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, 2003

                                       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
              Cedar Knolls, NJ                         07927
   --------------------------------------             --------
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)           (ZIP CODE)


                                  973-539-9528
                                  ------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

                                  Common Stock
                                 --------------
                                (TITLE OF CLASS)

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 [ ] No |X|

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  Fis 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, 2003 (the last  business day of the  Registrant's
most recently completed second fiscal quarter) was approximately $6,964,684.

As of April 12, 2004, there were 18,463,624  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                                                         16

Item 3. Legal Proceedings                                                  16

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

PART II                                                                    17

Item 5. Market for Registrant's Common Equity, Related Stockholder
         Matters and Issuer Purchases of Equity Securities                 17

Item 6. Selected Financial Data                                            17

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk        42

Item 8. Financial Statements and Supplementary Data                        42

Item 9. Changes in and Disagreements With Accountants on
         Accounting and Financial Disclosure                               42

Item 9A. Controls and Procedures                                           42

PART III                                                                   43

Item 10. Directors and Executive Officers of the Registrant                43

Item 11. Executive Compensation                                            46

Item 12. Security Ownership of Certain Beneficial Owners and
          Management and Related Stockholder Matters                       50

Item 13. Certain Relationships and Related Transactions                    52

Item 14. Principal Accountant Fees and Services                            55

PART IV                                                                    56

Item 15. Exhibits, Financial Statements Schedules,
          and Reports on Form 8-K                                          56


<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 history of losses;  our  ability to obtain  additional
financing, meet stock repurchase obligations, anticipate and respond to changing
customer  preferences,  license  and  produce  desirable  content,  protect  our
databases and other  intellectual  property from  unauthorized  access,  pay our
trade creditor and collect  receivables;  dependence on  third-party  providers,
suppliers and distribution channels;  competition;  the costs and success of our
marketing  strategies,  product  returns and member  attrition.  Undue reference
should not be placed on these forward-looking statements, which speak only as of
the date  hereof.  We  undertake  no  obligation  to update any  forward-looking
statements.

INTRODUCTION
MediaBay,  Inc. is a media,  marketing and publishing  company  specializing  in
spoken audio content, whose industry-leading  businesses include direct response
and interactive  marketing,  retail product  distribution,  media publishing and
broadcasting.  Our operations are comprised of four  subsidiaries  -- Audio Book
Club, Inc. ("ABC"), a leading club for audiobooks, Radio Spirits, Inc. ("RSI" or
"Radio Spirits"), a leading seller of classic radio programs, MediaBay.com, Inc.
our  digital  audio  download  service,   and  RadioClassics,   Inc.  ("RCI"  or
RadioClassics"),  a leading distributor of classic radio content across multiple
broadcast  platforms  including Sirius;  XM Satellite and traditional  broadcast
radio. Our content libraries  include over 60,000 classic radio programs,  3,500
film and  television  programs and  thousands of  audiobooks,  much of which are
proprietary.

We distribute our products to our customer database of approximately 3.0 million
names and 1.0 million e-mail addresses,  in over 7,000 retail outlets and on the
Internet through streaming and downloadable audio.

Audio  Book  Club  is a  membership-based  club  with  exclusive  licenses  from
publishers to distribute  audiobooks in a club format.  This business is modeled
after traditional book-of-the month clubs and its member database has grown from
approximately  64,000 in 1995 to  approximately  2.5 million as of December  31,
2003, through organic growth and acquisitions.  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. Products are sold in over 7,000 leading retail outlets, as
well as  directly  to  consumers  through its  catalogue  and  World's  Greatest
Old-Time Radio continuity program.


                                       1
<PAGE>

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:

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 member file,  which includes active and inactive  members,  has
grown  significantly  from  approximately  64,000  names at December 31, 1995 to
approximately 2.5 million names at December 31, 2003.

Audio Book Club members can enroll in the club through the mail by responding to
direct  mail  advertisements,   and  online  through  the  club's  web  site  at
www.audiobookclub.com.  We have established relationships with substantially all
of the major  audiobook  publishers,  including  Random  House Audio  Publishing
Group,  Simon & Schuster  Audio,  Harper Audio and Time Warner Audio Books. As a
club  operator,  we  license  a  recording  or a group  of  recordings  from the
publisher  for sale in a club format,  frequently  on an exclusive  basis,  on a
royalty or per copy basis.  We then  subcontract  the  manufacturing,  including
duplication and printing, to a third party,  resulting in lower costs and higher
product  margins  than  traditional  catalog,  Internet or  retailer  sellers of
audiobooks.  The Audio Book Club accounted for  approximately 72% of revenues in
2003.

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 over 7,000 retail
outlets, including such well-known national chains as Sam's Club, Target, Barnes
& Noble, Borders, 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
60,000  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 28% of MediaBay's revenue in 2003.

MediaBay.com
MediaBay.com  provides the  infrastructure  and support for all of our web sites
including www.audiobookclub.com, www.radiospirits.com, www.RadioClassics.com and
www.MediaBayDownloads.com.   MediaBay.com  powers  our  digital  audio  download
service  located at  www.MediaBayDownloads.com  which offers many of our classic
radio programs for purchase  either via a secure digital  download  subscription
service or on a pay per download  basis, in either case, with desktop and mobile
playback  capabilities  on iPods  and  other MP3  players.  With the  increasing
popularity of these portable  music players,  in particular the iPod, we believe
this division is poised for growth.




                                       2
<PAGE>

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" heard,  based on Arbitron  data,  on more than 235 radio  stations by
nearly 3 million listeners weekly and can also be heard on dedicated channels on
both the Sirius  Satellite Radio and XM Satellite Radio services,  with combined
subscribers in excess of 1.5 million.

STRATEGY
Our strategy consists of the following  three-pronged  approach: 1) Increase the
number of  distribution  channels of our  products;  2)  Increase  the number of
products we  distribute  through those  channels,  and 3) Increase the amount of
products each customer  buys,  namely by increasing the "quality" of customer as
well  as  extending  the  "customer  life"  through  various  initiatives  (i.e.
initiating customer retention strategies).  Our ability to implement and execute
our  strategy  is  dependent  on a number of factors,  including  our ability to
obtain necessary financing. We believe that this strategy, if executed properly,
will enable us to utilize  the  following  assets to  increase  the sales of our
existing  products  as well as  develop  new  products,  leveraging  our  direct
marketing and wholesale distribution channels:

      o     OUR PROPRIETARY LICENSES AND CONTENT- A proprietary content library,
            consisting  of more than 50,000 hours of spoken audio  content,  the
            majority of which is acquired under license from the rightsholders.
      o     OUR  CUSTOMER   DATABASES-  A  customer  database,   which  includes
            approximately  3.0 million,  spoken audio buyers who have  purchased
            via our catalogs  and/or direct mail  marketing,  as well as a total
            database of more than 1.0 million targeted e-mail addresses.
      o     OUR WHOLESALE  DISTRIBUTION SYSTEM- A wholesale  distribution system
            that  distributes  our old-time  radio products in over 7,000 retail
            locations  including  Costco,  Target,  Sam's Club,  Barnes & Noble,
            Borders, Amazon.com, and Cracker Barrel Old Country Stores.
      o     OUR  INTERNET   DISTRIBUTION   PLATFORM-  Web  sites,   which  offer
            memberships  in our Audio Book Club and which sell both our old-time
            radio  shows and  audiobooks  to Audio book Club  members..  Our web
            sites also serve streams of classic radio content on a monthly basis
            to web site visitors at radiospirits.com and MediaBay.com.
      o     OVER  230  STATION   SYNDICATED   RADIO  NETWORK-   Direct  response
            advertising time to promote and cross-sell our products and products
            from third parties.
      o     OUR  DIRECT   MARKETING  AND  PRODUCT   DEVELOPMENT   KNOWLEDGE  AND
            EXPERIENCE-  Over  40  years  experience  among  top  management  of
            marketing  products  directly to consumers as well as developing new
            product ideas.

Additional Distribution Channels
We are seeking new distribution channels. In addition to current retail outlets,
which  include  Target,  Barnes  &  Noble  and  Borders,  we are  attempting  to
distribute our classic radio products through drug, gift and specialty stores as
well as  additional  specialty  catalogs.  In  addition,  we are  attempting  to
distribute our old-time radio products to truck stops,  airport kiosks and other
stores that specialize in product sales to travelers.


                                       3
<PAGE>

We believe that the emergence of the Internet as an increasingly  accepted media
distribution  channel,  as  demonstrated  by the recent  success of the iPod and
other audio devices and the continuing  growth in consumer demand for content in
a variety of  formats,  has  resulted  in  significant  opportunities  for us to
further use the Internet as a distribution channel. To capitalize on the growing
popularity of digital audio players such as MP3 players and iPods,  we intend to
expand our Internet presence and digital content delivery capabilities.

New Product Lines and Products Under Development
We expect to  develop  new  products  internally,  through  licensing  and other
arrangements and through strategic acquisitions of direct marketing and consumer
goods companies.  We have been  repackaging our existing  old-time radio content
and  promoting  it through  celebrity  sponsorship.  Examples of these  products
include a collection of baseball  players'  appearances  on old-time radio shows
and other old-time radio baseball themed programs to be hosted by Yogi Berra and
a comedy collection of old-time radio shows to be hosted by Jackie Mason.

In addition,  we recently  obtained the exclusive rights to publish,  duplicate,
distribute and sell selected seminars by the Learning Annex, an adult continuing
education  school  offering  classes  in  areas  such as  personal  improvement,
healing,  spiritual growth, media, and business.  The 10-year agreement gives us
the right to sell Learning Annex seminars in all wholesale and retail audio-book
channels, while paying the Learning Annex a royalty on each unit sold.

To  capitalize  on the growing  popularity  of digital audio players such as MP3
players and iPods, we make a portion of our old-time radio content available for
download over the Internet. For $19.95 a month, we offer subscribers the ability
to download a selection of our old-time radio programs.  We have also introduced
a  stream-only  plan of  old-time  radio  programs  for  $4.95 a month,  and are
evaluating product and pricing for delivery using this medium.

Increasing Customer Quality, Customer Satisfaction and "Lifetime" of Customer We
employ  data  mining  techniques  in order to analyze  various  segments  of our
current  customer  database,  as well as every new customer that joins the Audio
Book Club. We have the ability to determine not only customer acquisition costs,
but also what segments of customers are most profitable, and which customers are
actually unprofitable and should be removed from the program. We use these tools
to try to be more responsive, and relevant to our customers,  impacting how much
they  purchase,  and how long they remain with the Audio Book Club.  We are also
testing various pricing strategies and offers to determine elasticity of pricing
and promotions.

BUSINESS DIVISIONS

Audio Book Club
We believe that Audio Book Club is the largest membership-based  audiobook club.
Our total member file,  which includes  active and inactive  members,  has grown
significantly  from   approximately   64,000  names  at  December  31,  1995  to
approximately 2.5 million names at December 31, 2003.


                                       4
<PAGE>

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

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

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

We have  historically  acquired  new Audio Book Club members  primarily  through
direct  mailings  of  member  solicitation  packages,   acquisitions,   Internet
advertising, and to a lesser extent from advertisements in magazines, newspapers
and other publications,  package insert and telemarketing  programs.  We seek to
attract a financially  sound and  responsible  membership  base and target these
types of persons in our direct  mail,  Internet and other  advertising  efforts.
Based on our  extensive  knowledge and  expertise,  we select lists of names and
mine for membership  candidates that exhibit  characteristics of persons who are
likely to join Audio Book Club, purchase sufficient  quantities of audiobooks to
be a profitable  source of sales and remain  long-term  members.  We analyze our
existing mailing lists and our promotional campaigns to target membership lists,
which are more likely to yield higher response rates. We have gained substantial
knowledge  relating to the use of  third-party  mailing lists and believe we can
target potential  members  efficiently and cost effectively by using third-party
mailing lists.

Our Internet  marketing  program  focuses on  acquiring  Audio Book Club members
through  advertising  agreements  with other web sites that require payment only
when we enroll a bona fide member in Audio Book Club. This  cost-per-acquisition
arrangement  results in  substantially  lower marketing costs and direct control
over the cost of acquiring members.

Member Retention and Recurring Revenue
We  encourage  Audio Book Club  members  to  purchase  more than  their  minimum
purchase commitment by offering members selected promotions,  spot discounts and
other incentives based on the volume of their purchases. Audio Book Club members
receive one mailing  approximately  every three weeks.  Audio Book Club mailings
typically  include  a  multi-page  catalog  which  offers  hundreds  of  titles,
including a featured  selection (which is usually one of the most popular titles
at the time of mailing);  alternate selections, which are best selling and other
current popular titles; and backlist selections,  which are long-standing titles
that have continuously sold well.

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


                                       5
<PAGE>

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

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

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

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

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

Radio Spirits
In  December  1998,  we  completed a series of  acquisitions  and  combined  the
acquired businesses to form our Radio Spirits and RadioClassics divisions. Radio
Spirits and RadioClassics produce, syndicate, sell and license popular "classic"
and old-time radio and programs,  including vintage comedy, mystery,  detective,
adventure  and  suspense  programs  recorded  during the  "Golden  Age of Radio"
typically described as the 1930's through the 1950's.

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


                                       6
<PAGE>

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

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

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

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

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

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

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

Marketing
RSI  markets its library of old-time  radio and video  programs  through  direct
marketing,  Internet,  and on a wholesale basis through retail  channels.  RSI's
marketing efforts are aimed at the direct marketing channel of distribution, via
internally developed catalogs,  as well as through retail and online channels of
distribution.

Direct Mail
RSI produces  several  catalogs per year and mails them to its customer list and
selected  third-party  mailing lists three times per year. RSI maintains a total
file of over 400,000  names of customers and  prospects.  This list includes all
customers to which RSI's radio and video  programs or catalogs have been mailed.
RSI engages in list rental programs to maximize the revenue generation potential
of its customer list.

Wholesale
RSI has developed wholesale  distribution  through several large,  national book
retailers,  including Barnes & Noble, Borders, and Waldenbooks; gift stores such
as Cracker Barrel Old Country  Stores;  and mass  retailers  like Costco,  Sam's
Club,  and Target,  as well as on the  Internet at  Amazon.com.  RSI markets its
old-time  radio and classic video  programs to wholesale  customers  through its
in-house  sales  personnel,   independent  sales   representatives  and  through
third-party distributors.  RSI also engages in cooperative advertising to induce
retailers to purchase its products.


                                       7
<PAGE>

Broadcast
RSI  advertises  its  products on "When Radio  Was," our  nationally  syndicated
old-time  radio  broadcast,  which  is  broadcasted  weekly  on over  210  radio
stations.  Our old-time  radio shows can also be heard on dedicated  channels on
both the Sirius Satellite Radio and XM Satellite Radio services.

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

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

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

MediaBay.com
MediaBay.com  provides the  infrastructure  and support for all of our web sites
including         www.audiobookclub.com,         www.radiospirits.com        and
www.mediabaydownloads.com.   MediaBay.com  powers  our  digital  audio  download
service  located at  www.mediabaydownloads.com  which offers many of our classic
radio programs and audiobooks for purchase either via a secure digital  download
subscription  service  or on a pay per  download  basis,  in either  case,  with
desktop and mobile playback capabilities.

RadioClassics
Our RadioClassics subsidiary produces and syndicates a one-hour version of "When
Radio Was" which is hosted by Stan Freberg and broadcast  five nights each week.
In addition we also produce and syndicate a two-hour version of "When Radio Was"
which is broadcast one time each week and a one-hour weekend  version,  which is
broadcast  once each week.  These three  programs are broadcast on more than 235
radio  stations in the United  States.  Our library of old-time  radio  programs
provides the content and the basis for these programs.

Our current  syndicated  radio shows provide an excellent forum to introduce our
old-time radio programs to existing and potential new listeners. The syndication
agreements also provide us with several minutes per hour for our own advertising
and promotional use. We use this advertising and promotional forum as a means to
develop  broader name  recognition  for Radio Spirits,  to advertise third party
products  and services and to sell and  cross-promote  old-time  radio and other
MediaBay  products.  Our old-time  radio  content can also be heard on dedicated
channels on both the Sirius Satellite Radio and XM Satellite Radio services.


                                       8
<PAGE>

AUDIOBOOK INDUSTRY
First  introduced to the mass market in 1985,  audiobooks  are literary works or
other printed materials read by the author, a celebrity actor, or an ensemble of
readers or actors.  Audiobooks are recorded primarily on audiocassette and, to a
lesser extent,  on compact disc. Most best selling hardcover books printed today
are released  simultaneously as audiobooks.  Audiobooks are unabridged or author
approved  abridgements of the original works converted to an audio.  Today there
are over 70,000  audiobook titles in existence  spanning every genre,  including
non-fiction,  fiction,  self-improvement,  mystery, fantasy,  business,  science
fiction,  biography,  romance,  religion,  motivational  and  children's,  among
others. Audiobooks cover new releases as well as many of the literary classics.

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.

Through  consolidation  and the  exclusivity of the licenses with  publishers to
sell their  audiobooks  in a club  format,  we believe we are largest  business,
which  sells  audiobooks  in  a  club  format.  Furthermore,  as  was  similarly
accomplished  with the  formation  of the Radio  Spirits and  RadioClassics,  we
believe we are the  largest  producer,  marketer  and seller of  old-time  radio
programs.  However,  the  audiobook  and mail  order  industries  are  intensely
competitive.  We compete with all other  outlets  through which  audiobooks  and
other spoken word content are offered, including larger retailers such as Barnes
& Noble and Amazon.com.

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 April 12,  2004,  we had 37 full-time  employees.  Of these  employees,  4
served in corporate management;  18 served in operational positions at our Audio
Book Club operations;  7 served in operational positions at our MediaBay.com and
information  systems  operations  and 8 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.


                                       9
<PAGE>

RISK FACTORS

Risks Relating to Our Financial Condition
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, 2003, we had incurred an accumulated deficit of $102 million.
Losses  are  continuing  and are  expected  to  continue.  We may not be able to
achieve and sustain profitable operations.

Our auditors expressed doubt about our ability to continue as a going concern in
their audit report for the fiscal year ended  December  31,  2003.  Our auditors
have  included an  explanatory  paragraph in their audit opinion with respect to
our consolidated financial statements at December 31, 2003. The paragraph states
that our  recurring  losses from  operations  and our inability to meet our debt
obligations as they come due in 2004 raise  substantial  doubt about our ability
to  continue as a going  concern.  Furthermore,  the factors  leading to and the
existence of the explanatory  paragraph may adversely  affect our  relationships
with  suppliers and other  creditors and customers and may adversely  affect our
ability to obtain additional financing.

The terms of our debt impose restrictions on our business.
As of December 31, 2003 we had  approximately  $2.9 million of debt  outstanding
under our revolving  line of credit and  approximately  $15.1 million  principal
amount of debt outstanding and related accrued interest under promissory  notes.
Our  revolving  line of credit  restricts  our  ability to raise  financing  for
working capital  purposes because it requires us to use any proceeds from equity
or debt financings,  with limited exceptions, to repay amounts outstanding under
the credit  agreement.  In addition to limiting our ability to incur  additional
indebtedness,  our  existing  indebtedness  under our  revolving  line of credit
limits or prohibits us from, among other things:

      o     merging into or consolidating with another corporation;

      o     selling all or substantially all of our assets;

      o     declaring or paying cash dividends; or

      o     materially changing the nature of our business.

We have to make  substantial  payments  on our debt during 2004 and may not have
the  funds to do so.  Our line of credit  matures  on  September  30,  2004,  an
additional $10.8 million is due upon demand of the holders of notes which may be
made at various times during 2004  following the repayment of the line of credit
and an  additional  $4.3  million  under  promissory  notes is due in the fourth
quarter of 2004.  We are required to make  monthly  payments of principal on the
line of credit of  $106,666  through  August  2004 We might not have  sufficient
funds to repay the debt,  or be able to obtain  other  financing  to replace the
debt or obtain an extension of its maturity. In addition, if an event of default
occurs under the promissory  notes or senior credit  facility,  the indebtedness
would become due and payable. In such an event, it is unlikely that we will have
the funds necessary to repay all of the indebtedness.

Our obligations to repurchase  shares of our common stock will divert  available
cash from use in operation;  and we may not have the funds available to meet our
obligations.  We granted the seller in an acquisition  the right to sell back to
us shares of our common stock that we issued in connection with the acquisition.
Unless our common stock  satisfies  specific price  targets,  these rights could
require us to purchase up to 75,000  shares of our common  stock at a cost to us
of $1.1  million as follows:  (i) 25,000  shares at a cost to us of $350,000 and
(ii) 50,000 shares at a cost to us of $750,000 commencing December 31, 2005. The
repurchase  obligations  expire based on the stock reaching the repurchase price
for a period of 10  consecutive  trading  days.  We have asserted that the price
targets were  maintained  and that the  obligation  has expired.  The seller has
disputed this assertion and asserts the right to put 25,000 shares at a price of
$14.00 per share  beginning on December 31, 2003 and 50,000 shares at a price of
$15.00 per share  beginning on December  31,  2005.  The seller has demanded the
repurchase of the 25,000 shares for $350,000.  At this time, the status of these
discussions is open and we do not know what the outcome will be. We may not have
the funds to meet these obligations to repurchase  stock,  which could result in
the holder of these rights commencing lawsuits to enforce his rights. Even if we
have the funds available to meet these obligations, such payments will adversely
affect our cash flow and divert cash from use in operations.


                                       10
<PAGE>

Risks Relating to our Operations
If we do not  have  sufficient  funds to  market  to  attract  new  members  and
customers,  our customer and revenue  bases will  continue to erode.  Because we
significantly  reduced  our  market  expenditures  for  new  members,  our  club
membership  and  revenues  declined  significantly.  Sales  for the  year  ended
December 31, 2003  decreased $9.1 million or 20% to $36.6 million as compared to
$45.7  million  for the year  ended  December  31,  2002.  Audio Book Club sales
decreased by $8.0 million to $26.4 million for the year ended  December 31, 2003
from $34.4 million for the year ended  December 31, 2002,  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,  we spent
$2.1  million  to attract  new Audio  Book Club  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,  principally  due to the  lack of
necessary  funds.  If we do not have the funds available to spend to acquire new
members to offset member  attrition  and/or expand our existing  membership  and
customer  bases,  our revenue will  continue to decline,  which will continue to
negatively  impact our  performance and could  ultimately  impair our ability to
continue as a going concern.

Our  products are sold in a niche  market that may have  limited  future  growth
potential.  Although the market for audiobooks has expanded in recent years, the
markets for our products are niche markets.  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 catalog offerings;

      o     introduce new titles;

      o     anticipate order lead time;

      o     accurately assess inventory requirements; and

      o     develop new product delivery methods.


                                       11
<PAGE>

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

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

We may not be able to license or produce  desirable  spoken word content,  which
could reduce our revenues. We could lose sales opportunities if we are unable to
continue  to obtain the rights to  additional  audiobook  libraries  or selected
audiobook  titles.  Some of our license  agreements expire over the next several
months unless they are renewed. We may not be able to renew existing license and
supply arrangements for audiobook publishers' libraries or enter into additional
arrangements for the supply of new audiobook titles.

If our  third-party  providers  fail to perform  their  services  properly,  our
business  and results of  operations  could be adversely  affected.  Third-party
providers conduct all of our Audio Book Club and a majority of our Radio Spirits
customer  service  operations,  process  orders and collect  payments for us. If
these providers fail to perform their services properly, Audio Book Club members
and Radio Spirits' customers could develop negative perceptions of our business,
collections of receivables  could be delayed,  our operations might not function
efficiently, our expenses may increase and our revenue may decline.

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

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.


                                       12
<PAGE>

Increased  member  attrition  could  negatively  impact our future  revenues and
operating   results.
As is typical with membership clubs, we experience significant member attrition.
Our  audiobook  club lost more active  members  than new members  that joined in
2003.  Increases in membership  attrition  above the rates we  anticipate  could
materially   reduce  our  future  revenues.   We  incur   significant  up  front
expenditures  in connection  with acquiring new members.  A member may not honor
his or her commitment,  or we may choose to terminate a specific  membership for
several reasons,  including  failure to pay for purchases,  excessive returns or
cancelled  orders.  As a result,  we may not be able to fully  recoup  our costs
associated with acquiring new members. In addition,  once a member has satisfied
his or her initial  commitment  to  purchase  additional  audiobooks  at regular
prices, the member has no further commitment to make purchases.

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  audiobook  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 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 pay our accounts  payable in a timely manner,  our suppliers
and service  providers may refuse to supply us with products or provide services
to us.
At December  31,  2003,  we owed  approximately  $8.2 million to trade and other
creditors.  Approximately  $6.1 million of these accounts payable were more than
60 days past due. If we do not make satisfactory  payments to our vendors,  they
may refuse to continue to provide us with products or services on credit,  which
could interrupt our supply of products or services.


                                       13
<PAGE>

Higher than  anticipated  product return rates could reduce our future operating
results.
We experienced  product return rates of  approximately  24%, 26%, and 32% during
the years ended December 31, 2001, 2002 and 2003,  respectively.  If members and
customers  return  products to us in the future at higher rates than in the past
or than we  currently  anticipate,  our  net  sales  would  be  reduced  and our
operating  results would be adversely  affected.  A return rate in excess of our
allowance  for  returns  would  result in a charge to  earnings to write off the
related receivables and would reduce our assets.

If we are unable to collect our receivables in a timely manner or attract paying
members,  it may negatively impact our cash flow and our operating  results.
We experienced bad debt rates of approximately  6.1%, 6.2%, and 10.8% during the
years ended December 31, 2001,  2002 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  distribute  millions of  mailings  each year,  and postage is a  significant
expense in the operation of our business.  We do not pass on the costs of member
mailings and member solicitation  packages.  Even small increases in the cost of
postage,  multiplied  by the  millions of mailings we conduct,  would  result in
increased expenses and would negatively impact our operating results.

We face  significant  competition from a wide variety of sources for the sale of
our  products.
We 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  laser and  digital  video  discs.  Many of these  competitors  are
well-established  companies,  which have greater financial resources that enable
them to better  withstand  substantial  price  competition  or  downturns in the
market for spoken word content.

Risks Relating to Our Capital Structure

The Herrick family exerts significant influence over shareholder matters.

Norton Herrick, Howard Herrick, a director of MediaBay, their family members and
affiliates own approximately 24% of our outstanding  common stock and all of our
outstanding Series A convertible preferred stock, and therefore,  have the right
to cast  approximately  40% of the voting power of our capital stock.  They also
own  principal  amount of $7.1  million of  convertible  debt and  warrants  and
options,   which  in  the  aggregate  are   convertible  or   exercisable   into
approximately  19.2 million  shares of our common  stock at prices  ranging from
$0.56 per share to $4.00 per share, which if converted and exercised, would give
them the right to vote, in total,  approximately  63% of the voting power of our
capital stock. As significant  shareholders,  they exert  significant  influence
over  matters,  which  require  shareholder  vote,  including  the  election  of
directors,  amendments  to our  Articles  of  Incorporation  or  approval of the
dissolution,  merger, or sale of MediaBay, our subsidiaries or substantially all
of our assets.  In addition,  consent of the holders of the Series A convertible
preferred  stock is required  for certain  actions,  including a merger or other
business  combination,  certain  assets sales,  the creation,  authorization  or
increase of any series of shares of capital stock convertible into common stock,
incurrence of  indebtedness  and  declaration or payment of dividends on capital
stock.  Ownership of the  convertible  debt  restricts our ability to take other
corporate  actions,  including the  incurrence of additional  debt,  without the
holders'  consent.  This  concentration  of ownership and control by the Herrick
family could delay or prevent a change in our control or other action, even when
a change in  control or other  action  might be in the best  interests  of other
shareholders.


                                       14
<PAGE>

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,  significant price and
volume fluctuations, which could adversely affect the market price of our common
stock without  regard to our  operating  performance.  In addition,  the trading
price of our  common  stock  could be  subject to  significant  fluctuations  in
response to:

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

      o     actual or anticipated variations in our quarterly operating results;

      o     announcements by us or other industry participants,

      o     factors affecting the market for spoken word content;

      o     changes in national or regional economic conditions;

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

      o     general market conditions.

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 April 12, 2004, we have outstanding  approximately  18.5 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 2 years and are eligible
for sale under Rule 144(k). At April 12, 2004 there were outstanding options and
warrants to purchase and debt convertible into  approximately  29,535,000 shares
of our common stock at an average  exercise or conversion price of approximately
$1.56 per share. A substantial  portion of these shares has been  registered for
resale.  To the  extent  any of our  warrants  or options  are  exercised,  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.


                                       15
<PAGE>

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


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 August 11, 2003 at which time Mr.
Richard Berman,  Mr. Howard Herrick and Mr. Carl Wolf were  reappointed to serve
as a Class III directors until the Annual Meeting of Shareholders of the Company
to be held in 2006. Shareholder voting for these directors was as follows:

Director                     Votes For                Votes Withheld
--------                     ---------                --------------
Richard J. Berman            13,850,641                  244,254
Howard Herrick               13,739,541                  355,354
Carl T. Wolf                 13,848,141                  246,754

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

Director                        Class                 Expiration of Term
--------                        -----                  ------------------
Paul D. Ehrlich                 I                      2004
Joseph R. Rosetti               I                      2004
Jeffrey Dittus                  II                     2005
Mark P. Hershhorn               II                     2005
Richard J. Berman               III                    2006
Howard Herrick                  III                    2006
Carl T. Wolf                    III                    2006

In addition,  at the annual  meeting,  the  shareholders  approved a proposal to
authorize us to issue our common stock upon  conversion  of certain  convertible
shares of the  Series B  Convertible  Preferred  Shares  (the  "Series B Stock")
issued to certain of our  officers and  directors  by a vote of 8,418,809  votes
for,  352,599  votes  against,  10,460 votes  abstaining  and  5,313,027  broker
non-votes.


                                       16
<PAGE>

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, 2002
First Quarter                                      3.50           .59
Second Quarter                                     6.04          3.20
Third Quarter                                      4.90           .77
Fourth Quarter                                     1.63           .77
FISCAL YEAR ENDED 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

On April 12, 2004 the last reported sale price of our common stock on the Nasdaq
National  Market  was  $.68  per  share.  As  of  April  12,  2004,  there  were
approximately  144 record owners of our common stock.  We believe that there are
more than 400 beneficial owners of our common stock.

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

SALES OF SECURITIES AND USE OF PROCEEDS
During the three months ended  December 31, 2003,  we issued  options  under our
2001 and 1999 Stock Incentive  Plans to purchase a total of 1,259,925  shares of
our  common  stock to  officers,  directors  and  consultants.  We relied on the
exemptions  provided by Section 4(2) of the Securities Act of 1933 in connection
with such issuances.

ITEM 6. SELECTED FINANCIAL DATA
As a  result  of the  following  factors,  including  capitalization  of  direct
response advertising costs,  recording of the goodwill write-off,  the strategic
charges and the income tax benefit, as well as fluctuations in operating results
depending  on the  timing,  magnitude  and success of Audio Book Club new member
advertising campaigns, comparisons of our historical operating results from year
to year may not be meaningful.


                                       17
<PAGE>

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

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

As a  result  of the  series  of  strategic  initiatives  described  above,  our
operations had improved.  Although realization of net deferred tax assets is not
assured,  we  determined  that it is more  likely than not that a portion of our
deferred tax asset  relating to temporary  differences  between the tax bases of
assets or  liabilities  and their reported  amounts in the financial  statements
will be  realized  in future  periods.  Accordingly,  in 2001,  we  reduced  the
valuation  allowance  for deferred tax assets in the amount of $17.2 million and
recorded an income tax benefit.  In 2003,  the deferred tax asset was reduced by
approximately  $1.5  million  for  amounts,  which  the  Company  was  unable to
determine would be recoverable in future periods.

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.

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
settled  these  employment   agreements  and  consulting   agreement  for  total
consideration of $.5 million payable through May 2005.


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                                YEARS ENDED DECEMBER 31,
                                                           ---------------------------------------------------------------------
                                                              1999          2000          2001          2002           2003
                                                              ----          ----          ----          ----           ----
                                                                            (THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S>                                                           <C>           <C>           <C>           <C>            <C>
Net sales                                                     $ 46,227      $ 44,426      $ 41,805      $ 45,744       $ 36,617
Cost of sales                                                   23,687        23,044        19,783        20,651         17,479
Cost of sales - write-downs                                          -             -         2,261             -              -
Advertising and promotion                                        8,118        11,023        11,922        10,156          9,988
Advertising and promotion - write-downs                              -             -         3,971             -              -
Bad debt expense                                                                             2,536         2,821          3,940
General and administrative                                      10,762        14,406         8,947         8,347          6,816
Asset write-downs and strategic charges                              -             -         7,044             -            749
Severance and other termination costs                                -             -             -             -            544
Depreciation and amortization                                    6,812         7,984         5,156         1,314            328
Non-cash write-down of intangibles                                   -             -             -         1,224              -
Non-cash write-down of goodwill                                      -        38,226             -             -              -
                                                           ------------  ------------  ------------  ------------  -------------
              Operating (loss) income                           (3,152)      (50,257)      (19,815)        1,231         (3,227)
Interest income (expense), net                                  (6,271)       (2,940)       (2,790)       (2,974)        (1,925)
                                                           ------------  ------------  ------------  ------------  -------------
              Loss before income tax benefit (expense)
                  and extraordinary item                        (9,423)      (53,197)      (22,605)       (1,743)        (5,152)
Income tax benefit (expense)                                         -             -        17,200          (550)        (1,471)
                                                           ------------  ------------  ------------  ------------  -------------
              Loss before extraordinary item                    (9,423)      (53,197)       (5,405)       (2,293)        (6,623)
Extraordinary gain (loss) on early extinguishment of debt          999        (2,152)            -             -              -
                                                           ------------  ------------  ------------  ------------  -------------
              Net loss                                          (8,424)      (55,349)       (5,405)       (2,293)        (6,623)
Dividends on preferred stock                                         -             -             -           217            246
                                                           ------------  ------------  ------------  ------------  -------------
              Net loss applicable to common shares            $ (8,424)    $ (55,349)     $ (5,405)     $ (2,510)      $ (6,869)
                                                           ============  ============  ============  ============  =============

Basic and diluted loss per share:
Basic and diluted loss before extraordinary item                ($1.15)       ($4.18)       ($0.39)       ($0.18)        ($0.49)
                                                           ============  ============  ============  ============  =============
Basic and diluted loss applicable to common shares              ($1.03)       ($4.35)       ($0.39)       ($0.18)        ($0.49)
                                                           ============  ============  ============  ============  =============

Basic and diluted weighted average number of
              shares outstanding                                 8,205        12,718        13,862        14,086         14,098
                                                           ============  ============  ============  ============  =============


                                                                                      AS OF DECEMBER 31,
                                                           ---------------------------------------------------------------------
                                                                  1999          2000          2001          2002           2003
                                                                  ----          ----          ----          ----           ----
                                                                               (THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Working capital (deficit)                                      $ 1,599         $ 313      $ (4,167)     $ (4,336)       (20,165)
Total assets                                                    93,973        49,932        44,452        48,619         36,893
Current liabilities                                             20,275        17,103        15,491        18,984         29,194
Long-term debt (less current portion)                           36,134        15,340        15,849        14,680              -
Common stock subject to contingent put rights                    4,283         4,550         4,550         4,550            750
Stockholders' equity                                            33,281        12,939         8,562        10,405          6,949

</TABLE>


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.

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 2003, our Audio Book Club segment had
net sales of  approximately  $26.4  million,  our Radio Spirits  segment had net
sales of  approximately  $10.2 million,  our  MediaBay.com  segment had sales of
approximately  $0.1 million and we had eliminating  inter-segment  sales of $0.1
million.


                                       19
<PAGE>

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.

Our business is  dependent on  attracting  and  retaining  members in Audio Book
Club.  We  continually  monitor the cost to acquire new  members,  their  buying
behavior and the attrition  rate of members.  Any changes to these metrics could
have a significant impact on our business.

Historically,  we have funded our cash requirements  through sales of equity and
debt  securities and borrowings  from financial  institutions  and our principal
shareholders.  During  2003,  we did  not  have  sufficient  cash  to  undertake
marketing activities to the extent of historical levels. As a result, our member
and customer bases eroded and our revenues declined significantly.  We currently
do not have  sufficient  funds to market to attract new members and customers to
maintain our member and customer bases. We will require additional  financing to
conduct sufficient  marketing  activities to maintain and rebuild our member and
customer  bases.  If we do not  obtain  the  funds  necessary  to  increase  our
advertising to acquire new members to offset member  attrition and/or expand our
existing  membership and customer  bases,  our revenue will continue to decline,
which will continue to negatively  impact our performance  and could  ultimately
impair our ability to continue as a going concern.

We also have  significant  outstanding  indebtedness  and face  substantial debt
repayment obligations in the short-term.  Our line of credit, of $1.4 million as
of April 12, 2004, is due September 30, 2004, an additional $10.8 million is due
upon demand of the holders of notes  which may be made at various  times  during
2004  following  the  repayment  of the line of credit  and an  additional  $4.3
million  under  promissory  notes  is due in the  fourth  quarter  of  2004.  We
currently do not have  sufficient  funds to repay our debt as it will become due
and are actively seeking to obtain other financing to replace the debt or obtain
an extension of the maturities.

We have  implemented a series of initiatives to increase cash flow.  While these
initiatives and the significant  reduction in marketing  expenses increased cash
provided by  operating  activities  in 2003,  we cannot  sustain our  operations
without increasing marketing expenses.  We require additional financing to repay
debt, as described above, and to fund the maintenance of our operations, working
capital or other related uses.

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.  We
record  reductions to our revenues 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 the financial condition of our customers, including either
individual  consumers or retail  chains,  were to  deteriorate or if the payment
behavior were to change,  resulting in either their inability or refusal to make
payment to us,  additional  allowances would be required.  We capitalize  direct
response  marketing  costs for the acquisition of new members and amortize these
costs over the period of probable  future  benefits.  In order to determine  the
amount of advertising to be capitalized and the manner and period over which the
advertising  should be  amortized,  we  prepare  estimates  of  probable  future
revenues arising from the direct-response  advertising in excess of future costs
to be  incurred  in  realizing  those  revenues.  We record an  estimate  of our
anticipated bad debt expense based on our historical experience.


                                       20
<PAGE>

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.  Although  realization of net deferred tax assets
is not assured, management has determined that it is more likely than not that a
portion of our deferred tax asset relating to temporary  differences between the
tax bases of assets or liabilities  and their reported  amounts in the financial
statements will be realized in future  periods.  In 2003, the deferred tax asset
was reduced by approximately  $1.5 million for amounts,  which we were unable to
determine would be recoverable in future periods.

We completed  our annual  impairment  test of goodwill as of October 31, 2003 in
connection with the annual budgeting and planning process,  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.

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.


                                       21
<PAGE>

We record reductions to our revenue for future returns and record an estimate of
future  bad debts  arising  from  current  sales in general  and  administrative
expenses.  These allowances are based upon historical  experience and evaluation
of current trends.  If members and customers return products to us in the future
at higher rates than in the past or than we currently anticipate,  our net sales
would be reduced and our  operating  results  would be  adversely  affected.  In
November  2001, the Emerging  Issues Task Force  ("EITF")  issued EITF No. 01-9,
"Accounting  for  Consideration  Given by a Vendor to a  Customer  (Including  a
Reseller  of the  Vendor's  Products)",  which  addresses  the income  statement
classification of certain credits,  allowances,  adjustments, and payments given
to  customers  for the services or benefits  provided.  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 and 2003 was $118,000 and $60,000, respectively.

Deferred Member Acquisition Costs
We  are  required  to  capitalize  direct  response   marketing  costs  for  the
acquisition of new members in accordance  with AICPA  Statement of Position 93-7
"Reporting  on  Advertising  Costs" and amortize  these costs over the period of
probable future benefits.  In order to determine the amount of advertising to be
capitalized  and the  manner and period  over  which the  advertising  should be
amortized,  we prepare  estimates of probable future  revenues  arising from the
direct-response  advertising  in  excess  of  future  costs  to be  incurred  in
realizing  those  revenues.  If future revenue does not meet our estimates or if
members buying  patterns were to shift,  adjustments to the amount and manner of
amortization  would be required.  At December  31, 2003 we had  deferred  member
acquisition  costs of $3.2 million,  which is being  amortized over eighteen and
thirty month periods. We have tracked customer-buying  behavior and believe that
the estimates we have used to amortize ABC advertising  have been consistent and
we do not expect to see significant  changes.  In the fourth quarter of 2003, we
adjusted the  amortization  period for  advertising to attract  customers to our
World's Greatest Old-Time Radio continuity program and have revised the estimate
period for  amortization  of these  advertising  costs down to 18 months,  which
resulted in and increase in advertising expenses for the year ended December 31,
2003 of $409,000.

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 2003, assuming a constant gross profit percentage
and all other expenses unchanged, would have resulted in a decrease in net sales
of $536,000 and a increase in net loss available to common shares of $279,000. 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  $366,000.  Our  estimate of bad debt  expenses  in 2003 was  adjusted
upward due to the poor  paying  performance  of ABC  members  attracted  through
Internet  offers,  which did not require an upfront payment and members of Audio
Passages, our audiobook club with predominantly  Christian content whose members
also demonstrated poor paying performance.  Our Internet  advertising  currently
requires  payment with a credit card of the initial  order and will  continue to
require a credit card until we develop better credit screening methods.  We have
discontinued the Audio Passages marketing program.


                                       22
<PAGE>

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.  Although  realization of net deferred tax assets
is not  assured,  we have  determined  that it is more  likely  than  not that a
portion of our deferred tax asset relating to temporary  differences between the
tax bases of assets or liabilities  and their reported  amounts in the financial
statements will be realized in future  periods.  We determine the utilization of
deferred  tax assets in the future  based on our  current  year  projections  of
future periods.  . In 2003, the deferred tax asset was reduced by  approximately
$1.5 million for amounts, which we were unable to determine would be recoverable
in future periods.

At December 31, 2003,  we have a remaining  net deferred tax asset in the amount
of $14.8 million.  Should we determine we would be able to realize  deferred tax
assets in the future in excess of the net recorded amount,  an adjustment to our
deferred tax asset would  increase  income in the period such  determination  is
made.  Likewise,  should we determine that we will not be able to realize all or
part of our net deferred tax asset in the future,  an adjustment to the deferred
tax asset would be recorded as an increase to the valuation allowance, resulting
in  a  deferred  tax  expense   charged   against  income  in  the  period  such
determination is made.

Goodwill
Goodwill  represents the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase method
of accounting.  In July 2001, the Financial  Accounting  Standards  Board issued
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that
an intangible asset that is acquired shall be initially  recognized and measured
based on its fair value. The statement also provides that goodwill should not be
amortized,  but shall be tested for impairment  annually,  or more frequently if
circumstances indicate potential impairment,  through a comparison of fair value
to its carrying  amount.  At December 31, 2003, we had $9.7 million of goodwill,
all of which  relates to our Radio Spirits  operations.  We completed our annual
impairment test as of October 31, 2003 in connection  with the annual  budgeting
and planning process,  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.


                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                               ---------------------------------------------------------------
                                                                     2001                  2002                  2003
                                                               -------------------   -------------------   -------------------
<S>                                                                   <C>                   <C>                   <C>
Sales........................................................         100%                  100%                  100%
                                                               ===================   ===================   ===================
Cost of sales................................................          47                    45                    48
Cost of sales - write-downs..................................           5                    --                    --
Advertising and promotion....................................          29                    22                    27
Advertising and promotion - write-downs......................          10                    --                    --
Bad debt expense                                                        6                     6                    11
General and administrative expense...........................          21                    18                    19
Severance and other termination costs                                  --                    --                     1
Asset write-downs and strategic charges......................          17                    --                     2
Depreciation and amortization expense........................          12                     3                     1
Non-cash write-down of intangibles...........................          --                     3                    --
Interest expense, net........................................           7                     7                     5
Income tax expense (benefit).................................         (41)                    1                     4
Net (loss)...................................................         (13)                   (5)                  (18)
Dividends on preferred stock.................................          --                    --                     1
Net (loss) applicable to common shares.......................         (13)                   (5)                  (19)

</TABLE>

<TABLE>
<CAPTION>

Year ended December 31, 2003 compared to year ended December 31, 2002
---------------------------------------------------------------------
Net Sales
              ($000'S)

                                                            CHANGE FROM
                                   2002              2003   2002 TO 2003       % CHANGE
                                   ----              ----   ------------       --------
<S>                             <C>              <C>             <C>                 <C>
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)%
                       ======================================================================

</TABLE>

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.


                                       24
<PAGE>

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 20003
                             $          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
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.


                                       25
<PAGE>

<TABLE>
<CAPTION>

Advertising and promotion

                                                                                 FROM 2002 TO 2003
                                                  2002            2003          CHANGE       % CHANGE
                                                  ----            ----          ------       --------
($000'S)
AUDIO BOOK CLUB
<S>                                                 <C>             <C>          <C>             <C>
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.

As the chart  below  indicates,  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.

                               [BAR CHART OMITTED]


                                       26
<PAGE>

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  ("Bill Me
Members") 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.  As the chart  indicates 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 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.

<TABLE>
<CAPTION>


Bad Debt Expense
                                 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.


                                       27
<PAGE>

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>

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.


                                       28
<PAGE>

<TABLE>
<CAPTION>

Depreciation and Amortization
            $ (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>
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>

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.

<TABLE>
<CAPTION>

Interest Expense

                                                                                       FROM 2002 TO 2003
                                                         2002           2003         CHANGE       % CHANGE
                                                         ----           ----         ------       --------
$ (000'S)
<S>                                                        <C>            <C>          <C>           <C>
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.


                                       29
<PAGE>

<TABLE>
<CAPTION>

Preferred Stock Dividends
                                                                                            FROM 2002 TO 2003
                                                             2002            2003         CHANGE       % CHANGE
                                                             ----            ----         ------       --------
$ (000'S)
<S>                                                           <C>             <C>            <C>          <C>
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%
                                                           ======           =====        ======        ======


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.

Loss Applicable to Common Stockholders
                                                                                            FROM 2002 TO 2003
                                                              2002           2003          CHANGE        % CHANGE
                                                              ----           ----          ------        --------
$ (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.

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

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

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


                                       30
<PAGE>

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

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

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

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

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


                                       31
<PAGE>

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

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

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.

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

LIQUIDITY AND CAPITAL RESOURCES
Historically,  we have funded our cash requirements  through sales of our equity
and debt securities and borrowings from financial institutions and our principal
shareholders.  During  2003,  we did  not  have  sufficient  cash  to  undertake
marketing  activities  to the extent of  historical  levels.  For the year ended
December 31, 2003, we spent $2.1 million to attract new Audio Book Club 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, principally due
to the lack of  necessary  funds.  As a result,  our member and  customer  bases
eroded  and our  revenues  declined  significantly.  We  currently  do not  have
sufficient  funds to market to attract new members and customers to maintain our
member and customer  bases and have conducted only minimal tests of new Internet
marketing  initiatives in 2004. We will require additional  financing to conduct
sufficient  marketing activities to maintain and rebuild our member and customer
bases.  If we do not obtain the funds  necessary to increase our  advertising to
acquire  new  members to offset  member  attrition  and/or  expand our  existing
membership and customer bases, our revenue will continue to decline,  which will
continue to negatively  impact our performance and could  ultimately  impair our
ability to continue as a going concern.

Our revolving line of credit matures on September 30, 2004, an additional  $10.8
million is due upon  demand of the holders of notes which may be made at various
times  during  2004  following  the  repayment  of the  line  of  credit  and an
additional $4.3 million under  promissory  notes is due in the fourth quarter of
2004.  We are  required to make  monthly  payments of  principal  on the line of
credit of $106,666  in February  through  August 2004 We  currently  do not have
sufficient funds to repay our debt as it becomes due and are actively seeking to
obtain  other  financing  to  replace  the debt or  obtain an  extension  of the
maturities.   If  we  do  not  have  the  necessary  extensions  or  replacement
financings, we will be in default on our indebtedness.

Operating Activities
We have  implemented a series of initiatives to increase cash flow.  While these
initiatives and the significant  reduction in marketing  expenses increased cash
provided by  operating  activities  in 2003,  we cannot  sustain our  operations
without increasing marketing expenses.  We require additional financing to repay
debt and to fund the maintenance of operations, working capital or other related
uses.  Without  additional  capital,  we do not  have  the  funds  to  meet  our
short-term needs. We are currently exploring a number of alternatives, including
raising  additional  debt or equity,  refinancing or extending our existing debt
and selling certain assets to fund our long and short-term needs.


                                       32
<PAGE>

For the year ended December 31, 2003,  our cash increased by $.3 million,  as we
had cash  provided by operating  activities of $1.6 million and we had cash used
in  investing  activities  of $.3 million and in  financing  activities  of $1.0
million.

During 2003, we generated  cash from  operations of $1.6 million,  including the
repayment  of  accounts  payable  and accrued  expenses  of $5.4  million.  This
increase in cash from  operations  was due to  principally  to our  reducing new
member marketing dramatically in 2003 as compared to 2002.

Net cash provided by operating activities  principally consisted of our net loss
applicable  to common  shares of $6.9  million,  decreased by  depreciation  and
amortization  expenses of $.3 million,  amortization of deferred financing costs
and debt  discount of $.6 million,  non-current  accrued  interest and dividends
payable $1.2  million,  write-offs of assets  related to a terminated  marketing
program of $.7  million,  income  tax  expense of $1.5  million,  stock  related
non-cash  compensation  of  $.1  million;   decreases  in  accounts  receivable,
inventory,  royalty  advances and prepaid  expenses and other current  assets of
$4.2 million, $.9 million,  $.2 million and $.3 million,  respectively and a net
reduction  in  deferred  member  acquisition  costs  of $3.8  million.  Net cash
provided by operations was reduced by reductions in accounts payable and accrued
expenses of $5.4 million.

The decrease in accounts  receivable is principally due to reduced sales at both
our Audio Book Club and our wholesale Radio Spirits sales. We also have reserved
bad  debts  based on our  experience  in 2003,  which  was much  higher  than in
previous years, due to the significant increase in 2002 of ABC members recruited
in Bill Me  offers  from  the  internet  and  Audio  Passages  members.  We have
discontinued  Internet Bill Me offers until we have tested new credit  screening
methods and have discontinued our Audio Passages audiobook club. We believe that
these steps will  assist us in  reducing  our bad debt rate.  The  reduction  in
inventory  is a result of lower sales,  which  require  less  inventory  and the
aggressive  sale of slower  moving  items  old-time  radio  products  at heavily
discounted  prices in  remainder  sales.  We have also  provided  a reserve  for
obsolescence  for our Audio Passages  product because of our  discontinuing  the
operation.  The  decrease in royalty  advances is  principally  due to increased
royalty  expenses,  since we sold less new member units,  the audiobooks we sold
were at higher royalty rates and we also reserved $.4 million for advances we do
not expect to recover  principally  due to lower sales at Audio Book Club due to
fewer members.  The decrease in prepaid  expenses was  principally the result of
not mailing a direct mail campaign to acquire new members in our Audio Book Club
in December 2003 or January 2004. The decrease net deferred  member  acquisition
costs  is  directly   related  to  the  substantial   reduction  in  new  member
advertising.  We used substantially all of the cash generated from operations to
reduce accounts payable  resulting in a decrease in accounts payable and accrued
expenses of $5.4 million during the year ended December 31, 2003.

Investing Activities
Cash used in investing  activities  was for the  acquisition  of fixed assets of
$0.1 million,  principally  computer equipment,  and remaining payments of $0.25
million to Great  American  Audio for the 2002  acquisition  of certain of Great
American Audio assets including the license to The Shadow programs.

Financing Activities
During the year ended December 31, 2003, we repaid $1.6 million under our senior
credit  facility and the maturity of the senior credit  facility was extended to
September 30, 2004, subject to monthly  principals  payments of $106,667 through
August 2004.


                                       33
<PAGE>

On May 7, 2003,  we 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, 1,400
shares  ($140,000)  were  purchased  by Carl Wolf,  Chairman  and a director  of
MediaBay,  and 200 shares ($20,000) were purchased by John Levy,  Executive Vice
President  and Chief  Financial  Officer of  MediaBay.  The holders of shares of
Series B Stock are entitled to 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 we are  permitted to
make such payment in cash under the Credit Agreement.

The Series B Stock is  convertible  into shares of 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 the $0.77.

In the event of a  liquidation,  dissolution  or  winding  up of  MediaBay,  the
holders of Series B Stock  shall be  entitled  to  receive  out of the assets of
MediaBay,  a sum in cash equal to $100.00 per share  before any amounts are paid
to the holders of MediaBay  common stock and on a pari passu with the holders of
the Series A 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.

On June 16,  2003,  ABC entered into a  settlement  agreement  with respect to a
lawsuit in which ABC was the plaintiff and arising out of an acquisition made by
ABC.  Pursuant to the settlement  agreement,  ABC received $350,000 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 puts rights  terminated a $3.45  million  future  contingent
obligation of MediaBay and results in a corresponding  increase in stockholders'
equity.

The calculation of the settlement of litigation is as follows:

 Termination of contingent put rights                          $3,450,000
 Return for cancellation of 325,000 shares of common stock        247,000
 Legal and other costs incurred in connection with the
  litigation, net of cash received of $350                        690,000
                                                               ----------
 Net settlement of litigation recorded in Contributed Capital  $3,007,000
                                                               ==========

On October 1, 2003, we completed a $1,065,000  financing consisting of the notes
due  October 1, 2004.  The notes bear  interest  at 18%,  provide for accrual of
interest to maturity and have no  prepayment  penalty.  In  connection  with the
issuance  of the  notes,  we issued to the  investors,  five  year  warrants  to
purchase  266,250 shares of our common stock at an exercise  price of $0.80.  We
have also agreed to issue the  investors  warrants  to  purchase  an  additional
266,250 shares of MediaBay  common stock on April 1, 2004, if the notes have not
been repaid.  Carl Wolf, and Huntingdon,  Inc., a company wholly owned by Norton
Herrick,  each purchased a $100,000 note in the offering. In connection with the
financing,  Norton Herrick and Huntingdon  agreed with the holders of the notes,
that upon the occurrence and continuance of an event of default under the notes,
to the extent Mr.  Herrick or Huntingdon  received any payment on account of the
secured  indebtedness of our company held by them, they would remit such amounts
to the  holders  of the  notes an a pro rata  basis  until the notes are paid in
full.


                                       34
<PAGE>

On  January  29,  2004,  we  issued  $4,000,000  aggregate  principal  amount of
promissory notes (the "2004 Notes") and warrants to purchase 2,352,946 shares of
common  stock (the  "Investor  Warrants")  to 13  institutional  and  accredited
investors.  The 2004 Notes are 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 our  indebtedness
under our existing  credit  facility is either repaid or refinanced or (iii) the
consummation by us 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 our voting stock.  The 2004 Notes bear interest at
the rate of 6%,  increase to 9% on April 28, 2004 and 18% on July 27,  2004.  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 us 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.  In  consideration  for  Huntingdon's  consent to the  financing and
agreements to upon receipt of  shareholders'  approval we reduced 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  12,  2004,  the  principal  amount  of the 2004  Notes,  automatically
converted into 5,333,333  shares of our common stock at the rate of one share of
common stock at $0.75. In addition,  accrued  interest  accrued  interest in the
amount of  approximately  $49,000  converted  into  64,877  shares of our common
stock.

In connection with the offering, we issued to Rockwood,  Inc. ("Rockwood"),  the
placement  agent,  and a broker  warrants to purchase  an  aggregate  of 245,000
shares of Common Stock (the "Initial  Agent  Warrants"),  and agreed to issue to
Rockwood, if and only if we obtain shareholder approval, warrants to purchase an
additional  500,884 shares of Common Stock (the "Additional Agent Warrants" and,
together  with the Initial  Agent  Warrants,  the "Agent  Warrants")  as partial
consideration for Rockwood's  services as placement agent. The Investor Warrants
and Rockwood  Warrants  are  exercisable  until  January 28, 2009 at an exercise
price of $1.28 per share. The Additional Agent Warrants will become  exercisable
upon, and only if, our shareholders approve the Proposal.


                                       35
<PAGE>

Indebtedness

Following is a summary of our indebtedness to our creditors:

Credit Facility
As  of  April  12,  2004,  we  had  approximately   $1,386,667  of  indebtedness
outstanding  under the Amended and Restated Credit Agreement dated as of October
3, 2002, as amended,  by and among  MediaBay and Radio  Spirits,  Inc. and Audio
Book Club, Inc., wholly-owned subsidiaries of the MediaBay, as co-borrowers, and
ING (U.S.)  Capital LLC, as  administrative  agent,  and the other lenders named
therein (the "Credit  Agreement").  The maturity date of the Credit Agreement is
September  30,  2004;  provided  however,  that we are  required to make monthly
payments of  principal  of $106,667  through  August  2004.  The maturity of the
Credit  Agreement  automatically  extends to March 31, 2005 if the notes held by
ABC  Investment  LLC and the holders of the notes  issued in October 2003 extend
the  maturity  of their  notes by April 15,  2004 to June 30,  2005.  We are not
permitted to make any  additional  borrowings  under the Credit  Agreement.  The
interest rate on the credit  facility is equal to the prime rate plus 2 1/2%. We
granted  the  lenders  under  the  Credit  Agreement  a  security   interest  in
substantially  all of our assets and the assets of our  subsidiaries and pledged
the stock of our subsidiaries.

We are required to maintain minimum EBITDA,  as defined below, of $7,000,000 for
the period  beginning  on January  1, 2001 and ending  prior to March 31,  2004.
Under the Credit Agreement,  "EBITDA" means, for any period,  the sum of (i) net
income,  (ii)  interest  expense,  (iii) income tax expense,  (iv)  depreciation
expense,  (v)  extraordinary  and  nonrecurring  losses  and  (vi)  amortization
expense,  less extraordinary and nonrecurring gains (in each case, determined in
accordance with generally accepted  accounting  principles) plus adjustments for
(x) the pro forma effect of any Permitted  Acquisition (as defined in the Credit
Agreement)  and (y) non-cash stock  compensation;  provided that EBITDA shall be
adjusted  for the effect of  treating  our  advertising  expense  and new member
acquisition  costs as  expensed as  incurred.  We were in  compliance  with this
covenant at December 31, 2003.

In addition to limiting our ability to incur additional indebtedness, the Credit
Agreement prohibits us from, among other things:

      o     merging into or consolidating with another entity;

      o     selling all or substantially all of our assets;

      o     declaring or paying cash dividends;

      o     raising  additional  financing,  with  certain  exceptions,  without
            repaying a portion of the debt and

      o     materially changing the nature of our business.

We are currently seeking to refinance or extend this debt. Historically, we have
been able to extend the maturity of this debt.

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


                                       36
<PAGE>

Interest  on this note  accrues at the rate of 11% per annum and is payable on a
monthly  basis,  at the  holder's  option,  in cash or common  stock;  provided,
however,  that cash interest accrues until 10 days after we have paid all of our
obligations under the Credit Agreement.  This note is convertible into shares of
common  stock at the rate of $.56 per  share,  subject to  adjustment  for below
conversion price issuances.  This note is secured by a second lien on the assets
of Radio Spirits.

We are prohibited  from incurring  additional  indebtedness  (with  exceptions),
selling  all or  substantially  all of our assets and  materially  changing  the
nature of our business  without the prior written  consent of the holder of this
note. While Mr. Herrick has, in the past,  provided his consent to our incurring
additional  indebtedness,  he is not required to do so, and the requirement that
he provide his consent could be a significant impediment in our ability to raise
additional financing.

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

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

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

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

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

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

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

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

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


                                       37
<PAGE>

The $2,500,000 Note, and the $800,000 Note are convertible into shares of common
stock at the rate of $.56 per share,  subject to adjustment for below conversion
price issuances of securities.  The $500,000 Note is convertible at $2.00.  Each
of the  $1,000,000  Note and the  $150,000  Note is  convertible  into shares of
common  stock  at the  rate  of  $1.82  per  share,  and  the  $350,000  Note is
convertible  into  shares of common  stock at the rate of $1.25  per  share.  We
agreed as  consideration  for Norton  Herrick and  Huntingdon  consenting to the
January 2004  financing and granting  certain rights to investors in the January
2004 financings as discussed above, we would seek shareholder approval to reduce
the conversion rate of $1,000,000  Note, the $150,000 Note and the $500,000 Note
to $1.27.  Our Board has determined to recommend to our  shareholders to approve
the foregoing and intends to submit a proposal for  shareholder  approval at our
2004 annual meeting of shareholders.

All of the notes  held by  Huntingdon  are  secured  by a lien pari passu to the
senior  credit  facility on  substantially  all of our assets and certain of our
subsidiaries' assets, other than inventory, receivables and cash.

We are prohibited from incurring indebtedness (with exceptions),  selling all or
substantially  all of our  assets  and  materially  changing  the  nature of our
business  without the prior  written  consent of the holder of the notes.  While
Huntingdon  has, in the past,  provided its consent to our incurring  additional
indebtedness,  it is not required to do so, and the requirement  that it provide
its consent could be a significant impediment in our ability to raise additional
financing.

Note held by N. Herrick  Irrevocable  ABC Trust (the  "Trust")
The Trust holds a $500,000 principal amount 9% Convertible  Senior  Subordinated
Promissory  Note due  September  30,  2007,  except  that the  holder may demand
repayment of the unpaid principal  balance and interest on the note,  commencing
December 31,  2004,  if we have repaid all of our  obligations  under the Credit
Agreement.

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

We are prohibited  from incurring  additional  indebtedness  (with  exceptions),
selling  all or  substantially  all of our assets and  materially  changing  the
nature of our business  without the prior written  consent of the holder of this
note.  While the Trust has, in the past,  provided its consent to our  incurring
additional indebtedness,  the requirement that it provide its consent could be a
significant impediment in our ability to raise additional financing.

Note held by ABC Investment LLC
ABC Investment LLC is a third party, which holds a $3.2 million principal amount
Senior  Subordinated  Promissory  Note  due  December  31,  2004.  This  note is
convertible into shares of common stock at the rate of $3.12 per share,  subject
to adjustment for below  conversion  price  issuances of  securities.  This note
bears  interest  at the rate of 9% per  annum,  quarterly,  in  arrears.  We are
prohibited from incurring additional indebtedness (with exceptions), selling all
or  substantially  all of our assets and  materially  changing the nature of our
business without the prior written consent of the holder of this note.


                                       38
<PAGE>

October 2003 Notes
On October 1, 2003, we issued  $1,065,000  principal amount of notes due October
1, 2004.  The notes bear  interest  at the rate of 18%,  provide  for accrual of
interest to maturity and have no prepayment penalty. We also agreed to issue the
investors  warrants to purchase an additional  266,250 shares of MediaBay common
stock on April 1, 2004, if the notes have not been repaid.  The notes are due on
October 1, 2004,  however, if we raise more than $5.0 million in financing prior
to the  maturity  date  of  the  notes,  the  maturity  date  of  the  notes  is
accelerated.  Purchasers of notes  included Carl Wolf and a company wholly owned
by Norton Herrick.

January 2004 Notes
On January 29, 2004, we issued  $4,000,000  aggregate  principal amount of notes
are described above.
<TABLE>
<CAPTION>


Commitments
$(000,s)
                                                                       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>

Consulting Agreement
Effective  December  31,  2003,  we agreed  with Norton  Herrick to  terminate a
two-year  consulting  agreement with XNH Consulting  Services,  Inc. ("XNH"),  a
company  wholly-owned by Norton Herrick. In connection with the termination,  we
agreed 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.  The  termination  agreement  provides that the  indemnification
agreement with Mr. Herrick  entered into on November 15, 2002 pursuant to which,
we agreed to  indemnify  Mr.  Herrick to the  maximum  extent  permitted  by the
corporate  laws of the State of Florida or, if more  favorable,  our Articles of
Incorporation  and  By-Laws in effect at the time the  agreement  was  executed,
against  all claims  (as  defined in the  agreement)  arising  from or out of or
related to Mr. Herrick's services as an officer, director, employee,  consultant
or agent of ours or any subsidiary or in any other capacity shall remain in full
force and effect and to also indemnify XNH on the same basis. In connection with
the termination agreement,  Herrick and XNH agreed to extend the non-competition
and nondisclosure  covenants of the XNH consulting  agreement until December 31,
2006.

Employment Agreements
We have  commitments  pursuant to employment  agreements with our officers.  Our
minimum aggregate commitments under such employment agreements are approximately
$0.5 million, $0.4 million and $80,000 during 2004, 2005 and 2006, respectively.


                                       39
<PAGE>

Termination and Severance Agreements
Our minimum  aggregate  commitments  under settlement  payments under employment
agreements and a consulting agreement are $201,000 in 2004 and $30,000 in 2005.

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 the
Company  to  pay,  in  some  instances,  non-refundable  advances  upon  signing
agreements,  to be applied  against  future  royalties.  Our  minimum  aggregate
commitments  under  existing  licensing  agreements  are $459,000,  $347,000 and
$228,000 during 2004, 2005 and 2006, respectively.

Obligations to Seller in an Acquisition
In connection with an acquisition made in December 1998, we agreed to repurchase
certain  shares  issued to the seller at various  prices  ranging  from $7.00 to
$15.00.  The repurchase  obligation would expire based on the stock reaching the
repurchase  price for a period of 10 consecutive  trading days. We have asserted
that the price targets were maintained and that the obligation has expired.  The
seller has  disputed  this  assertion  and asserts  that the right to put 25,000
shares at a price of $14.00 per share  beginning on December 31, 2003 and 50,000
shares at a price of $15.00 per share beginning on December 31, 2005. The seller
has demanded the repurchase of the 25,000 shares for $350,000.

Recent Accounting Pronouncements
In April 2002,  the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  145  ("SFAS  145"),  "Rescission  of FASB
Statements  No. 4, 44 and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections,"  which is effective for fiscal years beginning after May 15, 2002,
with  earlier  application  encouraged.  Under SFAS 145,  gains and losses  from
extinguishment  of debt  will no  longer  be  aggregated  and  classified  as an
extraordinary  item,  net of related  income tax  effect,  on the  statement  of
earnings.  The adoption of SFAS 145 had no impact on our  financial  position or
results of operations.

In June 2002,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 146 ("SFAS  146"),  "Accounting  for Costs
Associated  with Exit or Disposal  Activities,"  which is effective  for exit or
disposal  activities  that are  initiated  after  December 31, 2002,  with early
application  encouraged.  SFAS 146 requires  recognition  of a liability for the
costs  associated  with an exit or  disposal  activity  when  the  liability  is
incurred,  as  opposed to when the  entity  commits to an exit plan as  required
under  EITF Issue No.  94-3.  SFAS 146 will  primarily  impact the timing of the
recognition of costs associated with any future exit or disposal activities. The
adoption  of SFAS 146 had no impact on our  financial  position  or  results  of
operations.

In December  2002,  the FASB issued  SFAS No. 148,  "Accounting  for Stock Based
Compensation",  which  amends  SFAS No.  123 to provide  alternative  methods of
transaction for an entity that  voluntarily  changes to the fair value method of
accounting  for  stock  based  compensation.   It  also  amends  the  disclosure
provisions of SFAS No. 123 to require prominent  disclosure about the effects on
reported net income of an entity's  accounting  policy decisions with respect to
stock based employee compensation.  Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim  Financial  Reporting",  to require  disclosure of those effects in
interim financial  statements.  SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, but early adoption is permitted.  Accordingly,  we have
adopted the applicable  disclosure  requirements  of this Statement  within this
report.  The adoption of SFAS No. 148 did not have a  significant  impact on our
financial disclosures.


                                       40
<PAGE>

In November 2002, the FASB issued  interpretation  No. ("FIN") 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others," which requires that guarantees within the
scope of FIN 45 issued or amended  after  December 31, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee,  be recognized
at the inception of the  guarantee.  The  effective  date for this FIN 45 is for
fiscal  years ending  after  December  15,  2002.  The adoption of FIN 45 had no
impact on our financial position or results of operations.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest
Entities,"  which is effective for interim periods  beginning after December 15,
2003.  This  interpretation  changes the method of determining  whether  certain
entities should be included in our consolidated financial statements.  An entity
is subject to FIN 46 and is called a variable  interest entity ("VIE") if it has
(1) equity that is  insufficient  to permit the entity to finance its activities
without  additional  subordinated  financial support from other parties,  or (2)
equity  investors  that cannot make  significant  decisions  about the  entity's
operations  or that do not absorb the  expected  losses or receive the  expected
returns of the entity. All other entities are evaluated for consolidation  under
SFAS  No.  94,  "Consolidation  of All  Majority-Owned  Subsidiaries."  A VIE is
consolidated  by its primary  beneficiary,  which is the party involved with the
VIE that has a majority of the  expected  losses or a majority  of the  expected
residual returns or both. We are currently evaluating FIN 46 and believe that it
will have no impact on our financial position or results of operations.

In April  2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  33 on
Derivative  Instruments  and Hedging  Activities",  which  amends and  clarifies
accounting for derivative instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities  that fall within the
scope of SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
Activities".  SFAS No. 149 amends SFAS No. 133 regarding  implementation  issues
raised in relation to the  application  of the  definition of a derivative.  The
amendments  set forth in SFAS No. 149 require  that  contracts  with  comparable
characteristics  be accounted  for  similarly.  This  Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging  relationships  designated  after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on our financial position or results
of operations.

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments  with  Characteristics  of both  Liabilities  and Equity."  SFAS 150
provides  guidance  on  classification  and  measurement  of  certain  financial
instruments with characteristics of both liabilities and equity. We reclassified
certain items to debt as a result of the SFAS 150.

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


                                       41
<PAGE>

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
"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, 2003, we did not engage APM for any non-audit services.

ITEM 7A.  QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET RISK
We are  exposed to market  risk for the impact of interest  rate  changes.  As a
matter of policy,  we do not enter into  derivative  transactions  for  hedging,
trading or speculative purposes.

Our  exposure  to  market  risk for  changes  in  interest  rates  relate to our
long-term debt. As of December 31, 2003, interest on $3.0 million of our debt is
payable at the rate of the prime rate plus 2.0% and  interest on $3.0 million of
our  long-term  debt is payable at the rate of the prime rate plus 2.5%.  If the
prime rate were to increase,  our interest  expense  would  increase,  however a
hypothetical  10% 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 2003 or 2002. All of our other debt is at fixed rates of interest.

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, 2003 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.


                                       42
<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
Carl T. Wolf         60    Chairman and Director
Jeffrey Dittus       37    Chief Executive Officer and Director
Howard Herrick       39    Executive Vice President and Director
John F. Levy         48    Executive Vice President and Chief Financial Officer
Robert Toro          39    Senior Vice President of Finance
Richard J. Berman    61    Director
Paul D. Ehrlich      59    Director
Mark P. Hershhorn    54    Director
Joseph R. Rosetti    70    Director

Carl T. Wolf,  60, as of May 2003 is our Chairman.  Mr. Wolf has been a director
of MediaBay  since March 1998.  Mr. Wolf is the  managing  partner of the Lakota
Holdings LLC. Mr. Wolf was formerly  Chairman of the Board,  President and Chief
Executive  Officer of Alpine Lace Brands,  Inc. Mr. Wolf founded Alpine Lace and
predecessors and had been the Chief Executive  Officer of each of them since the
inception  of Alpine  Lace in 1983.  Mr.  Wolf  became a director of Alpine Lace
shortly after its incorporation in February 1986.

Jeffrey  Dittus,  37, as of January 2004, is our Chief Executive  Officer.  From
December 2001 to January 2004,  Mr. Dittus was founder and managing  director of
Kauri Capital LLC, a boutique  merchant  bank.  From  September 1999 to November
2001,  Mr.  Dittus  was  co-founder  and Chief  Executive  Officer of IT Capital
Limited,  a publicly  listed  venture  capital  firm on the  Australian  and New
Zealand stock  exchanges.  From November 1998 to November  1999,  Mr. Dittus was
Vice  President  Investments  for  Mellon  Ventures;  a captive  private  equity
partnership of Mellon Bank.  From November 1995 to November 1998, Mr. Dittus was
Vice-President    Corporate    Development   and   Managing   Director   -   New
Zealand/Australia  for  National  Media  Corporation,  a large  direct  response
television marketer.

Howard Herrick, 39, is our co-founder and has been our Executive Vice President,
and a director since our inception.  Since 1988, Mr. Herrick has been an officer
of The Herrick  Company,  Inc. Mr.  Herrick is also an officer of the  corporate
general  partners of numerous  limited  partnerships,  which  acquire,  finance,
market, manage and lease office,  industrial,  motel and retail properties;  and
which  acquire,   operate,   manage,   redevelop  and  sell  residential  rental
properties.

John F. Levy,  48,  joined us in November  1997 and has served as our  Executive
Vice President and Chief Financial  Officer since January 1998. Prior to joining
us, Mr. Levy had previously served as Chief Financial Officer of both public and
private  entertainment  and consumer  goods  companies.  Mr. Levy is a Certified
Public Accountant with nine years experience with the national public accounting
firms of Ernst & Young, Laventhol & Horwath and Grant Thornton.

Robert Toro,  39, has been our Senior Vice President of Finance since July 1999,
Chief Financial  Officer of our Audio Book Club division since November 2001 and
an  employee  since  April  1999.  Before  joining  us, Mr. Toro was Senior Vice
President  of AM Cosmetics  Co. and had  previously  served in senior  financial
positions in both public and private  entertainment  and  publishing  companies.
From 1992  through  early  1997,  Mr. Toro  served in various  senior  financial
positions  with  Marvel  Entertainment  Group,  Inc.,  a publicly  traded  youth
entertainment  company. Mr. Toro is a Certified Public Accountant with six years
of experience with the national public  accounting firm of Arthur Andersen where
he was employed immediately prior to joining Marvel Entertainment Group.


                                       43
<PAGE>

Richard J. Berman,  61,  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 provider of video surveillance solutions to the
retail,   business-to-business,   professional,  and  homeland  security  market
segments 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, Inc. 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 D.  Ehrlich,  59,  has been a  director  since May 2001.  Mr.  Ehrlich is a
Certified Public Accountant and tax and financial consultant. Since August 2000,
Mr.  Ehrlich has been a Partner with Edwards & Topple,  LLP as well as President
of Paul D. Ehrlich, CPA, P.C., a tax and financial consulting corporation.  From
1981 to August 1, 2000,  Mr.  Ehrlich  was a  shareholder,  tax  specialist  and
director of Personal Financial Services of Feldman Sherb & Co., P.C. Mr. Ehrlich
has served on the Boards of  Directors of several  companies  and is a member of
the  American  Institute  of Certified  Public  Accountants,  the New York State
Society of Certified Public Accountants  (appointed  committee member),  and the
International Association for Financial Planning.

Mark P. Hershhorn, 54, has been a director since February 2003. Mr. Hershhorn is
currently  President and CEO of CKS & Associates and CEO for Midwest Real Estate
Investment  LLC, real estate  development  firms  specializing in renovation and
rehabilitation of apartment buildings in urban areas. Mr. Hershhorn was formerly
President,  CEO and a Director of National  Media  Corporation,  a publicly held
transactional television marketing company. Prior to National Media Corporation,
Mr.  Hershhorn  served as Senior Vice  President  of Food  Operations  and Joint
Ventures for  NutriSystems,  Inc. Mr.  Hershhorn also served as Chief  Financial
Officer,  Treasurer,  Vice President and Director of The Franklin Mint, a global
direct marketing company  operating in ten countries.  Mr. Hershhorn is a member
of  the  Graduate  Executive  Board  of the  Wharton  Graduate  Division  of the
University  of  Pennsylvania  and an active  participant  in the Wharton  School
Mentoring  program.  He is also  Vice  Chairman  of the  Board of  Overseas  and
Executive  Committee  of the  Rutgers  University  Foundation,  a member  of the
Rutgers  University  Board of Trustees,  Chairman of the Executive  Committee of
Rutgers University Scarlet R Club,  Chairperson of the Rutgers University Annual
Fund, a member of the Dean's  Advisory  Council for Rutgers College and a member
of Rutgers University President's Council.

Joseph R. Rosetti,  70, has been a director of MediaBay since December 2002. Mr.
Rosetti has been President of SafirRosetti,  an investigative  and security firm
owned by Omnicom Group, Inc since December 2001. 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.  Mr. Rosetti is also a
director of GVI  Security  Solutions,  Inc.,  a provider  of video  surveillance
solutions  to  the  retail,  business-to-business,  professional,  and  homeland
security market segments.


                                       44
<PAGE>

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. Paul Ehrlich and Joseph Rosetti are Class I directors
and will stand for  re-election  at the 2004  annual  meeting  of  shareholders.
Jeffrey  Dittus  and  Mark  Hershhorn  are  Class II  directors  and  stand  for
re-election at the 2005 annual meeting of shareholders.  Richard Berman,  Howard
Herrick and Carl Wolf are Class III directors and stand for  re-election  at the
2006  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 Richard Berman, Carl Wolf, Stephen McLaughlin, Robert
Toro and Norton Herrick each filed a Form 4 related to one transaction late.

AUDIT COMMITTEE
We have  established  an  Audit  Committee  of the  Board  of  Directors,  which
currently consists of Messrs. Ehrlich, Hershhorn and Rosetti, 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,  Hershhorn and Rosetti  qualify as "financial
experts" under federal securities laws.

CODE OF ETHICS
In March 2004, we adopted a written code of ethics that applies to our principal
executive officer,  principal  financial officer,  principal  accounting officer
other  executive  officers and persons  performing  similar  functions.  We will
provide  a copy of our  code of  ethics  without  charge  upon  written  request
addressed to MediaBay, Inc., 2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927,
Attention:  Investor Relations. We will disclose any amendment or waiver of this
code on a Current Report on Form 8-K.


                                       45
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
The following table discloses,  for the periods indicated,  compensation paid to
our  Chief  Executive  Officer  and each of the  four  most  highly  compensated
executive officers (the "Named Executives").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                        LONG-TERM
                                                                                   COMPENSATION AWARDS
                                                      ANNUAL COMPENSATION          SECURITIES UNDERLYING
                                              --------------------------------                                ALL OTHER
        NAME AND PRINCIPAL POSITION           YEAR           SALARY      BONUS       OPTIONS/SAR'S (#)       COMPENSATION
                                              ----          --------     -----       -----------------       ------------
<S>                                           <C>           <C>           <C>           <C>                 <C>
Ronald Celmer                                 2003          $ 85,608      $    --       1,500,000           $     --
Former Chief Executive Officer (1)

Hakan Lindskog                                2003           230,091       25,000              --           $131,250
Former Chief Executive Officer (2)            2002           317,187       45,000         200,000                 --
                                              2001           264,063       50,000         175,000                 --

John F. Levy                                  2003           190,000       35,705          60,241                 --
Executive Vice President and Chief            2002           181,414       17,500          50,000                 --
Financial Officer                             2001           180,000       17,500              --                 --

Steven M. McLaughlin                          2003           140,417       10,000          40,000             41,250
Former Executive Vice President and           2002           188,684           --          10,000                 --
Chief Technology Officer (3)                  2001           178,750           --              --                 --

Robert Toro                                   2003           185,000        5,223         216,145                 --
Senior Vice President Finance                 2002           176,752       18,500              --                 --
                                              2001           159,087       17,500          50,000                 --

HOWARD HERRICK                                2003           175,000       12,500         117,000                 --
Executive Vice President                      2002           154,167       15,000         100,000                 --
                                              2001           150,000       30,000         100,000                 --

Carl T. Wolf                                  2003           135,000           --         585,000                 --
Chairman (4)                                  2002            15,688           --         645,000                 --
                                              2001                --           --          35,000                 --

</TABLE>

      (1)   Ronald Celmer was employed as Chief  Executive  Officer of MediaBay,
            Inc.  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.

      (2)   Hakan Lindskog was employed as Chief Executive  Officer of MediaBay,
            Inc.  from January 1, 2003 through  August 13, 2003.  In  connection
            with the termination of his  employment,  we agreed to pay severance
            of $145,833 in  semi-monthly  payments  from August 15, 2003 through
            January 15, 2004.

      (3)   Stephen  McLaughlin  resigned as Executive  Vice President and Chief
            Technology  Officer of  MediaBay,  Inc. on September  15,  2003.  In
            connection with the termination of his employment,  we agreed to pay
            severance of $146,667 in semi-monthly  payments commencing September
            30, 2003 and ending October 15, 2004.


                                       46
<PAGE>

      (4)   Carl Wolf  became  Co-Chairman  on  November  15, 2002 and was named
            Chairman on May 1, 2003.

The  following  table  discloses  options  granted  during the fiscal year ended
December 31, 2003 to the Named Executives:

Option/SAR Grants in Fiscal Year Ending December 31, 2003:

<TABLE>
<CAPTION>

                                                                                               POTENTIAL
                              NUMBER OF      % OF TOTAL                                     REALIZABLE VALUE
                                SHARES        OPTIONS                                   AT ASSUMED ANNUAL RATES OF
                              UNDERLYING     GRANTED TO      EXERCISE                    STOCK PRICE APPRECIATION
                               OPTIONS      EMPLOYEES IN      PRICE      EXPIRATION          FOR OPTION TERM
           NAME                GRANTED      FISCAL YEAR     ($/SHARE)       DATE           5% ($)        10% ($)
           ----               --------     ------------    ---------    ----------      -------        --------
<S>           <C>               <C>               <C>         <C>        <C>   <C>       <C>            <C>
Ronald Celmer (1)               250,000           8%          $0.80      02/10/2009      $48,556        $121,297
Ronald Celmer (1)               250,000           8%           0.80      08/10/2009       54,618        136,597
Ronald Celmer (1)               250,000           8%           1.00      02/10/2010       10,984        103,426
Ronald Celmer (1)               250,000           8%           1.00      08/10/2010       17,349        120,256
Ronald Celmer (1)               250,000           8%           1.25      02/10/2011           --         76,269
Ronald Celmer (1)               250,000           8%           1.25      08/10/2011           --         94,782

Hakan Lindskog                       --          --              --           --              --             --

John F. Levy                     60,241           2%           0.85      09/15/2008       14,147         31,261

Howard Herrick                   39,000           1%           1.39      12/01/2009       18,800         42,787
Howard Herrick                   39,000           1%           1.39      12/01/2009       22,450         52,486
Howard Herrick                   39,000           1%           1.39      12/01/2009       26,283         63,156

Steven M. McLaughlin (2)         20,000           1%           1.50      02/15/2009           --          5,077
Steven M. McLaughlin (2)         20,000           1%           1.50      02/15/2010           --          8,585
Steven M. McLaughlin (2)         10,000          --            1.00      02/15/2005           --             --
Steven M. McLaughlin (2)         40,000           1%           1.50      02/15/2005           --             --

Robert Toro                      36,145           1%           0.85      09/15/2008        6,182         15,846
Robert Toro                      60,000           2%           1.02      11/14/2009       14,381         38,716
Robert Toro                      60,000           2%           1.02      11/14/2009       18,160         48,708
Robert Toro                      60,000           2%           1.02      11/14/2009       22,128         59,698

Carl Wolf                       285,000           9%           0.73      08/11/2003       51,158        111,786
Carl Wolf                       300,000           9%           1.36       12/4/2008      112,723        249,088

</TABLE>


                                       47
<PAGE>

(1)   Mr. Celmer's options were cancelled January 4, 2004.

(2)   Mr. McLaughlin  resigned  September 15, 2003. The 40,000 options scheduled
      to expire on 02/15/2009  and  02/15/2010  expired on 12/15 /2003,  90 days
      after his resignation.

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.

Aggregated Option Exercises And Fiscal Year-End Option Values

<TABLE>
<CAPTION>

                                         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

<S>            <C>                       <C>                  <C>                  <C>                     <C>
Ronald Celmer  (1)                               --            1,500,000            $    --                 $  --
Hakan Lindskog                                   --                   --                 --                    --
Steven McLaughlin                            58,000                   --              8,100                    --
John F. Levy  (2)                           150,241                   --             16,760                    --
Howard Herrick  (3)                         600,000              117,000             66,000                    --
Robert Toro                                 131,145              205,000             14,036                19,400
Carl T. Wolf  (4)                         1,022,500              285,000            108,950                    --

</TABLE>

(1)   Mr. Celmer's options were cancelled January 4, 2004.
(2)   10,000 of Mr. Levy's options expired on January 1, 2004.
(3)   50,000 of Mr. Herrick's options expired on February 9, 2004.
(4)   7,500 of Mr. Wolf's options expired on March 18, 2004.

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, 2003 was
$1.10.

DIRECTOR COMPENSATION
For the year ended December 31, 2003,  for serving as an  independent  director,
Mr. Hershhorn  received  $10,000 and Mr. Ehrlich  received cash  compensation of
$7,500.  During the year ended December 31, 2003, Mr. Berman received options to
purchase  125,000 shares of our common stock;  Mr. Ehrlich  received  options to
purchase 70,0000 shares of our common stock;  Mr. Hershhorn  received options to
purchase 90,000 shares of our common stock and Mr. Rosetti  received  options to
purchase 50,000 shares of our common stock.  Prior to his  resignation  from our
Board of  Directors,  during  the year  ended  December  31,  2003,  the  health
insurance  premiums  of Michael  Herrick and his family and  automobile  leasing
payments  for Mr.  Herrick's  automobile  were paid by us  totaling  $20,222 and
received $200,000 as compensation under a consulting  agreement.  We have agreed
to continue to pay the health insurance  premiums for Mr. Herrick and his family
and automobile leasing payments until September 2004.

For the year  ending  December  31,  2004,  Mr.  Ehrlich is  expected to receive
$10,000 and Mr. Hershhorn - $10,000. We are currently formulating our plans with
respect to the grant of stock-based  compensation to non-employee  directors for
the year ending December 31, 2004.


                                       48
<PAGE>

EMPLOYMENT AGREEMENTS
On January 29, 2004,we entered into a 27-month employment agreement with Jeffrey
Dittus.  The  agreement  provides for a base annual salary of $225,000 per year,
which will  increase to a base salary of $250,000  per year if we  consummate  a
minimum of $10 million in  financing by June 30,  2004,  of which the  financing
completed in January 2004 accounted for $4.0 million. Pursuant to the agreement,
we granted to Mr.  Dittus  options to purchase 1.5 million  shares of our 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 Carl T. Wolf on November
15, 2002. The agreement  provides for a base salary of $135,000 during the first
year of the agreement.  Mr. Wolf's employment under the agreement  automatically
terminates on November 14, 2004,  unless prior to such date, at least 75% of our
Board of Directors vote affirmatively to continue Mr. Wolf's  employment.  Under
the terms of the agreement, Mr. Wolf is required to devote at least 20 hours per
week to our business and  activities.  Pursuant to the  agreement,  Mr. Wolf was
granted  options to purchase  570,000  shares of our common stock.  Of the total
options  granted,  options with respect to 285,000 shares have an exercise price
of $1.25 and vested on November  15, 2003 and  options  with  respect to 285,000
shares have an exercise  price of $3.25 and vest on November  15,  2004.  In the
event  of  termination  of  employment  under  circumstances  described  in  the
employment  agreement,  including as a result of a change in control, we will be
required to provide  severance pay equal to the lesser of Mr. Wolf's base salary
for the  unexpired  period of his  employment  under the agreement or one year's
base salary.

We entered  into a 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 April 12, 2004,  options to purchase an aggregate
of 335,500 shares of our common stock have been granted under the 1997 plan.


                                       49
<PAGE>

Our 1999 Stock Option Plan  provides for the grant of stock  options to purchase
2,500,000  shares.  As of April 12,  2004,  options to purchase an  aggregate of
1,918,631 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 April
12, 2004,  options to purchase an  aggregate  of 2,464,750  shares of our common
stock have been granted under the 2000 plan.

Our  2001  Stock  Incentive  Plan  provides  for the  grant of any or all of the
following  types of awards:  (1) stock  options,  which may be either  incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other  stock-based  awards.  A total of 3,500,000 shares of common
stock have been reserved for distribution pursuant to the 2001 plan. As of April
12, 2004,  options to purchase an  aggregate  of 3,092,000  shares of our common
stock have been granted under the 2001 plan.

As of April 12,  2004,  of the  options  granted  under our  plans,  options  to
purchase  4,503,386 shares of our common stock have been granted to our officers
and  directors  as follows:  Carl T. Wolf  1,300,500  shares;  Jeffrey  Dittus -
1,500,000  shares;  Howard  Herrick  -  667,000  shares;  John F. Levy - 310,241
shares;  Robert  Toro - 336,145  shares;  Richard J.  Berman - 125,000;  Paul D.
Ehrlich - 85,000;  Shares; Mark P. Hershhorn -- 90,000 shares; Joseph R. Rosetti
- 90,000 shares.


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, 2003:

<TABLE>
<CAPTION>
                                                                                                                 I
                                                                                                       Number of securities
                                                  (a)                                                  remaining available
                                         Number of securities                    (b)                   for future issuance
                                           to be issued upon          Weighted-average exercise     under equity compensation
                                        exercise of outstanding     price of outstanding options,   plans (excluding securities
      PLAN CATEGORY                    options, warrants and rights      warrants and rights          reflected in column (a))
-------------------------              ----------------------------  ----------------------------   --------------------------
<S>                                            <C>                             <C>                              <C>
Equity compensation plans
 approved by security holders..........        7,810,881                       $  2.92                          3,689,119
Equity compensation plans
 not approved by security holders......        1,291,690                          4.29                                 --
Total..................................        9,102,571                       $  3.11                          3,689,119
</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 April 12, 2004:

      o     each of MediaBay's directors and executive officers;

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

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


                                       50
<PAGE>

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

For purposes of this table, a person is deemed to be the beneficial owner of the
securities  if that person has the right to acquire  such  securities  within 60
days of  April  12,  2004  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.

<TABLE>
<CAPTION>


Name and Address of                  NUMBER OF SHARES       PERCENTAGE OF SHARES
 Beneficial Owner                    BENEFICIALLY OWNED      BENEFICIALLY OWNED
-----------------                    ------------------     --------------------

<S>                                    <C>                       <C>
Norton Herrick                         21,104,776(1)             58.1%
Howard Herrick                          9,476,782(2)             38.7
Carl T. Wolf                            1,443,908(3)              7.3
Michael Herrick                         1,237,484(4)              6.5
ABC Investments, L.L.C                  1,025,641(5)              5.3
Jeffrey Dittus                            250,000(6)              1.3
John F. Levy                              177,215(7)                *
Robert Toro                               156,145(8)                *
Paul D. Ehrlich                            60,000(9)                *
Richard J. Berman                          55,000(10)               *
Joseph R. Rosetti                          45,000(11)               *
Mark P. Hershhorn                          45,000(12)               *
                                      ---------------           ------
All directors and executive
 officers as a group (9 persons)        11,709,050               44.4%
                                      ---------------           =======
</TABLE>

*     Less than 1%

(1)   Represents (a) 290,070 shares of common stock held by Norton Herrick,  (b)
      1,500,000  shares of common stock  issuable upon exercise of options,  (c)
      427,500  shares of common stock issuable upon exercise of warrants held by
      Huntingdon  Corporation  ("Huntingdon"),  (d)  3,543,303  shares of common
      stock  issuable upon  conversion of convertible  promissory  notes held by
      Huntingdon  and  (e)  7,022,581  shares  of  common  stock  issuable  upon
      conversion of convertible  notes held by Huntingdon,  (f) 2,964,180 shares
      of common stock held by N. Herrick  Irrevocable  ABC Trust (the  "Trust"),
      (g)  892,857  shares  of  common  stock  issuable  upon  conversion  of  a
      convertible  promissory note held by the Trust and (h) 4,464,285 shares of
      common stock  issuable upon  conversion of 25,000 shares of Series A Stock
      held by the Trust.  Mr. Herrick is the sole  stockholder of Huntingdon and
      has  sole  voting  and  dispositive  power  over  the  securities  held by
      Huntingdon.  Norton Herrick is the beneficiary of the Trust and has shared
      dispositive  power over the  securities  held by the Trust.  See  "Certain
      Relationships and Related Transactions."


                                       51
<PAGE>

(2)   Represents (a) 2,964,180  shares held by the Trust,  (b) 488,460 shares of
      common stock held by Howard  Herrick,  (c) 667,000  shares of common stock
      issuable  upon  exercise of options,  (d) 892,857  shares of common  stock
      issuable upon conversion of convertible promissory notes held by the Trust
      and (e)  4,464,285  shares of common stock  issuable  upon  conversion  of
      25,000 shares of Series A Stock held by the Trust.  Howard  Herrick is the
      sole  trustee  of the Trust.  Howard  Herrick  has sole  voting and shared
      dispositive power over the securities held by the Trust.

(3)   Represents  247,090  shares of common  stock,  1,015,000  shares of common
      stock issuable upon exercise of options and 181,818 shares of common stock
      issuable upon  conversion of Series B Stock.  Does not include  options to
      purchase 285,000 shares of common stock issuable upon exercise of options.

(4)   Represents 587,484 shares and 650,000 shares of common stock issuable upon
      exercise of options.

(5)   Represents   shares  of  common  stock  issuable  upon   conversion  of  a
      convertible note.

(6)   Represents  250,000  shares of common  stock  issuable  upon  exercise  of
      options.  Does not include  1,250,000 shares of common stock issuable upon
      exercise of options.

(7)   Represents  1,000 shares of common stock,  160,241  shares of common stock
      issuable  upon  exercise  of  options  and 25,974  shares of common  stock
      issuable upon  conversion of Series B Stock.  Does not include  options to
      purchase 150,000 shares of common stock.

(8)   Represents shares of common stock issuable upon exercise of options.  Does
      not include  180,000  shares of common  stock  issuable  upon  exercise of
      options.

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

(10)  Represents shares of common stock issuable upon exercise of options.  Does
      not  include  60,000  shares of common  stock  issuable  upon  exercise of
      options.

(11)  Represents 25,000 shares of common stock and 45,000 shares of common stock
      issuable  upon  exercise of options.  Does not  include  45,000  shares of
      common stock issuable upon exercise of options.

(12)  Represents shares of common stock issuable upon exercise of options.  Does
      not  include  45,000  shares of common  stock  issuable  upon  exercise of
      options.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Companies wholly owned by Norton Herrick, a principal  shareholder,  have in the
past provided accounting,  administrative,  legal and general office services to
us at cost since our  inception.  Companies  wholly owned by Norton Herrick have
also assisted us in obtaining insurance coverage without  remuneration.  We paid
or accrued to these entities  $88,000,  $430,000 and $292,000 for these services
during the years  ended  December  31,  2001,  2002 and 2003,  respectively.  In
addition,  a company wholly owned by Norton Herrick provided us with access to a
corporate  airplane  during 2001 and 2002. We generally paid the fuel,  fees and
other  costs  related  to our  use  of  the  airplane  directly  to the  service
providers.  For  use of this  airplane,  we paid  rental  fees of  approximately
$14,000 in each of 2001 and 2002 to Mr. Herrick's affiliate.  As of December 31,
2003 we owed to Mr. Herrick and his  affiliates  $895,000 for  reimbursement  of
such expenses and services.


                                       52
<PAGE>

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. The
agreement  provided,  among other  things that XNH will provide  consulting  and
advisory services to us and that XNH will be under the direct supervision of the
our Board of Directors.  For its services,  we agreed to pay XNH a fee of $8,000
per month 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.  The  consulting  agreement  provided  that the  indemnification
agreement with Mr. Herrick  entered into on November 15, 2002 pursuant to which,
we agreed to  indemnify  Mr.  Herrick to the  maximum  extent  permitted  by the
corporate  laws of the State of Florida or, if more  favorable,  our Articles of
Incorporation  and  By-Laws in effect at the time the  agreement  was  executed,
against  all claims  (as  defined in the  agreement)  arising  from or out of or
related to Mr. Herrick's services as an officer, director, employee,  consultant
or agent of ours or any subsidiary or in any other capacity shall remain in full
force and  effect  and to also  indemnify  XNH on the same  basis.  Mr.  Herrick
resigned as our Chairman effective May 1, 2003 and Mr. Herrick and we terminated
the employment agreement signed as of November 2, 2002 on May 1, 2003.

Effective  December 31,  2003,  we agreed with Norton  Herrick to terminate  the
two-year consulting agreement with XNH, we agreed 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.  The  termination
agreement provides that the  indemnification  agreement with Mr. Herrick entered
into on  November  15,  2002  shall  remain in full force and effect and to also
indemnify XNH on the same basis. In connection  with the termination  agreement,
the non-competition and nondisclosure  covenants of the XNH consulting agreement
were extended until December 31, 2006.

On May 7, 2003,  we 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, 1,400
shares  ($140,000),  were  purchased  by Carl Wolf,  Chairman  and a director of
MediaBay,  and 200 shares  ($20,000)  were purchased by John Levy, our Executive
Vice President 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 we are
permitted to make such payment in cash under our Credit Agreement.

The Series B Stock is  convertible  into shares of 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 our stock on
May 6, 2003.

In the event of a  liquidation,  dissolution  or  winding  up of  MediaBay,  the
holders of Series B Stock shall be entitled to receive out of our assets,  a sum
in cash equal to $100.00 per share before any amounts are paid to the holders of
our  common  stock and on a pari passu  basis  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.


                                       53
<PAGE>

On July 31, 2003, Norton Herrick exercised options to purchase 300,000 shares of
our common  stock at an exercise  price of $.50 per share  pursuant to an Option
Agreement  dated  November 23, 2001. The options were exercised on a "cash-less"
basis and the closing  stock price on July 31,  2003 was $.78.  Accordingly,  we
issued to Mr. Herrick a certificate for 107,692 shares of our common stock.

During the three months ended  September  30, 2003,  Norton  Herrick  provided a
$100,000  guarantee  to a  vendor.  We  subsequently  paid  the  vendor  and the
guarantee expired.  Mr. Herrick received no compensation and did not profit from
the transaction.

During the three months ended September 30, 2003, Norton Herrick also loaned the
Company  $100,000.  The loan was  subsequently  converted  into an investment by
Huntingdon Corporation, a company wholly owned by Mr. Herrick, in the $1,065,000
bridge  financing  completed on October 1, 2003.  Carl Wolf, our Chairman,  also
purchased a $100,000 note in this financing. In consideration, we issued to each
of Huntingdon and Mr. Wolf a $100,000 principal amount note due October 1, 2004.
The notes are  identical  to all other notes  issued in the  financing  and bear
interest at the rate of 18% per annum,  payable at maturity.  In connection with
the  issuance  of the  notes,  we agreed,  subject  to  receipt  of  shareholder
approval,  to issue to each of  Huntingdon  and Mr.  Wolf  warrants  to purchase
25,000  shares of common stock at an exercise  price of $.80 and agreed to issue
to each of them warrants to purchase an additional 25,000 shares of common stock
if the notes are not  repaid  on April 1,  2004 at an  exercise  price per share
equal to the closing sale price of our common stock on March 31, 2004.

We entered into an agreement  with Norton  Herrick  dated  November 7, 2003 (the
"November Agreement") whereby Mr. Herrick agreed to pay amounts owed to us under
Section  16(b) of the  Securities  Exchange  Act of 1934 as a result of  various
transactions  which are  attributable to Mr. Herrick  occurring within less than
six months of each other that involved our securities. Mr. Herrick agreed to pay
us the sum of $1,742,149,  (the "Payment") by delivering to us for  cancellation
within ten (10) days of the date of the November Agreement, shares of our common
stock and/or warrants to purchase shares of common stock with an aggregate value
equal to the Payment.  Under the November Agreement,  the value of each share of
common stock  delivered  under the  Agreement is equal to the last sale price of
our common stock on the trading day  immediately  prior to the date on which the
shares of common stock were  delivered  (the "Market  Price").  The value of any
warrant  delivered under the November  Agreement is equal to the Market Price of
the  underlying  shares less the  exercise  price of the  warrant.  Mr.  Herrick
delivered  the shares of common  stock and  warrants  pursuant  to the  November
Agreement on Monday,  November 17, 2003, with the value of the securities  based
on the Market Price on November 14, 2003 of $.94 per share of common  stock.  As
part of the Payment,  Mr. Herrick  returned to us 1,095,372 shares of our common
stock.  Based on the  Market  Price,  the  aggregate  value of these  shares  is
$1,029,650.  Also, as part of the Payment,  Mr.  Herrick  deposited  warrants to
purchase  1,875,000 shares of our common stock. Based on the Market Price ($.94)
less the exercise  price of the warrants  ($.56),  the aggregate  value of these
warrants was $712,500.  Of the 1,875,000  warrants  deposited,  1,650,000 became
exercisable May 14, 2001 and 225,000 became exercisable February 22, 2002.

In 2003 and 2002, Norton Herrick advanced  $360,000 and $372,000,  respectively,
to certain of our vendors and  professional  firms as payment of amounts owed to
them.  As we made  payments to these  vendors,  the  vendors  repaid the amounts
advanced  to them by Mr.  Herrick.  Mr.  Herrick  received  no interest or other
compensation  for  advancing  the  monies.  As of April  12,  2004,  none of the
advances were outstanding.


                                       54
<PAGE>

On  January  29,  2004,  we  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 us 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.  In  consideration  for  Huntingdon's  consent to the  Financing and
execution of the letter  agreement upon receipt of  shareholders'  approval,  we
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.

ITEM 14. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES
On June 24, 2003, MediaBay, Inc. (the "Company") dismissed Deloitte & Touche LLP
("D&T"), our former independent certified public accountants.  During neither of
the past two  years  ended  December  31,  2002  did the  reports  by D&T on the
financial  statements of the Company  contain an adverse opinion or a disclaimer
of opinion,  or was  qualified or modified as to  uncertainty,  audit scope,  or
accounting principles.  The decision to dismiss D&T as the Company's independent
certified  public  accountants  was made by the Audit  Committee of the Board of
Directors of the Company.  During the Company's two most recent fiscal years and
subsequent  period up to June 24,  2003,  there were no  disagreements  with the
former accountant on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved  to their  satisfaction  would have caused  them to make  reference  in
connection with their opinion to the subject matter of the disagreement. 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, 2003 by Amper  Politziner  & Mattia,  P.C. and
2002 by D&T. No fees were paid for non-audit related services.

                                2003       2002
                              --------   --------
Audit Fees (1)                $103,000   $338,000
Audit-Related Fees (2)              --     34,000
Tax Fees (3)                        --         --
All Other Fees (4)              13,000         --
                              --------   --------
       Total                  $116,000   $372,000

(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  accounting  research,  issues  relating  to  prior  years'  financial
      statements  and 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.


                                       55
<PAGE>

(4)   D&T 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.
      No other fees were billed by our principal  accountant other than the fees
      disclosed above.

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.

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

         (a) Exhibits

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

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

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

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

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. (15)

3.6   Amended and Restated By-Laws of the Registrant. (14)

10.1  Employment Agreement between the Registrant and Carl Wolf. (14)

10.2  Employment Agreement between the Registrant and Howard Herrick. (13)

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

10.4  $3,200,000 Principal Amount 9% Convertible Senior Subordinated  Promissory
      Note of the Registrant to ABC  Investment,  L.L.C.  due December 31, 2004.
      (12)

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

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

10.7  1997 Stock Option Plan (1)

10.8  1999 Stock Incentive Plan (4)

10.9  2000 Stock Incentive Plan (7)

10.10 2001 Stock Incentive Plan (10)


                                       56
<PAGE>

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

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

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

10.14 $1,984,250 principal amount 9% convertible senior subordinated  promissory
      note of Registrant issued to Norton Herrick due December 31, 2004. (9)

10.15 $500,000  principal amount 9% convertible senior  subordinated  promissory
      note of Registrant issued to N Herrick  Irrevocable ABC Trust due December
      31, 2004. (12)

10.16 $2,500,000   principal  amount   convertible  senior  promissory  note  of
      Registrant issued to Huntingdon  Corporation  ("Huntingdon") due September
      30, 2002. (9)

10.17 $800,000 principal amount 12% convertible senior  subordinated  promissory
      note of Registrant issued to Huntingdon due December 31, 2002. (9)

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

10.19 $500,000 principal amount convertible senior promissory note of Registrant
      issued to Huntingdon due June 30, 2003. (12)

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

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

10.22 Loan  Agreement   dated  October  3,  2002  between   Huntingdon  and  the
      Registrant, as amended. (14)

10.23 Agreement dated October 3, 2002 between Norton Herrick and the Registrant,
      among other things, amending the $1,984,250 principal amount note. (14)

10.24 Agreement  dated October 3, 2002 between Evan Herrick and the  Registrant,
      among other things, amending a $500,000 principal amount note. (14)

10.25 Letter Agreement between the Registrant and Norton Herrick entered into in
      November 2002. (14)

10.26 Indemnification  Agreement  dated as of  November  15,  2002  between  the
      Registrant, MEH Consulting Services. Inc. and Michael Herrick. (14)

10.27 Indemnification  Agreement  dated as of  November  15,  2002  between  the
      Registrant and Norton Herrick. (14)

10.28 Amendment No. 3 to the Credit Agreement dated April 9, 2003. (14)


                                       57
<PAGE>

10.29 Amendment No. 4 to Credit Agreement dated April 28, 2003 (15)

10.30 Consulting and  Termination  Agreement dated as of May 1, 2003 between XNH
      Consulting Services, Inc., Norton Herrick and the Registrant (15)

10.31 Letter from Deloitte & Touche LLP dated June 25, 2003 (16)

10.32 Amendment No. 5 to Credit Agreement dated September 12, 2003.

10.33 Amendment No. 6 to Credit Agreement dated September 23, 2003.

10.34 Settlement Agreement with Norton Herrick dated November 7, 2003.

10.35 Amendment No. 7 to Credit Agreement dated January 29, 2004.

10.36 Employment  Agreement  between the  Registrant  and Jeffrey  Dittus  dated
      January 28, 2004.

10.37 Agreement  dated January 29, 2004 between the  Registrant,  Norton Herrick
      and Huntingdon Corporation.

10.38 Agreement  dated January 29, 2004 among the  Registrant,  Norton  Herrick,
      Huntingdon Corporation and the Lenders listed on Schedule A thereto.

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

21.1  Subsidiaries of the Company.

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,  Executive Vice President and Chief Financial
      Officer of MediaBay,  Inc.,  pursuant to 18 U.S.C Section 1350, as Adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2001
________________________________________________________________________________

(1)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Registration Statement on Form SB-2 (file no. 333-30665) effective October
      22, 1997.
(2)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Current Report on Form 8-K for reportable event dated December 14, 1998.
(3)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(4)   Incorporated by reference to the applicable exhibit contained in our Proxy
      Statement dated February 23, 1999.
(5)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Quarterly  Report on Form 10-QSB for the  quarterly  period ended June 30,
      1999.



                                       58
<PAGE>

(6)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Registration  Statement on Form SB-2 (file no. 333-95793)  effective March
      14, 2000.
(7)   Incorporated by reference to the applicable exhibit contained in our Proxy
      Statement dated May 23, 2000.
(8)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Annual Report on Form 10-KSB for the year ended December 31, 2000.
(9)   Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Quarterly  Report on Form 10-QSB for the quarterly  period ended March 31,
      2001.
(10)  Incorporated by reference to the applicable exhibit contained in our proxy
      statement dated September 21, 2001.
(11)  Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Current Report on Form 8-K for reportable event dated January 18, 2002.
(12)  Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Annual Report on Form 10-KSB for the year ended December 31, 2001.
(13)  Incorporated  by  reference  to the  applicable  exhibit  contained in the
      Quarterly Report on Form 10-Q for the quarterly period ended September 30,
      2002.
(14)  Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Annual Report on Form 10-K for the year ended December 31, 2002.
(15)  Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Quarterly  Report on Form 10-Q for the  quarterly  period  ended March 31,
      2003.
(16)  Incorporated  by  reference  to the  applicable  exhibit  contained in our
      Current Report on Form 8-K for the reportable event dated June 24, 2003.

(b)   Financial Statement Schedule

         Schedule -I - Valuation and Qualifying Accounts and Reserve

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

         None.


                                       59
<PAGE>

<TABLE>
<CAPTION>
                                 MEDIABAY, INC.

                                    FORM 10-K

                                     ITEM 8

                          INDEX TO FINANCIAL STATEMENTS

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

Independent Auditors' Report...........................................................................................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

</TABLE>


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Media Bay, Inc. and Subsidiaries

We have audited the  accompanying  consolidated  balance sheet of Media Bay Inc.
and  Subsidiaries  as  of  December  31,  2003,  and  the  related  consolidated
statements  of  operations,  stockholders'  equity,  and cash flows for the year
ended  December  31,  2003.  Our audit also  included  the  financial  statement
schedule  listed in the Index at page S-1 as of  December  31,  2003 and for the
year 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 auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the 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
audit provides 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,  2003,  and the  consolidated  results  of their
operations  and their cash flows for year ended December 31, 2003, 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,  2003  and  for  year  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.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial statements,  the Company has suffered recurring losses from operations
and has a working capital  deficiency,  which raise  substantial doubt about its
ability to continue  as a going  concern.  Management's  plans  regarding  those
matters also are  described in Note 1. The  financial  statements do not include
any adjustments that might result from the outcome of the uncertainty.


/s/ Amper, Politziner & Mattia
Edison, New Jersey
March 19, 2004, except for Note 21 which is as of April 12, 2004



                                      F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying  consolidated balance sheets of MediaBay,  Inc.
and  subsidiaries  (the  "Company")  as of December  31,  2002,  and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
each of the two years in the period ended  December  31,  2002.  Our audits also
included the financial  statement schedule as of December 31, 2002, and for each
of the two  years  then  ended  listed  in the  index  at Item  15(a)(2).  These
financial statements and the financial statement schedule are the responsibility
of the Company's management.  Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits.

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

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

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

/s/ Deloitte & Touche LLP

Parsippany, New Jersey
April 15, 2003


                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                                 MEDIABAY, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

                                                                                                     DECEMBER 31,
                                                                                                 2003          2002
                                                                                             -----------    -----------
                                         ASSETS
Current Assets:
<S>                                                                                          <C>            <C>
    Cash and cash equivalents ............................................................   $       683    $       397
    Accounts receivable, net of allowances for sales returns and doubtful accounts of
       $4,446 and $5,325 at December 31, 2003 and 2002, respectively .....................         3,264          7,460
    Inventory ............................................................................         4,063          5,244
    Prepaid expenses and other current assets ............................................           215            503
                                                                                             -----------    -----------
    Royalty advances .....................................................................           804          1,044
        Total current assets .............................................................         9,029         14,648
Fixed assets, net ........................................................................           227            358
Deferred member acquisition costs ........................................................         3,172          7,396
Deferred income taxes ....................................................................        14,753         16,224
Other intangibles ........................................................................            54            122
Goodwill .................................................................................         9,658          9,871
                                                                                             -----------    -----------
                                                                                             $    36,893    $    48,619
                                                                                             ============   ===========
                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses ................................................   $    10,268    $    16,050
    Accounts payable, related parties ....................................................        ___826            566
    Common stock subject to contingent put rights, current portion .......................           350             --
    Short-term debt, net of original issue discount of $274 at December 31, 2003 .........         7,107          2,368
    Related party  short-term debt, net of original
     issue discount of $142 at December 31, 2003..........................................        10,643             --
                                                                                             -----------    -----------
        Total current liabilities ........................................................        29,194         18,984
                                                                                             -----------    -----------
Long-term debt, ..........................................................................            --          5,520
                                                                                             -----------    -----------
Related party long-term debt, net of original issue discount of $567 at December 31, 2002             --          9,160
                                                                                             -----------    -----------
Common stock subject to contingent put rights ............................................           750          4,550
                                                                                             -----------    -----------
Commitments and Contingencies ............................................................            --             --

Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares of
    Series A issued and  outstanding  at December 31, 2003 and December 31, 2002
    and 3,350 shares and no shares of Series B at December 31, 2003 and
    December 31, 2002, respectively ......................................................         2,828          2,500
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
    13,057,414 and 14,341,376 at December 31, 2003 and 2002, respectively ................        94,567         94,800
Contributed capital ......................................................................        11,569          8,251
Accumulated deficit ......................................................................      (102,015)       (95,146)
                                                                                             -----------    -----------
Total common stockholders' equity ........................................................         6,949         10,405
                                                                                             -----------    -----------
                                                                                             $    36,893    $    48,619
                                                                                             ============   ===========
          See accompanying notes to consolidated financial statements.

</TABLE>

                                      F-4
<PAGE>

<TABLE>
<CAPTION>
                                 MEDIABAY, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

                                                                         YEARS ENDED DECEMBER 31,
                                                                       2003         2002        2001
                                                                      --------    --------    --------
<S>                                                                   <C>         <C>         <C>
Sales, net of returns, discounts and allowances of $16,960, $16,195   $ 36,617    $ 45,744    $ 41,805
     and $13,099 for the years ended December 31, 2003, 2002 and
     2001, respectively
Cost of sales .....................................................     17,479      20,651      19,783
Cost of sales - write-downs .......................................         --          --       2,261
Advertising and promotion .........................................      9,988      10,156      11,922
Advertising and promotion write-downs .............................         --          --       3,971
Bad debt ..........................................................      3,940       2,821       2,536
General and administrative ........................................      6,816       8,347       8,947
Severance and other termination costs .............................        544          --          --
Asset write-downs and strategic charges ...........................        749          --       7,044
Depreciation and amortization .....................................        328       1,314       5,156
Non-cash write-down of intangibles ................................         --       1,224          --
                                                                      --------    --------    --------
      Operating (loss) income .....................................     (3,227)      1,231     (19,815)
Interest expense ..................................................      1,925       2,974       2,790
                                                                      --------    --------    --------
      Loss before income tax (expense) benefit ....................     (5,152)     (1,743)    (22,605)
Income tax (expense) benefit ......................................     (1,471)       (550)     17,200
                                                                      --------    --------    --------
      Net loss ....................................................     (6,623)     (2,293)     (5,405)
Dividends on preferred stock ......................................        246         217          --
                                                                      --------    --------    --------
      Net loss applicable to common shares ........................   $ (6,869)   $ (2,510)   $ (5,405)
                                                                      ========    ========    ========
Basic and diluted loss per share:
      Basic and diluted loss per share.............................  $    (.49)   $   (.18)   $  (.39)
                                                                      ========    ========    ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>

<TABLE>
<CAPTION>
                                 MEDIABAY, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
                             (AMOUNTS IN THOUSANDS)

                                                                        Series A                  Series B
                                                               Preferred     Series A    Preferred     Series B
                                                                stock -     Preferred     stock -     Preferred
                                                               number of     stock no    number of     stock no
                                                               ----------    ---------   ----------    ---------
                                                                 shares      par value     shares      par value
                                                                 ------      ---------     ------      ---------
<S>                                                               <C>      <C>       <C>          <C>
 Balance at January 1, 2001.....................................    --       $    --   $    --      $    --
    Warrants granted for financing and consulting services......    --            --        --           --
    Beneficial conversion feature of debt issued................    --            --        --           --
    Net loss applicable to common shares........................    --            --        --           --
 Balance at December 31, 2001...................................    --            --        --           --
    Conversion of convertible debt to preferred stock...........    25         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         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       $ 2,500     3,350      $   328
                                                                 =====       =======   ========      =======


                                                                Common
                                                                 stock       Common
                                                               number of   stock - no  Contributed    Accumulated
                                                               ----------  ----------- ------------   -----------
                                                                 shares     par value    capital       deficit
                                                                 ------     ---------    -------       -------

Balance at January 1, 2001.....................................  13,862       93,468      6,702    $(87,231)
   Warrants granted for financing and consulting services......      --           --        333          --
   Beneficial conversion feature of debt issued................      --           --        695          --
   Net loss applicable to common shares........................      --           --         --      (5,405)
Balance at December 31, 2001...................................  13,862       93,468      7,730     (92,636)
   Conversion of convertible debt to preferred stock...........      --           --         --          --
   Conversion of convertible notes.............................     200        1,000        (49)         --
   Options and warrants granted for consulting.................      --           --        659          --
   Exercise of options and warrants............................     221          207         --          --
   Cancellation of warrants issued.............................      --                    (125)         --
   Stock issued to consultants.................................      19           50         --          --
   Stock tendered as payment for exercise of options...........     (61)          --         --          --
   Stock and warrants issued in acquisition of patent..........     100           75         36          --
   Loss applicable to common shares............................      --           --         --      (2,510)
Balance at December 31, 2002...................................  14,341       94,800      8,251     (95,146)
   Issuance of Series B Preferred Stock........................      --           --         --          --
   Warrants granted in consideration for non-compete
   agreements..................................................      23           --
   Exercise of options.........................................     107           --         --          --
   Stock issued to consultants.................................      29           14         --          --
   Options issued to consultants...............................      --           --         26          --
   Columbia House settlement...................................    (325)        (247)     3,020          --
   Stock tendered as payment of settlement.....................  (1,095)          --         --          --
   Warrants issued in connection with financing................      --           --        176          --
   Options issued to Directors.................................      --           --         73          --
   Loss applicable to common shares............................      --           --         --      (6,869)
                                                                -------     --------     -------  ---------
 Balance at December 31, 2003                                    13,057     $ 94,567     $11,569  $(102,015)
                                                                =======     ========     =======  =========

          See accompanying notes to consolidated financial statements.

</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>


                                 MEDIABAY, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                                                                                         YEARS ENDED DECEMBER 31,

                                                                                  2003             2002               2001
                                                                              -------------    -------------    -------------
Cash flows from operating activities:
<S>                                                                             <C>              <C>              <C>
Net loss applicable to common shares.................................           $(6,869)         $(2,510)         $(5,405)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Amortization of deferred member acquisition costs................             6,161            5,571            7,489
    Non-current accrued interest and dividends payable...............             1,155              456               --
    Amortization of deferred financing costs and original issue
    discount.........................................................               561            1,453            1,011
    Depreciation and amortization....................................               328            1,314            5,156
    Non-cash compensation expense....................................               118               --               --
    Asset write-downs and strategic charges..........................               749               --           13,276
    Income tax expense (benefit).....................................             1,471              550          (17,200)
    Changes in asset and liability accounts, net of acquisitions and
       asset write-downs and strategic charges:
      Decrease (increase) in accounts receivable, net................             4,195           (2,643)             321
      Decrease (increase) in inventory...............................               896           (1,123)             365
      Decrease (increase) in prepaid expenses and other current
        assets.......................................................               300            1,106             (558)
      Decrease (increase) in royalty advances........................               240             (261)             590
      Increase in deferred member acquisition costs..................            (2,410)          (8,099)          (3,748)
      (Decrease) increase in accounts payable and accrued expenses...            (5,346)           3,981           (3,360)
                                                                              -------------    -------------    -------------
       Net cash provided by (used in) operating activities...........             1,549            1,019           (2,063)
                                                                              -------------    -------------    -------------
Cash flows from investing activities:
  Purchase of fixed assets...........................................               (16)            (111)            (188)
  Additions to intangible assets.....................................              (102)              --             (110)
  Cash paid in acquisitions..........................................              (148)          (1,000)              --
                                                                              -------------    -------------    -------------
       Net cash used in investing activities.........................              (266)          (1,111)            (298)
                                                                              -------------    -------------    -------------
Cash flows from financing activities:
  Proceeds from issuance of notes payable - related parties..........                --            2,000            2,800
  Proceeds from issuance of debt                                                  1,065               --               --
  Repayment of long-term debt........................................            (1,615)          (1,640)            (400)
  Increase in deferred financing costs...............................               (99)            (149)            (473)
  Payments made in connection with litigation settlement recorded in
  contributed capital, net of cash received..........................              (676)              --               --
  Proceeds from exercise of stock options............................                --              214               --
  Proceeds from sale of preferred stock, net of costs................               328               --               --
                                                                              -------------    -------------    -------------
       Net cash (used in) provided by financing activities...........              (997)             425            1,927
                                                                              -------------    -------------    -------------
Net increase (decrease) in cash and cash equivalents.................               286              333             (434)
Cash and cash equivalents at beginning of year.......................               397               64              498
                                                                              -------------    -------------    -------------
Cash and cash equivalents at end of year.............................         $     683        $     397        $       64
                                                                              =============    =============    =============
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       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) LIQUIDITY AND CASH FLOW
Historically,  MediaBay, Inc. (the "Company"),  has funded its cash requirements
through  sales of equity  and debt  securities  and  borrowings  from  financial
institutions  and principal  shareholders.  The Company's  line of credit is due
September  30,  2004,  an  additional  $10.8  million is due upon  demand of the
holders of notes which may be made at various  times  following the repayment of
the line of credit and an additional $4.3 million under  promissory notes is due
in the fourth  quarter of 2004. The Company  currently does not have  sufficient
funds to repay the debt and is actively  seeking to obtain  other  financing  to
replace the debt or obtain an extension of its maturity.

The Company  currently does not have  sufficient  funds to market to attract new
members and  customers,  and its customer and revenue bases have eroded and will
continue to erode.  If the Company does not have the funds available to spend to
acquire  new  members to offset  member  attrition  and/or  expand its  existing
membership  and customer  bases,  revenue will  continue to decline,  which will
continue  to  negatively  impact  performance  and could  ultimately  impair the
Company's ability to continue as a going concern.

The Company has implemented a series of initiatives to increase cash flow. While
these initiatives and the significant  reduction in marketing expenses increased
cash provided by operating  activities in 2003,  the Company  cannot sustain its
operations  without  increasing  marketing  expenses.  The  Company  anticipates
requiring  additional  financing  to repay  debt and to fund  the  expansion  of
operations, acquisitions, working capital or other related.

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

(3) SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation
The consolidated  financial  statements  include the accounts of the Company and
its wholly owned subsidiaries.  All significant  intercompany accounts have been
eliminated.

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

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


                                      S-1
<PAGE>

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

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

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

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

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

Goodwill
Goodwill  represents the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase method
of accounting.  In accordance with Statement of Financial  Accounting  Standards
("SFAS") No. 142,  "Goodwill and Other  Intangible  Assets",  the Company ceased
amortization  of  goodwill  as of January 1, 2002.  The  Company  completed  the
transitional  impairment test as of January 1, 2002,  which did not result in an
impairment loss and performed its annual impairment tests as of October 31, 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
The Company derives its principal  revenue through sales of audiobooks,  classic
radio  shows  and  other  spoken  word  audio  products  directly  to  consumers
principally  through  direct mail. The Company also sells classic radio shows to
retailers  either  directly  or  through   distributors.   The  Company  derives
additional  revenue  through  rental of its  proprietary  database  of names and
addresses  to  non-competing  third  parties  through list rental  brokers.  The
Company also derives a small amount of revenue from advertisers  included in its
nationally  syndicated  classic  radio shows.  The Company  recognizes  sales to
consumers,  retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on  notification  by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification  of the airing of the  advertisement  by the media  buying  company
representing  the  Company.   Allowances  for  future  returns  are  based  upon
historical experience and evaluation of current trends.


                                       2
<PAGE>

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

Cost of Sales
Cost of sales includes the following:

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

Cooperative Advertising and Related Selling Expenses
In November 2001, the Emerging  Issues Task Force ("EITF") issued EITF No. 01-9,
"Accounting  for  Consideration  Given by a Vendor to a  Customer  (Including  a
Reseller  of the  Vendor's  Products)",  which  addresses  the income  statement
classification of certain credits,  allowances,  adjustments, and payments given
to customers for the services or benefits provided. The Company adopted EITF No.
01-9 effective  January 1, 2002,  and, as such, has classified the cost of these
sales  incentives  as a  reduction  of net  sales.  The  effect  on net sales of
applying EITF No. 01-9 in 2003 and 2002 was $60 and $118, respectively.

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.


                                     S-3
<PAGE>

<TABLE>
<CAPTION>

                                                                                      YEAR ENDED DECEMBER 31,
                                                                           2003                2002                2001
                                                                     ------------------ ------------------- -------------------
<S>                                                                       <C>                <C>                 <C>
Net loss applicable to common shares, as reported                         ($6,869)           ($2,510)            ($5,405)
Add: Stock-based employee compensation expense included in
     reported net income applicable to common shares, net of
     related tax effects                                                       --                 --                  --
Deduct: Total stock-based employee compensation expense determined
     under fair value based method for all awards, net of related
     tax effects                                                           (1,486)            (1,245)               (163)
                                                                     ------------------ ------------------- -------------------
Pro forma net loss applicable to common shares                            ($8,355)           ($3,755)            ($5,568)
                                                                     ================== =================== ===================

Net loss per share:

Basic and diluted-as reported                                              ($0.49)            ($0.18)             ($0.39)
                                                                     ================== =================== ===================

Basic and diluted-pro forma                                                ($0.60)            ($0.27)             ($0.40)
                                                                     ================== =================== ===================
</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.  Although  realization of net deferred tax assets
is not assured, management has determined that it is more likely than not that a
portion of the Company's  deferred tax asset  relating to temporary  differences
between the tax bases of assets or liabilities and their reported amounts in the
financial  statements will be realized in future periods. The Company determines
the  utilization  of  deferred  tax assets in the future  based on current  year
projections by management.

At December 31, 2003,  the Company had a remaining net deferred tax asset in the
amount of $14.8 million. Should management determine it would be able to realize
deferred  tax  assets in the  future in excess of the net  recorded  amount,  an
adjustment  to its deferred tax asset would  increase  income in the period such
determination is made. Likewise, should management determine that it will not be
able to realize  all or part of its net  deferred  tax asset in the  future,  an
adjustment  to the  deferred  tax asset  would be recorded as an increase to the
valuation allowance,  resulting in a deferred tax expense charged against income
in the period such determination is made.


                                       S-4
<PAGE>

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.

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 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.

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


                                       S-5
<PAGE>

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

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

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

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

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

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

o     $635 of fixed assets of the Old-Time Radio operations  written down to net
      realizable value due to the closing of the Schaumburg, Illinois facility;

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

o     $357 of write-downs of prepaid assets,

o     $297 of write-offs to receivables

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

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

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

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


                                      S-6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     2003              2002
                                                                                  ---------          ---------
      <S>                                                                         <C>                   <C>
         Capital leases, equipment and related software...........................$     825          $     813
         Furniture and fixtures...................................................       82                 80
         Leasehold improvements...................................................       74                 73
         Web site development costs...............................................       57                 57
                                                                                  ---------          ---------
         Total....................................................................    1,038              1,023
         Accumulated depreciation.................................................     (811)              (665)
                                                                                  ---------          ---------
                                                                                  $     227          $     358
                                                                                  =========          =========

</TABLE>

Depreciation  expense for the years ended  December 31, 2003,  2002 and 2001 was
$146, $221 and $601, respectively.

(5) ASSET ACQUISITIONS
On March 1, 2002,  the Company  acquired  inventory,  licensing  agreements  and
certain  other  assets,  used by Great  American  Audio in  connection  with its
old-time radio business,  including the exclusive  license to "The Shadow" radio
programs.  The  Company  expended  $379 in cash at closing,  including  fees and
expenses.  Additional payments of nine monthly  installments of $74 commenced on
June 15,  2002.  Other  costs  related  to the  asset  purchase  were  $39.  The
allocation of asset value was as follows:

         Other assets                                            $          5
         Net Inventory                                                     60
         Royalty Advances (The Shadow)                                     10
         Goodwill                                                       1,009
                                                                 -------------
         Total                                                         $1,084
                                                                 =============
(6) GOODWILL AND OTHER INTANGIBLES
In June 2001, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
142,  "Goodwill and Other  Intangible  Assets" ("SFAS 142"). The Company adopted
SFAS 142 on January 1, 2002.  SFAS 142 changed the  accounting  for goodwill and
indefinite-lived   intangible   assets  from  an   amortization   method  to  an
impairment-only  approach.  Goodwill and indefinite-lived  intangible assets are
tested for impairment  annually or when certain  triggering  events require such
tests and are written down, with a resulting  charge to operations,  only in the
period in which the recorded value of goodwill and  indefinite-lived  intangible
assets is more than their fair value.

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

<TABLE>
<CAPTION>
                                                                              FOR THE YEAR ENDED DECEMBER 31,
                                                                             2003            2002        2001
                                                                           --------        --------    --------
<S>                                                                        <C>             <C>         <C>
NET INCOME (LOSS):
Reported net loss applicable to common shares                              $ (6,869)       $ (2,510)   $ (5,405)
Goodwill amortization                                                           ---             ---         509
                                                                           --------        --------    --------
Adjusted net loss                                                          $ (6,869)       $ (2,510)   $ (4,896)
                                                                           ========        ========    ========
BASIC AND DILUTED LOSS PER COMMON SHARE:
Reported basic and diluted loss per common share                            $  (.49)       $  (.18)   $  (.39)
Goodwill amortization                                                           ---            ---        .04
                                                                           --------        --------   -------
Adjusted basic and diluted loss per common share                            $  (.49)       $  (.18)   $  (.35)
                                                                           ========        ========   =======
</TABLE>


                                      S-7
<PAGE>

SFAS 142 requires the Company to perform an  evaluation  of whether  goodwill is
impaired as of January 1, 2002,  the  effective  date of the  statement  for the
Company. The Company completed the transitional impairment test as of January 1,
2002, and its annual  impairment  tests as of October 31, 2003 and 2002, 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 2003 and 2002:



                                                    2003        2002

Balance at January 1,                            $   9,871    $  8,649
Goodwill acquired during the year                       --       1,222
Finalization of GAA asset purchase allocation         (213)         --
                                                 ---------    --------
Ending Balance                                   $   9,658    $  9,871
                                                 =========    ========

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 $181,  $1,093 and $4,027 for the years
ended  December 31, 2003,  2002 and 2001,  respectively.  The Company  estimates
intangible amortization expenses of $54 in 2004.

The following table presents  details of other  intangibles at December 31, 2003
and December 31, 2002:

<TABLE>
<CAPTION>
                                            DECEMBER 31,2003                   DECEMBER 31, 2002
                                  -----------------------------------     ----------------------------------
                                              ACCUMULATED                         ACCUMULATED
                                    COST      AMORTIZATION      NET         COST   AMORTIZATION        NET
                                  --------      --------    --------     --------     --------       --------
<S>                               <C>           <C>           <C>         <C>          <C>           <C>
Mailing Agreements                $    592      $    592      $   --      $   592      $   524       $     68
Customer Lists                       4,380         4,380          --        4,380        4,380             --
Non-Compete Agreements                 313           264          49          200          151             49
Other                                    5            --           5            5           --              5
                                  --------      --------    --------     --------     --------       --------
Total Other Intangibles           $  5,290      $  5,236    $     54      $ 5,177      $ 5,055       $    122
                                  ========      =========   ========     ========     ========       ========

(7) DEBT

     AS OF DECEMBER 31,                                                                  2003            2002
                                                                                  -------------   -------------
     Credit agreement, senior secured bank debt.................................       $ 2,925         $ 4,540
     Note to Seller of GAA assets...............................................            --             148
     Subordinated debt..........................................................         3,200           3,200
     October 2004 Notes and related accrued interest, net of original issue
     discount...................................................................           982              --
     Related party notes and related accrued interest, net of original issue
     discount...................................................................        10,643           9,160
                                                                                  -------------   -------------
                                                                                        17,750          17,048
     Less: current maturities...................................................      (17,750)         (2,368)
                                                                                  -------------   -------------
                                                                                         $  --         $14,680
                                                                                  =============   =============
</TABLE>


                                       8
<PAGE>

Senior Credit Facility
Since  November  1999, the Company has not been permitted to make any additional
borrowings under the Credit Agreement.  The interest rate on the credit facility
is equal to the prime rate p1/2 2 1/2%. The weighted  average  interest rate for
the years ended December 31, 2003 and 2002 was 6.44% and 6.76%, respectively.

In January and February 2004, the Company made principal  payments of $1,538 and
the  balance of Senior  Credit  Facility  as of April 12,  2004 is  $1,387.  The
maturity date of the Senior Credit  Facility was extended to September 30, 2004;
provided  however,  that the  Company is required  to make  monthly  payments of
principal of $107 through August 2004.

The Company was in compliance with its debt covenants at December 31, 2003.

Subordinated Debt
In August 2002, ABC Investment  LLC, a third party holder of  subordinated  debt
converted principal amount of $1,000 into 200,000 shares of the Company's common
stock. At December 31, 2003, the principal amount of the subordinated  debt held
by ABC Investment LLC is $3,200.  The note is currently  convertible into shares
of common stock at the rate of $3.04 per share,  subject to adjustment for below
conversion price issuances of securities. The note bears interest at the rate of
9% per annum,  quarterly,  in arrears.  The note is due December  31, 2004.  The
Company is prohibited from incurring additional  indebtedness (with exceptions),
selling  all or  substantially  all of its assets and  materially  changing  the
nature of its business  without the prior written  consent of the holder of this
note.

October 2003 Notes
On October 1, 2003,  the Company  issued  $1,065  principal  amount of notes due
October 1, 2004. The notes bear interest at the rate of 18%, provide for accrual
of interest to maturity and have no prepayment  penalty.  In connection with the
issuance of the notes,  the Company issued to the investors,  five year warrants
to purchase  266,250  shares of MediaBay  common  stock at an exercise  price of
$0.80,  the closing price of the stock on September 30, 2003. The Company agreed
to issue the  investors  warrants to purchase an  additional  266,250  shares of
MediaBay  common stock on April 1, 2004, if the notes have not been repaid.  The
notes are due on October 1,  2004,  however,  if the  Company  raises  more than
$5,000  million  in  financing  prior to the  maturity  date of the  notes,  the
maturity date of the notes is accelerated.  Carl Wolf and a company wholly owned
by Norton Herrick each purchased $100 principal amount of the notes.

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


                                      S-9
<PAGE>

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

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

Norton Herrick
Norton Herrick holds a $1,984 principal amount Convertible  Senior  Subordinated
Promissory Note due September 30, 2007,  except that the holder has the right to
demand repayment of the unpaid  principal  balance of, and interest on, the note
at any time on or after the later of (i)  December 31, 2004 and (ii) the date on
which the Company has repaid all of our obligations under the Credit Agreement.

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

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

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

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

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

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

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

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

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

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


                                       10
<PAGE>

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

The $2,500 Note, and the $800 Note are  convertible  into shares of common stock
at the rate of $.56 per share,  subject to adjustment for below conversion price
issuances of  securities.  The $500 Note is  convertible  at $2.00.  Each of the
$1,000 Note and the $150 Note is convertible  into shares of common stock at the
rate of $1.82 per share,  and the $350 Note is convertible into shares of common
stock at the rate of $1.25 per share.  The Company agreed as  consideration  for
Norton  Herrick  and  Huntingdon  consenting  to a January  2004  financing  and
granting  certain  rights to investors in the January  2004  financing  that the
Company would seek shareholder  approval to reduce the conversion rate of $1,000
note, the $150 note and the $500 note to $1.27. The Company's Board of Directors
has  determined  to recommend to its  shareholders  to approve the foregoing and
intends to submit a proposal for shareholder approval at its 2004 annual meeting
of shareholders.

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

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

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

The future minimum loan payments are as follows:

         Year Ending December 31,

          2004.................................................  $  18,024
                                                                 ---------
          Total maturities, including debt discount of $274....  $  18,024
                                                                 =========

(9) COMMITMENTS AND CONTINGENCIES

Rent expense for the years ended  December 31, 2003,  2002 and 2001  amounted to
$180, $291 and $272, 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.  The Company  entered  into two  ten-year  leases on 7,000  square feet of
office and  warehouse  space in Bethel,  Connecticut  and 3,000  square  feet of
warehouse  space in Sandy Hook,  Connecticut,  respectively.  Lease payments and
mandatory capital  improvement  payments,  starting in 2004, are $4,000 per year
and $2,000 per year on the Bethel and Sandy Hook properties, respectively.


                                      S-11
<PAGE>

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

         Year ending December 31,

        2004...............................................  $  163
        2005...............................................     191
        2006...............................................     194
        2007...............................................     203
        2008...............................................     203
        Thereafter.........................................      10
        Total lease commitments............................  ------
                                                             $  964
                                                             ======

Capitalized Leases
Payments  under  capitalized  lease  obligations  are $53 and $18 for the  years
ending December 31, 2004, 2005 and 2006, respectively.

During the year ended  December  31, 2003,  the Company had two capital  leases.
Lease  payments under these  agreement  were $53, $53 and $40 in 2003,  2002 and
2001,  respectively.  The amount of equipment  capitalized  under the leases and
included in fixed assets is $330 and net of depreciation the fixed asset balance
is $94 and $156 at December  31, 2003 and 2002,  respectively.  The  obligations
under the leases  included  in  accounts  payable  and  accrued  expenses on the
consolidated  balance  sheets at  December  31, 2003 and 2002 were $71 and $112,
respectively.

         Minimum annual lease commitments under capital leases are as follows:

         2004..................................................  $  53
         2005..................................................     18
                                                                 -----
         Total capital lease commitments.......................  $  71
                                                                 =====
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  $538,  $446 and $75 during 2004,  2005 and 2006,
respectively.

Termination and Severance Agreements
Our minimum  aggregate  commitments  under settlement  payments under terminated
employment agreements and a terminated consulting agreement are $201,000 in 2004
and $30,000 in 2005.

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 $2,524,  $3,243 and $3,199 for 2003,
2002 and 2001, respectively. Minimum advances required to be paid under existing
agreements for the next five years are as follows:

         2004                                                   $  459
         2005                                                      347
         2006                                                      228
         2007                                                      354
         2008                                                       85
         2009                                                       14
                                                                ------
         Total                                                  $1,487
                                                                ======


                                      S-12
<PAGE>

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

(10) STOCK OPTION AND STOCK INCENTIVE PLANS

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

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

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

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

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

         Stock option activity under the plans is as follows:

                                                           WEIGHTED
                                                            AVERAGE
                                                           EXERCISE
                                         SHARES              PRICE
                                         ----------        ----------
Outstanding at January 1, 2001            6,653,100            $ 6.52
   Granted                                  898,000              1.23
   Exercised                                     --                --
   Canceled and expired                  (1,561,750)             9.01
                                         ----------        ----------
Outstanding at December 31, 2001          5,989,350              5.06
   Granted                                1,205,000              2.27
   Exercised                               (151,000)              .51
   Canceled 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
                                         ==========        ==========


                                      S-13
<PAGE>

Norton  Herrick  exercised  options to purchase  300,000 shares of the Company's
common stock under an option granted to him on November 23, 2001.

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

<TABLE>
<CAPTION>
                                                 NO. OF       EXERCISE       ASSUMED       RISK-FREE     FAIR VALUE
                                                 SHARES        PRICE       VOLATILITY    INTEREST RATE    PER SHARE
DATE

2001 GRANTS:
<S>                                              <C>          <C>           <C>          <C>            <C>
     First Quarter                                     --       $--            --             --          $    --
     Second Quarter                                84,000      2.07           165%         4.81%            0.12
     Third Quarter                                  6,000      2.00           165%         4.63%            0.14
     Fourth Quarter                               808,000      1.14           165%         4.85%            0.19
                                               ----------
Total                                             898,000
                                               ==========
2002 GRANTS:
     First Quarter                                 250,000      2.70           159%         4.42%           $1.25
     Second Quarter                                     --      --              --             --           --
     Third Quarter                                  40,000      4.44           159%         3.46%            3.31
     Fourth Quarter                                915,000      2.06           159%         3.08%            0.87
                                               -----------
                                                 1,205,000
                                               ===========

2003 GRANTS:
     First Quarter                                  40,000     $1.50           165%         4.85%            $.90
     Second Quarter                                    --      --              --         --               --
     Third Quarter                              2,173,856      .97            165%         4.85%            0.29
     Fourth Quarter                             1,379,925      1.17            97%         4.00%            0.67
                                              -----------
Total                                           3,593,781
                                              ===========
</TABLE>

The  following  table  summarizes   information  for  options   outstanding  and
exercisable at December 31, 2003:

<TABLE>
<CAPTION>

                                                                                              OPTIONS EXERCISABLE
                                       OPTIONS OUTSTANDING           WEIGHTED          -------------------------------------
                                         WEIGHTED AVERAGE             AVERAGE                           WEIGHTED AVERAGE
 RANGE OF PRICES        NUMBER        REMAINING LIFE IN YEARS     EXERCISE PRICE        NUMBER           EXERCISE PRICE
 ---------------- ---------------------------------------------- ---------------------------------- -------------------------
<S>    <C>              <C>                     <C>                   <C>                <C>                <C>
 $0.50-1.00             2,059,856               5.35                  $  0.86            580,856            $  0.82
 $1.01-3.00             2,330,425               5.98                     1.27            637,500               1.44
 $3.01-5.00             2,723,000               5.56                     3.91          2,409,000               3.98
 $5.01-14.88              697,600               4.50                    10.69            672,850              10.84
 ---------------- ---------------------------------------------- ---------------------------------- ------------------------
 $0.50 -14.88           7,810,881               5.54                  $  2.92          4,300,206            $  4.25
 ================ ============================================== ================================== ========================
</TABLE>


                                      S-14
<PAGE>

At December 31, 2003, there were 1,664,500 additional shares available for grant
under the 1997 Plan,  581,369  additional  shares  available for grant under the
1999 Plan,  1,035,250  additional shares available for grant under the 2000 Plan
and 408,000  available for grant under the 2001 Plan.  There was no compensation
expense  recorded  in  connection  with these  plans in each of the years  ended
December 31, 2003, 2002, and 2001.

(11) WARRANTS AND NON-PLAN OPTIONS

The Company granted non-plan options and warrants to purchase a total of 456,250
shares of the  Company's  common  stock,  381,250  of which  vested in 2003,  to
consultants and advisors.  During the year ended December 31, 2003,  warrants to
purchase  1,875,000 of the Company's  common stock were canceled and warrants to
purchase 1,808,649 shares of the Company's common stock expired.

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          -------------------------------------
                                         WEIGHTED AVERAGE             AVERAGE                           WEIGHTED AVERAGE
 RANGE OF PRICES        NUMBER        REMAINING LIFE IN YEARS     EXERCISE PRICE        NUMBER           EXERCISE PRICE
 ---------------- ---------------------------------------------- ---------------------------------- -------------------------
<S>    <C>                <C>                   <C>                   <C>                <C>                <C>
 $0.10-1.00               374,250               3.90                  $  0.84            249,250            $  0.79
 $1.01-3.00               517,500               7.98                     1.86            517,500               1.86
 $3.01-14.20              399,940               2.27                    10.68            349,940              11.49
 ---------------  ------------------ --------------------------  ---------------- ----------------  -----------------------
 $0.50-14.20            1,291,690               5.03                  $  4.29          1,116,690            $  4.64
 ================ ============================================== ================================== ========================
</TABLE>

(12) 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
                                                                    =========

                                      S-15
<PAGE>

(13) COMMON STOCK SUBJECT TO CONTINGENT PUT RIGHTS
In connection  with an acquisition  made in December 1998, the Company agreed to
repurchase  certain  shares issued to the seller at various  prices ranging from
$7.00 to $15.00.  The  repurchase  obligation  would  expire  based on the stock
reaching the repurchase  price for a period of 10 consecutive  trading days. The
Company  has  asserted  that the  price  targets  were  maintained  and that the
obligation has expired.  The seller has disputed this assertion and asserts that
the  right to put  25,000  shares at a price of $14.00  per share  beginning  on
December 31, 2003 and 50,000 shares at a price of $15.00 per share  beginning on
December 31, 2005.  The seller has demanded the  repurchase of the 25,000 shares
for $350,000.

(14) EQUITY
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,  Executive Vice President 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.

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.

Warrants  Granted in Consideration  for Non-Compete  Agreements The Company also
issued  non-plan  warrants to purchase  90,000  shares of its common  stock to a
former  employee and  consultant at prices ranging from $1.50 to $3.00 per share
as part of  non-competition  agreements.  The value of the  warrants  of $23 was
computed  using an acceptable  valuation  model and is being  amortized over the
lives of the agreements.


                                      S-16
<PAGE>

Exercise of Options
On July 31, 2003, Norton Herrick exercised options to purchase 300,000 shares of
MediaBay  common  stock at an  exercise  price of $.50 per share  pursuant to an
Option  Agreement  dated  November  23, 2001.  The options  were  exercised on a
"cash-less"  basis  and the  closing  stock  price  on July 31,  2003 was  $.78.
Accordingly,  the Company issued to Mr. Herrick a certificate for 107,692 shares
of MediaBay common stock.

Stock Issued to Consultants
During the year ended  December 31, 2003,  the Company  issued  29,000 shares of
common  stock  to a  consultant  as  partial  consideration  for  organizational
management  advisory services.  The shares were valued at market on the dates of
the  grants  and an expense  ($14) for the value of the  shares is  included  in
general and administrative expenses.

Options Issued to Consultants
The Company  issued 60,000  options  under the Company's  stock option plans and
150,000  non-plan  warrants to advisors  and  consultants  during the year ended
December  31,  2003 of which the 60,000  options and 75,000  warrants  vested in
2003.  The options and the vested  warrants were valued at $26 using an accepted
valuation method and have been included in general and administrative expenses.

Stock and Options Tendered as Payment of Settlement
The Company entered into an agreement with Norton Herrick dated November 7, 2003
(the "November Agreement") whereby Mr. Herrick agreed to pay amounts owed to the
Company under Section 16(b) of the  Securities  Exchange Act of 1934 as a result
of various  transactions  which are attributable to Mr. Herrick occurring within
less than six months of each other that  involved our  securities.  Mr.  Herrick
agreed to pay the Company the sum of $1,742,  (the  "Payment")  by delivering to
the Company for  cancellation  within ten (10) days of the date of the  November
Agreement,  shares of our common  stock  and/or  warrants to purchase  shares of
common stock of the Issuer with an aggregate  value equal to the Payment.  Under
the November Agreement,  the value of each share of common stock delivered under
the Agreement is equal to the last sale price of our common stock on the trading
day  immediately  prior to the date on which the  shares of  common  stock  were
delivered (the "Market  Price").  The value of any warrant  delivered  under the
November  Agreement is equal to the Market Price of the  underlying  shares less
the exercise price of the warrant.  Mr.  Herrick  delivered the shares of common
stock and warrants  pursuant to the November  Agreement on Monday,  November 17,
2003, with the value of the securities based on the Market Price on November 14,
2003 of $.94 per share of common  stock.  As part of the  Payment,  Mr.  Herrick
returned  to the  Company  1,095,372  shares of our common  stock.  Based on the
Market Price,  the aggregate  value of these shares is $1,030.  Also, as part of
the Payment,  Mr. Herrick deposited warrants to purchase 1,875,000 shares of our
common  stock.  Based on the Market Price ($.94) less the exercise  price of the
warrants  ($.56),  the  aggregate  value  of these  warrants  was  $712.  Of the
1,875,000  warrants  deposited,  1,650,000  became  exercisable May 14, 2001 and
225,000 became exercisable February 22, 2002.

Warrants Issued in Connection with Financing
In  connection  with the  issuance of the $1,065  principal  amount of notes due
October 1, 2004, described in Note 7, the Company issued to the investors,  five
year warrants to purchase 266,250 shares of MediaBay common stock at an exercise
price of $0.80,  the  closing  price of the stock on  September  30,  2003.  The
warrants were valued at $176, using an acceptable valuation method and the value
of the warrants is being  amortized over the term of the notes.  Carl Wolf and a
company wholly owned by Norton  Herrick each purchased $100 principal  amount of
the notes and each received 25,000 warrants.


                                      S-17
<PAGE>

Options Issued to Directors
During the year ended  December 31, 2003, the Company issued options to purchase
335,000 shares of its common stock to its non-employee directors. Of the options
issued, 130,000 vested during 2003. The Company valued the vested options at $73
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.

(14) INCOME TAXES
The Company's  income tax provision for the years ended December 31, 2003,  2002
and 2001 includes a Federal  deferred tax expense of $1,471,  a Federal deferred
tax expense of $550 and a Federal deferred tax benefit of $17,200, respectively.

Income tax expense  (benefit)  for the years ended  December 31, 2003,  2002 and
2001 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>
                                                                          2003               2002              2001
                                                                    -----------------  -----------------  ----------------
<S>                                                                 <C>                    <C>              <C>
Computed tax benefit                                                $      (446)           $    (797)       $    (9,268)
Increase (decrease) in valuation allowance for
Federal and State deferred tax assets                                       1,917              1,347             (7,932)
                                                                    -----------------  -----------------  ----------------
Income tax expenses (benefit)                                       $       1,471          $     550        $   (17,200)
                                                                    =================  =================  ================

</TABLE>

The ultimate  realization  of deferred tax assets is dependent on the generation
of future  taxable  income  during the periods in which those  temporary  timing
differences become deductible.  Although  realization of net deferred tax assets
is not assured, management has determined that it is more likely than not that a
portion of the Company's  deferred tax asset  relating to temporary  differences
between the tax bases of assets or liabilities and their reported amounts in the
financial statements will be realized in future periods.  Accordingly,  in 2001,
the Company  reduced the  valuation  allowance  for  deferred  tax assets in the
amount of $17,200 and recorded an income tax benefit.  In 2003, the deferred tax
asset was reduced by  approximately  $1,471 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:

<TABLE>
<CAPTION>


Deferred tax assets:
                                                                                    2003            2002
                                                                                 ------------   ------------
<S>                                                                              <C>             <C>
Federal and state net operating loss carry-forwards                              $     22,362    $   22,224
Loss in I-Jam, LLC                                                                         85            85
Accounts receivable, principally due to allowance for doubtful accounts and
reserve for returns                                                                     1,408         1,668
Inventory, principally due to reserve for obsolescence                                    584           475
Fixed assets/Intangibles                                                               13,984        13,725
Beneficial conversion feature                                                             156           (42)
                                                                                 ------------   -----------
Total net deferred tax assets                                                          38,579        38,135
Less valuation allowance                                                              (23,826)      (21,911)
                                                                                 ------------   -----------
Net deferred tax assets                                                          $     14,753   $    16,224
                                                                                 ============   ===========

</TABLE>


                                      S-18
<PAGE>

The Company has  approximately  $54,660 of net  operating  loss  carry-forwards,
which may be used to offset  possible  future  earnings,  if any,  in  computing
future  income tax  liabilities.  The net operating  losses will expire  between
December  31, 2018 and December 31, 2023 for federal  income tax  purposes.  For
state  purposes,  the net operating  losses will expire at varying times between
2006 and 2013,  as the  Company is subject  to  corporate  income tax in several
states.  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 equity  financing the Company  obtained in
2000 and 2004 may result in an ownership  change and, thus, may limit the use of
prior net operating losses.

(15) NET LOSS PER SHARE OF COMMON STOCK

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

Basic and diluted loss per share were computed using the weighted average number
of shares  outstanding  for the years ended December 31, 2003,  2002 and 2001 of
14,098, 14,086 and 13,862, respectively.

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.

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.

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

(16) SUPPLEMENTAL CASH FLOW INFORMATION

No cash has been  expended  for income  taxes for the years ended  December  31,
2003,  2002 and 2001.  Cash expended for interest was $537,  $766 and $1,095 for
the years ended December 31, 2003, 2002 and 2001, respectively.

The Company had the following  non-cash  activities for the years ended December
31, 2003, 2002, and 2001:

<TABLE>
<CAPTION>

                                                                               2003            2002            2001
                                                                             --------        --------        --------
<S>                                                                          <C>             <C>             <C>
E-Data patent rights acquisition.......................................      $     --        $     75        $     --
Conversions of subordinated notes into common shares...................            __           1,000              __
Conversion of notes into preferred shares..............................            __           2,500              --
Stock tendered as payment for exercise of options......................           150              75              --
Settlement of litigation...............................................         3,697              --              --
</TABLE>


                                      S-19
<PAGE>

(17) RELATED PARTY TRANSACTIONS

Companies wholly owned by Norton Herrick, a principal  shareholder,  have in the
past provided accounting,  administrative,  legal and general office services to
the  Company  at cost  since its  inception.  Companies  wholly  owned by Norton
Herrick have also assisted the Company in obtaining  insurance  coverage without
remuneration.  The Company paid or accrued to these  entities $88, $430 and $292
for these  services  during the years ended  December 31,  2001,  2002 and 2003,
respectively. In addition, a company wholly owned by Norton Herrick provided the
Company  access  to a  corporate  airplane  during  2001 and 2002.  The  Company
generally paid the fuel, fees and other costs related to its use of the airplane
directly to the service  providers.  For use of this airplane,  the Company paid
rental  fees of  approximately  $14 in each of 2001  and  2002 to Mr.  Herrick's
affiliate.  As of  December  31, 2003 the  Company  owed to Mr.  Herrick and his
affiliates $895 for reimbursement of such expenses and services.

On May 1, 2003, the Company  entered into a two-year  consulting  agreement with
XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton Herrick.
The agreement provides,  among other things that XNH will provide consulting and
advisory  services  to the  Company  and  that  XNH  will be  under  the  direct
supervision of the Company's Board of Directors.  For its services,  the Company
agreed to pay XNH a fee of $8 per month and to provide Mr.  Herrick  with health
insurance  and other  benefits  applicable  to its  officers  to the extent such
benefits may be provided  under the  Company's  benefit  plans.  The  consulting
agreement provides that the  indemnification  agreement with Mr. Herrick entered
into on November 15, 2002 pursuant to which, the Company agreed to indemnify Mr.
Herrick to the maximum  extent  permitted by the corporate  laws of the State of
Florida or, if more  favorable,  the  Company's  Articles of  Incorporation  and
By-Laws in effect at the time the agreement was executed, against all claims (as
defined in the  agreement)  arising  from or out of or related to Mr.  Herrick's
services as an officer, director,  employee,  consultant or agent of the Company
or any subsidiary or in any other capacity shall remain in full force and effect
and to also  indemnify  XNH on the  same  basis.  Mr.  Herrick  resigned  as the
Company's  Chairman  effective  May 1,  2003  and the  Company  and Mr.  Herrick
terminated  the  employment  agreement  signed as of  November 2, 2002 on May 1,
2003.

Effective  December  31,  2003,  the Company  agreed with Norton  Herrick to the
consulting  agreement with XNH. In connection with the termination,  the Company
agreed to pay XNH a fee of $7.5 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.  The  termination  agreement  provides that the  indemnification
agreement  with Mr.  Herrick  shall  remain in full force and effect and to also
indemnify XNH on the same basis. In connection  with the  termination  agreement
Herrick and XNH agreed that the non-competition  and nondisclosure  covenants of
the XNH consulting agreement were extended to survive until December 31, 2006.

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,  Executive Vice President 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 Credit Agreement with its senior lender.


                                      S-20
<PAGE>

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 our 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 our assets,  a sum
in cash equal to $100 per share  before any  amounts  are paid to the holders of
our  common  stock and on a pari passu  basis  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.

On July 31, 2003, Norton Herrick exercised options to purchase 300,000 shares of
MediaBay  common  stock at an  exercise  price of $.50 per share  pursuant to an
Option  Agreement  dated  November  23, 2001.  The options  were  exercised on a
"cash-less"  basis  and the  closing  stock  price  on July 31,  2003 was  $.78.
Accordingly,  the Company issued to Mr. Herrick a certificate for 107,692 shares
of MediaBay common stock.

During the three months ended September 30, 2003, Norton Herrick provided a $100
guarantee  to a  vendor.  The  Company  subsequently  paid  the  vendor  and the
guarantee expired.  Mr. Herrick received no compensation and did not profit from
the transaction.

During the three months ended  September 30, 2003,  Mr.  Herrick also loaned the
Company  $100,  the  loan  was  subsequently  converted  into an  investment  by
Huntingdon  Corporation,  a company  wholly-owned by Mr. Herrick,  in the $1,065
bridge  financing  completed on October 1, 2003.  Carl Wolf, our Chairman,  also
purchased a $100 note in this financing. In consideration, the Company issued to
each of  Huntingdon  and Mr.  Wolf a $100  principal  amount note due October 1,
2004.  The notes are  identical to all other notes issued in the  financing  and
bear interest at the rate of 18% per annum,  payable at maturity.  In connection
with the  issuance  of the  notes,  the  Company  agreed,  subject to receipt of
shareholder  approval,  to issue to each of Huntingdon  and Mr. Wolf warrants to
purchase  25,000 shares of common stock at an exercise  price of $.80 and agreed
to issue to each of them  warrants to purchase an  additional  25,000  shares of
common  stock if the notes are not repaid on April 1, 2004 at an exercise  price
per share equal to the closing sale price of our common stock on March 31, 2004.

The Company entered into an agreement with Norton Herrick dated November 7, 2003
(the "November Agreement") whereby Mr. Herrick agreed to pay amounts owed to the
Company under Section 16(b) of the  Securities  Exchange Act of 1934 as a result
of various  transactions  which are attributable to Mr. Herrick occurring within
less than six months of each other that  involved our  securities.  Mr.  Herrick
agreed to pay the Company the sum of $1,742,  (the  "Payment")  by delivering to
the Company for  cancellation  within ten (10) days of the date of the  November
Agreement,  shares of our common  stock  and/or  warrants to purchase  shares of
common stock of the Issuer with an aggregate  value equal to the Payment.  Under
the November Agreement,  the value of each share of common stock delivered under
the Agreement is equal to the last sale price of our common stock on the trading
day  immediately  prior to the date on which the  shares of  common  stock  were
delivered (the "Market  Price").  The value of any warrant  delivered  under the
November  Agreement is equal to the Market Price of the  underlying  shares less
the exercise price of the warrant.  Mr.  Herrick  delivered the shares of common
stock and warrants  pursuant to the November  Agreement on Monday,  November 17,
2003, with the value of the securities based on the Market Price on November 14,
2003 of $.94 per share of common  stock.  As part of the  Payment,  Mr.  Herrick
returned  to the  Company  1,095,372  shares of our common  stock.  Based on the
Market Price,  the aggregate  value of these shares is $1,030.  Also, as part of
the Payment,  Mr. Herrick deposited warrants to purchase 1,875,000 shares of our
common  stock.  Based on the Market Price ($.94) less the exercise  price of the
warrants  ($.56),  the  aggregate  value  of these  warrants  was  $712.  Of the
1,875,000  warrants  deposited,  1,650,000  became  exercisable May 14, 2001 and
225,000 became exercisable February 22, 2002.


                                      S-21
<PAGE>

On January 29, 2004, the Company  issued $4,000  aggregate  principal  amount of
promissory notes (the "2004 Notes") and warrants to purchase 2,352,946 shares of
common  stock (the  "Investor  Warrants")  to 13  institutional  and  accredited
investors (the  "Offering").  The 2004 Notes are 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 our
indebtedness  under our 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 our assets or the purchase by a single entity, person or
group of  affiliated  entities or persons of 50% of our voting  stock.  The 2004
Notes bear interest at the rate of 6%,  increase to 9% on April 28, 2004 and 18%
on July  27,  2004.  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.  In consideration for Huntingdon's consent
to the Financing and agreements to upon receipt of Shareholders'  Approval , the
Company reduced the conversion  price of $1,150  principal amount of convertible
promissory  notes  held by  Huntingdon  from  $2.00 to $1.27 and $500  principal
amount of convertible promissory notes held by Huntingdon from $1.82 to $1.27.

In 2003 and  2002,  Norton  Herrick  advanced  $360 and $372,  respectively,  to
certain of our  vendors  and  professional  firms as payment of amounts  owed to
them.  As the Company made  payments to these  vendors,  the vendors  repaid the
amounts  advanced to them by Mr.  Herrick.  Mr. Herrick  received no interest or
other  compensation for advancing the monies.  As of April 12, 2004, none of the
advances were outstanding.

(18) RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002,  the Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No.  145  ("SFAS  145"),  "Rescission  of FASB
Statements  No. 4, 44 and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections,"  which is effective for fiscal years beginning after May 15, 2002,
with  earlier  application  encouraged.  Under SFAS 145,  gains and losses  from
extinguishment  of debt  will no  longer  be  aggregated  and  classified  as an
extraordinary  item,  net of related  income tax  effect,  on the  statement  of
earnings.  The  adoption  of SFAS 145 had no impact on the  Company's  financial
position or results of operations.


                                      S-22
<PAGE>

In June 2002,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  No. 146 ("SFAS  146"),  "Accounting  for Costs
Associated  with Exit or Disposal  Activities,"  which is effective  for exit or
disposal  activities  that are  initiated  after  December 31, 2002,  with early
application  encouraged.  SFAS 146 requires  recognition  of a liability for the
costs  associated  with an exit or  disposal  activity  when  the  liability  is
incurred,  as  opposed to when the  entity  commits to an exit plan as  required
under  EITF Issue No.  94-3.  SFAS 146 will  primarily  impact the timing of the
recognition of costs associated with any future exit or disposal activities. The
adoption  of SFAS 146 had no impact on its  financial  position  or  results  of
operations.

In November 2002, the FASB issued  interpretation  No. ("FIN") 45,  "Guarantor's
Accounting  and  Disclosure  Requirements  for  Guarantees,  Including  Indirect
Guarantees of Indebtedness of Others," which requires that guarantees within the
scope of FIN 45 issued or amended  after  December 31, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee,  be recognized
at the inception of the  guarantee.  The  effective  date for this FIN 45 is for
fiscal  years ending  after  December  15,  2002.  The adoption of FIN 45 had no
impact on its financial position or results of operations.

In December  2002,  the FASB issued  SFAS No. 148,  "Accounting  for Stock Based
Compensation",  which  amends  SFAS No.  123 to provide  alternative  methods of
transaction for an entity that  voluntarily  changes to the fair value method of
accounting  for  stock  based  compensation.   It  also  amends  the  disclosure
provisions of SFAS No. 123 to require prominent  disclosure about the effects on
reported net income of an entity's  accounting  policy decisions with respect to
stock based employee compensation.  Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim  Financial  Reporting",  to require  disclosure of those effects in
interim financial  statements.  SFAS No. 148 is effective for fiscal years ended
after  December 15, 2002,  but early  adoption is  permitted.  Accordingly,  the
Company has adopted the  applicable  disclosure  requirements  of this Statement
within this  report.  The  adoption  of SFAS No. 148 did not have a  significant
impact on the Company's financial disclosures.

In January 2003,  the FASB issued FIN 46,  "Consolidation  of Variable  Interest
Entities,"  which is effective for interim periods  beginning after December 15,
2003.  This  interpretation  changes the method of determining  whether  certain
entities should be included in the Company's  consolidated financial statements.
An entity is subject to FIN 46 and is called a variable  interest entity ("VIE")
if it has (1) equity  that is  insufficient  to permit the entity to finance its
activities without additional subordinated financial support from other parties,
or (2)  equity  investors  that  cannot  make  significant  decisions  about the
entity's  operations  or that do not absorb the  expected  losses or receive the
expected   returns  of  the  entity.   All  other  entities  are  evaluated  for
consolidation   under  SFAS  No.  94,   "Consolidation  of  All   Majority-Owned
Subsidiaries."  A VIE is consolidated by its primary  beneficiary,  which is the
party  involved  with the VIE that has a majority  of the  expected  losses or a
majority  of the  expected  residual  returns  or both.  The  Company  currently
evaluating  FIN 46 and  believes  that it will have no  impact on its  financial
position or results of operations.

In April  2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  33 on
Derivative  Instruments  and Hedging  Activities",  which  amends and  clarifies
accounting for derivative instruments,  including certain derivative instruments
embedded in other  contracts,  and for hedging  activities  that fall within the
scope of SFAS No.  133,  "Accounting  for  Derivative  Instruments  and  Hedging
Activities".  SFAS No. 149 amends SFAS No. 133 regarding  implementation  issues
raised in relation to the  application  of the  definition of a derivative.  The
amendments  set forth in SFAS No. 149 require  that  contracts  with  comparable
characteristics  be accounted  for  similarly.  This  Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and for hedging  relationships  designated  after June 30, 2003. The adoption of
SFAS No. 149 did not have a material impact on the Company's  financial position
or results of operations.


                                      S-23
<PAGE>

On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments  with  Characteristics  of both  Liabilities  and Equity."  SFAS 150
provides  guidance  on  classification  and  measurement  of  certain  financial
instruments with  characteristics  of both  liabilities and equity.  The Company
reclassified certain items to debt as a result of the SFAS 150.

 (19) SEGMENT REPORTING

For 2003,  2002 and 2001,  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.

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.

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 2003

                                                        CORPORATE     ABC         RSI        MBAY.COM      INTER-SEG.  TOTAL
                                                        ---------   --------     --------    --------      ----------  -------

<S>                                                     <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

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

</TABLE>


                                      S-24
<PAGE>

<TABLE>
<CAPTION>

YEAR ENDED DECEMBER 31, 2001

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


(20) 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.

YEAR ENDED
DECEMBER 31, 2003                                         1ST              2ND             3RD               4TH
                                                        QUARTER          QUARTER         QUARTER           QUARTER
                                                       ----------       ----------      ----------        ----------
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)

YEAR ENDED
DECEMBER 31, 2002                                         1ST              2ND             3RD               4TH
                                                        QUARTER          QUARTER         QUARTER           QUARTER
                                                       ----------       ----------      ----------        ----------
Sales                                                    $ 9,480         $ 11,977        $ 11,267          $ 13,020
Cost of sales                                              4,289            5,194           5,241             5,927
Net (loss) applicable to common shares                     (759)              338           (187)           (1,902)  (****)
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share                   $(0.05)           $ 0.02         $ (.01)           $ (.13)
Diluted earnings (loss) per common share                 $(0.05)           $ 0.02         $ (.01)           $ (.13)

YEAR ENDED
DECEMBER 31, 2001                                         1ST              2ND             3RD               4TH
                                                        QUARTER          QUARTER         QUARTER           QUARTER
                                                       ----------       ----------      ----------        ----------
Sales                                                     $9,601         $ 10,915         $ 9,879          $ 11,410
Cost of sales                                              3,816            5,455           5,285             5,227
Cost of sales - write-downs                                   --               --           2,261                --
Net income (loss)                                         10,591  (*)     (2,151)        (16,955)  (**)       3,110
Basic and diluted income (loss) per share:
Basic earnings (loss) per common share                    $ 0.77  (*)     $(0.16)         $(1.22)  (**)      $ 0.23  (*****)
Diluted earnings (loss) per common share                  $ 0.58  (*)     $(0.16)         $(1.22)  (**)      $ 0.11  (*****)

</TABLE>

                                      S-25
<PAGE>

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

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

(***)  Includes  asset   write-downs  and  strategic  charges of  the  Company's
       Audio Passages audiobook club of $749 and severance and other termination
       costs of $544,  relating to the  termination  of three senior  executives
       with employment agreements and termination of a consulting agreement  and
       income  tax  expense  of  $1,417  related  to utilization of deferred tax
       assets.

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

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

(21) SUBSEQUENT EVENTS

From  January 1, 2004 to April  12,2004 the Company  issued  options to purchase
1,650,000  shares  of its  common  stock to  certain  directors,  employees  and
consultants  to the Company  under its 2001 Stock Option plan.  The Company also
cancelled options to purchase 1,774,500 shares of its common stock.

On January 29, 2004, the Company  issued $4,000  aggregate  principal  amount of
promissory  notes (the  "Notes")  and warrants to purchase  2,352,946  shares of
common  stock (the  "Investor  Warrants")  to 13  institutional  and  accredited
investors  (the  "Offering").  The notes are 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 notes bear interest at the rate of 6%, increase to
9% on April 28, 2004 and 18% on July 27, 2004. In connection  with the Offering,
Norton  Herrick and  Huntingdon  entered  into a letter  agreement  (the "Letter
Agreement") with the purchasers of Notes in the Offering  pursuant to which they
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  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 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 Norton Herrick's and Huntingdon's rights
under the security agreements.  In consideration for Huntingdon's consent to the
Financing and agreements,  upon receipt of Shareholders'  Approval,  the Company
will reduce the conversion price of the Huntingdon Notes to $1.28.


                                      S-26
<PAGE>

In accordance with 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, on receipt of Shareholder approval, which was
received on April 12, 2004. 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  Rockwood,   Inc.
("Rockwood"),  the  placement  agent,  and a  broker  warrants  to  purchase  an
aggregate of 245,000 shares of common stock and also issued to Rockwood warrants
to purchase an  additional  500,884  shares of Common Stock on April 12, 2004 as
partial  consideration for Rockwood's  services as placement agent. All warrants
issued are exercisable  until January 28, 2009 at an exercise price of $1.28 per
share.

The following pro forma balance sheet reflects the effects of the receipt of the
$4,000 million debt, less offering fees and expenses of $531, and the subsequent
conversion of the subordinated debt to common stock on stockholder  approval, as
if the transactions had occurred on December 31, 2003:

<TABLE>
<CAPTION>
                                 MEDIABAY, INC.
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

PRO FORMA TO REFLECT RECEIPT OF $4,000 CONVERTIBLE NOTES OFFERING
AND SUBSEQUENT CONVERSION OF SUCH NOTES TO EQUITY.

                                                   HISTORICAL      PRO FORMA            PRO FORMA
                                                   DECEMBER 31,   ADJUSTMENTS            DECEMBER 31,
                                                      2003          DR (CR)   NOTES        2003
                                                    ----------    ----------  -----     ----------
            ASSETS
Current Assets:
<S>                                                      <C>          <C>      <C>        <C>
Cash and cash equivalents                                $ 683        $ 3,469  (1)        $ 2,902
                                                                     $ (1,250) (2)
Accounts receivable, net                                 3,264              -               3,264
Inventory                                                4,063              -               4,063
Prepaid expenses and other current assets                  215              -                 215
Royalty advances                                           804              -                 804
                                                    ----------      ----------         ----------
Total current assets                                     9,029          2,219              11,248
Fixed assets, net                                          227              -                 227
Deferred member acquisition costs                        3,172              -               3,172
Deferred income taxes                                   14,753              -              14,753
Other intangibles                                           54              -                  54
Goodwill                                                 9,658              -               9,658
                                                    ----------      ----------         ----------
                                                      $ 36,893        $ 2,219            $ 39,112
                                                    ==========      ==========         ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses                 $ 10,268            $ -            $ 10,268
Accounts payable, related parties                          826              -                 826
Common stock subject to
 contingent put rights, current portion                    350              -                 350
Short-term debt                                          7,107          1,250  (2)          5,857
Related party short-term debt                           10,643              -              10,643
                                                    ----------      ----------         ----------
Total current liabilities                               29,194          1,250              27,944
Common stock subject to contingent put rights              750              -                 750
                                                    ----------      ----------         ----------
                                                                                                -
Commitments and Contingencies                                -              -                   -
                                                                                                -
Preferred stock                                          2,828                              2,828
Common stock                                            94,567         (3,469) (1)         98,036
Contributed capital                                     11,569         (1,164) (3)         16,724
                                                                       (3,991) (4)
(3,188) (4)
Accumulated deficit                                   (102,015)         1,164  (3)       (107,170)
                                                                        3,991  (4)
                                                    ----------      ----------         ----------
Total common stockholders' equity                        6,949         (3,469)             10,418
                                                    ----------      ----------         ----------
                                                      $ 36,893       $ (2,219)           $ 39,112
                                                    ==========      ==========         ==========
</TABLE>

NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003:

(1)   To record  receipt of $4,000  convertible  notes,  less  offering fees and
      expenses of $531, and conversion of such notes to common stock on approval
      by stockholders which was recived on April 12, 2004.

(2)   To record principal payment to senior lender made on receipt of funds from
      the convertible notes offering.

(3)   To  record  value of  warrants  issued  to  investors  and  agents  in the
      convertible notes offering and subsequent expense.

(4)   To record value of beneficial  conversion feature in the convertible notes
      offering and subsequent expense.


                                      S-27
<PAGE>

<TABLE>
<CAPTION>

                                      SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                            FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

                                             BALANCE                                          WRITE-OFFS
                                           BEGINNING OF     AMOUNTS CHARGED     AMOUNTS        AGAINST        BALANCE END
                                              PERIOD         TO NET INCOME      ACQUIRED       RESERVES        OF PERIOD
                                          ---------------- ------------------ ------------ ---------------- --------------

 Allowances for sales returns and doubtful accounts:
<S>                                           <C>             <C>              <C>            <C>               <C>
 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
 Year Ended December 31, 2001                    4,516           15,496           --             15,473            4,539

 Valuation allowance for Federal and State deferred tax assets
 Year Ended December 31, 2003                   21,911            1,471           --                446           23,826
 Year Ended December 31, 2002                   20,563              550           --                798           21,911
 Year Ended December 31, 2001                   37,763          (17,200)          --                 --           20,563

</TABLE>


                                      S-28
<PAGE>

                                   SIGNATURES

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

                                       MEDIABAY, INC.

                                       BY: /S/ JOHN F. LEVY
                                           -------------------------------------

                                               JOHN F. LEVY,
                                               EXECUTIVE VICE PRESIDENT AND
                                               CHIEF FINANCIAL OFFICER

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

<TABLE>
<CAPTION>

          SIGNATURE                    TITLE                                               DATE
          ---------                    -----                                               ----

<S>                             <C>                                                    <C>
     /s/ Carl T. Wolf           Chairman and Director                                   April 12, 2004
------------------------------
          CARL WOLF

    /s/ Jeffrey Dittus          Chief Executive Officer                                 April 12, 2004
------------------------------  (Principal Executive Officer)
        JEFFREY DITTUS

    /s/ Howard Herrick          Director and Executive Vice President                   April 12, 2004
------------------------------
        HOWARD HERRICK

     /s/ John F. Levy           Executive Vice President and Chief Financial Officer    April 12, 2004
------------------------------  (Principal Financial and Accounting Officer)
         JOHN F. LEVY

    /s/ Richard Berman          Director                                                April 12, 2004
------------------------------
        RICHARD BERMAN

     /s/ Paul Ehrlich           Director                                                April 12, 2004
------------------------------
         PAUL EHRLICH

    /s/ Mark Hershhorn          Director                                                April 12, 2004
------------------------------
        MARK HERSHHORN

    /s/ Joseph Rosetti          Director                                                April 12, 2004
------------------------------
        JOSEPH ROSETTI

</TABLE>



                                      S-29