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, 2004

                                       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 of          (IRS employer identification no.)
     incorporation or organization)

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

                                  973-539-9528
              (Registrant's Telephone Number, Including Area Code)

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

                                  Common Stock
                                  ------------
                                (Title of Class)

Indicate by check mark whether the Registrant: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filling requirements for
the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|

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

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of June 30, 2004 (the last business day of the Registrant's
most recently completed second fiscal quarter) was approximately $6,647,500.

As of March 28, 2005, there were 35,406,151 shares of the Registrant's Common
Stock outstanding.

                      Documents Incorporated by Reference:

                                      None

<PAGE>

                                 MEDIABAY, INC.

Form 10-K

Table of Contents

ITEM I                                                                        1

Item 1. Business                                                              1

Item 2. Properties                                                           17

Item 3. Legal Proceedings                                                    17

Item 4. Submission of Matters to a Vote of Security Holders                  17

PART II                                                                      18

Item 5. Market for Registrant's Common Equity, Related Stockholder
     Matters and Issuer Purchases of Equity Securities                       18

Item 6. Selected Financial Data                                              18

Item 7. Management's Discussion and Analysis of Financial Condition and
     Results of Operations                                                   20

Item 7A. Quantitative and Qualitative Disclosures About Market Risk          44

Item 8. Financial Statements and Supplementary Data                          44

Item 9. Changes in and Disagreements With Accountants on Accounting and
     Financial Disclosure                                                    44

Item 9A. Controls and Procedures                                             44

Item 9B. Other Information                                                   44

PART III                                                                     45

Item 10. Directors and Executive Officers of the Registrant                  45

Item 11. Executive Compensation                                              48

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters                                         52

Item 13. Certain Relationships and Related Transactions                      53

Item 14. Principal Accountant Fees and Services                              57

PART IV                                                                      58

Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K   58

<PAGE>

PART I

Item 1.  Business
Forward-looking Statements

Certain statements in this Form 10-K and in the documents incorporated by
reference in this Form 10-K constitute "forward-looking" statements within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical facts included in this Report, including,
without limitation, statements regarding our future financial position, business
strategy, budgets, projected costs and plans and objectives of our management
for future operations are forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. These forward
looking statements involve certain known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any results, performances or achievements expressed
or implied by such forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations, include,
without limitation our ability to implement our new strategy and transition our
business and the risks related thereto: our history of losses and declining
revenues; our ability to license and sell new spoken word content, obtain
additional financing, anticipate and respond to changing customer preferences,
license and produce desirable content, protect our databases and other
intellectual property from unauthorized access, and collect receivables;
dependence on third-party providers, suppliers and distribution channels;
competition; the costs and success of our marketing strategies, product returns,
member attrition; and risks relating to our capital structure. 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
We are a digital media and publishing company specializing in spoken audio
entertainment. We have over 75,000 hours of audio content, which we distribute
via mail order, our websites, some of the nation's largest retailers, and a la
carte, digital downloads and subscription services.

Today we have two principal content libraries; (1) Audiobooks: which we license
from the nation's largest publishing houses to sell on CD and cassette through
the Audio Book Club and which we intend to distribute via digital downloads on
third-party websites and a digital download service that is under development;
and (2) An archive of the history of American radio which we produce and sell on
CD and cassettes through our catalog, a mail order based continuity program,
retail outlets, and our on-line download subscription service and third-party
websites, of which one is currently operational. We broadcasts our radio
programs through a syndicated radio show on 200 commercial stations across the
United States, as well as its 24-hour Radio Classics channels on Sirius and XM
Satellite Radio.

We are transitioning our business from selling hard goods primarily via mail
order to digital distribution via wireless and Internet downloads. Our
distribution strategy is two pronged: (1) to wholesale our audio content to the
leading music services and broadband companies on a white label basis, both
domestically and internationally; and (2) to operate our own downloadable


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content stores and subscription services which are intended to be branded via
partnerships with celebrities and corporate affiliates, each chosen specifically
to reach the targeted demographics known to be interested in its content. We
intend to use various means to market our downloadable content stores, including
working with manufacturers of digital music players, smart phones, and PDA's to
include samples of our audio content for consumers to preview when they purchase
these new devices, with the hope that that these samples will attract consumers
to our content stores.

We recently executed distribution agreements with Microsoft's MSN Music to
provide our spoken word content to the MSN audience, which has 350 million
unique monthly visitors. We have also executed a distribution agreement with
Loudeye to act as our digital sales agent in distributing our catalog to
potentially 70 music services which that company hosts and sources content for.
In addition, we expect to launch an on-demand, download and subscription service
in partnership with Larry King in 2005, and have begun to make our Classic Radio
library available for ring tone distribution.

Today, some of our largest digital content partners include Simon & Schuster,
Random House, Harper Collins, Penguin Group (USA) Audio, Hay House, Sound Room
Publishers, Oasis, Zondervan, BBC, Blackstone, and CBS Radio.

March 2005 Financing
On March 23, 2005, we received an infusion of $35 million in private equity
financing from several institutional investors. We retired all of our borrowings
and our cash reserves increased to approximately $16.5 million. Because of this
financing, we believe that we have sufficient cash to implement our new
strategy, including required marketing expenditures, for at least twelve months.

Strategy
In response to the music industry's recent success in creating a market for
legal digital downloads using digital rights management solutions that are
intended to prevent piracy of copyrighted content, we intend to become a leading
distributor for downloadable, spoken word audio entertainment. We intend to
build this new distribution channel by utilizing our nearly twelve years of
experience operating the Audio Book Club and our old-time radio business. During
those twelve years, we have serviced approximately 2.9 million customer accounts
and plan to leverage this list of audio buyers to attract new digital shoppers.

We intend to use the Windows Media Digital Rights Management (DRM) system, and
other easy to use, rights management technologies that may evolve over time.
Beginning this past Christmas season, 70 new digital devices that support the
Microsoft "PlaysforSure(TM)" digital rights management and device platform
became available for sale by many of the leading device manufacturers. Examples
of companies offering a "PlaysforSure(TM)" device include Hewlett Packard, Dell,
Creative, Rio, i-River and Samsung. Many of these devices have large file
storage capacities and make, what we believe, could be a perfect match for our
content, which is typically one half hour in length for our classic radio shows,
to an average of 6 to10 hours for an audiobook.

In addition, the rapid evolution of cell and smart phones with hard drives and
media players presents a large potential user base of digital devices for our
content, as more than 500 million new handsets are sold each year in the market
place. These portable devices, coupled with the ubiquitous installed base of
personal computers with CD burners and USB port memory discs are making digital
audio content portable and more accessible to users.

We believe the proliferation of broadband Internet service, the Microsoft
digital rights management solution, and an expanding user base of portable
devices have created an inflection point where downloads are a better way to


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distribute audio than traditional CDs and tapes via a retail store or by mail
order. Broadband Internet and ubiquitous wireless networks means companies like
MediaBay can deliver audio files quickly and affordably. Downloads provide
consumers a more convenient way to purchase audio in real time and provides
incredible opportunity for broad choice since there are no inventory
requirements. This distribution is better for the environment and most
importantly, provides real savings for the consumer.

We have determined that future investment in our mail order, hard goods based,
Audio Book Club would not provide the returns adequate to justify future
expenditures. Accordingly, in 2004, we discontinued marketing to attract new
Audio Book Club members and are developing plans to transition current members
to new programs including encouraging existing members to begin downloading
spoken word.


Online Agreement with Microsoft
The first step in executing our new strategy is our agreements with Microsoft.
These agreements provide for us to distribute spoken word audio content,
including audiobooks from the largest publishers and our old-time radio
programs, through an exclusive distribution relationship with the new MSN Music
Service. Today, MSN has an audience of 350 million unique monthly visitors.
Microsoft has announced that the new music service will have the largest
selection of songs and audio content of any service and will be compatible with
the most number of digital devices, leveraging its industry leading windows
media player and windows digital rights management platform.


Online Agreement with Loudeye
We have also announced a multi-year agreement with Loudeye Corp., a worldwide
leader in business-to-business digital media solutions. Loudeye is working with
us to provide a solution for powering digital distribution of a wide range of
audiobooks. Under the agreement, we intend to make available our audiobook
content catalog to Loudeye for both domestic and international distribution,
subject to obtaining appropriate international rights, to new and existing
Loudeye partners. Loudeye and its OD2 services have relationships with more than
70 web storefronts and music services throughout the United States, Europe and
Australia.


Larry King Opportunity
Celebrity Interactive LLC, Larry King and MediaBay have signed an endorsement
and promotion agreement, which MediaBay intends to use to reach first time
downloaders and the large and diverse Larry King fan base to help us build a new
digital service. We intend to utilize the arrangement with Larry King to form a
Larry King audio entertainment and education service. This digital service is
being designed to allow consumers to shop and download a broad selection of
content, including but not limited to, audiobooks, classic radio programs,
educational materials, self-help titles, and current events. We anticipate that
the titles will be available for download directly to the personal computer or
other digital devices.


Open Standard Platform Technology
We have chosen to leverage the proliferation of the Windows Media DRM platform
as the de facto rights management standard for content owners to protect their
intellectual property on the Internet. According to a report from the
International Federation of the Phonographic Industry (IFPI) trade group, the
number of online music stores quadrupled to more than 230 in 2004. In the United
States, the overwhelming majority of these stores have adopted the Windows Media


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DRM as their solution to protect content owners intellectual property and to
transfer files to digital hand held devices. This trend is certain to improve
consumer choice as it allows consumers to shop in a broad range of stores, but
maintain the flexibility to switch devices over time as functionality improves
without having to worry about media format conversion issues that closed
proprietary systems, such as Apple i-Tunes, create. On-line music stores in the
United States that use the Window's DRM system include such companies as
RealNetworks, MSN Music, Wal-Mart, Napster, Music Maker, Yahoo's Music Match,
Buy.com, Music Now, and VirginDigital. The competing storefronts, which use
proprietary DRM technologies or closed systems, are Sony, Apple and Audible.

Industry Background
A major trend over the thirty years in the United States is to work longer
hours, spend more time in the automobile commuting to and from work, and thus
have less time for leisure activities. According to Harris Interactive, since
1973, the median number of hours that people say they work has jumped from 41
hours a week to 49. Over the same period, Harris reports that people's leisure
time has dropped from 26 to 19 hours per week. Listening is a way for
individuals to consume content at times when they are unable to read, such as
when they are driving. The 2003 edition of the Veronis Suhler Stevenson
Communications Industry Forecast estimates that on average Americans spent more
than 20 hours a week listening to the radio in 2003, compared to 17.7 hours in
1998. In comparison, Veronis Suhler Stevenson estimates that book reading
declined among Americans from an average of 2.3 hours in 1998 to 2.1 hours per
week in 2003. According to the 2000 United States Census, 97 million people
drive to and from work alone, an increase of 15% from 1989. The average travel
time to work increased to 25.5 minutes each way, an increase of 7% from 1990. In
addition, more than 42 million individual drivers have a commute of at least 30
minutes or more each way.

As individuals look to use their commuting time more efficiently and manage an
increasing amount of available content, audiobooks have emerged as a
personalized "pay-to-listen" alternative to radio, because radio does not allow
listeners to control when they listen to a particular program.

According to the Audio Publishers Association 2003 Sales Survey, the U.S. market
for audiobooks on cassette and CD sold in retail stores grew to $800 million in
2001. The APA also estimated that 25 million American households listened to
audiobooks in 2002, and that in 2002 audiobooks were the "fastest growing
segment of the publishing industry".

This increasing usage of audiobooks exists despite limited types of content,
high prices and the limitations of cassette tapes and CDs. For instance, the
audiobook market based on retail sales does not include the many audiobooks and
other spoken word products sold to consumers directly or in vertical markets
such as personal improvement, training, and educational markets, nor does it
address the emerging market in personalized "time-shifted" radio programming or
timely print content such as newspapers, newsletters, magazines, and journals.

The Internet has emerged as a powerful global communications and entertainment
medium, giving millions of people the ability to access large amounts of
valuable, pay-for-access media. Jupiter Research reported that as of the end of
2003, 21.5 million households, or about one-fifth of U.S. households, were
connected to the Internet via broadband. Based on historic growth rates and
current trends around broadband availability, interest, and pricing, Jupiter
Research forecasts that by 2008, 46 million households, representing half of
online households and 40% of all U.S. households will connect via high-speed,
always-on technologies. Through the Internet, people can buy various forms of
information and entertainment, from books to music and video for usage both at
and away from the computer.


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According to International Data Corporation (IDC), mobile access to the
Internet, instant messaging, music, and more are spurring a nearly fivefold
run-up in worldwide sales of smart handheld devices by 2004, creating a market
for those products valued at approximately $26 billion.

In December 2003, Jupiter Research published a report that predicted the demand
for MP3 players in the U.S. would grow at a rate of 50% a year through 2006.
According to Jupiter, shipments of MP3 players in the U.S. were about 3.5
million in 2003, which are almost double 2002 figures. Jupiter also predicted
that there would be more than 26 million MP3 players in use by 2006 and that
starting in 2004, the demand for players with hard drives will surpass that of
players with flash memory. The DVD player market, which we believe is a valid
comparative model, has grown from 11.4 million U.S. households in 2000 to 39.3
million in 2003 according to the Consumer Electronics Association, with an
average price of $490 in 1997 to an estimated $138 in 2003.

The market for personal digital assistants that have digital audio capabilities
had been led by Pocket PCs -- devices running on Microsoft operating systems
which are manufactured by Hewlett-Packard, Toshiba, and Dell among others.
Gartner Group has reported that sales of smartphones were significant enough in
the U.S. to slow the sales of PDAs. Research firm IDC published a report in
February 2004 estimated that smartphones showed significant growth and future
promise. In 2003, the worldwide smartphone market grew 181% year-over-year to
9.6 million units.

The key characteristic of smartphones that enable the download of spoken word
content is the inclusion of enough internal memory to store our audio content.
Since most smartphones "dock" to computers, allowing for data exchange of
contact and schedule information, spoken word can also be transferred to
smartphones via a personal computer.

We are seeking to develop relationships with cell phone companies and other high
technology providers. Wireless handheld technology is the ideal match for the
download spoken word business. 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. This freedom to download
wirelessly will allow unprecedented convenience for consumers.

Current Businesses
Audio Book Club is a membership-based club with licenses from publishers to
distribute audiobooks in a club format. This business is modeled after
traditional book-of-the month. Radio Spirits, which we believe, is the world's
largest seller of old-time radio shows, sells on audiocassettes and compact
discs through retail, direct mail and online channels. Our radio library
consists of thousands of famous old-time radio shows, many of which it licenses
exclusively.

Our content library consists of more than 75,000 hours of spoken audio content
including audiobooks and old-time radio shows. The majority of our content is
acquired under license from the rights holders enabling us to manufacture the
product giving us lower costs for goods sold than other companies.

Our customer base includes over 2.9 million spoken audio buyers who have
purchased via catalogs and direct mail marketing. Our old-time radio products
are sold in retail locations including Barnes & Noble, Borders, Wal-mart and
Cracker Barrel Old-Time Stores.

We report financial results on the basis of four reportable segments; corporate,
Audio Book Club, Radio Spirits and MediaBay.com. A fifth division,
RadioClassics, 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. Our four divisions serving the spoken
word audio industry are as follows:


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Audio Book Club
We believe that Audio Book Club, which is modeled after the traditional
"Book-of-the-Month Club" format, is the largest membership-based audiobook club.
The club's total account file, which includes active and inactive accounts, was
approximately 2.5 million accounts at December 31, 2004.

We have determined that future investment in Audio Book Club would not provide
the returns adequate to justify future expenditures. Accordingly we have
discontinued marketing to attract new Audio Book Club members and are developing
plans to transition current members to new programs including encouraging
existing members to begin downloading spoken word. Due to the lack of new member
marketing expenditures revenue in Audio Book Club declined $14.1 million, or
53.3% to $12.3 million for the year ended December 31, 2004 from $26.4 million
for the year ended December 31, 2003 and we expect revenue derived from the
Audio Book Club to continue to decline. The Audio Book Club accounted for
approximately 64.7% of revenues in 2004.

Radio Spirits
We believe Radio Spirits is the world's largest seller of old-time radio shows,
which it sells on audiocassettes and compact discs through retail, direct mail
and online channels. Radio Spirits has a database of names of more than 400,000
catalog customers and prospects and sells its products in such well-known
national chains as Barnes & Noble, Borders, Wal-Mart, Cracker Barrel Old Country
Stores and online retailers such as Amazon.com. Radio Spirits' products can also
be purchased online at www.radiospirits.com. The Radio Spirits content library
consists of more than 65,000 hours of classic radio shows licensed on a
primarily exclusive basis. Radio Spirits' library of classic radio shows
includes episodes from the following notable series: The Shadow, The Jack Benny
Program, The Bob Hope Show, Superman, Suspense and many others including famous
stars such as Clark Gable, Cary Grant, Humphrey Bogart, Jimmy Stewart, Lucille
Ball, Frank Sinatra, Judy Garland, Orson Welles and Bing Crosby. Radio Spirits
also offers its old-time radio programs in a continuity format, a marketing
program that automatically sends selections to a customer once an initial order
is placed. Radio Spirits accounted for approximately 35.3% of MediaBay's revenue
in 2004.

MediaBay.com
MediaBay.com provides the infrastructure and support for all of our web sites
including www.audiobookclub.com, www.radiospirits.com, and
www.RadioClassics.com. It is expected that MediaBay.com will power our new
digital audio download services.

RadioClassics Division
RadioClassics was created to distribute our proprietary old-time radio content
across multiple distribution platforms including traditional radio, cable
television, satellite television (DBS), satellite radio and the Internet.
RadioClassics currently distributes a national "classic" radio program, "When
Radio Was" and can also be heard on dedicated channels on both the Sirius
Satellite Radio and XM Satellite Radio services.

Competition
We compete for discretionary consumer spending with other mail order clubs and
catalogs and other direct marketers and traditional and on-line retailers that
offer products with similar entertainment value as audiobooks and old-time radio
programs, such as music on cassettes and compact discs, printed books, videos,
and laser and digital video discs. Many of these competitors are
well-established companies, which have greater financial resources.


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We will compete for consumers of spoken word content with other Internet-based
audio distributors, as well as with our existing, competitors, such as
distributors of audio on cassette tape or compact disc. The business of
providing content over the Internet is experiencing rapid growth and is
characterized by rapid technological changes, changes in consumer habits and
preferences, and the emergence of new and established companies. We will also
continue to compete with (i) book store chains deep-discount retailers, retail
stores, mass merchandisers, mail order catalogs, clubs, and libraries that sell,
rent, or loan audiobooks on cassette tape or compact disc, such as Borders,
Barnes & Noble, (ii) online retailers such as Amazon.com, (iii) websites that
offer streaming access to spoken audio content using tools such as the
RealPlayer or Windows Media Player, (iv) other companies offering services
similar to ours, such as Audible AudioFeast, and (v) online and Internet portal
companies such as America Online, Inc., Yahoo! Inc., and iTunes, which are
either offering or have the potential to offer audio content. Moreover Audible,
Inc., has begun to establish itself as a leader in downloadable spoken word
content distribution.

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

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

Employees
As of March 28, 2005 we had 35 full-time employees. Of these employees, 3 served
in corporate management; 16 served in operational positions at our Audio Book
Club operations; 9 served in operational positions at our MediaBay.com and
information systems operations and 7 served in operational positions at our
old-time radio operations. We believe our employee relations to be good. None of
our employees are covered by a collective bargaining agreement.

RISK FACTORS
Risks Relating to our Operations
We have a history of losses, are not currently profitable, and expect to incur
losses in the future. Since our inception, we have incurred significant losses.
As of December 31, 2004, we had incurred an accumulated deficit of approximately
$133 million. Losses are continuing and are expected to continue. We may not be
able to achieve and sustain profitable operations.

Our revenues have declined significantly and will continue to decline. We do not
intend to devote sufficient funds to market to attract new Audio Book Club
members and our revenue bases will continue to erode.
Because we significantly reduced our marketing expenditures for new members, our
club membership and revenues declined significantly. Sales for the year ended
December 31, 2004 decreased $17.8 million or 48.6% to $18.8 million as compared
to $36.6 million for the year ended December 31, 2003. Audio Book Club sales
decreased by $14.1 million to $12.3 million for the year ended December 31, 2004


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from $26.4 million for the year ended December 31, 2003 principally due to a
decrease in club membership as a result of a reduction in our advertising
expenditures for new members. We do not anticipate conducting any significant
new member acquisition marketing of Audio Book Club as we have moved to a new
strategy to grow our business, as a result, our revenues will continue to
decline until such time, if ever, as we successfully implement our new
strategies.

Our products are sold in a niche market that may have limited future growth
potential.
Consumer interest in audiobooks and old-time radio may decline in the future,
and growth trends in these markets may stagnate or decline. A decline in the
popularity of audiobooks and old-time radio would limit our future growth
potential and negatively impact our future operating results.

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

      o     plan for product offerings;

      o     introduce new titles;

      o     anticipate order lead time;

      o     accurately assess inventory requirements; and

      o     develop new product delivery methods.

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 premium spoken word content. We rely on third-party content
providers to offer downloads of premium spoken word content. These third party
providers include publishers. In some cases, we may be required to pay
substantial fees to obtain this third party content. In order to provide a
compelling service, we must license a wide variety of spoken word content to our
customers with attractive usage rules such as CD recording, output to digital
audio devices, portable subscription rights and other rights. In addition, if we
do not have sufficient breadth and depth of the titles necessary to satisfy
increased demand arising from growth in our customer base, our customer
satisfaction may be affected adversely. We cannot guarantee that we will be able
to secure licenses to spoken word content or that such licenses will be
available on commercially reasonable terms. Some of our license agreements
expire over the several months unless they are renewed.

In addition, we have an agreement with a publisher under which we made periodic
payments for a series of audiobook titles. The agreement provides us to make
additional payments of approximately $700,000, some of which is past due. We do
not believe that we can profitably license the additional titles and we are
negotiating with the publisher to revise, amend or cancel the agreement.

If our third-party providers fail to perform their services properly, our
business and results of operations could be adversely affected.
Third-party providers conduct all of our Audio Book Club and a majority of our
Radio Spirits customer service operations, process orders and collect payments


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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, our operations might
not function efficiently, our expenses may increase and our revenue may decline.

Our fulfillment agreement with a third-party provider, which provides virtually
all of the services for our Audio Book Club, expires April 2005 and new
arrangements may be more expensive and create disruptions in service to our
Audio Book Club members.
Our fulfillment agreement with the third-party provider, which provides
virtually all of the services for our Audio Book Club expires, April 2005. While
we are negotiating to extend such agreement to continue on a month-to-month
basis, we cannot assure you that we will be able to enter into such an agreement
Moreover, we anticipate that a month-to-month agreement will result in higher
fulfillment costs. If we are required or elect to change fulfillment providers,
there may be significant disruptions to our Audio Book Club members, which could
result in decreased orders and higher returns and bad debts.

If our marketing strategies to acquire new customers are not successful our
sales will decline and our costs could increase. 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 or the members we
do acquire may not purchase as many products as we anticipate, return products
at a higher rate than we expect or fail to pay for their purchases. As a result,
our operating results would be negatively impacted and our sales growth would be
inhibited.

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

New laws addressing the sending of e-mails may limit our ability to market or
subject us to penalties. New laws recently enacted to limit "spam" e-mails may
impact our ability to conduct e-mail campaigns. While we attempt to only use
"opt-in" e-mail addresses and to work with third parties whose lists consist of
"opt-in" e-mails, the law may limit the number of third parties whose lists we
can use or significantly reduce the number of e-mails within these lists.
Limitations on our ability to continue the use of e-mail marketing campaigns
could adversely affect our ability to attract new Audio Book Club members and
increase our cost to acquire new members.

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

If third parties obtain unauthorized access to our member and customer databases
and other proprietary information, we would lose the competitive advantage they
provide. We believe that our member file and customer lists are valuable
proprietary resources, and we have expended significant amounts of capital in
acquiring these names. Our member and customer lists, trade secrets, trademarks
and other proprietary information have limited protection. Third parties may


                                       9
<PAGE>

copy or obtain unauthorized access to our member and customer databases and
other proprietary know-how, trade secrets, ideas and concepts.

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

If we are unable to collect our receivables in a timely manner, it may
negatively impact our cash flow and our operating results. We experienced bad
debt rates of approximately 4.4% and 10.8% during the year ended December 31,
2004 and 2003, respectively. 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 and reduce our assets.

Increases in costs of postage could negatively impact our operating results. We
market through direct mailings to both our customers and prospective customers,
and postage is a significant expense in the operation of our business. We do not
pass on the costs of member mailings and member solicitation packages. Even
small increases in the cost of postage, multiplied by the millions of mailings
we conduct, would result in increased expenses and would negatively impact our
operating results.

We face significant competition from a wide variety of sources for the sale of
our products. We may not be able to compete effectively because of the
significant competition in our markets from many competitors, many of whom are
better financed and have greater resources and from other competing products,
which provide similar entertainment value. We compete with other web sites,
retail outlets and catalogs, 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 DVDs. 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.

A decline in current levels of consumer spending could reduce our sales. The
level of consumer spending directly affects our business. One of the primary
factors that affect consumer spending is the general state of the local
economies in which we operate. Lower levels of consumer spending in regions in
which we have significant operations could have a negative impact on our
business, financial condition or results of operations.

We have not fully complied with the terms of all of our license agreements and
failure to do so may impair our ability to license products from some
rightsholders. As of the December 31, 2004, certain royalty payments have not
been made and there have been no requests for royalty statements or payments in


                                       10
<PAGE>

connection therewith. The publishers and other rightsholders have not requested
royalty statements or payments. These amounts are accrued for and reflected in
the Company's financial statements.


                                       11
<PAGE>

If we are unable to complete our assessment as to the adequacy of our internal
control over financial reporting when required and future year-ends as required
by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose
confidence in the reliability of our financial statements, which could result in
a decrease in the market price of our common stock.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to include a report
of management on the issuer's internal control over financial reporting in their
annual reports on Form 10-K. This report is required to contain an assessment by
management of the effectiveness of such issuer's internal controls over
financial reporting. In addition, the public accounting firm auditing a public
company's financial statements must attest to and report on management's
assessment of the effectiveness of the company's internal controls over
financial reporting. While we anticipate expending significant resources in
developing the necessary documentation and testing procedures required by
Section 404, there is a risk that we will not comply with all of the
requirements imposed by Section 404. If we fail to implement required new or
improved controls, we may be unable to comply with the requirements of SEC 404
in a timely manner. This could result in an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial
statements, which could cause the market price of our common stock to decline
and make it more difficult for us to finance our operations.

The effectiveness of our disclosure and internal controls may be limited. Our
disclosure controls and procedures and internal controls over financial
reporting may not prevent all errors and intentional misrepresentations. Any
system of internal control can only provide reasonable assurance that all
control objectives are met. Some of the potential risks involved could include
but are not limited to management judgments, simple errors or mistakes, willful
misconduct regarding controls or misinterpretation. There is no guarantee that
existing controls will prevent or detect all material issues or be effective in
future conditions, which could materially and adversely impact our financial
results in the future.

Additional Risks Relating to Our Change in Strategy and Our Downloadable Spoken
Word Content Offerings and Online Initiatives.

Our new strategy to focus on downloadable spoken word content and our proposed
Larry King online initiatives is subject to many uncertainties and could result
in continuing losses and declining revenues until such time, if ever, it is
successfully implemented.

Historically, we have sold audiobooks through a membership club format and other
spoken word content, substantially all in hard goods format (audio cassettes and
CDs). Over the past two years, we significantly reduced our new member and
customer marketing activities. We intend to pursue a new strategy of pursuing
the opportunities to sell downloadable spoken word content and selling hard good
format content online. We have limited experience in the emerging and
competitive downloadable content distribution business and cannot assure you
that we will be successful in transiting, operating and growing our business.

Because we intend to pursue a new strategy, which focuses on downloadable spoken
word content and our proposed on-line club, we intend to phase out the Audio
Book Club and will not devote the funds necessary to acquire new members to
offset member attrition and/or expand our existing membership and customer
bases. As a result, our revenue will continue to decline, which will continue to
negatively impact our performance. We expect this trend to continue until such
time, if even, as we generate significant revenue from the sale of downloadable


                                       12
<PAGE>

spoken word content and attract and establish a meaningful customer base for our
online Larry King website. We do not expect to begin to offer downloadable
spoken word content until at least June 2005 or launch our proposed Larry King
website until at least June 2005. There can be no assurance that we will meet
these launch dates, or be able to successfully implement our new strategies or
that implementation will result in increased revenues or profitable operations.

The download spoken word distribution business is new and rapidly evolving and
may not prove to be a profitable or even viable business model. Download spoken
word distribution services are a relatively new business model for delivering
digital media over the Internet. It is too early to predict whether consumers
will accept, in significant numbers, online spoken word content services and
accordingly whether the services will be financially viable. If download spoken
word distribution services do not prove to be popular with consumers, or if
these services cannot sustain any such popularity, our business and prospects
would be harmed.

Our proposed Larry King on-line service may not attract new customers. We have
signed an agreement with Larry King to form an online Larry King audio
entertainment and education service, which we believe could build an income
stream to replace the current negative option audiobook club. The celebrity
spokesman and associated public relations activities are expected to lower
acquisition costs of new members. We have not completed the design and
development of our proposed Larry King web site and related strategies and
cannot assure you that we will be successful in operating and growing the web
site. If our efforts are not successful, we will not generate sufficient
revenues to offset the expected continuing declining revenues from our Audit
Book Club. Moreover, there can be no assurance that we will be able to reduce
our cost of acquiring new members and overall operating costs as compared to our
Audio Book Club.

The market for our service is uncertain and consumers may not be willing to use
the Internet to purchase spoken audio content, which could harm our business.
Downloading audio content from the Internet is a relatively new method of
distribution and its growth and market acceptance is highly uncertain. Our
success will depend in large part on more widespread consumer willingness to
purchase and download spoken audio content over the Internet. Purchasing this
content over the Internet involves changing purchasing habits, and if consumers
are not willing to purchase and download this content over the Internet, our
revenue will be limited, and our business will be materially and adversely
affected. We believe that acceptance of this method of distribution may be
subject to network capacity constraints, hardware limitations, company computer
security policies, the ability to change user habits, and the quality of the
audio content delivered.

Manufacturers of electronic devices may not manufacture, make available, or sell
a sufficient number of products suitable for our service, which would limit our
revenue growth. If manufacturers of electronic devices do not manufacture, make
available, or sell a sufficient number of electronic devices enabled with the
Windows Media Platform for downloadable spoken word content or if these players
do not achieve sufficient market acceptance our sales could be adversely
affected and our business will be materially and adversely affected. Microsoft
competes with others for relationships with manufacturers of electronic devices
with audio playback capabilities. Manufacturers of electronic devices have
experienced delays in their delivery schedule of their digital players due to
parts shortages and other factors. Although the content we intend to provide can
be played on personal computers and burned to CDs for later listening, we
believe that a key to our future success is the ability to playback this content
on hand-held electronic devices that have digital audio capabilities.


                                       13
<PAGE>

We must provide digital rights management solutions that are acceptable to both
content providers and consumers. We must provide digital rights management
solutions and other security mechanisms in our download spoken word distribution
services in order to address concerns of content providers and authors, and we
cannot be certain that content licensors or consumers will accept them. Content
providers may be unwilling to continue to support portable subscription
services. Consumers may be unwilling to accept the use of digital rights
management technologies that limit their use of content, especially with large
amounts of free content readily available.

Third-party providers of digital rights management software, such as Microsoft,
may be unwilling to continue to provide such software to us upon reasonable or
any terms. If we are unable to acquire these solutions on reasonable or any
terms, or if customers are unwilling to accept these solutions, our business and
prospects could be harmed.

Capacity constraints and failures, delays, or overloads could interrupt our
service and reduce the attractiveness of downloading spoken word to potential
customers. Any capacity constraints or sustained failure or delay in downloading
spoken word could reduce the attractiveness of downloading spoken word products
which could materially and adversely affect our ability to implement our new
strategy. The success of our new strategy depends on our ability to
electronically, efficiently, and with few interruptions or delays distribute
spoken audio content to potential customers. Accordingly, the performance,
reliability, and availability of our Website, our transaction processing systems
and our network infrastructure are critical to our operating results. We believe
the potential instability of the Internet could mean that periodic interruptions
to our new service could occur. These interruptions might make it difficult to
download audio content from our Website in a timely manner and jeopardize
prospective customer relationships.

We do not have a comprehensive disaster recovery plan and we have limited
back-up systems, and a disaster could severely damage our operations and could
result in loss of customers. If our computer systems are damaged or interrupted
by a disaster for an extended period of time, our business, results of
operations, and financial condition would be materially and adversely affected.
We do not have a comprehensive disaster recovery plan in effect. Our operations
depend upon our ability to maintain and protect our computer systems - all of
which are located in our headquarters and at a third party offsite hosting
facility. Although we maintain insurance against general business interruptions,
we cannot assure you that the amount of coverage will be adequate to compensate
us for our losses.

Problems associated with the Internet could discourage use of Internet-based
services and adversely affect our business. If the Internet fails to develop or
develops more slowly than we expect as a commercial medium, our business may
also grow more slowly than we anticipate or fail to grow. Our success will
depend in large part on increasing use of the Internet. There are critical
issues concerning the commercial use of the Internet which we expect to affect
the development of the market for downloadable spoken word, including:

      o     Secure transmission of customer credit card numbers and other
            confidential information;

      o     Reliability and availability of Internet service providers;

      o     Cost of access to the Internet;

      o     Availability of sufficient network capacity; and


                                       14
<PAGE>

      o     Ability to download audio content consistent with computer security
            measures employed by businesses.

More consumers are utilizing non-PC devices to access digital content, and we
may not be successful in gaining widespread adoption by users of such devices.
In the coming years, the number of individuals who access digital content
through devices other than a personal computer, such as personal digital
assistants, cellular telephones, television set-top devices, game consoles and
Internet appliances, is expected to increase dramatically. Manufacturers of
these types of products are increasingly investing in media-related
applications, but development of these devices is still in an experimental stage
and business models are new and unproven. If we are unable to offer downloads of
spoken word content on these alternative non-PC devices, we may fail to capture
a sufficient share of an increasingly important portion of the market for
digital media services or our costs may increase significantly.

We could be sued for content that we distribute over the Internet, which could
subject us to substantial damages. A lawsuit based on the spoken word content we
intend to distribute could be expensive and damaging to our business. As a
distributor and publisher of content over the Internet, we may be liable for
copyright, trademark infringement, unlawful duplication, negligence, defamation,
indecency, and other claims based on the nature and content of the materials
that we publish or distribute to customers. Our liability insurance may not
cover claims of these types or may not be adequate to protect us from the full
amount of the liability. If we are found liable in excess of the amount of our
insurance coverage, we could be liable for substantial damages. Our reputation
and business may suffer even if we are not liable for significant financial
damages.

Future government regulations may increase our cost of doing business on the
Internet, which could adversely affect our cost structure. Laws and regulations
applicable to the Internet, covering issues such as user privacy, pricing, and
copyrights are becoming more prevalent. The adoption or modification of laws or
regulations relating to the Internet could force us to modify our services in
ways that could adversely affect our business.

We may become subject to sales and other taxes for direct sales over the
Internet, which could affect our revenue growth. Increased tax burden could make
our service too expensive to be competitive. We do not currently collect sales
or other similar taxes for download of content. Nevertheless, one or more local,
state, or foreign jurisdictions may require that companies located in other
states collect sales taxes when engaging in online commerce in those states. If
one or more states successfully assert that we should collect sales or other
taxes on the download of spoken word content, the increased cost to our
customers could discourage them from purchasing our services, which would
materially and adversely affect our business.

We may not be able to protect our licenses or our intellectual property, which
could jeopardize our competitive position. If we fail to protect our licenses or
our intellectual property, we may be exposed to expensive litigation or risk
jeopardizing our competitive position. The steps we have taken may be inadequate
to protect our licenses or other intellectual property. We rely on a combination
of licenses, confidentiality agreements, and other contracts to establish and
protect our intellectual property rights. We may have to litigate to enforce our


                                       15
<PAGE>

licenses or other intellectual property rights or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and the diversion of our management and other resources, which
would harm our business.

Other companies may claim that we infringe their copyrights or patents, which
could subject us to substantial damages. Any claim of infringement could cause
us to incur substantial costs defending against the claim, even if the claim is
invalid, and could distract our management from our business. A party making a
claim could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from offering downloads of spoken word content. Any of these events
could have a material adverse effect on our business, operating results, and
financial condition.

The online content distribution industry is highly competitive and we cannot
assure you that we will be able to compete effectively, which would harm our
business. We will face competition in all aspects of our online business and we
cannot assure you that we will be able to compete effectively. We will compete
for consumers of spoken word content with other Internet-based audio
distributors, as well as with our existing, competitors, such as distributors of
audio on cassette tape or compact disc. The business of providing content over
the Internet is experiencing rapid growth and is characterized by rapid
technological changes, changes in consumer habits and preferences, and the
emergence of new and established companies. We will also continue to compete
with (i) book store chains deep-discount retailers, retail stores, mass
merchandisers, mail order catalogs, clubs, and libraries that sell, rent, or
loan audiobooks on cassette tape or compact disc, such as Borders, Barnes &
Noble, (ii) online retailers such as Amazon.com, (iii) websites that offer
streaming access to spoken audio content using tools such as the RealPlayer or
Windows Media Player, (iv) other companies offering services similar to ours,
such as Audible AudioFeast, iTunes, and (v) online and Internet portal companies
such as America Online, Inc., and Yahoo! Inc., and, which have the potential to
offer audio content. Moreover Audible, Inc., has begun to establish itself as a
leader in downloadable spoken word content distribution. Many of these companies
have financial, technological, promotional, and other resources that are much
greater than those available to us and could use or adapt their current
technology, or could purchase technology, to provide a service directly
competitive with our services and products.

Risks Relating to Our Capital Structure

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

Our stock price has been and could continue to be extremely volatile.
The market price of our common stock has been subject to significant
fluctuations since our initial public offering in October 1997. The securities
markets have experienced, and are likely to experience in the future,


                                       16
<PAGE>

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     Timely and successful implementation of our new strategies;

      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.

Our stock price may decline if we are unable to maintain our listing on Nasdaq
Our Common Stock is currently below the minimum per share requirement ($1.00)
for continued listing on the Nasdaq National Market and we have received a
letter dated March 8, 2005 from Nasdaq Stock Market, Inc. stating that we are
not in compliance with the minimum per share requirement ($1.00) for continued
listing on the exchange under Nasdaq Marketplace Rule 4310(c)(4). We have 180
days to demonstrate compliance by having our stock trade over $1.00 for a
minimum of ten consecutive trading days, or are subject to delisting by Nasdaq.

A large number of shares of our common stock could be sold in the market in the
near future, which could depress our stock price. As of March 28, 2005, we had
outstanding approximately 37.8 million shares of common stock. In addition, a
substantial portion 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(k). There are currently outstanding options and warrants to purchase and
convertible preferred stock convertible into an aggregate of approximately 163
million shares of our common stock. To the extent any of our warrants or options
are exercised or convertible preferred stock is converted, your percentage
ownership will be 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.

Because our board of directors consists of three classes, it may be more
difficult for a third party to acquire our company. Our by-laws divide our board
of directors into three classes, serving staggered three-year terms. The
staggered board of directors may make it more difficult for a third party to
acquire, or may discourage acquisition bids for our company.

Our outstanding preferred stock and our ability to designate additional
preferred stock could adversely effect the rights of our common stockholders.
Our Articles of Incorporation authorize our board of directors to issue up to
5,000,000 shares of "blank check" preferred stock without shareholder approval,
in one or more series and to fix the dividend rights, terms, conversion rights,
voting rights, redemption rights and terms, liquidation preferences, and any
other rights, preferences, privileges, and restrictions applicable to each new
series of preferred stock. We currently have four series of preferred stock
outstanding all of which have liquidation preferences senior to our common


                                       17
<PAGE>

stock. Three of these series have approval rights with respect to amendments to
our articles of incorporation which adversely affect the preferred stock,
incurrence of indebtedness, payment of dividends and distributions, redemption
of capital stock, the creation of other series of capital stock convertible into
our common stock. Moreover, two of the series of preferred stock have voting
rights, including an approval right with respect to certain corporate events,
such as, mergers and other business contribution and certain sales and transfer
of assets. The existence of our outstanding preferred stock and designation of
additional series of preferred stock in the future could, among other results,
adversely affect the voting power of the holders of common stock and, under
certain circumstances, could make it difficult for third parties to gain control
of our company, prevent or substantially delay a change in control, discourage
bids for our common stock at a premium, or otherwise adversely affect the market
price of our common stock.


Item 2. Properties
We lease approximately 12,000 square feet of office space in Cedar Knolls, New
Jersey pursuant to a sixty-six month lease agreement dated April 18, 2003.


Item 3. Legal Proceedings
We are not a party to any lawsuit or proceeding, which we believe is likely to
have a material adverse effect on us.


Item 4. Submission of Matters to a Vote of Security Holders
An Annual Meeting of Shareholders was held on December 15, 2004 at which time
Mr. Joseph Rosetti, Mr. Paul Ehrlich and Mr. Steven Yarvis were reappointed to
serve as Class I directors until the Annual Meeting of Shareholders of the
Company to be held in 2007. Shareholder voting for these directors was as
follows:

Director                    Votes For                         Votes Withheld
--------                    ---------                         --------------
Joseph Rosetti              25,083,772                            88,465
Paul Ehrlich                25,083,572                            88,665
Steven Yarvis               24,997,860                           174,277

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

Director                        Class                 Expiration of Term
--------                        -----                 ------------------
Jeffrey Dittus                    II                         2005
Paul D. Neuwirth                  II                         2005
Richard Berman                   III                         2006
John F. Levy                     III                         2006


In addition, at the annual meeting, the shareholders approved the adoption of
the Company's 2004 Stock Incentive Plan (the "2004 Plan") providing for the
issuance of stock options to purchase, or equity awards for, up to 7,500,000
Shares of the Corporation's Common Stock by a vote of 13,468,891 for and 405,132
votes against, with 221,244 votes abstaining and 11,076,970 shares of Common
Stock not voting.

The shareholders also approved the adoption of a resolution to amend the
Company's Certificate of Incorporation to effect a combination (a "Reverse
Split") of the Company's issued and outstanding Common Stock. The motion
received, with respect to (i) Common Stock: 17,702,449 votes for and 930,263


                                       18
<PAGE>

votes against, with 30,570 votes abstaining, (ii) Series A Preferred Stock
1,428,571 votes for and no votes against, and (iii) with respect to Series C
Preferred Stock 5,580,384 votes for and no votes against. The Board of Directors
may abandon the proposal at any time prior to the date and time at which the
Reverse Split becomes effective if for any reason the Board of Directors deems
it advisable to abandon the proposal. The Board has elected to abandon the
proposal.

The Board also approved an amendment to the Company's Articles of Incorporation
to change the Company's name to Soundbytes Media Corporation. The motion to
amend the Company's Articles of Incorporation to change the Company's name to
Soundbytes Media Corporation received, with respect to (i) Common Stock:
18,055,734 votes for and 81,208 votes against, with 26,340 votes abstaining,
(ii) Series A Preferred Stock 1,428,571 votes for and no votes against and (iii)
with respect to Series C Preferred Stock 5,580,384 votes for and no votes
against.


PART II

Item 5. Market for Registrant's Common Equity Related Stockholder Matters and
Issuer Purchases of Equity Securities MediaBay's common stock has been quoted on
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, 2003
First Quarter                                 $  1.27            $   .77
Second Quarter                                   1.11                .64
Third Quarter                                    1.10                .60
Fourth Quarter                                   1.65                .80

Fiscal Year Ended December 31, 2004
First Quarter                                    1.59                .52
Second Quarter                                    .72                .36
Third Quarter                                     .49                .25
Fourth Quarter                                   1.91                .33

On March 28, 2005 the last reported sale price of our common stock on the Nasdaq
National Market was $0.60 per share. As of March 28, 2005, there were
approximately 150 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.


Item 6. Selected Financial Data
As a result of the following factors, including capitalization and write-off of
direct response advertising costs, recording of goodwill write-offs, the


                                       19
<PAGE>

strategic charges and the income tax benefit and subsequent expense, as well as
fluctuations in operating results depending on the timing, magnitude and success
of Audio Book Club new member advertising campaigns, and the changes in our
strategy made in 2004, as discussed above, comparisons of our historical
operating results from year to year may not be meaningful. For more information,
see our financial statements for the years ended December 31, 2002, 2003 and
2004 and the notes thereto included herein.


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                        --------------------------------------------------------
                                                                          2000        2001        2002        2003        2004
                                                                        --------    --------    --------    --------    --------
                                                                                 (thousands, except per share data)
<S>                                                                     <C>         <C>         <C>         <C>         <C>
Statement of Operations Data:
Net sales                                                               $ 44,426    $ 41,805    $ 45,744    $ 36,617    $ 18,831
Cost of sales                                                             23,044      19,783      20,651      17,479       8,802

Cost of sales - write-downs                                                   --       2,261          --          --       3,745
Advertising and promotion                                                 11,023      11,922      10,156       9,988       4,700

Advertising and promotion - write-downs                                       --       3,971          --          --         846
Bad debt expense                                                           2,583       2,536       2,821       3,940         829
General and administrative                                                11,823       8,947       8,347       6,816       6,043

Asset write-downs and strategic charges                                       --       7,044          --         749          --

Severance and other termination costs                                         --          --          --         544          --
Depreciation and amortization                                              7,984       5,156       1,314         328         144

Non-cash write-down of intangibles                                            --          --       1,224          --          --

Non-cash write-down of goodwill                                           38,226          --          --          --          --
                                                                        --------    --------    --------    --------    --------
     Operating (loss) income                                             (50,257)    (19,815)      1,231      (3,227)     (6,278)
Interest income (expense), net                                            (2,940)     (2,790)     (2,974)     (1,925)     (9,082)
                                                                        --------    --------    --------    --------    --------
     Loss before income tax benefit (expense)
      and extraordinary item                                             (53,197)    (22,605)     (1,743)     (5,152)    (15,360)

Income tax benefit (expense)                                                  --      17,200        (550)     (1,471)    (14,753)
                                                                        --------    --------    --------    --------    --------
     Loss before extraordinary item                                      (53,197)     (5,405)     (2,293)     (6,623)    (30,113)

Extraordinary gain (loss) on early extinguishment of debt                 (2,152)         --          --          --          --
                                                                        --------    --------    --------    --------    --------
     Net loss                                                            (55,349)     (5,405)     (2,293)     (6,623)    (30,113)

Dividends on preferred stock                                                  --          --         217         246         574
                                                                        --------    --------    --------    --------    --------
     Net loss applicable to common shares                               $(55,349)   $ (5,405)   $ (2,510)   $ (6,869)   $(30,687)
                                                                        ========    ========    ========    ========    ========

Basic and diluted loss per share:
Basic and diluted loss before extraordinary item                        $  (4.18)   $  (0.39)   $  (0.18)   $  (0.49)   $  (1.71)
                                                                        ========    ========    ========    ========    ========
Basic and diluted loss applicable to common shares                      $  (4.35)   $  (0.39)   $  (0.18)   $  (0.49)   $  (1.71)
                                                                        ========    ========    ========    ========    ========

Basic and diluted weighted average number of
     shares outstanding                                                   12,718      13,862      14,086      14,098      17,976
                                                                        ========    ========    ========    ========    ========
</TABLE>


                                       21
<PAGE>

<TABLE>
<CAPTION>
                                                                   As of December 31,
                                                                                                Actual    Pro Forma (a)
                                                  2000       2001        2002        2003        2004        2004
                                                --------   --------    --------    --------    --------    --------
                                                                        (thousands, except per share data)
<S>                                             <C>        <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Working capital (deficit)                       $    313   $ (4,167)   $ (4,336)   $(20,165)   $    720    $ 15,705
Total assets                                      49,932     44,452      48,619      36,893      16,576      31,361
Current liabilities                               17,103     15,491      18,984      29,194       5,905       5,705

Long-term debt (less current portion)             15,340     15,849      14,680          --      16,853         640

Common stock subject to contingent put rights      4,550      4,550       4,550         750          --          --
Total Common Stockholders' equity (deficit)     $ 12,939   $  8,562    $ 10,405    $  6,949    $ (6,181)   $ 25,016
</TABLE>

(a) Gives effect to (i) the sale of $35 million in Series D preferred stock and
warrants (the "Financing"), (2) repayment of $9.35 million of senior debt
facility, (iii) conversion of $5.8 million subordinated debt and $1.1 million
stated capital of preferred stock to common stock and, (iv) payment of $2.3
million in accrued interest and dividends, (v) redemption of $5.8 million of
stated capital of Series A and Series C Preferred Stock, which will occur on or
before June 1, 2005 (vi) loss on early retirement of debt of $.8 million, (vii)
payment of $3.1 million of cash fees and expenses incurred and the issuance of
warrants valued at $2.7 million to investment bankers in connection with the
Financing. See Note 19 Subsequent Events to our Financial Statements for the
year ended December 31, 2004, included herein. This information is being
provided to illustrate the significant effect of the Financing on MediaBay's
financial position.

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

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

On March 23, 2005, we received an infusion of $35 million in private equity
financing from several institutional investors. We retired all of our borrowings
and our cash reserves increased to approximately $16.5 million. Because of this
financing, we believe that we have sufficient cash to implement our new
strategy, including for required marketing expenditures, for at least twelve
months.

We report financial results on the basis of four business segments; Corporate,
Audio Book Club, Radio Spirits and MediaBay.com. A fifth division,
RadioClassics, 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 2004, our Audio Book Club segment had
net sales of approximately $12.3 million, our Radio Spirits segment had net
sales of approximately $6.4 million, our MediaBay.com segment had sales of
approximately $0.2 million and we had eliminating inter-segment sales of $0.1
million.

We derive our principal revenue through sales of audiobooks, classic radio shows
and other spoken word audio products directly to consumers principally through
direct mail. We also sell classic radio shows to retailers either directly or
through distributors. We derive additional revenue through rental of our
proprietary database of names and addresses to non-competing third parties
through list rental brokers. We also derive a small amount of revenue from
advertisers who advertise on our nationally syndicated classic radio shows.


                                       22
<PAGE>

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

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

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

Revenue Recognition
We derive our principal revenue through sales of audiobooks, classic radio shows
and other spoken word audio products directly to consumers principally through
direct mail. We also sell classic radio shows to retailers either directly or
through distributors. We derive additional revenue through rental of our
proprietary database of names and addresses to non-competing third parties
through list rental brokers. We also derive a small amount of revenue from
advertisers included in our nationally syndicated classic radio shows. We
recognize sales to consumers, retailers and distributors upon shipment of
merchandise. List rental revenue is recognized on notification by the list
brokers of rental by a third party when the lists are rented. We recognize
advertising revenue upon notification of the airing of the advertisement by the
media buying company representing us. Allowances for future returns are based
upon historical experience and evaluation of current trends. The historical
return rates for ABC members have been consistent for the past year and our
estimate is based on a detailed historical examination of trends. Based on the
current performance and historical trends, we do not expect significant changes
in the estimate of returns for ABC members. The estimate of returns for
wholesale sales of our old-time radio products is based on a detailed review of
each significant customer, depending on the amount of products sold to a
particular customer in a specific periods, the overall return rate for wholesale
sales could vary.

We record reductions to our revenue for future returns and record an estimate of
future bad debts arising from current sales in general and administrative
expenses. These allowances are based upon historical experience and evaluation
of current trends. If members and customers return products to us in the future
at higher rates than in the past or than we currently anticipate, our net sales
would be reduced and our operating results would be adversely affected. In
November 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a


                                       23
<PAGE>

Reseller of the Vendor's Products)", which addresses the income statement
classification of certain credits, allowances, adjustments, and payments given
to customers for the services or benefits provided. We adopted EITF No. 01-9
effective January 1, 2002, and, as such, have classified the cost of these sales
incentives as a reduction of sales. The effect on sales of applying EITF No.
01-9 in 2002, 2003 and 2004 was $118,000, $60,000 and $48,000 respectively.

Downloadable content revenue from the sale of individual content titles is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Content revenue from the sale of content subscriptions
is recognized pro rata over the term of the subscription period. Rebates and
refunds are recorded as a reduction of revenue in the period in which the rebate
or refund is paid in accordance with Emerging Issues Task Force Issue No. 01-9,
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products).

Accounts Receivable Valuation
We record an estimate of our anticipated bad debt expense and return rates based
on our historical experience. If the financial condition of our customers,
including either individual consumers or retail chains, were to deteriorate, or
if the payment or buying behavior were to change, resulting in either their
inability or refusal to make payment to us, additional allowances would be
required. For example, a one percent increase in returns as a percentage of
gross sales for the year ended 2004, assuming a constant gross profit percentage
and all other expenses unchanged, would have resulted in a decrease in net sales
of $242,000 and a increase in net loss available to common shares of $129,000. A
one percent increase in bad debt expenses as a percentage of net sales, assuming
all other expenses were unchanged, would have resulted in an increase in bad
debt expenses and a corresponding increase in net loss available to common
shares of $188,000.

Income Taxes
The ultimate realization of deferred tax assets is dependent on the generation
of future taxable income during the periods in which temporary timing
differences become deductible. We determine the utilization of deferred tax
assets in the future based on current year projections by management.

Based on a change in our strategy, which we believe will result in lower sales
and losses in the near term, but ultimately will be more profitable, we have
determined that it is not more likely than not that we will, in the foreseeable
future, be able to realize all or part of our net deferred tax asset. We have
accordingly made an adjustment to the deferred tax asset recording an increase
to the valuation allowance, resulting in a deferred tax expense charged against
income in the fourth quarter of 2004, the period when such determination was
made.

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. We account for direct response advertising for the acquisition of new
members in accordance with AICPA Statement of Position 93-7, "Reporting on
Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of direct
response advertising (a) whose primary purpose is to elicit sales to customers
who could be shown to have responded specifically to the advertising and (b)
that results in probable future benefits should be reported as assets net of
accumulated amortization Accordingly, we have capitalized direct response
advertising costs and amortized these costs over the period of future benefit
(the average member life), which has been determined to be generally 30 months.
The costs are being amortized on accelerated basis consistent with the


                                       24
<PAGE>

recognition of related revenue. In the fourth quarter of 2003, we adjusted the
amortization period for advertising to attract customers to its World's Greatest
Old-Time Radio continuity program and revised the estimate period for
amortization of these advertising costs down to 18 months, which resulted in an
increase in advertising expenses for the year ended December 31, 2003 of $409.

SOP 93-7 requires that the realizability of the mounts of direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable remaining future
net revenues. Based on the change in our strategy we have determined that the
future net revenue from our Audio Book Club does not support the carrying amount
of the direct-response advertising reported as assets relating to the Audio Book
Club. Accordingly, we have made an adjustment to write-off the carrying amount
of the asset in the fourth quarter for 2004 resulting in an increase in
advertising expense of $846.


Goodwill
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase method
of accounting. In July 2001, the Financial Accounting Standards Board issued
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
an intangible asset that is acquired shall be initially recognized and measured
based on its fair value. The statement also provides that goodwill should not be
amortized, but shall be tested for impairment annually, or more frequently if
circumstances indicate potential impairment, through a comparison of fair value
to its carrying amount. At December 31, 2004, we had $9.7 million of goodwill,
all of which relates to our Radio Spirits operations. We completed our annual
impairment test as of January 2005, utililizing the services of an independent
third-party appraiser, which did not result in an impairment loss. However, if
conditions or circumstances were to change resulting in a deterioration of our
Radio Spirits business, a future impairment of goodwill could be necessary.

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

                                                  Year Ended December 31,
                                            -----------------------------------
                                               2002         2003         2004
                                            ---------    ---------    ---------
Net sales .............................        100%         100%         100%
                                            =========    =========    =========
Cost of sales .........................         45           48           47
Cost of sales - write-downs ...........         --           --           20
Advertising and promotion .............         22           27           25
Advertising and promotion - write-downs         --           --            5
Bad debt expense ......................          6           11            4
General and administrative expense ....         18           19           32
Severance and other termination costs .         --            1           --
Asset write-downs and strategic charges         --            2           --
Depreciation and amortization expense .          3            1            1
Non-cash write-down of intangibles ....          3           --           --
Interest expense, net .................          7            5           48
Income tax expense (benefit) ..........          1            4           78
Net (loss) ............................         (5)         (18)        (160)
Dividends on preferred stock ..........         --            1            3
Net (loss) applicable to common shares          (5)         (19)        (163)


                                       25
<PAGE>

Year ended December 31, 2004 compared to year ended December 31, 2003
Net Sales
       ($000's)                          Change from
                     2003        2004    2003 to 2004   % Change
                     ----        ----    ------------   --------

Audio Book Club   $ 26,380     12,303     (14,076)       (53.4)%
                  ----------------------------------------------

Radio Spirits
Catalog              4,210      3,248        (962)       (22.8)
Wholesale            3,048      1,671      (1,377)       (45.2)
Continuity           2,841      1,403      (1,438)       (50.6)
                  ----------------------------------------------
                    10,099      6,322      (3,777)       (37.4)
                  ----------------------------------------------

MediaBay.com           138        205          67         48.7
                  ----------------------------------------------
                  $ 36,617     18,831     (17,786)       (48.6)%
                  ==============================================

Audio Book Club sales decreased principally due to a decrease in club membership
as a result of a reduction in our advertising expenditures for new members. For
the year ended December 31, 2004, the Audio Book Club spent $414,000 to attract
new members, a reduction of $1.7 million, or 80.2%, from the amount spent to
attract new members of $2.1 million during the year ended December 31, 2003.
Audio Book Club attracted approximately 19,000 new members in the year ended
December 31, 2004 as compared to approximately 134,000 new members in the year
ended December 31, 2003.

The decrease in Radio Spirits catalog sales is principally attributable to lower
sales from catalogs mailed due to less new product introductions into the
catalogs and fewer new customers. Wholesale sales of old-time radio products
decreased principally due to lower orders from mass merchants and other
retailers. Sales of our The World's Greatest Old-Time Radio continuity program
decreased for the year ended December 31, 2004, as compared to the year ended
December 31, 2003, principally due to the reduction in our advertising
expenditures for new members. For the year ended December 31, 2004, we spent
$6,000 to attract new continuity customers, compared to $775,000 spent to
attract new customers during the year ended December 31, 2003.

<TABLE>
<CAPTION>
Cost of Sales
$ (000's)                   2003                         2004
                  -------------------------   ---------------------------
                                  As a %                          As a %        From 2003 to 20003
                       $       of Net Sales        $          of Net Sales  of Net Sales     % Change
                  -----------   ----------    ----------      ------------   ----------      --------
<S>               <C>           <C>           <C>             <C>            <C>             <C>
Audio Book Club   $   12,107          45.9%   $    5,484          44.6%        (6,623)         (54.7)%
                  ------------------------------------------------------------------------------------

Radio Spirits
Catalog                 47.9%        1,476          45.5          (539)         (26.7)
                                                                                               2,015
Wholesale               67.5%        1,346          80.6          (711)         (34.6)
                                                                                               2,057
Continuity              45.6%          495          29.7          (800)         (61.8)
                  ------------------------------------------------------------------------------------
                       5,367          53.1%        3,317          52.5          (2050)         (38.2)
                  ------------------------------------------------------------------------------------
MediaBay.com                             5             1           0.3             (4)         (80.0)
                  ------------------------------------------------------------------------------------
                  $   17,479          47.7%        8,802          46.7%        (8,677)         (49.6)%
                  ====================================================================================
</TABLE>


                                       26
<PAGE>

The principal reason for the decline in cost of sales at Audio Book Club was a
reduction in net sales of 53.4% as described above. Cost of sales as a
percentage of net sales at Audio Book Club for the year ended December 31, 2004
was 60.2%, compared to 45.9% for 2003. Cost of sales increased as a percentage
of sales because our smaller active membership required us to purchase finished
goods from publishers rather than licensing and manufacturing product due to
lower sales and made us unable to meet manufacturing minimums and recoup
advances to publishers, and because higher sales of unabridged and CD titles
with higher costs, higher manufacturing costs due to lower volumes and the
offering of more discounted titles in our catalogs in an effort to increase
sales.

As a percentage of net sales, cost of sales at Radio Spirits increased to 54.1%
for the year ended December 31, 2004 from 53.1% for the year ended December 31,
2003. Cost of catalog sales decreased as a percentage of net sales to 46.3% for
the year ended December 31, 2004 as compared to 47.9% for the year ended
December 31, 2003 principally due to less discounting in the catalogs. The cost
of wholesale sales as percentage of net revenue increased to 79.3% as compared
to 67.5% for the year ended December 31, 2003 principally due to principally due
to sales to discounters of discontinued items. The cost of World's Greatest
Old-Time Radio continuity sales as a percentage of net income decreased to 37.0%
from 45.6% principally due to the smaller number of new customers in 2004 whose
initial purchase has a very high cost of goods sold.

Cost of sales - write-downs
         (000's)

                                    2003       2004
                                 --------   --------
Cost of sales - write-downs      $     --   $  3,745
                                 ========   ========

We have conducted a review of our operations including product offerings,
marketing methods and fulfillment. We are committed to digitizing and encoding
our library of spoken word content and making our content available to the
digital customer as described in the introduction to this Item 1. Business.

As a result of decisions made in the third quarter of 2004 we have recorded $2.1
million of strategic charges for the three months ended September 30, 2004.
These charges include: $1.0 of inventory written down to net realizable value
due to a reduction in Audio Book Club members and our new focus on delivering
spoken word products via downloads and $1.1 million of write-downs to royalty
advances paid to audiobook publishers and other license holders, which we do not
believe will be recoverable due to our new focus on delivering spoken word
products via downloads.

In the fourth quarter of 2004, we decided to transition our Audio Book Club
customers to either principally a downloadable business or an Internet based
business, which will not offer a negative club option. Based on this decision,
we further reduced the value of our Audio Book Club inventory by $870,000 and
reduced the amount of publishers' advances recorded as assets by $215,000.

Also in the fourth quarter of 2004, we reviewed our product mix of offerings to
both our mail order and wholesale Radio Spirits customers. We have experienced a
significant shift in the mix between CDs and cassettes and will substantially
reduce the number of cassette offerings in the future. Accordingly, we have
written off a substantial portion of our existing cassette inventory as well as
a portion of our CD inventory relating to older products, which we will not
aggressively promote in future periods. The additional increase in the reserve
for obsolescence of the Radio Spirits inventory made in the fourth quarter of
2004 was $560,000.


                                       27
<PAGE>

Advertising and promotion

<TABLE>
<CAPTION>
                                                                          From 2003 to 2004
                                                                          -----------------
                                        2003            2004           Change        % Change
                                    ------------    ------------    ------------    ------------
<S>                                 <C>             <C>             <C>                    <C>
($000's)
Audio Book Club
New Member                          $      2,092    $        414    $     (1,678)          (80.2)%
Current Member                             1,993             994            (999)          (50.1)
                                    ------------------------------------------------------------
                                           4,085           1,408          (2,677)          (65.5)
                                    ------------------------------------------------------------

Radio Spirits
Catalog                                      964             787            (177)          (18.4)
Wholesale                                     74              57             (17)          (22.3)
Continuity                                   775               6            (769)          (99.2)
                                    ------------------------------------------------------------
                                           1,813             850            (963)          (53.1)
                                    ------------------------------------------------------------

New Projects                                 339             164            (175)          (51.6)
                                    ------------------------------------------------------------
Total Spending                             6,237           2,422          (3,815)          (61.2)

Amount Capitalized                        (2,410)           (354)         (2,056)          (85.3)
Amount Amortized                           6,161           2,632          (3,529)          (57.3)
                                    ------------------------------------------------------------
Advertising and Promotion Expense   $      9,988    $      4,700    $     (5,288)          (52.9)%
                                    ============================================================
</TABLE>


Advertising and promotion decreased $5.3 million to $4.7 million or 52.9% for
the year ended December 31, 2004 from the amount spent during the year ended
December 31, 2003 of $10.0 million. Actual advertising expenditures for the year
ended December 31, 2004 decreased $3.8 million to $2.4 million from $6.2 million
during the year ended December 31, 2003. The decrease was due to a minimal
amount of new member marketing for Audio Book Club new members due to cash
constraints and our change in strategy as described above and decreased
advertising to existing members due to the reduction in Audio Book Club
membership because of normal member attrition with no marketing to replace
leaving members. Radio Spirits continuity advertising was reduced due to cash
constraints. We spent $164,000 on the new Larry King promotion in 2004.

Advertising and promotion - write-downs
         (000's)

                                               2003         2004
                                            ----------   ----------
Advertising and promotion - write-downs     $       --   $      846
                                            ==========   ==========

Based on the change in our strategy , described above, we have determined that
the future net revenue from our Audio Book Club does not support the carrying
amount of the direct-response advertising reported as assets relating to the
Audio Book Club. Accordingly, we have made an adjustment to write-off the
carrying amount of the asset in the fourth quarter for 2004 resulting in an
increase in advertising expense of $846,000.


                                       28
<PAGE>

<TABLE>
<CAPTION>
Bad Debt Expense
                            2003                       2004
                  ----------------------------------------------------
         $ (000's)                As a %                      As a %          from 2002 to 2003
                      $        of Net Sales       $           Sales         Change        % Change
                  ----------    ----------    ----------     ---------    ----------     ----------
<S>               <C>           <C>           <C>            <C>          <C>            <C>
Audio Book Club   $    3,404          12.9%   $      744           6.0%   $   (2,660)         (78.1)%
                  -----------------------------------------------------   -------------------------

Radio Spirits
Catalog                   --            --            --            --            --             --
Wholesale                 15           0.5%           15           0.8%           --             --
Continuity               521          18.3%           70           5.2%          451           86.5%
                  -----------------------------------------------------   -------------------------
                         536           5.3%           85           1.3%          451           84.1%
                  -----------------------------------------------------   -------------------------

MediaBay.com              --            --            --            --            --             --
                  -----------------------------------------------------   -------------------------
                  $    3,940          10.8%   $      829           4.4%   $    3,111           79.0%
                  =====================================================   =========================
</TABLE>

The principal reason for the decline in bad debt expense at Audio Book Club was
a reduction in net sales of 53.4% as described above. Bad debt expense as a
percentage of net sales at Audio Book Club for the year ended December 31, 2004
was 6.0 %, compared to 12.9% for the year ended December 31, 2003. The decrease
in bad debt expense as a percentage of net sales is principally due to a reduced
number of new members, who typically have higher bad debt expense, since a lower
number of new members were added in the year ended December 31, 2004 as compared
to the year ended December 31, 2003.

The bad debt expense of World's Greatest Old-Time Radio continuity for the year
ended December 31, 2004 decreased by $451,000 to $70,000 from $521,000 for the
year ended December 31, 2003. As a percentage of net sales, bad debt expense for
the World's Greatest Old-Time Radio continuity for the year ended December 31,
2004 was 5.2% as compared to 18.3% for the year ended December 31, 2003. The
decrease in bad debt expense as a percentage of net sales is principally due to
a reduced number of new customers, who typically have higher bad debt expense,
since a lower number of new customers were added in the year ended December 31,
2004 as compared to the year ended December 31, 2003.

Because of the reasons stated above, our bad debt expense decreased $3.1
million, or 79.0% to $829,000 for the year ended December 31, 2004 as compared
to $3.9 million for the year ended December 31, 2003. As a percentage of net
sales, bad debt expense was 4.4 % for the year ended December 31, 2004 as
compared to 10.8% for the year ended December 31, 2003.

General and Administrative

<TABLE>
<CAPTION>
        $ (000's)           2003                       2004
                  ----------------------------------------------------
                                  As a %                      As a %          from 2003 to 2004
                      $        of Net Sales       $        of net Sales    Change        % Change
                  ----------    ----------    ----------     ---------    ----------     ----------
<S>               <C>           <C>           <C>            <C>          <C>            <C>
Audio Book Club   $    2,626          10.0%   $    2,379          19.3%   $     (247)          (9.4)%

Radio Spirits          1,163          11.5%          959          15.2%         (204)         (17.5)

MediaBay.com             614                         621                           7            1.1

Corporate              2,412                       2,084                        (328)         (13.6)
                  -----------------------------------------------------   --------------------------
                  $    6,815          18.6%   $    6,043          32.1%   $     (772)         (11.3)%
                  =====================================================   ==========================
</TABLE>


                                       29
<PAGE>

General and administrative expenses at Audio Book Club declined principally due
to reductions in payroll and related costs due to reduced staff. General and
administrative expenses at Radio Spirits for the year ended December 31, 2004
declined principally due to reductions in payroll due to reduced staff and
commissions to outside sales personnel due to lower wholesale sales. Our
corporate general and administrative expenses for the year ended December 31,
2004 declined principally due to lower payroll costs due to less employees and
settlement of lease and consulting obligations.

Asset write-downs and strategic charges
         (000's)

                                                       2003        2004
                                                     --------    -------
Asset write-downs and strategic charges              $    749    $    --
                                                     ========    =======

In the fourth quarter of 2003, we evaluated the performance of Audio Passages,
an Audio Book Club marketing program tailored to listeners with an interest in
Christian product and determined based on past performance and expected future
performance that we should terminate the Audio Passages marketing program. In
connection with the termination of the Audio Passages marketing program, we took
a strategic charge for the establishment of a reserve for obsolescence of Audio
Passages inventory of $0.3 million and an assets write-down for previously
capitalized advertising, which are not recoverable in the amount of $0.5
million.

Termination costs
         (000's)

                               2003          2004
                             -------      ---------
Termination costs            $  544       $      --
                             =======      =========

In 2003, the employment of two senior executives who had employment agreements
was terminated and the decision was made to terminate the employment agreement
of another senior executive. A consulting agreement was also terminated. We
agreed to make aggregate settlement payments under the employment agreements and
consulting agreement for total consideration of $.5 million payable through May
2005.

Depreciation and Amortization
<TABLE>
<CAPTION>
                           2003                       2004
                  ----------------------------------------------------
$ (000's)                         As a %                      As a %          from 2003 to 2004
                      $        of Net Sales       $        of net Sales    Change        % Change
                                ----------                   ---------    ----------     ----------
<S>               <C>            <C>            <C>          <C>          <C>            <C>
Depreciation:
Audio Book Club   $      104          0.4%           83           0.7%    $      (21)         (19.9)%

Radio Spirits             42          0.4%           37           0.6             (5)         (11.9)%


Amortization:
Corporate                182           --            24            --           (158)         (87.0)%
                  -----------------------     -----------------------     -------------------------
                  $      328          0.9%          144           0.8%    $     (184)         (75.0)%
                  =======================     =======================     =========================
</TABLE>

The decrease in amortization expenses is principally attributable to the
reduction of the carrying amounts of our intangible assets made in the fourth
quarter of 2003. Specifically, we made a strategic decision to no longer compete
in the DVD market and accordingly wrote off the value of certain video and DVD
rights we had acquired in the amount of $90,000. We also made the strategic


                                       30
<PAGE>

decision in the fourth quarter of 2003 to discontinue future mailings to the
Columbia House lists of members of other clubs. Accordingly, in the fourth
quarter of 2003, we wrote off the unamortized value of the Columbia House
mailing agreement of $986,000.

Interest Expense

<TABLE>
<CAPTION>
                                                                              From 2003 to 2004
                                                                              -----------------
                                                  2003         2004         Change       % Change
                                                  ----         ----         ------       --------
<S>                                            <C>          <C>           <C>                <C>
$ (000's)
Interest paid                                  $      384   $    1,045    $      661         159.1%

Interest accrued                                       74           25           (49)        (66.2)

Interest included in debt                             907          521          (386)        (42.6)

Amortization of deferred financing costs and
original issue discount                               560        1,341          (781)       (139.5)

Loss on early extinguishment of debt                   --        1,532         1,532            --

Beneficial conversion expense                          --        3,991         3,991            --

Inducement to convert                                  --          391           391            --

Interest converted to preferred stock                  --          254           254            --

Less: Interest income                                  --          (18)          (18)           --
                                               ----------------------------------------------------
Total interest expense                         $    1,925   $    9,082    $    7,157         371.8%
                                               ====================================================
</TABLE>

The increase in interest expenses is principally due to increased debt and
higher interest costs and amortization of debt discount relating to the 2004
financing transactions as described in the Liquidity and Capital Resources
section of this Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.

Net loss before income taxes for the year ended December 31, 2004 was $15.4
million as compared to a net loss before income taxes for the year ended
December 31, 2003 of $5.2 million.

Income Tax Expense

                                                  From 2003 to 2004
                                                  -----------------
                         2003        2004        Change       % Change
                         ----        ----        ------        --------
$ (000's)

Income Tax Expense   $    1,471   $   14,753   $  (13,282)      902.9%
                     ==================================================

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. We determine the utilization of deferred tax
assets in the future based on current year projections by management.

Based on the change in Company strategy, described above, we have determined
that it is not more likely than not that we will, in the foreseeable future, be
able to realize all or part of our net deferred tax asset. Accordingly, we have
made an adjustment to the deferred tax asset recording an increase to the
valuation allowance, resulting in a deferred tax expense charged against income
of $14.8 million in the fourth quarter of 2004, the period when such
determination was made.

During the years ended December 31, 2003; we utilized $1,471,000, of the $17.2
million deferred tax asset recorded in 2001. Accordingly, we recorded income tax
expense of $1,471,000 for the year ended December 31, 2003.


                                       31
<PAGE>

<TABLE>
<CAPTION>
Preferred Stock Dividends
                                                                                       From 2003 to 2004
                                                        2003            2004         Change       % Change
                                                        ----            ----         ------       --------
$ (000's)
<S>                                                 <C>             <C>              <C>            <C>
Series A Preferred Stock dividends                            228             228            --           --
Series B Preferred Stock dividends                             18              28            10         55.6%
Series C Preferred Stock dividends                             --             318           318
Total dividends accrued on preferred stock          -------------   -------------    ----------     ---------
                                                    $         246   $         574    $      328     $  133.3%
                                                    =============   =============    ==========     =========
</TABLE>

The increase in preferred stock dividends for the year ended December 31, 2004
as compared to the year ended December 31, 2003, is due to an increase in
dividends for Series B Preferred Stock which was issued May 2003 and outstanding
for only part of 2003 and dividends on the Series C Preferred Stock issued in
May 2004. Our Principal Shareholder agreed to exchange the principal of certain
notes, plus accrued and unpaid interest owed to the Principal Shareholder
aggregating $3.8 million and accrued and unpaid dividends owed to the Principal
Shareholder aggregating $519,000 into an aggregate of 43,527 shares of Series C
Preferred Stock convertible into (i) an aggregate of 5,580,384 shares of Common
Stock at an effective conversion price of $0.78, and (ii) warrants to purchase
an aggregate of 11,160,768 shares of Common Stock. The Series C Preferred Stock
accrues dividends at the rate of 9% per annum.

Loss Applicable to Common Stockholders
                                                        From 2003 to 2004
                                                        -----------------
                                           2003      2004     Change
                                           ----      ----     ------
$ (000's)
Loss applicable to common stockholders   $ 6,869   $30,687   $23,818

Principally due to reduced sales and higher interest costs, partially offset by
lower advertising, bad debt expense, certain write-offs and strategic charges
described above general and administrative expenses, increased interest
expenses, including beneficial conversion charges and recognition of deferred
tax expenses, our net loss applicable to common shares for the year ended
December 31, 2004 increased $23.8 million to $30.7 million, or $1.71 per diluted
share as compared to a net loss applicable to common shares for the year ended
December 31, 2003 of 6.9 million, or $.49 per diluted share of common stock.


Year ended December 31, 2002 compared to year ended December 31, 2003
Net Sales

       ($000's)                             Change from
                     2002         2003      2002 to 2003    % Change
                  ----------   ----------    ----------     ----------
Audio Book Club   $   34,343   $   26,380    $   (7,963)         (23.2)%
                  ----------------------------------------------------

Radio Spirits
Catalog                4,507        4,210          (297)          (6.6)%
Wholesale              5,594        3,048        (2,546)         (45.5)%
Continuity             1,085        2,841         1,756          161.8%
                  ----------------------------------------------------
                      11,186       10,099        (1,087)          (9.7)%
                  ----------------------------------------------------

MediaBay.com             215          138           (77)         (35.8)%
                  ----------------------------------------------------
                  $   45,744   $   36,617    $   (9,127)         (20.0)%
                  ====================================================


                                       32
<PAGE>

Audio Book Club sales decreased principally due to a decrease in club membership
as a result of a reduction in our advertising expenditures for new members. For
the year ended December 31, 2003, the Audio Book Club spent $2.1 million to
attract new members, a reduction of $6.2 million, or 74.7%, from the amount
spent to attract new members of $8.3 million during the year ended December 31,
2002. Audio Book Club attracted approximately 134,000 new members in the year
ended December 31, 2003 as compared to approximately 290,000 new members in the
year ended December 31, 2002.

The decrease in Radio Spirits catalog sales is principally attributable to
reduced catalog mailings. We spent $81,000, or 7.8% less in advertising during
the year ended December 31, 2003 as compared to the spending during the year
ended December 31, 2002. Wholesale sales of old-time radio products decreased
principally due to reduced sales to three major customers in 2003 and higher
returns from our major customers. Sales of our The World's Greatest Old-Time
Radio continuity program increased for the year ended December 31, 2003, as
compared to the year ended December 31, 2002, principally due to the inclusion
of a full year of sales in 2003. The World's Greatest Old-Time Radio continuity
program was introduced in the third quarter of 2002.

<TABLE>
<CAPTION>
Cost of Sales
-------------
$ (000's)
                             2002                        2003
                  -------------------------   -------------------------
                                   As a %                      As a %          from 2002 to 2003
                      $        of Net Sales       $        of net Sales    Change        % Change
                  ----------      ---------   ----------    -----------    ----------     ----------
<S>               <C>             <C>         <C>           <C>            <C>            <C>
Audio Book Club   $   14,821          43.2%   $   12,107          45.9%    $   (2,714)         (18.3)%
                  ----------------------------------------------------------------------------------
Radio Spirits
Catalog                1,874          41.6%        2,015          47.9%           141            7.5%
Wholesale              3,072          54.9%        2,057          67.5%        (1,015)         (33.0)%
Continuity               884          81.5%        1,295          45.6%           411           46.5%
                  ----------------------------------------------------------------------------------
                       5,830          52.1%        5,369          53.1%          (463)          (7.9)%
                  ----------------------------------------------------------------------------------

MediaBay.com              --                           5                            5
                  ----------------------------------------------------------------------------------
                  $   20,651          45.1%   $   17,479          47.7%    $   (3,172)         (15.4)%
                  ==================================================================================
</TABLE>


The principal reason for the decline in cost of sales at Audio Book Club was a
reduction in net sales of 23.2% as described above. Cost of sales as a
percentage of net sales at Audio Book Club for the year ended December 31, 2003
was 45.9%, compared to 43.2% for 2002. The increase in cost of sales as a
percentage of net sales is principally due to increased costs relating to higher
return rates in 2003, an increase in the reserve for obsolescence in 2003, in
part related to the termination of Audio Passages, our Christian audiobook club,
and higher average royalty rates since fewer books were sold in new member
offerings, which have lower royalty rates, partially offset by a reduced number
of heavily discounted books sold to new members due to a lower number of new
members added in 2003 as compared to 2002.

As a percentage of net sales, cost of sales at Radio Spirits increased to 53.1%
for the year ended December 31, 2003 from 52.1% for the year ended December 31,
2002. Cost of catalog sales increased as a percentage of net sales to 47.9% for
the year ended December 31, 2003 as compared to 41.6% for the year ended
December 31, 2002 principally due to sales of discounted items both in the Radio
Spirits catalog and through a campaign on radio stations. The cost of wholesale
sales as percentage of net revenue increased to 67.5% as compared to 54.9% for
the year ended December 31, 2002 principally due to the sales of slower moving


                                       33
<PAGE>

items at heavily discounted prices in remainder sales and costs associated with
higher returns. The cost of World's Greatest Old-Time Radio continuity sales as
a percentage of net income decreased 45.6% from 81.5%. The continuity program
commenced in August 2002 and the majority of sales in 2002 were of heavily
discounted introductory merchandise designed to attract new buyers.

Advertising and promotion

<TABLE>
<CAPTION>
                                                                     From 2002 to 2003
                                                                     -----------------
                                       2002           2003         Change          % Change
                                       ----           ----         ------          --------
<S>                                 <C>           <C>           <C>                 <C>
($000's)
Audio Book Club
New Member                          $    8,269    $    2,092    $   (6,177)         (74.7)%
Current Member                           2,310         1,993          (317)         (13.7)%
                                    -----------------------------------------------------
                                        10,579         4,085        (6,494)         (61.4)%
                                    -----------------------------------------------------

Radio Spirits
Catalog                                  1,070           964          (106)          (9.9)%
Wholesale                                  151            74           (77)         (51.0)%
Continuity                                 885           775          (110)         (12.4)%
                                    -----------------------------------------------------
                                         2,106         1,813          (293)         (13.9)%
                                    -----------------------------------------------------

New Projects                                --           339           339
                                    -----------------------------------------------------
Total Spending                          12,685         6,237        (6,448)         (50.8)%

Amount Capitalized                      (8,099)       (2,410)
Amount Amortized                         5,571         6,161
                                    ------------------------
Advertising and Promotion Expense   $   10,157    $    9,988
                                    ========================
</TABLE>


Although advertising and promotion expenses were relatively consistent, actual
advertising expenditures in the year ended December 31, 2003 were $6.2 million,
a decrease of $6.4 million or 50.8% over the amount spent during the year ended
December 31, 2002 of $12.7 million.

We attempted to grow our Audio Book Club very aggressively in 2002. We spent
$8.3 million to attract new members to our Audio Book Club in 2002.

The largest increases in 2002 as compared to 2001 were in attracting members
through the Internet to our Audio Book Club in offers which required no
immediate payment to join the club or purchase the initial books and in
attracting member to Audio Passages, an audiobook club with products intended
for a Christian audience. The cost to acquire these customers was lower than our
traditional direct mail campaigns to acquire Audio Book Club members, however
the performance of both the members attracted through the Internet and the Audio
Passages members was much worse than our traditional Audio Book Club members.
Because we spent a substantial amount of money to acquire these members and
their performances were worse than we anticipated, we did not have much funds
for advertising in 2003 and accordingly our advertising and promotion activities
were dramatically reduced in 2003. A large portion of advertising expenditures
in 2002 was capitalized and a substantial portion of that advertising was
expensed in 2003. Our new member recruitment was significantly reduced in 2003.
In 2004, we have done a small amount of marketing for new ABC members on an


                                       34
<PAGE>

Internet offer requiring credit card payment. While the initial response was
encouraging we continue to monitor the buying and payment behavior of these
customers and currently do not have sufficient funds to conduct any additional
marketing.

Bad Debt Expense
<TABLE>
<CAPTION>
                             2002                     2003
                  -----------------------------------------------------
        $ (000's)                    As a %                    As a %        from 2002 to 2003
                       $          of Net Sales      $      of Net Sales     Change      % Change
                  --------------------------------------------------------------------------------
<S>               <C>             <C>         <C>          <C>            <C>           <C>
Audio Book Club   $    2,735           8.0%   $    3,404          12.9%   $      669          24.5%
                  --------------------------------------------------------------------------------
Radio Spirits
Catalog                   --            --            --            --            --            --
Wholesale                 15           0.3%           15           0.5%           --            --
Continuity                71           6.5%          521          18.3%          450         633.8%
                  --------------------------------------------------------------------------------
                          86           1.5%          536           5.3%          450         523.3%
                  --------------------------------------------------------------------------------

MediaBay.com              --            --            --            --            --            --
                  --------------------------------------------------------------------------------
                  $    2,821          13.7%   $    3,940          10.8%   $    1,119          39.7%
                  ================================================================================
</TABLE>

Bad debt expense at Audio Book Club increased by $.7 million to $3.4 million, or
12.9%of sales. The principal reason for the increase in bad debt expense at
Audio Book Club was the attraction of over 96,000 members through the Internet,
most of which were Bill Me Members. The bad debt rates for the initial
discounted offer to these Bill Me Internet Members often exceeded 50% and the
bad debt rate for shipments subsequent to payment for the initial offer exceeded
the historical bad debt rate of the Audio Book Club acquired through direct
mail. We stopped offering Bill Me offers on the Internet in the second quarter
of 2003 and are testing alternatives methods to attract members either through
an offer requiring immediate payment of the initial offer with a credit card or
much more extensive initial screening methods.

The bad debt expense of World's Greatest Old-Time Radio continuity members for
the year ended December 31, 2003 increased by $.4 million to $.5 million from
$.1 million for the year ended December 31, 2002. As a percentage of net sales,
bad debt for the year ended December 31, 2003 were 18.3% as compared to 6.5% for
the year ended December 31, 2002. The program commenced in 2002, and as the
program matured in 2003, and customer-paying behavior became more evident, the
allowance for bad debts and the corresponding bad debt rate increased.

General and Administrative
<TABLE>
<CAPTION>
        $ (000's)            2002                         2003
                  --------------------------------------------------------
                                    As a %                        As a %        From 2002 to 2003
                       $        of Net Sales      $           Of Net Sales    Change           % Change
                  -------------------------------------------------------------------------------------
<S>               <C>           <C>           <C>             <C>           <C>                <C>
Audio Book Club   $    2,842           8.3%   $    2,626           10.0%    $     (216)          (7.6)%

Radio Spirits          1,617          14.5%        1,163           11.5%          (454)         (28.1)%

MediaBay.com             654                         614                           (40)          (6.1)%
Corporate              3,234                       2,412                          (822)         (25.4)%
                  -------------------------------------------------------------------------------------
                  $    8,347          18.2%   $    6,815           18.6%    $   (1,532)         (18.4)%
                  =====================================================================================
</TABLE>


                                       35
<PAGE>

General and administrative expenses at Audio Book Club declined principally due
to reductions in payroll due to reduced staff. General and administrative
expenses at Radio Spirits for the year ended December 31, 2003 declined
principally due to reductions in payroll due to reduced staff and commissions to
outside sales personnel due to lower wholesale sales, lower consulting costs
principally due to the termination of a consulting agreement entered in to 2001
with the previous president of Radio Spirits following his resignation and
settlement of all outstanding amounts with a former joint venture partner
responsible for syndication of our old-time radio shows on broadcast radio. Our
corporate general and administrative expenses for the year ended December 31,
2003 declined principally due to reductions in public and investor relations,
travel and legal fees partially offset by higher insurance costs.

Asset write-downs and strategic charges
         (000's)

                                                       2002       2003
                                                     --------   --------
Asset write-downs and strategic charges              $     --   $    749
                                                     ========   ========

In the fourth quarter of 2003, we evaluated the performance of Audio Passages,
an Audio Book Club marketing program tailored to listeners with an interest in
Christian product and determined based on past performance and expected future
performance that we should terminate the Audio Passages marketing program. In
connection with the termination of the Audio Passages marketing program, we took
a strategic charge for the establishment of a reserve for obsolescence of Audio
Passages inventory of $0.3 million and an assets write-down for previously
capitalized advertising, which are not recoverable in the amount of $0.5
million.

Termination costs
         (000's)

                               2002                     2003
                          --------------             ---------
Termination costs         $           --             $     544
                          ==============             =========

In 2003, the employment of two senior executives who had employment agreements
was terminated and the decision was made to terminate the employment agreement
of another senior executive. A consulting agreement was also terminated. We
agreed to make aggregate settlement payments under the employment agreements and
consulting agreement for total consideration of $.5 million payable through May
2005.

Depreciation and Amortization
<TABLE>
<CAPTION>
                            2002                      2003
                  -------------------------  --------------------------
$ (000's)                        As a %                      As a %            From 2002 to 2003
                      $       of Net Sales         $      of Net Sales      Change          % Change
                  -------------------------   -------------------------     ------------------------
<S>               <C>              <C>        <C>               <C>         <C>            <C>
Depreciation:
Audio Book Club   $      124           0.4%   $      104            0.4%    $      (20)        (16.1)%

Radio Spirits             97           0.9%           42            0.4%           (55)        (56.7)%

Amortization:
Corporate              1,093                         182                          (911)        (83.3)%
                  -------------------------   -------------------------     ------------------------
                  $    1,314           2.9%   $      328            0.9%    $     (986)       -75.0%
                  =========================   =========================     ========================
</TABLE>

                                       36
<PAGE>

The decrease in amortization expenses is principally attributable to the
reduction of the carrying amounts of our intangible assets made in the fourth
quarter of 2002. Specifically, we made a strategic decision to no longer compete
in the DVD market and accordingly wrote off the value of certain video and DVD
rights we had acquired in the amount of $90,000. We also made the strategic
decision in the fourth quarter of 2002 to discontinue future mailings to the
Columbia House lists of members of other clubs. Accordingly, in the fourth
quarter of 2002, we wrote off the unamortized value of the Columbia House
mailing agreement of $986,000.

Interest Expense

<TABLE>
<CAPTION>
                                                                                     From 2002 to 2003
                                                                                 ---------------------------
                                                         2002         2003          Change         % Change
                                                      ------------------------------------------------------
<S>                                                   <C>          <C>           <C>                 <C>
$ (000's)
Interest paid                                         $      766   $      384    $     (382)         (49.9)%
Interest accrued                                             118           74           (44)         (37.3)%
Interest included in debt                                    637          907           270           42.4%
Amortization of deferred financing costs and
  original issue discount
                                                           1,453          560          (893)         (61.5)%
                                                      ------------------------------------------------------
Total interest expense                                $    2,974   $    1,925    $   (1,049)         (35.3)%
                                                      ======================================================
</TABLE>

The reduction in interest expense is principally due to a reduction in the
amortization of deferred financing costs and original issue discount of $0.9
million based on the original terms of the debt to which the costs and discount
related.

Net loss before income taxes for the year ended December 31, 2003 was $5.2
million as compared to a net loss before income taxes for the year ended
December 31, 2002 of $1.7 million.

Income Tax Expense
                                                  From 2002 to 2003
                                                  -----------------
                        2002          2003       Change         % Change
                        ----          ----       ------         --------
$ (000's)
Income Tax Expense   $      550   $    1,471   $      921        167.5%
                     ==========   ==========   ==========      ========

During the years ended December 31, 2003 and 2002, we utilized $1,471,000 and
$550,000, respectively, of the $17.2 million deferred tax asset recorded in
2001. Accordingly, we recorded income tax expense of $1,471,000 and $550,000 for
the years ended December 31, 2003 and 2002, respectively.

<TABLE>
<CAPTION>
Preferred Stock Dividends
                                                                         From 2002 to 2003
                                                                         -----------------
                                                  2002       2003      Change       % Change
                                                  ----       ----      ------       --------
<S>                                                  <C>        <C>         <C>       <C>
$ (000's)
Dividends accrued on Series A Preferred Stock        217        228         11        5.1%
Dividends accrued on Series B Preferred Stock         --         18         18
                                                --------   --------   --------     -------
Total dividends accrued on preferred stock      $    217   $    246   $     29       13.4%
                                                ========   ========   ========     =======
</TABLE>

For the year ended December 31, 2003, we accrued preferred stock dividends of
$0.2 million on the outstanding 25,000 shares of Series A Preferred stock, which
were issued in January 2002 and $18,000 for dividends for Series B Preferred
Stock issued May 2003.


                                       37
<PAGE>

<TABLE>
<CAPTION>
Loss Applicable to Common Stockholders
                                                                From 2002 to 2003
                                                                -----------------
                                            2002      2003      Change     % Change
                                            ----      ----      ------     --------
<S>                                      <C>        <C>        <C>           <C>
$ (000's)
Loss applicable to common stockholders   $  2,510   $  6,869   $  4,359      173.7%
                                         ========   ========   ========    ========
</TABLE>

Principally because of lower sales due in large part to reduced spending on new
member advertising at Audio Book Club and lower wholesale sales at Radio
Spirits, our net loss applicable to common shares increased $4.4 million to $6.9
million, or $.49 per diluted share as compared to a net loss applicable to
common shares for the year ended December 31, 2002 of $2.5 million, or $.18 per
diluted share of common stock.

Liquidity and Capital Resources
Historically, we have funded our cash requirements through sales of equity and
debt securities and borrowings from financial institutions and our principal
shareholders. For the year ended December 31, 2004, we spent $414,000 to attract
new Audio Book Club members, a reduction of $1.7 million, or 80.2%, from the
amount spent to attract new members of $2.1 million during the year ended
December 31, 2003, due to a change in strategic direction described PART I, Item
1. Business, above and to the lack of necessary funds. As a result, our member
and customer bases eroded and our revenues declined significantly.

Because of the March 2005 financing described below, we believe that we have
sufficient cash to implement our new strategy, including required spending on
marketing, for a minimum of twelve months.


Operating Activities
Net cash used in operating activities of $4.2 million, which principally
consisted of the net loss of $30.7 million, increases in prepaid expenses and
royalty advances of $48,000 and $1.0 million, respectively, and a decrease in
accounts payable and accrued expenses of $5.4 million, partially offset by
deferred tax expenses of $14.8 million, non-cash beneficial conversion charges
of $4.4 million, $4.6 million of write-downs of inventory and advances to
publishers, as described above, loss on extinguishment of debt of $1.5 million,
depreciation and amortization expenses of $144,000, amortization of deferred
financing costs and original issue discount of $1.3 million, non-current accrued
interest and dividends payable of $1.5 million, non-cash stock compensation of
$328,000 decreases in accounts receivable of $2.0 million and inventory of
$103,000 and a net reduction in deferred member acquisition costs of $2.3
million.

The decrease in accounts receivable was primarily attributable to a reduction in
sales as described above. The net decrease in deferred member acquisition cost
is due to reduced spending on new member and customer acquisition activities as
described above. The increase in royalty advances is principally due to a
decline in sales and a reduction in new member acquisition activities at Audio
Book Club, which results in lower royalty expense and less utilization of the
advances, as well as the timing and payment of advances. During the year ended
December, 2004, we reduced accounts payable and accrued expenses by $5.3
million, the majority of which were over 90 days past due.


Investing Activities
Net cash used in investing activities consisted of the acquisition of fixed
assets of $136,000, principally computer equipment and acquisition of certain
old-time radio rights from a rightsholder of $20,000.


                                       38
<PAGE>

Financing Activities
The following is a summary of our financing activities since January 1, 2004:


January 2004 Convertible Debt
On January 29, 2004, we issued $4.0 million aggregate principal amount of
promissory notes (the "Notes") and warrants to purchase 2,352,946 shares of
common stock (the "Investor Warrants") to institutional and accredited investors
(the "Offering"). The notes were due on the earlier of (i) April 30, 2005, (ii)
such date on or after July 1, 2004 at such time as all of our indebtedness under
our existing credit facility is either repaid or refinanced or (iii) our
consummation of a merger, combination or sale of all or substantially all of our
assets or the purchase by a single entity, person or group of affiliated
entities or persons of 50% of the our voting stock. The notes bore interest at
the rate of 6%, increasing to 9% on April 28, 2004 and 18% on July 27, 2004. On
receipt of shareholder approval, which was received on April 12, 2004, in
accordance with the terms of the Notes, the principal amount of the notes
automatically converted into common stock at the rate of one share of common
stock at $0.75, or approximately 5,333,333 shares. In addition, accrued interest
in the amount $49,000 also converted into common stock at $0.75 per share, or
64,877 shares.

In connection with the Offering, we issued to the placement agent and a broker
warrants to purchase an aggregate of 245,000 shares of common stock and also
issued to the placement agent warrants to purchase an additional 500,884 shares
of common stock on April 12, 2004 as partial consideration for the placement
agent's services. All warrants issued are exercisable until January 28, 2009 at
an exercise price of $1.28 per share.

We used a portion of the proceeds of the offering to repay $1,250,000 of
principal due on our prior credit Agreement with ING (U.S.) Capital, L.L.C. and
Patriarch Partners, L.L.C. (the "ING Credit Agreement") and to reduce our
accounts payable.


New Credit Agreement and Related Financing Transactions
On April 28, 2004, we entered into a new credit agreement ("New Credit
Agreement") by and among MediaBay and certain of its subsidiaries, the
guarantors signatory thereto, Zohar CDO 2003-1, Limited ("Zohar") as lender, and
Zohar, as agent, pursuant to which we and certain of our subsidiaries initially
borrowed $9.5 million. The initial term of the New Credit Agreement is one year
and it is extendable, at our sole option, for two additional one-year terms upon
issuance of additional notes of $600,000 for the first additional year and
$300,000 for the second additional year, provided there is no event of default.
The loan bears interest at the rate of LIBOR plus 10%. In the first year of the
loan, a fee of $900,000 has been added to the principal balance, which will be
reflected as debt discount and will be accreted to interest expense over the
next twelve months. We used a portion of the $8.6 million of funds received
under the New Credit Agreement to satisfy all of its outstanding obligations
under (i) promissory notes that it issued in October 2003 in the aggregate
principal amount of $1.0 million plus accrued interest of $200,000, (ii) the ING
Credit Agreement, which had an outstanding principal balance of approximately
$1.4 million and a partial payment of $1.6 million of the convertible note
issued to ABC Investment, L.L.C. as described below. In connection with the
March 2005 financing described above we repaid all amounts due under the senior
notes.

Norton Herrick ("Herrick"), a principal shareholder of the Company, Huntingdon
Corporation ("Huntingdon"), a company wholly-owned by Herrick, and N. Herrick
Irrevocable ABC Trust (the "Trust"), of which Herrick is the beneficiary, and


                                       39
<PAGE>

Howard Herrick, a principal shareholder of the Company, is the trustee,
consented to the New Credit Agreement and the other transactions described above
and entered into a subordination agreement with Zohar. The New Credit Agreement
required the aggregate amount of principal and interest owed by MediaBay to
Herrick, Huntingdon and the Trust be reduced to $6,800,000 ("Permissible Debt")
by June 1, 2004.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004 Herrick exchanged
accrued and unpaid interest and dividends (including accrued and unpaid interest
distributed by the Trust to Herrick) owed to Herrick aggregating $1,181,419 into
(i) 11,814 shares of Series C Preferred Stock with a liquidation preference of
$100 per share convertible into an aggregate of 1,514,615 shares of Common Stock
at an effective conversion price of $0.78, and (ii) warrants to purchase
3,029,230 shares of Common Stock. The warrants are exercisable until April 28,
2014 at an exercise price of $0.53.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004 Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Preferred
Stock convertible into an aggregate of 4,065,768 shares of Common Stock at an
effective conversion price of $0.78, and (ii) warrants to purchase an aggregate
of 8,131,538 shares of Common Stock. The warrants are exercisable until April
28, 2014 at an exercise price of $0.53. If the amount of the Permissible Debt is
required to be reduced due to MediaBay's failure to raise the requisite
additional equity, such reduction will automatically occur by the exchange of
Permissible Debt held by Huntingdon for additional shares of Series C Preferred
Stock in an aggregate liquidation preference equal to the amount of debt
exchanged and warrants to purchase a number of shares of common stock equal to
two times the number of shares of preferred stock issuable upon conversion of
the Series C Preferred Stock.

Herrick and Huntingdon agreed not to demand repayment of their debt until the
earlier of (i) the repayment of the New Credit Agreement or (ii) June 28, 2007.
In connection with the Financing described below, Herrick and Huntingdon
converted all their notes into common stock at their stated terms.

The remaining promissory notes held by Herrick, Huntingdon and the Trust are
guaranteed by certain subsidiaries of the Company and secured by a lien on the
assets of the Company and certain subsidiaries of the Company.


New ABC Note
On April 28, 2004, we repaid $1.6 million principal amount of the $3.2 million
principal amount convertible note issued to ABC Investment, L.L.C. We issued a
new $1.6 million note (the "New ABC Note") for the remaining principal amount.
The New ABC Note extends the maturity date from December 31, 2004 to July 29,
2007. In exchange for extending the maturity date, the conversion price of the
New ABC Note was reduced to $0.50. The closing sale price of our common stock on
the closing date was $0.48. In the fourth quarter of 2004, the note was
converted into our common stock.


Settlement of Put Obligations
We entered into a settlement agreement with Premier Electronic Laboratories,
Inc. ("Premier") dated April 1, 2004. Pursuant to the settlement, among other
things, we agreed to pay Premier $950,000 in exchange for Premier waiving its
right to put its shares of Common Stock to MediaBay pursuant to a Put Agreement
dated December 11, 1990. MediaBay's obligation under the Put Agreement was


                                       40
<PAGE>

reduced by $150,000 in exchange for relinquishing certain leases for real
property. MediaBay paid $14,000 on closing and is paying the remaining balance
over six years in monthly payments starting at $7,000 in July 2004 and
increasing to $19,000 from May 2007 through April 2010.


October Sale of Equity
On October 11, 2004, we entered into a Securities Purchase Agreement pursuant to
which we issued to the Forest Hill Capital LLC ("Forest Hill"), for the account
of certain of its affiliates ("the "Forest Hill Entities") thereunder an
aggregate of 1,800,000 shares of our common stock and warrants to purchase
400,000 shares of Common Stock (the "October Warrants"). The Forest Hill
Entities paid an aggregate purchase price of $900,000 for the shares and October
Warrants. Each October Warrant is exercisable to purchase one share of the
Company's Common Stock at an exercise price of $0.83 per share during the
five-year period commencing on October 11, 2004. In connection with the
Financing described below, the Forest Hill Entities exchanged these shares of
common stock and warrants for Series D Preferred Stock and the October Warrants
issued in the Financing described below.


March 2005 Financing
On March 23, 2005, we issued an aggregate of (a) 35,900 shares (the "Offering
Shares") of our Series D Convertible Preferred Stock (the "Series D Preferred")
convertible into 65,272,273 of our common stock, (b) 32,636,364 five-year common
stock purchase warrants (the "Offering Warrants") and (c) preferred warrants
(the "Over-Allotment Warrants" and, together with the Offering Shares and the
Offering Warrants, the "Offering Securities") exercisable for a limited time,
for additional proceeds to us of $8.975 million, to purchase (1) up to 8,975
additional shares of Series D Preferred (the "Additional Shares" and, together
with the Offering Shares, the "Preferred Shares") and (2) up to 8,159,091
additional warrants identical to the Offering Warrants (the "Additional
Warrants" and, together with the Offering Warrants, the "Warrants"), to
accredited investors (the "Investors") for an aggregate purchase price of $35.9
million (the "Financing").

Immediately prior to the Financing, holders of a majority of our voting
securities approved by written consent (the "Shareholder Consent") (a) an
amendment to our Articles of Incorporation, increasing the number of our
authorized shares of the common stock ("Common Stock") from 150,000,000 to
300,000,000, (b) a change of control which may occur as a result of the
Financing, and (c) our issuance, in connection with the transactions
contemplated by the Financing documents, of Common Stock in excess of 19.99% of
the number of shares of Common Stock outstanding immediately prior to the
Financing.

While such actions have been approved by a majority of our shareholders, we may
not effect them until it satisfies certain information requirements to our
shareholders not party to the Shareholder Consent. As a result, the Shareholder
Consent will not be effective, and therefore no conversion of the Preferred
Shares nor exercise of the Warrants or the Satellite Warrant above the Cap
Amount can be effected until at least 20 calendar days after an information
statement is sent or given to such shareholders. Until such time, the Investors
have agreed not to convert or exercise their securities above their pro rata
portion of the Cap Amount and Merriman has agreed not to exercise the Merriman
Warrants.

The Preferred Shares have a face value of $1,000 per share ("Stated Value") and
are convertible at any time at the option of the holder into shares ("Conversion
Shares") of common stock at the rate of $0.55 per Conversion Share, subject to
certain anti-dilution adjustments, including for issuances of Common Stock for


                                       41
<PAGE>

consideration below the conversion price. The Preferred Shares are also
mandatorily convertible at our option, subject to satisfaction of certain
conditions, commencing 30 days following the later date to occur (the "Effective
Date") of (a) the effective date of the Financing Registration Statement
(defined below) and (b) the effective date of the Shareholder Consent. Under
certain limited circumstances within our control, the holders will also have the
right to require us to redeem their Preferred Shares at their Stated Value.
Cumulative dividends will accrue on the Preferred Shares on an annualized basis
in an amount equal to 6% of their Stated Value until they are converted or
redeemed and will be payable quarterly in arrears, beginning April 1, 2005, in
cash or, at our option, subject to satisfaction of certain conditions, in shares
of Common Stock ("Dividend Shares") valued at 93% of the average of the daily
volume weighted average per-share price of the Common Stock for the five trading
days prior to the applicable payment date. The Preferred Shares are non-voting.
Subject to certain exceptions for accounts receivable and equipment and capital
lease financings, we may not incur additional indebtedness for borrowed money or
issue additional securities that are senior to or pari passu to the Preferred
Shares without the prior written consent of holders of at least 2/3rds of the
Preferred Shares then outstanding.

Each Warrant is exercisable to purchase one share of Common Stock (collectively,
the "Warrant Shares"), at an exercise price of $0.56 per share for a period of
five years commencing September 23, 2005, subject to certain anti-dilution
adjustments, including for issuances of Common Stock for consideration below the
exercise price. In addition, once exercisable, the Warrants permit cashless
exercises during any period when the Warrant Shares are not covered by an
effective resale registration statement.

The Over-Allotment Warrants are exercisable until 90 days following the
Effective Date for the purchase of Additional Shares and Additional Warrants, at
an exercise price equal to the Stated Value of the Additional Shares purchased,
with the purchase of each Additional Share including an Additional Warrant
exercisable for a number of Warrant Shares equal to 50% of the Conversion Shares
underlying such Additional Share.

As part of the Financing, the Forest Hill Entities exchanged the 1.8 million
shares of Common Stock and 400,000 October Warrants previously purchased by them
in October 2004 for $900,000 of the Offering Securities.

In connection with the Financing, we also entered into an agreement (the
"Herrick Agreement") with Herrick and Huntingdon (collectively, the "Herrick
Entities"), pursuant to which, concurrently with the Financing:

      o     all $5.784 million principal amount of our convertible notes owned
            by the Herrick Entities (the "Herrick Notes") and 10,684 of their
            shares of our Series A Preferred Stock were converted into an
            aggregate of approximately 12.2 million shares of Common Stock (the
            "Herrick Shares"), at their stated conversion rate of $0.56 per
            share;

      o     we also agreed to redeem the remaining 14,316 shares of Series A
            Preferred Stock held by the Herrick Entities and all 43,527 of their
            shares of our Series C Convertible Preferred Stock of the Company
            (collectively, the "Redemption Securities") for $5.8 million, the
            aggregate stated capital of such shares, on the earlier of the
            effective date of the Shareholder Consent and June 1, 2005, and both
            the Redemption Securities and the redemption price were placed into
            escrow pending such date;

      o     the Herrick Entities waived certain of their registration rights and
            we agreed to include the Herrick Shares for resale in the Financing
            Registration Statement, so long as such Herrick Shares are owned by
            the Herrick Entities and not otherwise transferred, including, but
            not limited to, in the Herrick Financing (as defined below); and


                                       42
<PAGE>

      o     the Herrick Entities consented to the terms of the Financing and the
            agreements entered into in connection with the Financing, as we were
            required to obtain such consents pursuant to the terms of the
            Herrick Notes, the Series A Preferred Stock and the Series C
            Preferred Stock.

      o     Herrick and Huntingdon also entered into a voting agreement and
            proxy with us pursuant to which they agreed not to take any action
            to contradict or negate the Shareholder Consent and gave us a proxy
            to vote their shares, at the direction of the Company's Board of
            Directors, until the Effective Date.

We received $35 million of gross proceeds (not including the securities
exchanged by the Forest Entities for $900,000 of the purchase price) in the
Financing. Merriman Curhan Ford & Co. ("Merriman") acted as a financial advisor
with respect to certain of the investors in the Financing for which it received
compensation from us of $2,625,000 plus a five-year warrant (the "Merriman
Warrant") to purchase 7,159,091 shares of Common Stock at an exercise price of
$0.56 per share commencing upon the effectiveness of the Shareholder Consent.
Merriman also received a structuring fee from us with respect to the Financing
in the amount of $175,000. In addition, we issued to Satellite Strategic Finance
Associates, LLC, an investor in the Financing, a warrant (the "Satellite
Warrant") to purchase 250,000 shares of Common Stock (identical to the
Warrants), and reimbursed it $55,000 for expenses, for consulting services
rendered by it in connection with the Financing.

Concurrently with the Financing, we repaid from net Financing proceeds all of
the principal and accrued and unpaid interest due on our outstanding senior
notes issued on April 28, 2004, in the aggregate amount of approximately $9.4
million. We will report an additional charge in the first quarter of 2005 to
reflect the write-off of unamortized financing charges related to the repayment
of this debt.

We used approximately $2,271,000 of the proceeds from the Financing to pay all
accrued and unpaid interest to the Herrick Entities on convertible notes and the
Series A Preferred Stock and Series C Preferred Stock.

The Offering Securities, the Satellite Warrant and the Merriman Warrant (the
"Financing Securities") were issued in the Financing without registration under
the Securities Act of 1933, as amended (the "Act"), in reliance upon the
exemptions from registration provided under Section 4(2) of the Act and
Regulation D promulgated thereunder.


                                       43
<PAGE>

Commitments
$(000's)
<TABLE>
<CAPTION>
                                                     Payments Due by Period
                                --------------------------------------------------------------
Contractual Obligations                      Less than        1-3          3-5       More Than
                                   Total       1 Year        Years        Years       5 Years
                                ----------   ----------   ----------   ----------   ----------
<S>                             <C>          <C>          <C>          <C>          <C>
Debt Obligations                $   17,770   $   17,770   $       --   $       --   $       --
Capital Lease Obligations               71           53           18           --           --
Operating Lease Obligations            964          163          385          406           10
Purchase Obligations                 1,487          459          575          453           --
Other Long Term Liabilities
Reflected on the Registrant's
Balance Sheet Under GAAP             1,331          551          780           --           --
                                ----------   ----------   ----------   ----------   ----------
Total                           $   21,623   $   18,996   $    1,758   $      859   $       10
                                ==========   ==========   ==========   ==========   ==========
</TABLE>

Operating Lease
We lease approximately 12,000 square feet of office space in Cedar Knolls, New
Jersey pursuant to a sixty-six month lease agreement dated April 18, 2003.

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

         Year ending December 31,

        2005...............................................     $   186
        2006...............................................         189
        2007...............................................         198
        2008...............................................         198
        Thereafter.........................................          --
        Total lease commitments............................     -------
                                                                $   771
                                                                =======
Capitalized Leases

During the year ended December 31, 2004, we had three capital leases. Lease
payments under these agreement were $59, $53 and $53 in 2004, 2003 and 2002,
respectively. The amount of equipment capitalized under the leases and included
in fixed assets is $196, and net of depreciation the fixed asset balance is $24
and $94 at December 31, 2004 and 2003, respectively. The obligations under the
leases included in accounts payable and accrued expenses on the consolidated
balance sheets at December 31, 2004 and 2003 were $9 and $71, respectively.

         Minimum annual lease commitments under capital leases are as follows:

         2005..................................................  $  18
         2006..................................................      6
         2007..................................................      1
                                                              --------
         Total capital lease commitments.......................  $  25
                                                              ========
Employment Agreements
We have commitments pursuant to employment agreements with certain of our
officers. Our minimum aggregate commitments under such employment agreements are
approximately $674 and $223 during 2005and 2006, respectively.


                                       44
<PAGE>

Licensing Agreements

We have numerous licensing agreements for both audiobooks and old-time radio
shows with terms generally ranging from one to five years, which require us to
pay, in some instances, non-refundable advances upon signing agreements, against
future royalties. We are required to pay royalties based on net sales. Royalty
expenses were $1,473,000 $2,524,000 and $3,243,000 for 2004, 2003 and 2002,
respectively. Minimum advances required to be paid under existing agreements for
the next five years are as follows:

         2005                                    $   303,000
         2006                                        455,000
         2007                                        238,000
         2008                                        138,000
                                                 -----------
         Total                                   $ 1,134,000
                                                 ===========

Recent Accounting Pronouncements

Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We do not yet know the impact that
any future share-based payment transactions will have on our financial position
or results of operations.

Inventory costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing", to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005; however, early adoption of this Statement is permitted. The
Company does not anticipate an impact from the adoption of this statement.


Net Operating Losses
Our federal 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
and March 2005 resulted in an ownership change and, thus, limits our use of
virtually all of our prior net operating losses. In the event we achieve
profitable operations, this significant limitation on the utilization of net
operating losses has the effect of increasing our tax liability and reducing net
income and available cash reserves. We are unable to determine the availability
of net operating losses since this availability is dependent upon profitable
operations, which we have not achieved in prior periods. We have provided a full
valuation allowance for our net operating loss carryforwards.


Audit Committee Approval of Non-Audit Services
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for
disclosing any non-audit services approved by our Audit Committee (the


                                       45
<PAGE>

"Committee") to be performed by Amper, Politziner & Mattia ("APM"), our external
auditor. Non-audit services are defined as services other than those provided in
connection with an audit or a review of our financial statement. During the year
ended December 31, 2004, we did not engage APM for any non-audit services.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2004, we were exposed to market risk for the impact of interest
rate changes. As a result of the March 2005 financing described above, we no
longer have any debt with an interest rate fluctuating with market rates. 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 related to our
long-term debt. As of December 31, 2004, interest on $9.4 million of our debt
was payable at the rate of the LIBOR plus 10.0% and interest on $2.5 million of
our long-term debt was payable at the rate of the prime rate plus 2.0%. If LIBOR
or the prime rate were to have increased, our interest expense would have
increased, however a hypothetical 10% increase in interest rates, from
approximately 6% to 6.6%, would not have had a material impact on our fair
values, cash flows or earnings for either 2004 or 2003.


Item 8. Financial Statements and Supplementary Data
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.


Item 9A. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried
out under the supervision and with the participation of our management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that our disclosure controls
and procedures are effective at the reasonable assurance level to timely alert
them of information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934. During the quarter ended
December 31, 2004 there were no changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.


Item 9B. Other Information
Not applicable.


                                       46
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

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

Name                        Age      Position
----                        ---      --------
Joseph R. Rosetti            71      Chairman and Director
John F. Levy                 49      Vice Chairman and Chief Financial Officer
Jeffrey Dittus               38      Chief Executive Officer and Director
Robert Toro                  40      Senior Vice President of Finance
Richard J. Berman            62      Director
Paul D. Ehrlich              60      Director
Paul D. Neuwirth             68      Director
Stephen Yarvis               67      Director


Joseph Rosetti, 71, was appointed Chairman of the Board of Directors of the
Company in August 2004. Mr. Rosetti has been a director of the Company since
December 2002. Mr. Rosetti is President of SafirRosetti, an investigative and
security firm owned by Omnicom Group, Inc. Prior to forming SafirRosetti, Joseph
R. Rosetti was the Vice Chairman of Kroll Associates. As Vice Chairman, he had
responsibility for Corporate Security/Crisis Management, which provides industry
and professional organizations with preventive measures to combat corporate and
financial crimes. From 1971 to 1987 he had worldwide responsibility at IBM for
security programs in physical security, investigations, personnel security,
trade secret protection, information asset security, real and movable and
financial asset security and Department of Defense Security. Mr. Rosetti was a
member of the U.S. National Chamber of Commerce Crime Reduction Panel and was
Staff Director for the Conference of the National Commission on Criminal Justice
Standards and Goals, a member of the private Security Task Force to the National
Advisory Committee on Criminal Justice Standards and Goals and Chairman of the
American Management Association's Council on Crimes against Business. Prior to
joining IBM, Mr. Rosetti was the Northeast Director for the Law Enforcement
Assistance Administration of the U.S. Department of Justice and a Special Agent,
Group Supervisor, and Special Assistant to the Assistant Commissioner for
Compliance in the Intelligence Division, U.S. Treasury Department. Prior to
joining the Treasury Department, Mr. Rosetti held the position of Chief
Accountant at Marriott Corporation. Mr. Rosetti is a director of GVI Security
Solutions, Inc., a publicly traded company.

John Levy, 49, has been Vice Chairman of the Company since August 2004, Chief
Financial Officer of the Company since January 1998 and an employee of the
Company since November 1997. Prior to joining the Company, Mr. Levy was Senior
Vice President of Tamarix Capital Corporation and had previously served as Chief
Financial Officer of both public and private entertainment and consumer goods
companies. 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.

Jeffrey Dittus, 38, has been Chief Executive Officer and a director of the
Company since January 2004. From 1995 through 1998, Mr. Dittus was a senior
executive with one of the world's largest direct response marketers, National
Media Corporation. While at National Media, Mr. Dittus had direct responsibility
for over 300 staff in two different countries, and built a process that
streamlined the marketing process in concert with building direct marketing
systems that quickly evaluated the profitability of new product launches. After
leaving National Media, Mr. Dittus founded IT Capital Limited, a public company
based in New Zealand, serving as its Chief Executive Officer until November


                                       47
<PAGE>

2001. Mr. Dittus returned to the United States and, in November 2001 founded a
merchant banking firm Kauri Capital, serving as its managing director until
January 2004. Mr. Dittus is a member of the Board of Directors of the Leukemia
and Lymphoma Society. Mr. Dittus earned a B.S. degree from Pennsylvania State
University in Finance and began his career with Philadelphia Bank.

Robert Toro, 40, has been Senior Vice President of Finance of the Company since
July 1999, Chief Financial Officer of the Company's Audio Book Club division
since November 2001 and an employee since April 1999. Prior to joining the
Company, 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 Arthur Andersen
where he was employed immediately prior to joining Marvel Entertainment Group.

Richard J. Berman, 62, became a director in June 2003. Mr. Berman has over 30
years of experience in venture capital and mergers and acquisitions. He is
currently a Director of International Microcomputer Software, Inc. a publicly
traded software company, the Internet Commerce Corporation, a publicly traded
Internet supply chain company, NexMed, a publicly traded life sciences company,
GVI Security Solutions, Inc., a publicly traded company, and is currently
Chairman of the KnowledgeCube Group, a venture capital firm, and Candidate
Resources Inc., a leading manager of human resource websites. Mr. Berman started
and managed the mergers and acquisitions and private equity groups of Bankers
Trust as Senior Vice President. Mr. Berman has also invested in and managed over
20 companies including as Chairman of Prestolite Battery, Inc., Boston Proper
and Internet Commerce Corporation. Mr. Berman received his B.S. and M.B. A. in
Finance from New York University, a J.D. from Boston College Law School and a
degree in International Law from Hague Academy of International Law.

Paul Ehrlich, 60, has been a director of the Company since May 2001. Since
August 2000, Mr. Ehrlich has been a partner in Edwards & Topple, LLP, a
certified public accounting firm. From 1981 until August 1, 2000, Mr. Ehrlich
was shareholder, Tax Specialist, Director of Personal Finance Services at
Feldman Sherb & Co., P.C. Mr. Ehrlich has served on the Board of Directors of
several companies and is a member of the American Institute of Certified Public
Accountants, the New York Society of Certified Public Accountants (appointed
committee member), and the International Association of Financial Planning. Mr.
Ehrlich received his B.A., a degree in accounting from Queens College and his
MBA from Pace University.

Paul Neuwirth, 69, has been a director of the Company since June 2004. Mr.
Neuwirth is a consultant on client issues and on litigation cases to the
international accounting firm Grant Thornton, LLP, where he was a partner from
1969 until his retirement from the firm in 2001. He was Managing Partner of the
Philadelphia Office of Grant Thornton from 1976 to 1991 and in charge of service
to clients and Litigation Support Services from 1991 to 2001. Mr. Neuwirth was
Interim Director of Internal Audit of the Board of Pensions of the Presbyterian
Church (U.S.A.) from 2001 through 2003. Since 1979, Mr. Neuwirth has been on the
faculty of The Wharton School of the University of Pennsylvania where he teaches
graduate and undergraduate courses in Auditing and in International Accounting.
A member of the American Institute of CPAs, Mr. Neuwirth was a member and
chairman of its Insurance Trust Committee for 12 years. He is a member of the
Pennsylvania Institute of CPAs and holds a Bachelor of Business Administration
degree from Baruch College of The City University of New York. Mr. Neuwirth is
an investor in residential and commercial real estate and a principal in medical
service businesses.


                                       48
<PAGE>

Stephen Yarvis, 67, has been a director of the Company since June 2004. Mr.
Yarvis was Senior Vice-President, Government Sales of Revlon Government Sales
Inc. from 1995 through 1999. From 1985 through 1995, Mr. Yarvis was employed by
the Mennen Division of Colgate-Palmolive Company, most recently as Vice
President, Sales Special Markets. From 1983 through 1985, Mr. Yarvis was
Vice-President sales, private label wipe products for Nice-Pak Products Prior to
joining Nice-Pak; Mr. Yarvis held various positions with Warner Lambert Company
and was market research supervisor at PepsiCo, Inc. Mr. Yarvis holds an MBA from
New York University, and a BA from Hobart College.

The following information is with respect to incumbent directors in Class II and
Class III of the Board of Directors who are not nominees for election at this
Annual Meeting of Shareholders:

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. Jeffrey Dittus and Paul Neuwirth are Class II
directors and stand for re-election at the 2005 annual meeting of shareholders.
Richard Berman and John F. Levy are Class III directors and stand for
re-election at the 2006 annual meeting of shareholders. Paul Ehrlich, Stephen
Yarvis and Joseph Rosetti are Class I directors and will stand for re-election
at the 2007 annual meeting of shareholders. Our executive officers serve at the
direction of the Board and until their successors are duly elected and
qualified.

Compliance with Section 16(a) Beneficial Ownership Reporting Companies
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, 2003, all filing requirements
applicable to our officers, directors, and greater than 10% shareholders were
complied with, except that Mr. Neuwirth and Norton Herrick each filed a Form 4
related to one transaction late.

Director Independence
The Board has determined that Messrs. Berman, Ehrlich, Neuwirth and Yarvis meet
the director independence requirements of the Marketplace Rules of the National
Association of Securities Dealers, Inc. ("NASD") applicable to Nasdaq listed
companies.

Audit Committee
We have established an Audit Committee of the Board of Directors, which
currently consists of Messrs. Ehrlich, Neuwirth and Yarvis, each of whom is an
"independent" director as defined under the rules of the National Association of
Securities Dealers, Inc. Mr. Ehrlich serves as Chairman. The Board has
determined that Messrs. Ehrlich and Neuwirth qualify as "financial experts"
under federal securities laws.

Compensation Committee

We have established a Compensation Committee of the Board of Directors, which
currently consists of Messrs. Berman, Neuwirth and Yarvis, each of whom is an
"independent" director as defined under the rules of the National Association of
Securities Dealers, Inc. Mr. Yarvis serves as Chairman.


                                       49
<PAGE>

Nominating Committee

We have established a Nominating Committee of the Board of Directors, which
currently consists of Messrs. Berman, Ehrlich and Yarvis, each of whom is an
"independent" director as defined under the rules of the National Association of
Securities Dealers, Inc. Mr. Berman serves as Chairman.

Code of Ethics and Business Conduct
The Company adopted a Code of Ethics and Business Conduct that applies to its
employees, including its senior management, including its Chief Executive
Officer, Chief Financial Officer, Controller and persons performing similar
functions. Copies of the Code of Ethics and Business Conduct can be obtained,
without charge, upon written request, addressed to: Corporate Secretary,
MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927.

Communications with the Board
The Board of Directors, through its Nominating Committee, has established a
process for stockholders to send communications to the Board of Directors.
Stockholders may communicate with the Board of Directors individually or as a
group by writing to: The Board of Directors of MediaBay, Inc., c/o Corporate
Secretary, 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927. Shareholders
should identify their communication as being from a shareholder of the Company.
The Corporate Secretary may require reasonable evidence that the communication
or other submission is made by a shareholder of the Company before transmitting
the communication to the Board of Directors.

Item 11. Executive Compensation
The following table discloses for the fiscal years ended December 31, 2002, 2003
and 2004, compensation paid to Ron Celmer, Carl Wolf and Jeffrey Dittus, our
Chief Executive Officers during 2004, and our current executive officers (the
"Named Executives").

Summary Compensation Table
<TABLE>
<CAPTION>
                                                                            Long-Term
                                                                           Compensation
                                                                              Awards
                                                                            Securities
                                               Annual Compensation          Underlying
                                          -------------------------------                      All Other
     Name and Principal Position          Year      Salary       Bonus     Options/SAR's (#)  Compensation
<S>                                       <C>     <C>          <C>           <C>         <C>
Carl Wolf                                  2004   $   61,923   $       --      500,000   $       --
Former Chairman and                        2003      135,000           --      585,000           --
Former Chief Executive Officer (1)         2002       15,688           --      645,000           --

Joseph Rosetti                             2004       33,750           --      575,000           --
Chairman (2)

Ronald Celmer                              2003       85,608           --    1,500,000           --
Former Chief Executive Officer (3)

Jeffrey Dittus                             2004      222,172           --    2,250,000           --
Chief Executive Officer (4)

John F. Levy                               2004      190,048           --      900,000
Vice Chairman and                          2003      190,000       35,705       60,241           --
Chief Financial Officer                    2002      181,414       17,500       50,000           --

Robert Toro                                2004      185,048           --           --
Senior Vice President Finance              2003      185,000        5,223      216,145           --
                                           2002      176,752       18,500           --           --
</TABLE>

                                       50
<PAGE>

      (1)   Carl Wolf became Co-Chairman on November 15, 2002, was named
            Chairman on May 1, 2003, became Interim Chief Executive Officer on
            January 3, 2004 and resigned on May 27, 2004.

      (2)   Joseph Rosetti was appointed Chairman on August 12, 2004.

      (3)   Ronald Celmer was employed as Chief Executive Officer from August
            15, 2003 through January 5, 2004. In connection with the termination
            of his employment, we paid severance of $56,250 in six semi-monthly
            payments commencing January 15, 2004.

      (4)   Jeffrey Dittus became Chief Executive Officer on January 29, 2004.

The following table discloses options granted during the fiscal year ended
December 31, 2004 to the Named Executives:

Option/SAR Grants in Fiscal Year Ending December 31, 2004:

<TABLE>
<CAPTION>
                                                                                                                Potential
                                                                                                              Realized Value
                                         % of Total                                                     At Assumed Annual Rates of
                        Number of          Options                                                              Stock Price
                         Shares           Granted to                                                           Appreciation
                        Underlying        Employees                                                           for Option Term
                         Options          in Fiscal           Exercise Price            Expiration     ----------------------------
          Name           Granted             Year                ($/share)                  Date        5% ($)              10%($)
<S>                    <C>               <C>                  <C>                       <C>            <C>                <C>
Carl Wolf                500,000             8.28%                 $ 0.53                05/28/2009    $ 73,215           $ 161,785

Joseph Rosetti            75,000             1.24%                   0.54                05/28/2009      11,188              24,721
                         400,000             6.63%                   0.33                08/12/2009      36,464              80,573
                         100,000             1.66%                   1.79                12/15/2009      49,447             109,262


Jeffrey Dittus           250,000             4.14%                   0.99                04/30/2009      75,559             165,193
                         250,000             4.14%                   0.99                07/30/2009      79,547             175,259
                         250,000             4.14%                   1.55                01/30/2010          --              55,448
                         250,000             4.14%                   1.55                07/30/2010          --              77,535
                         250,000             4.14%                   1.86                01/30/2011          --              22,179
                         250,000             4.14%                   1.86                04/30/2011          --              34,359
                         400,000             6.63%                   0.54                05/28/2009      59,668             131,848
                         350,000             5.80%                   0.60                10/05/2009      58,010             128,185


John F. Levy             750,000            12.42%                   0.54                05/28/2009     111,877             247,214
                         150,000             2.48%                   1.00                11/14/2009      48,971             110,482
</TABLE>

The following table sets forth information concerning the number of options
owned by the Named Executives and the value of any in-the-money unexercised
options as of December 31, 2003. No options were exercised by any of these
executives during fiscal 2003.


                                       51
<PAGE>

Aggregated Option Exercises And Fiscal Year-End Option Values

                 Number of Securities Underlying
                      Unexercised Options at   Value of Unexercised In-the-Money
Name                     December 31, 2003       Options at December 31, 2003
                         -----------------       ----------------------------

                    Exercisable  Unexercisable  Exercisable   Unexercisable
                    -----------  -------------  -----------   -------------
Carl Wolf             779,953             --   $    215,011   $         --

Joseph Rosetti        427,500        237,500        311,875        281,875

Jeffrey Dittus        700,000      1,550,000        482,000        534,500

John F. Levy          420,241        600,000        332,369        560,000

Robert Toro           216,145        120,000         84,602         63,600

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, 2004 was $1.55

Director Compensation
For the year ended December 31, 2004, for serving as an independent director and
on the Audit Committee, Messrs. Neuwirth and Yarvis received $5,000 and Mr.
Ehrlich received cash compensation of $10,000. During the year ended December
31, 2004, Mr. Berman received options to purchase 225,000 shares of our common
stock; Mr. Ehrlich received options to purchase 125,000 shares of our common
stock and Messrs. Neuwirth and Yarvis each received options to purchase 100,000
share. For the year ending December 31, 2005, Mr. Ehrlich is expected to receive
$15,000 and Messrs. Neuwirth and Yarvis are expected to receive $10,000 each.

Employment Agreements
On January 29, 2004, the Company entered into a 27-month employment agreement
with Jeffrey Dittus. The agreement provides for a base annual salary of $250,000
per year. Pursuant to the agreement, the Company granted to Mr. Dittus options
to purchase 1,500,000 shares of Common Stock, which have exercise prices and
vest as follows:

      Options to Purchase            Exercise Price           Vesting Date
      -------------------            --------------           ------------
         250,000 shares                  $0.99                 04/30/2004
         250,000 shares                  $0.99                 07/30/2004
         250,000 shares                  $1.55                 01/30/2005
         250,000 shares                  $1.55                 07/30/2005
         250,000 shares                  $1.86                 01/30/2006
         250,000 shares                  $1.86                 04/30/2006

We entered into a two-year employment agreement with Joseph Rosetti effective
August 2004. This agreement provides for a monthly salary of $7,500, which was
subsequently adjusted to $8,500. Pursuant to the agreement, Mr. Rosetti was
granted options to purchase 400,000 shares of common stock at an exercise price
of $0.33 per share.


                                       52
<PAGE>

We entered into a two-year employment agreement with John Levy effective August
2004. The agreement provides for an annual base salary of $190,000, in the first
year of the agreement and an annual base compensation of $210,000 in the second
year of the agreement, in each case, subject to a 10% increase upon our
obtaining an aggregate of $12 million of debt or equity financing following the
date of the agreement. 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
annual salary then in effect for a period of 12 months.

We entered into a 38-month employment agreement with Howard Herrick dated
October 30, 2002. The agreement provides for an annual base salary of $175,000
in the first year of the agreement and four percent increases in each succeeding
year. Mr. Herrick's agreement also provides for a minimum annual bonus of
$30,000, however for the year ended December 31, 2003, in order to conserve
cash, we paid Mr. Herrick $12,000 and granted Mr. Herrick options to purchase
117,000 in partial payment of his bonus. Pursuant to the agreement, we granted
to Mr. Herrick options to purchase 100,000 shares of common stock with an
exercise price of $1.00, which immediately vested. In the event of termination
of employment under circumstances described in the employment agreement,
including as a result of a change in control, we will be required to provide
severance pay equal to the greater of $525,000 or three times total compensation
received by Mr. Herrick during the twelve months prior to termination.

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 28, 2005, options to purchase an aggregate
of 1,977,000 shares of our common stock have been granted under the 1997 plan.

Our 1999 Stock Option Plan provides for the grant of stock options to purchase
2,500,000 shares. As of March 28, 2005, options to purchase an aggregate of
2,379,843 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
28, 2005, options to purchase an aggregate of 3,418,250 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
28, 2005, options to purchase an aggregate of 3,417,000 shares of our common
stock have been granted under the 2001 plan.

Our 2004 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 7,500,000 shares of common
stock have been reserved for distribution pursuant to the 2004 plan. As of March
28, 2005, options to purchase an aggregate of 450,000 shares of our common stock
have been granted under the 2004 plan.

As of March 28, 2005, of the options outstanding under our plans, options to
purchase 5,031,386 shares of our common stock which are outstanding to our
officers and directors as follows: Joseph R. Rosetti - 665, 000 shares; Jeffrey
Dittus - 2,250,000 shares; John F. Levy - 1,020,241 shares; Robert Toro -
336,145 shares; Richard J. Berman - 350,000; Paul D. Ehrlich - 210,000; Shares;
Paul Neuwirth -- 100,000 shares; and Steve Yarvis - 100,000 shares.


                                       53
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters The following table details information regarding
our existing equity compensation plans as of December 31, 2004:

<TABLE>
<CAPTION>
                                                     (a)                          (b)                       I
                                                                                                  Number of securities
                                                                                                   remaining available
                                                                                                   for future issuance
                                              Number of securities          Weighted-average          under equity
                                               to be issued upon           exercise price of      compensation plans
                                            exercise of outstanding        outstanding options,    (excluding securities
              Plan Category               options, warrants and rights     warrants and rights   eflected in column (a))
----------------------------------------- ----------------------------     --------------------  -------------------------
<S>                                        <C>                             <C>                    <C>
Equity compensation plans
 approved by security holders ...........                  10,555,064              $1.95                 7,357,907
Equity compensation plans
 not approved by security holders .......                  15,869,598              $0.76                        --
Total ...................................                  26,424,662              $1.24                 7,357,907
</TABLE>

Note 1: See Note 10 and Note 11 to the Consolidated Financial Statements for a
further description of these plans.

The following table sets forth information regarding the beneficial ownership of
common stock, based on information provided by the persons named below in
publicly available filings, as of March 22, 2005:

      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
            5% 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.

For purposes of this table, a person is deemed to be the beneficial owner of the
securities if that person has the right to acquire such securities within 60
days of March 28, 2005 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 exercisable within such 60 day period, but
that options, warrants or other convertible securities held by all other persons
were not exercised or converted.

                                       54
<PAGE>

                            Number of Shares
Name and Address            Beneficially Owned (1)     Percentage of Class
-----------------           ----------------------     -------------------
Norton Herrick                   19,829,839 (2)                   40.4%
Jeffrey Dittus                    1,150,000 (3)                    3.1
John Levy                           687,215 (4)                    1.9
Joseph Rosetti                      590,000 (5)                    1.6
Robert Toro                         216,145 (6)                     *
Richard Berman                      350,000 (7)                     *
Paul Ehrlich                        210,000 (7)                     *
Paul Neuwirth                        50,000 (8)                     *
Stephen Yarvis                       50,000 (8)                     *
Directors and officers
 as a group (8 persons)           3,303,360                        8.5%

--------------------------------------
*        Less than 1%

(1)   Based on 35,406,151 shares outstanding

(2)   Represents (i) 6,150,214 shares of Common Stock owned by Mr. Herrick
      ("Herrick"), (ii) 1,500,000 shares of Common Stock issuable upon exercise
      of options, (iii) 4,071,043 shares of Common Stock issuable upon
      conversion of convertible preferred stock held by Mr. Herrick, (iv)
      1,430,203 shares of Common Stock issuable upon exercise of warrants held
      by Mr. Herrick, (v) 4,065,769 shares of Common Stock issuable upon
      conversion of convertible preferred stock held by Huntingdon, and (vi)
      2,612,610 shares of Common Stock issuable upon exercise of warrants held
      by Huntingdon. Mr. Herrick is the sole stockholder of Huntingdon and his
      voting and dispositive power over the securities held by Huntingdon.

(3)   Represents shares issuable upon exercise of options. Does not include
      1,100,000 shares issuable upon issue of options.

(4)   Represents (i) 1,000 shares of common stock, (ii) 25,974 shares issuable
      upon conversion of Series B Preferred stock and (iii) 410,241 shares of
      common stock issuable upon exercise of options. Does not include 350,000
      shares of common stock issuable upon exercise of options.

(5)   Represents (i) 25,000 shares and (ii) 562,500 shares issuable upon
      exercise.

(6)   Represents shares issuable upon exercise of options. Does not include
      120,000 shares issuable upon exercise of options.

(7)   Represents shares issuable upon exercise of options.

(8)   Represents shares issuable upon exercise of options. Does not include
      25,000 shares issuable upon exercise of options.


Item 13. Certain Relationships and Related Transactions
As of December 31, 2004 we owed to Norton Herrick, a principal shareholder, and
his affiliates approximately $315,000 for reimbursement of certain expenses and
services incurred in prior years. On April 28, 2004, in connection with the
agreements described below, we agreed to repay Mr. Herrick based on an agreed
upon schedule. From April 28, 2004 through December 31, 2004 we paid Mr. Herrick
a total of $324,000. As of December 31, 2004, we will pay Mr. Herrick (i)
$40,500 per month on the first of each month through and including July 2005 and
(ii) $31,410 on August 1, 2005.

On May 1, 2003, we entered into a two-year consulting agreement with XNH
Consulting Services, Inc. ("XNH"), a company wholly-owned by Herrick. Effective
December 31, 2003, we agreed with Herrick to terminate the two-year consulting
agreement with XNH, and to pay XNH a fee of $7,500 per month for 16 months


                                       55
<PAGE>

commencing on January 1, 2004 and to provide Herrick with health insurance and
other benefits applicable to our officers to the extent such benefits may be
provided under our benefit plans. The termination agreement provides that the
indemnification agreement with Herrick entered into on November 15, 2002 shall
remain in full force and effect and that we will reimburse Herrick for expenses
incurred in connection with any indemnification obligation. In April 2004, we
amended the termination agreement such that we are no longer required to either
pay Herrick the $7,500 each month or to provide Herrick with health insurance
and other benefits applicable to our officers. In connection with the
termination agreement, the non-competition and nondisclosure covenants of the
XNH consulting agreement were extended until December 31, 2006. In accordance
with the agreement, we paid or reimbursed certain health insurance premiums for
Mr. Herrick.

On May 7, 2003, the Company sold 3,350 shares of a newly created Series B Stock
with a liquidation preference of $100 per share for $335,000. Of the total sold,
200 shares ($20,000) were purchased by John Levy, Vice Chairman and Chief
Financial Officer of the Company. Under a subscription agreement, certain
"piggy-back" registration rights were granted.

On January 29, 2004, the Company issued $4,000,000 aggregate principal amount of
promissory notes (the "2004 Notes") and warrants to purchase 2,352,946 shares of
Common Stock to 13 institutional and accredited investors. In connection with
this offering, Herrick and Huntingdon Corporation ("Huntingdon" and together
with Herrick, the "Herrick Entities") entered into a letter agreement with the
purchasers of the 2004 Notes pursuant to which they granted to the holders of
the 2004 Notes in the event of an Event of Default (as defined in the 2004
Notes) the rights to receive payment under certain secured indebtedness owed by
the Company to Norton Herrick and Huntingdon and to exercise their rights under
security agreements securing such secured indebtedness. Pursuant to the letter
agreement, the Herrick Entities also executed Powers-of-Attorney in favor of a
representative of the 2004 Note holders pursuant to which such representative
may, following an Event of Default, take actions necessary to enforce the 2004
Note holders rights under the letter agreement, including enforcing the Herrick
Entities' rights under the security agreements. On April 12, 2004, the notes
were converted into Common Stock. In consideration for Huntingdon's consent to
the Financing and execution of the letter agreement upon receipt of
shareholders' approval, the Company agreed to reduce the conversion price of
$1,150,000 principal amount of convertible promissory notes held by Huntingdon
from $2.00 to $1.27 and $500,000 principal amount of convertible promissory
notes held by Huntingdon from $1.82 to $1.27.

On April 28, 2004, the Company entered into a new credit agreement. Herrick,
Huntingdon and N. Herrick Irrevocable ABC Trust (the "Trust"), of which Herrick
was the beneficiary, consented to the new credit agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The new credit agreement required the aggregate amount of principal and
interest owed by the Company to Herrick, Huntingdon and the Trust be reduced to
$6,800,000 ("Permissible Debt") by June 1, 2004, and that the Permissible Debt
be further reduced by up to an additional $1,800,000 if the Company does not
raise at least $2,000,000 in additional equity in each of the two calendar years
following the execution of the new credit agreement. MediaBay received a
fairness opinion in connection with this transaction.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Herrick
exchanged accrued and unpaid interest and dividends (including accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating


                                       56
<PAGE>

$1,181,419 into (i) 11,814 shares of Series C Convertible Preferred Stock with a
liquidation preference of $100 per share convertible into an aggregate of
1,514,615 shares of Common Stock at an effective conversion price of $0.78, and
(ii) warrants to purchase 3,029,230 shares of Common Stock. The warrants are
exercisable until April 28, 2014 at an exercise price of $0.53.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Convertible
Preferred Stock convertible into an aggregate of 4,065,768 shares of Common
Stock at an effective conversion price of $0.78, and (ii) warrants to purchase
an aggregate of 8,131,538 shares of Common Stock. The warrants are exercisable
until April 28, 2014 at an exercise price of $0.53. If the amount of the
Permissible Debt is required to be reduced due to the Company's failure to raise
the requisite additional equity, such reduction will automatically occur by the
exchange of Permissible Debt held by Huntingdon for additional shares of Series
C Convertible Preferred Stock in an aggregate liquidation preference equal to
the amount of debt exchanged and warrants to purchase a number of shares of
Common Stock equal to two times the number of shares of Common Stock issuable
upon conversion of the Series C Convertible Preferred Stock.

Herrick and Huntingdon agreed not to demand repayment of their debt until the
earlier of (i) the repayment of the New Credit Agreement or (ii) June 28, 2007.
The remaining promissory notes held by Herrick, Huntingdon and the Trust are
guaranteed by certain subsidiaries of the Company and secured by a lien on the
assets of the Company and certain subsidiaries of the Company.

On April 28, 2004, the Company repaid $1.6 million principal amount of the $3.2
million principal amount convertible note issued to ABC Investments, L.L.C., a
principal shareholder of the Company. We issued a new $1.6 million note (the
"New ABC Note") for the remaining principal amount. The New ABC Note extends the
maturity date from December 31, 2004 to July 29, 2007. In exchange for extending
the maturity date, the conversion price of the New ABC Note was reduced to
$0.50. The closing sale price of our common stock on the closing date was $0.48.
During October 2004, ABC Investments, L.L.C. converted $1,000,000 principal
amount of the New ABC into shares of Common Stock pursuant to the terms of the
note.

In December 2004, we entered into a letter agreement with certain affiliates of
Forest Hill Capital, LLC, at that time a principal shareholder (collectively,
the "Forest Entities"), extending the date by which we are required to file a
registration statement covering the securities issued to Forest Hill entities
(the "Registration Statement") to January 31, 2005. As consideration for this
extension, we issued to the Forest Hill Entities warrants to purchase an
aggregate of 50,000 shares of our common stock, exercisable until December 14,
2008 at a price of $1.42 per share. On February 8, 2005. we entered into another
letter agreement with the Forest Hill Entities extending the date by which we
were require to file the Registration Statement to May 1, 2005 (the
"Extension"). As consideration for the Extension, we issued an aggregate of
119,048 shares of our Common Stock (the "January Shares"), based on the last
sale price of the Common Stock on February 8, 2005 of $0.84. We also agreed that
if the last sale price of the Common Stock on the date the Registration
Statement is declared effective by the Securities and Exchange Commission (the
"Effective Date") is below $0.75, we will pay an aggregate of $250,000 less the
value of the January Shares on the Effective Date in cash or in shares of Common
Stock, at the Forest Hill entities' option. We also granted the Forest Hill
entities the right to require us to purchase an aggregate of 200,000 shares of
our common stock from the Forest Hill entities at a price of $3.00 per share if,
at any time prior to the Effective Date, the last sale price of the Common Stock
is above $4.00 per share.


                                       57
<PAGE>

As part of the Financing, the Forest Hill Entities exchanged 1.8 million shares
of Common Stock and 400,000 common stock warrants previously purchased by them
from the Company in October 2004 for $900,000 of the Offering Securities. The
Forest Hill Entities also purchased an additional $1.0 million of the Offering
Securities. We also agreed to include an additional 119,048 shares of Common
Stock, as well as 50,000 shares of Common Stock underlying certain additional
warrants, already beneficially owned and retained by Forest Hill Capital, for
resale in the Financing Registration Statement.

In connection with the Financing, we also entered into an agreement with the
Herrick Entities, pursuant to which, concurrently with the Financing:

      o     all $5.784 million principal amount of our convertible notes owned
            by the Herrick Entities (the "Herrick Notes") and 10,684 of their
            shares of our Series A Preferred Stock were converted into an
            aggregate of approximately 12.2 million shares of Common Stock (the
            "Herrick Shares"), at their stated conversion rate of $0.56 per
            share;

      o     we also agreed to redeem the remaining 14,316 shares of Series A
            Preferred Stock held by the Herrick Entities and all 43,527 of their
            shares of our Series C Preferred Stock (collectively, the
            "Redemption Securities") for $5.8 million, the aggregate stated
            capital of such shares, on the earlier of the effective date of the
            Shareholder Consent and June 1, 2005, and both the Redemption
            Securities and the redemption price were placed into escrow pending
            such date;

      o     the Herrick Entities waived certain of their registration rights and
            we agreed to include the Herrick Shares for resale in the Financing
            Registration Statement, so long as such Herrick Shares are owned by
            the Herrick Entities and not otherwise transferred, including, but
            not limited to, in the Herrick Financing (as defined below); and

      o     the Herrick Entities consented to the terms of the Financing and the
            agreements entered into in connection with the Financing, as we were
            required to obtain such consents pursuant to the terms of the
            Herrick Notes, the Series A Preferred Stock and the Series C
            Preferred Stock.

      o     Herrick and Huntingdon also entered into a voting agreement and
            proxy with us pursuant to which they agreed not to take any action
            to contradict or negate the Shareholder Consent and gave us a proxy
            to vote their shares, at the direction of the Company's Board of
            Directors, until the Effective Date.

On March 23, 2005 in connection with March 2005 transactions described in Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations, the Company, Herrick and Huntingdon entered into a voting agreement
whereby Herrick and Huntingdon authorized the chairman and/or president of the
Company to vote their voting securities pursuant to the terms of the March 2005
transaction and in accordance with the Company's Board of Directors.

Also on March 23, 2005 in connection with March 2005 transactions, we entered
into a registration rights agreement dated the date hereof with Herrick and
Huntingdon in which the parties are granted "piggy-back" registration rights
and, with respect to the shares of Common Stock issuable to Herrick and
Huntingdon upon conversion of the Herrick Notes and Series A Preferred Stock,
Herrick and Huntingdon are granted the same automatic registration rights as the
Investors under the Registration Rights Agreement.
We also entered into another registration rights agreement dated March 23, 2005,
with Herrick and Huntingdon in which the parties are granted "piggy-back"
registration rights and, with respect to the shares of our common stock issuable
to Herrick and Huntingdon upon exercise of the warrants held by Herrick and
Huntingdon.

We also paid to Norton Herrick and Huntingdon all accrued and unpaid interest
dividends due to them in the amount $2,271,000.


                                       58
<PAGE>

Item 14. Principal Accountants' Fees and Services On June 24, 2003, the Company
engaged Amper, Politziner & Mattia, P.C. to serve as the Company's independent
certified public accountants.

The following table presents fees charged for professional fees charged for
professional audit services for the audit of the Company's financial statements
for the years ended December 31, 2004 and 2003 by Amper Politziner & Mattia,
P.C. No fees were paid for non-audit related services.

                             2003         2004

Audit Fees (1)           $  103,000   $  124,000
Audit-Related Fees (2)           --   $   15,750
Tax Fees (3)                     --           --
All Other Fees (4)           13,000           --

       Total             $  116,000   $  139,750


      (1)   The aggregate fees billed for each year for professional services
            rendered by our principal accountant for the audit of our financial
            statements and review of financial statements included in our Form
            10-Q.

      (2)   Fees billed for assurance and related services by our principal
            accountant for the filing of a registration statement on Form S-3
            not reported above.

      (3)   There were no fees billed by our principal accountant for
            professional services rendered for compliance, tax advice and tax
            planning.

      (4)   Former principal accountants billed $13,000 for review of financial
            statements included in our Form 10-Q for the three months ended
            March 31, 2003 prior to their dismissal. Our former principal
            accountants, other than the fees disclosed above, billed no other
            fees.

Pre-approval Policies and Procedures
Consistent with the Securities and Exchange Commission requirements regarding
auditor independence, our Audit Committee has adopted a policy to pre-approve
all audit and permissible non-audit services provided by our principal
accountant. Under the policy, the Audit Committee must approve non-audit
services prior to the commencement of the specified service. Our principal
accountants have verified, and will verify annually, to our Audit Committee that
have not performed, and will not perform any prohibited non-audit service.


                                       59
<PAGE>

PART IV

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

            (a)   Exhibits

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

3.2         Articles of Amendment to Articles of Incorporation. (3)

3.3         Articles of Amendment to Articles of Incorporation. (4)

3.4         Articles of Amendment to Articles of Incorporation of the Registrant
            filed with the Department of State of the State of Florida on
            January 18, 2002. (7)

3.5         Articles of Amendment to Articles of Incorporation of the Registrant
            filed with the Department of State of the State of Florida on May 7,
            2003. (9)

3.6         Amended and Restated By-Laws of the Registrant. (8)

3.7         Amendment to the Articles of Incorporation of MediaBay, Inc.
            regarding the designation of the Series D Preferred Stock. (14)

10.1        1997 Stock Option Plan (1)

10.2        1999 Stock Incentive Plan (2)

10.3        2000 Stock Incentive Plan (5)

10.4        2001 Stock Incentive Plan (6)

10.5        2004 Stock Incentive Plan (13)

10.6        Letter Agreement between the Registrant and Norton Herrick entered
            into in November 2002. (10)

10.7        Indemnification Agreement dated as of November 15, 2002 between the
            Registrant, MEH Consulting Services. Inc. and Michael Herrick. (8)

10.8        Indemnification Agreement dated as of November 15, 2002 between the
            Registrant and Norton Herrick. (8)

10.9        Termination Agreement dated as of March 8, 2004 among XNH Consulting
            Services, Inc., the Registrant and Norton Herrick. (11)

10.10       Employment Agreement between the Registrant and Jeffrey Dittus dated
            January 28, 2004. (14)

10.11       Employment Agreement between the Registrant and Joseph Rosetti. (12)

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

10.13       Letter Agreement among the Registrant and the Forest Hill Entities
            dated February 8, 2005.

10.14       Registration Rights Agreement dated March 21, 2005 by and among
            MediaBay, Inc. and each of the investors whose names appear on the
            signature pages thereof. (14)

10.15       Registration Rights Agreement dated March 21, 2005 by and between
            MediaBay, Inc. and Goldman, Sachs & Co. (14)


                                       60
<PAGE>

10.16       Registration Rights Agreement (No. 1) dated March 19, 2005 by and
            among MediaBay, Inc., Norton Herrick and Huntingdon Corporation.
            (14)

10.17       Registration Rights Agreement (No. 2) dated March 19, 2005 by and
            among MediaBay, Inc., Norton Herrick and Huntingdon Corporation.
            (14)

10.18       Securities Purchase Agreement dated March 21, 2005 by and among
            MediaBay, Inc., Satellite Strategic Finance Associates, LLC and the
            other institutional investors whose names appear on the signature
            pages thereof, including exhibits and schedules thereto. (14)

10.19       Form of Warrant issued to each Investor pursuant to the Securities
            Purchase Agreement. (14)

10.20       Form of Preferred Warrant issued to each Investor pursuant to the
            Securities Purchase Agreement. (14)

10.21       Form of Warrant issued to Satellite Strategic Finance Associates,
            LLC. (14)

10.22       Form of Warrant issued to Merriman Curhan Ford & Co. (14)

10.23       Form of Key Employee Agreement dated March 21, 2005 between
            MediaBay, Inc. and each of Jeffrey A. Dittus and Joseph Rosetti.
            (14)

10.24       Form of Voting Agreement and Proxy dated March 21, 2005 by and among
            MediaBay, Inc., Norton Herrick and Huntingdon Corporation. (14)

10.25       Agreement dated March 19, 2005 by and among MediaBay, Inc., Norton
            Herrick and Huntingdon Corporation. (14)

10.26       Letter Agreement dated March 21, 2005 by and among MediaBay, Inc.,
            Forest Hill Select Offshore Ltd., Forest Hill Select Fund, L.P. and
            Lone Oak Partners L.P. (14)

10.27       Form of Letter Agreement between MediaBay, Inc. and each of Stephen
            Yarvis, Paul Ehrlich, Paul Neuwirth and Richard Berman. (14)

21.1        Subsidiaries of the Company. (11)

23.1        Consent of Amper Politziner & Mattia, P.C.

23.2        Consent of Deloitte & Touche LLP.

31.1        Chief Executive Officer Certification Pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002.

31.2        Chief Financial Officer Certification Pursuant to Section 302 of the
            Sarbanes-Oxley Act of 2002.

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

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


                                       61
<PAGE>

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

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

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

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

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

(6)   Incorporated by reference to the applicable exhibit contained in our proxy
      statement dated September 21, 2001. (7) Incorporated by reference to the
      applicable exhibit contained in our Current Report on Form 8-K for the
      reportable event dated January 18, 2002.

(8)   Incorporated by reference to the applicable exhibit contained in our
      Annual Report on Form 10-K for the year ended December 31, 2002.

(9)   Incorporated by reference to the applicable exhibit contained in our
      Quarterly Report on Form 10-Q for the quarterly period ended March 31,
      2003.

(10)  Incorporated by reference to Exhibit 10.32 contained in our Annual Report
      on Form 10-K for the year ended December 31, 2002.

(11)  Incorporated by reference to the applicable exhibit contained in our
      Annual Report on Form 10-K for the year ended December 31, 2003.


(12)  Incorporated by reference to the applicable exhibit contained in our
      Quarterly Report on Form 10-QSB for the quarterly period ended September
      30, 2004.

(13)  Incorporated by reference to the applicable exhibit contained in our
      Definitive Proxy Statement dated November 16, 2004.

(14)  Incorporated by reference to the applicable exhibit contained in our
      Current Report on Form 8-K for the reportable event dated March 19, 2005.

(b)   Financial Statement Schedule

      Schedule -I - Valuation and Qualifying Accounts and Reserve


                                       62
<PAGE>

                                 MediaBay, Inc.

                                    Form 10-K

                                     Item 8

                          Index to Financial Statements

Report of Independent Public Accounting Firm.............................F-2

Report of Independent Public Accounting Firm.............................F-3

Consolidated Balance Sheets as of December 31, 2003 and 2002.............F-4

Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001........................................F-5

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001.........................................F-6

Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001........................................F-7

Notes to Consolidated Financial Statements...............................F-8

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


                                      F-1
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Media Bay, Inc. and Subsidiaries



      We have audited the accompanying consolidated balance sheets of Media Bay
Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the two years in the period ended December 31, 2004. Our audit also included the
financial statement schedule listed in the Index at page S-1 as of December 31,
2004 and 2003 and for the years then ended. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audit.

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

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Media Bay Inc.
and Subsidiaries at December 31, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule as of December 31, 2004 and 2003 and for years then
ended, when considered in relation to the consolidated basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.

      /s/ Amper, Politziner & Mattia, P.C.

          Edison, New Jersey

          March 28, 2005


                                      F-2
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.

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

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill and
intangible assets upon adoption of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".


/s/ Deloitte & Touche LLP


Parsippany, New Jersey
April 15, 2003


                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                      2004            2003
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
                                    Assets
Current Assets:
      Cash and cash equivalents ...............................................   $      3,122    $        683
      Accounts receivable, net of allowances for sales returns and doubtful
            accounts of $2,708 and $4,446 at December 31, 2004 and 2003,
            respectively ......................................................          1,285           3,264
      Inventory ...............................................................          1,530           4,063
      Prepaid expenses and other current assets ...............................            199             215
      Royalty advances ........................................................            489             804
                                                                                  ------------    ------------
            Total current assets ..............................................          6,625           9,029
Fixed assets, net .............................................................            243             227
Deferred member acquisition costs .............................................             --           3,172
Deferred income taxes .........................................................             --          14,753
Other intangibles .............................................................             50              54
Goodwill ......................................................................          9,658           9,658
                                                                                  ------------    ------------
                                                                                  $     16,576    $     36,893
                                                                                  ============    ============

                     Liabilities and Stockholders' Equity
Current liabilities:
      Accounts payable and accrued expenses ...................................   $      5,361    $     10,268
      Accounts payable, related party .........................................            315             826
      Common stock subject to contingent put rights, current portion ..........             --             350
      Current portion of long-term debt .......................................            200              --
      Short-term debt, net of original issue discount of $54 and $274 at
            December 31, 2004 and 2003, respectively ..........................             29           7,107
      Related party  short-term debt, net of original issue discount of $142 at
            December 31, 2004 and 2003, respectively ..........................             --          10,643
                                                                                  ------------    ------------
            Total current liabilities .........................................          5,905          29,194
Long-term debt, net of original issue discount of $908 at December 31, 2004 ...          9,102              --
Related party long-term debt including accrued interest .......................          7,750              --
Common stock subject to contingent put rights .................................             --             750
                                                                                  ------------    ------------
Commitments and Contingencies .................................................             --              --
                                                                                  ------------    ------------
            Total liabilities .................................................         22,757          29,944
                                                                                  ------------    ------------
Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares of
      Series A outstanding at December 31, 2004 and December 31, 2003; 200 and
      3,350 shares of Series B issued and outstanding at December 31, 2004 and
      December 31, 2003, respectively and 43,527 and no shares of Series C
      issued and outstanding at December 31, 2004 and December 31, 2003,
      respectively ............................................................          6,873           2,828
Common stock; no par value, authorized 150,000,000 shares; issued and
      outstanding 24,843,980 and 13,057,414 at December 31, 2004 and 2003,
      respectively ............................................................        101,966          94,567
Contributed capital ...........................................................         17,682          11,569
Accumulated deficit ...........................................................       (132,702)       (102,015)
                                                                                  ------------    ------------
Total common stockholders' equity (deficit) ...................................         (6,181)          6,949
                                                                                  ------------    ------------
                                                                                  $     16,576    $     36,893
                                                                                  ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                              Years ended December 31,
                                                                         2004            2003             2002
                                                                     ------------    ------------    ------------

<S>                                                                  <C>             <C>             <C>
Sales, net of returns, discounts and allowances of $5,363, $16,960
     and $16,195 for the years ended December 31, 2004, 2003 and
     2002, respectively ..........................................   $     18,831    $     36,617    $     45,744
Cost of sales ....................................................          8,802          17,479          20,651
Cost of sales - write-downs ......................................          3,745              --              --
Advertising and promotion ........................................          4,700           9,988          10,156
Advertising and promotion write-downs ............................            846              --              --
Bad debt .........................................................            829           3,940           2,821
General and administrative .......................................          6,043           6,816           8,347
Severance and other termination costs ............................             --             544              --
Asset write-downs and strategic charges ..........................             --             749              --
Depreciation and amortization ....................................            144             328           1,314
Non-cash write-down of intangibles ...............................             --              --           1,224
                                                                     ------------    ------------    ------------
      Operating (loss) income ....................................         (6,278)         (3,227)          1,231
Interest expense .................................................          9,082           1,925           2,974
                                                                     ------------    ------------    ------------
      Loss before income tax expense .............................        (15,360)         (5,152)         (1,743)
Income tax expense ...............................................         14,753           1,471             550
                                                                     ------------    ------------    ------------
      Net loss ...................................................        (30,113)         (6,623)         (2,293)
Dividends on preferred stock .....................................            574             246             217
                                                                     ------------    ------------    ------------
      Net loss applicable to common shares .......................   $    (30,687)   $     (6,869)   $     (2,510)
                                                                     ============    ============    ============


Basic and diluted loss per share:
      Basic and diluted loss per share ...........................   $      (1.71)   $       (.49)   $       (.18)
                                                                     ============    ============    ============
</TABLE>

See accompanying notes to consolidated financial statements.


                                      F-5
<PAGE>

START HERE :) :)

                                 MEDIABAY, INC.
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 2004, 2003 and 2002
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                              Series A                          Series B
                                                              Preferred        Series A         Preferred          Series B
                                                               stock -         Preferred         stock -           Preferred
                                                              number of      stock no par       number of         stock no par
                                                               shares            value            shares              value
                                                          ---------------   ---------------   ---------------    ---------------
<S>                                                       <C>               <C>               <C>                <C>
Balance at January 1, 2002 ............................                --     $          --                --    $            --
    Conversion of convertible debt to preferred stock .            25,000             2,500                --                 --
    Conversion of convertible notes ...................                --                --                --                 --
    Options and warrants granted for consulting .......                --                --                --                 --
    Exercise of options and warrants ..................                --                --                --                 --
    Cancellation of warrants issued ...................                --                --                --                 --
    Stock issued to consultants .......................                --                --                --                 --
    Stock tendered as payment for exercise of options .                --                --                --                 --
    Stock and warrants issued in acquisition of patent                 --                --                --                 --
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2002 ..........................            25,000             2,500                --                 --
    Issuance of Series B Preferred Stock ..............                --                --             3,350                328
    Warrants granted in consideration for non-compete
      agreements ......................................                --                --                --                 --
    Exercise of options ...............................                --                --                --                 --
    Stock issued to consultants .......................                --                --                --                 --
    Options issued to consultants .....................                --                --                --                 --
    Columbia House settlement .........................                --                --                --                 --
    Stock tendered as payment of settlement ...........                --                --                --                 --
    Warrants issued in connection with financing ......                --                --                --                 --
    Options issued to Directors .......................                --                --                --                 --
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2003 ..........................            25,000   $         2,500             3,350    $           328
                                                          ===============   ===============   ===============    ===============
    Conversion of Series B Preferred Stock, net of fees                --                --            (3,150)              (308)
    Issuance of Series C Preferred Stock ..............                --                --                --                 --
    Conversion of subordinated debt ...................                --                --                --                 --
    Sales of common stock .............................                --                --                --                 --
    Exercise of options and warrants ..................                --                --                --                 --
    Stock issued to consultants .......................                --                --                --                 --
    Beneficial conversion feature of debt issued ......                --                --                --                 --
    Warrants issued in connection with financing ......                --                --                --                 --
    Inducement to convert .............................                --                --                --                 --
    Settlement of put obligation ......................                --                --                --                 --
    Options issued to Directors .......................                --                --                --                 --
    Options issued to consultants .....................                --                --                --                 --
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2004 ..........................            25,000   $         2,500               200    $            20
                                                          ===============   ===============   ===============    ===============
</TABLE>

<TABLE>
<CAPTION>
                                                            Series C
                                                           Preferred          Series C
                                                            stock -           Preferred        Common stock       Common stock
                                                            number of        stock no par       -number of          - no par
                                                      .       shares             value            shares              value
                                                          ---------------   ---------------   ---------------    ---------------
<S>                                                       <C>               <C>               <C>                <C>
Balance at January 1, 2002 ............................                --   $            --            13,862    $        93,468
    Conversion of convertible debt to preferred stock .                --                --                --                 --
    Conversion of convertible notes ...................                --                --               200              1,000
    Options and warrants granted for consulting .......                --                --                --                 --
    Exercise of options and warrants ..................                --                --               221                207
    Cancellation of warrants issued ...................                                  --                --                 --
    Stock issued to consultants .......................                --                --                19                 50
    Stock tendered as payment for exercise of options .                --                --               (61)                --
    Stock and warrants issued in acquisition of patent                 --                --               100                 75
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2002 ..........................                --                --            14,341             94,800
    Issuance of Series B Preferred Stock ..............                --                --                --                 --
    Warrants granted in consideration for non-compete
      agreements ......................................                --                --                --                 --
    Exercise of options ...............................                --                --               107                 --
    Stock issued to consultants .......................                --                --                29                 14
    Options issued to consultants .....................                --                --                --                 --
    Columbia House settlement .........................                --                --              (325)              (247)
    Stock tendered as payment of settlement ...........                --                --            (1,095)                --
    Warrants issued in connection with financing ......                --                --                --                 --
    Options issued to Directors .......................                --                --                --                 --
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2003 ..........................                --                --            13,057    $        94,567
                                                          ===============   ===============   ===============    ===============
    Conversion of Series B Preferred Stock, net of fees                --                --               468                365
    Issuance of Series C Preferred Stock ..............                                                43,527              4,353
    Conversion of subordinated debt ...................                --                --             8,598              5,554
    Sales of common stock .............................                --                --             1,800                900
    Exercise of options and warrants ..................                --                --               896                562
    Stock issued to consultants .......................                --                --                25                 17
    Beneficial conversion feature of debt issued ......                --                --                --                 --
    Warrants issued in connection with financing ......                --                --                --                 --
    Inducement to convert .............................                --                --                --                 --
    Settlement of put obligation ......................                --                --                --                 --
    Options issued to Directors .......................                --                --                --                 --
    Options issued to consultants .....................                --                --                --                 --
    Loss applicable to common shares ..................                --                --                --                 --
                                                          ---------------   ---------------   ---------------    ---------------
Balance at December 31, 2004 ..........................            43,527   $         4,353            24,844    $       101,965
                                                          ===============   ===============   ===============    ===============
</TABLE>

<TABLE>
<CAPTION>



                                                           Contributed         Accumulated
                                                      .       capital            deficit
                                                          ---------------    ---------------
<S>                                                       <C>                <C>
Balance at January 1, 2002 ............................   $         7,730    $       (92,636)
    Conversion of convertible debt to preferred stock .                --                 --
    Conversion of convertible notes ...................               (49)                --
    Options and warrants granted for consulting .......               659                 --
    Exercise of options and warrants ..................                --                 --
    Cancellation of warrants issued ...................              (125)                --
    Stock issued to consultants .......................                --                 --
    Stock tendered as payment for exercise of options .                --                 --
    Stock and warrants issued in acquisition of patent                 36                 --
    Loss applicable to common shares ..................                --             (2,510)
                                                          ---------------    ---------------
Balance at December 31, 2002 ..........................             8,251            (95,146)
    Issuance of Series B Preferred Stock ..............                --                 --
    Warrants granted in consideration for non-compete
      agreements ......................................                23                 --
    Exercise of options ...............................                --                 --
    Stock issued to consultants .......................                --                 --
    Options issued to consultants .....................                26                 --
    Columbia House settlement .........................             3,020                 --
    Stock tendered as payment of settlement ...........                --                 --
    Warrants issued in connection with financing ......               176                 --
    Options issued to Directors .......................                73                 --
    Loss applicable to common shares ..................                --             (6,869)
                                                          ---------------    ---------------
Balance at December 31, 2003 ..........................   $        11,569           (102,015)
                                                          ===============    ===============
    Conversion of Series B Preferred Stock, net of fees                --                 --
    Issuance of Series C Preferred Stock ..............                --                 --
    Conversion of subordinated debt ...................                --                 --
    Sales of common stock .............................                --                 --
    Exercise of options and warrants ..................                --                 --
    Stock issued to consultants .......................                --                 --
    Beneficial conversion feature of debt issued ......             3,991                 --
    Warrants issued in connection with financing ......             1,164                 --
    Inducement to convert .............................               391                 --
    Settlement of put obligation ......................               259                 --
    Options issued to Directors .......................               219                 --
    Options issued to consultants .....................                89                 --
    Loss applicable to common shares ..................                --            (30,687)
                                                          ---------------    ---------------
Balance at December 31, 2004 ..........................   $        17,682    $      (132,702)
                                                          ===============    ===============
</TABLE>


                                      F-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Years ended December 31,
                                                                        2004          2003          2002
                                                                     ----------    ----------    ----------
<S>                                                                  <C>           <C>           <C>

Cash flows from operating activities:
Net loss applicable to common shares .............................   $  (30,687)   $   (6,869)   $   (2,510)
  Adjustments to reconcile net loss to net cash used in
       operating activities:
    Asset write-downs and strategic charges ......................        4,591           749            --
    Income tax expense ...........................................       14,753         1,471           550
    Non-cash beneficial conversion ...............................        4,382            --            --
    Amortization of deferred member acquisition costs ............        2,663         6,161         5,571
    Loss on extinguishment of debt ...............................        1,532            --            --
    Non-current accrued interest and dividends payable ...........        1,472         1,155           456
    Amortization of deferred financing costs and original issue
    discount .....................................................        1,329           561         1,453
    Depreciation and amortization ................................          144           328         1,314
    Non-cash compensation expense ................................          328           118            --
    Changes in asset and liability accounts, net of acquisitions
       and asset write-downs and strategic charges:
      Decrease (increase) in accounts receivable, net ............        1,979         4,195        (2,643)
      Decrease (increase) in inventory ...........................          103           896        (1,123)
      (Increase) decrease in prepaid expenses
        and other current assets .................................          (48)          300         1,106
      (Increase) decrease in royalty advances ....................       (1,000)          240          (261)
      Increase in deferred member acquisition costs ..............         (356)       (2,410)       (8,099)
      (Decrease) increase in accounts payable and accrued expenses       (5,406)       (5,346)        3,981
                                                                     ----------    ----------    ----------
       Net cash provided by (used in) operating activities .......       (4,221)        1,549         1,019
                                                                     ----------    ----------    ----------
Cash flows from investing activities:
  Purchase of fixed assets .......................................         (136)          (16)         (111)
  Additions to intangible assets .................................          (20)         (102)           --
  Cash paid in acquisitions ......................................           --          (148)       (1,000)
                                                                     ----------    ----------    ----------
       Net cash used in investing activities .....................         (156)         (266)       (1,111)
                                                                     ----------    ----------    ----------
Cash flows from financing activities:
  Proceeds from issuance of debt .................................       13,500         1,065            --
  Proceeds from sale of common stock .............................          900            --            --
  Proceeds from exercise of stock options ........................          563            --           214
  Proceeds from sale of preferred stock, net of costs ............           --           328            --
  Proceeds from issuance of notes payable - related parties ......           --            --         2,000
  Repayment of long-term debt ....................................       (6,008)       (1,615)       (1,640)
  Increase in deferred financing costs ...........................       (2,139)          (99)         (149)
  Payments made in connection with litigation
      settlement recorded in contributed
      capital, net of cash received ..............................           --          (676)           --
                                                                     ----------    ----------    ----------
       Net cash provided by (used in) financing activities .......        6,816          (997)          425
                                                                     ----------    ----------    ----------
Net increase in cash and cash equivalents ........................        2,439           286           333
Cash and cash equivalents at beginning of year ...................          683           397            64
                                                                     ----------    ----------    ----------
Cash and cash equivalents at end of year .........................   $    3,122    $      683    $      397
                                                                     ==========    ==========    ==========

</TABLE>

                                      F-7
<PAGE>

                                 MEDIABAY, INC.
                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2003, 2002 and 2001
                    (Dollars in thousands, except per share d

(1) Organization

The Company is a Florida corporation formed on August 16, 1993. The Company is a
media, marketing and publishing company specializing in spoken audio
entertainment. Today, the Company is a leading reseller of audiobooks on CD and
cassettes from the nation's largest publishing houses via the Audio Book Club, a
mail order based, negative option book club. MBAY is also a licensee and
marketer of programs from the golden age of radio. These titles are sold in
physical formats through a catalog focused on collectors, a mail order based
continuity program, retail outlets, and an on-line download subscription
service. The Company's strategy consist of pursuing the download opportunity
through both the exclusive distribution agreement with Microsoft and the
opportunity to offer their content to other websites; leveraging their agreement
with Larry King to create opportunities which provide lower customer acquisition
costs and higher profit potential; and exploiting their existing content and
businesses.

(2) Significant Accounting Policies

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

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

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

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

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

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

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

                                      F-8
<PAGE>

Other Intangibles, Net
Intangible assets, principally consisting of purchased intellectual property,
which is reviewed for impairment on each reporting date, and non-compete
agreements, which are being amortized over their contractual term.

Goodwill
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase method
of accounting. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", the Company ceased
amortization of goodwill as of January 1, 2002. The Company completed the
transitional impairment test as of January 1, 2002, which did not result in an
impairment loss and performed an annual impairment tests in January 2005,
October 2003 and 2002, which did not result in an impairment loss. Prior to
January 1, 2002, goodwill was amortized over the estimated period of benefit not
to exceed 20 years.

Revenue Recognition
During the years ended December 31, 2004, 2003 and 2002, the Company derived its
principal revenue through sales of audiobooks, classic radio shows and other
spoken word audio products directly to consumers principally through direct
mail. The Company also sold classic radio shows to retailers either directly or
through distributors. The Company derived additional revenue through rental of
its proprietary database of names and addresses to non-competing third parties
through list rental brokers. The Company also derived a small amount of revenue
from advertisers included in its nationally syndicated classic radio shows. The
Company recognizes sales to consumers, retailers and distributors upon shipment
of merchandise. List rental revenue is recognized on notification by the list
brokers of rental by a third party when the lists are rented. The Company
recognizes advertising revenue upon notification of the airing of the
advertisement by the media buying company representing the Company. Allowances
for future returns are based upon historical experience and evaluation of
current trends.

Downloadable content revenue from the sale of individual content titles is
recognized in the period when the content is downloaded and the customer's
credit card is processed. Downloadable content revenue from the sale of
downloadable content subscriptions is recognized pro rata over the term of the
subscription period. Rebates and refunds are recorded as a reduction of revenue
in the period in which the rebate or refund is paid in accordance with Emerging
Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor
to a Customer (Including a Reseller of the Vendor's Products).

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

                                      F-9
<PAGE>


Cost of Sales
Cost of sales includes the following:

      o     Product costs (including free audiobooks in the initial enrollment
            offer to prospective members)
      o     Royalties to publishers and rightsholders
      o     Fulfillment costs, including shipping and handling
      o     Customer service
      o     Direct response billing, collection and accounts receivable
            management

Cooperative Advertising and Related Selling Expenses
In accordance with EITF No. 01-9, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", the
Company classifies the cost of sales incentives as a reduction of net sales.

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

General and Administrative Costs
General and administrative costs include the following:

      o     Payroll and related items
      o     Commissions
      o     Insurance
      o     Office expenses
      o     Telephone and postage
      o     Public and investor relations
      o     Dues and subscriptions
      o     Rent and utilities
      o     Travel and entertainment
      o     Bank charges
      o     Professional fees, principally legal and auditing fees
      o     Consulting

Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no stock-based employee
compensation cost has been recognized in the financial statements as all options
granted under the Company's stock option plan, had an exercise price at least
equal to the market value of the underlying common stock on the date of grant.
The pro forma information below is based on provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure", issued in
December 2002.

                                      F-10
<PAGE>

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                    2004         2003         2002
                                                                -----------    --------    ----------
<S>                                                             <C>            <C>         <C>

Net loss applicable to common shares, as reported               $   (30,687)   $ (6,869)   $   (2,510)
Add: Stock-based employee compensation expense included in
     reported net income applicable to common shares, net of
     related tax effects                                                 --          --            --
Deduct: Total stock-based employee compensation expense
     determined under fair value based method for all awards,
      net of related tax effects                                     (2,092)     (1,486)       (1,245)
                                                                -----------    --------    ----------
Pro forma net loss applicable to common shares                  $   (32,779)   $ (8,355)   $   (3,755)
                                                                -----------    --------    ----------

Net loss per share:

Basic and diluted-as reported                                   $     (1.71)   $  (0.49)   $    (0.18)
                                                                ===========    ========    ==========

Basic and diluted-pro forma                                     $     (1.82)   $  (0.60)   $    (0.27)
                                                                ===========    ========    ==========

</TABLE>

Income Taxes
The ultimate realization of deferred tax assets is dependent on the generation
of future taxable income during the periods in which temporary timing
differences become deductible. The Company determines the utilization of
deferred tax assets in the future based on current year projections by
management.

Based on a change in Company strategy, which the Company believes will result in
lower sales and losses in the near term, but ultimately will be more profitable,
the Company has determined that it is not more likely than not that it will, in
the foreseeable future, be able to realize all or part of its net deferred tax
asset. The Company has accordingly made an adjustment to the deferred tax asset
recording an increase to the valuation allowance, resulting in a deferred tax
expense charged against income in the fourth quarter of 2004, the period when
such determination was made.

Deferred Member Acquisition Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization Accordingly, the Company has capitalized direct
response advertising costs and amortizes these costs over the period of future
benefit (the average member life), which has been determined to be generally 30
months. The costs are being amortized on accelerated basis consistent with the
recognition of related revenue. In the fourth quarter of 2003, the Company
adjusted the amortization period for advertising to attract customers to its
World's Greatest Old-Time Radio continuity program and revised the estimate
period for amortization of these advertising costs down to 18 months, which
resulted in an increase in advertising expenses for the year ended December 31,
2003 of $409.

                                      F-11
<PAGE>

SOP 93-7 requires that the realizability of the mounts of direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable remaining future
net revenues. Based on a change in Company strategy, which the Company believes
will result in lower sales and losses in the near term, but ultimately will be
more profitable, the Company has determined that the future net revenue from the
Company's Audio Book Club does not support the carrying amount of the
direct-response advertising reported as assets relating to the Audio Book Club.
Accordingly the Company has made an adjustment to write-off the entire carrying
amount of the asset in the fourth quarter for 2004 resulting in an increase in
advertising expense of $846.

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

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

(3) Asset Write-Downs and Strategic Charges
In September 2004, the Company conducted a review of its operations including
product offerings, marketing methods and fulfillment. The Company is committed
to digitizing and encoding its library of spoken word content that includes
audiobooks and famous Old Time Radio shows, including The Shadow, Amos and Andy,
Jack Benny, Dragnet, Gunsmoke and more. By making its content available to the
digital customer, it believes it can expand the market for its audio content and
may be able to significantly reduce the cost of delivery. The Company believes
this distribution strategy could lead to increased revenues and potentially put
the Company on a track to profitability.

In October 2004 the Company and Microsoft announced that they are working
together to offer a wide range of audiobook titles via download to the millions
of MSN(R) users in the United States. Among the audiobook titles we will
exclusively offer on the MSN Music service are those from the nation's largest
audiobook publishers. MSN attracts more than 350 million unique users worldwide
per month. With localized versions available globally in 39 markets and 20
languages, MSN is a world leader in delivering Web services to consumers and
online advertising opportunities to businesses worldwide.

In October 2004 the Company also announced that it had signed a multi-year
agreement with Celebrity Newsletter LLC to develop television personality and
syndicated talk show host, Larry King's, On-line Audiobook and Entertainment
Club. The Company intends to design The Larry King Audiobook Club to meet, what
it believes, are its customers' needs for an easy to use online retail
experience. The Company is working to give its members more choice, better
customer service, and great prices for repeat buyers.

                                      F-12
<PAGE>

The Company believes that many of its key operating metrics may be improved by
its transition from a predominantly mail order business to an Internet based
business. The Company hopes to reduce its return rates, lower its bad debt rates
and reduce printing and fulfillment costs.

As a result of these third quarter decisions, the Company has recorded $2,100 of
strategic charges for the three months ended September 30, 2004. These charges
include: $1,000 of inventory written down to net realizable value due to a
reduction in Audio Book Club members and the Company's new focus on delivering
spoken word products via downloads and $1,100 of write-downs to royalty advances
paid to audiobook publishers and other license holders, which the Company does
not believe will be recoverable due to its new focus on delivering spoken word
products via downloads.

In the fourth quarter of 2004, the Company determined to transition its Audio
Book Club customers to either a downloadable business or an Internet based
business, which will not offer a negative club option. Based on this decision,
the Company reduced the value of its Audio Book Club inventory by $870, reduced
the amount of publishers' advances recorded as assets by $215 and wrote-off the
carrying amount direct-response advertising relating to Audio Book Club
resulting in an increase in advertising expense of $846. The Company also
determined based on this fourth quarter review that it is not more likely than
not that it will, in the foreseeable future, be able to realize all or part of
its net deferred tax asset. The Company has accordingly made an adjustment to
the deferred tax asset recording an increase to the valuation allowance,
resulting in a deferred tax expense charged against income in the fourth quarter
of 2004 of $14,753, the period when such determination was made.

Also in the fourth quarter of 2004, the Company reviewed its product mix of
offerings to both its mail order and wholesale Radio Spirits customers. The
Company has experienced a significant shift in the mix between CDs and cassettes
and will substantially reduce the number of cassette offerings in the future.
Accordingly, the Company has written off a substantial portion of its existing
cassette inventory as well as a portion of its CD inventory relating to older
products, which it will not aggressively promote in future periods. Workpapers
supporting these write-offs have been provided to our auditors. The additional
increase in the reserve for obsolescence of the Radio Spirits inventory made in
the fourth quarter of 2004 was $560.

In the fourth quarter of 2003, the Company evaluated the performance of Audio
Passages, an Audio Book Club marketing program tailored to listeners with an
interest in Christian product and determined based on past performance and
expected future performance that it should terminate the Audio Passages
marketing program. In connection with the termination of the Audio Passages
marketing program, the Company took a strategic charge for the establishment of
a reserve for obsolescence of Audio Passages inventory of $285 and an assets
write-down for previously capitalized advertising, which will no longer recover
of $464.

                                      F-13
<PAGE>

(4) Fixed Assets
Fixed Assets consist of the following as of December 31,

                                                            2004         2003
                                                           -------      -------
  Capital leases, equipment and related software .......   $   959      $   825
  Furniture and fixtures ...............................        84           82
  Leasehold improvements ...............................        74           74
  Web site development costs ...........................        57           57
                                                           -------      -------
  Total ................................................     1,174        1,038
  Accumulated depreciation .............................      (931)        (811)
                                                           -------      -------
                                                           $   243      $   227
                                                           =======      =======

Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$120, $146 and $221, respectively.

(5) Goodwill and Other Intangibles

SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires the
Company to perform an evaluation of goodwill impairment annually. The Company
conducted its annual impairment test for 2004 in January 2005, utilizing the
services of an independent appraiser, and its annual impairment tests for 2003
and 2002 in October 2003 and 2002,respectively, none of which resulted in an
impairment loss. Any future impairment losses incurred will be reported in
operating results.

The following is a reconciliation of changes in the carrying amounts of goodwill
for the Radio Spirits reportable segment for each of 2004 and 2003:



                                                    2004        2003
                                                   --------    --------
Balance at January 1,                              $  9,658    $  9,871
Goodwill acquired during the year                        --          --
Finalization of GAA asset purchase
  allocation                                             --        (213)
                                                   --------    --------
Ending Balance                                     $  9,658    $  9,658
                                                   ========    ========

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

Amortization of intangible assets was $24, $181 and $1,093 for the years ended
December 31, 2004, 2003 and 2002, respectively. The Company estimates intangible
amortization expenses of $45 in 2005.

                                      F-14
<PAGE>

The following table presents details of other intangibles at December 31, 2004
and December 31, 2003:

<TABLE>
<CAPTION>
                                    December 31, 2004                 December 31, 2003
                              ------------------------------   ------------------------------
                                        Accumulated                      Accumulated
                               Cost    Amortization     Net     Cost    Amortization      Net
                              ------   ------------   ------   ------   ------------   ------
<S>                           <C>      <C>            <C>      <C>      <C>            <C>
Mailing Agreements            $  592   $        592   $   --   $  592   $        592   $   --
Customer Lists                 4,380          4,380       --    4,380          4,380       --
Non-Compete Agreements           313            288       25      313            264       49
Other                             25             --       25        5             --        5
                              ------   ------------   ------   ------   ------------   ------
Total Other Intangibles       $5,310   $      5,260   $   50   $5,290   $      5,236   $   54
                              ======   ============   ======   ======   ============   ======
</TABLE>


(6)   Debt

<TABLE>
<CAPTION>
                                                                        As of
                                                          December 31,       December 31,
                                                              2004               2003
                                                       ----------------    ----------------
<S>                                                    <C>                 <C>
  Credit agreement, senior secured bank debt,          $             --    $          2,925
  Credit agreement, senior secured debt,
  net of original issue discount                                  8,661                  --
  Subordinated debt                                                  --               3,200
  Premier debt, net of original issue discount                      670                  --
  October 2003 Notes and related accrued interest,
  net of original issue discount                                     --                 982
  Related party notes and related accrued interest,
  net of original issue discount                                  7,750              10,643
                                                       ----------------    ----------------
  Total Debt                                                     17,081              17,750
           Less: Current Portion                                   (229)            (17,750)
                                                       ----------------    ----------------
  Long-Term Debt                                       $         16,852    $             --
                                                       ================    ================
</TABLE>

Convertible Debt
On January 29, 2004, the Company issued $4,000 aggregate principal amount of
promissory notes (the "January 2004 Notes") and warrants to purchase 2,352,946
shares of common stock (the "Investor Warrants") to institutional and accredited
investors (the "Offering"). The notes were due on the earlier of (i) April 30,
2005, (ii) such date on or after July 1, 2004 at such time as all of the
Company's indebtedness under its existing credit facility is either repaid or
refinanced or (iii) the consummation by the Company of a merger, combination or
sale of all or substantially all of the Company's assets or the purchase by a
single entity, person or group of affiliated entities or persons of 50% of the
Company's voting stock. The January 2004 Notes bore interest at the rate of 6%,
increasing to 9% on April 28, 2004 and 18% on July 27, 2004. On receipt of
shareholder approval, which was received on April 12, 2004, in accordance with
the terms of the January 2004 Notes, the principal amount of the notes
automatically converted into MediaBay common stock at the rate of one share of
common stock at $0.75, or approximately 5,333,333 shares. In addition accrued
interest in the amount $49 also converted into common stock at $0.75 per share,
or 64,877 shares.

In connection with the Offering, the Company issued to the placement agent and a
broker warrants to purchase an aggregate of 245,000 shares of common stock and
also issued to the placement agent warrants to purchase an additional 500,884
shares of Common Stock on April 12, 2004 as partial consideration for its
services as placement agent. All warrants issued are exercisable until January
28, 2009 at an exercise price of $1.28 per share.

                                      F-15
<PAGE>

The Company accounted for the issuance of the January 2004 debt and its
subsequent conversion in accordance with Emerging Issues task Force No. 00-27,
"Application of Issue No. 98-5 to Certain Convertible Instruments". Accordingly,
the Company recorded an expense of $3,991 as beneficial conversion expenses at
the date of the conversion. The Company also recorded in interest expense a loss
on early extinguishment of debt for the unamortized debt discount relating to
the expenses incurred in the transaction and the relative fair value of the
warrants issued in the transaction totaling $1,343.

In connection with the Offering, the Principal Shareholder and an affiliate of
the Principal Shareholder entered into a letter agreement (the "Letter
Agreement") with the purchasers of January 2004 Notes in the Offering pursuant
to which the Principal Shareholder granted to the holders of the Notes in the
event of an Event of Default (as defined in the Notes) the rights to receive
payment under certain secured indebtedness owed by the Company to the Principal
Shareholder and to exercise their rights under security agreements securing such
secured indebtedness. Pursuant to the Letter Agreement, the Principal
Shareholder also executed Powers of Attorney in favor of a representative of the
January 2004 Note holders pursuant to which such representative may, following
an Event of Default, take actions necessary to enforce the Note holders rights
under the Letter Agreement, including enforcing the Principal Shareholder's
rights under the security agreements.


New Credit Agreement and Related Transactions
On April 28, 2004, MediaBay entered into a new credit agreement ("New Credit
Agreement") by and among MediaBay and certain of its subsidiaries, the
guarantors signatory thereto, Zohar CDO 2003-1, Limited ("Zohar") as lender, and
Zohar, as agent, pursuant to which MediaBay and certain of its subsidiaries
initially borrowed $9,500. The initial term of the New Credit Agreement is one
year and it is extendable, at MediaBay's sole option, for two additional
one-year terms upon issuance of additional notes of $600 for the first
additional year and $300 for the second additional year, provided there is no
event of default. The loan bears interest at the rate of LIBOR plus 10%. In the
first year of the loan, a fee of $900 has been added to the principal balance,
which will be reflected as debt discount and will be accreted to interest
expense over the next twelve months. The New Credit Agreement contains certain
positive and negative covenants, including, beginning with the quarter ending
September 30, 2004, the maintenance of certain minimum levels of EBITDA, as
defined in the New Credit Agreement. Had the New Credit Agreement been in effect
at the date of the filing of this Annual Report on Form 10-K, the Company would
not be in compliance with EBITDA covenant.

MediaBay used a portion of the $8,600 of funds received under the New Credit
Agreement to satisfy all of its outstanding obligations under (i) promissory
notes that it issued in October 2003 in the aggregate principal amount of
$1,065, and (ii) its prior Credit Agreement, which had an outstanding principal
balance of approximately $1,386. The Company has included in interest expense a
loss on early extinguishment of debt of $73 related to unamortized original
issue discount relating to promissory notes that it issued in October 2003 and a
loss on early extinguishment of debt of $116 related to unamortized debt
discount relating to the prior Credit Agreement.

                                      F-16
<PAGE>

The Principal Shareholder and an affiliate of the principal shareholder, which
held a $500 principal amount note and 25,000 shares of Series A Convertible
Preferred Stock, consented to the New Credit Agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The New Credit Agreement required the aggregate amount of principal and
interest owed by MediaBay to the Principal Shareholder and the affiliate of the
Principal Shareholder be reduced to $6,800 ("Permissible Debt") by June 1, 2004,
and that the Permissible Debt be further reduced by up to an additional $1,800
if MediaBay does not raise at least $2,000 in additional equity in the two years
after the execution of the New Credit Agreement.

On April 28, 2004, to reduce its debt to $6,800, the Principal Shareholder and
his affiliate agreed, subject to, and automatically upon, the receipt of a
fairness opinion from an independent investment banking firm, to exchange the
principal of their $500 Note, $1,000 Note, $150 Note and $350 Note, plus accrued
and unpaid interest owed to the Principal Shareholder aggregating $1,833 and
accrued and unpaid dividends owed to the Principal Shareholder aggregating $519
into an aggregate of 43,527 shares of Series C Preferred Stock convertible into
(i) an aggregate of 5,580,384 shares of Common Stock at an effective conversion
price of $0.78, and (ii) warrants to purchase an aggregate of 11,160,768 shares
of Common Stock. The Warrants are exercisable until April 28, 2014 at an
exercise price of $0.53. The Series C Preferred Stock has a liquidation
preference of $100 per share. On May 25, 2004, a fairness opinion was received
from an independent investment banking firm, and, pursuant to the agreements
described above, the exchange of debt for units occurred. The transactions
described above resulted in a charge to earnings for debt inducement pursuant to
SFAS 84 of $391.

The remaining promissory notes held by the Principal Shareholders and its
affiliate were guaranteed by certain subsidiaries of the Company and secured by
a lien on the assets of the Company and certain subsidiaries of the Company. If
the amount of the Permissible Debt was required to be reduced due to MediaBay's
failure to raise the requisite additional equity, such reduction will
automatically occur by the exchange of Permissible Debt for additional shares of
Series C Preferred Stock in an aggregate liquidation preference equal to the
amount of debt exchanged and warrants to purchase a number of shares of common
stock equal to two times the number of shares of preferred stock issuable upon
conversion of the Series C Preferred Stock.


New ABC Note
Also on April 28, 2004, MediaBay repaid $1,600 principal amount of the $3,200
principal amount convertible note issued to ABC Investment, L.L.C. MediaBay
issued a new $1,600 note (the "New ABC Note") for the remaining principal
amount. The New ABC Note extends the maturity date from December 31, 2004 to
July 29, 2007. In exchange for extending the maturity date, the conversion price
of the New ABC Note was reduced to $0.50. The closing sale price of MediaBay's
Common Stock on the closing date was $0.48. The entire principal amount of the
note was converted into common stock during the fourth quarter of 2004.


Premier Debt
MediaBay has also entered into a settlement agreement, dated as of April 1,
2004, with Premier Electronic Laboratories, Inc. ("Premier"). Pursuant to the
settlement, among other things, MediaBay is paying Premier $950 in exchange for
Premier waiving its right to put its shares of Common Stock to MediaBay pursuant
to a Put Agreement dated December 11, 1998. MediaBay's obligation under the Put
Agreement was reduced by $150 in exchange for relinquishing certain leases for
real property. MediaBay paid $14 on closing and is paying the remaining balance
over six years in monthly payments starting at $7 in July 2004 and increasing to
$19 from May 2007 through April 2010.

                                      F-17
<PAGE>


The future minimum loan payments are as follows:

  Year Ending December 31,

     2005........................................................ $     284
     2006........................................................       284
     2007........................................................    16,911
     2008........................................................       233
     2009........................................................       233
     Beyond......................................................        77
                                                                  ---------
     Total maturities, including debt discount of $223........... $  18,022
                                                                  =========

(7) Commitments and Contingencies

Rent expense for the years ended December 31, 2004, 2003 and 2002 amounted to
$179, $180 and $291, respectively.

Operating Leases
The Company leases approximately 12,000 square feet of office space in Cedar
Knolls, New Jersey pursuant to a sixty-six month lease agreement dated April 18,
2003.

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

     Year ending December 31,

     2005...............................................         $    186
     2006...............................................              189
     2007...............................................              198
     2008...............................................              198
     Thereafter.........................................               --
                                                                 --------
     Total lease commitments............................         $    771
                                                                 ========
Capitalized Leases
During the year ended December 31, 2004, the Company had three capital leases.
Lease payments under these agreement were $59, $53 and $53 in 2004, 2003 and
2002, respectively. The amount of equipment capitalized under the leases and
included in fixed assets is $196, and net of depreciation the fixed asset
balance is $24 and $94 at December 31, 2004 and 2003, respectively. The
obligations under the leases included in accounts payable and accrued expenses
on the consolidated balance sheets at December 31, 2004 and 2003 were $9 and
$71, respectively.

     Minimum annual lease commitments under capital leases are as follows:

     2005..................................................  $  18
     2006..................................................      6
     2007..................................................      1
                                                             -----
     Total capital lease commitments.......................  $  25
                                                             =====
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 $674 and $223 during 2005 and 2006, respectively.

                                      F-18
<PAGE>

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 $1,473, $2,524 and $3,243 for 2004,
2003 and 2002, respectively. Minimum advances required to be paid under existing
agreements for the next five years are as follows:

     2005                                  $   303,000
     2006                                      455,000
     2007                                      238,000
     2008                                      138,000
                                           -----------
     Total                                 $ 1,134,000
                                           ===========
The Company has an agreement with a publisher under which it made periodic
payments for a series of audiobook titles. The agreement provides for the
Company to make additional payments of approximately $700, some of which is past
due. The Company does not believe that it can profitably license the additional
titles and is negotiating with the publisher to revise, amend or cancel the
agreement. The Company does not believe that canceling the agreement would have
a material adverse effect on its business, however it does want to maintain a
good relationship with the publisher.

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.

(8) Stock Option and Stock Incentive Plans

In June 1997, the Company adopted the 1997 Stock Option Plan, pursuant to which
the Company's Board of Directors may grant stock options to key employees of the
Company. In June 1998, the Company amended the 1997 Stock Option Plan to
authorize the grant of up to 2,000,000 shares of authorized but unissued common
stock.

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

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

                                      F-19
<PAGE>

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.

In December 2004, the Company's shareholders adopted the Company's 2004 Stock
Incentive Plan, which provides for grants of awards of stock options, restricted
stock, deferred stock or other stock based awards. A total of 7,500,000 shares
of common stock have been reserved for issuance pursuant to the plan.

Options under the Company's option plans expire at various times between 2005
and 2014. In accordance with the plans, options generally have terms of 5 to 10
years and vest from grant date to three years.

         Stock option activity under the plans is as follows:

                                                                       Weighted
                                                                        average
                                                                       exercise
                                                          Shares        price
                                                       -----------    ----------
Outstanding at January 1, 2002                           5,989,350    $     5.06
   Granted                                               1,205,000          2.27
   Exercised                                              (151,000)          .51
   Canceled and expired                                   (748,750)         6.95
                                                       -----------    ----------
Outstanding at December 31, 2002                         6,294,600          4.39
   Granted                                               3,593,781          1.05
   Exercised                                              (300,000)          .50
   Canceled and expired                                 (1,777,500)         4.73
                                                       -----------    ----------
Outstanding at December 31. 2003                         7,810,881          2.92
   Granted                                               6,037,500           .86
   Exercised                                              (788,029)          .62
   Canceled and expired                                 (2,511,288)         2.79
                                                       -----------    ----------
Outstanding at December 31. 2004                        10,549,064    $     1.95
                                                       ===========    ==========

The per share weighted-average fair value of stock options granted during the
years ended December 31, 2004, 2003 and 2002 is as follows using an accepted
option-pricing model with the following assumptions and no dividend yield. The
shares were granted as follows:

<TABLE>
<CAPTION>
       Date                 No. of     Exercise      Assumed      Risk-free      Fair Value
                            Shares      Price      Volatility   interest rate     per Share
                          ----------   --------    ----------   -------------    ----------
<S>                       <C>          <C>         <C>          <C>              <C>
2002 Grants:
     First Quarter           250,000   $   2.70          159%            4.42%   $     1.25
     Second Quarter               --         --           --               --            --
     Third Quarter            40,000       4.44          159%            3.46%         3.31
     Fourth Quarter          915,000       2.06          159%            3.08%         0.87
                          ----------
Total                      1,205,000
                          ----------
2003 Grants:
     First Quarter            40,000       1.50          165%            4.85%         0.90
     Second Quarter               --         --           --               --            --
     Third Quarter         2,173,856       0.97          165%            4.85%         0.29
     Fourth Quarter        1,379,925       1.17           97%            4.00%         0.67
                          ----------
Total                      3,593,871
                          ==========

2004 Grants:
     First Quarter         1,655,000       1.42          100%            3.50%         0.61
     Second Quarter        2,100,000       0.53           75%            3.45%         0.29
     Third Quarter           907,500       0.43           75%            3.44%         0.18
     Fourth Quarter        1,375,000   $   0.96          200%            3.46%   $     0.83
                          ----------
     Total                 6,037,500
                          ==========
</TABLE>


                                      F-20
<PAGE>

The following table summarizes information for options outstanding and
exercisable at December 31, 2004:

<TABLE>
<CAPTION>
                                                                            Options Exercisable
                                                                     -------------------------------
                              Options Outstanding      Weighted
  Range                         Weighted Average        Average                    Weighted Average
 of Prices       Number     Remaining Life in Years  Exercise Price     Number      Exercise Price
-----------   -----------   -----------------------  --------------   ----------   ----------------
<S>           <C>           <C>                      <C>              <C>          <C>
 $0.33-0.50     1,432,500                      5.20   $        0.38      638,750   $           0.39
  0.54-0.75     1,889,953                      4.37            0.57      727,453               0.59
  0.85-1.00     1,454,374                      4.16            0.96    1,334,374               0.96
  1.02-2.00     3,096,137                      4.88            1.46    1,627,046               1.42
  2.25-$4.88    2,676,100                      4.48            4.85    2,658,100               4.85
              -----------   -----------------------  --------------   ----------   ----------------
               10,549,064                      4.63   $         .95    6,983,723   $            .46
              ===========   =======================  ==============   ==========   ================

</TABLE>

At December 31, 2004, there were 23,000 additional shares available for grant
under the 1997 Plan, 120,157 additional shares available for grant under the
1999 Plan, 81,750 additional shares available for grant under the 2000 Plan,
83,000 additional shares available for grant under the 2001 Plan and 7,050,000
additional shares available for grant under the 2004 Plan.

(9) Warrants and Non-Plan Options

In connection with the financings described above, in 2004, the Company granted
warrants to purchase a total of 14,925,848 shares of the Company's common stock,
all of which vested in 2004, to investors and advisors. During the year ended
December 31, 2004, warrants to purchase 139,940 of the Company's common stock
expired; non-plan options to purchase 200,000 shares of the Company's common
stock expired or were cancelled and non-plan options to purchase 8,000 shares
were exercised.

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

<TABLE>
<CAPTION>
                                                                            Options Exercisable
                                                                   -------------------------------
                              Options Outstanding      Weighted
  Range                         Weighted Average        Average                    Weighted Average
 of Prices       Number     Remaining Life in Years  Exercise Price     Number      Exercise Price
-----------   -----------   -----------------------  --------------   ----------   ----------------
<S>           <C>           <C>                      <C>              <C>          <C>
$0.53-0.80     11,593,268                      9.12           $0.54    1,593,268              $0.54
 0.83-1.25        690,000                      4.78            0.94      690,000               0.94
 1.28-2.00      3,476,330                      4.38            1.34    3,476,330               1.34
3.00-$12.00       110,000                      5.22            4.73      110,000               4.73
              -----------   -----------------------  --------------   ----------   ----------------
               15,869,598                      7.87           $0.76   15,869,598              $0.76
              ===========   =======================  ==============   ==========   ================
</TABLE>

                                      F-21
<PAGE>


(10) Litigation Settlement
In December 1998, the Company acquired certain assets from a third party. The
parties also entered into certain other agreements including a mailing agreement
and a non-compete agreement. As consideration for the assets acquired and the
related transactions, including the mailing agreement and the non-compete
agreement, the third party received cash consideration of $30,750 and an
aggregate of 325,000 shares of the Company's common stock"(the "shares") and
warrants to purchase an additional 100,000 shares of the Company's common stock.
The parties also entered into a Registration and Shareholder Rights Agreement
pursuant to which, the Company granted the third party the right under certain
circumstances, commencing December 31, 2004, to require the Company to purchase
from the third party the Shares at a price of $15.00 per Share.

In 2001, the Company commenced litigation alleging, among other things, that the
Company was fraudulently induced to purchase certain of the assets. On June 16,
2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary of MediaBay
entered into a settlement agreement with respect to the lawsuit. Pursuant to the
settlement agreement, ABC received $350 in cash, the return for cancellation of
325,000 shares of MediaBay common stock issued in connection with the
acquisition and the termination of put rights granted to the seller in the
acquisition with respect to 230,000 of the shares (put rights with respect to
the remaining 95,000 shares had previously terminated). The termination of the
put rights terminated a $3,450 future contingent obligation of MediaBay and
results in a corresponding increase in stockholders' equity.

The calculation of the settlement of litigation recorded in Contributed Capital
is as follows:



  Termination of contingent put rights                      $      3,450
  Return for cancellation of 325,000 shares of
    common stock                                                     247
  Cash received                                                      350
                                                            ------------
  Total received in settlement of litigation                       4,047
  Legal and other costs incurred in connection with the
    litigation                                                     1,027
                                                            ------------
  Settlement of litigation recorded in Contributed Capital  $      3,020
                                                            ============
(11) Equity
On October 11, 2004, MediaBay, Inc. (the "Company") entered into a Securities
Purchase Agreement pursuant to which it issued to the purchasers thereunder an
aggregate of 1,800,000 shares (the "Shares") of the Company's common stock, no
par value per share (the "Common Stock"), and warrants to purchase 450,000
shares of Common Stock (the "Warrants"). The purchasers paid an aggregate
purchase price of $900,000 for the Shares and Warrants. Each Warrant is
exercisable to purchase one share of the Company's Common Stock at an exercise
price of $0.83 per share during the five (5)-year period commencing on October
11, 2004. The Shares and Warrants were issued to the purchasers without
registration under the Securities Act of 1933, as amended (the "Act"), in
reliance upon the exemptions from registration provided under 4(2) of the Act.
The issuances did not involve any public offering; the Company made no
solicitation in connection with the transactions other than communications with
the purchasers; the Company obtained representations from the purchasers
regarding their investment intent, experience and sophistication; the purchasers
either received or had access to adequate information about the Company in order
to make informed investment decisions; the Company reasonably believed that the
purchasers were sophisticated within the meaning of Section 4(2) of the Act; and
the Shares and Warrants were issued with restricted securities legends. No
underwriting discounts or commissions were paid in conjunction with the
issuances.

                                      F-22
<PAGE>

Series B Convertible Preferred Stock
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Vice Chairman and Chief Financial Officer of
the Company. The holders of shares of Series B Convertible Preferred Stock will
receive dividends at the rate of $9.00 per share, payable quarterly, in arrears,
in cash on each March 31, June 30, September 30 and December 31; provided that
payment will accrue until the Company is permitted to make such payment in cash
under its Agreement with its senior lender. During the fourth quarter of 2004,
3,150 shares of Series B Preferred Stock were converted into the Company's
common stock.

The Series B Stock is convertible into shares of Common Stock into MediaBay
Common Stock at a conversion rate equal to a fraction, (i) the numerator of
which is equal to the number of Series B Stock times $100 plus accrued and
unpaid dividends though the date of conversion and (ii) the denominator is
$0.77, the average price of the Company's stock on May 6, 2003.

In the event of a liquidation, dissolution or winding up of the Company, the
holders of Series B Stock shall be entitled to receive out of the assets of the
Company, a sum in cash equal to $100.00 per share before any amounts are paid to
the holders of the Company common stock and on a pari passu with the holders of
the Series A Convertible Preferred Stock. The holders of Series B Stock shall
have no voting rights, except as required by law and except that the vote or
consent of the holders of a majority of the outstanding shares of Series B
Stock, voting separately as a class, will be required for any amendment,
alteration or repeal of the terms of the Series B Stock that adversely effects
the rights, preferences or privileges of the Series B Stock.

Options Issued to Directors
During the year ended December 31, 2004, the Company issued options to purchase
700,000 shares of its common stock to its non-employee directors. Of the options
issued, 462,500 vested during 2004. The Company valued the vested options at
$219 using an acceptable valuation method and recorded an expense for that
amount in general and administrative expenses.

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

(12) Income Taxes
The Company's income tax provision for the years ended December 31, 2004, 2003
and 2002 includes a Federal deferred tax expense of $14,753, a Federal deferred
tax expense of $1,471 and a Federal deferred tax benefit of $550, respectively.

Income tax expense for the years ended December 31, 2004, 2003 and 2003 differed
from the amount computed by applying the U.S. Federal income tax rate of 34% and
the state income tax rate of 7% to the pre-tax loss as a result of the
following:

<TABLE>
<CAPTION>
                                                     2004         2003       2002
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Computed tax benefit                               $ (6,360)   $   (446)   $   (797)
Increase (decrease) in valuation allowance for
Federal and State deferred tax assets                21,113       1,917       1,347
                                                   --------    --------    --------
Income tax expense                                 $ 14,753    $  1,471    $    550
                                                   ========    ========    ========
</TABLE>

                                      F-23
<PAGE>

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. Management determined in the fourth quarter of
2004 that, based on the inherent uncertainties in the Company's strategy to
fully reserve for the deferred tax asset. Accordingly, in 2004, the deferred tax
asset was reduced by approximately $14,753 for amounts, which the Company was
unable to determine would be recoverable in future periods.

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

Deferred tax assets:
                                                             2004         2003
                                                           --------    --------
Federal and state net operating loss carry-forwards        $ 31,103    $ 22,362
Loss in I-Jam, LLC                                               85          85
Accounts receivable, principally due to allowance for
  doubtful accountsand reserve for returns                      606       1,408
Inventory, principally due to reserve for obsolescence        1,522         584
Intangibles                                                  11,186      13,984
Beneficial conversion feature                                   438         156
Total net deferred tax assets                                44,940      38,579
Less valuation allowance                                    (44,940)    (23,826)
                                                           --------    --------
Net deferred tax assets                                    $     --    $ 14,753
                                                           ========    ========

At December 31, 2004, the Company had approximately $76,887 of net operating
loss carry-forwards, which could possibly have been used to offset possible
future earnings, if any, in computing future income tax liabilities. However,
the March 2005 transactions described in Note 21 to these financial statements
have resulted in limitations to the utilization of net operating loss
carryforwards.

(13) Net Loss Per Share of Common Stock

Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the applicable reporting
periods. The computation of diluted net loss per share is similar to the
computation of basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the dilutive potential common shares had been issued.

Basic and diluted loss per share were computed using the weighted average number
of shares outstanding for the years ended December 31, 2004, 2003 and 2002 of
17,976, 14,098 and 14,086, respectively.

Common equivalent shares of 22,551 including 20,400 relating to convertible
subordinated debt and convertible preferred stock were not included in the
calculation of fully diluted shares because they were anti-dilutive. Interest
expense and dividends on the convertible subordinated debt and convertible
preferred stock that were not added back to net loss were $1,322 for the year
ended December 31, 2004.

Common equivalent shares of 16,969 including 15,909 relating to convertible
subordinated debt and convertible preferred stock were not included in the
calculation of fully diluted shares because they were anti-dilutive. Interest
expense and dividends on the convertible subordinated debt and convertible
preferred stock that were not added back to net loss were $1,150 for the year
ended December 31, 2003.

                                      F-24
<PAGE>

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

(14) Supplemental Cash Flow Information

No cash has been expended for income taxes for the years ended December 31,
2004, 2003 and 2002. Cash expended for interest was $1,045, $384 and $766 for
the years ended December 31, 2004, 2003 and 2002, respectively.

The Company had the following non-cash activities for the years ended December
31, 2004, 2003, and 2002:

<TABLE>
<CAPTION>
                                                            2004       2003      2002
                                                           ------     ------   ------
<S>                                                        <C>        <C>      <C>
E-Data patent rights acquisition ...................       $   --     $   --   $   75
Conversions of subordinated notes into common shares        5,649         --    1,000
Conversion of notes into preferred shares ..........        4,353         --    2,500
Stock tendered as payment for exercise of options ..                     150       75
Settlement of litigation ...........................                   3,697       --
</TABLE>

(15) Related Party Transactions

As of December 31, 2004, we owed to Mr. Herrick and his affiliates approximately
$315,000 for reimbursement of certain expenses and services incurred in prior
years. On April 28, 2004, in connection with the agreements described below, the
Company agreed to repay Mr. Herrick based on an agreed upon schedule. From April
28, 2004 through December 31, 2004 the Company paid Mr. Herrick a total of
$324,000. As of December 31, 2004, the Company will pay Mr. Herrick (i) $40,500
per month on the first of each month through and including July 2005 and (ii)
$31,410 on August 1, 2005.

On May 1, 2003, we entered into a two-year consulting agreement with XNH
Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton Herrick.
Effective December 31, 2003, we agreed with Norton Herrick to terminate the
two-year consulting agreement with XNH, and to pay XNH a fee of $7,500 per month
for 16 months commencing on January 1, 2004 and to provide Mr. Herrick with
health insurance and other benefits applicable to our officers to the extent
such benefits may be provided under our benefit plans. In April 2004, we amended
the termination agreement such that we are no longer required to either pay Mr.
Herrick the $7,500 each month or to provide Mr. Herrick with health insurance
and other benefits applicable to our officers. In connection with the
termination agreement, the non-competition and nondisclosure covenants of the
XNH consulting agreement were extended until December 31, 2006. In accordance
with the agreement, the Company paid or reimbursed certain health insurance
premiums for Mr. Herrick.

In December 2004, the Company entered into a letter agreement with certain
affiliates of Forest Hill Capital, LLC, at that time a principal shareholder
(collectively, the "Forest Hill Entities"), extending the date by which the
Company is required to file a registration statement covering the securities
issued to Forest Hill entities (the "Registration Statement") to January 31,
2005. As consideration for this extension, the Company issued to the Forest Hill
Entities warrants to purchase an aggregate of 50,000 shares of its common stock,
exercisable until December 14, 2008 at a price of $1.42 per share.

                                      F-25
<PAGE>

On January 29, 2004, the Company issued $4,000,000 aggregate principal amount of
promissory notes (the "2004 Notes") and warrants to purchase 2,352,946 shares of
Common Stock to 13 institutional and accredited investors. In connection with
this offering, Norton Herrick and Huntingdon entered into a letter agreement
with the purchasers of the 2004 Notes pursuant to which they granted to the
holders of the 2004 Notes in the event of an Event of Default (as defined in the
2004 Notes) the rights to receive payment under certain secured indebtedness
owed by the Company to Norton Herrick and Huntingdon and to exercise their
rights under security agreements securing such secured indebtedness. Pursuant to
the letter agreement, Norton Herrick and Huntingdon also executed
Powers-of-Attorney in favor of a representative of the 2004 Note holders
pursuant to which such representative may, following an Event of Default, take
actions necessary to enforce the 2004 Note holders rights under the letter
agreement, including enforcing Norton Herrick's and Huntingdon's rights under
the security agreements. On April 12, 2004, the notes were converted into Common
Stock. In consideration for Huntingdon's consent to the Financing and execution
of the letter agreement upon receipt of shareholders' approval, the Company
agreed to reduce the conversion price of $1,150,000 principal amount of
convertible promissory notes held by Huntingdon from $2.00 to $1.27 and $500,000
principal amount of convertible promissory notes held by Huntingdon from $1.82
to $1.27.

On April 28, 2004, the Company entered into a new credit agreement. Herrick,
Huntingdon and N. Herrick Irrevocable ABC Trust (the "Trust"), of which Herrick
was the beneficiary, consented to the new credit agreement and the other
transactions described above and entered into a subordination agreement with
Zohar. The new credit agreement required the aggregate amount of principal and
interest owed by the Company to Herrick, Huntingdon and the Trust be reduced to
$6,800,000 ("Permissible Debt") by June 1, 2004, and that the Permissible Debt
be further reduced by up to an additional $1,800,000 if the Company does not
raise at least $2,000,000 in additional equity in each of the two calendar years
following the execution of the new credit agreement. MediaBay received a
fairness opinion in connection with this transaction.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Herrick
exchanged accrued and unpaid interest and dividends (including accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating
$1,181,419 into (i) 11,814 shares of Series C Convertible Preferred Stock with a
liquidation preference of $100 per share convertible into an aggregate of
1,514,615 shares of Common Stock at an effective conversion price of $0.78, and
(ii) warrants to purchase 3,029,230 shares of Common Stock. The warrants are
exercisable until April 28, 2014 at an exercise price of $0.53.

Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged the principal of the $500,000 principal amount note, $1,000,000
principal amount note, $150,000 principal amount note and $350,000 principal
amount note held by Huntingdon, plus accrued and unpaid interest owed to
Huntingdon aggregating $1,171,278 into (i) 31,713 shares of Series C Convertible
Preferred Stock convertible into an aggregate of 4,065,768 shares of Common
Stock at an effective conversion price of $0.78, and (ii) warrants to purchase
an aggregate of 8,131,538 shares of Common Stock. The warrants are exercisable
until April 28, 2014 at an exercise price of $0.53. If the amount of the
Permissible Debt is required to be reduced due to the Company's failure to raise
the requisite additional equity, such reduction will automatically occur by the
exchange of Permissible Debt held by Huntingdon for additional shares of Series
C Convertible Preferred Stock in an aggregate liquidation preference equal to
the amount of debt exchanged and warrants to purchase a number of shares of
Common Stock equal to two times the number of shares of Common Stock issuable
upon conversion of the Series C Convertible Preferred Stock.

                                      F-26
<PAGE>

Herrick and Huntingdon agreed not to demand repayment of their debt until the
earlier of (i) the repayment of the New Credit Agreement or (ii) June 28, 2007.
The remaining promissory notes held by Herrick, Huntingdon and the Trust are
guaranteed by certain subsidiaries of the Company and secured by a lien on the
assets of the Company and certain subsidiaries of the Company.

On April 28, 2004, the Company repaid $1.6 million principal amount of the $3.2
million principal amount convertible note issued to ABC Investments, L.L.C., a
principal shareholder of the Company. We issued a new $1.6 million note (the
"New ABC Note") for the remaining principal amount. The New ABC Note extends the
maturity date from December 31, 2004 to July 29, 2007. In exchange for extending
the maturity date, the conversion price of the New ABC Note was reduced to
$0.50. The closing sale price of our common stock on the closing date was $0.48.
During October 2004, ABC Investments, L.L.C. converted $1,000,000 principal
amount of the New ABC into shares of Common Stock pursuant to the terms of the
note.

On May 7, 2003, the Company sold 3,350 shares of a newly created Series B Stock
with a liquidation preference of $100 per share for $335,000. Of the total sold,
200 shares ($20,000) were purchased by John Levy, Vice Chairman and Chief
Financial Officer of the Company. Under a subscription agreement, certain
"piggy-back" registration rights were granted.

(16) Recent Accounting Pronouncements

Share-Based Payment
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after June 15, 2005. We do not yet know the impact that
any future share-based payment transactions will have on our financial position
or results of operations.

Inventory costs
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing", to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005; however, early adoption of this Statement is permitted. The
Company does not anticipate an impact from the adoption of this statement.

(17) Segment Reporting

For 2004, 2003 and 2002, 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 evaluates performance and allocates resources among its three operating
segments based on operating income and opportunities for growth. RadioClassics,
which was created to distribute the Company's proprietary old-time radio content
across multiple distribution platforms including traditional radio, cable
television, satellite television (DBS), satellite radio and the Internet, is
aggregated with RSI for segment reporting purposes. Inter-segment sales are
recorded at prevailing sales prices.

                                      F-27
<PAGE>

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

Year ended December 31, 2004
<TABLE>
<CAPTION>

                                                          Corporate      ABC         RSI       MBAY.com    Inter-Seg.      Total
                                                          ---------    --------    --------    --------    ----------    --------
<S>                                                       <C>          <C>         <C>         <C>         <C>    <C>    <C>
Sales                                                     $      --    $ 12,303    $  6,382    $    205    $      (60)   $ 18,831
(Loss) profit before asset write-downs and
strategic charges, severance and other termination
costs, non-cash write-down of intangibles,
depreciation, amortization interest expense, income
tax expense and dividends on preferred stock                 (2,084)          2         938        (416)           17      (1,543)
Depreciation and amortization                                    24          83          37          --            --         144
Asset write-downs and strategic charges                          --       3,831         760          --            --       4,591
Severance and other termination costs                            --          --          --          --            --          --
Interest expense                                              9,078          --           4          --            --       9,082
Income tax expense                                           14,753          --          --          --            --      14,753
Dividends on preferred stock                                    574          --          --          --            --         574
Net (loss) income applicable to common shares               (26,513)     (3,912)        137        (416)           17     (30,687)
Total assets                                                     --       3,508      13,122           1           (55)     16,576
Purchase of fixed assets                                         --         127           9          --            --         136

Year ended December 31, 2003

<CAPTION>
                                                          Corporate      ABC         RSI       MBAY.com    Inter-Seg.      Total
                                                          ---------    --------    --------    --------    ----------    --------
<S>                                                       <C>          <C>         <C>         <C>         <C>    <C>    <C>
Sales                                                     $      --    $ 26,379    $ 10,247    $    138    $     (147)   $ 36,617
(Loss) profit before asset write-downs and
strategic charges, severance and other termination
costs, non-cash write-down of intangibles,
depreciation, amortization interest expense, income
tax expense and dividends on preferred stock                 (2,407)        455         846        (481)          (19)     (1,606)
Depreciation and amortization                                   180         106          42          --            --         328
Asset write-downs and strategic charges                         749          --          --          --            --         749
Severance and other termination costs                           544          --          --          --            --         544
Interest expense                                              1,913          --          12          --            --       1,925
Income tax expense                                            1,200         271          --          --         1,471
Dividends on preferred stock                                    246          --          --          --            --         246
Net (loss) income applicable to common shares                (6,039)       (851)        521        (481)          (19)     (6,869)
Total assets                                                 24,312      14,613      38,925
Purchase of fixed assets                                         --          14           2          --            --          16

Year ended December 31, 2002

<CAPTION>
                                                          Corporate      ABC         RSI       MBAY.com    Inter-Seg.      Total
                                                          ---------    --------    --------    --------    ----------    --------
<S>                                                       <C>          <C>         <C>         <C>         <C>    <C>    <C>
Sales                                                     $      --    $ 34,342    $ 11,348    $    215    $     (161)   $ 45,744
(Loss) profit before asset write-downs and
strategic charges, depreciation, amortization,
interest expense and income tax benefit                      (3,233)      5,281       2,141        (436)           16       3,769
Asset write-downs and strategic charges                          --       1,217          97          --            --       1,314
Depreciation and amortization                                 2,903          --          71          --            --       2,974
Interest expense                                              1,134          90       1,224
Income tax benefit                                             (449)       (101)       (550)
Net (loss) income applicable to common shares                   217          --          --          --            --         217
Total assets                                                 (6,353)      2,481       1,782        (436)           16      (2,510)

</TABLE>

                                      F-28
<PAGE>

(18) Quarterly Operating Data (Unaudited)

The following table presents selected unaudited operating data of the Company
for each quarter in the three year period ended December 31, 2003.

<TABLE>
<CAPTION>
Year Ended
December 31, 2004                                              1st         2nd          3rd          4th
                                                            Quarter      Quarter      Quarter      Quarter
                                                           ---------    ---------    ---------    ---------
<S>                                                        <C>          <C>          <C>          <C>

Sales                                                      $   5,684    $   4,801    $   3,849    $   4,496
Cost of sales                                                  2,570        2,228        1,875        2,129
Cost of sales - write-downs                                       --           --        2,100        1,645
Net (loss) income applicable to common shares                 (1,168)      (7,111)      (3,784)     (18,624)
Basic and diluted loss per share:                          $   (0.09)   $   (0.40)   $   (0.21)   $   (0.83)
<CAPTION>
Year Ended
December 31, 2003                                              1st         2nd          3rd          4th
                                                            Quarter      Quarter      Quarter      Quarter
                                                           ---------    ---------    ---------    ---------
<S>                                                        <C>          <C>          <C>          <C>
Sales                                                      $  10,697    $   9,407    $   9,572    $   6,941
Cost of sales                                                  5,234        4,124        4,252        3,869
Net (loss) income applicable to common shares                 (1,537)        (228)         285       (5,389)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share                     $    (.11)   $    (.02)   $     .02    $    (.38)
Diluted earnings (loss) per common share                   $    (.11)   $    (.02)   $     .02    $    (.38)

</TABLE>

(19) Subsequent Events

Extension to File Registration Statement
On February 8, 2005, the Company entered into a letter agreement further
extending the date by which the Company shall file the Registration Statement
with respect to the October 11, 2004 sale of common stock and warrants to May 1,
2005 (the "Extension"). As consideration for the Extension, the Company issued
to the Forest Hill Entities an aggregate of 119,048 shares of its Common Stock
(the "January Shares"), based on the last sale price of the Common Stock on
February 8, 2005 of $0.84. If the last sale price of the Common Stock on the
date the Registration Statement is declared effective by the Securities and
Exchange Commission (the "Effective Date") is below $0.75, the Company is
required to pay to the Forest Hill Entities an aggregate of $250 less the value
of the January Shares on the Effective Date in cash or in shares of Common
Stock, at the Forest Hill Entities' option. The Company also granted the Forest
Hill Entities the right (the "Put Right") to require the Company to purchase an
aggregate of 200,000 shares of the Common Stock issued to the Forest Hill
Entities at a price of $3.00 per share if, at any time prior to the Effective
Date, the last sale price of the Common Stock is above $4.00 per share, subject
to the Company obtaining the Consents. The Company's maximum potential
obligation under the Put Right is $600.

The January Shares were issued to the purchasers without registration under the
Securities Act of 1933, as amended (the "Act"), in reliance upon the exemptions
from registration provided under 4(2) of the Act. The issuances did not involve
any public offering; the Company made no solicitation in connection with the
transactions other than communications with the purchasers; the Purchasers
either received or had access to adequate information about the Company in order
to make informed investment decisions; the Company reasonably believed that the
purchasers were sophisticated within the meaning of Section 4(2) of the Act; and
the January Shares were issued with restricted securities legends. No
underwriting discounts or commissions were paid in conjunction with the
issuances.

                                      F-29
<PAGE>

March Transactions
On March 23, 2005, MediaBay, Inc. (the "Company") issued an aggregate of (a)
35,900 shares (the "Offering Shares") of its Series D Convertible Preferred
Stock (the "Series D Preferred") convertible into 65,272,273 shares of the
Company's common stock, (b) 32,636,364 five-year common stock purchase warrants
(the "Offering Warrants") and (c) preferred warrants (the "Over-Allotment
Warrants" and, together with the Offering Shares and the Offering Warrants, the
"Offering Securities") exercisable for a limited time, for additional proceeds
to the Company of $8,975, to purchase (1) up to 8,975 additional shares of
Series D Preferred (the "Additional Shares" and, together with the Offering
Shares, the "Preferred Shares") and (2) up to 8,159,091 additional warrants
identical to the Offering Warrants (the "Additional Warrants" and, together with
the Offering Warrants, the "Warrants"), to accredited investors (the
"Investors") for an aggregate purchase price of $35,900 (the "Financing").

Immediately prior to the Financing, holders of a majority of the Company's
voting securities approved by written consent (the "Shareholder Consent") (a) an
amendment to the Articles of Incorporation of the Company, increasing the number
of authorized shares of the common stock of the Company ("Common Stock") from
150,000,000 to 300,000,000, (b) a change of control which may occur as a result
of the Financing, and (c) the Company's issuance, in connection with the
transactions contemplated by the Financing documents, of Common Stock in excess
of 19.99% of the number of shares of Common Stock outstanding immediately prior
to the Financing.

While such actions have been approved by a majority of the shareholders, the
Company may not effect them until it satisfies certain information requirements
to the shareholders of the Company not party to the Shareholder Consent. As a
result, the Shareholder Consent will not be effective, and therefore no
conversion of the Preferred Shares nor exercise of the Warrants or the Satellite
Warrant above the Cap Amount can be effected until at least 20 calendar days
after an information statement is sent or given to such shareholders. Until such
time, the Investors have agreed not to convert or exercise their securities
above their pro rata portion of the Cap Amount and Merriman has agreed not to
exercise the Merriman Warrants.

The Preferred Shares have a face value of $1,000 per share ("Stated Value") and
are convertible at any time at the option of the holder into shares ("Conversion
Shares") of common stock at the rate of $0.55 per Conversion Share, subject to
certain anti-dilution adjustments, including for issuances of Common Stock for
consideration below the conversion price. The Preferred Shares are also
mandatorily convertible at the option of the Company, subject to its
satisfaction of certain conditions, commencing 30 days following the later date
to occur (the "Effective Date") of (a) the effective date of the Financing
Registration Statement (defined below) and (b) the effective date of the
Shareholder Consent. Under certain circumstances under the control of the
Company, the holders will also have the right to require the Company to redeem
their Preferred Shares at their Stated Value. Cumulative dividends will accrue
on the Preferred Shares on an annualized basis in an amount equal to 6% of their
Stated Value until they are converted or redeemed and will be payable quarterly
in arrears, beginning April 1, 2005, in cash or, at the Company's option,
subject to its satisfaction of certain conditions, in shares of Common Stock
("Dividend Shares") valued at 93% of the average of the daily volume weighted
average per-share price of the Common Stock for the five trading days prior to
the applicable payment date. The Preferred Shares are non-voting. Subject to
certain exceptions for accounts receivable and equipment and capital lease
financings, the Company may not incur additional indebtedness for borrowed money
or issue additional securities that are senior to or pari passu to the Preferred
Shares without the prior written consent of holders of at least 2/3rds of the
Preferred Shares then outstanding.

                                      F-30
<PAGE>

Each Warrant is exercisable to purchase one share of Common Stock (collectively,
the "Warrant Shares"), at an exercise price of $0.56 per share for a period of
five years commencing September 23, 2010, subject to certain anti-dilution
adjustments, including for issuances of Common Stock for consideration below the
exercise price. In addition, once exercisable, the Warrants permit cashless
exercises during any period when the Warrant Shares are not covered by an
effective resale registration statement.

The Over-Allotment Warrants are exercisable until 90 days following the
Effective Date for the purchase of Additional Shares and Additional Warrants, at
an exercise price equal to the Stated Value of the Additional Shares purchased,
with the purchase of each Additional Share including an Additional Warrant
exercisable for a number of Warrant Shares equal to 50% of the Conversion Shares
underlying such Additional Share.

As part of the Financing, the Forest Hill Entities exchanged 1.8 million shares
of Common Stock and 400,000 common stock warrants previously purchased by them
from the Company in October 2004 for $900 of the Offering Securities. The Forest
Hill Entities also purchased $1,000 of the Offering Securities. The Company has
agreed to include an additional 119,048 shares of Common Stock, as well as
50,000 shares of Common Stock underlying certain additional warrants, already
beneficially owned and retained by Forest Hill Capital, for resale in the
Financing Registration Statement. The Forest Entities also purchased 1,000
shares of the Offering Securities.

In connection with the Financing, the Company also entered into an agreement
(the "Herrick Agreement") with Norton Herrick, a principal shareholder of the
Company, and Huntington Corporation, one of his affiliates and also a principal
shareholder of the Company (collectively, the "Herrick Entities"), pursuant to
which, concurrently with the Financing:

o     all $5,784 principal amount of the convertible notes of the Company owned
      by the Herrick Entities (the "Herrick Notes") and 10,684 of their shares
      of the Series A Convertible Preferred Stock of the Company ("Series A
      Preferred") were converted into an aggregate of approximately 12.2 million
      shares of Common Stock (the "Herrick Shares"), at their stated conversion
      rate of $0.56 per share;

o     the Company agreed to redeem the remaining 14,316 shares of Series A
      Preferred held by the Herrick Entities and all 43,527 of their shares of
      the Series C Convertible Preferred Stock of the Company (collectively, the
      "Redemption Securities") for $5,784, the aggregate stated capital of such
      shares, on the earlier of the effective date of the Shareholder Consent
      and June 1, 2005, and both the Redemption Securities and the redemption
      price were placed into escrow pending such date;

o     the Herrick Entities waived certain of their registration rights and the
      Company agreed to include the Herrick Shares for resale in the Financing
      Registration Statement, so long as such Herrick Shares are owned by the
      Herrick Entities and not otherwise transferred, including, but not limited
      to, in the Herrick Financing (as defined below); and

o     the Herrick Entities consented to the terms of the Financing and the
      agreements entered into in connection with the Financing, as the Company
      was required to obtain such consents pursuant to the terms of the Herrick
      Notes, the Series A Preferred and the Series C Preferred.

o     Herrick and Huntingdon also entered into a voting agreement and proxy with
      the Company pursuant to which they agreed not to take any action to
      contradict or negate the Shareholder Consent and gave the Company a proxy
      to vote their shares, at the direction of the Company's Board of
      Directors, until the Effective Date.

                                      F-31
<PAGE>

o     the Company entered into a registration rights agreement dated the date
      hereof with Herrick and Huntingdon in which the parties are granted
      "piggy-back" registration rights and, with respect to the shares of Common
      Stock issuable to Herrick and Huntingdon upon conversion of the Herrick
      Notes and Series A Preferred Stock, Herrick and Huntingdon are granted the
      same automatic registration rights as the Investors under the Registration
      Rights Agreement.

o     the Company also entered into another registration rights agreement dated
      March 23, 2005, with Herrick and Huntingdon in which the parties are
      granted "piggy-back" registration rights and, with respect to the shares
      of our common stock issuable to Herrick and Huntingdon upon exercise of
      the warrants held by Herrick and Huntingdon.

The Company received $35,000 of gross proceeds (not including the securities
exchanged by the Forest Entities for $900 of the purchase price) in the
Financing. Merriman Curhan Ford & Co. ("Merriman") acted as a financial advisor
with respect to certain of the investors in the Financing for which it received
compensation from the Company of $2,625 plus a five-year warrant (the "Merriman
Warrant") to purchase 7,159,091 shares of Common Stock at an exercise price of
$0.56 per share commencing upon the effectiveness of the Shareholder Consent.
Merriman also received a structuring fee from the Company with respect to the
Financing in the amount of $175. In addition, the Company issued to Satellite
Strategic Finance Associates, LLC, an investor in the Financing, a warrant (the
"Satellite Warrant") to purchase 250,000 shares of Common Stock (identical to
the Warrants), and reimbursed it $55 for expenses, for consulting services
rendered by it in connection with the Financing.

Concurrently with the Financing, the Company repaid from its net Financing
proceeds, all of the principal and accrued and unpaid interest due on the
Company's outstanding senior notes issued on April 28, 2004, in the aggregate
amount of approximately $9,400. The Company will report an additional charge in
the first quarter of 2005 to reflect the write-off of unamortized financing
charges related to the repayment of this debt.

The Company also paid to Norton Herrick and Huntingdon all accrued and unpaid
interest dividends due to them in the amount $2, 271 and placed into escrow
$5,784, such amounts to be used to redeem the portion of Series A Preferred
Stock not converted and all of the Series C Preferred Stock on a date at least
20 days after an information statement is sent to all shareholders who did not
initially vote on the transaction.


                                      F-32
<PAGE>

Pro Forma Balance Sheet

The following pro forma balance sheet reflects the effects of the March
transactions:

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

<TABLE>
<CAPTION>

                                    Pre-Transaction
                                      December 31,                                                   Pro Forma for
                                        2004            Dr.            Dr.              Cr.           Transaction
                                       ---------    ---------       ---------        ---------         ---------
                   Assets
<S>                                    <C>          <C>             <C>              <C>             <C>
Current Assets:
     Cash and cash equivalents         $   3,122    $  35,000(1)                       (20,215)(10)    $  17,907
     Accounts receivable, net              1,285                                                           1,285
     Inventory                             1,530                                                           1,530
     Prepaid expenses and other
       current assets                        199                                                             199
     Royalty advances                        489                                                             489
                                       ---------    ---------       ---------        ---------         ---------

     Total current assets                  6,625       35,000              --          (20,215)           21,410

 Fixed assets, net                           243                                                             243
 Other intangibles                            50                                                              50
 Goodwill                                  9,658                                                           9,658
                                       ---------    ---------       ---------        ---------         ---------
                                       $  16,576    $  35,000              --        ($ 20,215)        $  31,361
                                       ---------    ---------       ---------        ---------         ---------


  Liabilities and Stockholders' Equity

 Current liabilities:
     Accounts payable and
       accrued expenses                $   5,676                                                       $   5,676
     Current portion of
       long-term debt                        200         (200)(2)                                             --
     Short-term debt, net                     29                                                              29
                                       ---------    ---------       ---------        ---------         ---------

     Total current liabilities             5,905         (200)             --               --             5,705

 Long-term debt, net                       9,102       (9,200)(2)                          738(7)            640
    Related party long-term debt
      including accrued interest           7,750       (5,784)(3)                                             --
                                                       (1,966)(4)
                                       ---------    ---------       ---------        ---------         ---------
      Total liabilities                   22,757      (17,150)             --              738             6,345
                                       ---------    ---------       ---------        ---------         ---------

 Preferred stock                           6,873       (5,784)(5)      (3,065)(8)       35,000 (1)        30,135
                                                                       (1,069)(3)       (2,720)(9)           900 (6)
 Common stock                            101,966         (900)(6)                        5,784 (3)       107,919
                                                                                         1,069 (3)
 Contributed capital                      17,682                                         2,720 (9)        20,402
 Accumulated deficit                    (132,702)        (738)(7)                                       (133,440)
                                       ---------    ---------       ---------        ---------         ---------
 Total common stockholders' equity        (6,181)      (8,491)         (5,785)          45,473            25,016
                                       ---------    ---------       ---------        ---------         ---------
                                          16,576      (25,641)         (5,785)          46,211            31,361
                                       ---------    ---------       ---------        ---------         ---------
</TABLE>

Notes:

(1)   Gives effect to the sale of $35 million in Series D preferred stock.

(2)   Gives effect to the repayment of senior debt facility.

(3)   Gives effect to the conversion of related party debt to common stock.

(4)   Gives effect to the payment of accrued interest and dividends.

(5)   Assumes redemption of preferred stock, which will occur on or before June
      1, 2005.

(6)   To record issuance of Series D Preferred Stock and warrants in exchange
      for common stock and warrants issued in October 2004.

(7)   To record loss on early retirement of debt.

(8)   Represents estimate of cash fees and expenses on the transaction.

(9)   Represents value of warrants issued to investment bankers.

(10)  Total amounts to be paid out in the transaction as follows:


               Repayment of senior debt facility $    9,400
       Payment of accrued interest and dividends      1,966
          Payment of convertible preferred stock      5,784
                    Payment of fees and expenses      3,065 (estimated)
                                                ------------
                                                 $   20,215
                                                ------------

                                      F-33

<PAGE>

          SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              For the years ended December 31, 2004, 2003 and 2002

<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, 2004                   $      4,446           6,192          --         7,930         2,708
Year Ended December 31, 2003                   $      5,325          20,900          --        21,779         4,446
Year Ended December 31, 2002                   $      4,539          18,793          --        18,007         5,325

Valuation allowance for Federal and
  State deferred tax assets:
Year Ended December 31, 2004                   $     23,826          14,753       6,361            --        44,940
Year Ended December 31, 2003                   $     21,911           1,471          --           446        23,826
Year Ended December 31, 2002                   $     20,563             550          --           798        21,911
</TABLE>

                                      F-34

<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    MEDIABAY, INC.

                              By:  /s/ John F. Levy
                                   --------------------------------------------
                                       John F. Levy
                                       Vice Chairman and Chief Financial Officer

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

     Signature                       Title                        Date
     ---------                       -----                        ----

/s/ Joseph Rosetti    Chairman and Director                      March 31, 2005
--------------------
    Joseph Rosetti


/s/ Jeffrey Dittus    Chief Executive Officer and Director       March 31, 2005
--------------------  (Principal Executive Officer)
    Jeffrey Dittus


/s/ John F. Levy      Vice Chairman and Chief Financial Officer  March 31, 2005
--------------------  and Director
    John F. Levy      (Principal Financial and Accounting Officer)


                      Director
--------------------
   Richard Berman


/s/ Paul Ehrlich      Director                                   March 31, 2005
--------------------
    Paul Ehrlich


/s/ Paul D. Neuwirth  Director                                   March 31, 2005
--------------------
    Paul D. Neuwirth


/s/ Stephen Yarvis    Director                                   March 31, 2005
--------------------
    Stephen Yarvis