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, 2005

                                       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 if the  registrant  is a well-know  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.

    [ ] Yes |X| No

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.

    [ ] Yes |X| No

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements  for the past 90 days.  |X| Yes [ ] No  Indicate  by check  mark if
disclosure   of   delinquent   filers   pursuant  to  Item  405  of   Regulation
S-K(ss.229.405  of this  chapter)  is not  contained  herein,  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  of this Form 10-K.  |X|  Indicate  by check mark  whether the
registrant  is  a  large   accelerated   filer,  an  accelerated   filer,  or  a
non-accelerated   filer.   See  definition  of  "accelerated   filer  and  large
accelerated  filer"  in Rule  12b2  of the  Exchange  Act.  (Check  one):

Large accelerated filer [ ]   Accelerated Filer [ ]    Non-accelerated filer |X|

Indicate by check mark whether the  registrant is a shell company (as defined in
Rule 12b-2 of the Act). |_| Yes |X| No

      The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant,  computed by reference to the last reported
sale  price at which  the  common  stock  was sold on June 30,  2005  (the  last
business day of the Registrant's most recently  completed second fiscal quarter)
was  approximately  $19,900,000.  As of March 29,  2006,  there were  10,516,444
shares of the Registrant's Common Stock outstanding.

                      Documents Incorporated by Reference:
                                      None


<PAGE>

                                 MEDIABAY, INC.

Form 10-K

Table of Contents

<TABLE>
<CAPTION>
<S>                                                                                 <C>
ITEM I                                                                              3

Item 1. Business                                                                    3

Item 1A. Risk Factors                                                               10

Item 2.  Properties                                                                 18

Item 3.  Legal Proceedings                                                          18

Item 4.  Submission of Matters to a Vote of Security Holders                        18

PART II                                                                             19

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and
         Issuer Purchases of Equity Securities                                      19

Item 6.  Selected Financial Data                                                    19

Item 7.  Management's Discussion and Analysis of Financial Condition and
         Results of Operations                                                      21

Item 7A. Quantitative and Qualitative Disclosures About Market Risk                 46

Item 8.  Financial Statements and Supplementary Data                                46

Item 9.  Changes in and Disagreements With Accountants on Accounting and
         Financial Disclosure                                                       46

Item 9A. Controls and Procedures                                                    46

Item 9B. Other Information                                                          46

PART III                                                                            47

Item 10. Directors and Executive Officers of the Registrant                         47

Item 11. Executive Compensation                                                     50

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters                                                55

Item 13. Certain Relationships and Related Transactions                             57

Item 14. Principal Accountant Fees and Services                                     60

PART IV                                                                             61

Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K          61
</TABLE>

<PAGE>

PART I

Item 1. Business
Forward-looking Statements

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

Introduction

      We are a digital media and publishing company specializing in spoken audio
entertainment,  such as audio readings of books, newspapers, magazines, original
productions  and radio  broadcast  transcripts,  each of which audio readings is
referred to as a title.  We offer  thousands of audio  titles,  comprising  over
75,000 hours of aggregate audio content, which we distribute via mail order, our
websites and some of the nation's largest retailers. Our titles can be purchased
in digital format via Internet downloads through subscription services at a flat
monthly fee for a specified  number of titles per month,  and/or on a per title,
or a la carte,  basis. Our titles can also be obtained in hard copy format, such
as CDs and cassettes.

      We have two principal content libraries;  (1) audiobooks which we sell via
digital download and on compact disc and cassette,  through Soundsgood.com,  the
Audio Book Club and third-party  websites;  and (2) an archive of the history of
American  radio which we produce and sell on compact disc and cassettes  through
our catalog,  a mail order based  continuity  program,  retail outlets,  and our
on-line download subscription service and third-party websites. We broadcast our
radio programs through a syndicated  radio show on approximately  200 commercial
stations  across  the  United  States,  as well as its  24-hour  Radio  Classics
channels on Sirius and XM Satellite Radio.

                                       3
<PAGE>

      We are  transitioning  our business from selling hard goods  primarily via
mail order to digital  distribution  via wireless and  Internet  downloads.  Our
distribution  strategy is two pronged: (1) to wholesale our audio content to the
leading  music  services,  broadband  portals,  cell phone and  satellite  radio
companies,  both  domestically and  internationally;  and (2) to operate our own
downloadable  content stores and subscription  services which are co-branded via
partnerships with celebrities and corporate affiliates, each chosen specifically
to reach the targeted  demographics  known to be interested  in its content.  In
addition to our growing  list of  marketing  partners,  we intend to use various
means to market our  downloadable  content  stores,  including  marketing to our
existing  customer  list of  approximately  2.5  million  audiobook  buyers that
participated  in the Audio Book Club or have purchased  from Radio  Spirits,  as
well as working with  manufacturers of digital music players,  smart phones, and
PDAs to include  samples of our audio content for consumers to preview when they
purchase  these new  devices,  with the hope that  these  samples  will  attract
consumers to our content stores.

      In October 2005,  we launched our new digital  storefront  and  technology
platform, www.Soundsgood.com. Soundsgood.com is a fully enabled digital download
service that offers  thousands of digital  audiobooks,  classic  radio shows and
other  spoken  word audio  content on a per title  basis or as part of a monthly
subscription.  The service  offers users audio  content  that can be  downloaded
directly to the users'  personal  computers,  burned to CD or transferred to any
Window's  Media  compatible  device that plays secured WMA (Windows Media Audio)
files.  There are over 70 digital devices on the market today that are compliant
with Microsoft  Corporation's  PlaysforSure"(TM)  digital rights  management and
device platform,  which means they can play WMA formatted  digital files, and we
are working closely with Microsoft  Corporation to ensure that our content works
seamlessly on these devices and the many new smart cellular phones that will run
the new Windows Mobile 5.0 operating system.

      To expand the digital distribution of our audio content, we executed an
exclusive distribution agreement with Microsoft's MSN Music to provide our
spoken word content to the MSN audience, which has 350 million unique monthly
visitors, a content distribution agreement with Real Networks, which operates
Rhapsody, the largest music subscription service in the United States, and a
distribution agreement with Music Net, a business-to-business digital music
service provider, to serve as its exclusive spoken word content aggregator. We
have also executed distribution agreements for our growing library of classic
radio ring tones with Infospace, MobileStreams, Jamster and DotPhoto. These
distributors place the ringtones with the following service providers: Nextel,
Verizon, Alltell, T-Mobile Alltel, nTelos, Midwest Wireless, Verizon Wireless
and Verizon Wireless Puerto Rico services.

      We have acquired the rights to distribute digital audiobooks from
substantially all of the major publishing houses in the United States and have a
growing number of titles with various international rights of distribution. Our
content library consists of all genres of audiobooks, classic American radio
shows, educational courses, university lectures, theatre plays, self improvement
courses, television soundtracks, stand-up comedy, children's storytelling,
parenting advice and study guides.

      Our digital content partners include BBC,  Blackstone,  Brilliance  Audio,
CBS Radio,  Harper Collins,  Hay House,  Oasis,  Penguin Group USA Audio, Random
House, Simon & Schuster, Sound Room Publishers, Time Warner Audio and Zondervan.
In addition to Audio Book Club, we distribute  our content  through  proprietary
web  sites  soundsgood.com  and  radiospirits.com,  as well as  through  partner
channels including MSN Music,  Sirius Satellite Radio and XM Satellite Radio.

      We have also begun to produce a series of exclusive audio works in
partnership with large publishing companies such as John Wiley to produce a
series of Audio Cliffs Notes, and the Hindustan Times to produce and distribute
a daily audio newspaper. We anticipate that this production effort will grow if
these initial projects are successful.


                                       4
<PAGE>

Strategy

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

      We intend to use the Windows Media Digital Rights Management (DRM) system,
and other easy to use, rights management  technologies that may evolve over time
for the cellular  marketplace.  Beginning  this past  Christmas  season,  70 new
digital  devices that support the Microsoft  "PlaysforSure(TM)"  digital  rights
management  platform  became  available  for sale by many of the leading  device
manufacturers.  Examples  of  companies  offering  a  "PlaysforSure(TM)"  device
include Hewlett Packard, Dell, Creative, Rio, i-River and Samsung. Many of these
devices  have large file  storage  capacities  and support  the  playback of our
content.  Typically our content is one half hour in length for our classic radio
shows, to an average of 6 to 10 hours for an audiobook.

      In addition, the rapid evolution of cell and smart phones with hard drives
and media players  presents a large  potential user base of digital  devices for
our  content,  as more than 800 million new  handsets  are sold each year in the
market place. These portable devices, coupled with the ubiquitous installed base
of  personal  computers  with CD burners  and USB port  memory  discs are making
digital audio content portable and more accessible to users.

      We believe the proliferation of broadband Internet service,  the Microsoft
digital  rights  management  solution,  and an  expanding  user base of portable
devices have created an inflection  point where  digital  downloads are a better
way to distribute audio than  traditional  Compact Discs and audio cassette tape
distribution by mail order.  Broadband Internet and ubiquitous wireless networks
means  companies  like MediaBay can deliver audio files quickly and  affordably.
Downloading  provides  consumers a more convenient way to purchase audio in real
time and an incredible opportunity for broad choice since there are no inventory
requirements.   We  believe  that  download   distribution  is  better  for  the
environment  because it eliminates  the need for the physical  storage format of
the content,  such as the CD or cassette.  Digital  delivery  also enables us to
pass  through the savings we realize  from no media  manufacturing  costs to the
consumer,  as two  audiobooks  can be downloaded for $19.95 whereas we typically
charge $25.00 for one audiobook on CD or cassette.

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

                                       5
<PAGE>

Digital Distribution Agreements with Microsoft, Real Networks and MusicNet

      The first step in executing  our new strategy  was the  completion  of two
agreements with Microsoft.  These agreements provide for us to distribute spoken
word audio content,  including  audiobooks  from the largest  publishers and our
old-time radio programs, through an exclusive distribution relationship with the
new MSN Music Service.  Today, MSN has an audience of 350 million unique monthly
visitors.  Microsoft's  new music  service has one of the largest  selections of
songs and audio content of any service and is compatible  with a large number of
digital  devices,  leveraging  its  industry  leading  windows  media player and
windows digital rights management platform.

      Additionally  we signed a  distribution  agreement  with Real  Networks to
provide spoken work and audio  entertainment  content to Real's subscriber base.
We will  provide our content  library on an "a la carte"  basis  through  Real's
Music Store or to the  approximately  1.0 million  subscribers  of the  Rhapsody
music service. In addition,  we expect users to be able to transfer their spoken
word  libraries  onto  hundreds of portable  devices  supported by Real.  At the
current  time,  these  devices  include  the Apple  iPod,  and most  models from
Creative,    i-River,    Rio,   and   many   other   MP3   players   listed   at
http://music.guide.real.com/rhapsodydevices.

      We also signed an agreement with MusicNet, a business-to-business  digital
music  service  provider,   to  serve  as  its  exclusive  spoken  word  content
aggregator.  Through the new deal, consumers visiting  MusicNet-enabled  digital
music  services will have access to our library of  audiobooks  and other spoken
word  content  available  on Windows  Media.  MusicNet's  distribution  partners
include  a wide  array of  subscription-based  digital  music  services  such as
Yahoo!, HMV, Virgin Digital, Synacor and Cdigix. MusicNet offers these companies
and  others a suite of fully  customized  digital  music  experiences,  enabling
consumers to buy digital music  subscriptions,  portable  subscriptions and a la
carte downloads. MusicNet has licensed two million tracks and offers the largest
catalog available in the industry today for subscription and purchase.

Open standard platform technology

      We have  chosen to leverage  the  proliferation  of the Windows  Media DRM
platform  as the de facto  rights  management  standard  for  content  owners to
protect their intellectual property on the Internet.  According to a report from
the  International  Federation of the Phonographic  Industry (IFPI) trade group,
the number of online  music  stores  quadrupled  to more than 230 in 2004.  This
trend is certain to improve  consumer choice as it allows consumers to shop in a
broad range of stores,  but maintain the flexibility to switch devices over time
as functionality  improves without having to worry about media format conversion
issues that closed proprietary systems, such as Apple i-Tunes,  create.  On-line
music stores in the United States that use the Window's DRM system  include such
companies as RealNetworks,  MSN Music, Wal-Mart, Napster, AOL Music Now, Yahoo's
Music Match, Buy.com,  Music Now, and VirginDigital.  The competing storefronts,
which use proprietary DRM technologies or closed systems, are Apple and Audible.

Industry background

      A major trend over the thirty years in the United States is to work longer
hours,  spend more time in the  automobile  commuting to and from work, and thus
have less time for leisure  activities.  According to Harris  Interactive,  from
1973 to 2003,  the median  number of hours that  people say they work has jumped
from 41 hours a week to 49. Over the same period,  Harris  reports that people's
leisure  time has dropped  from 26 to 19 hours per week.  Listening is a way for
individuals  to consume  content at times when they are unable to read,  such as
when  they are  driving.  The  2003  edition  of the  Veronis  Suhler  Stevenson
Communications Industry Forecast estimates that on average Americans spent 1,013
hours  listening  to the radio in 2003,  compared  to 911  hours in 1998,  which
averages out to an additional  approximately  2 hours a week spent  listening to
the radio in 2003. In comparison,  Veronis Suhler Stevenson  estimates that book
reading  declined  among  Americans  from an average of 118 hours in 1998 to 110
hours in 2003.  According to the 2000 United States  Census,  97 million  people
drove to and from work alone  that  year,  an  increase  of 15% from  1990.  The
average  travel time to work  increased to 25.5 minutes each way, an increase of
14% from 1990.  In  addition,  more than 42 million  individual  drivers  have a
commute of at least 30 minutes or more each way.

                                       6
<PAGE>

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

      According to the Audio Publishers  Association 2004 Sales Survey, the U.S.
market for  audiobooks  has  reached an  estimated  $800  million.  The APA also
estimated  that one in five,  or 23  million,  American  households  listened to
audiobooks in 2001.

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

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

      According  to a 2001  report by market  analyst  International  Data Corp.
(IDC), worldwide sales of smart handheld devices were expected to grow at a rate
of 48% per year over the next four years, reaching  approximately $26 billion by
2004.

      In December 2003,  Jupiter Research  published a report that predicted the
demand for MP3 players in the U.S.  would grow at a rate of 50% per year through
2006.  According to Jupiter,  shipments of MP3 players in the U.S. for 2003 were
forecasted at over 3.5 million.  Jupiter also  predicted  that there would be an
installed  based of more than 26 million MP3 players by 2006 and that,  starting
in 2004,  the demand for players with hard drives would  surpass that of players
with flash memory.  According to a Consumer Electronics Market Association study
from June 2005, nearly 20 million DVD players were shipped in 2004 and household
penetration  of DVD players  rose from 60% at the  beginning  of 2004 to 75%, or
over 86 million  households,  at the beginning of 2005.

      The  market  for  personal  digital  assistants  that have  digital  audio
capabilities  had  been  led by  Pocket  PCs --  devices  running  on  Microsoft
operating systems which are manufactured by Hewlett-Packard,  Toshiba,  and Dell
among others.  Research firm IDC published a report in February 2004 in which it
noted that smartphones showed significant growth and future promise and that, in
2003, the worldwide  smartphone  market grew 181%  year-over-year to 9.6 million
units.

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

      We are  seeking to develop  relationships  with cell phone  companies  and
other high technology providers. Wireless handheld technology is the ideal match
for the download spoken word business.  The combination of wireless  freedom and
digital  transmission  will in the future  allow a consumer to  download  from a
library of audio  recordings and bypass the anchored desktop PC. This freedom to
download wirelessly will allow unprecedented convenience for consumers.

                                       7
<PAGE>

Businesses

Soundsgood.com

      SoundsGood.com which was launched in October 2005, provides consumers with
an easy way to access thousands of best selling audio books, classic radio shows
and theatre  performances,  as well as a growing collection of audio newspapers,
magazines,  lectures, self help and wellness courses, modern day radio shows and
other spoken word entertainment.

      SoundsGood.com   provides   customers  with  both  digital  downloads  for
immediate  listening as well as the ability to purchase  CDs and  audiocassettes
for those more comfortable with traditional media.  SoundsGood  supports digital
downloads that are compatible  with MP3 players,  CD players,  PCs and a growing
number of smart cellular phones that support the Windows Media audio format.

      SoundsGood  offers a wide range of audiobook  titles ranging from New York
Times  best  sellers to the  obscure.  There is a monthly  subscription  for two
downloads,  and individual purchases of CDs, cassettes and digital downloads are
available at an additional cost.

Audio Book Club

      Audio   Book  Club  was   originally   modeled   after   the   traditional
"book-of-the-month  club"  format and had a negative  option  requirement.  This
meant that, unless a member affirmatively declined the featured selection in our
mailing  on  or  prior  to  the   designated   reply  date,  the  selection  was
automatically  shipped to the member and the  member  was  billed.  We  recently
transitioned  this business to one that has a positive  option drop ship format,
meaning that products are shipped only if the customer  affirmatively orders the
product, and that sells audiobooks via download, CD and cassette format.

      We mail one catalog approximately every month, which offers between 50 and
75 audio book titles.  Audiobook  Club  customers  are  encouraged to make their
purchases on  Soundsgood.com  by downloading  their  selections.  Alternatively,
customers can purchase their selections in traditional CD or cassette format. We
purchase  audiobooks  on  a  wholesale  basis  and  utilize  the  services  of a
third-party  fulfillment  provider,  which allows us to ship the titles from its
inventory.  We also utilize the services of a third-party  that  provides  order
processing  and data  processing  services.  These  services  include  accepting
customer orders,  implementing our credit  policies,  billing and invoicing.  We
intend to migrate our  customer  base over to Internet  ordering and credit card
purchases only.

Radio Spirits

      Radio Spirits sells old-time radio programs on audiocassettes  and compact
discs  through  retail,  direct mail and online  channels.  Radio  Spirits has a
database of names of more than 400,000 catalog customers and prospects and sells
its products in such  well-known  national  chains as Barnes & Noble and Borders
and online  retailers  such as Amazon.com.  Radio Spirits'  products can also be
purchased  online at  www.radiospirits.com.  The Radio Spirits  content  library
consists  of more  than  65,000  hours of  classic  radio  shows  licensed  on a
primarily  exclusive  basis.  Radio  Spirits'  library  of classic  radio  shows
includes episodes from the following notable series:  The Shadow, The Jack Benny
Program, The Bob Hope Show, Superman,  Suspense and many others including famous
stars such as Clark Gable, Cary Grant,  Humphrey Bogart, Jimmy Stewart,  Lucille
Ball, Frank Sinatra,  Judy Garland,  Orson Welles and Bing Crosby. Radio Spirits
also offers its  old-time  radio  programs in a continuity  format,  a marketing
program that automatically  sends selections to a customer once an initial order
is placed.  Radio Spirits  accounted for  approximately  46.2% of our revenue in
2005.

                                       8
<PAGE>

      We have acquired exclusive  licensing rights to a substantial  majority of
our old time radio library. These rights have been principally acquired from the
original rights holders  (actors,  directors,  writers,  producers or others) or
their  estates.  Our engineers use digital sound  equipment to improve the sound
quality of our old time radio  programs  and then we contract  with  third-party
manufacturers to duplicate and manufacture our old time radio program  cassettes
and CDs.

      We utilize the services of a third-party fulfillment provider to warehouse
and  track  our  inventory,  ship the  ordered  product,  implement  our  credit
policies, and provide data processing services,  including billing and invoicing
services.

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,     www.soundsgood.com,    and    www.msn.soundsgood.com.

RadioClassics  division

      RadioClassics  was created to distribute  our  proprietary  old-time radio
content across multiple  distribution  platforms  including  traditional  radio,
cable television,  satellite television (DBS), satellite radio and the Internet.
RadioClassics  currently  distributes a national "classic" radio program,  "When
Radio Was" and can also be heard 24 hours a day on  dedicated  channels  on both
the Sirius Satellite Radio and XM Satellite Radio services.

Competition

      We  compete  for  discretionary  consumer  spending  with other mail order
clubs,  catalogs,  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 much greater financial resources.

      We compete for consumers of spoken word content with other  Internet-based
audio  distributors,   as  well  as  with  our  existing  competitors,  such  as
distributors  of audio  on  cassette  tape or  compact  disc.  The  business  of
providing  content  over  the  Internet  is  experiencing  rapid  growth  and is
characterized  by rapid  technological  changes,  changes in consumer habits and
preferences,  and the emergence of new and established companies.  Inherent with
this rapid  increase in growth of digital  media are new market  entrants due to
limited  barriers  to entry.  We also  continue  to compete  with (i) book store
chains deep-discount and general merchandise retailers, mass merchandisers, mail
order catalogs, content clubs, and libraries that sell, rent, or loan audiobooks
on cassette tape or compact  discs.  Examples in these  categories  are Borders,
Barnes & Noble,  Amazon.com,  Books-a-Million,  and Wal-Mart  (ii) websites that
offer  downloadable  access to spoken  audio  content  using  tools  such as the
RealPlayer  or Windows  Media Player,  (iii)  websites  that offer  downloadable
access to spoken audio using their own technologies  and audio players,  such as
Audible  and Apple  i-Tunes,  and (iv) large  Internet  portals  such as America
Online,  Inc. and Yahoo! Inc. which are either offering or have the potential to
offer audio content.  Moreover Audible, Inc., has begun to establish itself as a
leader in downloadable spoken word content distribution.

Warranties and return policies

      Our policy is to accept  returns of damaged  audiobooks and old time radio
programs. In order to maintain favorable customer relations, we generally accept
returns of unopened  audiobooks  and old time radio  products  sold  through our
catalogs  within 30 days of purchase.  We also accept returns of unsold products
sold on a wholesale basis.

                                       9
<PAGE>

Intellectual property

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

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

Employees

      As of March 29, 2006 we had 27 full-time employees.  Of these employees, 2
served in corporate management;  19 served in operational positions at our Audio
Book Club operations and 6 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.

Item 1.  Risk Factors

                          Risks related to our business

      We have received a going concern opinion from our  independent  registered
      public  accounting  firm, which could adversely affect our stock price and
      our ability to raise capital.

      Amper,  Politziner  and Mattia,  P.C, our  independent  registered  public
accounting  firm, has included an  explanatory  paragraph in their report on our
financial statements for the year ended December 31, 2005, which highlights that
current cash balances are insufficient to support operations for the next twelve
months,  thereby  raising  substantial  doubt about our ability to continue as a
going concern. The inclusion of a going concern explanatory  paragraph in Amper,
Politziner and Mattia,  P.C's report on our financial  statements  could have an
adverse effect on our stock price and ability to raise additional capital.

      Our  financial  statements  have  been  prepared  on the  basis of a going
concern,  which  contemplates  the  realization  of assets and  satisfaction  of
liabilities in the normal course of business.  We have not made any  adjustments
to the  financial  statements  as a result  of the  outcome  of the  uncertainty
described above.

      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, 2005, we had incurred an accumulated  deficit of approximately $163 million.
Losses  are  continuing  and are  expected  to  continue.  We may not be able to
achieve and sustain profitable operations.

      Our revenues have declined  significantly and will continue to decline. We
      do not intend to devote  sufficient  funds to market to attract  new Audio
      Book Club members and our revenue bases will continue to erode.

                                       10
<PAGE>

      Because  we  significantly  reduced  our  marketing  expenditures  for new
members, our club membership and revenues declined significantly.  Sales for the
year ended  December  31,  2005  decreased  52.4% as  compared to the year ended
December  31, 2004.  Audio Book Club sales for the year ended  December 31, 2005
decreased  62.2%  compared to the year ended  December 31, 2004 as a result of a
reduction in our advertising  expenditures for new members. We do not anticipate
conducting any significant new member  acquisition  marketing of Audio Book Club
as we have  moved to a new  strategy  to grow our  business.  As a  result,  our
revenues will  continue to decline until such time, if ever, as we  successfully
implement our new strategies.

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

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

      o     plan for product offerings;

      o     introduce new titles;

      o     anticipate order lead time;

      o     accurately assess inventory requirements; and

      o     develop new product delivery methods.

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

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

      If our third-party  providers fail to perform their services properly,  we
      may not be able to service our customers  properly and our  operations may
      not function effectively.

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

                                       11
<PAGE>

      If our marketing  strategies  to acquire new customers are not  successful
      our sales growth will decline and our costs could increase.

      Many factors  beyond our control,  such as the public's  receptiveness  to
direct  mail or email  solicitations,  may affect the  success of our  marketing
strategies.  If our direct mail, internet and other marketing strategies are not
successful,  our per customer  acquisition costs may increase and we may acquire
fewer new  customers  than  anticipated  or the  customers 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 sales growth
would be inhibited and our costs would increase.

      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  (those  belonging to  customers  that have  affirmatively  elected to
receive  emails from us) 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  customers  and increase our
cost to acquire new customers.

      We face  significant  competition  from a wide  variety of sources for the
      sale of our products, which could prevent us from significantly increasing
      our revenues.

      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 than us, and from other products  providing
similar  entertainment value, such as music on cassettes and CDs, printed books,
videos and DVDs. We compete for discretionary  consumer spending with other mail
order clubs,  catalogs,  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 much greater financial resources.

      We compete for consumers of spoken word content with other  Internet-based
audio  distributors,   as  well  as  with  our  existing  competitors,  such  as
distributors  of audio  on  cassette  tape or  compact  disc.  The  business  of
providing  content  over  the  Internet  is  experiencing  rapid  growth  and is
characterized  by rapid  technological  changes,  changes in consumer habits and
preferences,  and the emergence of new and established companies.  Inherent with
this rapid  increase in growth of digital  media are new market  entrants due to
limited  barriers  to entry.  We also  continue  to compete  with (i) book store
chains deep-discount and general merchandise retailers, mass merchandisers, mail
order catalogs, content clubs, and libraries that sell, rent, or loan audiobooks
on cassette tape or compact  discs.  Examples in these  categories  are Borders,
Barnes & Noble,  Amazon.com,  Books-a-Million,  and Wal-Mart  (ii) websites that
offer  downloadable  access to spoken  audio  content  using  tools  such as the
RealPlayer  or Windows  Media Player,  (iii)  websites  that offer  downloadable
access to spoken audio using their own technologies  and audio players,  such as
Audible  and Apple  i-Tunes,  and (iv) large  Internet  portals  such as America
Online,  Inc. and Yahoo! Inc. which are either offering or have the potential to
offer audio content.  Moreover Audible, Inc., has begun to establish itself as a
leader in downloadable spoken word content distribution.

      We have not fully complied with the terms of all of our license agreements
      and failure to do so may impair our ability to license  products from some
      rightsholders.

      As of  December  31,  2005,  we had past due  royalty  payments  under our
licensing   agreements   aggregating   $1,397,000.   The  publishers  and  other
rightsholders to whom these payments would be payable have not requested royalty
statements  or  payments.  These  amounts are accrued for and  reflected  in our
financial statements.

                                       12
<PAGE>

      Additional  risks relating to our change in strategy and our  downloadable
              spoken word content offerings and online initiatives

      We are pursuing a new strategy of selling downloadable spoken word content
and selling hard good format content online.  We have limited  experience in the
emerging and competitive  downloadable content distribution  business and cannot
assure you that we will be  successful in  transitioning,  operating and growing
our business. In the event that we are unable to successfully  implement our new
strategy, we will be required to pursue alternative business strategies, such as
seeking  to enter  new  markets  or  finding  strategic  partners  with  greater
financial,  marketing  and  other  resources,  and  if we are  unable  to do so,
discontinue operations.

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

      Historically, we have sold audiobooks through a membership club format and
other  spoken  word  content,  substantially  all in hard  goods  format  (audio
cassettes and compact discs). Over the past two years, we significantly  reduced
our new member and customer marketing activities.

      Because we are  pursuing a new  strategy,  which  focuses on  downloadable
spoken  word  content,  we have  transitioned  the Audio Book Club to a positive
option drop ship business and will not devote the funds necessary to acquire new
Audio Book Club members to offset  member  attrition.  As a result,  our revenue
will  continue  to  decline,  which  will  continue  to  negatively  impact  our
performance.  We expect this trend to continue  until such time,  if ever, as we
generate  significant  revenue from the sale of downloadable spoken word content
and attract and establish a meaningful  customer base for our online websites or
other websites we may develop. There can be no assurance that we will meet these
launch dates,  or be able to  successfully  implement our new strategies or that
implementation will result in increased revenues or profitable operations.

      The download spoken word distribution business is new and rapidly evolving
      and may not prove to be a profitable or even viable business model.

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

      The market for our service is uncertain  and if consumers  are not willing
      to use the Internet to purchase spoken audio content, our revenues will be
      limited.

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

                                       13
<PAGE>

      Manufacturers of electronic  devices may not manufacture,  make available,
      or sell a sufficient  number of products  suitable for our service,  which
      would limit our revenue growth.

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

      If we do not provide digital rights  management  solutions in our download
      distribution services,  content providers may refuse to license content to
      us and consumers may not purchase our content.

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

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

      Capacity  constraints and failures,  delays,  or overloads could interrupt
      our service and reduce the  attractiveness  of downloading  spoken word to
      potential customers.

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

      Because we do not have a  comprehensive  disaster  recovery  plan and have
      only  limited  back-up  systems,  a  disaster  could  severely  damage our
      operations and could result in loss of customers.

      If  our  computer  systems  are  damaged  or  interrupted  by a  disaster,
including fire or major computer virus,  for an extended period of time, we will
not be able to service  our  customers  until such time as we are able to repair
our systems.  This will result in a loss of revenue.  We might also be unable to
utilize customer data for direct marketing initiatives,  which would also reduce
revenue.  We do not have a comprehensive  disaster recovery plan in effect.  Our
operations depend upon our ability to maintain and protect our computer systems;
all of which  are  located  in our  headquarters  and at a  third-party  offsite
hosting  facility.  Although  we maintain  insurance  against  general  business
interruptions, we cannot assure you that the amount of coverage will be adequate
to compensate us for our losses.

                                       14
<PAGE>

      Problems   associated   with  the  Internet   could   discourage   use  of
      Internet-based services and adversely affect our business.

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

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

      o     reliability and availability of Internet service providers;

      o     cost of access to the Internet;

      o     availability of sufficient network capacity; and

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

      If we are unable to offer downloads of our content on non-PC  devices,  we
      may fail to capture a  significant  share of the market for digital  media
      services and our revenues may be limited.

      In the coming years,  the number of individuals who access digital content
through  devices  other  than a  personal  computer,  such as  personal  digital
assistants,  cellular telephones,  television set-top devices, game consoles and
Internet  appliances,  is expected to increase  dramatically.  Manufacturers  of
these  types  of  products   are   increasingly   investing   in   media-related
applications, but development of these devices is still in an experimental stage
and business models are new and unproven. If we are unable to offer downloads of
spoken word content on these alternative non-PC devices,  we may fail to capture
a  sufficient  share of an  increasingly  important  portion  of the  market for
digital media services and our revenues may be limited.

      We could be sued for content that we distribute  over the Internet,  which
      could subject us to substantial damages.

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

      We could face liability and other costs relating to our storage and use of
      personal information about our users.

      Users  provide  us  with  personal  information,   including  credit  card
information,  which we do not share  without the user's  consent.  Despite  this
policy of obtaining  consent,  however,  if third persons were able to penetrate
our network security or otherwise  misappropriate  our users' personal or credit
card  information,  we could be  subject  to  liability,  including  claims  for
unauthorized  purchases  with credit card  information,  impersonation  or other
similar  fraud  claims,  and  misuses  of  personal  information,  such  as  for
unauthorized  marketing  purposes.  New privacy legislation may further increase
this type of liability. California, for example, passed a privacy law that would
apply to a security  breach  that  affects  unencrypted,  computerized  personal
information of a California  resident.  Furthermore,  we could incur  additional
expenses if additional  regulations  regarding  the use of personal  information
were  introduced or if federal or state agencies were to investigate our privacy
practices.

                                       15
<PAGE>

      We may not be able to protect our licenses or our  intellectual  property,
      which could jeopardize our competitive position.  Unauthorized duplication
      of the  content  we sell could  result in our  liability  for  substantial
      damages  and  discourage  other  content   providers  from  entering  into
      agreements with us.

      If we fail to protect our  customer  lists,  licenses or our  intellectual
property,  we may be exposed to expensive  litigation or risk  jeopardizing  our
competitive  position.  The steps we have taken may be inadequate to protect our
licenses or other intellectual  property.  We rely on a combination of licenses,
confidentiality  agreements,  and other  contracts to establish  and protect our
intellectual property rights.

      We believe that we are able to license  spoken word audio  content in part
because  our  service  has been  designed  to  reduce  the risk of  unauthorized
duplication  and playback of audio files.  If these security  measures fail, our
content  may be  vulnerable  to  unauthorized  duplication  playback.  If others
duplicate the content we provide without  authorization,  content  providers may
terminate their  agreements with us and hold us liable for substantial  damages.
Although we maintain general liability insurance, including insurance for errors
or omissions,  we cannot assure you that the amount of coverage will be adequate
to compensate us for these losses. Security breaches might also discourage other
content  providers from entering into  agreements with us. We may be required to
expend  substantial  money and other  resources to protect against the threat of
security breaches or to alleviate problems caused by these breaches.

      We may have to  litigate to enforce  our  licenses  or other  intellectual
property rights or to determine the validity and scope of the proprietary rights
of others. Litigation could result in substantial costs and the diversion of our
management and other resources, which would harm our business.

      Other  companies may claim that we infringe  their  copyrights or patents,
      which could subject us to substantial damages.

      Any  claims of  infringement  could  cause us to incur  substantial  costs
defending  against the claim,  even if the claim is invalid,  and could distract
our management from our business. A party making a claim could secure a judgment
that requires us to pay  substantial  damages.  A judgment could also include an
injunction or other court order that could prevent us from offering downloads of
spoken word content.

                     Risks Relating to Our Capital Structure

      Our stock price has been and could continue to extreme  volatility,  which
      could  result in  delisting  from  Nasdaq if we fail to satisfy  the $1.00
      minimum bid request for our common stock.

      In September 2005, we received notification from Nasdaq indicating that we
were not in compliance with the $1.00 minimum bid request for continued listing
of our common stock and, therefore were subject to delisting from the Nasdaq
National Market. In October 2005, following shareholder and board approval, we
effected a 6- for -1 share reverse split of our common stock and in November
2005, Nasdaq advised us that our common stock remained eligible for listing on
the Nasdaq National Market. The market price of our common stock has remained
subject to significant fluctuations, including trading at a closing sale price
below $1.00 for consecutive trading days since regaining compliance with
Nasdaq's $1.00 minimum bid price requirement. If our common stock again falls
below $1.00 for a significant period of time, we will be required to seek to
effect another reverse stock split or may be delisted from Nasdaq. If we are
delisted from Nasdaq, the market for our securities may be more limited.
Additionally, if we are delisted from Nasdaq and, at any time we have net
tangible assets of $5,000,000 or less and our common stock has a market price
per share of less than $5.00, transactions in our securities may be subject to
the "penny stock" rules promulgated under the Securities Exchange Act. If our
common stock becomes subject to these rules, broker-dealers may find it
difficult to effectuate customer transactions and trading activity in our
securities may be adversely affected. As a result, the market price of our
securities may be depressed and securityholders may find it more difficult to
sell their securities.

                                       16
<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.

      The number of shares of common  stock  which are  available  for sale upon
      exercise of  convertible  preferred  stock and  exercise  of warrants  and
      options is  substantial  in relation to our currently  outstanding  common
      stock and the public float of our common stock,  and could cause  downward
      pressure on the market price for our common stock.

      The number of shares of common stock  registered  for resale upon exercise
of  convertible  preferred  stock  and  exercise  of  warrants  and  options  is
significantly greater than the number of shares currently outstanding and in the
public float. If those securityholders determine to sell a significant number of
shares into the market at any given time,  there  likely will not be  sufficient
demand in the  market to  purchase  the  shares  without a decline in the market
price for our  common  stock.  Moreover,  continuous  sales into the market of a
number of shares in excess of the typical  trading  market for our common stock,
or even the  availability  of such a large number of shares,  could  continue to
depress the trading market for our common stock over an extended period of time.

      A large  number of shares of our common  stock could be sold in the market
      in the near future, which could depress our stock price.

      As of March 29, 2006, we had outstanding  approximately  10,516,444 shares
of common stock. In addition,  a substantial portion of our shares are currently
freely trading without restriction under the Securities Act of 1933, having been
registered  for  resale  or held by their  holders  for over two  years  and are
eligible for sale under Rule 144(k). There are currently outstanding options and
warrants  to  purchase  and  convertible  preferred  stock  convertible  into an
aggregate  of  approximately  18.4  million  shares  of  our  common  stock  and
substantially  all of  the  underlying  shares  are  available  for  sale  under
effective registration statements.  To the extent any of our warrants or options
are  exercised or  convertible  preferred  stock is converted,  your  percentage
ownership  will be  diluted  and our  stock  price  could be  further  adversely
affected.  Moreover,  as the underlying  shares are sold, the market price could
drop significantly if the holders of these restricted shares sell them or if the
market perceives that the holders intend to sell these shares.

      Because our board of directors  consists of three classes,  it may be more
      difficult for a third party to acquire our company.

      Our by-laws  divide our board of  directors  into three  classes,  serving
staggered  three-year terms. As a result, a shareholder  acquiring a majority of
the voting  stock may not be able to appoint a  majority  of the  members of our
board of directors upon acquiring majority ownership because at least two annual
meetings,  instead of one,  will be  required to effect a change of control of a
majority  of the  members  of the board of  directors.  The  staggered  board of
directors  may  make it more  difficult  for a third  party to  acquire,  or may
discourage acquisition bids for our company.

                                       17
<PAGE>

      Our outstanding  preferred  stock and our ability to designate  additional
      preferred  stock  could   adversely   affect  the  rights  of  our  common
      stockholders.

      Our articles of incorporation authorize our board of directors to issue up
to  5,000,000  shares of  "blank  check"  preferred  stock  without  shareholder
approval,  in  one  or  more  series  and to fix  the  dividend  rights,  terms,
conversion  rights,  voting  rights,  redemption  rights and terms,  liquidation
preferences,  and any other rights,  preferences,  privileges,  and restrictions
applicable to each new series of preferred  stock.  We currently have two series
of preferred stock outstanding all of which have liquidation  preferences senior
to our common stock.  One of these series have  approval  rights with respect to
amendments to our articles of incorporation which adversely affect the preferred
stock,  incurrence  of  indebtedness,  payment of dividends  and  distributions,
redemption  of capital  stock,  the  creation of other  series of capital  stock
convertible  into our common  stock.  Moreover,  one of the series of  preferred
stock has voting  rights,  including  an approval  right with respect to certain
corporate events,  such as, mergers and other business  combinations and certain
sales and transfer of assets.  The existence of our outstanding  preferred stock
and  designation  of additional  series of preferred  stock in the future could,
among other results,  adversely affect the voting power of the holders of common
stock  and,  under  certain  circumstances,  could make it  difficult  for third
parties to gain control of our company,  prevent or substantially delay a change
in control,  discourage  bids for our common  stock at a premium,  or  otherwise
adversely affect the market price of our common stock.

Item 2. Properties

      Our executive  office is currently  located at 2 Ridgedale  Avenue,  Cedar
Knolls, New Jersey,  where we lease  approximately  12,000 square feet of office
space.  The lease  expires in  October  2008 and  provides  for  minimum  annual
payments  of $189,000  in 2006 and  $198,000  in each of 2007 and 2008.

      We also  subleased  two  offices  in New  York,  New York  from a  company
partially owned by our Chairman.  The lease commenced on August 1, 2005 and ends
on July 31,  2006.  The lease  amount is $3,000  per  month.  The  annual  lease
payments in 2006 are $21,000.

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 October 6, 2005 at which
time Mr. Jeffrey Dittus and Mr. Robert B. Montgomery  were  reappointed to serve
as Class II directors until the Annual Meeting of Shareholders of the Company to
be held in 2008. Shareholder voting for these directors was as follows:

Director                       Votes For               Votes Withheld
--------                       ---------               --------------
Jeffrey Dittus                 6,689,640                   58,898
Robert Montgomery              6,690,882                   57,656

      The  shareholders  also approved the adoption of a resolution to amend the
Company's  Articles of Incorporation to effect a combination (a "Reverse Split")
of the  Company's  issued and  outstanding  Common  Stock.  The motion  received
6,604,490 votes for and 120,420 votes against. The Board of Directors approved a
1 for 6 Reverse Split which became effective on October 25, 2005.

                                       18
<PAGE>

PART II

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

      Our common  stock has been  quoted on the  Nasdaq  National  Market  since
November  15,  1999.  From  November  15, 1999 to October 24, 2005 it was quoted
under the symbol  "MBAY." In  September  2005,  we received a letter from Nasdaq
indicating  that we were not in  compliance  with the  $1.00  minimum  bid price
requirement for continued  listing of our common stock. From October 25, 2005 to
November 25, 2005 our common stock  temporarily  traded under the symbol "MBAYD"
and  beginning  November 25, 2005 it resumed  trading  under the symbol  "MBAY",
following  receipt of a letter dated  November 9, 2005,  from Nasdaq  indicating
that our common  stock  remained  eligible  for  listing on the Nasdaq  National
Market.  The  following  table shows the high and low sales prices of our common
stock  as  reported  by the  Nasdaq  National  Market  for the  fiscal  quarters
indicated,  after giving  retroactive  effect to our October 2005 1-for-6  share
reverse stock split.

                                                  High              Low
                                                 ------           ------
Fiscal Year Ended December 31, 2004
   First Quarter                                 $ 9.54           $ 3.12
   Second Quarter                                $ 4.32           $ 2.16
   Third Quarter                                 $ 2.94           $ 1.50
   Fourth Quarter                                $11.46           $ 1.98
Fiscal Year Ended December 31, 2005
   First Quarter                                 $ 9.54           $ 3.06
   Second Quarter                                $ 4.14           $ 2.34
   Third Quarter                                 $ 4.20           $ 1.44
   Fourth Quarter                                $ 2.31           $ 1.20


      On March 29, 2006 the last  reported sale price of our common stock on the
Nasdaq  National  Market  was $0.95  per  share.  As of such  date,  there  were
approximately  149 record owners of our common stock;  however,  a number of our
shares are held in street name and as such we believe that the actual  number of
beneficial owners is higher.

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 Series D
preferred   Stock  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.

                                       19
<PAGE>

Item 6. Selected Financial Data

         We have derived the selected statement of operations data for the years
ended December 31, 2003, 2004 and 2005 and selected balance sheet data as of
December 31, 2005 and 2004 from our audited consolidated financial statements
that are included in this Report on Form 10-K. We have derived the selected
statement of operations data for the years ended December 31, 2001 and 2002 and
the selected balance sheet data as of December 31, 2001, 2002 and 2003 from our
audited consolidated financial statements that are not included in this Report
of Form 10-K.

      As a result of such factors as the  capitalization and write-off of direct
response  advertising  costs,  recording of goodwill  write-offs,  severance and
other termination costs and income tax benefit and subsequent  expense,  as well
as  fluctuations  in operating  results  depending on the timing,  magnitude and
success of Audio Book Club new member advertising campaigns,  and the changes in
our strategy made in 2004, all as discussed elsewhere herein, comparisons of our
historical operating results from year to year may not be meaningful.

      You  should  read  the  following  selected  consolidated  financial  data
together with the "Management's  Discussion and Analysis of Financial  Condition
and  Results of  Operations"  section  appearing  elsewhere  herein and with our
consolidated financial statements and accompanying notes appearing at the end of
this Report on Form 10-K:

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                           ------------------------------------------------------------
                                                             2001         2002         2003         2004         2005
                                                           --------     --------     --------     --------     --------
                                                                        (thousands, except per share data)
<S>                                                        <C>          <C>          <C>          <C>          <C>
Statement of Operations Data:
Net sales                                                  $ 41,805     $ 45,744     $ 36,617     $ 18,831     $  8,955
Cost of sales                                                22,044       20,651       17,764       12,547        5,920
Advertising and promotion                                    15,893       10,156       10,452        5,546        2,091
Bad debt expense                                              2,833        2,821        3,940          829           51
General and administrative                                   15,694        8,347        6,816        6,043        6,895
Severance and other termination costs                            --           --          544           --          697
Depreciation and amortization                                 5,156        1,314          328          144          154
Non-cash write-down of intangibles                               --        1,224           --           --           --
Non-cash write-down of goodwill                                  --           --           --           --        3,502
                                                           --------     --------     --------     --------     --------
   Operating (loss) income                                  (19,815)       1,231       (3,227)      (6,278)     (10,355)
Interest income (expense), net                               (2,790)      (2,974)      (1,925)      (9,082)        (510)
Loss on early extinguishment of debt                                                                               (579)
                                                           --------     --------     --------     --------     --------
   Loss before income tax benefit (expense)                 (22,605)      (1,743)      (5,152)     (15,360)     (11,444)
Income tax benefit (expense)                                 17,200         (550)      (1,471)     (14,753)          --
                                                           --------     --------     --------     --------     --------
   Net loss                                                  (5,405)      (2,293)      (6,623)     (30,113)     (11,444)
Dividends on preferred stock                                     --          217          246          574        1,446
Deemed dividend on beneficial conversion of Series D
Preferred Stock                                                  --           --           --           --       17,423
                                                           --------     --------     --------     --------     --------
   Net loss applicable to common shares                    $ (5,405)    $ (2,510)    $ (6,869)    $(30,687)     (30,313)
                                                           ========     ========     ========     ========     ========

Basic and diluted loss applicable to common shares         $  (2.34)    $  (1.08)    $  (2.92)    $ (10.24)    $  (4.08)
                                                           ========     ========     ========     ========     ========
   Basic and diluted weighted average number of shares
                        outstanding                           2,310        2,348        2,350        2,996        7,430
                                                           ========     ========     ========     ========     ========
</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                   As of December 31,
                                                  2001        2002        2003        2004        2005
                                                --------    --------    --------    --------    --------
                                                           (thousands, except per share data)
<S>                                             <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Working capital (deficit)                       $ (4,167)   $ (4,336)   $(20,165)   $    720    $  5,364

Total assets                                      44,452      48,619      36,893      16,576      18,667

Current liabilities                               15,491      18,984      29,194       5,905       5,320

Long-term debt (less current portion)             15,849      14,680          --      16,852         608
Common stock subject to contingent put rights        758         758         125          --          --

Total Common Stockholders' equity (deficit)     $  8,562    $ 10,405    $  6,949    $ (6,181)   $ 12,739
</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.

      Amper,  Politziner  and Mattia,  P.C, our  independent  registered  public
accounting  firm, has included an  explanatory  paragraph in their report on our
financial statements for the year ended December 31, 2005, which highlights that
current cash balances are insufficient to support operations for the next twelve
months,  thereby  raising  substantial  doubt about our ability to continue as a
going concern. The inclusion of a going concern explanatory  paragraph in Amper,
Politziner and Mattia,  P.C's report on our financial  statements  could have an
adverse effect on our stock price and ability to raise additional financing.

      Our  financial  statements  have  been  prepared  on the  basis of a going
concern,  which  contemplates  the  realization  of assets and  satisfaction  of
liabilities in the normal course of business.  We have not made any  adjustments
to the  financial  statements  as a result  of the  outcome  of the  uncertainty
described above.

      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 2005, our Audio Book Club segment had
net sales of approximately $4.6 million, our Radio Spirits segment had net sales
of  approximately  $4.1  million,  and our  MediaBay.com  segment  had  sales of
approximately $0.2 million.

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

                                       21
<PAGE>

      New sources of  entertainment  media  continue to grow as the quantity and
variety of content and its sources  proliferate.  The  Internet has emerged as a
powerful  global  communications  and  entertainment  media,  giving millions of
people the ability to access  large  amounts of valuable  pay-for-access  media.
Additionally,  recent advances in technologies  have made it possible to deliver
digital  downloads  of  music  and  spoken  word  content,  such as  audiobooks,
newspapers and magazines.  A key driving force in consumer acceptance of digital
downloads has been the emerging market for handheld devices that play digital or
compressed  audio.  Over  the  past  few  years,  the  music  industry  has been
successful  in creating a market for digital  downloads.  According  to a report
published January 19, 2006 by the  International  Federation of the Phonographic
Industry,  global sales of music via the Internet and mobile phones proliferated
in 2005,  generating  sales of $1.1  billion  for record  companies  a threefold
increase on 2004. Accordingly, our strategy is to provide digital audio books to
this  rapidly  growing  audience of music  buyers and mobile phone users who are
using  different  broadband  and  wireless  technologies  to access  their audio
content.

      As a provider of secure WMA audio  content,  we hope to take  advantage of
the large  worldwide  installed  base of  windows  media  players  on  consumers
desktops  worldwide,  and the  growing  number  of smart  phones  that are being
shipped with the new Windows Mobile 5.0 platform which includes a mobile windows
media  player that  enables  playback of the  companies  content on these mobile
devices.  While we cannot  predict  the  adoption  rate for our  content on this
technology  platform,  we have chosen to  leverage  the  Microsoft  technologies
rather than build our own proprietary  digital rights management and compression
system due to the large market opportunity  presented by this installed base and
the difficulty and expense in creating a new unproven  system and the complexity
of intellectual property laws.

      In October 2005, we launched our digital distribution strategy through the
launch of  Soundsgood.com,  our fully enabled digital  storefront and technology
platform. We also continue to enter into strategic agreements to license content
and to  distribute  downloads to  consumers.  In December  2005, we launched our
co-branded digital storefront with Microsoft at msn.soundsgood.com. We have also
entered  into  distribution  agreements  with Real  Network's  Rhapsody and with
MusicNet.  We have gradually  begun  increasing  our marketing  efforts to drive
customers  to our  storefronts,  and expect to continue to do so at these modest
levels until such time as we believe it will be cost  effective to  aggressively
market to new  customers,  including our database of 2.5 million  customers that
have purchased audiobooks from us in the past.

      To date, our sales of digital downloads have been minimal.  Our sales will
continue to decline  until such time as we generate  significant  sales from the
implementation of our digital strategy.

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.

                                       22
<PAGE>

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

Revenue recognition

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

      We record  reductions  to our  revenue  for future  returns  and record an
estimate  of  future  bad  debts  arising  from  current  sales in  general  and
administrative  expenses.  These allowances are based upon historical experience
and evaluation of current trends. If members and customers return products to us
in the future at higher rates than in the past or than we currently  anticipate,
our net sales  would be reduced and our  operating  results  would be  adversely
affected.  In November 2001, the Emerging Issues Task Force ("EITF") issued EITF
No.  01-9,  "Accounting  for  Consideration  Given  by a  Vendor  to a  Customer
(Including a 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 2003,  2004 and 2005 was $60,000,  $48,000 and $62,000
respectively.

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

Accounts receivable valuation

      We record an estimate of our anticipated bad debt expense and return rates
based on our historical experience. If the financial condition of our customers,
including either individual consumers or retail chains, were to deteriorate,  or
if the payment or buying  behavior  were to change,  resulting  in either  their
inability  or refusal  to make  payment to us,  additional  allowances  would be
required.  For example,  a one percent  increase in returns as a  percentage  of
gross sales for the year ended 2005, assuming a constant gross profit percentage
and all other expenses unchanged, would have resulted in a decrease in net sales
of $108,000 and an increase in net loss available to common shares of $37,000. A
one percent increase in bad debt expense as a percentage of net sales,  assuming
all other  expenses  were  unchanged,  would have resulted in an increase in bad
debt expenses and corresponding  increase in net loss available to common shares
of $90,000.

                                       23
<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.  We determine the  utilization  of deferred tax
assets in the future based on current year projections by management.

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

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.  We conducted our annual  impairment test
for 2005 in February 2006 and for 2004 in January  2005,  utilizing the services
of an independent appraiser, and our annual impairment tests for 2003 in October
2003. We recorded an  impairment  charge of $3,502,000 at December 31, 2005 as a
result of the impairment test conducted in February 2006.

                                       24
<PAGE>

Results of Operations

      The  following  tables set forth,  for the periods  indicated,  historical
operating data as a percentage of net sales:

                                                   Year Ended December 31,
                                                 ---------------------------
                                                 2003       2004       2005
                                                 ----       ----       ----
Net sales                                        100%       100%       100%
Cost of sales                                      49         67         66
Advertising and promotion                          29         29         23
Bad debt expense                                   11          4          1
General and administrative expense                 18         32         77
Severance and other termination costs               1         --          8
Depreciation and amortization expense               1          1          2
Charge for impairment of goodwill                  --         --         39
Interest expense, net                               5         48          6
Loss on early extinguishment of debt               --         --          6
Income tax expense (benefit)                        4         78         --
                                                 ----       ----       ----
   Net (loss)                                     (18)      (160)      (128)
                                                 ----       ----       ----
Dividends on preferred stock                        1          3         16
Deemed dividends on beneficial conversion of       --         --        195
   Series D Preferred Stock                      ====       ====       ====
   Net (loss) applicable to common shares         (19)%     (163)%     (339)%
                                                 ====       ====       ====


Year ended December 31, 2005 compared to year ended December 31, 2004

Net Sales
   $(000's)
                              2004      2005       Change         %
                             -------   -------    -------       -----
Sales
        Audio Book Club      $12,304   $ 4,648    $(7,656)      (62.2%)
                             ------------------------------------------
        Radio Spirits
               Catalog         3,248     2,591       (657)      (20.2%)
               Wholesale       1,671     1,009       (662)      (39.6%)
               Continuity      1,403       534       (869)      (61.9%)
                             ------------------------------------------
                               6,322     4,134     (2,188)      (34.6%)
                              ------------------------------------------
        MediaBay.com             205       173        (32)      (15.6%)

         Total                $18,831   $ 8,955    $(9,876)      (52.4%)
                             ==========================================

      Audio  Book Club sales  decreased  principally  due to a decrease  in club
membership as a result of  discontinuing  our advertising  expenditures  for new
members.

      In the second  quarter of 2005, we changed our business model from that of
a  traditional  "book-of-the-month  club"  with a  negative  option  format to a
business  selling  audiobooks  and other  audio  entertainment  under a positive
option drop ship format.  Under the negative  option  format,  unless the member
affirmatively  declined the  audiobook  selection  featured in our mailing on or
prior to the designated reply date, the featured item was automatically  shipped
to the member and the member  was  billed  for the  product.  Under our  current
positive  option drop ship  format,  products  are shipped  only if and when the
customer  affirmatively  orders them. As a result of this change,  we anticipate
lower returns from our customers in future periods.

                                       25
<PAGE>

      The decrease in Radio Spirits catalog sales is principally attributable to
fewer customers,  as we have not incurred marketing  expenditures to attract new
members,  and greater  discounting in our catalogs.  Wholesale sales of old-time
radio  products  decreased  principally  due  to  reduced  sales  to  our  major
customers.  Sales of our World's  Greatest  Old-Time  Radio  continuity  program
decreased  principally  due to the  lack  of  advertising  expenditures  for new
customers. Cost of sales

<TABLE>
<CAPTION>

Cost of sales
   $(000's)
                                   As a %                      As a %
                       2004    of NetSales      2005    of Net Sales     Change        %
                     ----------------------------------------------------------------------
<S>                  <C>             <C>      <C>              <C>       <C>           <C>
Audio Book Club      $ 8,469         68.8%    $ 3,488          75.0%     $ 4,981       58.8%
                     ----------------------------------------------------------------------
Radio Spirits
      Catalog          1,476         45.5%      1,261          48.7%         215       14.6%
      Wholesale        1,346         80.6%        934          92.6%         412       30.6%
      Continuity         495         35.3%        237          44.4%         258       52.1%
      Other              760         12.0%         --            --          760      100.0%
                     ----------------------------------------------------------------------
                       4,077         64.5%      2,432          58.8%       1,645       40.3%
                     ----------------------------------------------------------------------
MediaBay.com               1          0.3%         --           0.0%           1      100.0%
                     ----------------------------------------------------------------------
Total                $12,547         66.6%    $ 5,920          66.1%     $ 6,627       52.8%
                     ----------------------------------------------------------------------
</TABLE>

      The principal reason f or the de cline in cost of sales at Audio Book Club
was a  reduction  in  sales  of 62.2%  as  described  above.  Cost of sales as a
percentage of sales at Audio Book Club for the year ended  December 31, 2005 was
75.0%  compared to 68.8% for 2004. The increase in cost of sales as a percentage
of sales is principally  due to an increase in product and related royalty costs
as a percentage of sales  (accounting  for 42% of the increase)  since a smaller
active membership  requires us to purchase finished goods from publishers rather
than the  licensing  and  manufacturing  of product  due to lower  sales and our
inability  to meet  manufacturing  minimums and recoup  advances to  publishers,
higher  sales  of  unabridged  and  CD  titles  with  higher  costs  and  higher
manufacturing  costs due to lower volumes until in the second quarter of 2005 we
moved our warehouse and fulfillment  operations to a facility which allows us to
drop ship from its inventory and  accordingly we have changed from licensing and
manufacturing our audiobook titles to buying on a wholesale basis. Under our new
buying  arrangement  we  are  buying  products  at a  fixed  percentage  off  of
manufacturer's  suggested  retail price. The cost of the new arrangement will be
dependent on future sales volume. Additionally, an increase in fulfillment costs
as a percentage of sales  (accounting  for 58% of the increase) due to the fixed
cost of  fulfillment  being  allocated  over  lower  sales  as well as one  time
programming and transition  costs  associated with the change in our fulfillment
operations and the move from a negative  option book club to a business  selling
audiobooks and other audio  entertainment  without a negative option requirement
contributed  to the increase in cost of sales as a percentage  of sales at Audio
Book Club.

      Cost of Radio Spirits  catalog sales increased as a percentage of sales to
48.7%  for  year  ended  December  31,  2005 as  compared  to  45.5%  for  2004,
principally due to higher royalty and  fulfillment  costs as a percentage of the
lower sales volume due to the fixed portion of royalty  advances and warehousing
and  fulfillment  costs.  The cost of  wholesale  sales as  percentage  of sales
increased to 92.6% for the year ended December 31, 2005 as compared to 80.6% for
2004,  principally  due to a greater  portion of fixed costs,  the fixed cost of
warehousing  and  fulfillment  (accounting  for 54% of the increase) and royalty
advances  (accounting  for 46% of the  increase)  in relation to the lower sales
volume.  The cost of  World's  Greatest  Old-Time  Radio  continuity  sales as a
percentage of sales  increased to 44.4% for the year ended  December 31, 2005 as
compared to 35.3% for 2004,  principally  due to the fixed cost  associated with
warehousing and fulfillment in relation to the lower sales volume as we have not
marketed for new customers.

                                       26
<PAGE>

      In the second  quarter  of 2005,  due to the  change in  strategy  for our
audiobook club we recorded a $305,000  write-down of royalty advances to what we
believe is net  realizable  value at December 31, 2005. In 2004 we recorded $3.0
million of charges  relating  to Audio Book Club  representing  $1.9  million in
inventory  write-downs and $1.1 million for the write-down of royalty  advances.
Additionally,  we  recorded  $760,000  in  charges  relating  to  Radio  Spirits
representing  the  write-down  of inventory of $560,000 and royalty  advances of
$200,000  included in the other category on the chart above as they are not able
to be allocated to any one business line within Radio Spirits.


Advertising and promotion
    $(000's)                         2004       2005     Change        %
                                    -------    -------   -------     ------
Audio Book Club
             New member             $   414    $    --   $   414      100.0%
             Current Member             994        448       546       54.9%
                                    ---------------------------------------
 Total Audio Book Club                1,408        448       960       68.2%
                                    ---------------------------------------
 Radio Spirits
             Catalog                    787        760        27        3.4%
             Wholesale                   57         43        14       24.6%
             Continuity                   6          0         6      100.0%
                                    ---------------------------------------
Total Radio Spirits                     850        803        47        5.5%
                                    ---------------------------------------
New Projects                            164        824      (660)    (402.4)%
                                    ---------------------------------------
Total Spending                        2,422      2,075       347       14.3%
                                    ---------------------------------------
Amount Capitalized                     (354)        --      (354)     100.0%
Amount Amortized                      3,478         16     3,462       99.5%
                                    ---------------------------------------
Advertising and Promotion Expense   $ 5,546    $ 2,091   $ 3,455       62.3%
                                    =======================================

      Advertising and promotion  expenses decreased to $2.1 million for the year
ended December 31, 2005 as compared to $5.5 million in 2004,  principally due to
lower amortization of deferred customer acquisition costs. In the fourth quarter
of 2004,  based on the change in our strategy,  described  above,  we determined
that the future net  revenue  from our Audio  Book Club  would not  support  the
carrying amount of the direct-response  advertising  reported as assets relating
to the Audio Book Club.  Accordingly,  we wrote-off $846 the carrying  amount of
the asset in the fourth quarter for 2004 resulting in an increase in advertising
expense in 2004 and lower  expense in 2005.  The decrease in spending was due to
the lack of new customer  marketing for Audio Book Club new customers due to our
change in strategy as  described  above and  decreased  advertising  to existing
customers due to the reduction in Audio Book Club customers  because of customer
attrition with no marketing to replace leaving members.


                                       27
<PAGE>

      In 2005, we spent  $824,000  related to new projects,  principally  direct
marketing  related  to  the  promotion  of  digital  downloads  of  spoken  word
entertainment.

Bad debt expense

<TABLE>
<CAPTION>
                                              As a %                  As a %
$(000's)                             2004   of Net Sales    2005   of Net Sales    Change     %
                                     ----       ---         ----        ---         ----    ----
<S>                                  <C>        <C>         <C>         <C>         <C>     <C>
Audio Book Club                      $744       6.0%        $  8        0.2%        $736    98.9%
                                     ----       ---         ----        ---         ----    ----
Radio Spirits
            Catalog                    --       0.0%          --        0.0%          --         *
            Wholesale                  15       0.9%          15        1.5%          --     0.0%
            Continuity                 70       5.0%          28        5.3%          42     59.8%
                                     ----       ---         ----        ---         ----    ----
                                       85       1.3%          43        1.0%          42    49.3%
                                     ----       ---         ----        ---         ----    ----
MediaBay.com                           --      --             --         --           --     --
                                     ----       ---         ----        ---         ----    ----
Total                                $829       4.4%        $ 51        0.6%        $778    93.9%
                                     ====       ===         ====        ===         ====    ====
</TABLE>

      The  principal  reason for the  decline in bad debt  expense at Audio Book
Club was a reduction in net sales of 62.2% as described  above. Bad debt expense
as a percentage of sales at Audio Book Club for the year ended December 31, 2005
was 0.2 %, compared to 6.0% for the year ended  December 31, 2004.  The decrease
in bad  debt  expense  as a  percentage  of net  sales at  Audio  Book  Club was
principally due to better than anticipated  payments from remaining core members
who historically have been good paying customers.

General and administrative

<TABLE>
<CAPTION>
                                         As a %                    As a %
    $(000's)                2004     of Net Sales        2005   of Net Sales     Change       %
                            ----     ------------        ----   ------------     ------       -
<S>                           <C>             <C>         <C>             <C>        <C>        <C>
Audio Book Club             $  2,379     19.3%       $  1,452        31.2%      $  927     39.0%
Radio Spirits                    959     15.2%            858        20.8%         101     10.5%
MediaBay.com                     621    302.7%            561       325.1%          60      9.6%
Corporate                      2,084                    4,024         0.0%      (1,940)   (93.1%)
                            --------------------------------------------------------------------------
Total                       $  6,043     32.1%       $  6,895        77.0%      $ (851)   (14.1%)
                            ==========================================================================
</TABLE>

      The  increase in general and  administrative  expenses of $851,000 for the
year ended  December 31, 2005 as compared to the year ended December 31, 2004 is
principally  due to increases in payroll and related  costs of $347,000,  travel
and entertainment  expenses of $72,000,  and professional fees of $440,000.  The
increase  in payroll  was mainly  attributable  to various  bonuses  paid in the
second quarter of 2005 and the hiring, retention and promotion of key employees.
The increase in travel and  entertainment  expenses  relates  mainly to business
development  travel  incurred to build the new digital  download  business.  The
increase in  professional  fees was mainly  attributable to legal and consulting
fees associated with the transition to the new download  business  strategy,  as
well as an increase in accounting fees related to Sarbanes-Oxley compliance.

                                       28
<PAGE>

Termination costs
                                          Year ended December 31,
                                        -------------------------
$(000's)                                   2004          2005
                                        ----------    -----------
Termination costs...................    $    --       $     697
                                        ==========    ===========

      In the second quarter of 2005, the employment of one senior  executive who
had an  employment  agreement  was  terminated  and the  employment  of  several
employees,  one of which had an employment  agreement,  was also terminated.  We
agreed to make aggregate  settlement  payments totaling $697,000 payable through
March 2006.

Depreciation and amortization

                                                       Year ended
                                                      December 31,
                                                 -------------------------
$(000's)                                            2004           2005
                                                 ----------    -----------
Depreciation:
    Audio Book Club.............................    $   83        $   126
    Radio Spirits...............................        37             20
                                                 ----------    -----------
       Total depreciation.......................       120            146
Amortization:
    Corporate...................................        24              8
                                                 ----------    -----------
           Total depreciation and amortization..    $  144        $   154
                                                 ==========    ===========

      The increase in depreciation and amortization  expenses for the year ended
December 31, 2005 as compared to the year ended December 31, 2004 is principally
attributable to depreciation on fixed asset additions in 2005,  partially offset
by reductions in the amortization of intangibles, which had been fully amortized
or    written    off    during   the   year    ended    December    31,    2004.

Charge on impairment of goodwill
                                          Year ended December 31,
                                        --------------------------
$(000's)                                   2004            2005
                                        -----------     ----------


Charge on impairment of goodwill....        --            $ 3,502
                                        ===========     ==========

      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",  we ceased
amortization of goodwill as of January 1, 2002. We performed  annual  impairment
tests as of December 31, 2005, 2004 and 2003 in February 2006,  January 2005 and
October  2003,  respectively.  We  recorded  an  impairment  charge of $3,502 at
December 31, 2005 as a result of the impairment test conducted in February 2006.

                                       29
<PAGE>
<TABLE>
<CAPTION>

Interest expense
                                                              2004         2005          Change               %
                                                            --------     -------        ---------         ---------
$ (000's)
<S>                                                         <C>          <C>            <C>                 <C>
Total interest paid                                         $  1,045     $   677        $    (368)          (35.2%)
Interest accrued                                                  25         -                (25)         (100.0%)
Interest included in principle amount of debt (1)                521         -               (521)         (100.0%)
Amortization of deferred financing costs
and original issue discount                                    1,341          90           (1,251)          (93.3%)
Loss from early extinguishment of debt                         1,532         579             (953)          (62.2%)
Beneficial Conversion of Debt                                  3,991         -             (3,991)          (100.0%)
Inducement to Convert                                            391         -               (391)          (100.0%)
Interest converted to preferred stock                            254         -               (254)          (100.0%)
                                                            --------     -------        ---------         ---------
Total interest expense                                         9,100       1,346           (7,754)           (85.2%)

Interest Income                                                  (18)       (257)             239         (1,327.8%)
                                                            --------     -------        ---------         ---------
Net interest expense                                        $  9,082     $ 1,089        $  (7,993)           (88.0%)
                                                            ========     ========       =========         =========
</TABLE>

      (1)  For  the  year  ended  December  31,  2004  we had  outstanding  loan
agreements  that  provided for accrued  interest on the loans to be added to the
principal amount of the debt.

      The decrease in interest  expenses is principally due to the conversion of
debt into preferred stock and common stock in 2004 and the payment of the senior
debt facility and related party debt in connection  with our March 2005 Series D
preferred stock financing described below under "Liquidity and capital resources
- Financing activities."

Income tax expense

                                   Year ended December 31,
                                ------------------------------
$ (000's)                           2004             2005
                                -------------     ------------

Income tax expense...........    $  14,753           $  --
                                 =========           =====

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

      Based on the change in our distribution strategy, described above, we have
determined  that it is more likely than not (a likelihood of more than 50%) that
we will be  unable  to  realize  all or part  of our  net  deferred  tax  asset.
Accordingly,  we have made an adjustment to the deferred tax asset  recording an
increase to the valuation allowance, resulting in a deferred tax expense charged
against  income of $14.8 million in the fourth  quarter of 2004, the period when
such determination was made.

      We have  provided a full  valuation  allowance  against  the  increase  in
deferred tax assets relating to our loss in 2005.

                                       30
<PAGE>

Preferred stock dividends
                                                   2004        2005
                                                   ----        ----
$ (000's)

Dividends accrued on Series A Preferred Stock    $    228    $     50
Dividends accrued on Series B Preferred Stock          28           2
Dividends accrued on Series C Preferred Stock         318         100
Dividends accrued on Series D Preferred Stock          --       1,294
                                                 --------------------
Total dividends accrued on preferred stock            574       1,446
Deemed dividend on beneficial conversion of
Series D Preferred Stock                               --      17,423
                                                 --------------------
Total                                            $    574    $ 18,869
                                                 ====================

      The shares of our Series D Preferred  Stock are convertible at any time at
the option of the holder  into  shares of our common  stock at the rate of $3.30
per share,  and each warrant  issued in connection  with our March 2005 Series D
Preferred  Stock  financing is  exercisable  to purchase one share of our common
stock at an exercise  price of $3.36 per share.  The market price for our common
stock at March 21, 2005 was $4.14. We recorded a non-cash deemed dividend in the
amount of $17,423,000 to reflect the value of the beneficial  conversion feature
of  the  Series  D  Preferred  Stock  and  increased   contributed   capital  by
$17,423,000.  The  recording  of the  dividend  had no effect on our cash or net
equity.

      The increase in preferred  stock dividends for the year ended December 31,
2005 as  compared to the year ended  December  31, 2004 is due to the accrual of
dividends  for the Series D Preferred  Stock issued in March 2005,  as described
below in "Liquidity and capital resources - Recent financing transaction."

      During the  second  quarter of 2005,  1,180  shares of Series D  Preferred
Stock were  converted  into  361,700  shares of common stock and between July 1,
2005 and  during  the third  quarter  an  additional  13,657  shares of Series D
Preferred  Stock and related  dividends were converted into 4,159,822  shares of
common stock. These conversions and future conversions,  if any, will reduce the
preferred stock dividend in future periods.

Loss  applicable  to  common stockholders

<TABLE>
<CAPTION>
$(000's)                                          Year ended December 31,           From 2004 to 2005
                                              -----------------------------     -------------------------
                                                   2004             2005        $ change         % change
                                              ------------     ------------     --------         --------
<S>                                           <C>              <C>              <C>                 <C>
Loss applicable to common stockholders.....   $   (30,687)     $    (30,313)    $    374            1.2%
                                              ============     =============    ========            ====
</TABLE>

      Principally due to the deemed dividend for beneficial conversion of Series
D Preferred Stock of $17,423,000 charge on impairment of goodwill of $3,502,000
and lower sales, our net loss applicable to common shares for the year ended
December 31, 2005 was $30.3 million or $4.08 per diluted share.

      Principally due to reduced sales and interest expense, including
beneficial conversion charges, and recognition of deferred tax expenses, our net
loss applicable to common shares for the year ended December 31, 2004 was $30.7
million, or $10.24 per diluted share.

                                       31
<PAGE>

Year ended December 31, 2004 compared to year ended December 31, 2003

Net sales

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                 ------------------------------------------------------------           Change from
$(000's)                                     2003                           2004                       2003 to 2004
                                 -------------  --------------   -------------  -------------   ----------------------------
                                      $           As a % of           $          As a % of
                                    amount        net sales         amount       net sales        $ change       % change
                                 -------------  --------------   -------------  -------------   --------------  ------------
<S>                                 <C>                 <C>         <C>                <C>        <C>               <C>
Audio Book Club...............      $  26,380           72.0%       $  12,303          65.3%      $  (14,076)       (53.4)%
                                 -------------  --------------   -------------  -------------   --------------
Radio Spirits:
   Catalog....................          4,210           11.5%           3,248          17.2%            (962)       (22.8)%
   Wholesale..................          3,048            8.3%           1,671           8.9%          (1,377)       (45.2)%
   Continuity.................          2,841            7.8%           1,403           7.5%          (1,438)       (50.6)%
                                 -------------  --------------   -------------  -------------   --------------
     Total Radio Spirits......         10,099           27.6%           6,322          33.6%          (3,777)       (37.4)%
                                 -------------  --------------   -------------  -------------   --------------
MediaBay.com..................            138            0.4%             205           1.1%              67         48.7%
                                 -------------  --------------   -------------  -------------   --------------
                                    $  36,617          100.0%       $  18,831         100.0%      $  (17,786)       (48.6)%
                                 =============  ==============   =============  =============   ==============
</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,  2004,  the Audio  Book Club  spent
$414,000 to attract new members, a reduction of $1.7 million, or 80.2%, from the
amount  spent to  attract  new  members  of $2.1  million  during the year ended
December 31, 2003. Audio Book Club attracted approximately 19,000 new members in
the year ended  December  31,  2004 as  compared  to  approximately  134,000 new
members in the year ended December 31, 2003.

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

Cost of sales

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                 ------------------------------------------------------------           Change from
$(000's)                                     2003                           2004                       2003 to 2004
                                 -------------  --------------   -------------  -------------   ----------------------------
                                      $           As a % of           $          As a % of
                                    amount        net sales         amount       net sales        $ change       % change
                                 -------------  --------------   -------------  -------------   --------------  ------------
<S>                                 <C>                 <C>         <C>                <C>        <C>               <C>

Audio Book Club..........        $   12,392            47.0%       $    8,469          68.8%          $(3,923)       (31.7)%
                                 -------------  --------------   -------------  -------------   --------------  ------------
Radio Spirits:
   Catalog...............             2,015            47.9%            1,476           45.5             (539)       (26.7)
   Wholesale.............             2,057            67.5%            1,346           80.6             (711)       (34.6)
   Continuity............             1,295            45.6%              495           35.3             (800)       (61.8)
   Other                                 --               --              760           12.0              760        100.0
                                 -------------  --------------   -------------  -------------   --------------  ------------
     Total Radio Spirits.             5,367            53.1%            4,077           64.5           (1,290)       (24.0)
MediaBay.com.............                 5               --                1            0.3               (4)       (80.0)
                                 -------------  --------------   -------------  -------------   --------------  ------------
                                 $   17,764            48.5%       $   12,547           66.7%         $(5,217)       (29.4)%
                                 =============  ==============   =============  =============   ==============  ============
</TABLE>

                                       32
<PAGE>


      The  principal  reason for the decline in cost of sales at Audio Book Club
was a reduction  in net sales of 53.4% as  described  above.  Cost of sales as a
percentage of net sales at Audio Book Club for the year ended  December 31, 2004
was 68.8%, compared to 47.0% for 2003.

      We are  committed  to  digitizing  and encoding our library of spoken word
content and making our content available to the digital customer as described in
the  introduction  to this section and are  transitioning  our  business  from a
predominately mail order business to an Internet based business. The increase in
cost of sales as a percentage of sales was mainly  attributable to $1.87 million
of inventory  written down to net  realizable  value due to a reduction in Audio
Book Club  members  and our new focus on  delivering  our  audiobooks  and other
spoken word products via downloads  and $1.1 million of  write-downs  to royalty
advances paid to audiobook publishers and other license holders,  which will not
be  recoverable  due to our new focus on  delivering  spoken word  products  via
downloads.

      As a percentage of net sales,  cost of sales at Radio Spirits increased to
64.5%  for the year  ended  December  31,  2004 from  53.1%  for the year  ended
December 31, 2003.  Cost of catalog sales decreased as a percentage of net dales
to 45.5% as compared to 47.9% for the year ended  December 31, 2003  principally
due to less  discounting  in the  catalogs.  The  cost of  wholesale  sales as a
percentage  of net revenue  increased to 80.6% as compared to 67.5% for the year
ended December 31, 2003  principally due to sales to discounters of discontinued
items.  The  cost of  World's  Greatest  Old-time  Radio  continuity  sales as a
percentage of sales decrease to 35.3% from 45.6%  principally due to the smaller
number of new customers in 2004 whose initial  purchase has as very high cost of
goods  sold.  In the fourth  quarter of 2004,  we  reviewed  our  product mix of
offerings to both our mail order and wholesale Radio Spirits customers.  We have
experienced a significant  shift in the mix between  compact discs and cassettes
and will  substantially  reduce the number of cassette  offerings in the future.
Accordingly, we wrote off $560,000 of cassette inventory as well as a portion of
our CD inventory  relating to older  products  and $200,000 of royalty  advances
which we do not expect to recoup.  The write off  amounts  are  included  in the
other  category on the chart above as they are not able to be  allocated  to any
one business line within Radio Spirits.

      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.

                                       33
<PAGE>

Advertising and promotion
<TABLE>
<CAPTION>
                                               Year ended December 31,             From 2003 to 2004
                                            ------------------------------    -----------------------------
$(000's)                                        2003            2004           $ change        % change
                                            --------------  --------------    -----------   ---------------
Audio Book Club:
<S>                                             <C>               <C>          <C>                <C>
    New member............................      $   2,092         $   414      $ (1,678)          (80.2)%
   Current member.........................          1,993             994          (999)          (50.1)%
                                            --------------  --------------    -----------
      Total Audio Book Club...............          4,085           1,408        (2,677)          (65.5)%
Radio Spirits:
   Catalog................................            964             787          (177)          (18.4)%
   Wholesale..............................             74              57           (17)          (22.3)%
   Continuity.............................            775               6          (769)          (99.2)%
                                            --------------  --------------    -----------
      Total Radio Spirits.................          1,813             850          (963)          (53.1)%
                                            --------------  --------------    -----------
New projects..............................            339             164          (175)          (51.6)%
                                            --------------  --------------    -----------
Total spending............................          6,237           2,422          3,815            61.2%
Amount capitalized........................        (2,410)           (354)        (2,056)          (85.3)%
Amount amortized..........................          6,625           3,478          3,147            47.5%
                                            --------------  --------------    -----------
Advertising and promotion expense.........      $  10,452         $ 5,546      $ (4,906)          (46.9)%
                                            ==============  ==============    ===========
</TABLE>

      Advertising and promotion  decreased $4.9 million to $5.5 million or 46.9%
for the year ended  December  31, 2004 from the year ended  December 31, 2003 of
$10.4 million.  Actual advertising  expenditures for the year ended December 31,
2004  decreased  $3.8 million to $2.4 million from $6.2 million  during the year
ended  December 31, 2003. The decrease was due to a minimal amount of new member
marketing for Audio Book Club new members due to cash constraints and our change
in strategy as described above and decreased advertising to existing members due
to the  reduction  in Audio  Book  Club  membership  because  of  normal  member
attrition with no marketing to replace leaving members. Radio Spirits continuity
advertising  was  reduced  due to cash  constraints.  We spent  $164,000  on new
projects in 2004 principally marketing tests for the digital business.

      Included in Audio Book  amortization in 2004 is an adjustment to write-off
the carrying amount of the capitalized advertising in the amount of $846,000 due
to the change in strategy  described above. In 2003 we wrote off $0.5 million in
capitalized advertising in connection with the termination of the Audio Passages
marketing program.

Bad debt expense

<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                 ------------------------------------------------------------           Change from
$(000's)                                     2003                           2004                       2003 to 2004
                                 -------------  --------------   -------------  -------------   ----------------------------
                                      $           As a % of           $          As a % of
                                    amount        net sales         amount       net sales        $ change       % change
                                 -------------  --------------   -------------  -------------   --------------  ------------
<S>                                 <C>          <C>           <C>              <C>            <C>               <C>
Audio Book Club..........          $ 3,404            12.9%          $   744           6.0%       $  (2,660)        (78.1)%
                                 -------------  --------------   -------------  -------------   --------------
Radio Spirits:
   Catalog...............               --             --                 --            --               --            --%
   Wholesale.............               15            0.5                 15           0.8               --            --%
   Continuity............              521           18.3                 70           5.2             (451)        (86.5)%
                                 -------------  --------------   -------------  -------------   --------------
     Total Radio Spirits.              536            5.3                 85           1.3             (451)        (84.1)%
MediaBay.com.............               --             --                 --            --               --            --%
                                 -------------  --------------   -------------  -------------   --------------
                                   $ 3,940            10.8%          $   829           4.4%       $   3,111         (79.0)%
                                 =============                   =============                  ==============
</TABLE>

                                       34
<PAGE>

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

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

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

General  and administrative


<TABLE>
<CAPTION>
                                                   Year ended December 31,
                                 ------------------------------------------------------------           Change from
$(000's)                                     2003                           2004                       2003 to 2004
                                 ----------------------------    ----------------------------   ----------------------------
                                      $           As a % of           $          As a % of
                                    amount        net sales         amount       net sales        $ change       % change
                                 -------------  --------------   -------------  -------------   --------------  ------------
<S>                                 <C>          <C>           <C>              <C>            <C>               <C>
Audio Book Club.......           $  2,626           10.0%          $  2,379           19.3%          $   (247)         (9.4)%
Radio Spirits.........              1,163           11.5%               959           15.2%              (204)        (17.5)%
MediaBay.com..........                614                               621                                 7           1.1%
Corporate.............              2,413                             2,084                              (329)        (13.6)%
                                 -------------                   -------------                  --------------
                                 $  6,816           18.6%          $  6,043           32.1%          $   (773)        (11.3)%
                                 =============                   =============                  ==============
</TABLE>

      General  and   administrative   expenses  at  Audio  Book  Club   declined
principally due to reductions in payroll and related costs due to reduced staff.
General and administrative expenses at Radio Spirits for the year ended December
31, 2004  declined  principally  due to reductions in payroll of $136,000 due to
reduced staff and reduced commissions to outside sales personnel of $127,000 due
to lower wholesale sales. Our corporate general and administrative  expenses for
the year ended  December 31, 2004 declined  principally  due to lower payroll of
$257,000 costs due to fewer employees.

Termination costs

                                              Year ended December 31,
                                          -------------------------------
$(000's)                                      2003              2004
                                          -------------     -------------
Termination costs......................      $ 544              $ --
                                          =============     =============

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

                                       35
<PAGE>

Depreciation and amortization

<TABLE>
<CAPTION>
                                             Year ended December 31,
                           ------------------------------------------------------------           Change from
$(000's)                               2003                           2004                       2003 to 2004
                           ----------------------------    ----------------------------   ----------------------------
                                $           As a % of           $          As a % of
                              amount        net sales         amount       net sales        $ change       % change
                           -------------  --------------   -------------  -------------   --------------  ------------
<S>                           <C>          <C>           <C>              <C>            <C>               <C>
Depreciation:
  Audio Book Club.....        $  104            0.4%            $   83           0.7%            $   (21)        (19.9)%
  Radio Spirits.......            42            0.4%                37           0.6%                 (5)        (11.9)%
                           -------------                   -------------                  --------------
   Total depreciation.           146                               120                               (26)
                           -------------                   -------------                  --------------
Amortization:
   Corporate..........           182             --                 24             --               (158)        (87.0)%
                           -------------                   -------------                  --------------
Total depreciation and
  amortization........        $  328            0.9%            $  144           0.8%           $   (184)        (75.0)%
                           =============                   =============                  ==============
</TABLE>

      The decrease in amortization  expenses is principally  attributable to the
reduction of the carrying  amounts of our  intangible  assets made in the fourth
quarter of 2003. Specifically, we made a strategic decision to no longer compete
in the DVD market and  accordingly  wrote off the value of certain video and DVD
rights we had  acquired  in the amount of  $90,000.  We also made the  strategic
decision in the fourth  quarter of 2003 to  discontinue  future  mailings to the
Columbia  House  lists of members  of other  clubs.  Accordingly,  in the fourth
quarter  of 2003,  we wrote  off the  unamortized  value of the  Columbia  House
mailing agreement of $986,000.

Interest expense
<TABLE>
<CAPTION>
                                                   Year ended December 31,            From 2003 to 2004
                                               -------------------------------- ------------------------------
$(000's)                                            2003             2004        $ Change          % Change
                                               ---------------  --------------- ------------     -------------
<S>                                              <C>                 <C>         <C>               <C>
Interest paid..............................      $      384          $ 1,045     $   661           159.1%
Interest accrued...........................              74               25         (49)          (66.2)%
Accrued interest included in principle amount
   of debt outstanding.....................             907              521        (386)          (42.6)%
Amortization of deferred financing costs and
   original issue discount.................             560            1,341        (781)         (139.5)%
Loss on early extinguishment of debt.......              --            1,532       1,532              --
Beneficial conversion expense..............              --            3,991       3,991              --
Inducement to convert......................              --              391         391              --
Interest converted to preferred stock......              --              254         254              --
Less: Interest income......................              --              (18)        (18)             --
                                               ---------------  --------------- ------------
Total interest expense.....................          $1,925          $ 9,082      $ 7,157          371.8%
                                               ===============  =============== ============
</TABLE>

      The increase in interest expenses is principally due to increased debt and
higher  interest costs and  amortization  of debt discount  relating to the 2004
financing  transactions as described below in "Liquidity and capital resources -
Recent financing transactions."

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

Income tax expense

<TABLE>
<CAPTION>
                                   Year ended December 31,              From 2003 to 2004
                                ------------------------------  -------------------------------
$ (000's)                           2003             2004         $ change          % change
                                -------------     ------------  -------------     -------------
<S>                               <C>              <C>           <C>                 <C>
Income tax expense...........     $ 1,471          $  14,753     $ (13,282)          902.9%
                                =============     ============  =============     =============
</TABLE>

                                       36
<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.  We determine the  utilization  of deferred tax
assets in the future based on current year projections by management.

      Based on the change in our distribution strategy, described above, we have
determined  that it is more likely than not (a likelihood of more than 50%) that
we will be  unable  to  realize  all or part  of our  net  deferred  tax  asset.
Accordingly,  we have made an adjustment to the deferred tax asset  recording an
increase to the valuation allowance, resulting in a deferred tax expense charged
against  income of $14.8 million in the fourth  quarter of 2004, the period when
such determination was made.

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

Preferred stock dividends

<TABLE>
<CAPTION>
                                                      Year ended December 31,               From 2003 to 2004
                                                   -------------------------------    ------------------------------
$ (000's)                                              2003             2004            $ Change         % Change
                                                   --------------   --------------    --------------   -------------
<S>                                                   <C>               <C>               <C>
Series A Preferred Stock dividends............        $   228           $  228            $ --                 --%
Series B Preferred Stock dividends............             18               28               10              55.6%
Series C Preferred Stock dividends............             --              318              318                --%
                                                   --------------   --------------    --------------
Total dividends accrued on preferred stock....        $   246           $  574              328             133.3%
                                                   ==============   ==============    ==============
</TABLE>

      The increase in preferred  stock dividends for the year ended December 31,
2004 as compared to the year ended  December 31, 2003,  is due to an increase in
dividends for Series B Preferred Stock which was issued May 2003 and outstanding
for only part of 2003 and  dividends  on the Series C Preferred  Stock issued in
May 2004. Our Principal  Shareholder agreed to exchange the principal of certain
notes,  plus  accrued  and unpaid  interest  owed to the  Principal  Shareholder
aggregating  $3.8 million and accrued and unpaid dividends owed to the Principal
Shareholder  aggregating $519,000 into an aggregate of 43,527 shares of Series C
Preferred  Stock  convertible  into (i) an aggregate of 930,064 shares of Common
Stock at an effective  conversion  price of $4.68, and (ii) warrants to purchase
an aggregate of 1,860,128  shares of Common Stock.  The Series C Preferred Stock
accrues  dividends  at the  rate of 9% per  annum.

Loss applicable to common stockholders

<TABLE>
<CAPTION>
                                                    Year ended December 31,
                                               ----------------------------------  --------------
$(000's)                                             2003             2004           $ change
                                               ----------------- ----------------  --------------
<S>                                                 <C>            <C>               <C>
Loss applicable to common stockholders.....         $ 6,869        $  30,687         $ 23,818
                                                    =======        =========         ========
</TABLE>

      Principally  due to reduced  sales and higher  interest  costs,  partially
offset by lower advertising,  bad debt expense, certain write-offs and strategic
charges described above general and administrative expenses,  increased interest
expenses,  including  beneficial  conversion charges and recognition of deferred
tax  expenses,  our net loss  applicable  to common  shares  for the year  ended
December  31,  2004  increased  $23.8  million to $30.7  million,  or $10.26 per
diluted share as compared to a net loss applicable to common shares for the year
ended  December  31, 2003 of 6.9 million,  or $2.94 per diluted  share of common
stock.

                                       37
<PAGE>

Liquidity and capital resources

      Historically, we have funded our cash requirements through sales of equity
and debt securities and borrowings from financial institutions and our principal
shareholders.

      As of December 31,  2005,  we had cash on hand of $8.2  million,  which is
substantially  greater  than the $3.1 million cash on hand at December 31, 2004.
However,  our cash balance has declined during 2006 and will continue to decline
for the  foreseeable  future unless we obtain  financing,  as we continue to use
cash in our operations.

      We are currently  pursuing a new strategy of selling  downloadable  spoken
word and  hard  good  format  content  online.  To date,  our  sales of  digital
downloads have been minimal.

      Because we are  pursuing a new  strategy,  which  focuses on  downloadable
spoken word content,  we have not, and will not,  devote the funds  necessary to
acquire new Audio Book Club  members to offset  member  attrition.  As a result,
revenue will continue to decline,  which will continue to negatively  impact our
performance  and result in negative  cash flow from  operations.  We expect this
trend to continue until such time, if ever, we can generate  significant revenue
from the sale of  downloadable  spoken word content and attract and  establish a
meaningful  customer  base for our  online  websites  or other  websites  we may
develop.

We  believe  that  our  existing  cash  plus  anticipated  revenues  will not be
sufficient  to fund our  capital  commitments  described  below and  operate our
business for the next twelve months without  raising  additional  financing.  We
have  engaged  investment  bankers to help seek  strategic  alternatives  for us
including raising additional  financing.  There can be no assurance that we will
be successful in raising additional financing.  The failure to do so in a timely
manner will limit our ability to execute our business plan and could  ultimately
impair our ability to continue as a going concern.

Cash flows

      For the year ended December 31, 2005,  cash increased by $5.1 million,  as
we had net cash used in operating  activities of $6.2 million,  used net cash of
$1.7  million  in  investing  activities  and had  cash  provided  by  financing
activities of $13.0 million.

Operating Activities

      We used  approximately  $6.2 million in operating  activities during 2005.
Net cash used in operating activities  principally  consisted of the net loss of
$11.4 million, increases of $319,000 and $34,000 in prepaid expenses and royalty
advances, respectively and a decrease in accounts payable and accrued expense of
$643,000 which were partially offset by the non-cash  charges  consisting of the
charge for impairment of goodwill of $3,502,000 the loss on early extinguishment
of debt  of  $579,000,  depreciation  and  amortization  expenses  of  $154,000,
amortization  of  deferred  financing  costs  and  original  issue  discount  of
$240,000,  non-current  accrued  interest and dividends  payable of $155,000 and
amortization  of  deferred  member  acquisition  costs  of  $17,000;  as well as
decreases  in  accounts  receivable  and  inventory  of $816,000  and  $767,000,
respectively.  The decreases in accounts  receivable and inventory are primarily
attributable to the reduction in sales as described  above and the  remaindering
of manufactured audio book inventory under license due to the change in strategy
discussed  above.  The increase in prepaid  expenses is  principally  due to the
timing of payments of  marketing  costs and other costs  related to the download
business and certain  Radio  Spirit's  catalog  costs.  The decrease in accounts
payable and accrued expenses is principally due to the payment of back royalties
to publishers.

                                       38
<PAGE>

Investing Activities

      During  the year  ended  December  31,  2005,  net cash used in  investing
activities consists of acquisition of fixed assets and website development costs
of $1.7 million,  principally computer equipment and the cost of the development
of the new websites offering downloadable audio.

Financing Activities.

      During the year ended  December  31, 2005,  we received net cash  proceeds
from the sale of Series D Preferred Stock of $31.4 million,  as described below,
repaid debt in the amount of $11.8 million,  repaid accrued interest,  dividends
and fees  relating to the debt of $891,000  and  redeemed  Series A and Series C
Preferred  Stock  in the  amount  of $5.8  million,  received  $40,000  from the
exercise of stock  options and had an  increase in deferred  financing  costs of
$107,000.  Recent  financing  transactions

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

January 2004 convertible debt

      On January 29, 2004, we issued $4.0 million aggregate  principal amount of
promissory  notes and  warrants  to  purchase  392,158  shares of common  stock,
referred  to as the January  2004  warrants,  to  institutional  and  accredited
investors.

      The notes were due on the earlier of (i) April 30, 2005, (ii) such date on
or after July 1, 2004 when all of our  indebtedness  under our  existing  credit
facility was either repaid or refinanced or (iii) our  consummation of a merger,
combination or sale of all or substantially all of our assets or the purchase by
a single entity, person or group of affiliated entities or persons of 50% of our
voting  stock.  The notes bore  interest at the rate of 6%,  increasing to 9% on
April 28, 2004 and 18% on July 27,  2004.  In  accordance  with the terms of the
notes,  upon our receipt of  shareholder  approval,  which occurred on April 12,
2004, the principal amount of the notes  automatically  converted into shares of
our  common  stock at the rate of $4.50  per  share,  or  approximately  888,888
shares.  In addition,  accrued  interest in the amount of $49,000 also converted
into common stock at $4.50 per share, or 10,813 shares.

      The January 2004  warrants are  exercisable  until  January 28, 2009 at an
exercise price of $7.68 per share.

      In  connection  with our  January  2004 note  financing,  we issued to the
placement  agent and a broker warrants to purchase an aggregate of 40,833 shares
of common stock and also issued to the placement  agent  warrants to purchase an
additional  83,481  shares  of our  common  stock on April 12,  2004 as  partial
consideration  for the placement  agent's  services.  All of these  warrants are
identical to the January 2004 warrants.

      We used a portion of the proceeds of the January  2004  financing to repay
$1,250,000  of  principal  due on our prior  credit  agreement  with ING  (U.S.)
Capital,  L.L.C.  and  Patriarch  Partners,  L.L.C.  and to reduce our  accounts
payable.

2004 Credit Agreement and related financing transactions

      On April 28, 2004, we entered into a credit agreement,  referred to as the
2004 Credit  Agreement,  by and among MediaBay and certain of its  subsidiaries,
the guarantors  signatory  thereto,  Zohar CDO 2003-1,  Limited,  referred to as
Zohar, as lender,  and Zohar, as agent,  pursuant to which we and certain of our
subsidiaries  initially  borrowed  $9.5  million.  The initial  term of the 2004
Credit Agreement was one year and it was extendable, at our sole option, for two
additional  one-year terms upon issuance of additional notes of $600,000 for the
first  additional  year and $300,000 for the second  additional  year,

                                       39
<PAGE>

provided  there was no event of default.  The loan bears interest at the rate of
LIBOR plus 10%. In the first year of the loan,  a fee of $900,000 has been added
to the principal  balance,  which will be reflected as debt discount and will be
accreted to interest  expense over the next twelve months.  We used a portion of
the $8.6 million of funds  received  under the 2004 Credit  Agreement to satisfy
all of our outstanding  obligations under (i) promissory notes that we issued in
October  2003 in the  aggregate  principal  amount of $1.0  million plus accrued
interest of $200,000 and (ii) our  outstanding  credit  agreement,  which had an
outstanding  principal  balance  of  approximately  $1.4  million  and a partial
payment of $1.6 million on the convertible note issued to ABC Investment, L.L.C.
as described below. In connection with the March 2005 financing described below,
we repaid all amounts due under the 2004 Credit Agreement.

      Norton Herrick, a principal  shareholder of ours at that time, referred to
as Herrick,  Huntingdon Corporation, a company wholly-owned by Herrick, referred
to as Huntingdon,  and N. Herrick Irrevocable ABC Trust, of which Herrick is the
beneficiary,  and Howard Herrick,  a principal  shareholder of ours at the time,
was the trustee,  referred to as the Herrick Trust, consented to the 2004 Credit
Agreement  and  the  other  transactions  described  above  and  entered  into a
subordination  agreement  with Zohar.  The 2004 Credit  Agreement  required  the
aggregate amount of principal and interest owed by us to Herrick, Huntingdon and
the Herrick Trust be reduced to $6,800,000 ("Permissible Debt") by June 1, 2004.

      Pursuant to an agreement  dated April 28, 2004,  on May 25, 2004,  Herrick
exchanged  accrued and unpaid  interest  and  dividends  (including  accrued and
unpaid  interest  distributed  by the Herrick  Trust to  Herrick)  owed by us to
Herrick aggregating  $1,181,419 into (i) 11,814 shares of our Series C Preferred
Stock  with a  liquidation  preference  of $100 per  share  convertible  into an
aggregate of 252,436 shares of common stock at an effective  conversion price of
$4.68,  and (ii)  warrants  to  purchase  504,872  shares of common  stock.  The
warrants are exercisable until April 28, 2014 at an exercise price of $3.18.

      Pursuant to an agreement  dated April 28, 2004, on May 25, 2004 Huntingdon
exchanged  the  principal of the  $500,000  principal  amount  note,  $1,000,000
principal amount note,  $150,000  principal  amount note and $350,000  principal
amount note held by Huntingdon,  plus accrued and unpaid  interest owed by us to
Huntingdon  aggregating  $1,171,278  into  (i)  31,713  shares  of our  Series C
Preferred Stock  convertible into an aggregate of 677,628 shares of common stock
at an  effective  conversion  price of $4.68,  and (ii)  warrants to purchase an
aggregate of 1,355,256  shares of our common stock. The warrants are exercisable
until  April  28,  2014 at an  exercise  price of  $3.18.  If the  amount of the
Permissible  Debt is  required  to be  reduced  due to our  failure to raise the
requisite  additional  equity,  such reduction will  automatically  occur by the
exchange of Permissible Debt held by Huntingdon for additional  shares of Series
C Preferred Stock in an aggregate liquidation  preference equal to the amount of
debt exchanged and warrants to purchase a number of shares of common stock equal
to two times the number of shares of preferred stock issuable upon conversion of
the Series C Preferred Stock.

         Herrick and Huntingdon agreed not to demand repayment of their debt
until the earlier of (i) the repayment of the 2004 Credit Agreement or (ii) June
28, 2007. In connection with our March 2005 financing described below, Herrick
and Huntingdon converted all their notes into common stock at their stated
terms.

New ABC note

      On April 28,  2004,  we repaid $1.6 million  principal  amount of the $3.2
million  principal amount  convertible note issued to ABC Investment,  L.L.C. We
issued a new $1.6 million note for the remaining  principal amount.  The new ABC
note  extended the  maturity  date from  December 31, 2004 to July 29, 2007.  In
exchange for extending the maturity date,  the  conversion  price of the new ABC
note was  reduced to $3.00.  The closing  sale price of our common  stock on the
closing  date was  $2.88.  In the fourth  quarter of 2004,  the new ABC note was
converted into shares of our common stock.

                                       40
<PAGE>

Settlement of put obligations

      Premier Electronic  Laboratories,  Inc. ("Premier") exercised its right to
put its shares of common stock to us pursuant to a Put Agreement  dated December
11, 1990.  We entered into a settlement  agreement  with Premier  dated April 1,
2004,  pursuant to which,  among other things, we agreed to pay Premier $950,000
as payment of the amount due to Premier.  Our obligation under the put agreement
was reduced by $150,000 in exchange for  relinquishing  certain  leases for real
property.  We paid $14,000 on closing and are paying the remaining  balance over
six years in monthly payments  starting at $7,000 in July 2004 and increasing to
$19,000 from May 2007 through April 2010.

October 2004 sale of equity

      On October 11,  2004,  we entered  into a  Securities  Purchase  Agreement
pursuant to which we issued to Forest Hill  Capital  LLC,  referred to as Forest
Hill,  for the account of certain of its  affiliates,  referred to as the Forest
Hill  entities,  an aggregate of 300,000 shares of our common stock and warrants
to purchase  66,667  shares of common  stock,  referred  to as the October  2004
warrants.  The Forest Hill entities paid an aggregate purchase price of $900,000
for these  shares and  October  2004  warrants.  Each  October  2004  warrant is
exercisable  to purchase one share of our common  stock at an exercise  price of
$4.98 per share  until  October  11,  2009.  In  connection  with the March 2005
financing  described  below,  the Forest Hill  entities  exchanged the shares of
common  stock and  October  2004  warrants  issued to them in  October  2004 for
securities issued in the March 2005 financing.

March 2005 equity financing

      On March 23,  2005,  we issued to  accredited  investors  for an aggregate
purchase  price of $35.9 million an aggregate of (a) 35,900 shares of our Series
D Convertible Preferred Stock,  convertible into 10,878,788 shares of our common
stock, (b) 5,439,394  five-year common stock purchase  warrants,  referred to as
the  March  2005  warrants,   and  (c)  preferred   warrants,   referred  to  as
Over-Allotment  Warrants,  to purchase for  additional  proceeds to us of $8.975
million, up to 8,975 additional shares of Series D Preferred Stock and 1,359,849
additional March 2005 warrants in a private financing,  referred to as the March
2005 financing.

      Immediately  prior to the March 2005  financing,  holders of a majority of
our voting securities  approved by written consent (the  "Shareholder  Consent")
(a) an amendment to our articles of incorporation,  increasing the number of our
authorized shares of common stock from 150,000,000 to 300,000,000,  (b) a change
of control which could occur as a result of the financing, and (c) our issuance,
in connection with the  transactions  contemplated  by the financing,  of common
stock in excess of 19.99% of the  number of shares of common  stock  outstanding
immediately prior to the financing. However, while such actions were approved by
a majority of our shareholders prior to the financing,  we were not permitted to
effect  them  until  we  satisfied  certain  information   requirements  to  our
shareholders not party to the Shareholder  Consent. As a result, the Shareholder
Consent did not become effective until May 3, 2005.

      The  shares of Series D  Preferred  Stock  have a face or stated  value of
$1,000  per share and are  convertible  at any time at the  option of the holder
into shares of common stock at the rate of $3.30 per each share of common stock,
subject to certain anti-dilution adjustments,  including for issuances of common
stock for  consideration  below the  conversion  price.  The Series D  Preferred
shares are also mandatorily  convertible at our option,  subject to satisfaction
of certain conditions and subject to certain

                                       41
<PAGE>

limitations. Under certain limited circumstances within our control, the holders
will also  have the  right to  require  us to  redeem  their  shares of Series D
Preferred Stock at their stated value. Cumulative dividends accrue on the Series
D  Preferred  shares on an  annualized  basis in an amount  equal to 6% of their
stated value until they are  converted or redeemed and are payable  quarterly in
arrears, on each of January 1, April 1, July 1 and October 1, in cash or, at our
option,  subject to satisfaction of certain conditions,  in shares of our common
stock  valued  at 93% of  the  average  of the  daily  volume  weighted  average
per-share  price of the  common  stock for the five  trading  days  prior to the
applicable payment date. The Series D Preferred Stock is non-voting.  Subject to
certain  exceptions  for accounts  receivable  and  equipment  and capital lease
financings, we may not incur additional indebtedness for borrowed money or issue
additional securities that are senior to or pari passu to the Series D Preferred
Stock without the prior written consent of holders of at least two-thirds of the
then outstanding shares of the Series D Preferred Stock.

      Each of the March 2005  warrants is  exercisable  to purchase one share of
our common stock,  at an exercise price of $3.36 per share,  until September 23,
2010, subject to certain anti-dilution  adjustments,  including for issuances of
common stock for  consideration  below the exercise  price of the  warrants.  In
addition,  once exercisable,  the March 2005 warrants permit cashless  exercises
during any period when the  underlying  shares are not  covered by an  effective
resale registration statement.

      The Over-Allotment warrants expired unexercised pursuant to their terms.

      As part of the March 2005  financing,  the Forest Hill entities  exchanged
the 300,000  million  shares of common stock and 66,667  October  2004  Warrants
previously  purchased by them in October  2004,  for $900,000 of the  securities
issued in the March 2005 financing.

      In  connection  with the March 2005  financing,  we also  entered  into an
agreement,  referred to as the Herrick  Agreement,  with Herrick and Huntingdon,
collectively   referred  to  as  the  "Herrick  Entities,   pursuant  to  which,
concurrently with the financing:

      o     all $5.784 million  principal amount of our convertible  notes owned
            by the  Herrick  Entities,  referred to as the  Herrick  Notes,  and
            10,684  of  their  shares  of our  Series  A  Preferred  Stock  were
            converted into an aggregate of approximately  2.03 million shares of
            our common stock, referred to as the Herrick Shares, at their stated
            conversion rate of $3.36 per share;

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

      o     the Herrick Entities waived certain of their registration rights and
            we agreed to include the Herrick Shares for resale in a registration
            statement as long as they were owned by the Herrick Entities and not
            otherwise  transferred,   except  as  contemplated  in  the  Herrick
            Agreement;

      o     the  Herrick  Entities  consented  to the  terms of the  March  2005
            financing and the  agreements  entered into in connection  with such
            financing,  as we were required to obtain such consents  pursuant to
            the terms of the Herrick Notes, the Series A Preferred Stock and the
            Series C Preferred Stock; and

      o     Herrick and  Huntingdon  also  entered into a voting  agreement  and
            proxy with us  pursuant  to which they agreed not to take any action
            to contradict or negate the Shareholder Consent.

                                       42
<PAGE>

      We received $35 million of gross  proceeds (not  including the  securities
exchanged by the Forest  entities  for  $900,000 of the  purchase  price) in the
March 2005 financing.  Merriman  Curhan Ford & Co. acted as a financial  advisor
with respect to certain of the  investors in the financing for which it received
compensation  from  us of  $2,625,000  plus  a  five-year  warrant  to  purchase
1,193,182  shares  of  common  stock at an  exercise  price of $4.14  per  share
commencing  upon the  effectiveness  of the Shareholder  Consent.  Merriman also
received a $175,000  structuring  fee from us with respect to the financing.  In
addition, we issued to Satellite Strategic Finance Associates,  LLC, an investor
in the financing, a warrant to purchase 41,667 shares of common stock (identical
to the March 2005  warrants),  and  reimbursed  it  $55,000  for  expenses,  for
consulting services rendered by it in connection with the financing.

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

      We used  approximately  $2.3 million of the  proceeds  from the March 2005
financing  to pay all  accrued and unpaid  interest  to the Herrick  Entities on
their  convertible notes and the Series A Preferred Stock and Series C Preferred
Stock.

      As of March 29,  2006,  14,837  shares of Series D  Preferred  Stock  plus
accrued  dividends  thereon had been converted  into 4,521,592  shares of common
stock and 21,063 shares of Series D Preferred Stock are outstanding.

Commitments

      The following table sets forth our contractual  obligations as of December
31, 2005:

<TABLE>
<CAPTION>

Commitments as of 12/31/05
$(000,s)
                                               Payments Due by Period
Contractual Obligations                                                                  More
                                                     Less than     1-3        3-5        Than
                                            Total      1 Year     Years      Years      5 Years
                                            -----      ------     -----      -----      -------
<S>                                         <C>         <C>       <C>        <C>          <C>
Debt Obligations                            $803        $77       $416       $310         $--
Capital Lease Obligations                      5          5         --         --          --
Operating Lease Obligations                  606        210        396         --          --
Purchase Obligations                         943        453        490         --          --
Interest payments on Debt                     --         --         --         --          --
Dividend payments on Preferred Stock       6,330      1,266      2,532      2,532          *
                                          ----------------------------------------
Total                                     $8,687     $2,011     $3,834     $2,842
                                          ========================================
</TABLE>


* Dividend  payments  will  continue  at $1,266 per year  assuming  that the
  preferred stock that they relate to is not redeemed or converted.

================================================================================

      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.

                                       43
<PAGE>

      We subleased  two offices in New York,  New York from a company  partially
owned our Chairman.  The lease  commenced on August 1, 2005 and ends on July 31,
2006.

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

      Year ending December 31,

      2006 .................................  210
      2007 .................................  198
      2008 .................................  198
      Thereafter ...........................   --
                                             ----
      Total lease commitments .............. $606
                                             ====
      Capitalized leases.

      During the year ended December 31, 2005, we had one capital leases.  Lease
payments under these  agreements were $6,000,  $59,000 and $53,000 in 2005, 2004
and 2003, respectively. The amount of equipment capitalized under the leases and
included in fixed assets is $159,000,  and net of  depreciation  the fixed asset
balance is $4,000 and $24,000 at December 31, 2005 and 2004,  respectively.  The
obligations  under the leases included in accounts  payable and accrued expenses
on the consolidated balance sheets at December 31, 2005 and 2004 were $5,000 and
$9,000, respectively.

      Minimum annual lease  commitments  under capital leases are as follows (in
thousands):

      Year ending December 31,
      2006...............................      5
                                        ----------
      Total capital lease commitments....   $  5
                                        ==========
Employment agreements

      We have commitments pursuant to employment  agreements with certain of our
officers. Our minimum aggregate commitments under such employment agreements are
approximately  $365,000,  $280,000 and $117,000  during  2006,  2007,  and 2008,
respectively.

Licensing agreements

      We have numerous  licensing  agreements  for both  audiobooks and old-time
radio shows with terms generally  ranging from one to five years,  which require
us to pay, in some instances,  non-refundable  advances upon signing agreements,
against future  royalties.  We are required to pay royalties based on net sales.
Royalty  expenses were $913,000  $1,473,000 and  $2,524,000  for 2005,  2004 and
2003, respectively.

      As of  December  31,  2005,  we had past due  royalty  payments  under our
licensing   agreements   aggregating   $1,397,000.   The  publishers  and  other
rightsholders to whom these payments would be payable have not requested royalty
statements  or  payments.  These  amounts are accrued for and  reflected  in our
financial statements.

      Minimum  advances  required to be paid under  existing  agreements  are as
follows (in thousands):

      Year ended December 31,
      2006........................            453
      2007........................            235
      2008........................            148
                                  ------------------
      Total.......................           $836
                                  ==================

                                       44
<PAGE>

Recent accounting pronouncements

Consolidation of variable interest entities

      In March  2005,  the FASB issued  Staff  Position  (FSP) No. FIN  46(R)-5,
Implicit Variable  Interests under FASB  Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities. This FSP clarifies that when
applying the  variable  interest  consolidation  model,  a reporting  enterprise
should  consider  whether it holds an implicit  variable  interest in a variable
interest entity (VIE) or potential VIE when specific  conditions  exist. FSP No.
FIN 46(R)-5 is effective  as of April 1, 2005.  We do not  anticipate  an impact
from the adoption of this statement.

Accounting changes and error corrections

      In May 2005,  the FASB issued SFAS No. 154  "Accounting  Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3". This
Statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine  either the  period-specific  effects or the cumulative  effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial  statements or a change in accounting
estimate.  The  provisions of this  Statement  shall be effective for accounting
changes and correction of errors made in fiscal years  beginning  after December
15, 2005. The impact of FASB 154 will depend on the accounting  change,  if any,
in future periods.

Share-based payment

      In December 2004, the FASB issued SFAS No. 123(R),  "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based  Compensation".
SFAS 123(R) requires that the compensation cost relating to share-based  payment
transactions be recognized in financial  statements.  The compensation cost will
be  measured  based on the fair  value of the  equity or  liability  instruments
issued.  The  Statement  is  effective  as of the  beginning of the first annual
period  beginning after June 15, 2005. We are required to adopt Statement 123(R)
in 2006. This statement applies to all awards granted after the date of adoption
and to awards modified, repurchased or cancelled after that date. The cumulative
effect of initially  applying Statement 123(R), if any, will be recognized as of
the date of adoption.  We have  evaluated the impact of Statement SFAS 123(R) on
our financial  position and results of operations and do not expected the impact
to be  material  as all  options  outstanding  at  December  31, 2005 were fully
vested.

Exchanges of Nonmonetary Assets

      In  December  2004,  the FASB  issued  Statement  No.  153,  Exchanges  of
Nonmonetary  Assets,  an Amendment of APB Opinion No. 29 ("Statement  No. 153").
Statement No.153 is effective for nonmonetary  asset exchanges  occurring in our
fiscal year beginning January 1, 2006. Statement No. 153 requires that exchanges
of productive  assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial  substance.  Statement
No. 153 is not expected to have a material  impact on our financial  statements.

Inventory costs

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

                                       45
<PAGE>


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      We have no exposure to market risk for changes in interest  rates.  We had
total debt  outstanding  as of December  31, 2005 of $639,000 all of which is at
fixed rates.  Changes in the prime rate or LIBOR would not have an impact on our
fair values, cash flows, or earnings for the year ended December 31, 2005.

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

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

      Our management,  with the participation of our Chief Executive Officer and
Chief Financial Officer,  evaluated the effectiveness of our disclosure controls
and  procedures  as of December  31,  2005.  The term  "disclosure  controls and
procedures,"  as defined in Rules  13a-15(e) and 15d-15(e)  under the Securities
Exchange Act of 1934 (the "Exchange  Act"),  means controls and other procedures
of a  company  that are  designed  to ensure  that  information  required  to be
disclosed  by a  company  in the  reports  that it files or  submits  under  the
Exchange Act is recorded,  processed,  summarized and reported,  within the time
periods  specified  in the  SEC's  rules  and  forms.  Disclosure  controls  and
procedures  include,  without  limitation,  controls and procedures  designed to
ensure that  information  required to be  disclosed  by a company in the reports
that it files or submits under the Exchange Act is accumulated and  communicated
to the company's  management,  including  its principal  executive and principal
financial officers,  as appropriate to allow timely decisions regarding required
disclosure.  Management  recognizes that any controls and procedures,  no matter
how well  designed  and  operated,  can provide  only  reasonable  assurance  of
achieving their  objectives and management  necessarily  applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control over Financial Reporting

      During the quarter  ended  December  31, 2005 there were no changes in our
internal controls over financial reporting that have materially affected, or are
reasonably  likely to materially  affect,  our internal  controls over financial
reporting.

Item 9B. Other Information
Not applicable.



                                       46
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

              Our executive officers and directors are as follows:

Name                          Age   Position
----                          ---   --------

Joseph R. Rosetti..........   71    Chairman and Director
Jeffrey Dittus.............   39    Chief Executive Officer and Director
Robert Toro................   41    Chief Financial Officer and
                                    Senior Vice President of Finance
Daniel J. Altobello........   65    Director
Richard J. Berman..........   63    Director
Robert B. Montgomery.......   44    Director
Marshall C. Phelps.........   61    Director
Carl U.J. Rossetti.........   57    Director

      Joseph R.  Rosetti was  appointed  Chairman of our Board of  Directors  in
August 2004 and has been a member of our board of directors since December 2002.
Since  December 1, 2001,  Mr.  Rosetti has been  President of  SafirRosetti,  an
investigative  and security firm owned by Omnicom Group, Inc. From 1987 to 1991,
Mr. Rosetti was the Vice Chairman of Kroll Associates.  As Vice Chairman, he had
responsibility for Corporate Security/Crisis Management, which provides industry
and professional  organizations with preventive measures to combat corporate and
financial crimes.  From 1971 to 1987 he had worldwide  responsibility at IBM for
security  programs in physical  security,  investigations,  personnel  security,
trade  secret  protection,  information  asset  security,  real and  movable and
financial asset security and Department of Defense  Security.  Mr. Rosetti was a
member of the U.S.  National  Chamber of Commerce Crime  Reduction Panel and was
Staff Director for the Conference of the National Commission on Criminal Justice
Standards and Goals, a member of the private Security Task Force to the National
Advisory  Committee on Criminal Justice  Standards and Goals and Chairman of the
American Management  Association's Council on Crimes against Business.  Prior to
joining  IBM, Mr.  Rosetti was the  Northeast  Director for the Law  Enforcement
Assistance Administration of the U.S. Department of Justice and a Special Agent,
Group  Supervisor,  and Special  Assistant  to the  Assistant  Commissioner  for
Compliance in the Intelligence  Division,  U.S.  Treasury  Department.  Prior to
joining  the  Treasury  Department,  Mr.  Rosetti  held  the  position  of Chief
Accountant at Marriott  Corporation.  Mr.  Rosetti is a director of GVI Security
Solutions, Inc., a publicly traded company.

      Jeffrey Dittus has been our Chief Executive  Officer and has been a member
of our board of directors since January 2004. From 1995 through 1998, Mr. Dittus
was a  senior  executive  with  one  of  the  world's  largest  direct  response
marketers,  National Media Corporation.  While at National Media, Mr. Dittus had
direct responsibility for over 300 staff in two different countries, and built a
process that  streamlined the marketing  process in concert with building direct
marketing  systems  that  quickly  evaluated  the  profitability  of new product
launches. After leaving National Media, Mr. Dittus founded IT Capital Limited, a
publicly  traded  investment  company  focused  on early  stage,  new  media and
software  investments  based in New  Zealand,  serving  as its  Chief  Executive
Officer until November  2001.  Mr. Dittus  returned to the United States and, in
November  2001  founded a merchant  banking firm Kauri  Capital,  serving as its
managing  director  until January  2004.  Mr. Dittus is a member of the board of
directors  of  the  Audio  Publishers  Association,  the  audiobook  publishers'
industry  trade  association  and is a member of the Board of  Directors  of the
Leukemia and Lymphoma  Society.  He is also the founder of Divine 9 Open, a golf
tournament  that raises money for Leukemia and  Lymphoma  research.  Mr.  Dittus
earned a Bachelor  of Science  degree  from  Pennsylvania  State  University  in
Finance and began his career with Philadelphia Bank.

                                       47
<PAGE>

      Robert Toro has been our Chief  Financial  Officer  since May 2005 and 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.
Prior to joining us, Mr. Toro was Senior Vice  President of AM Cosmetics Co. and
had previously  served in senior financial  positions in both public and private
entertainment and publishing  companies.  From 1992 through early 1997, Mr. Toro
served in various senior financial  positions with Marvel  Entertainment  Group,
Inc., a publicly  traded youth  entertainment  company.  Mr. Toro is a Certified
Public Accountant with six years of progressive  experience with Arthur Andersen
where he was employed immediately prior to joining Marvel Entertainment Group.

      Daniel J.  Altobello  has been a member of our  board of  directors  since
April 2005.  Mr.  Altobello  has been  retired  since  serving as  Director  and
Chairman   of  Onex  Food   Services,   the  parent   corporation   of  Caterair
International,  Inc., and LSG/SKY Chefs from  September 1995 to June 2001.  From
1989 to 1995, Mr.  Altobello  served as Chairman,  President and Chief Executive
Officer  of  Caterair  International  Corporation.  From  1979 to 1989,  he held
various  managerial  positions  with the food service  management  and in-flight
catering divisions of Marriott  Corporation,  including Executive Vice President
of Marriott  Corporation and President of Marriott Airport Operations Group. Mr.
Altobello began his management career at Georgetown University as Vice President
of Administration Services. He is a member of the board of directors of Mesa Air
Group, Inc., World Air Holdings,  Inc. and Friedman,  Billings and Ramsey Group,
Inc. (public reporting  companies).  Mr. Altobello is also a director of several
public  companies:  Diamond  Rock  Hospitality  Trust,  Inc.,  JER  Real  Estate
Investment  Trust,  and a private  company,  Mercury Air Centers;  and is also a
trustee of Loyola Foundation,  Inc. Mr. Altobello obtained a Bachelor of Arts in
English from Georgetown University and a Master of Business  Administration from
Loyola College.

      Richard J. Berman became a director in June 2003.  Since January 2006, Mr.
Berman has been Chief  Executive  Officer of  Nexmed,  Inc.,  a publicly  traded
biotechnology  company.  From 2000 to March 2004, Mr. Berman was Chairman of the
Board of KnowledgeCube  Group,  Inc., an Internet commerce firm. From September,
1998 to June,  2000, Mr. Berman was Chairman of the Board and C.E.O. of Internet
Commerce Corporation (Nasdsaq: ICCA), a leading e-commerce  business-to-business
service  provider.  From 1982 to 1998,  Mr. Berman was President of the American
Acquisitions  Company,  a privately held merchant banking firm, and from 1983 to
1993, Chairman of the Board of Prestolite Battery Company of Canada, the largest
battery  producer in Canada.  From 1975 to 1982,  Mr.  Berman  served in various
executive  positions at Banker's Trust Company,  including Senior Vice President
responsible  for  managing the M&A and Equity  Buyout  Departments.  Mr.  Berman
currently  serves on the board of  directors  of Internet  Commerce  Corporation
(Nasdaq: ICCA), Nexmed, Inc. (Nasdaq: NexM), Advaxis (OTCBB: ADVS), GVI Security
Solutions  Inc.  (OTCBB:  GVIS),  Dyadic   International,   Inc.  (OTCBB:  DYAD)
International   Microcomputer  Software  (OTCBB:  IMSI)  Nayna  networks,   Inc.
(OTCBB:NAYN) and National Investment Managers  (OTLBB:NIVM).  Mr. Berman holds a
J.D.  from  Boston  College  Law School and an M.B.A.  in Finance  from New York
University.

         Robert B. Montgomery has been a member of our board of directors since
June 6, 2005. Since August 2001, Mr. Montgomery has been a Partner at Achilles
Partners, LLC, an advisory firm specializing in the media, communications and
technology industries. Mr. Montgomery is also currently Chief Executive Officer
of Achilles Media Ltd., a Toronto-based event management firm for television and
new media industry events. In addition, since August 2000, Mr. Montgomery has
served as a director of First Maximilian Associates Ltd. He holds a Bachelor of
Arts degree from the University of Manitoba in Canada.

                                       48
<PAGE>

      Marshall C. Phelps has been a member of our board of directors  since June
6, 2005. In June 2003, Mr. Phelps joined Microsoft Corporation serving as Deputy
General  Counsel and  Corporate  Vice  President for  intellectual  property and
licensing,   where  his   responsibilities   include   supervising   Microsoft's
intellectual property groups, including those responsible for trademarks,  trade
secrets,  patents,  licensing,  business development,  standards and copyrights.
From  September  2000 to December  2002,  Mr.  Phelps  worked for Spencer  Trask
Intellectual  Capital Company LLC, where for two years he served as Chairman and
Chief  Executive  Officer.  Mr.  Phelps  holds a Bachelor  of Arts  degree  from
Muskingum  College,  a Master of Science degree from Stanford Graduate School of
Business and a Doctorate from Cornell Law School.

      Carl U.J.  Rossetti has been a member of our board of directors since June
6, 2005.  Since  January  2000,  Mr.  Rossetti has been  employed at Time Warner
Cable,  most recently as Executive Vice President of Corporate  Development  and
President of Time Warner Cable Voice  Services.  In this position,  Mr. Rossetti
oversees  the digital  phone  business and is  responsible  for  developing  and
launching new products,  new  businesses and new services for Time Warner Cable.
He earned his BA in  Accounting  (1970) and his MBA (1975),  both at  Chamindale
University in Honolulu, Hawaii.

      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.  Richard Berman and Carl U.J.  Rossetti are Class III
directors and stand for re-election at the 2006 annual meeting of  shareholders.
Joseph Rosetti, Daniel J. Altobello and Marshall C. Phelps are Class I directors
and will stand for  re-election  at the 2007  annual  meeting  of  shareholders.
Jeffrey  Dittus  and  Robert  Montgomery  are Class II  directors  and stand for
re-election at the 2008 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,  2005,  all  filing
requirements  applicable  to our  officers,  directors,  and  greater  than  10%
shareholders were complied with.

Director Independence

      The Board has  determined  that  Messrs.  Altobello,  Berman,  Montgomery,
Phelps and Carl Rossetti,  meet the director  independence  requirements  of the
Marketplace  Rules of the  National  Association  of  Securities  Dealers,  Inc.
("NASD") applicable to Nasdaq listed companies.

Board Committees

Audit committee

      We have  established an Audit  Committee of the Board of Directors,  which
currently  consists  of  Messrs.  Altobello  (Chairman),   Montgomery  and  Carl
Rossetti,  each of whom is an "independent"  director as defined under the rules
of the National Association of Securities Dealers, Inc. The Board has determined
that Mr. Altobello  qualifies as a "financial  expert" under federal  securities
laws.
                                       49
<PAGE>

Compensation committee

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

Nominating committee

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

Code of ethics and business conduct

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

Communications with the Board

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

Item 11. Executive Compensation

      The  following  table  discloses  for the fiscal years ended  December 31,
2003, 2004 and 2005,  compensation  paid to Jeffrey Dittus,  our Chief Executive
Officer  during  2005,  and our  executive  officers  during  2005  (the  "Named
Executives").

                                       50
<PAGE>

Summary Compensation Table

      The  following  table  discloses  for the fiscal years ended  December 31,
2002, 2003 and 2004,  compensation paid to our current  executive  officers (the
"Named Executives").

<TABLE>
<CAPTION>
                                                                                         Long-Term
                                                      Annual compensation           compensation awards
                                              -----------------------------------  securities underlying         All other
        Name and principal position           Year           Salary        Bonus       Options/SAR's (#)       compensation
-----------------------------------           ----          --------      -------      -----------------       ------------
<S>                                           <C>            <C>                           <C>
Joseph Rosetti                                2005           107,500          --           50,000                  --
   Chairman (1)                               2004            33,750          --           95,833                  --

Jeffrey Dittus                                2005           267,333      175,000         366,667                  --
   Chief Executive Officer (2)                2004           222,172          --          375,000                  --

Robert Toro                                   2005           196,567       25,000         158,334
   Senior Vice President Finance              2004           185,048          --               --
                                              2003           185,000        5,223          36,024                  --

Patricia Campbell                             2005           150,991       50,000         301,667                  --
   Chief Operating Officer (3)
</TABLE>
---------------

(1)   Joseph Rosetti was appointed Chairman on August 12, 2004.
(2)   Jeffrey Dittus became Chief Executive Officer on January 29, 2004.
(3)   Patricia  Campbell  became  Chief  Operating  Officer on April 4, 2005 and
      resigned on January 31, 2006.

      The following table discloses options granted during the fiscal year ended
December  31,  2005 to the Named  Executives:

Option/SAR Grants in Fiscal Year Ending December 31, 2005:

<TABLE>
<CAPTION>
                                                                                                        Potential
                                                                                                      Realizable Value
                                Number of     % of Total                                          At Assumed Annual Rates of
                                  Shares        Options                                                 Stock Price
                                Underlying    Granted to                                               Appreciation
                                 Options     Employees in    Exercise Price                          for Option Term
            Name                 Granted      Fiscal Year      ($/share)      Expiration Date      5% ($)           10% ($)
---------------------------     ----------   ------------    --------------   ---------------    ---------        ----------
<S>                                <C>              <C>           <C>               <C>   <C>    <C>              <C>
Joseph Rosetti                     50,000           3.6%          $3.54             04/04/2015   $ 111,295        $ 282,033

Jeffrey Dittus                    200,000          14.5            1.35             12/31/2015     169,772          430,219
                                  166,667          12.1            3.54             04/04/2015     370,984          940,110

Robert Toro                       100,000           7.2            1.35             12/31/2015      84,886          215,110
                                   16,667           1.2            3.54             06/06/2015      37,099           94,013
                                   41,667           3.0            3.54             04/04/2015      92,746          235,029

Patricia Campbell (1)             150,000          10.9            1.35             12/31/2015     127,329          322,664
                                  141,667          10.3            3.54             04/04/2015     315,337          799,092
                                   10,000           0.7            2.16             06/06/2015      23,579           35,408
</TABLE>

                                       51
<PAGE>

(1) Pursuant to a termination  agreement dated January 31, 2006,  90,000 options
granted  to Ms.  Campbell  exercisable  at $1.35 per share were  terminated  and
56,667 options exercisable at $3.54 per share were also terminated.

      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, 2005. No options were exercised by any of
these executives during fiscal 2005.

Aggregated Option Exercises And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                              Number of Securities
                                             Underlying Unexercised                   Value of Unexercised
                                                   Options at                       In-the-Money Options at
Name                                           December 31, 2005                       December 31, 2005
                                               -----------------                       -----------------
                                          Exercisable      Unexercisable        Exercisable        Unexercisable
<S>                                         <C>                   <C>
Joseph Rosetti                              130,834               30,000            --                    --

Jeffrey Dittus                              329,167              412,502            --                    --

Robert Toro                                  63,524              145,002            --                    --

Patricia Campbell (1)                       126,666              175,001            --                    --
</TABLE>

(1) Pursuant to a termination  agreement dated January 31, 2006,  90,000 options
granted  to Ms.  Campbell  exercisable  at $1.35 per share were  terminated  and
56,667 options exercisable at $3.54 per share were also terminated.

      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 30, 2005
was $1.35.

Director compensation

      We  reimburse   directors  for  reasonable  travel  expenses  incurred  in
connection with their  activities on our behalf.  On April 4, 2005, the Board of
Directors  approved  payment of $35,000 of director  compensation to Mr. Berman,
for previous  services as a member of our board of  directors.  Our  independent
directors are compensated for their services as follows:

      On April 4, 2005, the Board approved a compensation plan for those persons
who serve as a member of our board of directors  and qualify as an  "independent
director"  under the  Nasdaq  Marketplace  Rules (or the rules of the  principal
exchange on which the Common Stock is listed,  if the Common Stock is not listed
on Nasdaq). The compensation payable to our independent directors is as follows:
(i) $2,000 per month for serving as a member of the Board of Directors,  payable
on the first calendar day of each month,  which payments  commenced May 1, 2005,
(ii) an  additional  $1,000 per month for serving as Audit  Committee  Chairman,
payable on the first  calendar of each month,  which  payments  commenced May 1,
2005, and (iii) an additional  $2,500 per month for serving as Lead  Independent
Director  (as  designated  by the  Board of  Directors),  payable  on the  first
calendar day of each month, which payments commenced May 1, 2005. Mr. Berman has
been designated by the Board of Directors as Lead Independent Director.

                                       52
<PAGE>

Employment agreements

      On January 29, 2004, we entered into a 27-month employment  agreement with
Jeffrey Dittus.  The agreement provided for a base annual salary of $250,000 per
year.  Pursuant to the  agreement,  we granted to Mr. Dittus options to purchase
250,000  shares of our  common  stock,  which have  exercise  prices and vest as
follows:

      Options to purchase:           Exercise price           Vesting date
      --------------------           --------------           ------------
         41,667 shares                   $5.94                 04/30/2004
         41,667 shares                   $5.94                 07/30/2004
         41,667 shares                   $9.30                 01/30/2005
         41,667 shares                   $9.30                 07/30/2005
         41,667 shares                   $11.16                01/30/2006
         41,667 shares                   $11.16                04/30/2006

      On June 6, 2005, we entered into an another employment  agreement with Mr.
Dittus,  which agreement  became effective on June 6, 2005, for Mr. Dittus to be
employed as its Chief  Executive  Officer.  The employment  agreement has a term
ending June 6, 2008 and  provides  for an annual base salary of  $280,000.  Upon
termination  of  Mr.  Dittus'  employment  without  Cause  (as  defined  in  the
employment  agreement) or upon Mr.  Dittus'  termination  of employment for Good
Reason (as  defined in the  employment  agreement),  in  addition  to paying Mr.
Dittus  through  the  date of  termination  and,  otherwise  complying  with the
employment agreement, we shall pay to Mr. Dittus severance compensation equal to
twelve (12) months of Mr. Dittus' base salary as of the date of  termination,  a
pro rata portion of any bonus earned  through the date of  termination,  and any
options to purchase our common stock then held by Mr.  Dittus  shall,  as of the
date of such termination, be deemed to be fully vested for all purposes.

      On June 6, 2005,  we entered into an employment  agreement  with Joseph R.
Rosetti, which agreement became effective on June 6, 2005, for Mr. Rosetti to be
employed as its  Chairman,  and ends on June 6, 2006 with  automatic  successive
one-year  extensions.  The  employment  agreement  provides  for an annual  base
compensation of $120,000.  Upon termination of Mr. Rosetti's  employment without
Cause,  we  shall  pay to Mr.  Rosetti,  in  accordance  with  the  terms of the
employment  agreement,  a severance  payment  equal to twelve (12) months of Mr.
Rosetti's  base  salary as of the date of  termination,  payable  in  bi-monthly
installments.  If the term or any  successive  extension  is not  extended  as a
result of Mr. Rosetti  providing  notice of such  non-renewal in accordance with
the agreement, Mr. Rosetti shall receive a severance payment equal to 50% of his
base  compensation  for  the  twelve  (12)  months  prior  to  the  date  of the
non-renewal, payable in bi-monthly installments.

      On April 1, 2005,  we entered into an employment  agreement  with Patricia
Campbell,  which agreement  became  effective on April 4, 2005, the commencement
date of Ms.  Campbell's  employment  (the "Campbell  Effective  Date"),  for Ms.
Campbell to serve as our Chief Operating Officer. The employment agreement had a
term ending March 31, 2008 and provides for an annual base salary of $215,000, a
starting  bonus of $50,000,  payable upon the first day of employment  under the
employment  agreement and grant of a stock option to purchase  141,667 shares of
common stock (the "Campbell  Option").  The Campbell  Option is exercisable at a
price of $3.54  per  share,  shall be  exercisable  commencing  on the  Campbell
Effective  Date at the closing  sale price of the Common  Stock on the  Campbell
Effective Date, and shall be exercisable as to 40% of the shares of Common Stock
covered thereby  commencing on the Campbell Effective Date and an additional 20%
of the  shares  covered  thereby  on each of the  first,  second  and third year
anniversaries  of the  Campbell  Effective  Date,  and shall expire on the tenth
anniversary of the Campbell  Effective  Date. On January 31, 2006, Ms.  Campbell
resigned her position as Chief  Operating  Officer.  Ms.  Campbell has agreed to
continue to

                                       53
<PAGE>

provide  services for a period of six (6) months (the "Term"),  during which she
agreed to devote  her full time for the first  three (3)  months and half of her
time to our business  during the second  three (3) months.  We agreed to pay Ms.
Campbell  at the rate equal to her base  salary  when she was  employed by us of
$215,000  (per  annum)  during  the first  three (3)  months  and at the rate of
$107,500 (per annum)  during the second three (3) months.  Certain stock options
previously  granted to Ms. Campbell will remain exercisable for their full term,
and certain other stock options are no longer  exercisable  and terminated as of
January 31,  2006.  Ms.  Campbell  agreed not to compete or engage in a business
competitive  with our  business  during  the Term and for a period  of two years
thereafter.

      On June 6, 2005, we entered into an employment agreement with Robert Toro,
which agreement became effective on June 6, 2005, for Mr. Toro to be employed as
its Senior Vice President and Chief Financial Officer,  and ends on June 6, 2006
with automatic successive one-year extensions,  unless Mr. Toro is given 90 days
written notice of non-renewal.  The employment  agreement provides for an annual
base compensation of $205,000. In addition,  Mr. Toro will receive stock options
to acquire an additional  16,667 shares of our Common Stock pursuant to our 2004
Stock   Incentive  Plan.  The  options  granted  to  Mr.  Toro  shall  (i)  vest
immediately,  (ii) be  exercisable  at a price of $3.54 per share  (the  closing
price  of the  Common  Stock  on the date of the  grant),  (iii) be  immediately
exercisable as to 40% of the shares covered thereby and shall become exercisable
as to an  additional  20% of the  shares  covered  thereby on each of the first,
second and third year  anniversaries  of the date of grant,  and (iv) expire ten
(10) years from the grant date.  Upon Mr. Toro's  termination  of his employment
for Good Reason (as defined in the employment agreement) or in the event that we
have  terminated Mr. Toro's  employment  under the agreement (i) "without cause"
(as defined in the employment  agreement),  (ii) in the event there is a "Change
of Control" (as defined in the employment  agreement)  and Mr. Toro  voluntarily
terminates his employment within three (3) months of such Change of Control,  or
(iii) Mr. Toro's  employment is terminated by us following the expiration of the
term of the employment  agreement  (including  MediaBay not offering Mr. Toro at
least a one-year employment term at the annual salary then in effect),  then Mr.
Toro shall be entitled to receive severance pay equal to 100% of his base salary
for the greater of (i) the balance of the term or (ii) 6 months;  such  payment,
if any,  shall be made to Mr.  Toro in equal  payments  in  accordance  with our
regular  payroll over the remaining  unexpired  period of Mr. Toro's  employment
term or six (6) month period, as the case may be. In addition,  upon a Change of
Control,  all stock options issued to Mr. Toro as of such date (except for those
which have expired prior  thereto),  shall  immediately be exercisable (in full)
and any unvested options shall immediately vest.

      Stock Plans

      Our 1997 Stock  Option  Plan  provides  for the grant of stock  options to
purchase up to 333,333 shares. As of March 29, 2006,  options to purchase all of
the shares available under this plan have been granted under the 1997 plan.

      Our 1999 Stock  Option  Plan  provides  for the grant of stock  options to
purchase  416,667 shares.  As of March 29, 2006,  options to purchase all of the
shares available under this plan 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  583,333  shares of common
stock have been reserved for distribution pursuant to the 2000 plan. As of March
29, 2006,  options to purchase all of the shares  available under this plan have
been granted under the 2000 plan.

                                       54
<PAGE>

      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  583,333  shares of common
stock have been reserved for distribution pursuant to the 2001 plan. As of March
29, 2006,  options to purchase all of the shares  available under this plan have
been granted under the 2001 plan.

      Our 2004 Stock  Incentive Plan provides for the grant of any or all of the
following  types of awards:  (1) stock  options,  which may be either  incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other  stock-based  awards.  A total of 1,250,000 shares of common
stock have been reserved for distribution pursuant to the 2004 plan. As of March
29, 2006,  options to purchase an  aggregate  of 1,076,906  shares of our common
stock have been granted under the 2004 plan.

      As of March 29, 2006, of the options outstanding under our plans,  options
to purchase  1,256,860  shares of our common stock which are  outstanding to our
officers and directors as follows:  Joseph R. Rosetti - 160,834 shares;  Jeffrey
Dittus - 741,667  shares;  Robert Toro - 208,524  shares;  Daniel J. Altobello -
25,000 shares;  Richard J. Berman - 70,834 shares; Robert B. Montgomery - 16,667
shares;  Marshall C. Phelps -- 16,667  shares;  and Carl U.J.  Rossetti - 16,667
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, 2005:

<TABLE>
<CAPTION>
                                                                                                             I
                                                                                                     Number of securities
                                                          (a)                                       remaining available for
                                                  Number of securities            (b)                future issuance under
                                                    to be issued upon       Weighted-average          equity compensation
                                                 exercise of outstanding   exercise price of           plans (excluding
                                                  options, warrants and    outstanding options,      securities reflected
Plan Category                                            rights            warrants and rights            in column (a)
---------------------------------------------  --------------------------  -------------------      -----------------------
<S>                                                     <C>                     <C>                     <C>
Equity compensation plans approved by                   2,901,964               $    4.90                  173,094
security holders..........................
Equity compensation plans not approved by
security holders..........................              9,242,589               $    3.76                    --
                                               --------------------------  -------------------      -----------------------
Total.....................................             12,144,553               $    4.03                  173,094
                                               ==========================  ===================      =======================
</TABLE>

Note 1: See Note 8 and Note 9 to the  Consolidated  Financial  Statements  for a
further description of these plans.

      The following  table sets forth certain  information  as of March 29, 2005
relating to the  beneficial  ownership of shares of our common stock by (i) each
person  or  entity  who is  known  by us to own  beneficially  5% or more of our
outstanding  common stock according to Schedules 13G and 13D filed with the SEC,
(ii) each of our directors  and nominees for  director,  (iii) each of the Named
Executives, and (iv) all of our directors and executive officers as a group.

                                       55
<PAGE>

<TABLE>
<CAPTION>
                                                                   Number of shares      Percentage of shares
         Name and address of beneficial owner (1)(2)              beneficially owned      beneficially owned
         -------------------------------------------              ------------------      ------------------
<S>                                                                   <C>                         <C>
Jeffrey Dittus............................................            528,667(3)                 4.8%
Joseph Rosetti............................................            151,667(4)                 1.4
Robert Toro...............................................            111,858(5)                 1.1
Richard J. Berman.........................................             66,666(6)                  *
Daniel J. Altobello.......................................             16,666(7)                  *
Robert B. Montgomery......................................              8,333(7)                  *
Marshall C. Phelps........................................              8,333(7)                  *
Carl U. J. Rossetti.......................................              8,333(7)                  *
Coghill Capital Management L.L.C. (8).....................          1,036,783                    9.9
Radcliffe SPC, Ltd (9)....................................            989,958                    9.4
Satellite Strategic Finance, LLC (10).....................            989,280                    9.4
Wood River Partners, L.P (11).............................            613,100                    5.8
All directors and executive officers as a group (8 persons)           900,523                    7.9%
</TABLE>

* Less than 1%

1.    Unless  otherwise  indicated the address of each  beneficial  owner is c/o
      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.

2.    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 January 9, 2006 upon the  exercise of options,  warrants
      or other convertible  securities.  In determining the percentage ownership
      of the persons in the table below, we assumed in each case that the person
      exercised and converted all options,  warrants or  convertible  securities
      which  are  currently   held  by  that  person  and  which  are  currently
      exercisable,  but that options,  warrants or other convertible  securities
      held by all other persons were not exercised or converted. Pursuant to the
      Certificate of  Designation of the Series D preferred  stock and the terms
      of the March 2005 warrants,  the selling  security holder is not permitted
      to convert or exercise  the  foregoing  securities  to the extent any such
      conversion or exercise  would result in its  beneficial  ownership of more
      than 4.99% of our  outstanding  common stock after  giving  effect to such
      conversion or exercise.

3.    Represents  (i) 2,833  shares of common  stock,  and (ii)  525,834  shares
      issuable  upon  exercise  of  options.  Does not  include  215,834  shares
      issuable upon exercise of options.

4.    Represents  (i) 10,833  shares of common  stock,  and (ii) 140,834  shares
      issuable upon exercise of options. Does not include 20,000 shares issuable
      upon exercise of options.

5.    Represents  shares  issuable  upon  exercise of options.  Does not include
      96,668 shares issuable upon exercise of options.

6.    Represents  shares  issuable  upon  exercise of options.  Does not include
      4,167 shares issuable upon exercise of options.

7.    Represents  shares  issuable  upon  exercise of options.  Does not include
      8,334 shares issuable upon exercise of options.

8.    The following  information  is based upon a Schedule  13G/A filed with the
      SEC on February 14, 2006. Represent shares of our common stock held by CCM
      Master  Qualified  Fund Ltd.  ("CCM").  Clint D.  Coghill is the  managing
      member of Coghill Capital Management, L.L.C. an entity which serves as the
      investment manager of CCM.
                                       56
<PAGE>

9     The  following  is based upon a Schedule  13G filed with the SEC on August
      16, 2005.  Represents  shares of our common  stock held by Radcliffe  SPC,
      Ltd.,  for and on behalf of the Class A Convertible  Crossover  Segregated
      Portfolio.  Does not include  212,424 shares of common stock issuable upon
      conversion of 701 shares of Series D preferred stock and 606,060 shares of
      common stock issuable upon exercise of warrants. Pursuant to an investment
      management agreement, RG Capital Management, L.P. ("RG Capital") serves as
      the  investment  manager of  Radcliffe  SPC,  Ltd.'s  Class A  Convertible
      Crossover  Segregated   Portfolio.   RGC  Management  Company,  LLC  ("RGC
      Management")  is the general partner of RG Capital.  Steve  Katznelson and
      Gerald Stahlecker serve as the managing members of RGC Management. Each of
      RG Capital, RGC Management and Messrs. Katznelson and Stahlecker disclaims
      beneficial  ownership of the  securities  owned by Radcliffe SPC, Ltd. for
      and on behalf of the Class A Convertible  Crossover Segregated  Portfolio.
      The address of  Radcliffe  SPC,  Ltd. is c/o SEI  Investments  Global Fund
      Services, Ltd., Styne House, Upper Hatch Street, Dublin 2 Ireland.

10.   The following information is based upon a Schedule 13G/A filed on February
      15, 2006.  Represents  389,257 shares held by Satellite  Strategic Finance
      Associates,  L.L.C.  and  600,023  shares  of our  common  stock  held  by
      Satellite Strategic Finance Partners, Ltd.  (collectively,  the "Satellite
      Finance  Funds").  Does not  include  1,396,667  shares  of  common  stock
      issuable upon  conversion of 4,609 shares of Series D preferred  stock and
      893,939  shares of common stock issuable upon exercise of warrants held by
      Satellite  Strategic  Finance  Associates,  L.L.C. and 2,154,545 shares of
      commons  stock  issuable  upon  conversion  of 7,110  shares  of  Series D
      Preferred  Stock  and  1,378,787  shares  of common  stock  issuable  upon
      exercise of warrants held by Satellite  Strategic Finance  Partners,  Ltd.
      Satellite  Asset  Management  is the  investment  manager  to  each of the
      Satellite Finance Funds and exercises  investment  discretion over each of
      the Satellite Finance Funds' portfolios.  The general partner of Satellite
      Asset  Management,  L.P. is Satellite Fund Management LLC.  Satellite Fund
      Management LLC has four members that make  investment  decisions on behalf
      of the Satellite  Finance  Funds,  and  investment  decisions made by such
      members,  when  necessary,  are made through the approval of a majority of
      such  members.  The address of the  Satellite  Finance  Funds is 623 Fifth
      Avenue, 20th Floor, New York, New York 10022.

11.   The following  information  is based on a Schedule  13G/A No. 2 filed with
      the SEC on February 13, 2006. According to such Schedule 13G/A, Wood River
      Associates,  L.L.C. and Arthur Steinberg have shared voting power and sole
      dispositive  power over the shares and Wood River Partners,  L.P. has sole
      voting power and sole dispositive power over the shares. Mr. Steinberg has
      been appointed as the receiver of these  entities  pursuant to an order of
      the United States District Court of the Southern District of New York. The
      address for these  entities is c/o Kaye Scholer LLP, 425 Park Avenue,  New
      York, New York 10022.I

Item 13. Certain Relationships and Related Transactions

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

      On April 28,  2004,  we  entered  into a new  credit  agreement.  Herrick,
Huntingdon  and N.  Herrick  Irrevocable  ABC Trust,  referred to as the Herrick
Trust,  of  which  Herrick  was the  beneficiary,  consented  to the new  credit
agreement  and  the  other  transactions  described  above  and  entered  into a
subordination

                                       57
<PAGE>

agreement with Zohar CDO 2003-1,  Limited. The new credit agreement required the
aggregate amount of principal and interest owed by us to Herrick, Huntingdon and
the Herrick Trust be reduced to $6,800,000 ("Permissible Debt") by June 1, 2004,
and  that  the  Permissible  Debt  be  further  reduced  by up to an  additional
$1,800,000 if we do not raise at least  $2,000,000 in additional  equity in each
of the two calendar years  following the execution of the new credit  agreement.
We received a fairness opinion in connection with this transaction.

      Pursuant to an agreement  dated April 28, 2004,  on May 25, 2004,  Herrick
exchanged  accrued and unpaid  interest  and  dividends  (including  accrued and
unpaid  interest  distributed  by the Herrick  Trust to Herrick) owed to Herrick
aggregating  $1,181,419 into (i) 11,814 shares of Series C Convertible Preferred
Stock  with a  liquidation  preference  of $100 per  share  convertible  into an
aggregate of 252,436 shares of common stock at an effective  conversion price of
$4.68,  and (ii)  warrants  to  purchase  504,872  shares of common  stock.  The
warrants are exercisable until April 28, 2014 at an exercise price of $3.18.

      Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged  the  principal of the  $500,000  principal  amount  note,  $1,000,000
principal amount note,  $150,000  principal  amount note and $350,000  principal
amount  note held by  Huntingdon,  plus  accrued  and  unpaid  interest  owed to
Huntingdon  aggregating  $1,171,278 into (i) 31,713 shares of Series C Preferred
Stock  convertible  into an  aggregate  of 677,628  shares of common stock at an
effective  conversion price of $4.68, and (ii) warrants to purchase an aggregate
of 1,355,256  shares of common stock.  The warrants are exercisable  until April
28, 2014 at an exercise price of $3.18. If the amount of the Permissible Debt is
required  to be reduced  due to our  failure to raise the  requisite  additional
equity,  such reduction will automatically  occur by the exchange of Permissible
Debt held by Huntingdon for additional  shares of Series C Preferred Stock in an
aggregate  liquidation  preference  equal to the  amount of debt  exchanged  and
warrants to  purchase a number of shares of common  stock equal to two times the
number of shares  of common  stock  issuable  upon  conversion  of the  Series C
Preferred Stock.

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

      On April 28,  2004,  we repaid $1.6 million  principal  amount of the $3.2
million principal amount  convertible note issued to ABC Investments,  L.L.C., a
former principal  shareholder of ours. We issued a new $1.6 million note for the
remaining  principal  amount.  The new ABC note  extended the maturity date from
December 31, 2004 to July 29, 2007. In exchange for extending the maturity date,
the conversion  price of the new ABC note was reduced to $3.00. The closing sale
price of our common stock on the closing date was $2.88.  During  October  2004,
ABC Investments,  L.L.C.  converted  $1,000,000  principal amount of the new ABC
note into shares of common stock pursuant to the terms of the note.

      On February 8, 2005, we entered into a letter  agreement  with Forest Hill
Capital,  LLC,  at that time a principal  shareholder,  as the manager of Forest
Hill Select Fund, L.P., Forest Hill Select Offshore,  Ltd. And Lone Oak Partners
L.P.,  collectively  referred to as the Forest  entities,  extending the date by
which  we were  required  to file  the  registration  statement  covering  their
securities  to May 1, 2005. As  consideration  for the  extension,  we issued an
aggregate of 19,841 shares of common stock, referred to as the extension shares,
based on the last sale price of our common  stock on  February 8, 2005 of $5.04.
We also agreed  that if the last sale price of the common  stock on the date the
registration  statement  covering their securities is declared  effective by the
SEC is below $4.50,  we would pay an aggregate of $250,000 less the value of the
extension shares on such effective date in cash or in shares of common stock, at
the Forest  entities'  option.  We also granted the Forest entities the right to
require us to purchase an aggregate  of 33,333  shares of common stock from them
at a price of $18.00 per share if, at any time prior to the effective  date, the
last sale  price of the  common  stock was above  $24.00  per  share.  We timely
complied  with  our  obligations  to  file  the  Forest  entities'  registration
statement.

                                       58
<PAGE>

      As part of the March 2005  financing,  the Forest  entities  exchanged the
300,000  shares of common  stock and 66,667  common  stock  warrants  previously
purchased by them from us in October 2004 for $900,000 of the securities  issued
in the March 2005  financing.  The Forest  entities also purchased an additional
$1.0 million of the  securities in the March 2005  financing.  We also agreed to
include an additional  19,841 shares of common stock, as well as 8,333 shares of
common stock underlying certain additional warrants,  already beneficially owned
and  retained  by  Forest  Hill  Capital,  LLC for  resale  in the  registration
statement filed on behalf of the investors in the March 2005 financing.

      In  connection  with the March 2005  financing,  we also  entered  into an
agreement with the Herrick  entities,  pursuant to which,  concurrently with the
financing:

      o     all $5.784 million  principal amount of our convertible  notes owned
            by the Herrick  entities (the  "Herrick  Notes") and 10,684 of their
            shares of Series A Preferred  Stock were converted into an aggregate
            of approximately  2,033,333 shares of our common stock,  referred to
            as the Herrick Shares,  at their stated conversion rate of $3.36 per
            share;

      o     we also  agreed to redeem the  remaining  14,316  shares of Series A
            Preferred Stock held by the Herrick entities and all 43,527 of their
            shares of Series C Preferred  Stock for $5.8 million,  the aggregate
            stated capital of such shares,  on the earlier of the effective date
            of the Shareholder Consent and June 1, 2005, and both the securities
            to be redeemed,  referred to as the redemption  securities,  and the
            redemption price were placed into escrow pending such date;

      o     the Herrick entities waived certain of their registration rights and
            we  agreed  to  include  the  Herrick   Shares  for  resale  in  the
            registration statement filed on behalf of the investors in the March
            2005  financing,  so long as such  Herrick  Shares were owned by the
            Herrick entities and not otherwise transferred,  including,  but not
            limited to, in the Herrick Financing described below;

      o     the  Herrick  entities  consented  to the  terms of the  March  2005
            financing and the  agreements  entered into in connection  with such
            financing,  as we were required to obtain such consents  pursuant to
            the terms of the Herrick Notes, the Series A Preferred Stock and the
            Series C Preferred Stock; and

      o     the Herrick  entities also entered into a voting agreement and proxy
            with us  pursuant  to which  they  agreed  not to take any action to
            contradict or negate the Shareholder  Consent and gave us a proxy to
            vote their shares, at the direction of our Board of Directors, until
            the effective date of such consent.

      Also on March 23, 2005 in  connection  with the March 2005  financing,  we
entered into a registration  rights agreement with the Herrick entities in which
they were granted the same automatic registration rights as the investors in the
March 2005  financing with respect to the shares of common stock issuable to the
Herrick  entities  upon  conversion  of the Herrick Notes and Series A Preferred
Stock. We also entered into another  registration  rights  agreement dated March
23, 2005, with the Herrick entities in which we agreed to register the shares of
common stock issuable to the Herrick entities upon exercise of the warrants held
by them in a  registration  statement  to be filed  with the SEC  within 30 days
following the effective date of the  registration  statement  filed on behalf of
the investors in the March 2005 financing.

                                       59
<PAGE>

      We also paid to the  Herrick  entities  all  accrued  and unpaid  interest
dividends due to them in the amount of $2,271,000 on March 23, 2005 and redeemed
the redemption  securities on May 3, 2005 (the effective date of the Shareholder
Consent) for $5.8 million.

      We subleased  two offices in New York,  New York from a company  partially
owned by our  Chairman.  The lease  commenced on August 1, 2005 and ends on July
31,  2006.  The lease amount is $3,000 per month.  The annual lease  payments in
2006 are $21,000.

Item 14. Principal Accountants' Fees and Services

The  following  table  presents fees charged for  professional  fees charged for
professional  audit  services for the audit of our financial  statements for the
years ended  December 31, 2005 and 2004 by Amper  Politziner  & Mattia,  P.C. No
fees were paid for non-audit related services.

                                     2004      2005
Audit Fees (1)                     $124,000   140,000
Audit-Related Fees (2)              $15,750    54,600
Tax Fees (3)                             --        --
                                  ---------- ---------
             Total                 $139,750   194,600
                                  ========== =========

      (1)   The aggregate  fees billed for each year for  professional  services
            rendered by our principal  accountant for the audit of our financial
            statements and review of financial  statements  included in our Form
            10-Q.
      (2)   Fees  billed for  assurance  and related  services by our  principal
            accountant  for the filing of a  registration  statement on Form S-3
            not reported above.
      (3)   There  were  no  fees  billed  by  our  principal   accountant   for
            professional  services  rendered for compliance,  tax advice and tax
            planning.

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.

                                       60
<PAGE>

PART IV

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

               (a) Exhibits

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

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

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

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

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

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

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

            3.8   Articles of  Amendment  to the  Articles of  Incorporation  of
                  MediaBay, Inc. filed May 3, 2005. (18)

            10.1  1997 Stock Option Plan. (1)

            10.2  1999 Stock Incentive Plan. (2)

            10.3  2000 Stock Incentive Plan. (5)

            10.4  2001 Stock Incentive Plan. (6)

            10.5  2004 Stock Incentive Plan. (13)

            10.6  Form of 2004 Stock Incentive Plan  Non-Qualified  Stock Option
                  Agreement for Officers. (16)

            10.7  Form of 2004 Stock Incentive Plan  Non-Qualified  Stock Option
                  Agreement for Directors. (16)

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

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

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

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

            10.12 Employment Agreement between the Registrant and Jeffrey Dittus
                  dated June 6, 2005. (14)

            10.13 Employment Agreement between the Registrant and Joseph Rosetti
                  dated June 6, 2005. (14)

            10.14 Employment  Agreement  between  the  Registrant  and John Levy
                  dated June 6, 2005. (14)

            10.15 Employment  Agreement  between the  Registrant and Robert Toro
                  dated June 6, 2005. (14)

            10.16 Amendment  No. 1 dated  July 5, 2005 to  Employment  Agreement
                  between the  Registrant and Jeffery Dittus dated June 6, 2005.
                  (15)

            10.17 Employment  Agreement  between  the  Registrant  and  Patricia
                  Campbell dated April 1, 2005 (effective April 4, 2005. (17)

            10.18 Employment Agreement between the Registrant and Howard Herrick
                  dated October 30, 2002. (21)

            10.19 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Jeffrey Dittus. (19)

            10.20 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Joseph Rosetti. (19)

                                       61
<PAGE>

            10.21 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Robert Toro. (19)

            10.22 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Patricia Campbell. (19)

            10.23 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Daniel Altobello. (19)

            10.24 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Richard Berman. (19)

            10.25 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Paul Neuwirth. (19)

            10.26 Option  Agreement  dated  as of  April  4,  2005  between  the
                  Registrant and Stephen Yarvis. (19)

            10.27 Severance and Consulting  Agreement between the Registrant and
                  John Levy. (19)

            10.28 Approval of Bonus Payable to Robert Toro. (19)

            10.29 Letter  Agreement  among the  Registrant  and the Forest  Hill
                  Entities dated February 8, 2005. (20)

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

            10.31 Registration  Rights  Agreement  dated  March 21,  2005 by and
                  between the Registrant and Goldman, Sachs & Co. (14)

            10.32 Registration  Rights Agreement (No. 1) dated March 19, 2005 by
                  and among  the  Registrant.,  Norton  Herrick  and  Huntingdon
                  Corporation. (14)

            10.33 Registration  Rights Agreement (No. 2) dated March 19, 2005 by
                  and  among  the  Registrant,  Norton  Herrick  and  Huntingdon
                  Corporation. (14)

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

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

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

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

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

            10.39 Form of Key  Employee  Agreement  dated March 21, 2005 between
                  the  Registrant.  and each of  Jeffrey  A.  Dittus  and Joseph
                  Rosetti. (14)

            10.40 Form of Voting Agreement and Proxy dated March 21, 2005 by and
                  among  the   Registrant,   Norton   Herrick   and   Huntingdon
                  Corporation. (14)

            10.41 Agreement  dated March 19,  2005 by and among the  Registrant,
                  Norton Herrick and Huntingdon Corporation. (14)

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

            10.43 Form of Letter  Agreement  between the  Registrant and each of
                  Stephen  Yarvis,  Paul  Ehrlich,  Paul  Neuwirth  and  Richard
                  Berman. (14)

            10.44 Transition  Agreement  dated  January 31, 2006, by and between
                  the Registrant and Patricia Campbell. (23)

            10.45 Lease on office space at 2 Ridgedale Avenue, Cedar Knolls, New
                  Jersey.

            10.46 Settlement Agreement by and between the Registrant and Premier
                  Electronics, Inc.

            21.1  Subsidiaries of the Company. (11)

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

            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.

                                       62
<PAGE>

            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 Robert  Toro,  Chief  Financial  Officer  of
                  MediaBay,  Inc., pursuant to 18 U.S.C Section 1350, as Adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

--------------------------------------------------------------------------------
      * Previously filed

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

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

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

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

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

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

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

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

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

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

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

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

      (14)  Incorporated by reference to the applicable exhibit contained in our
            Current Report on Form 8-K for the  reportable  event dated June 10,
            2005.

      (15)  Incorporated by reference to the applicable exhibit contained in our
            Current  Report on Form 8-K for the  reportable  event dated July 7,
            2005.

      (16)  Incorporated by reference to the applicable exhibit contained in our
            Current Report on Form 10-Q for the quarterly  period ended June 30,
            2005.

      (17)  Incorporated by reference to the applicable exhibit contained in our
            Current Report on Form 8-K for the  reportable  event dated April 7,
            2005.

      (18)  Incorporated by reference to the applicable exhibit contained in our
            Current  Report on Form 8-K for the  reportable  event  dated May 3,
            2005.

      (19)  Incorporated by reference to the applicable exhibit contained in our
            Quarterly  Report on Form 10-Q for the quarterly  period ended March
            31, 2005.

      (20)  Incorporated by reference to the applicable exhibit contained in our
            Annual  Report on Form 10-K for the fiscal year ended  December  31,
            2004.

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

                                       63
<PAGE>

      (22)  Incorporated by reference to the applicable exhibit contained in our
            Quarterly  Report  on Form  10-Q  for  the  quarterly  period  ended
            September 30, 2005.

      (23)  Incorporated by reference to the applicable exhibit contained in our
            Current  Report on Form 8-K for the  reportable  event dated January
            31, 2006.

      (b)   Financial Statement Schedule

            Schedule -I - Valuation and Qualifying Accounts and Reserve






























                                       64

<PAGE>

                                 MediaBay, Inc.
                          Index to Financial Statements

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

Consolidated Balance Sheets as of December 31, 2005 and 2004.................F-3

Consolidated Statements of Operations for the years ended December 31, 2005,
2004, and 2003...............................................................F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003.............................................F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004, and 2003...............................................................F-6

Notes to Consolidated Financial Statements...................................F-7

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
























                                      F-1

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
MediaBay, Inc. and Subsidiaries

      We have audited the accompanying  consolidated balance sheets of MediaBay,
Inc. and Subsidiaries  (the "Company") as of December 31, 2005 and 2004, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for each of the three years in the period ended  December  31,  2005.  Our
audits also included the  financial  statement  schedule  listed in the Index at
page S-1 as of December  31, 2005 and 2004 and for the three years in the period
ended  December  31,  2005.  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 audits.

      We conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  The  Company is not
required  to have,  nor were we engaged  to  perform,  an audit of its  internal
control over financial reporting.  Our audits included consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly  we express  no such  opinion.  An audit  also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MediaBay,  Inc.
and Subsidiaries at December 31, 2005 and 2004, and the consolidated  results of
their  operations and their cash flows for each of the three years in the period
ended  December 31, 2005, 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, 2005 and 2004 and for years then
ended,  when  considered  in  relation  to  the  consolidated   basic  financial
statements  taken as a whole,  presents  fairly in all  material  respects,  the
information set forth therein.

      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
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, P.C.
Edison, New Jersey
March 30, 2006

                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                                                         MEDIABAY, INC.
                                                   Consolidated Balance Sheets
                                                     (Dollars in thousands)

                                                                                                       December 31,
                                                                                                  2005               2004
                                                                                             ---------------    ---------------
                                           Assets
Current Assets:
<S>                                                                                          <C>                <C>
    Cash and cash equivalents...........................................................     $      8,243       $      3,122

    Accounts receivable, net of allowances for sales returns and doubtful accounts of
       $1,533 and $2,708 at December 31, 2005 and 2004, respectively....................              691              1,285
    Inventory...........................................................................              763              1,530
    Prepaid expenses and other current assets...........................................              464                199
    Royalty advances....................................................................              523                489
                                                                                             ---------------    ---------------
        Total current assets............................................................           10,684              6,625
Fixed assets, net.......................................................................            1,785                243
Other intangibles, net..................................................................               42                 50
                                                                                                    6,156
Goodwill................................................................................                               9,658
                                                                                             ---------------    ---------------
                                                                                             $     18,667       $     16,576
                                                                                             ===============    ===============
                     Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
    Accounts payable and accrued expenses...............................................     $      4,969       $      5,361
    Accounts payable, related party.....................................................               --                315
    Current portion of long-term debt.......................................................           --                200
    Short-term debt, net of original issue discount of $52 and $54 at December 31, 2005 and
       2004, respectively...................................................................           32                 29
    Preferred dividend payable..............................................................          319                 --
                                                                                             ---------------    ---------------
        Total current liabilities.......................................................            5,320              5,905
Long-term debt, net of original issue discount of $111 and $908
    at December 31, 2005 and 2004, respectively.........................................              608              9,102
Related party long-term debt including accrued interest.................................              --               7,750
                                                                                             ---------------    ---------------
        Total liabilities...............................................................            5,928             22,757
                                                                                             ---------------    ---------------
Commitments and Contingencies                                                                          --                 --

Preferred stock, no par value, authorized 5,000,000 shares; no shares of Series
    A outstanding at December 31, 2005 and 25,000 shares of Series A outstanding
    at December 31, 2004; 200 shares of Series B issued and outstanding at
    December 31, 2005 and December 31, 2004; no shares of Series C issued and
    outstanding at December 31, 2005 and 43,527 shares of Series C issued and
    outstanding at December 31, 2004; and 21,063 shares of Series D issued and
    outstanding at December 31, 2005
    and no shares of Series D issued and outstanding at December 31, 2004...............           11,436              6,873
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
    10,516,414 and 4,140,663 at December 31, 2005 and 2004, respectively................          121,681            101,966
Contributed capital.....................................................................           42,637             17,682
Accumulated deficit.....................................................................         (163,015)          (132,702)
                                                                                             ---------------    ---------------
Total common stockholders' equity (deficit).............................................           12,739             (6,181)
                                                                                             ---------------    ---------------
                                                                                             $     18,667       $     16,576
                                                                                             ===============    ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3

<PAGE>

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

                                                                                Years ended December 31,
                                                                        2005                2004             2003
                                                                  -----------------    ---------------   --------------
<S>                                                               <C>                   <C>                <C>
Sales, net of returns, discounts and allowances of $1,825,
     $5,363 and $16,960 for the years ended December 31,
     2005, 2004 and 2003, respectively..........................  $     8,955           $  18,831          $ 36,617
Cost of sales...................................................        5,920              12,547            17,764
Advertising and promotion expense...............................        2,091               5,546            10,452
Bad debt expense................................................           51                 829             3,940
General and administrative......................................        6,895               6,043             6,816
Severance and other termination costs...........................          697                  --               544
Depreciation and amortization...................................          154                 144               328
Charge for impairment of goodwill                                       3,502                  --                --
                                                                  -----------------    ---------------   --------------
      Operating (loss) income...................................      (10,355)             (6,278)           (3,227)
Interest (expense)..............................................         (767)             (9,082)           (1,925)
Interest income.................................................          257                  --                --
Loss on early extinguishment of debt............................         (579)                 --                --
                                                                  -----------------    ---------------   --------------
      Loss before income tax expense............................      (11,444)            (15,360)           (5,152)
Income tax expense..............................................           --              14,753             1,471
                                                                  -----------------    ---------------   --------------
      Net loss..................................................      (11,444)            (30,113)           (6,623)
Dividends on preferred stock....................................        1,446                 574               246
Deemed dividend on beneficial conversion of
    Series D Preferred Stock....................................       17,423                  --                --
                                                                  -----------------    ---------------   --------------
      Net loss applicable to common shares......................  $   (30,313)          $ (30,687)         $(6,869)
                                                                  =================    ===============   ==============


Basic and diluted loss per share:

      Basic and diluted loss per share..........................  $     (4.08)          $  (10.24)         $ (2.92)
                                                                  =================    ===============   ==============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>

                                 MEDIABAY, INC.
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 2005, 2004 and 2003
                             (Amounts in thousands)


<TABLE>
<CAPTION>
                                              Series A                        Series B                     Series C
                                              Preferred       Series A        Preferred       Series B    Preferred    Series C
                                               stock -        Preferred        stock -        Preferred     stock -    Preferred
                                              number of       stock no        number of       stock no     number of    stock no
                                               shares         parvalue         shares         par value     shares      parvalue
<S>                                          <C>         <C>                             <C>                        <C>
Balance at January1, 2003                         25,000      $ 2,500                 -       $       -            -     $     -
Issuance of Series B Preferred Stock                   -            -             3,350             328            -           -
Warrants granted in consideration for
non-compete agreements                                 -            -                 -               -            -           -
Exercise of options                                    -            -                 -               -            -           -
Stock issued to consultants                            -            -                 -               -            -           -
Options issued to consultants                          -            -                 -               -            -           -
Columbia House settlement                              -            -                 -               -            -           -
Stock tendered as payment of settlement                -            -                 -               -            -           -
Warrants issued in connections
convectionmith financing                               -            -                 -               -            -           -
Options issued to Directors                            -            -                 -               -            -           -
Loss applicable to common shares                       -            -                 -               -            -           -
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                      25,000        2,500             3,350             328            -           -
Conversion of Series B Preferred Stock,
net of fees                                            -            -            (3,150)           (308)           -           -
Issuance of Series C Preferred Stock                   -            -                 -               -       43,527       4,353
Conversion of subordinated debt                        -            -                 -               -            -           -
Sales of common stock                                  -            -                 -               -            -           -
Exercise of options and warrants                       -            -                 -               -            -           -
Stock issued to consultants                            -            -                 -               -            -           -
Beneficial conversion feature of debt issued           -            -                 -               -            -           -
Warrants issued in connection with financing           -            -                 -               -            -           -
Inducement to convert                                  -            -                 -               -            -           -
Settlement of put obligation                           -            -                 -               -            -           -
Options issued to Directors                            -            -                 -               -            -           -
Options issued to consultants                          -            -                 -               -            -           -
Loss applicable to common shares                       -            -                 -               -            -           -
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004                      25,000        2,500               200              20       43,527       4,353
Conversion of common stock to preferred                -           -                  -               -            -           -
Conversion of debt to common stock                     -           -                  -               -            -           -
Issuance ot common stock for extension of
registration rights agreement
Exercise of options
Conversion of preferred stock to common          (25,000)      (2,500)                -               -      (43,527)     (4,353)
Warrants issued in connection with sale of
Series D Preferred Stock                               -            -                 -               -            -           -
Beneficial conversion on Series D
Preferred Stock                                        -            -                 -               -            -           -
Preferred dividends paid in stock                      -            -                 -               -            -           -
Accretion of original issue discount
and beneficial conversion                              -            -                 -               -            -           -
Common stock issued to vendor                          -            -                 -               -            -           -
Sale of Series D Preferred Stock,
net of costs and beneficial conversion                 -            -                 -               -            -           -
Loss for the year ended December 31, 2005              -            -                 -               -            -           -
----------------------------------------------------------------------------------------------------------------------------------
                                                       -      $     -               200       $      20            -     $     -
==================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                              Series D
                                              Preferred       Series D       Common
                                               stock -         Preferred      stock      Common
                                              number of       stock no       number of  stock - no    Contributed   Accumulated
                                               shares         parvalue       shares     par value       capital       deficit
<S>                                                           <C>                <C>      <C>           <C>         <C>
Balance at January1, 2003                             -       $       -          2,390    $ 94,800      $   8,251   $   (95,146)
Issuance of Series B Preferred Stock                  -               -              -           -              -             -
Warrants granted in consideration for
non-compete agreements                                -               -              -           -             23             -
Exercise of options                                   -               -             18           -              -             -
Stock issued to consultants                           -               -              5          14              -             -
Options issued to consultants                         -               -              -           -             26             -
Columbia House settlement                             -               -            (54)       (247)         3,020             -
Stock tendered as payment of settlement               -               -           (183)          -              -             -
Warrants issued in connections
convectionmith financing                              -               -              -           -            176             -
Options issued to Directors                           -               -              -           -             73             -
Loss applicable to common shares                      -               -              -           -              -        (6,869)
--------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                          -               -          2,176      94,567         11,569      (102,015)
Conversion of Series B Preferred Stock,
net of fees                                           -               -             78         365              -             -
Issuance of Series C Preferred Stock                  -               -              -           -              -             -
Conversion of subordinated debt                       -               -          1,433       5,554              -             -
Sales of common stock                                 -               -            300         900              -             -
Exercise of options and warrants                      -               -            150         562              -             -
Stock issued to consultants                           -               -              4          18              -             -
Beneficial conversion feature of debt issued          -               -              -           -          3,991             -
Warrants issued in connection with financing          -               -              -           -          1,164             -
Inducement to convert                                 -               -              -           -            391             -
Settlement of put obligation                          -               -              -           -            259             -
Options issued to Directors                           -               -              -           -            219             -
Options issued to consultants                         -               -              -           -             89             -
Loss applicable to common shares                      -               -              -           -              -       (30,687)
--------------------------------------------------------------------------------------------------------------------------------
Balance at lkcember 31, 2004                          -               -          4,141     101,966         17,682      (132,702)
Conversion of common stock to preferred                             909           (300)       (909)             -             -
Conversion of debt to common stock                    -                          2,039       5,784              -             -
Issuance ot common stock for extension of
registration rights agreement                                                       19           -
Exercise of options                                                                 17          40
Conversion of preferred stock to common         (14,837)         (9,085)         4,497      15,938              -             -
Warrants issued in connection with sale of
Series D Preferred Stock                              -               -              -           -          12,838            -
Beneficial conversion on Series D
Preferred Stock                                       -               -              -           -          17,423            -
Preferred dividends paid in stock                     -               -             26          47              -             -
Accretion of original issue discount
and beneficial conversion                             -           6,741              -      (1,435)        (5,306)            -
Common stock issued to vendor                         -               -             77         250              -             -
Sale of Series D Preferred Stock,
net of costs and beneficial conversion           35,900          12,851              -           -              -             -
Loss for the year ended December 31, 2005             -               -              -           -              -       (30,313)
--------------------------------------------------------------------------------------------------------------------------------
                                                 21,063        $ 11,416          10,516   $121,681      $  42,637    $ (163,015)
================================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       F-5

<PAGE>

                                 MEDIABAY, INC.

                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                   Years ended December 31,
                                                                          2005             2004             2003
                                                                        -------------    -------------    -------------
Cash flows from operating activities:
<S>                                                                     <C>              <C>               <C>
Net loss.............................................................   $   (11,444)     $   (30,113)      $   (6,623)
  Adjustments to reconcile net loss to net cash used in
      operating activities:
    Charge for impairment of goodwill                                         3,502               --               --
    Inventory obsolescence included in cost of goods sold............            --            2,530              285
    Write-off of non-recoupable royalty advances                                 --            1,215               --
    Income tax expense...............................................            --           14,753            1,471
    Non-cash beneficial conversion                                                             4,382               --
    Amortization of deferred member acquisition costs................            17            3,509            6,625
    Loss on extinguishment of debt                                              579            1,532               --
    Non-current accrued interest.....................................           155              898              909
    Amortization of deferred financing costs and original issue
    discount.........................................................           240            1,329              561
    Depreciation and amortization....................................           154              144              328
    Non-cash compensation expense....................................                            328              118
    Changes in asset and liability accounts, net of acquisitions and
       asset write-downs:
      Decrease in accounts receivable, net...........................           816            1,979            4,195
      Decrease in inventory..........................................           767              103              896
      (Increase) decrease in prepaid expenses
        and other current assets.....................................          (319)             (48)             300
      (Increase) decrease in royalty advances........................           (34)          (1,000)             240
      Increase in deferred member acquisition costs..................            --             (356)          (2,410)
      (Decrease) increase in accounts payable and accrued expenses...          (643)          (5,406)          (5,346)
                                                                        -------------    -------------    -------------
       Net cash (used in) provided by operating activities...........        (6,210)          (4,221)           1,549
                                                                        -------------    -------------    -------------
Cash flows from investing activities:
  Purchase of fixed assets...........................................        (1,687)            (136)             (16)
  Additions to intangible assets.....................................            --              (20)            (102)
  Cash paid in acquisitions..........................................            --               --             (148)
                                                                        -------------    -------------    -------------
       Net cash used in investing activities.........................        (1,687)            (156)            (266)
                                                                        -------------    -------------    -------------
Cash flows from financing activities:
  Proceeds from issuance of debt                                                 --           13,500            1,065
  Redemption of Series A and C Preferred Stock                               (5,789)
  Proceeds from sale of common stock.................................            --              900               --
  Proceeds from exercise of stock options............................            40              563               --
  Proceeds from sale of preferred stock and warrants, net of costs...        31,421               --              328
  Repayment of long-term debt........................................       (11,763)          (6,008)          (1,615)
  Payment of dividends...............................................          (891)              --               --
  Increase in deferred financing costs...............................            --           (2,139)             (99)
  Payments made in connection with litigation
      settlement recorded in contributed
      capital, net of cash received..................................            --               --             (676)
                                                                        -------------    -------------    -------------
       Net cash provided by (used in) financing activities...........        13,018            6,816             (997)
                                                                        -------------    -------------    -------------
Net increase in cash and cash equivalents............................         5,121            2,439              286
Cash and cash equivalents at beginning of year.......................         3,122              683              397
                                                                        -------------    -------------    -------------
Cash and cash equivalents at end of year.............................   $     8,243      $     3,122       $      683
                                                                        =============    =============    =============
</TABLE>
See accompanying notes to consolidated financial statements.

                                       F-6

<PAGE>

                                 MEDIABAY, INC.
                   Notes to Consolidated Financial Statements
                  Years ended December 31, 2005, 2004 and 2003
                  (Dollars in thousands, except per share data)

(1)   Liquidity and Cash Flow

      Historically,  the Company has funded its cash requirements  through sales
of equity and debt securities and borrowings from financial institutions and its
principal shareholders.

      As of December  31,  2005,  the Company had cash on hand of $8.2  million,
which is  substantially  greater  than the $3.1 million cash on hand at December
31, 2004. However,  the Company's cash balance has declined during 2006 and will
continue to decline for the foreseeable future unless we obtain financing, as we
continue to use cash in our operations.

      The Company is currently  pursuing a new strategy of selling  downloadable
spoken word and hard good format content  online.  To date, its sales of digital
downloads have been minimal.

      Because  the  Company  is  pursuing  a  new  strategy,  which  focuses  on
downloadable  spoken word  content,  it has not, and will not,  devote the funds
necessary to acquire new Audio Book Club members to offset member attrition.  As
a result,  revenue will  continue to decline,  which will continue to negatively
impact its  performance  and result in negative cash flow from  operations.  The
Company expects this trend to continue until such time, if ever, it can generate
significant  revenue  from the sale of  downloadable  spoken  word  content  and
attract and  establish a  meaningful  customer  base for our online  websites or
other websites it may develop.

The Company believes that its existing cash plus  anticipated  revenues will not
be sufficient to fund its capital  commitments  described  below and operate its
business for the next twelve months without raising  additional  financing.  The
Company has engaged investment  bankers to help seek strategic  alternatives for
it including raising  additional  financing.  There can be no assurance that the
Company will be successful in raising additional financing. The failure to do so
in a timely manner will limit its ability to execute its business plan and could
ultimately impair its ability to continue as a going concern.


(2)   Organization

      MediaBay is a Florida  corporation  formed on August 16, 1993. The Company
is a digital media,  marketing and  publishing  company  specializing  in spoken
audio  entertainment,  such as audio readings of books,  newspapers,  magazines,
original productions and radio broadcast transcripts. Today, the Company has two
principal content libraries:  (1) Audiobooks which it sells via digital download
and  on CD  and  cassette  through  Soundsgood.com,  the  Audio  Book  Club  and
third-party websites;  and (2) an archive of the history of American radio which
it  produces  and  sells  on CD  and  cassettes  through  its  catalog,  a  mail
order-based   continuity   program,   retail  outlets,   its  on-line   download
subscription service and third-party websites.  The Company broadcasts its radio
programs through a syndicated  radio show on 200 commercial  stations across the
United States,  as well as its 24-hour Radio Classics  channels on Sirius and XM
Satellite Radio.

                                      F-7
<PAGE>

(3)   Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

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

Inventory

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

Prepaid Expenses

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

Fixed Assets, Net

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

      Costs of internal  use  software  are  accounted  for in  accordance  with
Statement of Position 98-1 ("SOP 98-1"),  "Accounting  for the Costs of Computer
Software  Developed or Obtained for Internal Use" and Emerging  Issue Task Force
Issue No. 00-02 ("EITF 00-02"),  "Accounting for Website Development Costs." SOP
98-1 and EITF 00-02  require  that the Company  expense  computer  software  and
website  development  costs as they are incurred during the preliminary  project
stage.  Once the  capitalization  criteria  of SOP 98-1 and EITF 00-02 have been
met,  external direct costs of materials and services  consumed in developing or
obtaining internal-use software,  including website development, the payroll and
payroll-related  costs for  employees who are directly  associated  with and who
devote time to the internal use computer software and associated  interest costs
are capitalized.  Capitalized costs are amortized using the straight-line method
over the software's estimated useful life, estimated at three years. Capitalized
internal  use  software  and  website  development  costs are  included in Fixed
Assets, net, in the accompanying balance sheets.

                                      F-8
<PAGE>

Other Intangibles, Net

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

Goodwill

      Goodwill  represents  the excess of the purchase price over the fair value
of net assets acquired in business combinations accounted for using the purchase
method of  accounting.  In  accordance  with  Statement of Financial  Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets",  the Company
ceased  amortization  of goodwill as of January 1, 2002.  The Company  performed
annual impairment tests as of December 31, 2005, 2004 and 2003 in February 2006,
January 2005 and October  2003.  The Company  recorded an  impairment  charge of
$3,502 at December 31, 2005 as a result of the  impairment  tested  conducted in
February 2006.

Revenue Recognition

      During the years  ended  December  31,  2005,  2004 and 2003,  the Company
derived its principal  revenue through sales of audiobooks,  classic radio shows
and other spoken word audio products directly to consumers  principally  through
direct mail and the  Internet.  The  Company  also sold  classic  radio shows to
retailers  either  directly  or  through   distributors.   The  Company  derived
additional  revenue  through  rental of its  proprietary  database  of names and
addresses  to  non-competing  third  parties  through list rental  brokers.  The
Company also derived a small amount of revenue from advertisers  included in its
nationally  syndicated  classic  radio shows.  The Company  recognizes  sales to
consumers,  retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on  notification  by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification  of the airing of the  advertisement  by the media  buying  company
representing the Company or directly from the broadcaster. Allowances for future
returns are based upon historical experience and evaluation of current trends.

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

Shipping and Handling Revenue and Costs

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

Cost of Sales

      Cost of sales includes the following:

      o     Product costs  (including free audiobooks in the initial  enrollment
            offer  to  prospective  customers  as well as the  cost to  digitize
            content for download)
      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

                                      F-9
<PAGE>

Cooperative Advertising and Related Selling Expenses

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

Bad Debt Expense

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

General and Administrative Costs

      General and administrative costs include the following:

      o     Bad debt expense
      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  employee  stock  options in  accordance  with
Accounting  Principles  Board Opinion No. 25 ("APB 25"),  "Accounting  for Stock
Issued to Employees." In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation"   ("SFAS  123")  was  issued.   SFAS  123,  which  prescribes  the
recognition  of  compensation  expense based on the fair value of options on the
grant date,  allows  companies to continue  applying APB 25 if certain pro forma
disclosures are made assuming a hypothetical fair value method  application.  In
December 2004, the FASB issued SFAS No. 123(R),  "Share-Based Payment," which is
a revision of SFAS No. 123,  "Accounting  for  Stock-Based  Compensation".  SFAS
123(R)  requires  that the  compensation  cost relating to  share-based  payment
transactions be recognized in financial  statements.  The compensation cost will
be  measured  based on the fair  value of the  equity or  liability  instruments
issued.  The  Statement  is  effective  as of the  beginning of the first annual
period  beginning  after  June 15,  2005.  The  cumulative  effect of  initially
applying  Statement  123(R),  if  any,  will  be  recognized  as of the  date of
adoption.  The  Company  evaluated  the impact of  Statement  SFAS 123(R) on its
financial position and results of operations and does not expected the impact to
be material as all options  outstanding  at December 31, 2005 were fully vested.
Had compensation  expense for the Company's stock options been recognized on the
fair value on the grant date under SFAS 123, the Company's net loss and net loss
per share for the year  ended  December  31,  2005 and 2004  would  have been as
follows:

                                      F-10
<PAGE>

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                                    2005               2004               2003
                                                              ------------------ ------------------ ------------------
<S>                                                            <C>                 <C>                 <C>
Net loss applicable to common shares, as reported             $    (30,313)        $  (30,687)        $   (6,869)

Add: Stock-based employee compensation expense included in
     reported net income applicable to common shares, net
     of related tax effects                                             --                 --                 --

Deduct: Total stock-based employee compensation expense
     determined under fair value based method for all
     awards, net of related tax effects                             (2,765)            (2,092)            (1,486)
                                                              ------------------ ------------------ ------------------
Pro forma net loss applicable to common shares                $    (33,078)        $  (32,779)        $   (8,355)
                                                              ================== ================== ==================
Net loss per share:

Basic and diluted-as reported                                 $      (4.08)        $   (10.24)        $    (2.92)
                                                              ================== ================== ==================

Basic and diluted-pro forma                                   $      (4.45)        $   (10.94)        $    (3.56)
                                                              ================== ================== ==================
</TABLE>

Income Taxes

      Income  taxes are  accounted  for under  the asset and  liability  method.
Deferred  tax  assets  and   liabilities  are  recognized  for  the  future  tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amount of existing  assets and  liabilities  and their  respective tax
basis and operating loss and tax credit carryforwards.  The ultimate realization
of deferred tax assets is dependent on the  generation of future  taxable income
during the periods in which temporary timing differences become deductible.  The
Company determines the utilization of deferred tax assets in the future based on
current year projections by management.  A valuation  allowance is provided when
it is more likely than not that some  portion or all of the  deferred tax assets
will not be realized.  Deferred tax assets and  liabilities  are measured  using
enacted  tax rates  expected  to apply to  taxable  income in the years in which
those temporary  differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.

      Based on a change in Company  strategy,  which the Company  believes  will
result in lower sales and losses in the near term, but  ultimately  will be more
profitable,  the Company has determined  that it is more likely than not that it
will,  in the  foreseeable  future,  be unable to realize all or part of its net
deferred  tax asset.  The  Company has  accordingly  made an  adjustment  to the
deferred tax asset recording an increase to the valuation  allowance,  resulting
in a deferred tax expense  charged against income in the fourth quarter of 2004,
the period when such  determination  was made. In 2005 the Company  continues to
provide a full valuation allowance for its net deferred tax assets.

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

                                      F-11
<PAGE>

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.

      SOP 93-7 requires that the realizability of the mounts of  direct-response
advertising reported as assets should be evaluated at each balance sheet date by
comparing the carrying amounts of the assets to their probable  remaining future
net revenues.  Based on a change in Company strategy, which the Company believes
will result in lower sales and losses in the near term, but  ultimately  will be
more  profitable,  the Company  determined  that the future net revenue from the
Company's  Audio  Book  Club  does  not  support  the  carrying  amount  of  the
direct-response  advertising reported as assets relating to the Audio Book Club.
Accordingly  the Company made an  adjustment  to write-off  the entire  carrying
amount of the asset in the fourth  quarter for 2004  resulting in an increase in
advertising  expense  of  $846.  At  December  31,  2005,  the  Company  had  no
direct-response advertising reported as assets.

Royalties

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

Use of Estimates

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

Recent Accounting Pronouncements

Consolidation of variable interest entities

      In March  2005,  the FASB issued  Staff  Position  (FSP) No. FIN  46(R)-5,
Implicit Variable  Interests under FASB  Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities. This FSP clarifies that when
applying the  variable  interest  consolidation  model,  a reporting  enterprise
should  consider  whether it holds an implicit  variable  interest in a variable
interest entity (VIE) or potential VIE when specific  conditions  exist. FSP No.
FIN 46(R)-5 is effective as of April 1, 2005. There was no impact to the Company
from the adoption of this statement. Accounting changes and error corrections

      In May 2005,  the FASB issued SFAS No. 154  "Accounting  Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3". This
Statement  requires  retrospective   application  to  prior  periods'  financial
statements of changes in accounting  principle,  unless it is  impracticable  to
determine  either the  period-specific  effects or the cumulative  effect of the
change. This Statement does not change the guidance for reporting the correction
of an error in previously issued financial  statements or a change in accounting
estimate.  The  provisions of this  Statement  shall be effective for accounting
changes and correction of errors made in fiscal years  beginning  after December
15, 2005. The impact of FASB 154 will depend on the accounting  change,  if any,
in future periods.

                                      F-12
<PAGE>

Share-based payment

      In December 2004, the FASB issued SFAS No. 123(R),  "Share-Based Payment,"
which is a revision of SFAS No. 123, "Accounting for Stock-Based  Compensation".
SFAS 123(R) requires that the compensation cost relating to share-based  payment
transactions be recognized in financial  statements.  The compensation cost will
be  measured  based on the fair  value of the  equity or  liability  instruments
issued.  The  Statement  is  effective  as of the  beginning of the first annual
period  beginning after June 15, 2005. We are required to adopt Statement 123(R)
in 2006. This statement applies to all awards granted after the date of adoption
and to awards modified, repurchased or cancelled after that date. The cumulative
effect of initially  applying Statement 123(R), if any, will be recognized as of
the date of adoption. There was no impact to the Company as a result of adopting
Statement SFAS 123(R) as all options outstanding at December 31, 2005 were fully
vested. Exchanges of Nonmonetary Assets

      In  December  2004,  the FASB  issued  Statement  No.  153,  Exchanges  of
Nonmonetary  Assets,  an Amendment of APB Opinion No. 29 ("Statement  No. 153").
Statement No.153 is effective for nonmonetary  asset exchanges  occurring in our
fiscal year beginning January 1, 2006. Statement No. 153 requires that exchanges
of productive  assets be accounted for at fair value unless fair value cannot be
reasonably determined or the transaction lacks commercial  substance.  Statement
No. 153 is not expected to have a material impact on our financial statements.

Inventory costs

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


(4)   Fixed Assets

      Fixed Assets consist of the following as of December 31,

                                                         2005          2004
                                                       ---------     --------
      Capital leases, equipment and related software...$  1,170     $   959
      Furniture and fixtures...........................      84          84
      Leasehold improvements...........................      74          74
      Web site development costs.......................   1,532          57
                                                       --------     -------
      Total............................................   2,860       1,174
      Accumulated depreciation.........................  (1,076)       (931)
                                                       --------     -------
                                                       $  1,784     $   243
                                                       ========     =======

      Depreciation  expense for the years ended December 31, 2005, 2004 and 2003
was $145, $120 and $146, respectively.

(5)   Goodwill and Other Intangibles

      SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") requires
the  Company to perform an  evaluation  of  goodwill  impairment  annually.  The
Company  conducted its annual  impairment test for 2005 in February 2006 and for
2004 in January 2005,  utilizing the services of an independent  appraiser,  and
its annual  impairment  tests for 2003 in October 2003. The Company  recorded an
impairment  charge of $3,502 at December 31, 2005 as a result of the  impairment
test conducted in February 2006.

                                      F-13
<PAGE>

      The following is a  reconciliation  of changes in the carrying  amounts of
goodwill for the Radio Spirits reportable segment for each of 2005 and 2004:

                                                  2005           2004

Balance at January 1,                          $   9,658      $   9,658
Charge for impairment of Goodwill                 (3,502)            --
                                               -----------    -----------
Ending Balance                                 $   6,156      $   9,658
                                               ===========    ===========

      The following table presents details of other  intangibles at December 31,
2005 and December 31, 2004:

<TABLE>
<CAPTION>
                                                 December 31, 2005                          December 31, 2004
                                     ---------------------------------------    ---------------------------------------
                                                    Accumulated                                Accumulated
                                       Cost        Amortization        Net         Cost        Amortization        Net
                                     ---------     ------------     --------    --------      --------------    --------
<S>                                  <C>             <C>             <C>        <C>            <C>              <C>
Mailing Agreements                   $     592       $      592      $    --    $     592      $      592       $    --
Customer Lists                           4,380            4,380           --        4,380           4,380            --
Non-Compete Agreements                     313              296           17          313             288            25
Other                                       25               --           25           25              --            25
                                     ---------       ----------      -------    ---------      ----------       -------
Total Other Intangibles              $   5,310       $    5,268      $    42    $   5,310      $    5,260       $    50
                                     =========       ==========      =======    =========      ==========       =======
</TABLE>

      Amortization of intangible assets was $8, $24 and $181 for the years ended
December 31, 2005, 2004 and 2003, respectively. The Company estimates intangible
amortization expenses of $8 in 2006 and $9 in 2007.

(6)   Debt

<TABLE>
<CAPTION>
                                                                           As of
                                                             December 31,         December 31,
                                                                 2005                 2004
                                                             ------------         ------------
<S>                                                          <C>                   <C>
     Credit agreement, senior secured debt,
          net of original issue discount                     $        --           $    8,661
     Premier debt, net of original issue discount                    640                 670
     Related party notes and related accrued interest,
          net of original issue discount                              --               7,750
                                                             ------------         ------------
     Total debt                                                      640               17,081
              Less: current portion                                  (32)                (229)
                                                             ------------         ------------
     Long-term debt                                                  608           $   16,852
                                                             ============         ============
</TABLE>

March 2005 Payment and Conversion of Debt

      On March 23, 2005,  the Company  completed the March  Financing  described
below.

                                      F-14
<PAGE>

      Concurrently  with the March  Financing,  the Company  repaid from the net
proceeds  all of the  principal  and  accrued  and  unpaid  interest  due on the
Company's  outstanding  senior notes issued on April 28, 2004,  in the aggregate
amount of  approximately  $9,400.  The  Company  reported  a charge in the first
quarter  of 2005 of $579 to  reflect  the  write-off  of  unamortized  financing
charges related to the repayment of this debt.

      Also in connection with the March  Financing,  the Company entered into an
agreement (the "Herrick  Agreement") with the Herrick Entities,  described below
(the "Herrick Agreement").  Pursuant to the Herrick Agreement, concurrently with
the  Financing,  among  other  actions,  all  $5,784  principal  amount  of  the
convertible  notes of the Company owned by the Herrick  Entities were  converted
into an aggregate of approximately  1.7 million shares of Common Stock, at their
stated conversion rate of $3.36 per share.

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

Convertible Debt

      On January 29, 2004, the Company issued $4,000 aggregate  principal amount
of promissory  notes (the "January 2004 Notes") and warrants to purchase 392,158
shares of common stock (the "Investor Warrants") to institutional and accredited
investors (the  "Offering").  The notes were due on the earlier of (i) April 30,
2005,  (ii)  such  date  on or  after  July 1,  2004 at such  time as all of the
Company's  indebtedness  under its existing  credit facility is either repaid or
refinanced or (iii) the consummation by the Company of a merger,  combination or
sale of all or  substantially  all of the Company's  assets or the purchase by a
single entity,  person or group of affiliated  entities or persons of 50% of the
Company's  voting stock. The January 2004 Notes bore interest at the rate of 6%,
increasing  to 9% on April 28,  2004 and 18% on July 27,  2004.  On  receipt  of
shareholder  approval,  which was received on April 12, 2004, in accordance with
the  terms  of the  January  2004  Notes,  the  principal  amount  of the  notes
automatically  converted into MediaBay  common stock at the rate of one share of
common stock at $4.50,  or  approximately  888,888 shares.  In addition  accrued
interest in the amount $49 also  converted into common stock at $4.50 per share,
or 10,813 shares.

      In connection with the Offering, the Company issued to the placement agent
and a broker  warrants to purchase an aggregate of 40,833 shares of common stock
and also issued to the placement agent warrants to purchase an additional 83,481
shares  of Common  Stock on April  12,  2004 as  partial  consideration  for its
services as placement agent.  All warrants issued are exercisable  until January
28, 2009 at an exercise price of $7.68 per share.

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

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

                                      F-15
<PAGE>

Zohar Credit Agreement and Related Transactions

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

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

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

      On April 28, 2004, to reduce its debt to $6,800, the Principal Shareholder
and his affiliate agreed,  subject to, and automatically  upon, the receipt of a
fairness  opinion from an independent  investment  banking firm, to exchange the
principal of their $500 Note, $1,000 Note, $150 Note and $350 Note, plus accrued
and unpaid  interest owed to the Principal  Shareholder  aggregating  $1,833 and
accrued and unpaid dividends owed to the Principal Shareholder  aggregating $519
into an aggregate of 43,527 shares of Series C Preferred Stock  convertible into
(i) an  aggregate of 930,046  shares of Common Stock at an effective  conversion
price of $4.68,  and (ii) warrants to purchase an aggregate of 1,860,128  shares
of Common  Stock.  The  Warrants  are  exercisable  until  April 28,  2014 at an
exercise  price  of  $3.18.  The  Series C  Preferred  Stock  has a  liquidation
preference of $100 per share.  On May 25, 2004, a fairness  opinion was received
from an independent  investment  banking firm,  and,  pursuant to the agreements
described  above,  the  exchange of debt for units  occurred.  The  transactions
described above resulted in a charge to earnings for debt inducement pursuant to
SFAS 84 of $391.

                                      F-16
<PAGE>

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

New ABC Note

      Also on April 28, 2004,  MediaBay  repaid $1,600  principal  amount of the
$3,200  principal  amount  convertible  note  issued to ABC  Investment,  L.L.C.
MediaBay  issued a new  $1,600  note  (the  "New ABC  Note")  for the  remaining
principal  amount.  The New ABC Note extends the maturity date from December 31,
2004 to July 29,  2007.  In  exchange  for  extending  the  maturity  date,  the
conversion  price of the New ABC Note was  reduced to $3.00.  The  closing  sale
price of  MediaBay's  Common  Stock on the  closing  date was $2.88.  The entire
principal  amount of the note was converted  into common stock during the fourth
quarter of 2004.

Premier Debt

      MediaBay entered into a settlement  agreement,  dated as of April 1, 2004,
with Premier Electronic Laboratories,  Inc. ("Premier").  Premier had previously
exercised  its right to put its shares of Common  Stock to  MediaBay  for $1,100
pursuant to a Put Agreement dated December 11, 1998. Pursuant to the settlement,
among other  things,  MediaBay is paying  Premier $950 as payment of the amounts
due to Premier.  MediaBay's  obligation  under the Put  Agreement was reduced by
$150 in exchange for  relinquishing  certain leases for real property.  MediaBay
paid $14 on  closing  and is  paying  the  remaining  balance  over six years in
monthly payments starting at $7 in July 2004 and increasing to $19 from May 2007
through April 2010.

      The future minimum loan payments are as follows:

      Year Ending December 31,

        2006................................................  $     77
        2007................................................       183
        2008................................................       233
        2009................................................       233
        Beyond..............................................        77
                                                           ---------------
        Total maturities, including debt discount of $164...  $    803
                                                           ===============


(7)   Commitments and Contingencies

      Rent expense for the years ended December 31, 2005, 2004 and 2003 amounted
to $189, $179 and $180, respectively.

                                      F-17
<PAGE>

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  subleased  two  offices in New York,  New York from a company
partially owned its Chairman.  The lease commenced on August 1, 2005 and ends on
July 31, 2006.  The lease amount is $3,000 per month.  The annual lease payments
in 2006 are $21.

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

      Year ending December 31,

      2006.....................................   $        210
      2007.....................................            198
      2008.....................................            198
      Thereafter...............................             --
                                                  ------------
      Total lease commitments..................   $        606
                                                  ============

Capitalized Leases

      During the year ended  December  31,  2005,  the  Company  had one capital
leases.  Lease payments under  capitalized lease agreements were $6, $59 and $53
in 2005, 2004 and 2003, respectively.  The amount of equipment capitalized under
the leases and included in fixed  assets is $159,  and net of  depreciation  the
fixed asset  balance is $4 and $24 at December 31, 2005 and 2003,  respectively.
The  obligations  under the leases  included  in  accounts  payable  and accrued
expenses on the  consolidated  balance sheets at December 31, 2005 and 2004 were
$5 and $9, respectively.

      Minimum annual lease commitments under capital leases are as follows:

      2006.....................................$      5
                                               ---------
      Total capital lease commitments..........$      5
                                               =========
Employment Agreements

      The Company has commitments pursuant to employment agreements with certain
of its  officers.  Its  minimum  aggregate  commitments  under  such  employment
agreements are approximately  $365,000,  $280,000 and 117,000 during 2006, 2007,
and 2008, respectively.

                                      F-18

<PAGE>

Licensing Agreements

      The Company has numerous  licensing  agreements  for both  audiobooks  and
old-time radio shows with terms generally ranging from one to five years,  which
require the  Company to pay, in some  instances,  non-refundable  advances  upon
signing  agreements,  against future  royalties.  The Company is required to pay
royalties based on net sales.  Royalty expenses were $913, $1,473 and $2,524 for
2005, 2004 and 2003,  respectively.  Minimum advances  required to be paid under
existing agreements for the next five years are as follows:

         2006                      453
         2007                      235
         2008                      148
                               -------
         Total                   $ 836
                               =======

      As of  December  31,  2005,  we had past due  royalty  payments  under our
licensing agreements aggregating $1,397. The publishers and other rights holders
to whom these payments would be payable have not requested royalty statements or
payments.  These  amounts  are  accrued  for  and  reflected  in  our  financial
statements.

Litigation

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

(8)   Stock Option and Stock Incentive Plans

      In June 1997, the Company adopted the 1997 Stock Option Plan,  pursuant to
which the Company's  Board of Directors may grant stock options to key employees
of the Company.  In June 1998, the Company amended the 1997 Stock Option Plan to
authorize the grant of up to 333,333  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 416,667  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 583,333 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 583,333
shares of common stock have been reserved for issuance pursuant to the plan.

      In December  2004, the Company's  shareholders  adopted the Company's 2004
Stock  Incentive  Plan,  which  provides for grants of awards of stock  options,
restricted  stock,  deferred  stock  or other  stock  based  awards.  A total of
1,250,000 shares of common stock have been reserved for issuance pursuant to the
plan.

                                      F-19
<PAGE>

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

      On December 30, 2005,  the Board of Directors  accelerated  the vesting of
all of the Company's  unvested stock options awarded to directors,  officers and
employees  under its various  plans all of which had an exercise  price  greater
than the closing  price of the  Company's  common  stock on the NASDAQ  National
Market on December 30, 2005.

      The Board's  decision to  accelerate  the vesting of these  options was in
response to a review of the Company's long-term incentive  compensation programs
in light  of  changes  in  market  practices  and  recently  issued  changes  in
accounting rules resulting from the issuance of SFAS No. 123R, which the Company
is required to adopt in 2006. The Company believed that accelerating the vesting
of these options prior to the adoption of SFAS No. 123R may have resulted in the
Company  not having to  recognize  compensation  expense  in the then  remaining
vesting periods.  Note 3 above discloses the Company's net loss and net loss per
share for the year ended December 31, 2005 and 2004 had compensation expense for
the Company's  stock options been recognized on the fair value on the grant date
under SFAS 123 (R).



         Stock option activity under the plans is as follows:

                                                                Weighted
                                                                 average
                                             Shares          exercise price
                                        -----------------    ----------------
Outstanding at January 1, 2003               1,049,100         $   26.34
   Granted                                     598,964              6.30
   Exercised                                   (50,000)             3.00
   Canceled and expired                       (296,250)            28.38
                                        -----------------    ----------------
Outstanding at December 31. 2003             1,301,814             17.52
   Granted                                   1,006,250              5.16
   Exercised                                  (131,338)             3.72
   Canceled and expired                       (418,548)            16.74
                                        -----------------    ----------------
Outstanding at December 31. 2004             1,758,178             11.70
   Granted                                   1,254,164              2.52
   Exercised                                   (17,710)             2.08
   Canceled and expired                       (109,335)            26.26
                                        -----------------    ----------------
Outstanding at December 31. 2005             2,885,297        $     7.41
                                        =================    ================



                                      F-20

<PAGE>


      The per share  weighted-average fair value of stock options granted during
the years ended December 31, 2005, 2004 and 2003 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>
                                                                                          Risk-free
                                                 No. of       Exercise       Assumed       interest     Fair Value
                   Date                          Shares        Price       Volatility        rate        per Share
------------------------------------------   --------------   --------     ----------     ---------     -----------
2003 Grants:
<S>                                                  <C>       <C>             <C>          <C>           <C>
     First Quarter                                   6,667     $ 9.00          165%         4.85%         $ 5.40
     Second Quarter                                      --        --           --            --               --
     Third Quarter                                 362,309       5.82          165%         4.85%           1.74
     Fourth Quarter                                229,988       7.02           97%         4.00%           4.02
                                             ---------------
Total                                              598,964
                                             ===============

2004 Grants:
     First Quarter                                 275,833     $ 8.52          100%         3.50%         $ 3.66
     Second Quarter                                350,000       3.18           75%         3.45%           1.74
     Third Quarter                                 151,250       2.58           75%         3.44%           1.08
     Fourth Quarter                                229,167       5.76          200%         3.46%           4.98
                                             ---------------
Total                                            1,006,250
                                             ===============

2005 Grants:
     First Quarter                                  16,667     $ 5.22          125%         3.35%         $ 2.13
     Second Quarter                                784,977       3.54          115%         3.35%           3.10
     Third Quarter                                      --         --           --            --              --
     Fourth Quarter                                452,500     $ 1.35          103%         4.38%          $1.24
                                             ---------------
Total                                            1,254,164
                                             ===============
</TABLE>

      The following table  summarizes  information  for options  outstanding and
exercisable at December 31, 2005:

<TABLE>
<CAPTION>
                                                                                             Options Exercisable
 Range of Prices        Number          Options Outstanding          Weighted     -------------------------------------------
                                          Weighted Average           Average           Number           Weighted Average
                                      Remaining Life in Years     Exercise Price                         Exercise Price
 ---------------- ---------------------------------------------- ---------------------------------- -------------------------
<S>     <C>               <C>                   <C>                   <C>                <C>             <C>
 $ 1.99-3.00              741,253               4.28                  $  1.65            193,812         $     2.26
   3.18-6.00            1,492,139               5.42                  $  3.94            769,374         $     4.17
  6.12-10.50              375,987               3.72                  $  7.80            293,902         $     7.94
 10.74-42.00              275,018               3.57                  $ 22.52            275,018         $    24.52
                  ---------------------------------------------- ---------------------------------- ------------------------
                        2,885,297               4.73                  $  7.41          1,515,439         $     8.30
                  ============================================== ================================== ========================
</TABLE>

      At December 31, 2005, there were no additional  shares available for grant
under the 1997 Plan,  no  additional  shares  available for grant under the 1999
Plan,  no  additional  shares  available  for  grant  under  the 2000  Plan,  no
additional shares available for grant under the 2001 Plan and 173,904 additional
shares available for grant under the 2004 Plan.

                                      F-21
<PAGE>

(9)   Warrants and Non-Plan Options

      In connection with the 2005 financings  described above the Company issued
warrants to purchase a total of 6,674,318  shares of the Company's common stock,
all of  which  became  exercisable  in  2005,  to  investors  and  advisors.  In
connection with the 2004 financings  described above the Company issued warrants
to purchase a total of 2,487,641  shares of the Company's  common stock,  all of
which became  exercisable  in 2004, to investors  and advisors.  During the year
ended  December 31, 2004,  warrants to purchase  23,323 of the Company's  common
stock  expired;  non-plan  options to purchase  33,333  shares of the  Company's
common stock expired or were  cancelled and non-plan  options to purchase  1,333
shares were exercised.

      The  following  table  summarizes  information  for  warrants and non-plan
options outstanding and exercisable at December 31, 2005:

<TABLE>
<CAPTION>
                                                                                             Options Exercisable
 Range of Prices        Number          Options Outstanding          Weighted     ------------------------------------------
                                          Weighted Average           Average           Number           Weighted Average
                                      Remaining Life in Years     Exercise Price                         Exercise Price
 ---------------- ---------------------------------------------- ---------------------------------- ------------------------
<S>      <C>            <C>                     <C>                     <C>             <C>                    <C>
   $3.18-$4.14          8,534,446               5.24                    $3.43           8,534,446              $3.43
   $4.80-$7.50            120,419               3.31                    $5.50             120,419              5.50
   $7.68-18.00            587,724               3.36                    $8.21            587,724               8.21
                  ---------------------------------------------- ---------------------------------- ------------------------
                        9,242,589               5.10                    $3.76          9,242,589              $3.76
                  ============================================== ================================== ========================
</TABLE>

(10)  Litigation Settlement

      In December 1998, the Company  acquired certain assets from a third party.
The parties  also  entered into  certain  other  agreements  including a mailing
agreement and a non-compete agreement.  As consideration for the assets acquired
and  the  related   transactions,   including  the  mailing  agreement  and  the
non-compete  agreement,  the third party received cash  consideration of $30,750
and an aggregate of 54,167 shares of the Company's common  stock"(the  "shares")
and warrants to purchase an additional  16,667  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 $90.00 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 54,167 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 38,333 of the shares (put rights with respect to the
remaining 15,833 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.

                                      F-22

<PAGE>

      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 54,167 shares of common stock            247
      Cash received                                                       350
                                                                       ------
      Total received in settlement of litigation                        4,047
      Legal and other costs incurred in connection with the litigation  1,027
                                                                       ------
      Settlement of litigation recorded in Contributed Capital         $3,020
                                                                       ======

(11)  Equity

      The  following   table  presents   information   regarding  the  Company's
outstanding preferred stock at December 31, 2005 and December 31, 2004:

<TABLE>
<CAPTION>
                                                                                         As of
                                                                               December 31,   December 31,
                                                                                   2005           2004
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
Series A Convertible Preferred Stock                                           $       --     $    2,500
Series B Convertible Preferred Stock                                                   20             20
Series C Convertible Preferred Stock                                                   --          4,353
Series D Convertible  Preferred  Stock,  total  outstanding  December 31,
     2005  $21,063,  net of cash  fees  and  expenses  of  $2,114;  value
     ascribed to investors' and advisors' warrants of $7,533                       11,416             --
                                                                               ------------   ------------
Total Preferred Stock                                                          $   11,436     $    6,873
                                                                               ============   ============
</TABLE>

March 2005 Sale of Series D Convertible Preferred Stock and Warrants

      On March 21, 2005,  the Company  issued an aggregate of (a) 35,900  shares
(the "Offering Shares") of its Series D Convertible Preferred Stock (the "Series
D Preferred")  convertible into 10,878,788 shares of the Company's common stock,
(b)  5,439,394   five-year   common  stock  purchase   warrants  (the  "Offering
Warrants"),  valued  at  $10,852  using an  accepted  valuation  method  and (c)
preferred  warrants  (the  "Over-Allotment  Warrants"  and,  together  with  the
Offering  Shares  and  the  Offering   Warrants,   the  "Offering   Securities")
exercisable  for a limited  time,  for  additional  proceeds  to the  Company of
$8,975, to purchase (1) up to 8,975 additional shares of Series D Preferred (the
"Additional  Shares" and,  together  with the Offering  Shares,  the  "Preferred
Shares") and (2) up to 1,359,849  additional  warrants identical to the Offering
Warrants (the "Additional  Warrants" and,  together with the Offering  Warrants,
the  "Warrants"),  to accredited  investors (the  "Investors")  for an aggregate
purchase price of $35,900 (the "Financing").

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

                                      F-23
<PAGE>

      While such actions were approved by a majority of the  shareholders  prior
to the  Financing,  the  Company  was not  permitted  to  effect  them  until it
satisfied  certain  information  requirements to the shareholders of the Company
not party to the Shareholder  Consent.  As a result, the Shareholder Consent did
not become effective until May 3, 2005.

      The  Preferred  Shares  have a face  value of $1,000  per  share  ("Stated
Value") and are  convertible at any time at the option of the holder into shares
("Conversion Shares") of common stock at the rate of $3.30 per Conversion Share,
subject to certain anti-dilution adjustments,  including for issuances of Common
Stock for  consideration  below the conversion  price.  The Preferred Shares are
also  mandatorily  convertible  at the  option of the  Company,  subject  to its
satisfaction of certain  conditions,  commencing June 10, 2005, which is 30 days
after May 11, 2005, the effective date of the registration statement registering
the shares underlying the Series D Preferred Stock. Under certain  circumstances
under  the  control  of the  Company,  the  holders  will also have the right to
require the Company to redeem  their  Preferred  Shares at their  Stated  Value.
Cumulative  dividends will accrue on the Preferred Shares on an annualized basis
in an amount  equal to 6% of their  Stated  Value  until they are  converted  or
redeemed and will be payable  quarterly in arrears,  beginning April 1, 2005, in
cash or,  at the  Company's  option,  subject  to its  satisfaction  of  certain
conditions,  in shares of Common Stock ("Dividend  Shares") valued at 93% of the
average of the daily volume weighted average per-share price of the Common Stock
for the five trading days prior to the  applicable  payment date.  The Preferred
Shares are non-voting. Subject to certain exceptions for accounts receivable and
equipment and capital  lease  financings,  the Company may not incur  additional
indebtedness for borrowed money or issue  additional  securities that are senior
to or pari passu to the Preferred  Shares  without the prior written  consent of
holders of at least two-thirds of the Preferred Shares then outstanding.

      Each  Warrant  is  exercisable  to  purchase  one  share of  Common  Stock
(collectively,  the "Warrant  Shares"),  at an exercise price of $3.36 per share
for a period of five years  commencing  September  23, 2005,  subject to certain
anti-dilution   adjustments,   including  for  issuances  of  Common  Stock  for
consideration  below the exercise  price.  In addition,  once  exercisable,  the
Warrants permit cashless exercises during any period when the Warrant Shares are
not covered by an effective resale registration statement.

      The Over-Allotment  Warrants were exercisable until February 9, 2006; none
were exercised.

      As part of the  Financing,  the Forest Hill  Select Fund L.P.  and related
entities (the "Forest Hill Entities")  exchanged  300,000 shares of Common Stock
and 66,667 common stock warrants  previously  purchased by them from the Company
in October 2004 for $900 of the Offering  Securities.  The Forest Hill  Entities
also  purchased  $1,000 of the  Offering  Securities.  The  Company  included an
additional  19,841  shares of Common  Stock,  as well as 8,333  shares of Common
Stock underlying certain  additional  warrants,  already  beneficially owned and
retained  by Forest  Hill  Capital,  for  resale in the  registration  statement
declared effective May 11, 2005.

      In  connection  with the  Financing,  the  Company  also  entered  into an
agreement  with  Norton  Herrick  and certain of his  affiliates  (the  "Herrick
Entities") pursuant to which, concurrently with the Financing:

      o     all $5,784 principal amount of the convertible  notes of the Company
            owned by the Herrick  Entities (the  "Herrick  Notes") and 10,684 of
            their  shares of the  Series A  Convertible  Preferred  Stock of the
            Company  ("Series A Preferred")  were converted into an aggregate of
            approximately  2.03  million  shares of Common  Stock (the  "Herrick
            Shares"), at their stated conversion rate of $3.36 per share;

                                      F-24
<PAGE>

      o     the Company agreed to redeem the remaining 14,316 shares of Series A
            Preferred  held by the  Herrick  Entities  and all  43,527  of their
            shares of the Series C  Convertible  Preferred  Stock of the Company
            (collectively,   the  "Redemption   Securities")  for  $5,784,   the
            aggregate  stated  capital  of such  shares,  on the  earlier of the
            effective date of the Shareholder Consent (May 3, 2005);

      o     the Herrick Entities waived certain of their registration rights and
            the Company  agreed to include the Herrick  Shares for resale in the
            registration  statement  declared  effective May 11, 2005 so long as
            such  Herrick  Shares  are  owned by the  Herrick  Entities  and not
            otherwise transferred, including, but not limited to, in the Herrick
            Financing (as defined below); and

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

      o     Herrick and  Huntingdon  also  entered into a voting  agreement  and
            proxy with the Company pursuant to which they agreed not to take any
            action to contradict or negate the Shareholder Consent.

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

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

      The  Company  received  $35,000  of  gross  proceeds  (not  including  the
securities exchanged by the Forest Hill Entities for $900 of the purchase price)
in the Financing.  Merriman Curhan Ford & Co.  ("Merriman") acted as a financial
advisor with respect to certain of the  investors in the  Financing for which it
received  compensation  from the Company of $2,625 plus a five-year warrant (the
"Merriman  Warrant") to purchase 1,193,182 shares of Common Stock at an exercise
price of $4.14 per share  commencing upon May 3, 2005, the effective date of the
Shareholder  Consent.  Merriman also received a structuring fee from the Company
with respect to the  Financing in the amount of $175.  In addition,  the Company
issued to Satellite  Strategic Finance  Associates,  LLC and Satellite Strategic
Finance  Partners,  Ltd.,  investors in the  Financing,  warrants to purchase an
aggregate of 41,667  shares of Common Stock  (identical  to the  Warrants),  and
reimbursed  them $55 for expenses,  for  consulting  services  rendered by it in
connection  with the  Financing.  The Company  incurred  cash fees and  expenses
including  fees paid to advisors  of $3,579.  Warrants  issued to advisors  were
valued at $1,986 using an accepted valuation method.

      The  Preferred  Shares  are  convertible  at any time at the option of the
holder into shares  ("Conversion  Shares") of common  stock at the rate of $3.30
per  Conversion  Share and each Warrant is  exercisable to purchase one share of
Common Stock (collectively, the "Warrant Shares"), at an exercise price of $3.36
per share. The market price for the Company's common stock at March 21, 2005 was
$4.14.  The Company  recorded as  dividends  an amount of $17,423 to reflect the
value of the  deemed  dividend  for  beneficial  conversion  feature of Series D
Preferred Stock.

                                      F-25
<PAGE>

      As of December 31, 2005,  14,837  shares of Series D Preferred  Stock plus
accrued  dividends  thereon had been converted  into 4,521,592  shares of common
stock and 21,063 shares of Series D Preferred Stock are outstanding.

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

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

      The Company  also paid to Norton  Herrick and  Huntingdon  all accrued and
unpaid  interest  dividends  due to them in the amount  $2,271  and placed  into
escrow  $5,784.  This  amount was  released  to redeem  the  portion of Series A
Preferred  Stock not converted and all of the Series C Preferred Stock on May 3,
2005, the 20th day after an information  statement was sent to all  shareholders
who did not initially vote on the transaction.

October 2004 Stock Sale

      On October  11,  2004,  MediaBay,  Inc.  (the  "Company")  entered  into a
Securities  Purchase  Agreement  pursuant  to which it issued to the  purchasers
thereunder an aggregate of 300,000 shares (the "Shares") of the Company's common
stock,  no par value per share (the  "Common  Stock"),  and warrants to purchase
75,000 shares of Common Stock (the "Warrants"). The purchasers paid an aggregate
purchase price of $900 for the Shares and Warrants.  Each Warrant is exercisable
to purchase  one share of the  Company's  Common  Stock at an exercise  price of
$4.98 per share during the five (5)-year period  commencing on October 11, 2004.
The Shares and Warrants were issued to the purchasers without registration under
the  Securities  Act of 1933,  as amended  (the  "Act"),  in  reliance  upon the
exemptions from  registration  provided under 4(2) of the Act. The issuances did
not involve any public offering;  the Company made no solicitation in connection
with the transactions other than communications with the purchasers; the Company
obtained  representations from the purchasers regarding their investment intent,
experience and  sophistication;  the purchasers either received or had access to
adequate  information  about the  Company in order to make  informed  investment
decisions;   the  Company   reasonably   believed  that  the   purchasers   were
sophisticated  within the meaning of Section 4(2) of the Act; and the Shares and
Warrants  were  issued  with  restricted  securities  legends.  No  underwriting
discounts or commissions were paid in conjunction with the issuances.

      On February 8, 2005, the Company entered into a letter agreement extending
the date by which the Company was  required to file the  Registration  Statement
with respect to the October 11, 2004 sale of common stock and warrants to May 1,
2005 (the "Extension").  As consideration for the Extension,  the Company issued
to the Forest Hill  Entities an aggregate  of 19,841  shares of its Common Stock
(the  "January  Shares"),  based on the last sale price of the  Common  Stock on
February 8, 2005 of $5.04 and paid to the Forest Hill  Entities an  aggregate of
19,841 shares of Common Stock, at the Forest Hill Entities' option.  The Company
also granted the Forest Hill Entities the right (the "Put Right") to require the
Company to purchase an aggregate of 33,333  shares of the Common Stock issued to
the Forest Hill Entities at a price of $18.00 per share if, at any time prior to
the Effective  Date, the last sale price of the Common Stock is above $24.00 per
share,  subject to the Company  obtaining  the Consents.  The Company's  maximum
potential obligation under the Put Right is $600.

                                      F-26
<PAGE>

Series B Convertible Preferred Stock

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

      The  Series B Stock is  convertible  into  shares  of  Common  Stock  into
MediaBay  Common  Stock  at a  conversion  rate  equal  to a  fraction,  (i) the
numerator  of which is equal to the  number  of Series B Stock  times  $100 plus
accrued  and  unpaid  dividends  though  the  date of  conversion  and  (ii) the
denominator is $4.62, the average price of the Company's stock on May 6, 2003.

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

Options Issued to Directors

      During the year ended  December 31, 2004,  the Company  issued  options to
purchase 116,666 shares of its common stock to its non-employee  directors.  The
Company  valued the  options at $219 using an  acceptable  valuation  method and
recorded an expense for that amount in general and administrative expenses.

Dividends

      The terms of the Company's  Series D Preferred  Stock prohibit the Company
from declaring or paying any dividends or  distributions on the Company's common
stock.

(12)  Income Taxes

      The Company's  income tax provision for the years ended December 31, 2005,
2004 and 2003 includes a Federal  deferred tax expense of $0 a Federal  deferred
tax  expense  of  $14,753  and  a  Federal   deferred  tax  benefit  of  $1,471,
respectively.

                                      F-27
<PAGE>

      Income tax expense for the years ended  December 31,  2005,  2004 and 2003
differed from the amount  computed by applying the U.S.  Federal income tax rate
of 34% and the state  income tax rate of 7% to the  pre-tax  loss as a result of
the following:

<TABLE>
<CAPTION>
                                                               2005             2004            2003
                                                         ----------------- --------------- ---------------
<S>                                                       <C>                <C>           <C>
Computed tax benefit                                      $     (5,423)      $    (6,360)  $        (446)
Increase (decrease) in valuation allowance for
Federal and State deferred tax assets                            5,423            21,113           1,917
                                                         ----------------- --------------- ---------------
Income tax expense                                        $         --       $    14,753   $       1,471
                                                         ================= =============== ===============
</TABLE>

      As a result of the Company's shift in business strategy, during the second
half of 2004, (i.e. its focus on new  distribution  channels for its spoken word
product) realization of net deferred tax assets is not assured. Accordingly, the
Company  determined,  based on its  current  and  projected  future  results  of
operations, that it can no longer satisfy the "more likely than not" criteria of
FASB Statement No. 109 and has  established a full valuation  allowance  against
its  deferred  tax  asset.  In 2005 the  Company  continued  to  provide  a full
valuation allowance for its deferred tax assets.  Accordingly,  the net deferred
tax asset at December 31, 2005 and 2004 is $0.

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

Deferred tax assets:

<TABLE>
<CAPTION>
                                                                                 2005                2004
                                                                           ----------------    ---------------
<S>                                                                          <C>                <C>
Federal and state net operating loss carry-forwards                          $   37,162         $    31,103
Loss in I-Jam, LLC                                                                   85                  85
Accounts receivable, principally due to allowance for doubtful accounts
and reserve for returns                                                             214                 606

Inventory, principally due to reserve for obsolescence                            1,688               1,522
Intangibles                                                                      11,101                11,186
Beneficial conversion feature                                                       113                 438
                                                                           ----------------    ---------------
Total net deferred tax assets                                                    50,363               44,940
Less valuation allowance                                                        (50,363)             (44,940)
                                                                           ----------------    ---------------
Net deferred tax assets                                                    $           --      $         --
                                                                           ================    ===============
</TABLE>

      At  December  31,  2005,  the  Company  had  approximately  $90,638 of net
operating  loss  carry-forwards,  which could  possibly have been used to offset
possible future  earnings,  if any, in computing  future income tax liabilities.
The Company may have experienced  various ownership  changes,  as defined by the
Act,  as a result of past  financings,  including  the March  2005  transactions
discussed  in  Note 11 and may  experience  others  in  connection  with  future
financings.  Accordingly,  the Company's  ability to utilize the  aforementioned
Federal carryforwawrds will be limited.

(13)  Net Loss Per Share of Common Stock

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

                                      F-28

<PAGE>

      Basic and diluted loss per share were computed using the weighted  average
number of shares  outstanding  for the years ended  December 31, 2005,  2004 and
2003 of 7,430, 2,996 and 2,350, respectively.

      Common equivalent shares of 18,387 including 6,387 relating to convertible
preferred  stock were not included in the  calculation  of fully diluted  shares
because they were  anti-dilutive.  Dividends on the convertible  preferred stock
that were not added back to net loss were $1,446 for the year ended December 31,
2005.

      Common  equivalent shares of 3,759 including 3,400 relating to convertible
subordinated  debt and  convertible  preferred  stock were not  included  in the
calculation of fully diluted shares  because they were  anti-dilutive.  Interest
expense and  dividends  on the  convertible  subordinated  debt and  convertible
preferred  stock that were not added  back to net loss were  $1,322 for the year
ended December 31, 2004.

      Common  equivalent shares of 2,828 including 2,652 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.

      The Company's Board of Directors and  shareholders  approved a one for six
reverse stock split effective  October 25, 2005. All references in the financial
statements  and notes  thereto  to the number of shares  outstanding,  per share
amounts, and stock option, warrant and convertible security data relating to the
Company's  common  shares have been  restated to reflect the effect of the stock
split for all periods presented.

(14)  Supplemental Cash Flow Information

      No cash has been  expended for income  taxes for the years ended  December
31, 2005,  2004 and 2003.  Cash expended for interest was $677,  $1,045 and $384
for the years ended December 31, 2005,  2004 and 2003,  respectively.  Cash paid
for dividends in 2005 was $1,514.

      The  Company had the  following  non-cash  activities  for the years ended
December 31, 2005, 2004, and 2003:

<TABLE>
<CAPTION>
                                                                               2005          2004           2003
                                                                              ------        ------         ------
Deemed dividend on beneficial conversion of Series D Preferred
<S>                                                                          <C>             <C>          <C>
    Stock                                                                    $17,423            --             --
Conversion of notes into preferred shares..............................      $14,837        $4,353             --
Issuance of warrants in connection with the March 2005 Financing             $12,838
                                                                                                --             --
Conversions of subordinated notes into common shares...................      $ 5,784        $5,649             --
Accrual of dividends on preferred stock................................      $   555        $  574         $  246
Conversion of common shares and warrants into preferred stock and
    warrants sold in the March 2005 Financing..........................      $   900            --             --

Stock tendered as payment for exercise of options......................           --            --         $  150
Settlement of litigation...............................................           --            --         $3,697
</TABLE>

                                      F-29
<PAGE>

(15)  Related Party Transactions

      The Company  subleased  two  offices in New York,  New York from a company
partially owned by its Chairman.  The lease commenced on August 1, 2005 and ends
on July 31,  2006.  The lease  amount is $3,000  per  month.  The  annual  lease
payments in 2006 are $21.

      As of  December  31,  2004,  we owed  to Mr.  Herrick  and his  affiliates
approximately  $315 for  reimbursement of certain expenses and services incurred
in prior years. On April 28, 2004, in connection  with the agreements  described
below, the Company agreed to repay Mr. Herrick based on an agreed upon schedule.
From April 28, 2004 through  December  31, 2004 the Company  paid Mr.  Herrick a
total of $324.  As of December  31, 2004,  the Company will pay Mr.  Herrick (i)
$40.5 per month on the first of each month through and  including  July 2005 and
(ii) $31.41 on August 1, 2005.

      On May 1, 2003, we entered into a two-year  consulting  agreement with XNH
Consulting  Services,  Inc. ("XNH"),  a company  wholly-owned by Norton Herrick.
Effective  December 31,  2003,  we agreed with Norton  Herrick to terminate  the
two-year  consulting  agreement with XNH, and to pay XNH a fee of $7.5 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. In April 2004, we amended
the termination  agreement such that we are no longer required to either pay Mr.
Herrick the $7.5 each month or to provide Mr. Herrick with health  insurance and
other benefits  applicable to our officers.  In connection  with the termination
agreement, the non-competition and nondisclosure covenants of the XNH consulting
agreement  were  extended  until  December  31,  2006.  In  accordance  with the
agreement,  the Company paid or reimbursed certain health insurance premiums for
Mr. Herrick.

      In December 2004, the Company entered into a letter agreement with certain
affiliates  of Forest Hill  Capital,  LLC, at that time a principal  shareholder
(collectively,  the "Forest  Hill  Entities"),  extending  the date by which the
Company is required to file a  registration  statement  covering the  securities
issued to Forest Hill entities  (the  "Registration  Statement")  to January 31,
2005. As consideration for this extension, the Company issued to the Forest Hill
Entities  warrants to purchase an aggregate of 8,333 shares of its common stock,
exercisable until December 14, 2008 at a price of $8.52 per share.

      On January 29, 2004, the Company issued $4,000 aggregate  principal amount
of promissory  notes (the "2004 Notes") and warrants to purchase  392,158 shares
of Common Stock to 13 institutional and accredited investors. In connection with
this offering,  Norton Herrick and  Huntingdon  entered into a letter  agreement
with the  purchasers  of the 2004 Notes  pursuant  to which they  granted to the
holders of the 2004 Notes in the event of an Event of Default (as defined in the
2004 Notes) the rights to receive  payment  under certain  secured  indebtedness
owed by the Company to Norton  Herrick  and  Huntingdon  and to  exercise  their
rights under security agreements securing such secured indebtedness. Pursuant to
the  letter   agreement,   Norton   Herrick   and   Huntingdon   also   executed
Powers-of-Attorney  in  favor  of a  representative  of the  2004  Note  holders
pursuant to which such representative  may, following an Event of Default,  take
actions  necessary  to enforce  the 2004 Note  holders  rights  under the letter
agreement,  including  enforcing Norton Herrick's and Huntingdon's  rights under
the security agreements. On April 12, 2004, the notes were converted into Common
Stock. In consideration for Huntingdon's  consent to the Financing and execution
of the letter  agreement  upon receipt of  shareholders'  approval,  the Company
agreed to reduce the conversion  price of $1,150 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.

                                      F-30
<PAGE>

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

      Pursuant to an agreement  dated April 28, 2004,  on May 25, 2004,  Herrick
exchanged  accrued and unpaid  interest  and  dividends  (including  accrued and
unpaid interest distributed by the Trust to Herrick) owed to Herrick aggregating
$1,181.4 into (i) 11,814 shares of Series C Convertible  Preferred  Stock with a
liquidation  preference  of $100 per  share  convertible  into an  aggregate  of
252,435 shares of Common Stock at an effective  conversion  price of $4.68,  and
(ii)  warrants to purchase  504,872  shares of Common  Stock.  The  warrants are
exercisable until April 28, 2014 at an exercise price of $3.18.

      Pursuant to an agreement dated April 28, 2004, on May 25, 2004, Huntingdon
exchanged  the principal of the $500  principal  amount note,  $1,000  principal
amount note, $150 principal  amount note and $350 principal  amount note held by
Huntingdon,  plus accrued and unpaid  interest  owed to  Huntingdon  aggregating
$1,171.2  into (i)  31,713  shares  of  Series  C  Convertible  Preferred  Stock
convertible  into an aggregate of 677,628 shares of Common Stock at an effective
conversion  price of $4.68,  and (ii)  warrants  to  purchase  an  aggregate  of
1,355,256 shares of Common Stock.  The warrants are exercisable  until April 28,
2014 at an exercise  price of $3.18.  If the amount of the  Permissible  Debt is
required  to be reduced  due to the  Company's  failure  to raise the  requisite
additional equity,  such reduction will  automatically  occur by the exchange of
Permissible  Debt  held  by  Huntingdon  for  additional   shares  of  Series  C
Convertible Preferred Stock in an aggregate liquidation  preference equal to the
amount of debt  exchanged  and warrants to purchase a number of shares of Common
Stock  equal to two times the  number of shares of Common  Stock  issuable  upon
conversion of the Series C Convertible Preferred Stock.

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

      On April 28,  2004,  the Company  repaid  $1,600  principal  amount of the
$3,200  principal amount  convertible note issued to ABC Investments,  L.L.C., a
principal  shareholder of the Company. We issued a new $1,600 note (the "New ABC
Note") for the remaining principal amount. The New ABC Note extends the maturity
date from  December 31, 2004 to July 29, 2007.  In exchange  for  extending  the
maturity date,  the  conversion  price of the New ABC Note was reduced to $3.00.
The closing sale price of our common stock on the closing date was $2.88. During
October 2004, ABC Investments,  L.L.C.  converted $1,000 principal amount of the
New ABC into shares of Common Stock pursuant to the terms of the note.

(16)  Segment Reporting

      For 2005,  2004 and 2003, the Company has divided its operations into four
reportable segments:  Corporate, Audio Book Club ("ABC") a membership-based club
selling  audiobooks  in direct mail and on the Internet;  Radio Spirits  ("RSI")
which  produces,  sells,  licenses and  syndicates  old-time  radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download  formats.  Segment operating income is total segment revenue reduced by
operating expenses  identifiable with that business segment.  Corporate includes
general corporate administrative costs, professional fees and interest expenses.
The  Company  evaluates  performance  and  allocates  resources  among its three
operating  segments based on operating income and opportunities for growth.  The
Company evaluates  performance and allocates resources among its three operating
segments based on operating income and opportunities for growth.  RadioClassics,
which was created to distribute the Company's proprietary old-time radio content
across  multiple  distribution  platforms  including  traditional  radio,  cable
television,  satellite  television (DBS),  satellite radio and the Internet,  is
aggregated  with RSI for segment  reporting  purposes.  Inter-segment  sales are
recorded at prevailing sales prices.

                                      F-31
<PAGE>

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



<TABLE>
<CAPTION>
Twelve Months Ended December 31, 2005                                                         Inter-
                                                Corporate      ABC      RSI (1)   Mbay.com    segment    Total
                                                ----------     ---        ---     --------    -------    -----
<S>                                             <C>         <C>       <C>           <C>        <C>     <C>
Sales                                                   -      4,648     4,135         173        (1)     8,955
Operating (loss) profit                            (4,679)    (1,698)   (3,644)       (389)       55    (10,355)
Interest expense, net of interest income              510          -         -           -         -        510
Loss on early retirement of debt                      579          -         -           -         -        579
Loss before income taxes                           (5,768)    (1,698)   (3,644)       (389)       55    (11,444)
Dividends and deemed dividends on Preferred
Stock                                              18,869          -         -           -         -     18,869
Income tax                                              -                                                     -
Net (loss) income applicable to common shares     (24,637)    (1,698)   (3,644)       (389)       55    (30,313)
Total assets                                            -      9,154     9,498          15         -     18,667
Acquisition of fixed assets                             -      1,687         -           -         -      1,687

(1)   Includes a charge for impairment of goodwill of $3,502.

                                                                                              Inter-
Twelve Months Ended December 31, 2004           Corporate      ABC        RSI     Mbay.com    segment    Total
                                                ----------     ---        ---     --------    -------    -----
Sales                                                   -     12,303     6,382         205       (59)    18,831
Operating (loss) profit                            (2,108)    (3,912)      141        (416)       17     (6,278)
Interest expense                                    9,078          -         4           -         -      9,082
Loss on early retirement of debt                        -          -         -           -         -          -
Loss before income taxes                          (11,186)    (3,912)      137        (416)       17    (15,360)
Dividends on Preferred Stock                          574          -         -           -         -        574
Income Tax                                         14,753                                                14,753
Net (loss) income applicable to common shares     (26,513)    (3,912)      137        (416)       17    (30,687)
Total assets                                            -      3,508    13,122           1       (55)    16,576
Acquisition of fixed assets                             -        128         8           -         -        136

                                                                                              Inter-
Twelve Months Ended December 31, 2003           Corporate      ABC        RSI     Mbay.com    segment    Total
                                                ----------     ---        ---     --------    -------    -----
Sales                                            $     --    $26,379   $10,247      $  138     $(147)   $36,617
Operating (loss) profit                            (3,880)       349       804        (481)      (19)    (3,227)
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
</TABLE>

                                      F-32
<PAGE>

(17)  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, 2005.

<TABLE>
<CAPTION>

Year Ended
December 31, 2005                                         1st               2nd             3rd               4th
                                                        Quarter           Quarter         Quarter           Quarter
                                                       -----------       ----------      ----------        ----------
<S>                                                      <C>              <C>             <C>                <C>
Sales                                                    $  3,353         $  2,272        $  1,387           $ 1,943
Cost of sales                                               1,796            1,607           1,002             1,515
Net (loss) income applicable to common shares             (19,234)          (2,950)         (2,240)           (5,889)
Basic and diluted loss per share:                        $  (4.61)        $  (0.47)       $  (0.25)          $ (0.56)

Year Ended
December 31, 2004                                         1st               2nd             3rd               4th
                                                        Quarter           Quarter         Quarter           Quarter
                                                       -----------       ----------      ----------        ----------
Sales                                                    $  5,684         $  4,801        $  3,849           $ 4,496
Cost of sales                                               2,570            2,228           3,975             3,774
Net (loss) income applicable to common shares              (1,168)          (7,111)         (3,784)          (18,624)
Basic and diluted loss per share:                        $  (0.54)        $  (2.40)       $  (1.26)          $ (4.98)

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                   $   (.66)        $   (.12)       $    .12           $ (2.28)
Diluted earnings (loss) per common share                 $   (.66)        $   (.12)       $    .12           $ (2.28)
</TABLE>

(18)  Subsequent Events

      On January 31, 2006,  Patricia G. Campbell  resigned her position as Chief
Operating  Officer of the Company.  Ms.  Campbell  agreed to continue to provide
services  to the Company  for a period of six (6) months  (the  "Term"),  during
which she agreed to devote her full time for the first three (3) months and half
of her time to the Company's  business  during the second three (3) months.  The
Company agreed to pay Ms. Campbell at the rate equal to her base salary when she
was employed by the Company of $215,000  (per annum)  during the first three (3)
months and at the rate of  $107,500  (per  annum)  during  the second  three (3)
months.  Certain stock options  previously  granted to Ms.  Campbell will remain
exercisable  for their full term,  and certain other stock options are no longer
exercisable  and terminated as of January 31, 2006. Ms.  Campbell  agreed not to
compete or engage in a business  competitive with the Company's  business during
the Term and for a period of two years thereafter.

                                      F-33

<PAGE>

          SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

              For the years ended December 31, 2005, 2004 and 2003

<TABLE>
<CAPTION>
                                              Balance       Amounts Charged                  Write-Offs
                                           Beginning of        to Net           Amounts        Against       Balance End
                                              Period            Income          Acquired       Reserves        of Period
                                          ---------------- ------------------ ------------ ---------------- --------------
 Allowances for sales returns and doubtful accounts:
<S>                                        <C>             <C>                               <C>              <C>
 Year Ended December 31, 2005              $     2,708     $         51                     $     1,226       $    1,533
 Year Ended December 31, 2004              $     4,446            6,192             --            7,930            2,708
 Year Ended December 31, 2003              $     5,325           20,900             --           21,779            4,446


 Valuation allowance for Federal and State deferred tax assets
 Year Ended December 31, 2005              $    44,940     $         --       $     --      $     5,423       $   50,363
 Year Ended December 31, 2004              $    23,826           14,753          6,361               --           44,940
 Year Ended December 31, 2003              $    21,911            1,471             --              446           23,826
</TABLE>





















                                      F-34

<PAGE>


                                   SIGNATURES

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

                                     MEDIABAY, INC.

                            By:      /s/ Robert Toro
                                     -----------------------------------------
                                        Robert Toro
                                        Chief Financial Officer and Senior
                                        Vice President of Finance

      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/ Joseph Rosetti         Chairman and Director                         March 30, 2006
-------------------------------
        Joseph Rosetti

      /s/ Jeffrey Dittus         Chief Executive Officer and Director          March 30, 2006
-------------------------------  (Principal Executive Officer)
        Jeffrey Dittus

        /s/ Robert Toro          Chief Financial Officer and                   March 30, 2006
-------------------------------  Senior Vice President of Finance
          Robert Toro            (Principal Financial and Accounting Officer)

    /s/ Daniel J. Altobello      Director                                      March 30, 2006
-------------------------------
      Daniel J. Altobello

      /s/ Richard Berman         Director                                      March 30, 2006
-------------------------------
        Richard Berman

     /s/ Robert Montgomery       Director                                      March 30, 2006
-------------------------------
       Robert Montgomery

    /s/ Marshall C. Phelps       Director                                      March 30, 2006
-------------------------------
      Marshall C. Phelps

    /s/ Carl U. J. Rossetti      Director                                      March 30, 2006
-------------------------------
      Carl U.J. Rossetti
</TABLE>


                                      F-35