept returns of damaged audiobooks. In order to maintain
favorable  customer  relations,  we  generally  also  accept  prompt  returns of
unopened audiobooks. We monitor each member's account to determine if the member
has made excessive  returns.  Our policy is to either  terminate a membership or
change  member  status to  positive  option,  if the member  makes three to five
consecutive  returns  of either  audiobooks  ordered or of  featured  selections
received because the member did not return the reply card on time.

     We have implemented a number of initiatives, which have reduced the returns
from our Audio Book Club members.  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

History

     RSI was formed in December 1998 by our acquisition of three businesses:

     o    Radio  Spirits,  Inc., a company  which  specialized  in  syndicating,
          selling and licensing old-time radio programs.  In connection with the
          Radio  Spirits,  Inc.  acquisition,  we also  acquired  the  assets of
          Buffalo  Productions,  Inc.  relating to its  business of  duplicating
          pre-recorded compact discs.

     o    The assets used by  Metacom,  Inc.  for its  Adventures  in  Cassettes
          business of producing, marketing and selling old-time radio programs.

     o    The assets used by Premier Electronic  Laboratories,  Inc. relating to
          its business of producing,  marketing and selling  old-time  radio and
          classic video programs.  Following the closing of these  acquisitions,
          these businesses were combined to form RSI.

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.  In November 2001, the intellectual
property  rights  related  to RSI's  old-time  radio  library of  programs  were
appraised at $30.6 million by an accredited  independent  third party  appraisal
firm well respected in the financial  community.  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  Lone  Ranger,  Superman,  Tarzan,  Sherlock
          Holmes, The Life of Riley and Lights Out;

     o    recordings of stars,  such as Humphrey  Bogart,  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:


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<PAGE>

     o    "TheGreatest  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.

     o    "The Smithsonian Collection" - 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.

     o    "AMC's  Audio  Movies  to  Go"  -  a  collection  of  old-time   radio
          adaptations  of classic  movies branded under this name featuring film
          stars such as Humphrey  Bogart,  Jimmy  Stewart,  John Wayne and Betty
          Davis.  RSI entered into an exclusive  agreement  with American  Movie
          Classics in October  1999.  This  product line is being sold in retail
          chains  carrying audio and video programs,  in RSI's product  catalogs
          and on RSI's web site.

     o    "The Sixty Greatest  Old-time Radio  Christmas  Shows Selected by Andy
          Williams" featuring classic Christmas episodes of old-time radios most
          popular  shows.  RSI has entered  into a license  agreement to use Mr.
          Williams' name and likeness.  This collection includes many of radio's
          most memorable Christmas  programs,  a spoken foreword by Mr. Williams
          and a companion informational booklet.

     o    "The 60 Greatest Old-time Radio  Science-Fiction  Programs as Selected
          by Ray  Bradbury"  which  includes  many radio's  most famous  science
          fiction  broadcasts.  The collection  will contain a 64-page  booklet,
          audio and written  forewords  by Mr.  Bradbury and feature "The War of
          the Worlds" and "Donovan's Brain" both starring Orson Welles,  classic
          episodes of "X Minus One,"  "Dimension  X," and  "Suspense" as well as
          several works written for radio by Mr. Bradbury.

     o    "America at War" which  includes 27 of the greatest  radio shows which
          aired  during  World  War  II.   Included  in  the   compilation   are
          performances by Jack Benny, Jimmy Stewart,  Frank Sinatra, John Wayne,
          Clark Gable,  Bette  Davis,  Orson  Welles and more.  The  compilation
          includes  Norman  Corwin's "We Hold These  Truths,"  which aired eight
          days  after  the  attack  on  Pearl  Harbor,  "On a Note  of  Triumph"
          commemorating our victory over Germany and "Fourteen August" broadcast
          upon victory over Japan. "America at War" also includes speeches given
          by  Franklin  D.  Roosevelt,  General  Douglas  MacArthur  and Winston
          Churchill.

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  Discovery  Stores and
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 list of over 600,000 names of customers of radio and video
programs  through  RSI's  catalogs and other  channels.  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.  RSI's catalogs offer cassettes and compact discs from its
old-time  radio library and videos from its classic video library and RSI's line
of DVDs, which combine classic radio and classic television programs on a single
DVD.


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Broadcast

     RSI  advertises  its  products  on  RadioClassics'   nationally  syndicated
old-time radio  broadcast,  which reaches an audience of 3 million  listeners of
old-time radio programs weekly on over 500 radio stations.

Internet

     RSI also sells its old-time  radio and classic video  programs in cassette,
compact disc and DVD to retail customers through its web site, Radiospirits.com.
Radiospirits.com  is an innovative  content and  e-commerce  web site,  offering
visitors a single  location for the largest  selection of old-time radio content
and products in digital  download and physical formats  (cassette,  CD and DVD).
Consumers  may  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.  Radiospirits.com provides visitors with a searchable
database  to preview  and  purchase  titles from RSI's  old-time  radio  program
library.  This site offers free  full-length  programs  in  streaming  audio and
digital download formats, information on the programs, celebrities and talent of
the Golden Age of Radio, contests and trivia information.

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 rights holders  (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.  Because RSI's old-time radio
content  is  acquired  under  license  from the rights  holders,  which give the
ability to  manufacture  the  programs,  RSI  enjoys a cost of goods  advantage,
resulting in favorable  product  margins.  RSI uses third parties to manufacture
most of its videos.

     RSI has encoded  over  10,000  programs  from its  old-time  radio  content
library  and  currently  provides  digital  download  delivery  of many of these
programs and  products,  and is  continuing  to encode  additional  programs for
digital download delivery.

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.

Video Library

     RSI also has an extensive  library of over 3,500 video programs,  including
an extensive  collection of foreign and silent  films,  as well as classic films
from the 1930s through the 1970s.  These  programs  include films  starring Jack
Nicholson,  John Wayne, James Stewart,  Frank Sinatra,  Bruce Lee, Orsen Welles,
Roy Rogers and Jack Palance.  In November 2001, the source materials relating to
RSI's video library were valued at $10.0  million by an  accredited  independent
third party appraisal firm well respected in the financial community.


                                       7
<PAGE>


DVDs

     In the spring of 2001,  RSI  introduced a new line of DVDs,  which combines
three classic  television  favorites with three old-time radio shows of the same
series.  Because of RSI's  old-time radio  licenses,  RSI is able to combine the
classic television programs with the radio shows that inspired them.

MediaBay.com

     MediaBay.com is an innovative  content and e-commerce web site offering our
2.6 million customers, 2.2 million email addresses and approximately 1.6 million
unique web site  monthly  visitors a single  location  for digital  downloads of
premium  spoken word content.  Portions of these  downloads are provided as free
samples,  however,  the  majority of the content is offered for sale either on a
per download  basis or as part of a monthly  subscription.  Our  objective is to
position  MediaBay.com as a leading digital download  provider of premium spoken
word audio content.

RadioClassics

         Our  RadioClassics  subsidiary  intends to syndicate our old-time radio
library across multiple  distribution  platforms  including  traditional  radio,
digital cable television,  satellite  television (DBS),  satellite radio and the
Internet.  We produce and syndicate  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  collectively
heard on more than 500 radio stations in more than 350 markets  including one of
the nation's  largest  radio  stations,  KNX1070 Los Angeles,  by over 3 million
listeners  weekly.  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 success with our traditional radio syndication programs
provides a natural  extension for the syndication of our content on a 24/7 basis
via numerous other distribution platforms through our RadioClassics  subsidiary.
RadioClassics  is  currently  in  discussions  with  leading  cable  television,
satellite  radio and satellite  television  companies to establish  distribution
capabilities for Radio Spirit's old-time radio content.

Industry Overview

Audiobooks

     The  market  for  audiobooks  in 2000,  according  to the Audio  Publishers
Association,  grew from an estimated $250 million in 1989 to approximately  $2.5
billion in 2000.

     In May 2001, the Audio Publishers Association released the results of a new
consumer study on audiobook listener profiles,  usage and buying trends.  Listed
below is an overview of some of their findings:

     o    The average audiobook listener earns 25% more than non-listeners,  has
          a higher level of education and is more likely to hold a  professional
          and managerial position than a non-listener.

     o    In 2001, 22.5% of American households listened to audiobooks.

     o    Audiobook  users are  demographically  similar  to print book users in
          gender, age and income, but audiobook users have larger households.

     o    The use of CDs for audiobooks has increased  dramatically  in the past
          two years.  In fact, the average  number of hours per week  audiobooks
          are  listened  to on CD is  currently  almost  equal  to  the  use  of
          audiobooks on cassettes.


                                       8
<PAGE>


     o    Cars, particularly among commuters,  are still the dominant place that
          consumers listen to audiobooks.  Each week, audiobooks are listened to
          an average of 4.4 hours in the car, 3.6 hours at home, 2 hours at work
          and 2 hours while exercising.

     o    Multi-tasking  continues  to be  the  primary  benefit  recognized  by
          consumers  of  audiobooks,  especially  by those who are driving  long
          distances, traveling, or commuting. Other advantages are entertainment
          and information.

Old-time Radio

     Old-time radio programs include radio dramas, mysteries, detective stories,
comedies,  westerns, science fiction and adventure stories that originally aired
from the 1930s to the 1960s.  Radio's  creative  forces fired the imagination of
listeners with drama,  comedy,  music and even  re-enactments of popular movies.
The medium's writers, producers and talent laid the foundation for the advent of
television.  Many of  Radio's  shows  and  stars  made the  transition  to early
television.

     Today  "old-time"  radio  programming  is  still a very  popular  listening
option.  Arbitron research has consistently shown that our nationally syndicated
old-time  radio shows rank first in New York,  Los Angeles,  Chicago,  Salt Lake
City and Milwaukee in the period when they aired.

Digital Downloads

     The  Internet has emerged as a  significant  global  communications  medium
giving  millions  of people the  ability to access  and share  large  amounts of
information  and to experience  entertainment  offerings.  Through the Internet,
people can quickly receive various forms of information and entertainment,  from
traditional  types of  publishing  such as text to the newer  technologies  like
streaming and downloadable audio.

     In the past, the audio  environment  available to Internet users restricted
consumers to listening  directly from their PCs or through  players that allowed
short lengths of audio content.  Consumer electronics and computer manufacturers
have been  addressing  this  constraint  by developing  mobile  devices that are
capable of storing  more audio  content  for  consumers  to play.  According  to
Forrester  Research,  the  installed  base of  Internet-connected  digital audio
players  reached one  million  units in 1999 and is  estimated  to be 34 million
units by 2003.  We believe this  increase in digital audio players will directly
translate into  increased  demand for premium spoken word content to be heard on
these players.

     We believe  that  wireless  telephone  and wireless  applications  protocol
("WAP")  technology is the ideal match for hand-held digital audio players.  The
combination of wireless  freedom and digital  transmission  will, in the future,
allow a consumer to download from a library of audio  recordings  and bypass the
anchored  desktop PC.  Forrester  predicts that carmakers will install  personal
audio  recorders.  By placing hard drives in cars and partnering with technology
companies,  vehicle  manufacturers  will be able to provide commuters a solution
for on-demand audio.

Competition

     We compete with other web sites, which offer similar entertainment products
or content,  including digital download, of 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.


                                       9
<PAGE>


     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; and

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

Intellectual Property

     We have a United States  registered  trademark for the Audio Book Club logo
and have several pending United States trademark and service mark registrations,
including "MediaBay," "Radio Spirits",  "MediaBay.com,"  "audiobookclub.com" and
the  MediaBay  logos.  We have  applied for  several  additional  service  marks
relating to slogans and designs used in our advertisements,  member mailings and
member solicitation  packages.  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 the radio and video 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.

Employees

     As of March 25, 2002, we had 48 full-time employees.  Of these employees, 5
served in corporate management;  27 served in operational positions at our Audio
Book  Club  operations;  1 served  in  management  and 4 served  in  operational
positions at our MediaBay.com  operations and 11 served in operational positions
at our  old-time  radio and classic  video  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  and old-time  radio and classic
video programs has expanded rapidly in recent years. However,  consumer interest
in audiobooks  and old-time  radio and classic video programs 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 and classic video
programs  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,   old-time  radio  and  classic  video
industries.  These changes  include  economic  factors  affecting  discretionary
consumer spending,  modifications in consumer  demographics and the availability
of other forms of entertainment. The audiobook, old-time radio and classic video
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;


                                       10
<PAGE>


     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 web sites 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.

     We could lose sales  opportunities  if we are unable to  continue to obtain
the rights to additional  audiobook libraries or selected audiobook titles. Many
of our license  agreements  with audiobook  publishers are one to three years in
length,  and some of our  agreements  will expire over the next  several  months
unless they are renewed. 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 a substantial portion of our customer service
operations,  process orders and collect payments for us. If these providers fail
to perform their  services  properly,  Audio Book Club members and Radio Spirits
customers  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.  Events in the
Fall of 2001,  including  individuals  contracting  Anthrax through  unsolicited
mail,  could alter the  public's  acceptance  of direct  mail.  Negative  public
reception of direct mail solicitations will result in lower customer acquisition
rates,  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


                                       11
<PAGE>


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.

     If the recent trend of bankruptcy filings by major retailers continues, the
number of outlets for our old-time radio product will become limited. 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 Audio Book Club  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
certain  of 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 protect our
trade  secrets.  If our lists or other  proprietary  information  were to become
generally available, we might lose a 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, 2001,  we owed  approximately  $13.9  million to trade and
other creditors.  Approximately $2.8 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 a product return rate of  approximately  26% during the year
ended December 31, 2000 and a return rate of  approximately  24% during the year
ended December 31, 2001. 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.


                                       12
<PAGE>


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.  Unanticipated  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; and

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

The market for digital download of spoken word content is uncertain,  and we may
not be able to participate in this market effectively or at all.

     Digital  download of spoken word  content from the Internet is a relatively
new method of  distribution  and its growth and market  acceptance is uncertain.
Purchasing  spoken word  content over the  Internet in digital  download  format
involves adjustments in general consumer purchasing patterns,  and consumers may
not be willing to purchase spoken word content in digital download format. If we
invest  significant  amounts of money and effort in developing  digital download
products,  which do not  achieve  widespread  popularity,  or if the  market for
digital download of spoken word content does not evolve as we anticipate, we may
not be able to recover our investment.

The loss or  unavailability  of our key personnel could have a material  adverse
effect on our business.

     Our success depends largely on the efforts of Norton Herrick, our Chairman,
Michael Herrick, our Chief Executive Officer, and Hakan Lindskog,  our President
and  Chief  Operating  Officer.  Norton  Herrick  is  actively  involved  in the
management and operation of several businesses and is required to devote only as
much time to our  business  and  affairs as he deems  necessary  to perform  his
duties.  Norton  Herrick may experience a conflict in the allocation of his time
among his  various  business  ventures.  The loss of the service of any of these
officers or of other key personnel  could have a material  adverse effect on our
business. We do not maintain key-man insurance on the lives of these officers or
any other key personnel.

Our announced  strategy of pursuing  acquisitions  could  negatively  impact our
operating results.

     While we have announced a strategy,  which includes growing by acquisition,
as of March 25, 2002, we have not completed a major acquisition since June 1999.
The legal and professional  costs associated with pursuing  acquisitions as well
as the time commitment of senior  management could have a negative impact on our
operating results.  There can be no assurance that we will realize the perceived
benefits of an acquisition.


                                       13
<PAGE>


Risks Related to Our Financial Condition

We have a history of losses,  are not currently  profitable and may incur future
losses.

     Since our inception,  we have incurred significant losses. We had losses of
$6.7 million during the year ended  December 31, 1999;  $54.6 million during the
year ended  December 31, 2000 and $4.8  million for the year ended  December 31,
2001. As of December 31, 2001, we had an accumulated deficit of $89.7 million.

We may not be able to meet our  obligations  to repurchase  shares of our common
stock in the future.

     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.  We may not have  sufficient  funds to meet  these
obligations to repurchase stock in the future.

Risks Related to Our Capital Structure

The Herrick family exerts significant influence over shareholder matters.

     As of December 31, 2001, Norton Herrick, Michael Herrick and Howard Herrick
and their affiliates own approximately 32.7% of our outstanding common stock. As
significant  shareholders  and directors,  they are generally able 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,  2001,  we had  approximately  $6.2  million  of  debt
outstanding  under our  revolving  line of credit  and $12.5  million  principal
amount of debt  outstanding  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 may have to make substantial  payments on our debt and may not have the funds
to do so.

     We are required to make an additional $1.3 million in principal payments on
our bank debt in 2002 and the  balance of our bank  debt,  in the amount of $4.6
million is due January 15, 2003.  We also have $2.5 million and $800,000 due to
a company  wholly  owned by our  Chairmain  in January  2003 and April 2003.  We
believe  the $3.3  million  will be  extended  if  required.  We might  not have
sufficient funds to repay the debt or 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 could become due and payable.

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. The additional equity financing we obtained in
connection with recent financings has resulted in an ownership change and, thus,
may  limit  our use of 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  after tax net income


                                       14
<PAGE>


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 of our  restricted  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 December 31, 2001,  we have  outstanding  approximately  13.9 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 two  years  and are
eligible for sale under Rule 144(e). There are currently outstanding options and
warrants  and  other  convertible  securities  to  purchase  an amount of shares
substantial  to the public  float.  Substantially  all 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.

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.

     We lease 8,000 and 8,400 square feet in  Schaumburg,  Illinois  pursuant to
two lease agreements which both expire in December 2005, subject to a three-year
renewal option. Monthly rent for the first lease is $5,000. These spaces contain
both office and warehouse  space,  which was used by RSI until the first quarter
of 2002.  Monthly  rent for the second  lease is $4,000 base rent and $2,000 per
month related to lessor's leasehold  improvements.  We are currently negotiating
the sublease for one of the spaces and have begun  seeking  tenants to sub-lease
the other space from us, but as of March 25, 2002,  we have not  subleased  this
space.

     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.


                                       15
<PAGE>


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

     An Annual  Meeting of  Shareholders  was held on October 22, 2001, at which
time Mr. Norton  Herrick was  reappointed to serve as a Class I director and Mr.
Paul Ehrlich was appointed to serve as a Class I director,  in each case,  until
the  Annual  Meeting  of  Shareholders  of  the  Company  to be  held  in  2004.
Shareholder voting for these directors was as follows:

              Director                Votes For              Votes Withheld
              --------                ---------              --------------
Norton Herrick                        11,000,730                286,843
Paul Ehrlich                          11,000,730                286,843

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

              Director                  Class              Expiration of Term
              --------                  -----              ------------------
Michael Herrick                           II                      2002
Roy Abrams                                II                      2002
Howard Herrick                           III                      2003
Carl Wolf                                III                      2003

     In  addition,  at the  meeting,  the  Company's  shareholders  adopted  and
approved the  Company's  2001 Stock  Incentive  Plan by a vote of 5,864,820  for
450,176 against and 41,113 abstaining.

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, 2000
           First Quarter                                16.875       6.625
           Second Quarter                                7.625       2.938
           Third Quarter                                 3.125       1.406
           Fourth Quarter                                3.813        .563
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 (through March 25, 2002)         3.44         .59

     On March 25, 2002 the last  reported  sale price of our common stock on the
Nasdaq  National  Market was $3.30 per share.  As of March 25, 2002,  there were
approximately  110 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.


                                       16
<PAGE>


Sales of Securities and Use of Proceeds

     In October 2001, we issued  warrants to purchase a total of 800,000  shares
of common  stock,  which  cannot vest until  November  30,  2002,  pursuant to a
consulting  agreement.  The  exercise  prices of the  warrants  are as  follows:
160,000  have an  exercise  price of $1.00 per share;  160,000  have an exercise
price of $2.00 per share;  160,000  have an  exercise  price of $3.00 per share;
160,000  have an  exercise  price of $4.00 per share;  160,000  have an exercise
price of $5.00 per share.  During the three months ended  December 31, 2001,  we
issued  options  under our 2000  Stock  Incentive  Plan to  purchase  a total of
808,000  shares of our common stock to officers,  directors  and  employees.  We
relied on the exemptions  provided by Section 4(2) of the Securities Act of 1933
in connection with such issuances.

Item 6.   Selected Financial Data

     The selected  financial  data set forth below should be read in conjunction
with the  financial  statements  and related  notes  thereto  and  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
other financial  information appearing elsewhere in this Form 10-K. The selected
financial  data set forth  below as of  December  31,  2001 and 2000 and for the
years  ended  December  31,  1999,  2000 and 2001,  are  derived  from,  and are
qualified by reference to, our audited financial  statements  included elsewhere
in this Form 10-K.  The selected  financial  data set forth below as of December
31, 1997,  1998 and 1999, and for the years ended December 31, 1997 and 1998 are
derived from our audited financial statements not included in this Form 10-K.

     The  balance  sheet and  statement  of  operations  data 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 a very large portion
of direct response advertising expenditures.

     Beginning in July 2000, we conducted a review of our operations,  including
product  offerings,  marketing methods and fulfillment.  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.


                                       17
<PAGE>


     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.

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                    --------------------------------------------------------------------
                                                      1997           1998          1999            2000          2001
                                                    --------       --------       --------       --------       --------
                                                                       (thousands, except per share data)
<S>                                                 <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:
Sales                                               $ 15,119       $ 22,242       $ 62,805       $ 59,881       $ 54,904
Returns, discounts and allowances                      5,041          7,348         16,578         15,455         13,099
                                                    --------       --------       --------       --------       --------
        Net sales                                     10,078         14,894         46,227         44,426         41,805
Cost of sales                                          5,495          9,452         23,687         23,044         19,783
Cost of sales - write-downs                               --             --             --             --          2,261
Advertising and promotion                              6,843          8,910          8,118         11,023         11,922
Advertising and promotion - write-downs                   --             --             --             --          3,971
General and administrative                             2,217          3,330          9,799         13,964         11,483
Asset write-downs and strategic charges                   --             --             --             --          7,044
Depreciation and amortization                              8            367          6,812          7,984          5,156
Non-cash write-down of goodwill                           --             --             --         38,226             --
                                                    --------       --------       --------       --------       --------
        Operating loss                                (4,485)        (7,165)        (2,189)       (49,815)       (19,815)
Interest (expense) income, net                          (436)           180         (4,518)        (2,681)        (2,235)
                                                    --------       --------       --------       --------       --------
        Loss before income tax benefit and
            extraordinary item                        (4,921)        (6,985)        (6,707)       (52,496)       (22,050)
Income tax benefit                                        --             --             --             --         17,200
                                                    --------       --------       --------       --------       --------
        Loss before extraordinary item                (4,921)        (6,985)        (6,707)       (52,496)        (4,850)
Extraordinary loss on early extinguishment
        of debt                                           --             --             --         (2,152)
                                                    --------       --------       --------       --------       --------
        Net loss                                    $ (4,921)      $ (6,985)      $ (6,707)      $(54,648)      $ (4,850)
                                                    ========       ========       ========       ========       ========
Basic and diluted net loss per share
        before extraordinary item                   $  (1.29)      $  (1.13)      $  (0.82)      $  (4.13)      $  (0.35)
                                                    ========       ========       ========       ========       ========
Basic and diluted net loss per share                $  (1.29)      $  (1.13)      $  (0.82)      $  (4.30)      $  (0.35)
                                                    ========       ========       ========       ========       ========
Weighted average number of shares
        outstanding                                    3,820          6,188          8,205         12,718         13,862
                                                    ========       ========       ========       ========       ========


Balance Sheet Data:
Working capital (deficit)                           $  9,645       $  6,571       $  5,967       $  7,833       $     (3)
Total assets                                          12,770         64,339         93,973         49,932         45,003
Current liabilities                                    3,017          8,231         20,275         17,103         15,491
Long-term debt                                            --         40,000         37,383         15,864         17,064
Common stock subject to contingent put rights             --          8,284          4,283          4,550          4,550
Stockholders' equity                                   9,753          7,824         32,032         12,415          7,898
</TABLE>


                                       18
<PAGE>


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

Introduction

     Beginning in July 2000, we conducted a review of our operations,  including
product offerings,  marketing methods and pricing. 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.
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" ("FASB 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.

     As a result of the  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.

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.  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.


                                       19
<PAGE>


     We believe  the  following  critical  accounting  policies  affect our more
significant  judgments and estimates used in the preparation of our consolidated
financial statements:

     o    We record  reductions to our revenue for future  returns and record an
          estimate  of future  bad  debts  arising  from  current  sales.  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.  Also, if the financial condition of our
          customers,  including both individual consumers or retail chains, were
          to  deteriorate,  resulting in their  inability to make payment to us,
          additional allowances would be required.

     o    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.  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. The difference between
          the amount  expended of $8.2  million for the year ended  December 31,
          2001 and the amount recorded as advertising and promotion expense,  of
          $11.9  million,  for  the  year  ended  December  31,  2001  is due to
          amortization of previously capitalized direct response advertising.

     o    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.  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.

     o    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, 2001,
          we had unamortized goodwill in the amount of $8.6, which is subject to
          the  transition  provisions  of SFAS No.  142.  We do not  believe the
          transitional  impairment  provisions of this  statement  will have any
          impact on our financial statements


                                       20
<PAGE>


Overview

     We are a leading 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 2001, our Audio
Book  Club  segment  had net sales of  approximately  $31.8  million,  our Radio
Spirits segment had net sales of approximately  $10.0, our MediaBay.com  segment
had sales of approximately $0.25 million and we had inter-segment sales of $0.26
million.

     Our content  library  consists of more than  50,000  hours of spoken  audio
content including audiobooks,  old-time radio shows and other unique spoken word
content.  The majority of our content is acquired  under license from the rights
holders  enabling us to manufacture the product giving us  significantly  better
product margins than other companies.

     Our customer base  includes  over 2.6 million  spoken audio buyers who have
purchased  via catalogs and direct mail  marketing.  We also  currently  have an
additional 2.2 million e-mail  addresses of spoken audio buyers and  enthusiasts
online.  Our old-time  radio  products are sold in over 7,000 retail  locations,
including Costco,  Target, Sam's Club, Barnes & Noble,  Borders,  Cracker Barrel
Old Country Stores and Amazon.com.

     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 and  nostalgia  video  streams of our
content  on a  monthly  basis  to web  site  visitors  at  RadioSpirits.com  and
MediaBay.com.

     Our  marketing  programs  have  consisted  primarily of direct mail,  media
advertising  and  marketing  on the  Internet.  We  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 future benefit, based on our historical experience.

Results of Operations

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

<TABLE>
<CAPTION>
                                                                          Year Ended
                                                                         December 31,
                                                               1999          2000          2001
                                                               ----          ----          ----
<S>                                                            <C>           <C>           <C>
Net sales.............................................          100%          100%          100%
                                                               ====          ====          ====
Cost of sales.........................................           51            52            47
Cost of sales - write-downs...........................           --            --             5
Advertising and promotion.............................           18            25            29
Advertising and promotion - write-downs...............           --            --            10
General and administrative expense....................           21            31            28
Asset write-downs and strategic charges...............           --            --            17
Depreciation and amortization expense.................           15            18            12
Non-cash write-down of goodwill.......................           --            86            --
Interest income (expense), net........................         (10)           (6)           (5)
Income tax benefit....................................           --            --            41
Extraordinary loss on early extinguishment of debt....           --           (5)            --
Net loss..............................................         (15)         (123)          (12)
</TABLE>


                                       21
<PAGE>


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

     Gross sales decreased $5.0 million,  or 8.3%, to $54.9 million for the year
ended December 31, 2001 from $59.9 million for the year ended December 31, 2000.
The decrease in gross 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. In addition,  in the
beginning of 2001,  we revised the logic used in  determining  customer  product
shipments,  which  resulted in lower gross  sales but also lower  return  rates.
Returns,  discounts and  allowances  declined $2.4 million,  or 15.2%,  to $13.1
million for the year ended  December  31,  2001 from $15.5  million for the year
ended  December 31, 2000.  Returns,  discounts and allowances as a percentage of
gross sales were 23.9% in 2001 as compared to 25.8% of gross sales for the prior
comparable  period  due  to  aforementioned  revisions  in  the  logic  used  in
determining customer shipments.

     Principally  as a result of lower gross  sales,  partially  offset by lower
return  rates,  net sales for the year ended  December 31, 2001  decreased  $2.6
million, or 5.9%, to $41.8 million from $44.4 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.  Excluding  the  write-down,  cost of sales for the year
ended December 31, 2001 decreased $3.3 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 $2.5 million,  or 17.8%, to
$11.5  million for the year ended  December 31, 2001 from $14.0  million for the
prior  comparable  period.  General and  administrative  expense  decreases  are
principally attributable to decreases in bad debt expenses commensurate with the
reduction in net sales,  payroll and related costs due to  previously  announced
staff  reductions,  office  expenses,  telephone costs related to a reduction in
"800"  service  calls,  travel  costs,  public  relations  costs and  consulting
services principally  relating to Internet maintenance and development.  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);

     o    $2.4 million 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    $1.9  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;


                                       22
<PAGE>


     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,  $2.3 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 $5.0 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 cost method 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.

     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" ("FASB 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.

     Net interest  expense for the year ended  December 31, 2001  decreased $0.5
million to $2.2 million as compared to net interest  expense of $2.7 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.

     Net loss before income tax benefit for the year ended December 31, 2001 was
$22.1 million as compared to a net loss before income taxes and an extraordinary
item in 2000 of $52.5 million for the year ended December 31, 2000.


                                       23
<PAGE>


     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
$4.9 million, or $0.35 per share of common stock for the year ended December 31,
2001,  as compared  to a net loss of $54.6  million or $4.30 per share of common
stock for the year ended December 31, 2000.

Year ended December 31, 2000 compared with year ended December 31, 1999

     Gross sales decreased $2.9 million,  or 4.7%, to $59.9 million for the year
ended December 31, 2000 from $62.8 million for the year ended December 31, 1999.
The  decrease in gross  sales was  primarily  attributable  to a slowdown in the
aggressive marketing at both Audio Book Club and Radio Spirits. In addition,  we
revised the logic used in determining customer product shipments, which resulted
in lower gross sales but also lower return rates. We also instituted a policy of
offering higher discounts, which resulted in lower dollar sales. This policy was
subsequently  eliminated.   Returns,  discounts  and  allowances  declined  $1.1
million,  or 6.8%,  to $15.5  million for the year ended  December 31, 2000 from
$16.6  million for the year ended  December 31,  1999.  Returns,  discounts  and
allowances  as a  percentage  of gross  sales were 25.8% in 2000 as  compared to
26.4% of gross sales for the prior comparable period. The decrease in returns is
due to  aforementioned  revisions  in the  logic  used in  determining  customer
shipments, as well as lower gross sales.

     Principally  as a result of lower gross  sales,  partially  offset by lower
return  rates,  net sales for the year ended  December 31, 2000  decreased  $1.8
million, or 3.9%, to $44.4 million from $46.2 million.

     Cost of sales  decreased  $0.6  million,  or 2.7%, to $23.0 million for the
year ended  December 31, 2000 from $23.7 million for the year ended December 31,
1999.  Gross profit  decreased  $1.2 million,  or 5.1%, to $21.4 million for the
year ended  December 31, 2000 from $22.5 million for the year ended December 31,
1999.  Gross profit as a percentage  of net sales was 48.1% as compared to 48.8%
in the prior  comparable  period.  In 2000, we offered an "everyday low pricing"
discount  structure  to Audio  Book Club  members  via both the  catalog  and at
Audiobookclub.com.  Beginning  in January  2001,  we  eliminated  this  discount
structure.

     Advertising  and promotion  expenses  increased  $2.9 million or 35.8%,  to
$11.0 million for the year ended  December 31, 2000 compared to $8.1 million for
the year ended December 31, 1999.  Actual amounts  expended for  advertising and
promotion in the year ended December 31, 2000 were $14.3 million,  a decrease of
$3.1  million  from the amount  expended in the year ended  December 31, 1999 of
$17.4  million.  The  difference  between  the  amount  expended  and the amount
recorded as expense is due to the capitalization of direct response advertising.
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 amortize
these costs over the period of future benefit.  Since 1999 was the first year we
capitalized new member  acquisitions  costs, we capitalized a very large portion
of direct response advertising expenditures.


                                       24
<PAGE>


     General and administrative  expenses  increased $4.2 million,  or 42.5%, to
$14.0  million for the year ended  December  31, 2000 from $9.8  million for the
prior  comparable  period.  General and  administrative  expense  increases  are
principally  attributable  to increased  personnel and related  costs  including
costs of  bringing  RSI  fulfillment  in-house,  investor  and  public  relation
expenses and consulting  expenses,  including  outside Internet  development and
maintenance expenses.

     Depreciation  and  amortization  expenses  increased  $1.2  million to $8.0
million  for the year ended  December  31,  2000 from $6.8  million for the year
ended  December 31, 1999.  The increase is principally  due to  amortization  of
goodwill and other  intangible  assets in  connection  with our  acquisition  of
Doubleday Direct's Audiobooks Direct.

     Net interest  expense for the year ended  December 31, 2000  decreased $1.8
million to $2.7 million as compared to net interest  expense of $4.5 million for
the year ended  December  31,1999.  The  Company  has  reduced its debt by $24.8
million since December 31, 1999.

     Loss before  extraordinary  item for the year ended  December  31, 2000 was
$52.5  million or $4.13 per share as compared  to a net loss of $6.7  million or
$.82 per share for the year ended December 31, 1999.

     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.

     Primarily due to the write-off of goodwill of $38.2  million,  net loss for
the year ended  December 31, 2000 was $54.6 million or $4.30 per share of common
stock as  compared  to a net loss of $6.7  million  or $.82 per  share of common
stock for the year ended December 31, 1999.

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  reduced  cash used in
operations  in  2001,  there  can be no  assurance  that  we  will  not  require
additional   financing  to  repay  debt,   fund  the  expansion  of  operations,
acquisitions,  working capital or other related uses. The asset  write-downs and
strategic  charges  taken in 2001 are not  expected to impact  future cash flows
except for $0.5 million of accrued lease  termination  costs in connection  with
the closing of the Schaumburg,  Illinois facility,  assuming the facility is not
sub-leased.

     We are  required  under  our the loan  agreement  for our bank debt to make
payments on our debt, in 2002, as follows:

     o    A payment of $300,000 was made in March 2002.

     o    Payments of $200,000 are due May 31 and June 30,2002.

     o    Monthly  payments  of  $150,000  are  due at the  end  of  each  month
          beginning in July 2002 and ending December 31, 2002.

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

     We also have  notes to  Huntingdon  Corporation  ("Huntingdon"),  a company
wholly owned by our Chairman, Norton Herrick of $2.5 million and $800,000. These
notes mature on January 15, 2003 and April 15, 2003, respectively.

     For the year ended  December 31, 2001,  our cash decreased by $0.4 million,
as we used net cash of $2.1 million and $0.3 million for operating and investing
activities,  respectively, and had cash provided by financing activities of $1.9
million.  Net cash used in operations  principally  consisted of the net loss of
$4.9 million, including a $17.2 million reduction in the valuation allowance for
deferred tax assets,  an increase in prepaid  expenses of $0.6 and a decrease in
accounts  payable  and  accrued  expenses  of $3.4  million.  Net  cash  used in
operations was partially  offset by asset  write-downs and strategic  charges of
$13.3 million,  depreciation and amortization  expenses  included in net loss of
$5.2 million,  a decrease in accounts  receivable of $0.3 million, a decrease in
inventories of $0.3 million,  a decrease in royalty advances of $0.6 million and
a net decrease in deferred member acquisition costs of $3.7 million.


                                       25
<PAGE>


     The increase in prepaid  expenses is principally  the result of advertising
costs  incurred  in December  2001 for an Audio Book Club direct mail  campaign,
which mailed in January 2002.  The decrease in accounts  payable is  principally
due to  payments  made to  vendors  as our cash  flow  improved  and  settlement
agreements  we entered  into with  certain  vendors.  The  decrease  in accounts
receivable was primarily  attributable  to lower net sales and to the collection
of retail  receivables,  net of returns,  at our old-time  radio  business.  The
decrease in  inventories  is  principally  due to a  reduction  in the number of
titles offered for sale.  The decrease in deferred  member  acquisition  cost is
principally due to settlements with direct response vendors,  principally on the
Internet,  and  reductions  in the  size  of  our  direct  response  advertising
campaigns resulting in better response rates.

     Cash used in investing  activities was for the acquisition of fixed assets;
principally  for  kiosks to be placed at  certain  retail  stores  and  computer
equipment, and the acquisition of certain rights relating to our video products.

     On May 14, 2001, we issued a $2.5 million secured senior  convertible  note
to  Huntingdon  Corporation  ("Huntingdon"),  a  company  wholly  owned  by  our
chairman,  Norton Herrick. In addition,  we issued a $0.8 million secured senior
subordinated  convertible  note to Huntingdon for advances  previously  received
including an advance of $0.3 million  received in February  2001.  For a further
description  of  these  transactions,  see Note 7 of the  Notes to  Consolidated
Financial Statements presented elsewhere in this Form 10-K.

     On May 14, 2001, we modified a $2.0 million senior subordinated convertible
note held by Norton Herrick. We also modified a $3.0 million senior subordinated
convertible  note held by Evan  Herrick,  Norton  Herrick's  son.  For a further
description  of  these  transactions,  see Note 7 of the  Notes to  Consolidated
Financial Statements presented elsewhere in this Form 10-K.

     In September  2001 and December  2001, in accordance  with our revised loan
agreement,  we made principal  payments on our revolving credit facility of $0.1
million and $0.3 million,  respectively. At December 31, 2001, the amount we may
borrow  under  the  revolving  loan  agreement  was  $6.2  million,  the  amount
outstanding  under the  revolving  loan  agreement.  In March  2002,  we made an
additional  $0.3  million loan  payment,  as of March 25, 2002 the amount we may
borrow under the revolving loan agreement was $5.9 million, which was the amount
outstanding under the revolving loan agreement.

     On  January  18,  2002,  Evan  Herrick,  a  principal  shareholder  of  the
Registrant,  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 February 22, 2002,  Huntingdon purchased a $0.5 million principal amount
convertible  senior  promissory  note due June 30, 2003. The note is convertible
into shares of Common  Stock at the rate of $0.56 of principal  and/or  interest
per share.  This note was issued in consideration of a $0.5 million loan made to
the Company by Huntingdon.

     On April 1, 2002,  Huntingdon  extended the  maturity  date of (1) the $2.5
million  secured senior  convertible  note to January 15, 2003 and (ii) the $0.8
million secured senior  subordinated  convertible  note to April 15, 2003 for no
additonal consideration.

     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.


                                       26
<PAGE>


Recently Issued Accounting Standards

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets".  SFAS No. 141 requires that all business  combinations be accounted for
under the purchase method.  The statement further requires separate  recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 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 remainder of fiscal 2001 at which
time  amortization  ceased,  and  we are  currently  performing  a  transitional
goodwill  impairment  test.  SFAS No. 142 is  effective  for our fiscal  periods
beginning January1,  2002. At December 31, 2001, we had unamortized  goodwill in
the amount of $8.6,  which is subject to the  transition  provisions of SFAS No.
142. We do not believe the transitional  impairment provisions of this statement
will have any impact on our financial  statements.

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143,  "Accounting  For Asset  Retirement  Obligations"  ("SFAS  143").  This
Statement   addresses   financial   accounting  and  reporting  for  obligations
associated with the retirement of tangible  long-lived assets and the associated
asset  retirement  costs.  It applies to legal  obligations  associated with the
retirement of long-lived assets that result from the acquisition,  construction,
development  and (or) the normal  operation  of a long-lived  asset,  except for
certain  obligations of lessees.  This standard  requires entities to record the
fair  value of a  liability  for an asset  retirement  obligation  in the period
incurred.  When the liability is initially  recorded,  the entity  capitalizes a
cost by increasing the carrying  amount of the related  long-lived  asset.  Over
time,  the  liability  is  accreted to its present  value each  period,  and the
capitalized cost is depreciated over the useful life of the related asset.  Upon
settlement of the  liability,  an entity either  settles the  obligation for its
recorded  amount or incurs a gain or loss upon  settlement.  We are  required to
adopt the  provisions  of SFAS 143 at the  beginning of our fiscal year 2003. We
have not determined the impact, if any, the adoption of this statement will have
on our financial position or results of operations.

     In  October  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets"  ("SFAS  144").  This  Statement  addresses  financial   accounting  and
reporting for the  impairment or disposal of long-lived  assets.  This Statement
supersedes FASB Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed  Of", and the  accounting  and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
-  Reporting  the  Effects  of  Disposal  of  a  Segment  of  a  Business,   and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
Statement  also  amends  ARB No. 51,  "Consolidated  Financial  Statements",  to
eliminate the exception to  consolidation  for a subsidiary for which control is
likely to be temporary.  This Statement  requires that one  accounting  model be
used for long-lived  assets to be disposed of by sale,  whether  previously held
and used or newly  acquired.  This Statement also broadens the  presentation  of
discontinued operations to include more disposal transactions. The provisions of
this Statement are required to be adopted by the Company at the beginning of its
fiscal year 2002.  We have not  determined  the impact,  if any, the adoption of
this statement will have on our financial position or results of operations.


                                       27
<PAGE>


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 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.

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. Interest on $8,680 of our long-term debt is payable at the prime
rate plus 2%. 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 2001 or
2000.

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.


                                       28
<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:

Name                            Age      Position
----                            ---      --------
Norton Herrick                  63       Chairman and Director

Michael Herrick                 35       Chief Executive Officer and Director

Howard Herrick                  37       Executive Vice President and Director

Hakan Lindskog                  41       President and Chief Operating Officer

Stephen M. McLaughlin           35       Executive Vice President and Chief
                                         Technology Officer

John F. Levy                    46       Executive Vice President and Chief
                                         Financial Officer

Robert Toro                     37       Senior Vice President of Finance

Roy Abrams                      58       Director

Paul Ehrlich                    57       Director

Carl T. Wolf                    58       Director


     Norton  Herrick,  63, 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 and
through his  wholly-owned  affiliates,  Mr. Herrick has completed  transactions,
including  building,  managing and marketing  primarily real estate valued at an
aggregate of approximately $2 billion.  Mr. Herrick serves on the National Board
of Directors for People for the American Way. Mr. Herrick served on the advisory
board of the Make-A-Wish  Foundation and the advisory  committee of the National
Multi Housing Council.  Mr. Herrick is the father of Michael Herrick,  our Chief
Executive  Officer  and a  director,  and Howard  Herrick,  our  Executive  Vice
President and a director.

     Michael  Herrick,  35, is our co-founder  and has been our Chief  Executive
Officer since January 2000 and a director since our  inception.  Mr. Herrick 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 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.

     Howard  Herrick,  37, 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. and is
currently its President. 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 Norton  Herrick,  our  Chairman  and  brother  of Michael
Herrick, our Chief Executive Officer, President and director.


                                       29
<PAGE>


     Hakan Lindskog, 41, 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.

     Stephen M. McLaughlin,  35, 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 it was acquired by Preferred
Employers  Holdings 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.

     John F.  Levy,  46,  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 was Senior Vice President of Tamarix Capital Corporation
and had previously  served as Chief Financial Officer of both public and private
entertainment  and  consumer  goods  companies.  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.

     Robert Toro,  37, 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 progressive  experience  with the national  public  accounting firm of Arthur
Andersen where he was employed immediately prior to joining Marvel Entertainment
Group.

     Roy Abrams,  58, has been a director of MediaBay since October 1997.  Since
April 1993 and from 1986 through  March 1990,  Mr. Abrams has owned and operated
Abrams Direct Marketing, a marketing consulting firm.

     Paul D. Ehrlich,  57, 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.


                                       30
<PAGE>


     Carl T. Wolf,  58, 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.

     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.  Michael Herrick and Roy Abrams are Class II directors
and stand for  re-election  at the 2002 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. Norton Herrick and Paul Ehrlich are Class I
directors  and  will  stand  for  re-election  at the  2004  annual  meeting  of
shareholders.  Our  executive  officers  serve at the direction of the Board and
until their successors are duly elected and qualified.

     Our Board of Directors held three  meetings  during the year ended December
31, 2001.  The meetings  were attended by all of the  directors.  The Board also
took action by unanimous written consent in lieu of meetings.

     We reimburse our  directors  for  reasonable  travel  expenses  incurred in
connection with their activities on our behalf,  but we do not pay our directors
any fees for Board participation.

Board Committee

     We have established an Audit Committee,  a Plan Committee and an Operations
Committee.  The  Audit  Committee  is  responsible  for  making  recommendations
concerning the engagement of independent public accountants, reviewing the plans
and results of the audit  engagement  with the independent  public  accountants,
approving  professional  services provided by the independent public accountants
and  reviewing  the  adequacy of our  internal  accounting  controls.  The Audit
Committee is currently comprised of Messrs. Paul Ehrlich (Chairman),  Roy Abrams
and Carl T. Wolf. We do not have standing compensation or nominating committees.

     The Plan  Committee is  responsible  to  administer  grants of awards under
MediaBay's 2000 and 2001 Stock Incentive Plans and all other matters relating to
the  Plans,  except  with  respect  to  persons  subject  to  Section  16 of the
Securities  Exchange Act of 1934. The Plan  Committee is currently  comprised of
Messrs. Norton and Michael Herrick.

     The  Operations  Committee is  empowered to authorize  MediaBay to issue or
grant a  limited  number  of  equity  securities  to  persons  or  entities  not
affiliated  with  MediaBay or any of its officers or directors.  The  Operations
Committee is currently comprised of Messrs. Norton and Michael Herrick.

Technology Advisory Board

     We have a Technology  Advisory  Board to assist in the further  development
and  implementation  of our new technologies,  partnerships,  joint ventures and
strategic  initiatives.  The  members of the  Technology  Advisory  Board are as
follows:

<TABLE>
<CAPTION>
Name                           Position                                    Company
----                           --------                                    -------
<S>                            <C>                                         <C>
Stephen McLaughlin,            Executive Vice President and
Chairman                       Chief Technology Officer                    MediaBay, Inc.

Rob Green                      Business Development Manager,               Microsoft Corporation
                               Digital Media Division,

Mort Greenberg                 Director, Integrated Partnerships           AskJeeves

Timothy W. Mattox              Technology Fund Director                    Dell Corporation

John Ramsey                    Chief Technology Officer                    Virtacon, Inc.

Michael Schoen                 Managing Director                           Credit Suisse First Boston

Harvey Stober                  Managing Partner                            Greystone Partners, L.P.

Carl T. Wolf (*)               Managing Partner                            Lakota Investment Group
</TABLE>

     (*) Mr. Wolf is also a director of MediaBay.


                                       31
<PAGE>


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 2001, all filing requirements
applicable to our officers,  directors,  and greater than 10% shareholders  were
complied with.

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.

Summary Compensation Table

<TABLE>
<CAPTION>
                                                                                             Long-Term Compensation
                                                          Annual Compensation                        Awards
                                                   -------------------------------            Securities Underlying
    Name and Principal Position                    Year        Salary       Bonus               Options/SAR's (#)
----------------------------------------           ----       --------      -----            -----------------------
<S>                                                <C>        <C>           <C>              <C>
Michael Herrick                                    2001       $175,000      50,000                   150,000
Chief Executive Officer                            2000        154,167      50,000                   600,000
                                                   1999        125,000          --                        --

Hakan Lindskog                                     2001        264,063      50,000                   175,000
President and Chief Operating Officer              2000        107,015          --                   150,000

John F. Levy                                       2001        180,000      17,500                        --
Executive Vice President and Chief                 2000        167,027      15,000                        --
Financial Officer                                  1999        152,125      12,500                    30,000

Steven M. McLaughlin                               2001        178,750          --                        --
Executive Vice President and Chief                 2000        167,500      25,000                    35,000
Technology Officer                                 1999        131,250      15,000                   158,000

Robert Toro                                        2001        159,087      17,500                    50,000
Senior Vice President Finance                      2000        141,784      10,000                    20,000
                                                   1999         97,125          --                    50,000
</TABLE>

     Mr. Lindskog joined MediaBay in June 2000, Mr.  McLaughlin  joined MediaBay
in February 1999 and Mr. Toro joined MediaBay in April 1999.


                                       32
<PAGE>


     The following table discloses  options granted during the fiscal year ended
December 31, 2001 to these executives:

Option/SAR Grants in Fiscal Year Ending December 31, 2001:

<TABLE>
<CAPTION>
                               Number of           % of Total
                                  Shares              Options
                              Underlying           Granted to
                                 Options         Employees in     Exercise Price
Name                             Granted          Fiscal Year           ($/share)   Expiration Date
----                          ----------         ------------     --------------    ---------------
<S>                           <C>                <C>              <C>               <C>
Michael Herrick                  150,000                16.7%              $ .50           11/23/11

Hakan Lindskog                    10,000                 1.1%              $1.00           04/02/07
                                  10,000                 1.1%              $2.00           04/02/07
                                   5,000                  .6%              $3.00           04/02/07
                                  50,000                 5.6%              $1.00           12/31/07
                                  50,000                 5.6%              $3.00           12/31/08
                                  50,000                 5.6%              $5.00           12/31/09

John F. Levy                          --                   --                 --                 --

Steven M. McLaughlin                  --                   --                 --                 --

Robert Toro                        5,000                  .6%              $1.00           04/02/07
                                   5,000                  .6%              $2.00           04/02/07
                                  20,000                 2.2%              $1.00           07/18/07
                                  20,000                 2.2%              $1.00           07/18/08
</TABLE>

     The following table sets forth information concerning the number of options
owned by these executives and the value of any in-the-money  unexercised options
as of December 31, 2001.  No options were  exercised by any of these  executives
during fiscal 2001.

Aggregated Option Exercises And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                    Number of Securities
                                  Underlying Unexercised               Value of Unexercised In-the
                               Options at December 31, 2001         Money Options at December 31, 2001
                             ---------------------------------      ----------------------------------
Name                         Exercisable         Unexercisable      Exercisable          Unexercisable
----                         -----------         -------------      -----------          -------------
<S>                          <C>                 <C>                <C>                  <C>
Michael Herrick                1,000,000                    --            18,000                    --

Hakan Lindskog                    75,000               250,000                --                    --

Steven McLaughlin                123,000                70,000             4,160                    --

John F. Levy                      80,000                    --                --                    --

Robert Toro                       70,000                50,000                --                    --
</TABLE>

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, 2001 was $.62.


                                       33
<PAGE>


Employment Agreements

     Effective  as of October 22, 2001,  we entered  into a one-year  employment
agreement  with  Norton  Herrick,  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.

     Effective January 1, 2002, we entered into a one-year employment  agreement
with Michael Herrick, which provides for an annual base salary of $175,000 and a
minimum  annual  bonus of  $50,000.  Mr.  Herrick's  salary  and bonus  shall be
reconsidered  at least  once  during  the term of the  agreement  and  shall not
necessarily be limited to such increase  granted other officers.  The employment
agreement requires Mr. Herrick to devote  substantially all of his business time
to  our  business  and  affairs.  The  agreement  contains  non-competition  and
non-solicitation  provisions for the term of the  employment  agreements and for
two  years  thereafter.   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 the total  compensation  received  from us
during the twelve months prior to the date of termination.

     We have entered into a 39-month  employment  agreement  with Hakan Lindskog
effective  October 1, 2001. The agreement  provides for an annual base salary of
$306,250  in the  first 12  months of his  employment,  $350,000  in the next 15
months of the agreement and an annual base compensation of $375,000 in the final
12 months of the agreement. Mr. Lindskog's agreement also provides for a minimum
bonus of $45,000  payable August 15, 2002,  August 15, 2003 and August 15, 2004.
Mr. Lindskog may also receive  performance-based  bonuses based on our achieving
minimum adjusted EBITDA targets.  These  performance  bonuses,  if any, would be
payable on April 1, 2003, 2004 and 2005. Pursuant to the agreement, we agreed to
grant to Mr. Lindskog options to purchase 150,000 shares of common stock. Of the
total  options  granted,  options with respect to 50,000 shares have an exercise
price of $1.00 and vest on December  31,  2002;  options  with respect to 50,000
shares have an exercise price of $3.00 and vest on December 31, 2003 and options
with  respect  to  50,000  shares  have an  exercise  price of $5.00 and vest on
December  31,  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.  Linskog'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 have  entered  into a  two-year  employment  agreement  with  John  Levy
effective November 10, 2001. The agreement provided 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 provided
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 agreed to grant 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 vest 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.


                                       34
<PAGE>


     We have  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 vest 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 March 25, 2002,  options to purchase an
aggregate  of 1,805,000  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 March 25,  2002,  options to purchase an  aggregate  of 1,174,600
shares of our common stock have been granted under the 1999 plan.

     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 March
25, 2002,  options to purchase an  aggregate  of 3,191,250  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 March
25,  2002,  no options to purchase  shares of our common stock have been granted
under the 2001 plan.

     As of March 25, 2002, of the options  granted  under our plans,  options to
purchase  5,242,000 shares of our common stock have been granted to our officers
and directors as follows: Norton Herrick -- 2,800,000 shares; Michael Herrick --
1,000,000  shares;  Howard Herrick -- 650,000 shares;  Hakan Lindskog -- 325,000
shares; John F. Levy -- 130,000 shares; Robert Toro -- 120,000 shares; Carl Wolf
-- 152,000  shares;  Stephen  McLaughlin -- 35,000 shares,  Roy Abrams -- 20,000
shares and Paul Ehrlich -- 10,000.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     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 March 25, 2002:

     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.

     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.


                                       35
<PAGE>


     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                                                         17,031,877 (1)                          56.8%
Evan Herrick                                                            5,652,222 (2)                          29.2%
Howard Herrick                                                          4,102,640 (3)                          28.2%
Michael Herrick                                                         1,488,460 (4)                          10.0%
Adage Capital Partners, L.P.
         Adage Capital Partners GP, L.L.C.
         Adage Capital Advisors, L.L.C                                    700,000 (5)                           5.0%
Phillip Gross                                                             700,000 (6)                           5.0%
Robert Atchinson                                                          700,000 (6)                           5.0%
Stephen M. McLaughlin                                                     158,300 (7)                           1.1%
Carl T. Wolf                                                              157,500 (8)                              *
Hakan Lindskog                                                            100,000 (9)                              *
John F. Levy                                                              98,000 (10)                              *
Robert Toro                                                               80,000 (11)                              *
Roy Abrams                                                                20,000 (12)                              *
Paul Ehrlich                                                              10,000 (13)                              *
                                                                    ------------                       -------------
All directors and executive officers as a group (10 persons)          22,758,317                                70.6%
                                                                    ============                       =============
</TABLE>

* Less than 1%

(1)  Represents (a) 150,700 shares of common stock held by Norton  Herrick,  (b)
     488,460 shares of common stock held by Howard  Herrick,  (c) 285,000 shares
     held by M.  Huddleston  Enterprises,  Inc.,  (d)2,800,000  shares of common
     stock issuable upon exercise of options, (e) 150,000 shares of common stock
     issuable  upon exercise of options  granted to Evan Herrick,  (f) 2,828,701
     shares  of  common  stock  issuable  upon  exercise  of  warrants,  and (g)
     10,329,016 shares issuable upon conversion of convertible promissory notes.
     Does  not  include  (i)  2,964,180   shares  held  by  the  Norton  Herrick
     Irrevocable  Trust and (ii) 46,229 shares which may become  issuable to Mr.
     Herrick upon exercise of warrants which may be required to be issued to Mr.
     Herrick. Evan Herrick has irrevocably granted to Norton Herrick sole voting
     and  dispositive  power with respect to the shares of common stock issuable
     upon  exercise  of  the  options  held  by  Evan   Herrick.   See  "Certain
     Relationships and Related Transactions."

(2)  Represents (a) 145,080 shares of common stock, (b) 892,857 shares of common
     stock  issuable  upon  conversion  of a  convertible  promissory  notes (c)
     150,000  shares of common stock  issuable  upon exercise of options and (d)
     4,464,285  shares of common stock  issuable  upon  conversion  of shares of
     Series A preferred  stock.  Does not include 150,000 shares of common stock
     issuable upon exercise of options as to which Evan Herrick has  irrevocably
     granted to Norton Herrick sole voting and dispositive  power.  See "Certain
     Relationships and Related Transactions."


                                       36
<PAGE>


(3)  Represents (a) 2,964,180 shares held by the Norton Herrick  Irrevocable ABC
     Trust,  (b) 488,460 shares of common stock held by Howard Herrick,  and (c)
     650,000  shares of common stock  issuable upon exercise of options.  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 shares of common stock held by
     Howard Herrick.

(4)  Represents  488,460  shares and 1,000,000  shares of common stock  issuable
     upon exercise of options.

(5)  Adage Capital Partners, L.P. ("ACP") directly owns 700,000 shares of common
     stock.  Adage Capital Partners GP, L.L.C.  ("ACPGP") is the general partner
     of ACP, and Adage Capital Advisors,  L.L.C.  ("ACA") is the managing member
     of ACPGP.  ACP has the power to dispose of and the power to vote the shares
     beneficially  owned by it,  which power may be  received by ACPGP.  ACA, as
     managing member of ACPGP, directs ACPGP's operations.

(6)  Messrs. Gross and Atchinson,  as managing members of ACA, have shared power
     to vote the common  stock  beneficially  owned by ACP. (7)  Represents  300
     shares  and  158,000  shares of common  stock  issuable  upon  exercise  of
     options.  Does not include  35,000  shares of common  stock  issuable  upon
     exercise of options.

(8)  Represents  5,000 shares of common stock and 152,500 shares of common stock
     issuable upon exercise of options.

(9)  Represents  shares of common stock issuable upon exercise of options.  Does
     not include 225,000 shares issuable upon exercise of options.

(10) Represents  1,000 shares of common stock and 97,000  shares of common stock
     issuable upon exercise of options.  Does not include 33,000 shares issuable
     upon exercise of options.

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

(12) Represents shares of common stock issuable upon exercise of options.

(13) Represents shares of common stock issuable upon exercise of options.


Item 13.  Certain Relationships and Related Transactions

     Companies  wholly owned by Norton Herrick,  our Chairman,  have in the past
provided  accounting,  administrative  and  general  office  services  to us and
obtained  insurance  coverage for us at cost since our inception.  We paid these
entities $88,000 and $133,000 for these services during the years ended December
31, 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  and  $25,000 in each of 2001 and 2000,  respectively  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.

     From December 1999 through February 2000,  Norton Herrick sold $6.2 million
principal  amount  of the  note  issued  to him in  December  1998 to two  third
parties.  Under a December 1998 agreement,  we issued to Mr. Herrick warrants to
purchase  145,221  shares of our common stock at an exercise  price of $8.41 per
share on terms which were  identical  to the warrants  issued to Mr.  Herrick in
December 1998.


                                       37
<PAGE>


     In January and February 2000,  Norton  Herrick sold $4.2 million  principal
amount of the note  issued to him in  December  1998 to two  unaffiliated  third
parties.  Under a December 1998 letter  agreement,  we 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.  No  compensation  has been  recognized  in
relation to this transaction.

     From  December  1999  through  February  2000,  Evan  Herrick,  son  of our
Chairman,  loaned us an  additional  $3.0  million  for which he  received  $3.0
million principal amount 9% convertible  promissory notes due December 31, 2004.
The notes were initially  convertible into shares of our common stock at $11.125
per share, which was the market value on the date the note was issued. The loans
evidenced by the notes were intended to be short-term and serve as a "bridge" to
replacement  financing.  At the time of issuance of the convertible  notes,  our
Board of  Directors  resolved to seek to replace or  refinance  the  convertible
notes and accept a proposal for refinancing,  whether or not (i) as favorable as
the convertible  notes  including,  without  limitation,  providing for a higher
interest rate or lower conversion  price,  (ii) requiring the issuance of equity
securities and/or (iii) requiring the payment of fees.

     In April and August 2000, our Board of Directors  determined  that reducing
the conversion price of the $3.0 million  principal amount 9% convertible  notes
due December 31, 2004 issued to Evan Herrick to the then current market value of
our common stock would be more favorable to us than  accepting the  alternatives
available to us to  refinance or replace the notes.  We revised the terms of the
$3.0 million  principal amount 9% convertible  promissory notes due December 31,
2004 to Evan Herrick. Evan Herrick has waived interest on the notes from July 1,
2000 to  December  31,  2000 and after  December  31,  2000 has agreed to accept
payment  of  interest  in cash or  common  stock  at our  option  under  certain
circumstances.

     In August 2000,  Norton Herrick sold the remaining  $2.8 million  principal
amount  of a 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 $0.8
million  principal  amount of the note into 440,000  shares of our 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 $2.0 million  principal  amount of the note,  which was not converted or paid
for. As a result of these transactions,  under a December 1998 letter agreement,
we issued to Mr. Herrick warrants to purchase an additional 18,480 shares of our
common stock at an exercise price of $8.41 per share. No  compensation  has been
recognized in relation to this transaction.

     In the fourth  quarter of 2000,  Glebe  Resources,  Inc., a company  wholly
owned by Norton Herrick ("Glebe"),  purchased $.2 million of audiobook inventory
from Doubleday Direct, Inc. MediaBay,  Inc. subsequently sold the audiobooks and
the funds  were  remitted  to Glebe in March  2001.  The  inventory  was sold at
Glebe's cost and Glebe did not profit by the transaction.

     Interest on subordinated  debentures held by a third party in the amount of
$97,000 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  $97,000 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 December 2000,  Huntingdon  Corporation,  an affiliate of Norton Herrick
("Huntingdon")  lent us $0.5  million and in February  2001 an  additional  $0.3
million. Huntingdon was issued a senior subordinated convertible note secured by
a second  lien on all of our assets and the assets of our  subsidiaries,  except
inventory,  receivables  and cash.  The note bears  interest  at 12%,  with such
interest


                                       38
<PAGE>


being  payable in kind,  common stock or cash at the holder's  option,  provided
that, if the holder elects to receive an interest  payment in cash, that payment
will accrue until we are permitted  under our revolving  credit facility to make
the cash payment. The note is due April 15, 2003. The notes are convertible into
shares of our common stock at the rate of $0.56 principal amount per share.

     On May 14, 2001, we issued a $2.5 million secured senior  convertible  note
to Huntingdon,  in consideration  for loans made by Huntingdon to the Company in
the amount of $2.5 million.  This note is convertible into MediaBay common stock
at a  conversion  rate of $0.56 per  share.  The  convertible  note,  in certain
respects,  ranks pari passu with the current revolving credit facility and has a
security interest in all our assets, except inventory, receivables and cash. The
note bears  interest at the prime rate plus 2% and matures on January 15,  2003.
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.

     On  May  14,  2001,  the  Company  also  modified  a  $2.0  million  senior
subordinated  convertible note held by Norton Herrick as  consideration  for Mr.
Herrick's  consent  to the  above  transactions,  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 and interest,  at Mr.
Herrick'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. Mr. Herrick was granted  registration rights
relating to the shares of common stock issuable upon conversion of the notes and
exercise of the warrants.

     In 2001,  Glebe,  on MediaBay's  behalf,  advanced a security  deposit to a
vendor in the amount of $100,000.  The advance was subsequently repaid and Glebe
received no compensation for and did not profit from this transaction.

     On January 18, 2002, Evan Herrick, a principal  shareholder of the Company,
exchanged  $2.5  million  principal  amount of a $3.0 million  principal  amount
convertible  note of  MediaBay  (the  "Note") in exchange  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  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.

     As  previously  agreed to with us, if we  required,  on February  22, 2002,
Huntingdon  purchased a $500 principal amount convertible senior promissory note
due June 30, 2003 (the "Note").  The Note is  convertible  into shares of Common
Stock at the rate of $0.56 of principal  and/or interest per share. The 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
commence on June 15, 2002.  Norton  Herrick,  our chairman,  has  guaranteed the
payments for no consideration from the Company.

     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.


                                       39
<PAGE>


     It is our  policy  that  each  transaction  between  us and  our  officers,
directors and 5% or greater shareholders will be on terms no less favorable than
could be obtained from independent third parties.

PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) Exhibits
------------
3.1      Restated Articles of Incorporation of the Registrant.+

3.2      Articles of Amendment to Articles of Incorporation.+++++

3.3      Articles of Amendment to Articles of Incorporation.++++++

3.4      Amended and Restated By-Laws of the Registrant.++++++

3.5      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.+++++++++++

10.1     Employment Agreement between the Registrant and Norton Herrick.

10.2     Employment Agreement between the Registrant and Michael Herrick.

10.3     Employment Agreement between the Registrant and Robert Toro.

10.4     Employment Agreement between the Registrant and John Levy.

10.5     Employment Agreement between our subsidiary and Hakan Lindskog.

10.6     Put  Agreement,  dated as of  December  11,  1998,  by and  between the
         Registrant and Premier Electronic Laboratories, Inc.+++

10.7     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.+++

10.8     $4,200,000   Principal  Amount  9%  Convertible   Senior   Subordinated
         Promissory  Note  of the  Registrant  to  ABC  Investment,  L.L.C.  due
         December 31, 2004.

10.9     Modification Letter, dated December 31, 1998, among Norton Herrick, the
         Registrant and Fleet National Bank+++

10.10    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.+++

10.11    1997 Stock Option Plan+

10.12    1999 Stock Incentive Plan++++

10.13    2000 Stock Incentive Plan+++++++

10.14    2001 Stock Incentive Plan++++++++++

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

10.16    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. +++++++++

10.17    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. +++++++++

10.18    $1,984,250   principal  amount  9%  convertible   senior   subordinated
         promissory note of Registrant issued to Norton Herrick due December 31,
         2004. +++++++++


                                       40
<PAGE>


(a) Exhibits
------------
10.19    $500,000 principal amount 9% convertible senior subordinated promissory
         note of Registrant issued to Evan Herrick due December 31, 2004.

10.20    $2,500,000  principal  amount  convertible  senior  promissory  note of
         Registrant  issued  to  Huntingdon   Corporation   ("Huntingdon")   due
         September 30, 2002. +++++++++

10.21    $800,000   principal   amount  12%  convertible   senior   subordinated
         promissory  note of Registrant  issued to  Huntingdon  due December 31,
         2002. +++++++++

10.22    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. +++++++++

10.23    $500,000   principal  amount  convertible  senior  promissory  note  of
         Registrant issued to Huntingdon due June 30, 2003.

21.1     Subsidiaries of the Company.++++++++

23.1     Consent of Deloitte and Touche LLP.

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

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

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

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

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

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

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

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

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

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

+++++++++++   Incorporated by reference to the applicable  exhibit  contained in
              our Current Report on Form 8-K for reportable  event dated January
              18, 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, 1998.

     None.


                                       41
<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/ Norton Herrick
                                                      --------------------------
                                                      Norton Herrick, Chairman

     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                Director and Chairman (Principal Executive Officer)        April 1, 2002
------------------------------
        Norton Herrick


     /s/ Michael Herrick                Director, Chief Executive Officer and President            April 1, 2002
------------------------------
       Michael Herrick


      /s/ Howard Herrick                Director and Executive Vice President                      April 1, 2002
------------------------------
        Howard Herrick


       s/ John F. Levy                  Executive Vice President and Chief Financial Officer       April 1, 2002
------------------------------          (Principal Financial and Accounting Officer)
         John F. Levy


        /s/ Roy Abrams                  Director                                                   April 1, 2002
------------------------------
          Roy Abrams


        /s/ Carl Wolf                   Director                                                   April 1, 2002
------------------------------
          Carl Wolf


       /s/ Paul Ehrlich                 Director                                                   April 1, 2002
------------------------------
         Paul Ehrlich
</TABLE>


                                       42
<PAGE>


                                 MediaBay, Inc.

                                    Form 10-K

                                     Item 8

                          Index to Financial Statements


Independent Auditors' Report                                                 F-2

Consolidated Balance Sheets as of December 31, 2001 and 2000                 F-3

Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999                                             F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000 and 1999                                             F-5

Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999                                             F-6

Notes to Consolidated Financial Statements                                   F-7

Schedule II-Valuation and Qualifying Accounts and Reserves                   S-1


                                      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, 2001 and 2000, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  2001.  Our
audits also included the  financial  statement  schedule  listed in the index at
Item 14-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 these financial  statements and 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, 2001 and 2000,  and the results of their  operations  and their
cash flows for each of the three years in the period ended  December 31, 2001 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.



/S/ Deloitte & Touche LLP

Parsippany, New Jersey

April 1, 2002


                                      F-2
<PAGE>


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

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                            2001        2000
                                                                                          --------    --------
<S>                                                                                       <C>         <C>
                                         Assets
Current assets:
  Cash and cash equivalents ...........................................................   $     64    $    498
  Accounts receivable, net of allowances for sales returns and doubtful accounts of
      $4,539 and $4,516 at December 31, 2001 and 2000,
      respectively ....................................................................      4,798       5,415
  Inventory ...........................................................................      4,061       6,687
  Prepaid expenses and other current assets ...........................................      1,807       1,104
  Royalty advances ....................................................................        773       3,712
  Deferred member acquisition costs ...................................................      3,435       7,520
  Deferred income taxes - current .....................................................        550          --
                                                                                          --------    --------
    Total current assets ..............................................................     15,488      24,936
Fixed assets, net .....................................................................        467       1,708
Deferred member acquisition costs .....................................................      1,433       5,062
Non-current prepaid expenses ..........................................................         24         177
Deferred income taxes - non-current ...................................................     16,650          --
Investment in I-Jam Multimedia LLC ....................................................         --       2,000
Other intangibles, net of accumulated amortization of $4,590 and $8,781 at December 31,
    2001 and 2000, respectively .......................................................      2,292       6,891
Goodwill, net of accumulated amortization of $1,518 and $1,009 at December 31, 2001 and
    2000, respectively ................................................................      8,649       9,158
                                                                                          --------    --------
                                                                                          $ 45,003    $ 49,932
                                                                                          ========    ========
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable and accrued expenses ...............................................   $ 13,891    $ 16,703
  Current portion -- long-term debt ...................................................      1,600         400
                                                                                          --------    --------
    Total current liabilities .........................................................     15,491      17,103
                                                                                          --------    --------
Long-term debt ........................................................................     17,064      15,864
                                                                                          --------    --------
Preferred Stock, no par value, authorized 5,000,000 shares; no shares issued and
    outstanding .......................................................................         --          --
Common stock subject to contingent put rights .........................................      4,550       4,550
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
    13,861,866 at December 31, 2001 and 2000 ..........................................     93,468      93,468
Contributed capital ...................................................................      4,094       3,761
Accumulated deficit ...................................................................    (89,664)    (84,814)
                                                                                          --------    --------
Total common stockholders' equity .....................................................      7,898      12,415
                                                                                          --------    --------
                                                                                          $ 45,003    $ 49,932
                                                                                          ========    ========
</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,
                                                                2001        2000        1999
                                                              --------    --------    --------
<S>                                                           <C>         <C>         <C>
Sales .....................................................   $ 54,904    $ 59,881    $ 62,805
Returns, discounts and allowances .........................     13,099      15,455      16,578
                                                              --------    --------    --------
      Net sales ...........................................     41,805      44,426      46,227
Cost of sales .............................................     19,783      23,044      23,687
Cost of sales - write-downs ...............................      2,261          --          --
Advertising and promotion .................................     11,922      11,023       8,118
Advertising and promotion write-downs .....................      3,971          --          --
General and administrative ................................     11,483      13,964       9,799
Asset write-downs and strategic charges ...................      7,044          --          --
Depreciation and amortization .............................      5,156       7,984       6,812
Non-cash write-down of goodwill ...........................         --      38,226          --
                                                              --------    --------    --------
      Operating loss ......................................    (19,815)    (49,815)     (2,189)
Interest expense ..........................................     (2,235)     (2,787)     (4,645)
Interest income ...........................................         --         106         127
                                                              --------    --------    --------
      Loss before income tax benefit and extraordinary item    (22,050)    (52,496)     (6,707)
Benefit for income taxes ..................................     17,200          --          --
                                                              --------    --------    --------
      Loss before extraordinary item ......................     (4,850)    (52,496)     (6,707)
Extraordinary loss on early extinguishment of debt ........         --      (2,152)         --
                                                              --------    --------    --------
      Net loss ............................................   $ (4,850)   $(54,648)   $ (6,707)
                                                              ========    ========    ========
Basic and diluted loss per share:
  Loss before extraordinary item ..........................   $   (.35)   $  (4.13)   $   (.82)
  Extraordinary loss on early extinguishment of debt ......         --        (.17)         --
                                                              --------    --------    --------
      Net loss ............................................   $   (.35)   $  (4.30)   $   (.82)
                                                              ========    ========    ========
</TABLE>

     See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>


                                 MEDIABAY, INC.
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 2001, 2000 and 1999
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                        Common stock -
                                                           number of   Common stock -   Contributed    Accumulated
                                                            shares      no par value      capital        deficit
                                                        -------------- --------------   ------------   ------------
<S>                                                             <C>     <C>             <C>            <C>
Balance at January 1, 1999 ...........................          7,079   $     28,960    $      2,323   $    (23,459)
Sale of common stock .................................          2,040         24,921              --             --
Fees and costs related to equity offerings ...........             --         (1,434)             --             --
Contingent put activity ..............................             --          4,001              --             --
Proceeds from exercise of stock options ..............             21             95              --             --
Warrants granted for financing and consulting services             --             --           1,132             --
Conversion of convertible subordinated notes .........            198          2,200              --             --
Net loss .............................................             --             --              --         (6,707)
                                                         ------------   ------------    ------------   ------------
Balance at December 31, 1999 .........................          9,338         58,743           3,455        (30,166)
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             --
Conversion of convertible subordinated notes .........            874          5,616              --             --
Net loss .............................................             --             --              --        (54,648)
                                                         ------------   ------------    ------------   ------------
Balance at December 31, 2000 .........................         13,862   $     93,468    $      3,761   $    (84,814)
Warrants granted for financing and consulting services             --             --             333             --
Net loss .............................................             --             --              --         (4,850)
                                                         ------------   ------------    ------------   ------------
Balance at December 31, 2001 .........................         13,862   $     93,468    $      4,094   $    (89,664)
                                                         ============   ============    ============   ============
</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,
                                                                                  2001        2000        1999
                                                                                --------    --------    --------
<S>                                                                             <C>         <C>         <C>
Cash flows from operating activities:
Net loss ....................................................................   $ (4,850)   $(54,648)   $ (6,707)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization ...........................................      5,156       7,984       6,812
    Amortization of deferred member acquisition costs .......................      7,489       6,029       1,603
    Amortization of deferred financing costs ................................        456         349         407
    Deferred income tax benefit .............................................    (17,200)         --          --
    Asset write-downs and strategic charges .................................     13,276          --          --
    Non-cash write-down of goodwill .........................................         --      38,226          --
    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:
      Decrease (increase) in accounts receivable, net .......................        321       3,476      (3,969)
      Decrease (increase) in inventory ......................................        365         495      (2,055)
      (Increase) decrease  in prepaid expenses and other current assets .....       (558)        251        (383)
      Decrease (increase) in royalty advances ...............................        590        (777)     (1,534)
      Increase in deferred member acquisition costs .........................     (3,748)     (9,313)    (10,899)
      (Decrease) increase in accounts payable and accrued expenses ..........     (3,360)        148      10,149
                                                                                --------    --------    --------
        Net cash used in operating activities ...............................     (2,063)     (5,628)     (6,576)
                                                                                --------    --------    --------
Cash flows from investing activities:
  Purchase of short-term investments ........................................         --          --        (100)
  Purchase of fixed assets ..................................................       (188)       (873)       (713)
  Maturity of short-term investments ........................................         --         100         500
  Investment in I-Jam Multimedia LLC ........................................         --      (2,000)         --
  Additions to intangible assets ............................................       (110)         --          --
  Cash paid in acquisitions .................................................         --      (1,250)    (19,985)
                                                                                --------    --------    --------
        Net cash used in investing activities ...............................       (298)     (4,023)    (20,298)
                                                                                --------    --------    --------
Cash flows from financing activities:
  Proceeds from issuance of notes payable - related parties .................      2,800       2,500       5,350
  Proceeds from borrowings with banks .......................................         --          --      11,080
  Repayment of long-term debt ...............................................       (400)    (21,723)    (15,127)
  Increase in deferred financing costs ......................................       (473)       (203)       (838)
  Proceeds from exercise of stock options ...................................         --          --          95
  Proceeds from sale of common stock, net of costs ..........................         --      29,377      23,826
                                                                                --------    --------    --------
        Net cash provided by financing activities ...........................      1,927       9,951      24,386
                                                                                --------    --------    --------
Net (decrease) increase in cash and cash equivalents ........................       (434)        300      (2,488)
Cash and cash equivalents at beginning of period ............................        498         198       2,686
                                                                                --------    --------    --------
Cash and cash equivalents at end of period ..................................   $     64    $    498    $    198
                                                                                ========    ========    ========
</TABLE>

         See accompanying notes to consolidated financial statements.


                                      F-6
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (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 leading  seller of spoken  audio and  nostalgia
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 and classic video programs are
marketed through  direct-mail  catalogs,  over the Internet at  RadioSpirits.com
and, on a wholesale basis, to major retailers.

(2) Significant Accounting Policies

Principles of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned subsidiaries. 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, Computer Software and Internet Web Site Development Costs

     Fixed assets,  consisting primarily of furniture,  leasehold  improvements,
computer  equipment,  and 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 as are all
internal costs and charges.

Intangible Assets

     Intangible  assets,  principally  consisting of customer  lists and certain
agreements  acquired  in  the  acquisitions,  are  being  amortized  over  their
estimated useful life.


                                      F-7
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(2) Significant Accounting Policies (continued)

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. Goodwill is amortized over the estimated period of benefit
not to  exceed  20 years.  The  carrying  value of  acquired  assets,  including
goodwill,  is  reviewed  if the facts  and  circumstances,  such as  significant
declines in sales,  earnings or cash flows or  material  adverse  changes in the
business  climate,  suggest that it may be impaired.  Goodwill  associated  with
assets  acquired in a purchase  business  combination  is included in impairment
evaluations  when events or  circumstances  indicate that the carrying amount of
these assets may not be recoverable.  If this evaluation indicates that acquired
assets and goodwill may not be recoverable, as determined based on the estimated
undiscounted  cash flows of the  entity  acquired,  impairment  is  measured  by
comparing the carrying value of goodwill to fair value. Fair value is determined
based on quoted market values, discounted cash flows or appraisals.

     During the fourth  quarter of 2000,  the Company  reviewed  its  long-lived
assets and certain identifiable intangibles,  including goodwill, for impairment
in accordance with FASB 121 due to a change in facts and circumstances. See Note
6.

Revenue Recognition

     The Company recognizes revenue upon shipment of merchandise. Allowances for
doubtful  accounts and future returns are based upon  historical  experience and
evaluation of current trends.

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.


                                      F-8
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(2) Significant Accounting Policies (continued)

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.  Prior to 1999, the Company had expensed these
costs as incurred.  Beginning in 1999, a determination was made that the Company
had developed  sufficient  history on its  customers to  capitalize  such costs.
Accordingly,  the Company has capitalized direct response  advertising costs and
amortizes  these  costs  over the  period  of  future  benefit,  which  has been
determined to be generally 30 months.  The costs are being amortized  consistent
with the recognition of related revenue.

Royalties

     The Company is liable for royalties to licensors  based upon revenue earned
from the respective  licensed  product.  Royalties,  in excess of advances,  are
payable  based  on  contractual  terms.  Royalty  advances  not  expected  to be
recovered through royalties on sales are charged to royalty expense.

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.

(3) Acquisitions

Acquisition of Doubleday Direct's Audiobooks Direct

     On June 15, 1999, a wholly owned  subsidiary  of the Company  acquired from
Doubleday  Direct,  Inc.  ("Doubleday")  its  business of direct  marketing  and
distribution of audiobooks and related products through  Doubleday's  Audiobooks
Direct Club ("Audiobooks  Direct").  At the time of the acquisition,  Audiobooks
Direct was one of the industry's  leading direct marketers of audiobooks using a
membership club format.

     As part of the acquisition,  the Company acquired Audiobooks Direct's total
membership  file of over 500,000  members as well as some other assets  relating
exclusively  to the  Audiobooks  Direct  Club.  The Company  also entered into a
reciprocal marketing arrangement with Doubleday.

     In addition,  the Company  entered  into a  non-compete  agreement  whereby
Doubleday agreed not to engage in designated activities,  which compete with the
operation of the Company's Audio Book Club for five years.


                                      F-9
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(3) Acquisitions (continued)

     As  consideration  for  the  acquisition  and  the  related   transactions,
including  the  mailing,  non-compete,  and  transitional  services  agreements,
Doubleday received from the Company cash  consideration of $19,865.  The Company
also  incurred  costs  and fees of  $646.  The  Company  has  accounted  for the
acquisition using the purchase method of accounting. The total purchase price of
$20,511 has been  accounted  for under the purchase  method of  accounting.  The
Company has identified $4,372 of intangible assets (representing customer lists,
a covenant not to compete and certain  agreements  acquired in the  acquisition)
and $15,076 of goodwill. Identifiable intangible assets have been amortized over
their estimated useful lives (ranging from 3 to 5 years).  In the fourth quarter
of 2000,  the  Company  reviewed  long-lived  assets  and  certain  identifiable
intangibles,   including  goodwill,  for  impairment  in  accordance  with  FASB
Statement of Standards 121," Accounting for the Impairment of Long-Lived  Assets
and for Long-Lived Assets To Be Disposed Of" ("FASB 121").  Goodwill relating to
the Doubleday acquisition has been written off (see Note 6).

     The following  unaudited  combined pro forma results of operations  for the
year ended December 31, 1999 assumes the acquisition of substantially all of the
assets used by Doubleday Direct,  Inc. in its Audiobooks Direct Club on June 15,
1999 occurred as of January 1, 1999:

                          Year ended December 31, 1999

                Net sales ..........................   $ 54,273
                                                       ========
                Net loss ...........................   $ (9,345)
                                                       ========
                Loss per share (basic and diluted) .   $  (1.14)
                                                       ========

(4) Asset Write-Downs and Strategic Charges

     The  Company  conducted  a  review  of  its  operations  including  product
offerings,  marketing methods and fulfillment. 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
intends to close its old-time radio  operations in Schaumburg,  Illinois and run
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 third quarter decisions,  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;


                                      F-10
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(4) Asset Write-Downs and Strategic Charges (continued)

     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.

     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,  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.

(5) Fixed Assets

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

                                         2001       2000
          Capitalized leases .......   $   270    $   270
          Equipment ................       443        758
          Furniture and fixtures ...        91        165
          Leasehold improvements ...        56        476
          Web site development costs        57      1,615
                                       -------    -------
          Total ....................       917      3,284
          Accumulated depreciation .      (450)    (1,576)
                                       -------    -------
                                       $   467    $ 1,708
                                       =======    =======

     Depreciation  expense for the years ended December 31, 2001,  2000 and 1999
was $601, $684 and $522, respectively.


                                      F-11
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(6) Goodwill

     During the fourth quarter of 2000, the Company reviewed  long-lived  assets
and certain related identifiable intangibles, including goodwill, for impairment
in accordance with FASB 121 due to a change in facts and  circumstances.  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.

(7) Long-Term Debt

As of December 31, .......................     2001        2000
Credit agreement, senior secured bank debt   $  6,180    $  6,580
Subordinated debt ........................      4,200       4,200
Related party notes ......................      8,284       5,484
                                             --------    --------
                                               18,664      16,264
Less: current maturities .................     (1,600)       (400)
                                             --------    --------
                                             $ 17,064    $ 15,864
                                             ========    ========

Bank Debt

     In December  1998, the Company  obtained  Senior Secured Bank Debt from (i)
Fleet National Bank ("Fleet") and (ii) ING (U.S.) Capital  Corporation  pursuant
to a Credit  Agreement dated December 31, 1998.  Fleet  subsequently  sold their
portion of the loan to Patriarch Capital  ("Patriarch").  The Company granted to
the lenders a security interest in substantially all of the Company's assets and
the assets of its subsidiaries and pledged the capital stock of its subsidiaries
to the  lenders as  collateral  under the  Credit  Agreement.  In June 1999,  in
connection  with the  acquisition  of  Audiobooks  Direct,  the  Company,  Fleet
National  Bank and ING  (U.S.)  Capital  Corporation  amended  the  terms of the
Company's  existing credit agreement to provide for an additional $6,000 of term
loans.

     In connection  with the 1999  financing,  the Company issued to the lenders
three-year  warrants  to purchase up to an  aggregate  of 119,940  shares of the
Company's  common stock with an  expiration  date of June 15,  2004,  an initial
exercise  price of  $14.20,  and a  valuation  of $2.63  per  warrant  using the
Black-Scholes  valuation model. All warrants are subject to certain  adjustments
and the total value of the  warrants  has been  included  in deferred  financing
costs.

     In March 2000,  the Company  made a quarterly  payment of  principal on its
term debt of $930. In April 2000,  the Company  repaid  $20,293 of its bank debt
out of the net  proceeds  from the  follow-on  primary  offering,  (See Note 12)
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


                                      F-12
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(7) Long-Term Debt (continued)

debt.  Also in April  2000,  the  Company  amended  the  terms of its  remaining
revolving debt 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
revolving  credit  facility of $6,580 was  extended to  September  30, 2002 with
certain  conditions.  The interest rate for the revolving credit facility is the
prime rate plus 2%. At December 31, 2001,  the interest  rate on the  borrowings
was  6.75%.  In  September  and  December  2001,  in  accordance  with  the loan
agreement,  the Company made principal  payments  totaling $400 on its revolving
credit  facility and the amount,  which may be borrowed under the revolving loan
agreement was reduced to $6,180, the amount outstanding under the revolving loan
agreement. A payment of $300 was made in March 2002.

     On  April  1,  2002,  the  maturity  date of the  principal  amount  of the
revolving  credit  facility  of $5,880 was  extended  to January  15,  2003 with
certain  conditions.  In addition to the $300  principal  payment  made in March
2002,  the Company is required to make payments in 2002, of $200 on May 31, 2002
and June 30,2002 and monthly payments of $150 at the end of each month beginning
in July 2002 and ending December 31, 2002.

Related Party Debt

     In December 1998,  the Company  obtained a portion of the financing for its
acquisitions  of Columbia  House's  Audiobook  Club and its  old-time  radio and
classic video products from Norton Herrick,  Chairman of the Company, by issuing
him a $15,000 principal amount 9% convertible  subordinated  promissory note due
December 31, 2004. In January 1999, $1,000 of the note was repaid. As additional
consideration,  Mr. Herrick was issued  five-year  warrants to purchase  850,000
shares of our common stock at an exercise price of $12.00 per share,  subject to
adjustment.  The note is  subordinated  to the Company's  obligations  under its
credit  facility with Patriarch and ING and is secured by a second lien security
interest on assets of the Company's old-time radio and classic video operations.
The independent  members of the Company's Board of Directors  approved the terms
of Mr.  Herrick's  loan.  The  Company  also  received  a  fairness  opinion  in
connection with this loan.

     The Company also obtained a portion of the financing for the acquisition of
Audiobooks   Direct  by  borrowing  $4,350  from  Mr.  Herrick  under  a  bridge
convertible  senior  subordinated  promissory  note in June 1999.  In a separate
letter agreement,  the Company agreed,  that if the Company repaid or refinanced
this note  with  debt or equity  financing  provided  by anyone  other  than Mr.
Herrick or a family member or affiliate of Mr. Herrick,  the Company would issue
to Mr. Herrick warrants to purchase an additional 125,000 shares of common stock
at $8.41 per share,  which warrants would be identical to the warrants issued to
him in connection  with the initial note issued to Mr. Herrick in December 1998.
In July 1999,  this promissory note was repaid and the warrants were issued upon
receipt of stockholder approval in September 1999.

     In August 1999,  Norton  Herrick sold $5,000 of the $14,000 9%  convertible
senior  subordinated  promissory note to an unaffiliated third party. The $5,000
promissory note has  substantially the same terms and conditions as the original
promissory note bearing  interest at 9% per annum and convertible at $11.125 per
share, subject to adjustment. The unaffiliated third party converted $800 of the
note into 71,910 shares of the Company's common stock.


                                      F-13
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(7) Long-Term Debt (continued)

     In December 1999, Mr. Herrick sold an additional $2,000 principal amount of
the note issued to him in December  1998 to an  unaffiliated  third  party.  The
third party converted the 2,000 principal amount note into 179,775 shares of the
Company's  common  stock.  Pursuant to the December 1998 letter  agreement,  the
Company has issued to Mr.  Herrick  warrants to purchase  186,667 at an exercise
price of $8.41 per share.

     From December 1999 to February 2000, Evan Herrick,  loaned the Company $3.0
million for which he  received  $3.0  million  principal  amount 9%  convertible
promissory  notes  due  December  31,  2004.  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  principal  amount 9%  convertible
notes due December  31, 2004 issued to Evan  Herrick 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  principal  amount  9%
convertible promissory notes due December 31, 2004 to Evan Herrick. 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.

     In January and February 2000,  Norton Herrick sold $4,224  principal amount
of the 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 the
December 1998 letter agreement, 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.  No  compensation  has been  recognized  in  relation  to this
transaction.

     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 our 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 a December 1998 letter agreement, 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.  No  compensation  has been
recognized in relation to this transaction.


                                      F-14
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(7) Long-Term Debt (continued)

     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.  This note is convertible  into MediaBay common
stock at a conversion rate of $0.56 per share. The convertible  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 note  bears  interest  at the prime rate plus 2% and
matures on January 15, 2003.  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 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 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. The note matures on April 15, 2003.

     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 of  advances  and the  $2,500 of
loans, 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.

     On May 14, 2001,  the Company also  modified a $1,984  senior  subordinated
convertible  note held by Norton  Herrick  as  consideration  for Mr.  Herrick's
consent to the above transactions,  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  and  interest,  at Mr.
Herrick'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. Mr. Herrick was granted  registration rights
relating to the shares of common stock issuable upon conversion of the notes and
exercise of the warrants.

     On May 14, 2001,  the Company also  modified a $3,000  senior  subordinated
convertible  note held by Evan Herrick,  Norton  Herrick's son, as consideration
for Mr. Norton  Herrick's  consent to the transactions and agreement to exchange
the  note  for  preferred   stock  if  requested  by  MediaBay  under  specified
circumstances. The modified note, which does not permit cash interest to be paid
currently,  is convertible  into common stock at a conversion  rate of $0.56 per
share.


                                      F-15
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(7) Long-Term Debt (continued)

     On  January  18,  2002,  Evan  Herrick,  a  principal  shareholder  of  the
Registrant,  exchanged  $2,500  million  principal  amount  of a $3,000  million
principal amount convertible note of MediaBay, Inc. (the "Note") in exchange for
25,000 shares of Series A Preferred Stock of MediaBay (the "Preferred  Shares"),
having a liquidation  preference of $2,500 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  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.

     For debt outstanding at December 31, 2001 the loans mature as follows:

     Year Ending December 31,

          2002....................         1,600
          2003....................         7,880
          2004....................         9,184
                                         -------
          Total maturities......         $18,664
                                         =======

(8) Commitments and Contingencies

     Rent expense for the years ended December 31, 2001,  2000 and 1999 amounted
to $272, $351 and $234, respectively.

     The Company  leases  8,000 and 8,400  square  feet of space in  Schaumburg,
Illinois  pursuant  to two lease  agreements  which both expire  December  2005,
subject to a three-year  renewal option. The monthly rent for the first lease is
$5.  Monthly  rent for the  second  lease  is $4 plus $2 per  month  related  to
Lessor's leasehold  improvements.  The Company is currently seeking to sub-lease
this space.

     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.  The Company has 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 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 seeking to sub-lease this space.

Capital Equipment Leases

     The company has two capital leases.  The Company leases computer  equipment
under a  three-year  lease,  which  expires in June  2002.  Total  annual  lease
payments,  including  interest,  are $55 and the  lease  provides  for a bargain
purchase  option of $14 at the end of the lease term.  Lease payments under this
agreement  in 2001,  2000 and 1999  were  $55,  $55 and $28,  respectively.  The
Company also leases sound equipment  under a 5-year lease,  which expires in May
2006. Total annual lease payments, including interest, are $33 and the lease


                                      F-16
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(8) Commitments and Contingencies (continued)

provides for a bargain purchase of $7. Lease payments under this agreement were
$22 in both 2001 and 2000. The amount of equipment capitalized under the two
leases and included in fixed assets is $270 and net of depreciation the fixed
asset balance is $157 and $211 at December 31, 2001 and 2000, respectively. The
obligations under the leases included in accounts payable and accrued expenses
on the consolidated balance sheet at December 31, 2001 was $136 at December 31,
2001 and $270 at December 31, 2000.

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

                   Year ending December 31,
          2002..............................  $328
          2003..............................   264
          2004..............................   132
          2005..............................   137
          2006..............................    20
                                              ----
          Total lease commitments...........  $881
                                              ====

Employment Agreements

     The Company has commitments pursuant to employment  agreements with certain
of  its  officers.  The  Company's  minimum  aggregate  commitments  under  such
employment  agreements are  approximately  $920, $423 and $188 during 2002, 2003
and 2004, 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 $3,199,  $2,483 and $2,955
for 2001, 2000 and 1999, respectively.

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.

(9) Stock Option Plan

     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.


                                      F-17
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(9) Stock Option Plan (continued)

     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.

     Stock option activity under the plans is as follows:

                                                Weighted average
                                     Shares      exercise price
                                   ----------   ----------------
Outstanding at January 1, 1999      1,858,500      $     5.37
    Granted                         1,195,950           11.29
    Exercised                              --              --
    Canceled                          (40,500)          11.76
                                   ----------      ----------
Outstanding at December 31, 1999    3,013,950            7.63
    Granted                         4,118,500            5.69
    Exercised                              --              --
    Canceled                         (479,350)           6.35
                                   ----------      ----------
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
                                   ==========      ==========

The per share  weighted-average  fair value of stock options  granted during the
year ended  December  31,  2001,  2000 and 1999 is as follows  using an accepted
option-pricing  model with the following  assumptions and no dividend yield. The
shares were granted as follows:

                      No. of   Exercise   Assumed       Risk-free     Fair Value
     Date             Shares     Price   Volatility   interest rate    per Share
     ----             ------     -----   ----------   -------------    ---------
1999 Grants:
    First Quarter      83,600  $  11.04          25%           5.07%  $     3.59
    Second Quarter    875,500  $  11.05          25%           4.99%  $     5.15
    Third Quarter     152,750  $  12.01          25%           5.71%  $     4.07
    Fourth Quarter     84,100  $  12.64          25%           6.13%  $     4.40
                    ---------
Total               1,195,950
                    =========

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
                    =========


                                      F-18
<PAGE>


                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(9) Stock Option Plan (continued)

                       No. of    Exercise  Assumed       Risk-free    Fair Value
      Date             Shares     Price   Volatility   interest rate   per Share
      ----             ------     -----   ----------   -------------   ---------
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
                     ========

     The following  table  summarizes  information  for options  outstanding and
exercisable at December 31, 2001:
<TABLE>
<CAPTION>
                                                                              Options Exercisable
                                                                        -----------------------------
                                  Options Outstanding       Weighted
                                   Weighted Average        Average                   Weighted Average
Range of Prices      Number     Remaining Life in Years  Exercise Price     Number    Exercise Price
----------------- ------------  ----------------------- --------------- ------------ ----------------
<S>                  <C>                  <C>                <C>           <C>            <C>
   $0.50-4.00        3,675,000            7.64               $3.20         3,174,250      $2.80
   $4.13-8.00        1,434,750            6.22                6.20         1,270,500       5.49
  $8.13-14.88          879,600            6.28               10.94           869,600      10.82
----------------- ------------  ----------------------- --------------- ------------ ----------------
  $0.50-14.88        5,989,350            7.10               $5.06         5,314,350      $5.21
================= ============  ======================= =============== ============ ================
</TABLE>

     At December 31, 2001,  there were 180,000  additional  shares available for
grant under the 1997 Plan, 1,313,400 additional shares available for grant under
the 1999 Plan, 517,250 additional shares available for grant under the 2000 Plan
and 3,500,000 available for grant under the 2001 Plan.

     The  Company  accounts  for  employee  stock  options  in  accordance  with
Accounting  Principles  Board Opinion No. 25 ("APB 25"),  "Accounting  for Stock
Issued to  Employees."  Under APB 25, the  Company  recognizes  no  compensation
expense related to employee stock options,  as no options are granted at a price
below market price on the day of grant. In October 1995,  Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
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,  2001,  2000 and 1999  would have been  $5,013,  and $0.36;
$73,185 and $5.75, and $12,508 and $1.52, respectively.


                                      F-19
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(10) Warrants and Non-Plan Options

     In addition to the 1,650,000  warrants  granted in 2001 described in Note 7
above,  during the year ended  December 31, 2001, the Company  granted  non-plan
options and  warrants to purchase a total of 1,275,000  shares of the  Company's
common stock to consultants and advisors,  and the fair values of $42,  computed
using accepted  option-pricing model, have been included in prepaid expenses and
contributed  capital  and have either been  expensed or are being  amortized  to
expense over their respective service periods.  The options and warrants vest at
various times and have exercise periods ranging from two to five years. Exercise
prices  range  from $1.00 to $6.00 per share.  During  the twelve  months  ended
December 31, 2001,  warrants to purchase  320,000 shares of the Company's common
stock were  canceled and warrants to purchase  300,000  shares of the  Company's
common stock expired.

     In October 1999, non-plan options for 21,600 shares of the Company's common
stock,  which had been granted in 1998, were exercised and the Company  received
$95 as payment of the exercise price.

(11) 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
acquisitions. At December 31, 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.

(12) 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.

     From April through August 1999, the Company sold 2,040,000 shares of common
stock to qualified  institutional  investors for proceeds of $23,487 net of cash
and non-cash fees and expenses of $1,434.


                                      F-20
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(13) Income Taxes

     Income tax benefit for the years ended  December  31,  2001,  2000 and 1999
differed from the amount  computed by applying the U.S.  Federal income tax rate
of 34% and the state income tax rate of 7.00% to the pre-tax loss as a result of
the following:

<TABLE>
<CAPTION>
                                                            2001         2000         1999
                                                          --------     --------     -------
<S>                                                       <C>          <C>          <C>
Computed tax benefit                                      $ (9,041)    $(22,473)    $(2,991)
(Decrease)  increase in valuation  allowance for
Federal and State  deferred tax assets                      (8,159)      22,473       2,991
                                                          --------     --------     -------
Income tax benefit                                        $(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:

<TABLE>
<CAPTION>
Deferred tax assets:                                         2001          2000         1999
                                                           --------      --------      -------
<S>                                                        <C>           <C>           <C>
Federal and state net operating loss carry-forwards        $ 23,122      $ 14,801      $ 7,340
Loss in I-Jam, LLC                                               85            --           --

Accounts receivable, principally due to allowance for
doubtful accounts and reserve for returns                     1,289         1,274        1,769
Inventory, principally due to reserve for obsolescence          927            --           --
Fixed assets/Intangibles                                     16,163        13,026       (2,481)
                                                           --------      --------      -------
Total gross deferred tax assets                              41,586        29,101        6,628
Less valuation allowance                                    (24,386)      (29,101)      (6,628)
                                                           --------      --------      -------
Net deferred tax assets                                    $ 17,200      $     --      $    --
                                                           ========      ========      =======
</TABLE>

     The Company has approximately $56,395 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, 2021 for federal  income tax  purposes.  For
state  purposes,  the net operating  losses will expire at varying times, as the
Company is subject to corporate income tax in several states.

(14) 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 net loss per share except that the denominator is increased
to  include  the  number  of  additional  common  shares  that  would  have been
outstanding if the dilutive potential common shares had been issued.


                                      F-21
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(14) Net Loss Per Share of Common Stock (continued)

     The weighted average number of shares  outstanding used in the net loss per
share  computations  for the years ended  December 31, 2001,  2000 and 1999 were
13,861,866, 12,718,065 and 8,204,543, respectively.

     Common equivalent shares totaling  11,787,000,  including 11,520,000 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 years ended  December  31, 2000 and 1999  because  they would have
been anti-dilutive were 472,589 and 1,658,980, respectively.

 (15) Supplemental Cash Flow Information

     No cash has been expended for income taxes for the years ended December 31,
2001,  2000 and 1999.  Cash expended for interest was $1,095,  $2,157 and $3,937
for the years ended December 31, 2001, 2000 and 1999, respectively.

     In  connection  with its  acquisition  of  Audiobooks  Direct in 1999,  the
Company  provided  119,940  warrants to the banks  providing  financing  for the
acquisition.  The  value  of the  warrants  of $315  was  included  in  deferred
financing fees and subsequently written off when the loan was repaid.

     In February  1999,  8,000 options were granted to an officer of the Company
below the current  market  price at the date of grant.  These  options have been
valued at $7.16  each  using  the  Black-Scholes  valuation  model and have been
included in prepaid expenses and are being amortized over two years, the term of
the related employment agreement.

     In April 1999,  the Company formed a Technology  Advisory Board  ("Advisory
Board") to further enhance its Internet  strategy.  The Advisory Board will work
with the Company to increase its online business and its strategic  alliances on
the Internet. Included in the total options and warrants granted during the year
ended  September 30, 1999 were warrants  granted to the Internet  Advisory Board
members.  These warrants were valued at $113 using the  Black-Scholes  valuation
model and have been included in prepaid  expenses and are being  amortized  over
the period of service.

     In 1999, the Company granted 96,000 warrants to advisors in connection with
its equity financings. The total value of these warrants using the Black-Scholes
method has been recorded at $380 and included in contributed capital.

     Included in the total  options and warrants  granted  during the year ended
December  31, 1999 were  warrants  granted to a law firm as partial  payment for
legal services provided in connection with the Company's  various  acquisitions.
The warrants have been valued at $50 using the Black-Scholes valuation model and
have been included in the cost of the acquisitions.

     In 2000,  third parties  converted  portions of the Company's  subordinated
notes  totaling  $5,616 into 873,594  shares of the Company's  common stock.  In
1999,  third  parties  converted  portions of the Company's  subordinated  notes
totaling $2,200 into 197,752 shares of the Company's common stock.


                                      F-22
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(16) Related Party Transactions

     Companies  wholly  owned by Norton  Herrick  provided  certain  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 $88,  $133 and $90 during the years  ended
December 31, 2001, 2000 and 1999,  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 of  approximately  $14 in 2001 and $25 in each of 2000
and 1999 to Mr. Herrick's affiliate.  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.

     In the fourth  quarter of 2000,  Glebe  Resources,  Inc., a company  wholly
owned by Norton  Herrick,  purchased $200 of audiobook  inventory from Doubleday
Direct, Inc. MediaBay,  Inc. subsequently sold the audiobooks and the funds were
remitted to Glebe  Resources,  Inc. The  inventory  was sold at Glebe's cost and
Glebe did not profit by the transaction.

     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,  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. See Notes
7 and 12 for other related party transactions.

(17) Recently Issued Accounting Standards

     In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business  Combinations"  and SFAS  No.  142,  "Goodwill  and  Other  Intangible
Assets".  SFAS No. 141 requires that all business  combinations be accounted for
under the purchase method.  The statement further requires separate  recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 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 will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and we will perform a transitional goodwill
impairment test. SFAS No. 142 is effective for fiscal periods beginning after
December 15, 2001. We are currently evaluating the impact of the new accounting
standards on existing goodwill and other intangible assets. While the ultimate
impact of the new accounting standards has yet to be determined, goodwill
amortization expense for the year ended December 31, 2001 was $509.


                                      F-23
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(17) Recently Issued Accounting Standards (continued)

     In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143,  "Accounting  For Asset  Retirement  Obligations"  ("SFAS  143").  This
Statement   addresses   financial   accounting  and  reporting  for  obligations
associated with the retirement of tangible  long-lived assets and the associated
asset  retirement  costs.  It applies to legal  obligations  associated with the
retirement of long-lived assets that result from the acquisition,  construction,
development  and (or) the normal  operation  of a long-lived  asset,  except for
certain  obligations of lessees.  This standard  requires entities to record the
fair  value of a  liability  for an asset  retirement  obligation  in the period
incurred.  When the liability is initially  recorded,  the entity  capitalizes a
cost by increasing the carrying  amount of the related  long-lived  asset.  Over
time,  the  liability  is  accreted to its present  value each  period,  and the
capitalized cost is depreciated over the useful life of the related asset.  Upon
settlement of the  liability,  an entity either  settles the  obligation for its
recorded  amount or incurs a gain or loss upon  settlement.  We are  required to
adopt the  provisions  of SFAS 143 at the  beginning of its fiscal year 2003. We
have not determined the impact, if any, the adoption of this statement will have
on our financial position or results of operations.

     In  October  2001,  the  FASB  issued  Statement  of  Financial  Accounting
Standards  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets"  ("SFAS  144").  This  statement  addresses  financial   accounting  and
reporting for the  impairment or disposal of long-lived  assets.  This statement
supersedes FASB Statement No. 121,  "Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be Disposed  Of", and the  accounting  and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
-  Reporting  the  Effects  of  Disposal  of  a  Segment  of  a  Business,   and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
Statement  also  amends  ARB No. 51,  "Consolidated  Financial  Statements",  to
eliminate the exception to  consolidation  for a subsidiary for which control is
likely to be temporary.  This Statement  requires that one  accounting  model be
used for long-lived  assets to be disposed of by sale,  whether  previously held
and used or newly  acquired.  This Statement also broadens the  presentation  of
discontinued operations to include more disposal transactions. The provisions of
this Statement are required to be adopted by the Company at the beginning of its
fiscal year 2002. We have not  determined the impact,  if any,  adoption of this
statement will have on our financial position or results of operations.

(18) Segment Reporting

     For 2001,  2000 and 1999, 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, 2001, 2000 and 1999 from its newest subsidiary  RadioClassics.  The
accounting  policies of the reportable  segments are the same as those described
in Note 2. Inter-segment sales are recorded at prevailing sales prices.


                                      F-24
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(18) Segment Reporting (continued)

Year ended December 31, 2001

<TABLE>
<CAPTION>
                                                        Audio Book         Radio         MediaBay.      Inter-
                                         Corporate         Club           Spirits          com          segment       Total
                                         ---------         ----           -------          ---          -------       -----
<S>                                       <C>            <C>             <C>             <C>            <C>         <C>
Net sales                                 $   --         $31,793         $10,021         $  249         $(258)      $41,805
Profit (loss) 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
Net interest expense                       2,224              --              11             --            --         2,235
Income tax benefit                            --          14,035           3,165             --            --        17,200
Net (loss) income                         (6,463)          6,120          (2,083)        (2,432)            8        (4,850)
Total assets                                  --          28,291          16,785              3           (76)       45,003
Net reductions to deferred member
    acquisition costs                         --          (3,730)            (11)            --            --        (3,741)
Additions to fixed assets                     --              58             130             --            --           188
</TABLE>


Year ended December 31, 2000
<TABLE>
<CAPTION>

                                                        Audio Book         Radio         MediaBay.     Inter-
                                         Corporate         Club           Spirits          com          segment       Total
                                         ---------         ----           -------          ---          -------       -----
<S>                                       <C>            <C>             <C>             <C>            <C>         <C>
Net sales                                 $   --         $31,442         $12,252         $1,566         $(834)      $44,426
Profit (loss) before depreciation,
    amortization, non-cash
    write-down of goodwill,
    interest expense and
    extraordinary loss on early
    extinguishment of debt                (2,773)         (1,051)          1,150           (967)           36        (3,605)
Depreciation and amortization                 --           6,586             970            428                       7,984
Non-cash write-down of goodwill               --          36,792           1,434             --            --        38,226
Net interest expense                       2,672              --               9             --            --         2,681
Extraordinary loss on early
    extinguishment of debt                 2,152              --              --             --            --         2,152
Net (loss) income                         (7,597)        (44,429)         (1,263)        (1,396)           37       (54,648)
Total assets                               2,000          28,179          18,431          1,498           (176)      49,932
Net additions to deferred  member
    acquisition costs                         --           1,691           1,593             --            --         3,284
Additions to fixed assets                     --             123             288            462            --           873
</TABLE>


                                      F-25
<PAGE>

                                 MEDIABAY, INC.

                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2001, 2000 and 1999
                  (Dollars in thousands, except per share data)

(18) Segment Reporting (continued)

Year ended December 31, 1999

<TABLE>
<CAPTION>
                                                        Audio Book        Radio         MediaBay.      Inter-
                                         Corporate         Club          Spirits          com          segment       Total
                                         ---------         ----          -------          ---          -------       -----
<S>                                      <C>            <C>              <C>            <C>             <C>        <C>
Net sales                                $    --        $ 32,160         $14,658        $    --         $(591)     $ 46,227
Profit (loss) before depreciation,
    amortization, non-cash
    write-down of goodwill,
    interest expense and
    extraordinary loss on early
    extinguishment of debt                (2,100)          4,922           2,606           (700)         (105)        4,623
Depreciation and amortization                 --           5,547             925            340                       6,812
Net interest expense                       4,518              --              --             --            --         4,518
Net (loss) income                         (6,619)           (624)          1,681         (1,040)         (105)       (6,707)
Total assets                                  --          74,255          19,831             --          (113)       93,973
Net additions to deferred member
    acquisition costs                         --           9,296              --             --            --         9,296
Additions to fixed assets                     --             286             107            320            --           713
</TABLE>


(19) Quarterly Operating Data (Unaudited)

     The following  table  presents  selected  unaudited  operating  data of the
Company for each quarter in the two year period ended December 31, 2001:

<TABLE>
<CAPTION>
                    Year Ended                            1st              2nd               3rd              4th
                December 31, 2000                       Quarter          Quarter           Quarter           Quarter
<S>                                                    <C>              <C>                 <C>             <C>
Net revenue                                            $ 10,946         $ 12,476            $ 9,729         $ 11,275

Cost of sales                                             5,750            6,547              5,452            5,295

Loss before extraordinary item                           (3,477)          (3,143)            (4,129)         (41,747)(**)

 Net loss                                                (3,477)          (5,295)(*)         (4,129)         (41,747)(**)
Basic and diluted loss per share:

Loss before extraordinary item per common share        $  (0.34)        $  (0.23)           $ (0.31)        $  (3.03)

Net loss per common share                              $  (0.34)        $  (0.39)(*)        $ (0.31)        $  (3.03)
</TABLE>

<TABLE>
<CAPTION>
                    Year Ended                            1st              2nd               3rd              4th
                December 31, 2001                       Quarter          Quarter           Quarter           Quarter
<S>                                                    <C>              <C>                 <C>             <C>
 Net revenue                                           $  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 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
</TABLE>

(*) In April 2000,  the Company  repaid $20,293 of its bank debt and recorded an
extraordinary loss of $2,152.

(**) Includes an impairment  charge of $38,226 million for long-lived assets and
certain related identifiable intangibles.

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


                                      F-26
<PAGE>

(19) Subsequent Events

     On January 18, 2002, Evan Herrick,  exchanged  $2,500 principal amount of a
$3,000 principal amount convertible note in exchange for 25,000 shares of Series
A Preferred Stock having a liquidation preference of $2,500 (see Note12 and Note
7).

     As  previously  agreed to with the  Company,  if the Company  required,  on
February 22, 2002,  Huntingdon  purchased a $500  principal  amount  convertible
senior  promissory note due June 30, 2003 (the "Note").  The Note is convertible
into shares of Common Stock at the rate of $.56 of principal and/or interest per
share.  The Note was issued in  consideration of a $500 loan made to the Company
by  Huntingdon.  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 $.56 per share.  The
warrants are exercisable until May 14, 2011.

     On March 1, 2002, the Company acquired inventory and licensing  agreements,
including the exclusive license to The Shadow radio programs.  A payment of $333
has been  paid and  additional  payments  of nine  monthly  installments  of $74
commence on June 15, 2002. Norton Herrick,  chairman of MediaBay, has guaranteed
the payments for no consideration from the Company.

     Subsequent  to December 31, 2001,  the Company  issued  options to purchase
243,500 shares of its common stock to certain  employees and  consultants to the
Company under its 2000 Stock Option plan. The Company also cancelled  options to
purchase  117,000  shares of its  common  stock.  In  addition  to the  warrants
described above,  the Company also issued non-plan  warrants to purchase 400,000
shares of its common stock to certain  advisors to the Company at prices ranging
from $2.00 to $5.00 per share.

     On  April  1,  2002,  the  maturity  date of the  principal  amount  of the
revolving  credit  facility  of $5,880 was  extended  to January  15,  2002 with
certain  conditions.  In addition to the $300  principal  payment  made in March
2002, the Company is required to make payments on its existing debt, in 2002, of
$200 on May 31, 2002 and June 30,2002 and monthly payments of $150 at the end of
each month beginning in July 2002 and ending December 31, 2002. Also on April 1,
2002,  the  maturity  dates of notes due to  Huntingdon  of $2,500 and $800 were
extended to January 15, 2003 and April 15, 2003, respectively.


                                      F-27
<PAGE>

          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              for the years ended December 31, 2001, 2000 and 1999

<TABLE>
<CAPTION>
                                      Balance       Amounts            Write-Offs
                                    Beginning of  Charged to   Amounts   Against   Balance End
                                       Period     Net Income  Acquired  Reserves    of Period
                                    ------------  ----------  --------  ---------  -----------
<S>                                    <C>          <C>         <C>      <C>         <C>
Allowances for sales returns
 and doubtful accounts:
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
Year Ended December 31, 1999           1,840        18,848      1,264    16,041       5,911
</TABLE>