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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                             ---------------------

                                  FORM 10-KSB

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

     For the fiscal year ended December 31, 1999

                                       OR


/ / Transition Report Under 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.
                         ----------------------------
                 (Name of Small Business Issuer in Its Charter)

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


           20 Community Place                                     07960
            Morristown, NJ                                    -------------
----------------------------------------                       (Zip Code)
(Address of principal executive offices)


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


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


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

Check whether the issuer: (1) filed all reports required to be filed by Section
13, or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filiing requirements for the past 90 days.  Yes /X/  No / /

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /

State issuer's revenues for its most recent fiscal year (ending December 31,
1999) were $62,805,000.

The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 20, 2000 was approximately $73,703,021. As of March
20, 2000, there were 13,421,866 shares of the issuer's Common Stock
outstanding.

                      Documents Incorporated by Reference:
                                     None
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                                MEDIABAY, INC.


                                  Form 10-KSB

                               Table of Contents

<TABLE>
<S>          <C>                                                                               <C>
PART

Item 1.      Description of Business .......................................................     2

Item 2.      Description of Property .......................................................    12

Item 3.      Legal Proceedings .............................................................    13

Item 4.      Submission of Matters to a Vote of Security Holders ...........................    13

PART II

Item 5.      Market for Common Equity and Related Stockholder Matters ......................    14

Item 6.      Management's Discussion and Analysis of Financial Condition and Results of
              Operations ...................................................................    15

Item 7.      Financial Statements ..........................................................    20

Item 8.      Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure ...................................................................    20

PART III

Item 9.      Directors, Executive Officers, Promoters and Control Persons; Compliance with
              Section 16(a) of the Exchange Act ............................................    21

Item 10.     Executive Compensation ........................................................    24

Item 11.     Security Ownership of Certain Beneficial Owners and Management ................    27

Item 12.     Certain Relationships and Related Transactions ................................    30

Item 13.     Exhibits, Lists and Reports on Form 8-K .......................................    32
</TABLE>
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                                    PART I

Item 1. Description of Business.

Forward-looking Statements

     Safe Harbor Statement under the Private Securities Litigation Reform Act
of 1995: Certain Statements contained in this Form 10-KSB 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. Such statements involve
certain known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially
different from any results, performances or achievements express or implied by
such forward-looking statements. Important factors that could cause actual
results to differ materially from our expectations, include, without
limitation, our history of losses, the growth of the digital download market
and other advances in technologies, our ability to successfully implement our
growth strategy, dependence on third party providers and suppliers; acquisition
opportunities, competition; and other risks described in our Registration
Statement on Form SB-2. Undue reference should not be placed on these
forward-looking statements, which speak only as of the date hereof.

Introduction

     MediaBay, Inc. is a leading provider of premium spoken word content and
products in hard goods and digital download formats via the Internet and
various offline methods. Our content library includes approximately 72,000
audiobook titles, 59,000 old time radio programs and 3,500 classic video
programs. We market our audiobooks through Audio Book Club, the largest
membership-based club of its kind with approximately 1.8 million members, and
our audiobookclub.com web site. Our old time radio and classic video programs
are marketed through the Internet and direct mail catalogs and, on a wholesale
basis, to major retailers, including Costco, Best Buy, Sam's Club, Barnes &
Noble, Waldenbooks, B. Dalton Booksellers and Amazon.com. All of our products
are available for purchase over the Internet through our content-rich portal
located at MediaBay.com. MediaBay.com utilizes our extensive library of premium
spoken word content and various product offerings to attract visitors, increase
the duration and frequency of their visits and expand our e-commerce
opportunities. According to PC Data Online, audiobookclub.com ranked as the
third most visited web site for books, the 69th most visited retail shopping
web site and the 34th fastest growing web site during November 1999. In
addition, we are currently encoding our library of proprietary and licensed
content and are beginning to offer products in a digital download format.

     We have consolidated the club industry for audiobooks by acquiring what we
believe to be our only competitors. As part of the acquisitions of Columbia
House's Audiobook Club and Doubleday Direct's Audiobooks Direct club, we
acquired over 1.1 million members and gained the exclusive right to access
their other club mailing lists of over 34 million existing active and inactive
members, as well as future members they acquire, without any list rental or
insertion fees. As a result of these acquisitions and our expanded customer
database, we have been able to negotiate better prices for products, enjoy
increased economies of scale with our advertising, printing and mailing costs,
stratify our member mailings to better serve our members and form specialty
clubs for audiobooks. In December 1998, we also acquired the assets of three
companies that produce, license, broadcast, syndicate and sell old time radio
and classic video programs. Through these acquisitions we obtained an extensive
library of over 59,000 old time radio and classic video programs, most of which
are exclusively licensed, and a customer list of over 400,000 names. We have
also enhanced our product offerings by acquiring and licensing diverse media
content and increased our customer base from approximately 260,000 customers at
December 31, 1997 to over 2.3 million customers at February 1, 2000.

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Business Strategy

     The market for spoken word content is large and growing rapidly. We
consider ourselves the market leader in this market and are implementing the
following strategies to capture additional market share:

   o Increase Internet Presence. MediaBay.com is an innovative content and
     e-commerce web site that combines the entertainment of content-driven web
     sites, with the product selection and service of e-commerce sites, while
     providing a sense of community for visitors. We launched MediaBay.com to
     (1) capitalize on our substantial customer base and ability to drive
     traffic to our web sites and (2) transport our unique spoken word,
     audiobook and old time radio, and classic video content library online. We
     believe that we were the first significant entrant into the spoken word
     content e-commerce market. Since we launched our online strategy in
     January 1998, we have added over 100,000 Audio Book Club members through
     audiobookclub.com. New members are enrolling online at an average rate of
     over 6,000 per month and the number of unique visitors to our web sites is
     approximately 1.2 million per month. Since our current cost of acquiring
     new members via the Internet is lower than through our offline marketing
     activities, we intend to increasingly emphasize this method of membership
     acquisition. We currently have a database of over 440,000 e-mail
     addresses. We are continuously enhancing our web sites and are actively
     leveraging our marketing, customer service and fulfillment expertise and
     capabilities to grow our online business.

     We believe that the club model used by Audio Book Club translates well to
     an Internet model because the club model ensures communication between us
     and our members and engenders a sense of belonging to a community. In
     addition, the model provides a significant breadth of product offerings
     and substantial information about our products. Unlike traditional web
     retailers, our members have a purchase obligation associated with their
     membership and there is a strong likelihood that they will remain members
     and repeat buyers for a sustained period.

   o Capitalize on Emerging Digital Delivery Technologies. We have entered
     into arrangements with Microsoft and Reciprocal and now have the
     infrastructure necessary to provide customers with secure digital
     downloads of our content. We are currently encoding our library of old
     time radio programs and selected audiobook titles to offer these products
     in a secure digital download format. We are finalizing agreements with
     publishers of other forms of spoken word content, including audio versions
     of newspapers, magazines and newsletters, to obtain the rights to market
     these items on our sites in secure digital download format. As digital
     download becomes an increasingly accepted method for delivery of spoken
     word content, we will expand our offering of products in this format. We
     believe that these distribution methods will further improve our product
     margins as they eliminate the costs of reproduction, packaging and
     warehousing.

   o Expand Marketing Strategy. We have developed a marketing strategy which
     incorporates a broad range of online and offline marketing methods to
     increase our customer base and revenues, including Internet marketing and
     advertising, targeted e-mails to our database, growing our online
     Affiliate Network and direct marketing. We utilize our 2.3 million name
     customer list, product inserts into our 750,000 retail packages, 3.7
     million mail order packages and inserts into our 13.5 million mailings to
     our customers to drive traffic to MediaBay.com and audiobookclub.com. We
     continuously add affiliates to our Affiliate Network program, which
     currently consists of approximately 13,500 other Internet sites which
     promote our web sites. We also have the exclusive right to use Columbia
     House's and Doubleday Direct's mailing lists, which provide us access to
     over 34 million of their other club members for direct mail campaigns and
     inserts into club member mailings to acquire Audio Book Club members
     without any list rental or insertion fees. We use our substantial
     knowledge relating to the use of third-party mailing lists to efficiently
     and cost effectively target buyers on these lists and to continue to
     acquire new members from third-party lists.

     We devote significant efforts to developing and testing various online and
     offline marketing strategies in a concerted effort to increase revenue and
     reduce marketing costs. Through constant testing and refinement of our
     marketing efforts we have grown, and are continuing to grow, our customer
     lists and have reduced, and continue to reduce, our per-customer
     acquisition costs. We have significantly reduced

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     our costs to acquire Audio Book Club members online to less than 5% of the
     per-member costs of our initial Internet marketing campaigns and to less
     than the per-member acquisition costs of our offline marketing campaigns
     while continuing to attract qualified and desirable members.

   o Leverage Our Unique Content. We offer approximately 135,000 spoken word
     and video products which we sell online and offline. We are able to use
     this content to attract and retain web site visitors and to offer this
     content to strategic partners in exchange for directing traffic to our
     sites. One method of attracting and retaining web site visitors is to
     enable them to sample video and audio clips free of charge from our
     library of audio books, old time radio programs and classic videos. Unlike
     many web sites which purchase third-party content and resell products, we
     own or license and manufacture a majority of our products and content. We
     license the rights to sell audiobooks in a club format from major
     publishers and pay royalties for each audiobook sold. We also own or
     exclusively license substantially all of our old time radio and classic
     video products. As a result, we believe that we have a low product cost
     compared to retailers and online book sellers. We also utilize our content
     to enter into content alliances whereby we offer leading web sites samples
     or full length programs in exchange for their directing traffic to our web
     sites. We currently have content alliances with Microsoft's
     windowsmedia.com, Diamond Rio's media portal, rioport.com, and Real
     Network's real.com.

Industry Overview

     Audiobooks and Other Spoken Word Entertainment

     First introduced to the mass market in 1985, audiobooks are literary
works, including best-selling selections from today's most popular writers, and
other printed materials, many of which are made more marketable through the use
of readings by the author, a celebrity actor, or an ensemble of readers or
actors. Audiobooks are recorded on cassettes and on compact discs. Most
best-selling hardcover books printed today are released simultaneously as
audiobooks. Audiobooks are usually author approved abridged versions of the
original works converted to an audio format and are typically three to six
hours in length.

     The audiobook market has increased at a nine-year compound annual growth
rate of approximately 27% from an estimated $250 million in 1989 to
approximately $2.2 billion in 1998. We believe that this sales growth is driven
by several factors, including:

  o the expanding number of available titles in audiobook format;
  o an increase in the number of retailers selling audiobooks;
  o an increase in product quality;
  o broadening public awareness of the portability and convenience of
    audiobooks as a viable alternative to printed books and music
    recordings; and
  o increasing time constraints on consumers.

As the market for audiobooks grows, some titles are being released only in
audio format. In December 1999, Simon & Schuster published a Stephen King
title, Blood and Smoke in audio format only and not in the written format.

     Audiobook titles span every genre, including non-fiction, fiction,
self-help, mystery, fantasy, business, science fiction, biography, romance,
religion, motivational and children's, among others. Audiobooks cover new
releases as well as many of the literary classics.

     Consumers of audiobooks are traditionally individuals who do not read as
often as they desire due to time constraints. As an alternative, these
individuals listen to audiobooks while engaging in other activities such as
driving or exercising. This demographic group has expanded to encompass a wide
variety of consumers. A 1996 market study by the Yankee Group indicates that
87% of automobile commuters listened to the radio an average of 50 minutes a
day while commuting. As individuals look to use their commuting time more
efficiently and manage an increasing amount of available content, we believe
that audiobooks have emerged as a personalized pay-to-listen alternative to
radio.

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     Old Time Radio and Classic Video Products

     Old time radio programs include radio dramas, mysteries, detective
stories, comedies, westerns, science fiction and adventure stories that
originally aired from the 1930s to the 1970s. Classic video programs include
films originally released from the silent film era of the 1930s through the
1970s.

     We believe there has been a resurgence in consumer interest for old time
radio and classic radio programs, as demonstrated by the growth of our sales of
these products and increased opportunities to enter into co-branding and
cross-marketing agreements, such as our agreements with the Frank Sinatra
estate, Walter Cronkite, the Smithsonian Institute and American Movie Classics.
We also believe that these programs have become a niche entertainment market,
appealing to those consumers who remember the "golden age of radio" and their
childhood film favorites with nostalgia and to younger listeners seeking new
forms of entertainment. We believe that our old time radio and classic video
products can increase their share of this market.

     Digital Delivery of Spoken Word Content

     The Internet has recently emerged as a significant global communications
resource enabling millions of people to access and share information,
experience entertainment offerings and purchase products. Through the Internet,
users have the ability to quickly receive information in various forms, from
text and multimedia to newer technologies such as streaming audio. According to
Jupiter Communications, almost 33% of online consumers, representing 43 million
people worldwide, often listen to spoken word content on their personal
computers. The current environment available on the Internet generally
restricts consumers to listening at their personal computers. However, consumer
electronics and computer manufacturers are addressing this constraint by
developing a new generation of mobile devices that are capable of playing back
digital downloads of spoken word content. An industry research analyst
estimates that sales of Internet-connected portable audio players will increase
from under 1.0 million units in 1999 to over 6.5 million units in 2002. We
believe that the emergence of digital download technologies will accelerate
growth in the market for spoken word content.

MediaBay Network

     We operate the MediaBay network of web sites which consists of
MediaBay.com, audiobookclub.com and bestbookclubs.com.

     MediaBay.com

     Our MediaBay.com media portal site is an innovative content and e-commerce
web site offering our 2.3 million customers and approximately 1.2 million
unique web site monthly visitors a single location for premium spoken word
content and products. MediaBay.com combines the entertainment of content-driven
web sites with the product selection and service of e-commerce sites, while
providing a sense of community for visitors. In July 1999, we launched
MediaBay.com to (1) capitalize on our substantial customer base and ability to
drive traffic our websites and (2) transport our unique spoken word, radio and
video content library online. We believe we were the first significant entrant
into the spoken word content e-commerce market.

     In addition to providing our own content, we have entered into several
arrangements to provide unique content, such as webcasts, including the
American Express Blue concert series, celebrity and author interviews and audio
horoscopes to attract and retain web site visitors.

     MediaBay.com was originally designed to network our various e-commerce
sites and is currently being redesigned as a true portal site. Redesigning
MediaBay.com into a channel format enables visitors to conveniently purchase
products from multiple channels in a single transaction and navigate
MediaBay.com without leaving the site. The redesigned site, which we expect to
re-launch by the end of the first quarter of 2000, will be comprised of the
following channels which are representative of our content and commerce
offerings:

   o Audiobook channel. At this channel, visitors can purchase on a retail
     basis almost any of the 72,000 audiobook titles in existence, sample
     15,000 audio clips from various audiobook titles, listen to streaming
     audio and digital downloads of selected audiobooks, read reviews, receive
     recommendations and visit our chatrooms.

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   o Old time radio channel. This channel provides visitors with a searchable
     database to select from over 59,000 programs from our old time radio
     program library to purchase and offers free full-length programs in
     streaming audio and digital download formats, information on the programs,
     celebrities and talent of the Golden Age of Radio and contests and trivia
     information. This site is heavily promoted by our nationally-syndicated
     radio program "When Radio Was," which is heard by over 3 million listeners
     weekly.

   o Classic video channel. This channel is devoted to classic, nostalgic and
     other unique film and video programs. This channel has a fully searchable
     database of over 3,500 video programs from our classic video library for
     purchase by visitors. We also intend to offer a large library of current
     and vintage video programs in the near future.

   o Newsstand channel. This channel offers newspapers, newsletters, magazines
     and other time sensitive content for purchase as hard goods, as well as in
     secure digital download formats and non-secure formats such as the mp3
     format.

   o Music channel. This channel is devoted to old time and current music in
     CD format and has a searchable database of tens of thousands of titles in
     addition to unique content, such as concert webcasts and archived
     performances from prior webcasts.

     Audiobookclub.com

     Audiobookclub.com provides visitors the opportunity to become members of
our Audio Book Club and provides our members with the ability to order almost
any audiobook in existence. Audiobookclub.com has acquired over 100,000 members
online since January 1998 and is currently enrolling new members at an average
rate of over 6,000 per month. This site currently receives over 1.0 million
unique visitors per month, according to recent measurements by PC Data Online.
Approximately 20% of the traffic to this site comes directly to
audiobookclub.com, and the remainder is driven to the site through links with
other sites. According to PC Data Online, audiobookclub.com ranked as the third
most visited web site for books, the 69th most visited retail shopping web site
and the 34th fastest growing web site during November 1999.

     Audiobookclub.com utilizes Net Perceptions GroupLens Recommendation
Engine, an advanced tool designed to deliver highly personalized content, to
attempt to create personalized audiobook buying experiences customized for each
member. Once members have logged onto audiobookclub.com, they are offered
audiobook selections that correspond to their previous buying patterns. Online
members also receive e-mail alerts that inform them of the addition of new
titles that may appeal to them. Members visiting audiobookclub.com are able to
sample over 15,000 audio clips from various audiobook titles, read reviews,
visit our chat room, "Coffee Talk", to discuss audiobook interests with other
members, and visit special sections such as CD Central and Unabridged Only.
Audiobookclub.com is updated simultaneously with the Audio Book Club catalog to
add new selections and the new current featured selection, as well as to add
new book cover images and audio clips to preview.

     Bestbookclubs.com

     Bestbookclubs.com, a co-branded web site with Doubleday Direct, was
established to accumulate a database of e-mail addresses, acquire new Audio
Book Club members and attract visitors to our web sites. We promote Doubleday
Direct's clubs and this joint web site on our audiobookclub.com and
MediaBay.com sites and Doubleday promotes our products and services on its web
sites, including doubledaybookclub.com, crossings.com and literaryguild.com.

Audio Book Club

     We believe that we are the largest marketer of audiobooks through our
Audio Book Club, the largest membership-based club of its kind. Our total
member file, which includes active and inactive members, has grown
significantly from approximately 64,000 names at December 31, 1995 to
approximately 1.8 million names at December 31, 1999. Of these members, 625,000
members were added as a result of our acquisition of Columbia House's Audiobook
Club and 500,000 members were added as a result of our acquisition of Doubleday
Direct's Audiobooks Direct club. In addition, we added 200,000 members in 1999
through internal growth.

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     We emphasize the timely introduction of new audiobook titles to our
catalogs and attempt to offer a balance between various genres and between
unabridged and abridged audiobooks, cassettes and compact discs to satisfy
differing member preferences. We also offer a special order service which
enables members to call us and order virtually any of the approximately 72,000
published titles in existence, whether or not listed in our member mailings.

     We are in the process of creating specialty clubs for audiobooks based on
consumer preferences which we have identified from our extensive database of
member information including a Christian audiobook club which is expected to be
launched by the second quarter of 2000. Our specialty clubs will feature a
specific interest, such as self help, religion, mystery, romance and science
fiction.

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

     Our Audio Book Club is modeled after the Book-of-the-Month Club. Audio
Book Club members can enroll in the club through the mail by responding to
direct mail or print media advertisements, online through our web site or by
calling or faxing us. We typically offer new members four audiobooks at an
introductory price of $.99 or less. By enrolling, the member commits to
purchase a minimum number of additional audiobooks, typically two or four, at
Audio Book Club's regular prices which generally range from $10.00 to $35.00
per audiobook. Our members continue to receive member mailings and typically
purchase audiobooks beyond their minimum purchase commitment.

Unique Spoken Word and Video Content

     We have exclusive rights to a substantial portion of our library of
popular old time radio and classic video programs, including vintage comedy,
mystery, detective, adventure and suspense programs. Our library consists of
over 59,000 radio programs, most of which are licensed on an exclusive basis,
including:

  o H.G. Wells' "War of the Worlds" broadcast;
  o hit series, such as The Lone Ranger, Superman, Tarzan, Sherlock Holmes, The
    Life of Riley and Lights Out;
  o recordings of stars, such as Humphrey Bogart, Lucille Ball, Frank Sinatra
    and Jack Benny; and
  o recordings of comedy teams, such as Abbott and Costello, Burns and Allen,
    Martin and Lewis and Baby Snooks and Daddy.

     We also produce and syndicate three national "classic" radio programs:
"When Radio Was" hosted by Stan Freberg, "Radio Movie Classics" hosted by
Jeffrey Lyons, and "Radio Super Heroes." These three programs are collectively
heard in more than 450 markets, including one of the nation's largest radio
stations, KNX1070 Los Angeles, by over 3 million listeners weekly. Our library
of old time radio programs provides the content and the basis for these
programs.

     We leverage the content of our old time radio and classic video library by
entering into marketing and co-branding arrangements which provide us a means
to repackage these programs. We offer the following collections:

   o "The Greatest Old-Time Radio Shows of the 20th Century -- selected by
     Walter Cronkite" -- a collection of approximately 60 old time radio
     programs. We have entered into a license agreement to use Mr. Cronkite's
     name and likeness. This collection includes approximately 30 hours of
     radio's most memorable programs, a spoken foreword by Mr. Cronkite and a
     companion informational booklet.

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

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   o "AMC's Audio Movies to Go" -- a collection of old time radio adaptations
     of classic movies branded under this name featuring film stars such as
     Humphrey Bogart, Jimmy Stewart, John Wayne and Betty Davis. We entered
     into an exclusive agreement with American Movie Classics in October 1999.
     This product line is being sold on American Movie Classics' cable channels
     reaching 69 million homes, in retail chains carrying audio and video
     programs, in our product catalogs and on our web site and AMC's web site.

     In the second quarter of 2000, we expect to release a collection of Frank
Sinatra's Greatest Radio Performances which we anticipate will contain
approximately 60 of Frank Sinatra's old time radio appearances. We have entered
into an agreement with Mr. Sinatra's estate for the use of Mr. Sinatra's name
and likeness in connection with a collection of his performances.

     We also have an extensive library of over 3,500 video programs, including
an extensive collection of foreign and silent films, as well as classic films
from the 1930s through the 1970s.

     We sell our old time radio and classic video programs on a retail basis
through our catalogs and direct mail. We maintain a list of over 400,000 names
of customers of radio and video programs through our catalogs. This list
includes all customers to which our radio and video programs or catalogs have
been mailed. We engage in list rental programs to maximize the revenue
generation potential of our customer list. We also sell our radio and video
programs on a wholesale basis through major retailers and online retailers,
including Costco, Best Buy, Sam's Club, Barnes & Noble, Waldenbooks, B. Dalton
Booksellers and Amazon.com.

Marketing

     Since our inception, we have engaged in an aggressive marketing program to
expand our Audio Book Club member base, expand our Internet presence, develop
alliances with other Internet companies and attract visitors to our web sites.
We devote significant efforts to developing various online and offline
marketing strategies in a concerted effort to increase revenue and reduce
marketing costs. We continually analyze the results of our marketing activities
in an effort to maximize sales, extend membership life cycles, and efficiently
target our marketing efforts to increase response rates to our advertisements
and reduce our per-member and per-customer acquisition costs.

     Internet Marketing

     Our marketing activities on the Internet have resulted in the enrollment
of over 100,000 new Audio Book Club members through our web sites since January
1998, with an average of over 6,000 new members currently enrolling over the
Internet each month. Audiobookclub.com currently attracts over 1.0 million
unique visitors per month.

     Our Internet marketing program focuses on developing alliances with other
Internet companies to attract visitors to our web sites to sell products and
obtain Audio Book Club members. We have entered into advertisement arrangements
with various Internet companies such as America Online, Yahoo!, Broadcast.com,
Mail.com, iVillage, Go2Net, Inc. and Microsoft for several of its web sites,
including its MSN.com portal site and its HotMail, WebTV and Link Exchange
properties, and we continue to explore arrangements with other Internet
companies. Most of the arrangements provide us with the flexibility to promote
one or more of our web sites to direct visitor traffic to the web site or sites
that we expect will benefit the most from the promotion.

     We established an Internet department which evaluates our click-through
rates and rate of conversions of visitors to customers on a daily basis and
alters our initiatives to maximize our Internet marketing and advertising
activities. We believe that this focus and our ability to negotiate favorable
agreements has resulted in a cost to acquire new members on the Internet which
is lower than our offline cost. Since our current cost of acquiring new members
via the Internet is lower than through offline marketing activities, we intend
to increasingly emphasize this method of member acquisition.

     We have established an Associates Network program of over 13,500 affiliate
web sites which advertise audiobookclub.com and receive a commission for each
member obtained through a link from their site.

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     We also use push-marketing programs consisting of targeted e-mail
campaigns to our existing e-mail address database of over 440,000 e-mail
addresses.

     We utilize our content to enter into alliances with many leading web
sites, including Microsoft's windowsmedia.com, Diamond Rio's media portal,
rioport.com, and Real Network's real.com which enable us to drive traffic to
our web sites to sell products and build our e-mail address database.

     In the belief that enticing, easy to use web sites are the best source of
marketing for repeat visitors, we continually make technological improvements
to our web sites to facilitate user access. By offering an increasingly varied
array of fresh content, audio and video clips and other features, we aim to
attract visitors to our Internet web sites both to remain at our sites to
purchase additional products and to return to our network of sites when they
choose to browse the Internet for entertainment options.

     Offline Marketing to Attract Online Customers

     We emphasize the use of our offline marketing efforts to attract visitors
to our web sites. We promote MediaBay.com and audiobookclub.com by inserting
promotional advertisements in our product packages, product shipments, direct
mailings, inserts and other selected mailings. In addition, we advertise our
web sites on our nationally syndicated radio program "When Radio Was," which is
heard seven days a week and has a weekly audience of over 3 million listeners.

     Club Member Acquisition

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

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

     In connection with our acquisitions of Columbia House's Audiobook Club and
Doubleday's Audiobooks Direct club, we obtained the exclusive right to use
their other current and future club mailing lists, which currently consist of
over 34 million active and inactive members, over the next several years,
without paying rental and insertion fees. Since these club mailing lists are
comprised of individuals who have previously joined other membership clubs, we
anticipate favorable future response rates and improved per-member acquisition
costs.

     We also acquired mailing lists with an aggregate of approximately 400,000
names of buyers and prospective buyers of old time radio and classic video
programs in connection with the acquisition of our old time radio and classic
video operations in December 1998. Since these persons have previously
purchased spoken word content through direct marketing, we have begun to target
them as potential customers or members of Audio Book Club.

     Member Retention and Recurring Revenue

     We encourage Audio Book Club members to purchase more than their minimum
purchase commitment by offering all members special discount pricing and other
incentives based on the volume of their purchases. Audio Book Club members
receive one mailing approximately every three weeks. Audio Book Club mailings
typically include a multi-page catalog which, together with the "more titles"
insert, offers approximately 500 titles, including a featured selection, which
is usually one of the most popular titles at the time of mailing; alternate
selections, which are best selling and other current popular titles; and
backlist selections, which are long-standing titles that have continuously sold
well. Each member mailing also includes an order form and a
"Member-Get-a-Member" form.

                                       9
<PAGE>

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

     We maintain a database of information on each name in our member file,
including number and genre of titles ordered, payment history and the marketing
campaign from which the member joined. We also maintain a lifetime value
analysis of each mailing list we use and each promotional campaign we
undertake. The substantially increased size of our database enables us to
better stratify our member mailings by sending marketing materials and monthly
selections that better reflect members' particular interests as evidenced by
their buying patterns and purchasing preferences, rather than sending the same
mailing and monthly selection to all members. Our objective is to use this
stratification technique and our database analysis expertise to decrease
members' returns of monthly selections, increase members' positive response to
our product offerings and thereby increase net sales and extend the membership
lifecycle.

     Marketing of Old Time Radio and Classic Video Products

     We sell our old time radio and classic video products primarily through
direct mail, radio and print advertisements and online marketing and promotion
of our web sites. Our catalogs offer cassettes and compact discs from our old
time radio library and videos from our classic video library. We mail our
catalogs four to six times each year to all persons on our customer list, as
well as to portions of our Audio Book Club member list. We also include product
insert advertisements for our radio and video programs in selected Audio Book
Club member mailings.

     We advertise these products on our nationally syndicated programs, which
reach an audience of 3 million listeners of old time radio programs weekly. We
also place advertisements in selected publications, including Reader's Digest,
TV Guide and Parent Magazine. We also offer our old time radio and classic
video programs to retail customers through our web sites, primarily on the old
time radio and classic video channels on MediaBay.com.

     We market our old time radio and classic video programs to wholesale
customers through our inhouse sales personnel and through third-party
distributors. We also engage in cooperative advertising to induce retailers to
purchase our products.

Supply and Production

     We have established relationships with substantially all of the major
audiobook publishers, including Random House Audio Publishing Group, Simon &
Schuster Audio, Harper Audio and Time Warner Audio Books for the supply of
audiobooks. For the years ended December 31, 1998 and 1999, approximately 55%
and 37% of our gross sales were from sales of titles licensed from the Random
House Audio Publishing Group.

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

     Our licensing agreements generally are non-exclusive, have one to
three-year terms, require us to pay an advance against future royalties upon
signing the license, permit us to sell audiobooks in our inventory at the
expiration of the term during a sell-off period and prohibit us from selling an
audiobook prior to the

                                       10
<PAGE>

publisher's release date for each audiobook. Most of the license agreements
permit us to make our own arrangements for the packaging, printing and cassette
duplication of audiobooks. Most of our license agreements permit us to produce
and sell audiobook titles in cassette and compact disc form. A few of our
license agreements grant us digital rights to the titles as well. We are
negotiating with publishers to obtain the rights to produce and sell additional
titles in a digital download format.

     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. Engineers in our Illinois facility use digital sound
equipment to improve the sound quality of our old time radio programs. We then
contract with third-party manufacturers to duplicate and manufacture the old
time radio cassettes and CDs which we sell. We duplicate or use third parties
to manufacture most of our videos.

     We are also in the process of encoding some of our old time radio products
and audiobooks which we license to provide digital download delivery of these
products.

Fulfillment and Customer Service

     Doubleday Direct currently provides order processing and data processing
services, warehousing and distribution services for our Audio Book Club
members. Doubleday Direct's services include accepting member orders,
implementing our credit policies, inventory tracking, billing, invoicing and
generating periodic reports, such as reports of sales activity, accounts
receivable aging, customer profile and marketing effectiveness. Doubleday
Direct also packs and ships the order, using the invoice as a packing list, to
the club member.

     Doubleday Direct continued to provide these services to the members we
acquired through our acquisition of their Audiobooks Direct club in June 1999
and has provided these services for all of our Audio Book Club members since
January 2000. We were able to negotiate a favorable pricing structure with
Doubleday Direct for these services based on the increased volume of business
we will provide to them. As a result, we currently anticipate that we will
begin to experience cost savings for these functions in the first quarter of
2000.

     For our Audio Book Club members, we offer fast ordering options, including
placing orders online through our web site, calling us with an order and faxing
an order to us. Orders are sent fourth class mail and are typically delivered
10 to 14 days following our receipt of orders. For an additional fee, members
can receive faster delivery of an order either by priority delivery, which
takes three to five days, or by overnight delivery.

     Members are billed for their purchases at the time their orders are
shipped and are required to make payment promptly. We generally allow members
in good standing to order up to $50 of products on credit, which may be
increased if the member maintains a good credit history with us.

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

     We will fulfill MediaBay.com orders from National Fulfillment Services,
Inc. National Fulfillment will accept orders, aggregate old time radio, classic
video, audiobook and third-party products, ship products to customers, invoice,
accept and apply collections and generate periodic reporting. We used National
Fulfillment for fulfillment services to our Audio Book Club prior to our using
Doubleday Direct.

     We fulfill retail orders for old time radio programs at our Illinois
facility. Wholesale product orders are drop shipped directly from our tape
duplicator or our facility.

                                       11
<PAGE>

     For our old time radio and classic video products, we only accept credit
card orders from retail customers and require wholesale customers to pay
invoices within 90 days. We maintain a toll-free customer service telephone
hotline for these customers and we can also be contacted by mail and e-mail.
Our policy is to accept returns of damaged products sold on a retail basis. We
accept returns of unsold products sold on a wholesale basis.

Competition

     The audiobook and mail order industries are intensely competitive.
However, we believe that we operate the only club for audiobooks in the United
States and that we are the largest marketer of old time radio programs.

     We compete with all other outlets through which audiobooks and other
spoken word content are offered, including bookstores, audiobook stores which
rent or sell only audiobooks, mail order companies that offer audiobooks for
rental and sale through catalogs and retail establishments such as convenience
stores, video rental stores and wholesale clubs.

     As the markets for spoken word content increasingly shifts towards the
Internet, we face competition for the marketing and distribution of these
products from other highly trafficked sites, offering a variety of competing
products, including Amazon.com and Barnesandnoble.com. Currently, there are
several other sites offering streaming audio content and products in digital
download format, including audiohighway.com and audible.com, which offer
digital download spoken word content, including audiobooks.

     We also compete for discretionary consumer spending with mail order clubs
and catalogs, other direct marketers and retailers that offer products with
similar entertainment value as audiobooks and old time radio and classic video
programs, such as music cassettes and compact discs, printed books, videos, and
laser and digital video discs.

Intellectual Property

     We have a United States registered trademark for the Audio Book Club logo
and have several pending United States trademark and service mark
registrations, including "MediaBay," "MediaBay.com," "audiobookclub.com" and
the MediaBay logos. We have applied for several additional service marks
relating to slogans and designs used in our advertisements, member mailings and
member solicitation packages. We believe that our trademarks and service marks
have significant value and are important to our marketing. We also own or
license the rights to the radio and video programs in our content library.

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

Employees

     As of March 3, 2000, we had 62 full-time employees. Of these employees, 7
served in management and 30 served in operational positions at our Audio Book
Club operations and 4 served in management and 21 served in operational
positions at our old time radio and classic video operations. We believe our
employee relations to be good. None of our employees is covered by a collective
bargaining agreement.

Item 2. Description of Property.

     We lease 1,155 square feet of office space in Boca Raton, Florida pursuant
to a lease agreement which expires in November 2000 at a monthly rent of
$1,307. We have the option to renew the lease for two consecutive three-year
periods.

     We sublease 828 square feet of space in Morristown, New Jersey from H.H.
Realty Investors, Inc., an affiliate of Norton Herrick, pursuant to a sublease
agreement that expires in December 2003 at a monthly rate of $1,340, the amount
paid by the related party to the landlord under the master lease.

                                       12
<PAGE>

     We sublease 2,793 square feet of space in Morristown, New Jersey from H.H.
Realty Investors, Inc., an affiliate of Norton Herrick pursuant to a sublease
agreement on a month-to-month basis at a monthly rate of $3,215, the amount
paid by the related party to the landlord under the master lease.

     We also lease approximately 3,655 square feet of space in Morristown, New
Jersey on a month-to-month basis at a current rent of $5,735 per month.

     We lease 8,000 square feet of space in Schaumburg, Illinois pursuant to a
lease agreement which expires in December 2005, subject to a three-year renewal
option. Monthly rent under this lease is $4,667.

     We lease a kiosk at a shopping mall in Aventura, Florida on a
month-to-month basis at a current rate of $5,000 per month.

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.

     No matters were submitted to a vote of our security holders during the
fourth quarter of the fiscal year covered by this report.

                                       13
<PAGE>

                                    PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

     MediaBay's common stock has been quoted in the Nasdaq National Market
under the symbol "MBAY" since November 15, 1999. From October 23, 1997 until
November 12, 1999, MediaBay's common stock was listed on the American Stock
Exchange under the symbol "KLB". The following table shows the high and low
sales prices of our common stock as reported by the Nasdaq National Market
since November 15, 1999 and by the American Stock Exchange until November 12,
1999.

<TABLE>
<CAPTION>
                                                        High           Low
                                                    ------------   -----------
<S>                                                 <C>            <C>
Fiscal Year Ended December 31, 1997
 Fourth Quarter (from October 23, 1997) .........    $   11.13      $   4.00
Fiscal Year Ended December 31, 1998
 First Quarter ..................................         7.38          4.00
 Second Quarter .................................        13.25          3.38
 Third Quarter ..................................        20.88          3.94
 Fourth Quarter .................................        16.63          5.00
Fiscal Year Ended December 31, 1999
 First Quarter ..................................        14.38          7.38
 Second Quarter .................................        19.94         10.00
 Third Quarter ..................................        15.88          7.25
 Fourth Quarter .................................        15.00         10.25
Fiscal Year Ended December 31, 2000
 First Quarter (through March 24, 2000) .........        16.875         7.59
</TABLE>

     On March 24, 2000, the last reported sale price of our common stock on the
Nasdaq National Market was $8.25 per share. As of March 14, 2000, there were
approximately 57 record owners of our common stock. We believe that there are
in excess of 400 beneficial owners of our common stock.

Dividend Policy

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

Sales of Securities and Use of Proceeds

     In October 1999, we issued 21,600 shares of our common stock to a third
party upon exercise of an option. We received $95,000 as payment of the
exercise price.

     In December 1999, we issued 179,775 shares of our common stock to a third
party upon conversion of convertible promissory notes at a conversion price of
$11.125 per share

     In December 1999, we issued a $1,000,000 principal amount convertible
promissory note due December 31, 2004 to the son of our Chairman. The
convertible note bears interest at the rate of 9% per year and is convertible
into shares of our common stock at the rate of $11.125 of principal or interest
outstanding, subject to adjustment.

     In December 1999, we issued warrants to purchase 46,667 shares of our
common stock at an exercise price of $8.41 per share pursuant to a December
1998 letter agreement.

     All of the forgoing securities were issed in private transactions pursuant
to exception from registration offered by Section 4(2) of the Securities Act of
1933.

     During the three months ended December 31, 1999, we issued options under
our 1999 stock incentive plan to purchase 84,100 shares of common stock to
certain individuals, including officers and directors. We relied on the
exemptions provided by Section 2(3) and/or Section 4(2) of the Securities Act
of 1933 in connection with the issuance of such options.

                                       14
<PAGE>

Item 6. Management's Discussion and Analysis of Financial Condition and Results
   of Operations

Overview

     We are a leading provider of premium spoken word content and products in
hard goods and digital download formats via the Internet and various offline
methods. We market our audiobooks through Audio Book Club, the largest
membership-based club of its kind with approximately 1.8 million members, and
our audiobookclub.com web site. We sell audiobooks in a club format through our
Audio Book Club and via the Internet through our audiobookclub.com site, and on
a retail basis through the audiobook channel on MediaBay.com. We sell our old
time radio and classic video programs on a retail basis through direct
marketing and via the Internet through the old time radio and classic video
channels on MediaBay.com, as well as on a wholesale basis to major retailers.

     Our marketing programs have consisted primarily of direct mail, media
advertising and marketing on the Internet. Online and offline direct response
marketing costs to current members are expensed on the date the promotional
materials are mailed. Online and offline direct response costs for any
premiums, gifts or discounted audiobooks in the promotional offer to new
members are expensed as incurred. Beginning in January 1999, we were required
to capitalize direct response marketing costs for the acquisition of new
members in accordance with AICPA Statement of Position 93-7 "Reporting on
Advertising Costs" and amortize these costs over the period of future benefit
which was estimated at 30 months based on our historical experience over the
last five years. We have also grown our membership base through acquisitions.
On December 14, 1998, we completed a series of acquisitions and combined the
acquired businesses within the old time radio and classic video programs area.
On December 31, 1998, we acquired from Columbia House substantially all of the
assets of its Audiobook Club and, on June 15, 1999, we acquired Audiobooks
Direct from Doubleday Direct. When reading the following results of operations,
please note:

   o Our results of operations for the year ended December 31, 1998 reflect
     the operations of Audio Book Club for the entire year and the operations
     of the acquired companies in the old time radio and classic video programs
     area from December 15, 1998 through December 31, 1998.

   o Our results of operations for year ended December 31, 1999 reflect the
     operations of our Audio Book Club, including Columbia House's Audiobook
     Club, and our old time radio and classic video programs area for the
     entire year, and the operations of Audiobooks Direct from June 16, 1999
     through December 31, 1999.

     As a result of the timing of our marketing activities within a given year
or quarter, the impact of capitalizing new member direct response marketing
costs and the timing of these acquisitions and related costs, including
increased interest expense and goodwill and other intangible asset amortization
expense, comparisons of our historical operating results from period to period
may not be meaningful to you.

Results of Operations

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

<TABLE>
<CAPTION>
                                                               Year Ended
                                                              December 31,
                                                           -------------------
                                                             1998       1999
                                                           --------   --------
<S>                                                        <C>        <C>
         Net sales .....................................      100%       100%
                                                              ===        ===
         Cost of sales .................................       63         51
         Gross profit ..................................       37         49
         Advertising and promotion expense .............       60         18
         General and administrative expense ............       22         21
         Depreciation and amortization expense .........        1         15
         Interest income (expense), net ................        1        (10)
         Net loss ......................................      (47)       (15)
</TABLE>

                                       15
<PAGE>

     Year ended December 31, 1999 compared with year ended December 31, 1998

     Gross sales increased $40.6 million, or 182.4%, to $62.8 million for the
year ended December 31, 1999 from $22.2 million for the year ended December 31,
1998. The increase in gross sales was primarily attributable to (1) increased
sales of audiobooks resulting from the continued expansion of Audio Book Club's
membership base including sales and acquisition of members through
audiobookclub.com, our Audio Book Club web site, (2) sales from the Columbia
House Audiobook Club acquisition for the full year ended December 31, 1999, (3)
sales from our acquired businesses within the old time radio and classic video
programs area, and (4) the inclusion of sales from Audiobooks Direct since its
acquisition on June 15, 1999.

     Returns, discounts and allowances for the year ended December 31, 1999
were $16.6 million, or 26.4% of gross sales, compared to $7.3 million, or 33.0%
of gross sales, for the prior comparable period. The decrease in returns as a
percentage of gross sales is due to the historically lower return rates for
sales of our old time radio and classic video programs and lower return rates
from sales to acquired members from Columbia House Audiobook Club as compared
to our historical return rate. The dollar increase in return rates, discounts
and allowances was primarily due to the increased gross sales.

     Principally as a result of higher gross sales, net sales for the year
ended December 31, 1999 increased $31.3 million or 210.4% to $46.2 million from
$14.9 million.

     Cost of sales increased $14.2 million, or 150.6%, to $23.7 million for the
year ended December 31, 1999 from $9.5 million in the prior comparable period.
Cost of sales as a percentage of net sales decreased to 51.2% from 63.5%. Gross
profit increased $17.1 million, or 314.2%, to $22.5 million for the year ended
December 31, 1999 from $5.4 million in the prior comparable period. Gross
profit as a percentage of net sales increased to 48.8% from 36.5% due to
improvement in the price we paid for products for our Audio Book Club based on
increased volume purchases as a result of our recent acquisitions, better
fulfillment arrangements and higher gross profit as a percentage of net sales
of our old time radio and classic video products.

     Advertising and promotion expenses (for acquisition and retention of
members) decreased $792,000 or 8.9%, to $8.1 million for the year ended
December 31, 1999 compared to $8.9 million in the prior comparable period. The
decrease is due to the capitalization of direct response advertising in the
year ended December 31, 1999, when we first met the measurement criteria
required for capitalization. This decrease was partially offset by higher
advertising expenses to existing Audio Book Club members and to old time radio
and classic video customers which are expensed in the period incurred. The
higher advertising expenses to existing Audio Book Club members resulted from
an increase in membership through continued member growth and acquisitions.

     General and administrative expenses increased $6.5 million, or 194.3%, to
$9.8 million for the year ended December 31, 1999 from $3.3 million for the
prior comparable period. General and administrative expense increases are
principally attributable to the acquisition and integration of the old time
radio and classic video operations, including its personnel and facilities, an
increase in the dollar amount of bad debt expenses as a result of sales
increases and increased personnel and related costs as we continue to grow and
internalize services previously performed by outside vendors. We did not retain
any personnel from the acquisitions of Columbia House Audiobook Club,
Audiobooks Direct and Adventures in Cassettes.

     Depreciation and amortization expenses increased $6.5 million to $6.8
million for the year ended December 31, 1999 from $367,000 for the prior
comparable period. The increase is principally due to amortization of goodwill
and other intangible assets in connection with our various acquisitions in the
amount of $6.3 million.

     Net interest expense for the year ended December 31, 1999 was $4.5 million
as compared to net interest income of $180,000 for the year ended December 31,
1998. The interest expense in 1999 is attributable to debt incurred in
connection with our various acquisitions.

     Primarily due to increased gross sales of $40.6 million, improvements in
gross profit as a percentage of net sales and the capitalization of direct
response advertising, our earnings before interest, taxes, depreciation and
amortization (EBITDA) increased $11.4 million to $4.6 million for the year
ended December 31, 1999. EBITDA is not a recognized measure of performance
under generally accepted accounting principles,

                                       16
<PAGE>

however, management believes that EBITDA is a relevant measure of performance
because it reflects our operations without giving effect to acquisition related
costs. The calculation of EBITDA may not be consistent with methods used by
other companies. Net loss for the year ended December 31, 1999 was $6.7 million
or $.82 per share of common stock as compared to a net loss of $7.0 million or
$1.13 per share of common stock for the year December 31, 1998. The decrease in
net loss was primarily attributable to increased gross sales, improvements in
gross profit as a percentage of net sales and the capitalization of direct
response advertising offset by increased interest expense and amortization of
goodwill and other intangibles in connection with our various acquisitions.

Liquidity and Capital Resources

     Historically, we have funded our cash requirements through sales of our
equity and debt securities and borrowings from financial institutions and our
principal shareholders. Our capital requirements have been and will continue to
be significant due to expanding operations, costs associated with direct mail
campaigns, other new member recruitment advertising, promotion and brand
building and expanding Internet operations.

     For the year ended December 31, 1999, our cash decreased by $2.5 million
as we used net cash of $6.6 million for operating and $20.3 million for
investing activities and had cash provided by financing activities of $24.4
million. Net cash used in operations principally consisted of the net loss of
$6.7 million, an increase in accounts receivable of $4.0 million, an increase
in inventory of $2.0 million, an increase in prepaid expenses of $383,000, an
increase in royalty advances of $1.5 million and an increase in deferred member
acquisition costs of $10.9 million, partially offset by an increase in accounts
payable and accrued expenses of $10.1 million. To arrive at net cash used in
operations, depreciation and amortization expenses of $8.8 million were added
to the net loss. The increase in accounts receivable during the year ended
December 31, 1999 is principally due to higher sales and the timing of those
sales. The increase in inventory supports our higher sales volume. The increase
in royalty advances relates to the advance payments to publishers and rights
holders of our various licensed products and is attributable to the growth of
our business. The increase in accounts payable and accrued expenses was
primarily attributable to the growth in our business and the timing of vendor
payments and invoicing.

     Cash used in investing activities for the year ended December 31, 1999 was
primarily attributable to the acquisition of Audiobooks Direct. For the year
ended December 31, 1999, net cash provided by financing activities consisted of
increased borrowings under our credit agreement for the acquisition of
Audiobooks Direct, proceeds from the sales of common stock and the issuance of
a subordinated note in connection with the acquisition of Audiobooks Direct.
These increases were partially offset by $15.1 million of principal payments on
our long-term bank debt and payments on the subordinated loans.

     Recent Acquisitions and Financings

     In December 1998, we completed the following acquisitions of old time
radio and classic video businesses:

   o We acquired Radio Spirits, Inc., a company which specialized in
     syndicating, selling and licensing old time radio programs, from Carl
     Amari, who became an officer of MediaBay upon the closing. The purchase
     price for the acquisition was $340,000 in cash, 425,000 shares of our
     common stock and options to purchase 175,000 shares of our common stock.
     We also paid $1.8 million of liabilities of Radio Spirits at the closing.
     In connection with the Radio Spirits acquisition, we also acquired from
     Mr. Amari (1) the assets of Buffalo Productions, Inc. relating to its
     business of duplicating pre-recorded compact discs for $369,000 and (2) a
     50% interest in a joint venture engaged in the production, broadcast,
     marketing and distribution of old time radio programs for $2.3 million.

   o We acquired the assets used by Metacom, Inc. for its Adventures in
     Cassettes business of producing, marketing and selling old time radio
     programs for $1.1 million, 50,000 shares of our common stock and warrants
     to purchase 50,000 shares of our common stock.

   o We acquired the assets used by Premier Electronic Laboratories, Inc.
     relating to its business of producing, marketing and selling old time
     radio and classic video programs for $240,000 and 125,000 shares of our
     common stock.

                                       17
<PAGE>

     On December 31, 1998, we acquired from Columbia House substantially all of
the assets of its Audiobook Club, including its membership file of over 600,000
members. We also entered into a marketing agreement with Columbia House in
which we received access to Columbia House's current and future club mailing
lists, which currently consist of over 20 million names of active and inactive
members, through 2006. In addition, Columbia House entered into a
non-competition agreement. As consideration for the acquisition, we paid to
Columbia House $30.8 million in cash and issued to Columbia House and its
designees, Sony Music Entertainment, Inc. and WCI Record Club Inc., a
subsidiary of Time Warner, a total of 325,000 shares of our common stock and
warrants to purchase an additional 100,000 shares of our common stock at a
price of $11.125 per share.

     In December 1998, we obtained financing for these acquisitions from (1)
Fleet National Bank and ING (U.S.) Capital Corporation and (2) Norton Herrick,
our Chairman. Under the credit facility with Fleet and ING, we borrowed an
aggregate of $27.0 million, consisting of a $25.0 million term loan and a $2.0
million advance under a $9.0 million revolving line of credit. The term loan is
payable as follows: four quarterly payments of $930,000 in the year 2000; four
quarterly payments of $1.6 million in the year 2001; four quarterly payments of
$2.2 million in the year 2002; and the balance due on March 31, 2003. We
granted to the lenders a security interest in substantially all of our assets
and the assets of our subsidiaries and pledged the capital stock of our
subsidiaries to the lenders as collateral under the credit facility. We also
issued to the lenders three-year warrants to purchase up to 197,448 shares of
common stock at an exercise price of $9.967 per share. Our borrowings from Mr.
Herrick were made under a $15.0 million principal amount 9% convertible
promissory note due December 31, 2004, of which $1.0 million principal amount
was repaid in January 1999. Mr. Herrick subsequently sold $5.0 million
principal amount of the note to a third party, which has converted $800,000
principal amount of the note. The interest rate on this portion of the note
sold by Mr. Herrick is payable quarterly at an annual rate of 9%. From December
1999 through February 2000, Mr. Herrick also sold approximately $6.2 million
principal amount of the note to two third parties. The third parties converted
these portions of the note into 559,437 shares. See "Certain Relationships and
Related Transactions."

     In connection with the acquisitions described above, we granted the
sellers the right, under specified conditions, to sell back to us up to an
aggregate of 675,000 shares issued to the sellers in connection with the
acquisitions. These rights have terminated as to 370,000 shares. The sellers
have the right under certain conditions to sell the remaining 305,000 shares of
stock to us at prices ranging from $14.00 to $15.00 per share at various times
commencing in December 2003 and expiring in December 2008, unless the rights
are terminated earlier as a result of our satisfying common stock price and/or
performance targets prior to exercise. If all of the rights are exercised prior
to termination, the maximum amount we could be required to pay for the
repurchase of all of the shares is approximately $4.6 million, payable as
follows: (1) $350,000 commencing December 2003; (2) $3.5 million commencing
December 2004; and (3) $750,000 commencing December 2005.

     From April through August 1999, we sold 2,040,000 shares of common stock
to qualified institutional buyers for gross proceeds of $24.9 million. We used
the proceeds primarily to finance the Audiobooks Direct acquisition described
below. Cash fees associated with these sales were $295,000 and were paid to an
unaffiliated third party.

     In June 1999, we acquired from Doubleday Direct the assets of Audiobooks
Direct, including its membership file of approximately 500,000 members. We also
entered into a marketing agreement with Doubleday Direct in which we received
access to Doubleday Direct's and Doubleday Select's existing and future club
mailing lists, which currently consist of over 14 million names of active and
inactive members. In addition, Doubleday Direct entered into a non-competition
agreement and a transitional services agreement with us. As consideration for
the acquisition, we paid Doubleday Direct $18.6 million in cash. We also
incurred cash costs and fees of $184,000 and estimated additional costs and
fees of approximately $175,000.

     In connection with the acquisition of Audiobooks Direct, we, Fleet and ING
amended the terms of our existing credit agreement to provide for an additional
$6.0 million of term loans. The interest rate under the credit agreement is
currently 3.75% above LIBOR and interest is payable at the expiration of the
respective LIBOR contracts. In connection with the additional loan in June
1999, we issued the lenders three-year warrants to purchase up to 119,940
shares at an exercise price of $14.20 per share.

                                       18
<PAGE>

     We also obtained a portion of the financing for our acquisition of the
business of Doubleday Direct's Audiobooks Direct club by borrowing $4.4 million
from Norton Herrick under a convertible promissory note. This loan was repaid
in full in July 1999. See "Certain Relationships and Related Transactions."

     At December 31, 1999, an aggregate of $28.3 million principal amount of
indebtedness was outstanding under our credit agreement with Fleet and ING.

     From December 1999 through February 2000, we borrowed a total of $3.0
million from Evan Herrick, a son of Norton Herrick and brother of Michael
Herrick and Howard Herrick, by issuing to Evan Herrick 9% convertible
promissory notes due December 31, 2004. We used the proceeds of these loans for
working capital and corporate purposes.

     As a result of recent acquisition activity and sales of our common stock,
MediaBay, Fleet and ING amended the terms of our existing credit agreement
whereby certain covenants under the agreement were adjusted. In connection
therewith we paid legal expenses and fees of $317,000.

     On March 20, 2000, we closed a public offering of 3,650,000 shares of our
common stock at $9.00 per share. Net proceeds to us from the sale of common
stock less underwriting discounts and commissions and estimated offering
expense are estimated to be $29.7 million.

     We intend to use a portion of these proceeds to repay indebtedness to our
banks and for general working capital purposes.

     We are seeking an asset based line of credit from our lenders and others.

Recently Issued Accounting Standards

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 provides a
comprehensive standard for the recognition and measurement of derivatives and
hedging activities in fiscal 2000 as the Statement is currently written.
However, the FASB has issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities -- Deferral of Effective Date of SFAS No.
133", which will defer adoption to fiscal 2001. The statement will require all
derivatives to be recorded on the balance sheet at fair value and also
prescribes special accounting for certain types of hedges. We have not entered
into any derivative or hedge transactions, and, therefore, do not believe that
SFAS No. 133 will have a material effect on our financial condition or results
of operations.

Year 2000

     We have not experienced any business interruptions or supplier delays from
year 2000 problems to date and have not discovered any year 2000 problems in
internal computer systems material to our operations. We intend to continue to
monitor our internal system for year 2000 problems. There can be no assurance,
however, that we or our suppliers may not face future problems as a result of
year 2000 issues.

Net Operating Losses

     Our net operating loss carryforwards expire in the years 2018 and 2019.
Under Section 382 of the Internal Revenue Code of 1986, utilization of prior
net operating losses is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change
multiplied by the long-term tax exempt rate. The additional equity financing we
obtained in connection with recent financings and this offering may result in
an ownership change and, thus, may limit our use of its prior net operating
losses. In the event we achieve profitable operations, any significant
limitation on the utilization of net operating losses would have the effect

                                       19
<PAGE>

of increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of net operating losses
since this availability is dependent upon profitable operations, which we have
not achieved in prior periods.

Quarterly Fluctuations

     Our operating results vary from period to period as a result of purchasing
patterns of members, the timing, costs, magnitude and success of direct mail
campaigns and Internet initiatives and other new member recruitment
advertising, member attrition, the timing and popularity of new audiobook
releases and product returns. The timing of new member enrollment varies
depending on the timing, magnitude and success of new member advertising,
particularly Internet advertising and direct mail campaigns.

     Our gross profit margin is affected by the percentage of new Audio Book
Club member enrollment purchases. Initial purchases by new members are at
substantially reduced prices to encourage enrollment. These offers, which are
typically four audiobooks for either $.99 or $.01 plus shipping and handling,
result in an initial loss to us which is expected to be recovered through
additional member purchases at regular prices. New member enrollment purchases
typically account for a higher percentage of sales following significant Audio
Book Club direct marketing activities.

     We believe that a significant portion of our sales of old-time radio and
classic video programs are gift purchases by consumers. Therefore, we tend to
experience increased sales of these products in the fourth quarter in
anticipation of the holiday season and the second quarter in anticipation of
Fathers' Day.

Item 7. Financial Statements.

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

Item 8. Changes in and Disagreements with Accountants on Accounting and
   Financial Disclosure.

     Not applicable.

                                       20
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons;
      Compliance with Section 16(a) of
      the Exchange Act.

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

<TABLE>
<CAPTION>
Name                                Age    Position
----                                ---    --------
<S>                                <C>     <C>
Norton Herrick .................    61     Chairman and Director
Michael Herrick ................    33     Chief Executive Officer, President and Director
Stephen M. McLaughlin ..........    33     Executive Vice President and Chief Technology Officer
Howard Herrick .................    35     Executive Vice President and Director
John F. Levy ...................    44     Executive Vice President and Chief Financial Officer
Robert Toro ....................    35     Senior Vice President of Finance
Jesse Faber ....................    45     President of Audio Book Club, Inc. and Director
Carl P. Amari ..................    36     President of Radio Operations and Director
Roy Abrams .....................    56     Director
Carl T. Wolf ...................    56     Director
</TABLE>

     Norton Herrick, 61, is our co-founder and has been Chairman and Director
since our inception. Mr. Herrick served as our President from our inception
until January 1996 and was Chief Executive Officer from January 1996 through
January 2000. Mr. Herrick has been a private businessman for over 30 years and
through his wholly-owned affiliates, Mr. Herrick has completed transactions,
including building, managing and marketing primarily real estate valued at an
aggregate of approximately $2 billion. Mr. Herrick serves on the advisory board
of the Make-A-Wish Foundation, the advisory committee of the National Multi
Housing Council and the National Board of Directors for People for the American
Way. Mr. Herrick is the father of Michael Herrick, our Chief Executive Officer,
President, and a director, and Howard Herrick, our Executive Vice President and
a director.

     Michael Herrick, 33, is our co-founder and has been our Chief Executive
Officer and President since January 2000 and a director since our inception.
Mr. Herrick was our Co-Chief Executive officer from April 1998 to January 2000
and has held various other offices with us since our inception. Since August
1993, Michael Herrick has been an officer (since January 1994, Vice President)
of the corporate general partner of a limited partnership which is a principal
shareholder of The Walking Company, a nationwide retailer of comfort and
walking footwear and related apparel and accessories. Mr. Herrick is a member
of the Board of Directors of the Audio Publisher's Association. Mr. Herrick is
the son of Norton Herrick, our Chairman, and brother of Howard Herrick, our
Executive Vice President and a director. Mr. Herrick received his B.A. degree
from the University of Michigan.

     Stephen M. McLaughlin, 33, has been our Executive Vice President and Chief
Technology Officer since February 1999. Prior to joining us, Mr. McLaughlin was
Vice President, Information Technology for Preferred Healthcare Staffing, Inc.,
a nurse-staffing division of Preferred Employers Holdings, Inc. Mr. McLaughlin
co-founded and was a director, Chief Operating Officer and Chief Information
Officer of NET Healthcare, Inc., from 1997 until it was acquired by Preferred
Employers Holdings in August 1998. In 1994, Mr. McLaughlin founded FX Media,
Inc., an Internet and multimedia development company. As CEO of FX Media, he
served as senior software engineer for all of its projects. Mr. McLaughlin
holds a degree in Computer Science and Engineering from the Massachusetts
Institute of Technology and conducted research at the MIT Media and Artificial
Intelligence labs.

     Howard Herrick, 35, is our co-founder and has been our Executive Vice
President, Editorial Director and a director since our inception. Since August
1993, Howard Herrick has been Vice President of the corporate general partner
of a limited partnership which is a principal shareholder of The Walking
Company. Since 1988, Mr. Herrick has been an officer of The Herrick Company,
Inc. and is currently its President. Mr. Herrick is also an officer of the
corporate general partners of numerous limited partnerships which acquire,
finance, manage and lease office, industrial and retail properties; and which
acquire, operate, manage, redevelop and sell residential rental properties. Mr.
Herrick is the son of Norton Herrick, our Chairman and brother of Michael
Herrick, our Chief Executive Officer, President and director.

                                       21
<PAGE>

     John F. Levy, 44, has been our employee since November 1997 and has served
as our Executive Vice President and Chief Financial Officer since January 1998.
Prior to joining us, Mr. Levy was Senior Vice President of Tamarix Capital
Corporation and had previously served as Chief Financial Officer of both public
and private entertainment and consumer goods companies. During 1994, Mr. Levy
served as Chief Financial Officer of the Continuum Entertainment Group, Inc., a
publicly-held record label which filed for protection under Chapter 11 of the
United States Bankruptcy Code in 1995 after Mr. Levy had left that company. Mr.
Levy is a Certified Public Accountant with nine years experience with the
national public accounting firms of Ernst & Young, Laventhol & Horwath and
Grant Thornton.

     Robert Toro, 35, has been our Senior Vice President of Finance since July
1999 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 the national public accounting firm of
Arthur Andersen where he was employed immediately prior to joining Marvel
Entertainment Group.

     Jesse Faber, 45, has been President of Audio Book Club, Inc. since January
2000 and a director since October 1997. Mr. Faber was our President from
October 1996 through January 2000. From 1989 to October 1996, Mr. Faber was
Senior Vice President and Partner of AyerDirect, a direct response advertising
agency wholly-owned by McManus, Inc., one of the ten largest advertising and
marketing agencies in the world.

     Carl P. Amari, 36, has been the President of Radio Operations since we
acquired our old time radio and classic video operations in December 1998 and a
director of MediaBay since September 1999. Since 1989, Mr. Amari was the CEO
and principal shareholder of Radio Spirits, Inc. Radio Spirits is recognized as
the largest company in the world specializing in the syndication, sales and
licensing of old time radio programming. He is also the executive producer of a
nationally syndicated version of "When Radio Was" which airs on 450 affiliates,
as well as for three other related syndicated radio programs. Radio Spirits
twice made Inc's list of the fastest growing privately held companies. In
connection with our acquisition of Radio Spirits, Inc. from Mr. Amari, Norton
Herrick agreed to vote his shares to elect Mr. Amari as a director.

     Roy Abrams, 56, has been a director of MediaBay since October 1997. Since
April 1993 and from 1986 through March 1990, Mr. Abrams has owned and operated
Abrams Direct Marketing, a marketing consulting firm.

     Carl T. Wolf, 56, has been a director of MediaBay since March 1998. Mr.
Wolf is the managing partner of the Lakota Investment Group. Mr. Wolf was
formerly Chairman of the Board, President and Chief Executive Officer of Alpine
Lace Brands, Inc. Mr. Wolf founded Alpine Lace and its predecessors and had
been the Chief Executive Officer of each of them since the inception of Alpine
Lace in 1983. Mr. Wolf became a director of Alpine Lace shortly after its
incorporation in February 1986.

     Our Board of Directors is classified into three classes, each with a term
of three years, with only one class of directors standing for election by the
shareholders in any year. Norton Herrick and Jesse Faber are Class I directors
and stand for re-election at the 2001 annual meeting of shareholders. Michael
Herrick, Roy Abrams and Carl Amari are Class II directors and stand for
re-election at the 2002 annual meeting of shareholders. Howard Herrick and Carl
Wolf are Class III directors and stand for re-election at the 2000 annual
meeting of shareholders. Our executive officers serve at the direction of the
Board and until their successors are duly elected and qualified.

     We have agreed with L.H. Friend, Weinress, Frankson & Presson, LLC who
conducted our October 1997 initial public offering, to use our best efforts to
nominate and elect one director designated by the underwriters to serve on our
Board of Directors. This agreement expires on October 22, 2000. To date, they
have not exercised this right. Our Board of Directors held one meeting during
the fiscal year ended December 31, 1999. The meeting was attended by all of the
directors, either in person or by telephone. The Board also took action by
unanimous written consent in lieu of meetings.

Board Committee

     We have established an Audit Committee, which is responsible for making
recommendations concerning the engagement of independent public accountants,
reviewing the plans and results of the audit engagement

                                       22
<PAGE>

with the independent public accountants, approving professional services
provided by the independent public accountants and reviewing the adequacy of
our internal accounting controls. The Audit Committee is currently comprised of
Messrs. Michael Herrick, Roy Abrams and Carl T. Wolf. We do not have standing
compensation or nominating committees.

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

Internet Advisory Board

     We have an Internet advisory board to assist in the further development
and implementation of our Internet Strategy.

     The Advisory Board consists of five members each with unique capabilities
that assist us to further expand our online business and presence for
MediaBay.com and Audiobookclub.com.

     The Board Members consist of Stephen McLaughlin, our Executive Vice
President and Chief Technology Officer; Timothy W. Mattox, Director, Enterprise
System Group Strategic Planning for Dell Corporation; John Ramsey, Chief
Technology Officer for Virtacon; Michael Schoen, Vice President at J.P. Morgan
and Harvey Stober, Managing Partner at Greystone Partners, LP.

     Timothy W. Mattox is a graduate of the Massachusetts Institute of
Technology with a Bachelors/Masters degree in Electrical Engineering/Computer
Science and holds a Master of Business Administration from Stanford Graduate
School of Business. He currently serves as Director, Enterprise System Group
Strategic Planning for Dell Corporation. Mr. Mattox began his career at Oracle
Corporation in 1989. In 1992, he was hired as a manager for Bain & Company,
Inc. where his duties included analyzing the potential impact of the Internet
on Bain's clients.

     John Ramsey graduated from the Massachusetts Institute of Technology with
a Bachelors/Masters degree in Computer Engineering. His background includes
Senior Project Leader at Oracle Corporation and Director of Software
Engineering at Teltronics, Inc. His expert programming skills have enabled him
to improve upon and develop new software, making him a valued member to any
team.

     Michael H. Schoen is a graduate of the Massachusetts Institute of
Technology with a Bachelor of Science degree in Management from the Sloan
School of Management. His areas of concentration were Corporate Finance and
Strategy. Mr. Schoen, whose responsibilities at J.P. Morgan include management
of debt capital raising transactions for a range of sovereigns and emerging
international corporations, has played an integral role in several benchmark
transactions including the $1 billion inaugural transaction for TPSA, the
Polish phone company.

     Harvey Stober is the Managing Partner of Greystone Partners, L.P., a New
York hedge fund. Mr. Stober's many contacts in the financial markets are
expected to help increase the exposure of MediaBay, Inc. Mr. Stober was
a Chemical Analyst at Dean Witter Reynolds, and was recognized as an "All Star
Analyst" by the Wall Street Journal.

     Compliance with Section 16(a) of the Exchange Act

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

     Based solely upon our review of the copies of such forms that we received,
we believe that, during the year ended December 31, 1999, all filing
requirements applicable to our officers, directors, and greater than 10%
shareholders were complied with, except for a Form 4 with respect to one
transaction in August 1999, which was inadvertently filed in an untimely manner
by Mr. Norton Herrick.


                                       23
<PAGE>

Item 10. Executive Compensation

     The following table discloses, for the periods indicated, compensation
paid to our Chief Executive Officer and other executive officers whose salary,
together with any bonus, exceeded $100,000 during the fiscal year ended
December 31, 1999.

     Summary Compensation Table

<TABLE>
<CAPTION>
                                                                              Long-Term Compensation Awards
                                                Annual Compensation          ------------------------------
                                          --------------------------------        Securities Underlying
      Name and Principal Position          Year       Salary       Bonus            Options/SAR's (#)
---------------------------------------   ------   -----------   ---------   ------------------------------
<S>                                       <C>      <C>           <C>         <C>
Norton Herrick ........................   1999      $100,000      $     0                 775,000
 Chairman                                 1998       100,000            0               1,000,000
                                          1997        19,354            0                       0

Michael Herrick .......................   1999       125,000            0                       0
 Chief Executive Officer and President    1998       125,000            0                 250,000
                                          1997        72,879            0                       0

Jesse Faber ...........................   1999       158,169       45,000                  20,000
 President of Audio Book Club, Inc.       1998       140,000       35,000                  50,000
                                          1997       128,417       40,000                  50,000

John F. Levy ..........................   1999       152,125       12,500                  30,000
 Executive Vice President and Chief       1998       137,083        7,500                  50,000
 Financial Officer                        1997        19,125            0                       0

Steven M. McLaughlin ..................   1999       131,250            0                 158,000
 Executive Vice President
 and Chief Technology Officer

Howard Herrick ........................   1999       125,000            0                       0
 Executive Vice President                 1998       125,000            0                 250,000
                                          1997       115,129            0                       0
</TABLE>

     Norton Herrick served as our Chief Executive Officer during the years
presented in the above table and Michael Herrick served as Co-Chief Executive
Officer from April 1998 through January 2000 and has served as Chief Executive
Officer and President since January 2000. Jesse Faber served as our President
from October 1996 through January 2000 and is currently President of Audio Book
Club, Inc.

     The 50,000 options reflected above for Mr. Faber were originally granted
in the fiscal year ended December 31, 1997, but their exercise price was
reduced during the fiscal year ended December 31, 1998 to the fair market value
of the underlying common stock at the time of repricing. The options reflected
in the above table do not include warrants issued to Norton Herrick in
connection with financing provided by Mr. Herrick. For more information about
these warrants, see "Related Party Transactions."

     Mr. McLaughlin joined our company in February 1999.

                                       24
<PAGE>

     The following table discloses options granted during the fiscal year ended
December 31, 1999 to these executives:

     Option/SAR Grants in Fiscal Year Ending December 31, 1999

<TABLE>
<CAPTION>
                                     Number of
                                 Shares Underlying     % of Total Options Granted to    Exercise Price
             Name                 Options Granted         Employees in Fiscal Year        ($/share)           Expiration Date
------------------------------  -------------------   -------------------------------  ---------------  ---------------------------
<S>                             <C>                   <C>                              <C>              <C>
Norton Herrick ...............        775,000                        63.6                  $ 11.00      10/9/09
Michael Herrick ..............              0                           0                  $    --      --
Jesse Faber ..................         10,000                          .8                  $  8.00      10/31/04
                                       10,000                          .8                  $ 12.00      10/31/05
John F. Levy .................         30,000(1)                      2.5                  $ 13.00      Five years from vesting(1)
Steven M. McLaughlin .........        150,000                        12.3                  $  9.75      Five years from vesting(2)
                                        8,000                          .7                  $   .10      02/15/04
Howard Herrick ...............              0                           0                  $    --      --
</TABLE>

------------
(1) One third of the 30,000 options granted to Mr. Levy vest on November 10,
    2000, and the balance will vest on November 10, 2001. All of the options
    are exercisable for a period of five years commencing immediately upon the
    applicable vesting period, subject to earlier expiration if Mr. Levy is
    not employed by us.

(2) These options vested as to 25,000 shares on February 15, 1999 and will vest
    as to (1) 25,000 shares on February 15, 2000, (ii) 30,000 shares on
    February 15, 2001, (iii) 35,000 shares on February 15, 2002 and (iv)
    35,000 shares on February 15, 2003. All of the options are exercisable for
    a period of five years commencing immediately upon the applicable vesting
    period.

     The following table sets forth information concerning the number of
options owned by these executives and the value of any in-the-money unexercised
options as of December 31, 1999. No options were exercised by any of these
executives during fiscal 1999:

     Aggregated Option Exercises And Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                              Number of Securities Underlying       Value of Unexercised
                                  Unexercised Options at                 In-the-Money
                                     December 31, 1999           Options at December 31, 1999
                              -------------------------------   ------------------------------
            Name               Exercisable     Unexercisable     Exercisable     Unexercisable
---------------------------   -------------   ---------------   -------------   --------------
<S>                           <C>             <C>               <C>             <C>
Norton Herrick ............     1,775,000               0        $6,520,313        $      0
Michael Herrick ...........       250,000               0         1,265,625               0
Jesse Faber ...............        30,000          40,000           185,625         230,625
John F. Levy ..............        20,000          60,000           153,750         230,625
Steven McLaughlin .........        33,000         125,000           124,638         179,688
Howard Herrick ............       250,000               0         1,265,625               0
</TABLE>

     The year-end values for unexercised in-the-money options represent the
positive difference between the exercise price of such options and the fiscal
year end market value of the common stock. An option is "in-the-money" if the
fiscal year-end fair market value of the common stock exceeds the option
exercise price. The closing sale price of our common stock on December 31, 1999
was $11.1875.

Employment Agreements

     Effective as of October 22, 1999, we entered into a one-year employment
agreement with Norton Herrick which provides for an annual base salary of
$100,000 and such increases and bonuses as the Board of

                                       25
<PAGE>

Directors may determine from time to time. The employment agreement does not
require that Mr. Herrick devote any stated amount of time to our business and
activities and contains noncompetition and nonsolicitation provisions for the
term of the employment agreement and for two years thereafter. If Mr. Herrick's
employment is terminated under circumstances described in the employment
agreement, including as a result of a change in control, Mr. Herrick will be
entitled to receive severance pay equal to the greater of $600,000 or six times
the total compensation received by Mr. Herrick from us during the twelve months
prior to the date of termination. If the severance payment is triggered, it is
possible that the payments may be deemed "excess parachute payments" under
Section 280(g) of the Internal Revenue Code and, as a result, we may not
receive a tax deduction for those payments.

     Effective October 22, 1997, we entered into three-year employment
agreements with each of Michael Herrick and Howard Herrick which provide for an
annual base salary of $125,000 and such increases and bonuses as the Board of
Directors may determine from time to time. The employment agreements require
each of Michael and Howard Herrick to devote substantially all of his business
time to our business and affairs. The agreements contain noncompetition and
nonsolicitation provisions for the term of the employment agreements and for
two years thereafter. In the event of termination of employment under
circumstances described in the employment agreements, including as a result of
a change in control, we will be required to provide severance pay equal to the
greater of $375,000 or three times the total compensation received from us
during the twelve months prior to the date of termination.

     On October 22, 1999, we entered into an employment agreement with Jesse
Faber which provides for an annual base salary of $165,000. The agreement
expires on October 31, 2000 and provides for a bonus of $55,000 payable if Mr.
Faber is employed by us at the end of the term. Pursuant to the agreement, we
granted to Mr. Faber options to purchase 10,000 shares of the common stock at
an exercise price of $12.00 per share. The options vest on October 31, 2000,
provided that Mr. Faber is employed by us on such date.

     We have entered into a two-year employment agreement with John Levy which
expires in November 2001. The agreement provides for an annual base salary of
$165,000, in the first year of the agreement and an annual base compensation of
$180,000 in the second year of the agreement. Mr. Levy's agreement also
provides for a minimum bonus of $15,000 in the first year of the agreement and
a minimum bonus of $17,500 in the second year of the agreement, provided Mr.
Levy is employed by us on each bonus date. Pursuant to the agreement, we agreed
to grant to Mr. Levy options to purchase 30,000 shares of common stock at an
exercise price of $13.00 per share. Options for 10,000 shares vest at the end
of the first year of the employment agreement and options for 20,000 shares
vest at the end of the second year of employment, provided Mr. Levy is employed
by us on the vesting dates. However, in the event of a change in control, all
options shall immediately vest and become exercisable.

     We entered into a two-year employment agreement with Stephen McLaughlin,
effective February 15, 1999, which provides for an annual base salary of
$150,000, a performance-based bonus of $15,000 payable if Mr. McLaughlin is
employed by us at the end of the first year of the employment term, $10,000
reimbursement for moving expenses and a $35,000 interest free loan. Pursuant to
the agreement, we granted to Mr. McLaughlin options to purchase 150,000 shares
of the common stock at an exercise price of $9.75 per share and options to
purchase 8,000 shares of the common stock at an exercise price of $0.10 per
share. The 8,000 options exercisable at $0.10 per share vested on February 15,
1999. The 150,000 options exercisable at $9.75 vest as follows: options for
25,000 shares vested on February 15, 1999; options for 25,000 shares vest on
February 15, 2000; options for 30,000 shares vest on February 15, 2001; and
options for 35,000 shares vest on each of February 15, 2002 and February 15,
2003.

     In December 1998, we entered into a three-year employment agreement with
Carl Amari. Pursuant to the agreement, Mr. Amari is entitled to receive a base
salary of $200,000 per year during the first 18 months of the agreement and
$300,000 per year during the second 18 months of the agreement. The agreement
also provides that Mr. Amari shall also be appointed as a member of our Board
of Directors for as long as he is employed by us.

                                       26
<PAGE>

Stock Plans

     Our 1997 Stock Option Plan provides for the grant of stock options to
purchase up to 2,000,000 shares. As of March 14, 2000, options to purchase an
aggregate of 1,981,900 shares of our common stock have been granted under the
1997 plan.

     Our 1999 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 2,500,000 shares of
common stock have been reserved for distribution pursuant to the 1999 plan. As
of March 14, 2000, options to purchase an aggregate of 1,931,850 shares of our
common stock have been granted under the 1999 plan.

     Of the options granted under our plans, options to purchase 3,235,000
shares of our common stock have been granted to our officers and directors as
follows: Norton Herrick -- 2,075,000 shares; Michael Herrick -- 550,000 shares;
Howard Herrick -- 400,000 shares; John F. Levy -- 80,000 shares; Jesse Faber --
70,000 shares; Robert Toro -- 50,000 shares; and Roy Abrams -- 10,000 shares.

Item 11. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth information regarding the beneficial
ownership of common stock, based on information provided by the persons named
below in publicly available filings, as of March 14, 2000 and as adjusted to
reflect the completion of this offering by:

  o each of MediaBay's directors and executive officers;
  o all directors and executive officers of MediaBay as a group; and
  o each person who is known by MediaBay to beneficially own more than five
    percent of our outstanding shares of common stock.

     Unless otherwise indicated, the address of each beneficial owner is care
of MediaBay, Inc., 20 Community Place, Morristown, New Jersey 07960. 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.

                                       27
<PAGE>

     For purposes of this table, a person is deemed to be the beneficial owner
of the securities that person can acquire upon the exercise of options,
warrants or other convertible securities within 60 days of the date of this
filing. In determining the percentage ownership of the persons in the table
above, we assumed in each case that the person exercised and converted all
options, warrants or convertible securities which are currently held by that
person and which are exercisable within 60 days of the date of this prospectus,
but that options, warrants or other convertible securities held by all other
persons were not exercised or converted.

<TABLE>
<CAPTION>
                                                                 Number of Shares      Percentage of Shares
            Name and Address of Beneficial Owner                Beneficially Owned      Beneficially Owned
------------------------------------------------------------   --------------------   ---------------------
<S>                                                            <C>                    <C>
Norton Herrick .............................................        3,881,431(1)               23.1%
Howard Herrick .............................................        3,852,640(2)               27.9
Michael Herrick ............................................        1,038,460(3)                7.4
Quantum Partners LDC .......................................          750,000                   5.6
 Kaya Flamboya
 Willemsted, Curacao
 Netherlands, Antilles
President and Fellows of Harvard College ...................          700,000                   5.2
 c/o Harvard Management Company, Inc.
 600 Atlantic Avenue
 Boston, Massachusetts 02210
Carl P. Amari ..............................................          447,875(4)                3.3
Carl T. Wolf ...............................................          102,750(5)                  *
Stephen M. McLaughlin ......................................           58,300(6)                  *
John F. Levy ...............................................           41,000(7)                  *
Jesse Faber ................................................           30,000(8)                  *
Roy Abrams .................................................           10,000(9)                  *
Robert Toro ................................................                0(10)                 *
All directors and executive officers as a group (10 persons)        8,973,996                  49.7%
</TABLE>

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

 (1) Represents (a) 8,200 shares of common stock held by Norton Herrick, (b)
     488,460 shares of common stock held by Howard Herrick, (c) 2,075,000
     shares of common stock issuable upon exercise of options, (d) 150,000
     shares of common stock issuable upon exercise of options granted to Evan
     Herrick, (e) 910,221 shares of common stock issuable upon exercise of
     warrants issued on December 31, 1998 or under a December 1998 letter
     agreement and (f) 249,550 shares issuable upon conversion of a convertible
     promissory note, based on an $11.125 conversion price. Does not include
     (i) 2,964,180 shares held by the Norton Herrick Irrevocable Trust, (ii)
     64,779 shares which may become issuable to Mr. Herrick upon exercise of
     warrants which may be required to issue to Mr. Herrick and (ii) additional
     shares if the promissory note is converted at a conversion price less than
     $11.125 per share. Evan Herrick has irrevocably granted to Norton Herrick
     sole voting and dispositive power with respect to the shares of common
     stock issuable upon exercise of the options held by Evan Herrick. See
     "Certain Relationships and Related Transactions."

 (2) Represents (a) 2,964,180 shares held by the Norton Herrick Irrevocable ABC
     Trust, (b) 488,460 shares of common stock held by Howard Herrick, and (c)
     400,000 shares of common stock issuable upon exercise of options. Howard
     Herrick is the sole trustee and Norton Herrick is the sole beneficiary of
     the Norton Herrick Irrevocable ABC Trust. The trust agreement provides
     that Howard Herrick shall have sole voting and dispositive power over the
     shares held by the trust. Howard Herrick has irrevocably granted to Norton
     Herrick sole dispositive power with respect to the shares of common stock
     held by Howard Herrick.

                                       28
<PAGE>

 (3) Represents 488,460 shares and 550,000 shares of common stock issuable upon
     exercise of options.

 (4) Represents 395,125 shares of common stock and options to purchase 52,750
     shares of common stock held by Mr. Amari. Does not include options to
     purchase 100,000 shares of common stock held in escrow subject to release
     to Mr. Amari if specific earnings performance targets are met by our old
     time radio and classic video operations acquired from Mr. Amari.

 (5) Includes 5,000 shares of common stock and 97,500 shares of common stock
     issuable upon exercise of options.

 (6) Represents 300 shares and 58,000 shares of common stock issuable upon
     exercise of options. Does not include 100,000 shares of common stock
     issuable upon exercise of options.

 (7) Represents 1,000 shares of common stock and 40,000 shares of common stock
     issuable upon exercise of options. Does not include 40,000 shares issuable
     upon exercise of options.

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

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

(10) Does not include 50,000 shares issuable upon exercise of options.

                                       29
<PAGE>

Item 12. Certain Relationships and Related Transactions

     Companies wholly-owned by Norton Herrick, our Chairman, have in the past
provided accounting, administrative and general office services to us and
obtained insurance coverage for us at cost since our inception. We paid these
entities $73,000 and $90,000 for these services during the years ended December
31, 1998 and 1999. In addition, a company wholly-owned by Norton Herrick
provides us access to a corporate airplane. We generally pay the fuel, fees and
other costs related to our use of the airplane directly to the service
providers. For use of this airplane, we paid rental fees of less than $25,000
in each of 1998 and 1999 to Mr. Herrick's affiliate. We anticipate obtaining
similar services from time to time from companies affiliated with Norton
Herrick, and we will reimburse their costs in providing the services to us.

     On March 18, 1998, we sold to Carl Wolf, one of our directors, a five-year
option to purchase 50,000 shares of our common stock at an exercise price of
$5.00 per share, the market value on the purchase date. The purchase price of
the option was $50,000. We also granted to Mr. Wolf the right to acquire a
second five-year option to purchase 25,000 shares at an exercise price of $5.00
per share for $25,000. Mr. Wolf exercised this right and purchased the
additional option in September 1998.

     In December 1998, we acquired Radio Spirits, Inc. from Carl Amari, who
subsequently became one of our directors, as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Recent Acquisitions and Financings."

     In December 1998, we obtained a portion of the financing for our
acquisitions of Columbia House's Audiobook Club and our old time radio and
classic video operations from Norton Herrick by issuing him a $15.0 million
principal amount 9% convertible subordinated promissory note due December 31,
2004. In January 1999, we repaid $1.0 million of the note. In August 1999, Mr.
Herrick sold $5.0 million principal amount of the note to a third party.
Interest on this note is payable monthly. The note was initially convertible,
in whole or in part, at the holder's option, into shares of our common stock at
$11.125 per share. As additional consideration for the bridge loan, we issued
to Mr. Herrick five-year warrants to purchase 500,000 shares of our common
stock at an exercise price of $12.00 per share, subject to adjustment. Because
the bridge loan was not refinanced, repaid or replaced by September 30, 1999,
(1) the interest rate of the note increased to 11%, (2) the conversion price of
the note was adjusted to the lesser of $11.125 per share and the average
closing bid price of our common stock for the five trading days prior to
conversion and (3) the exercise price of the warrants was adjusted to $8.41.
The additional 2% interest on the note through December 31, 1999 is being added
to the principal amount of the note and is due on the maturity of the note, and
the additional 2% interest commencing January 1, 2000 is payable monthly. The
note is subordinated to our obligations under our credit facility with Fleet
and ING and is secured by a second lien security interest on assets of our old
time radio and classic video operations. The terms of Mr. Herrick's loan to us
were approved by the independent members of our Board of Directors. We also
received a fairness opinion in connection with this loan.

     In December 1998, we also agreed that if the note is refinanced, repaid or
replaced by anyone other than Norton Herrick or a family member or affiliate of
Mr. Herrick, we will issue to Mr. Herrick warrants to purchase an additional
350,000 shares of our common stock on the same terms as those issued to him in
December 1998. In September 1999, we issued to Mr. Herrick warrants to purchase
140,000 shares of our common stock at a price of $8.41 per share.

     From December 1999 through February 2000, Norton Herrick sold $6,223,750
principal amount of the note issued to him in December 1998 to two third
parties and, in January 2000, we issued to one of the third parties warrants to
purchase 340,000 shares of our common stock at an exercise price of $12.50 per
share. Under the December 1998 agreement, we issued to Mr. Herrick warrants to
purchase 145,221 shares of our common stock at an exercise price of $8.41 per
share on terms which were identical to the warrants issued to Mr. Herrick in
December 1998. If the remaining $2,776,250 owed to Mr. Herrick under the note
is refinanced, repaid or replaced, under the December 1998 agreement we will
issue to Mr. Herrick warrants to purchase 64,779 shares of our common stock at
an exercise price of $8.41 per share on terms which are identical to the
warrants issued to Mr. Herrick in December 1998.

     In June 1999, we obtained a portion of the financing for our acquisition
of the business of Doubleday Direct's Audiobooks Direct club through a $4.4
million loan from Norton Herrick. In connection with this

                                       30
<PAGE>

loan, we agreed, subject to shareholder approval, that we would issue to Mr.
Herrick warrants to purchase 125,000 shares of our common stock at an exercise
price of $8.41 per share and on the same terms as the warrants issued to him in
December 1998. This loan was intended to be a bridge financing and was repaid
in full in July 1999. Shareholder approval was obtained in September 1999, and
we issued the warrants to Mr. Herrick.

     In December 1999 and January 2000, Evan Herrick, loaned the Company $3.0
million for which he received $3.0 million principal amount 9% convertible
promissory notes due December 31, 2004. The notes are convertible into shares
of our common stock at $11.125 per share. Evan Herrick is Norton Herrick's son
and Michael Herrick's and Howard Herrick's brother.

     We lease office space in New Jersey and Florida from affiliates of Norton
Herrick and other facilities in Illinois from Carl Amari. The terms of these
leases are described under "Business-Properties."

     Companies affiliated with Norton Herrick may continue to provide
accounting and general and administrative services to us, provide us with
access to a corporate airplane and obtain insurance coverage for us at cost. It
is our policy that each transaction between us and our officers, directors and
5% or greater shareholders will be on terms no less favorable than could be
obtained from independent third parties.

                                       31
<PAGE>

Item 13. Exhibits, Lists and Reports on Form 8-K.

     (a) Exhibits

<TABLE>
<S>           <C>
   3.1        Restated Articles of Incorporation of the Registrant.+

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

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

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

  10.1        Employment Agreement between the Registrant and Norton Herrick.+++++++++

  10.2        Employment Agreement between the Registrant and Michael Herrick.+

  10.3        Employment Agreement between the Registrant and Jesse Faber.+++++++++

  10.4        Employment Agreement between the Registrant and Stephen McLaughlin.+++++

  10.5        Employment Agreement between the Registrant and Howard Herrick.+

  10.6        Employment Agreement between the Registrant and John Levy.+++++++++

  10.7        Employment Agreement between our subsidiary and Carl Amari.+++++

  10.8        Supplemental Agreement, dated as of December 11, 1998, by and among the Registrant,
              Classic Radio Holding Corp. (now Radio Spirits, Inc.), Radio Spirits, Inc. and Carl
              Amari.+++

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

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

  10.11       $2,776,250 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
              Registrant to Norton Herrick due December 31, 2004.+++++++++

  10.12       $4,800,000 Principal Amount 9% Convertible Senior Subordinated Promissory Note of the
              Registrant to ABC Investment, L.L.C. due December 31, 2004.+++++++++

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

  10.14       Security Agreement, dated as of December 31, 1998, by and among the Registrant, Classic
              Radio Holding Corp. and Classic Radio Acquisition Corp. and Norton Herrick.+++++

  10.15       Credit Agreement, dated as of December 31, 1998, among the Registrant and Fleet National
              Bank.+++++

  10.16       Amendment and Supplement No. 1 to Credit Agreement dated June 14, 1999 by and among
              the Registrant, Fleet National Bank, as administrative agent, and ING (U.S.) Capital
              Corporation.+++++++

  10.17       Security Agreement, dated as of December 31, 1998, from the Registrant, ABC Internet
              Services, Inc., Classic Radio Holding Corp., Classic Radio Acquisition Corp., ABC
              Investment Corp., and CH Acquisitions Corp. as grantors to Fleet National Bank as
              administrative agent.+++++

  10.18       1997 Stock Option Plan+

  10.19       1999 Stock Incentive Plan++++++

  21.1        Subsidiaries of the Company.+++++++++
</TABLE>
                                       32
<PAGE>

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

++     Incorporated by reference to the applicable exhibit contained in our
       Annual Report on Form 10-KSB for the fiscal year ended December 31,
       1997.

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

++++    Incorporated by reference to the applicable exhibit contained in our
        Current Report on Form 8-K dated January 13, 1999.

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

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

+++++++  Incorporated by reference to the applicable exhibit contained in our
         Current Report on Form 8-K dated June 29, 1999.

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

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

     (b) Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts and Reserves

     (c) Reports on Form 8-K filed during the quarter ended December 31, 1998.

         None.

                                       33
<PAGE>

                                   SIGNATURES

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

                                                  MEDIABAY, INC.


                                                  By: /s/ Norton Herrick
                                                    --------------------------
                                                    Norton Herrick, Chairman

In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant in the
capacities and on the dates stated.

<TABLE>
<CAPTION>
        Signature                                 Title                                  Date
        ---------                                 -----                                  ----
<S>                                    <C>                                            <C>
   /s/  Norton Herrick                 Director and Chairman (Principal               March 28, 2000
--------------------------             Executive Officer)
        Norton Herrick


   /s/ Michael Herrick                 Director, Chief Executive Officer and          March 28, 2000
--------------------------             President
       Michael Herrick


   /s/ Jesse Faber                     Director                                       March 28, 2000
--------------------------
       Jesse Faber


   /s/ Howard Herrick                  Director and Executive Vice President          March 28, 2000
--------------------------
       Howard Herrick


   /s/ John F. Levy                    Executive Vice President and Chief             March 28, 2000
--------------------------             Financial Officer (Principal Financial
       John F. Levy                    and Accounting Officer)


   /s/ Roy Abrams
--------------------------             Director                                       March 28, 2000
       Roy Abrams


   /s/ Carl Wolf                       Director                                       March 28, 2000
--------------------------
       Carl Wolf


   /s/ Carl Amari                      Director                                       March 28, 2000
--------------------------
       Carl Amari
</TABLE>

                                       34
<PAGE>

                MediaBay, Inc. (Formerly Audio Book Club, Inc.)
                                  Form 10-KSB
                                    Item 7
                         Index to Financial Statements


<TABLE>
<S>                                                                                          <C>
Independent Auditors' Report .............................................................   F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 .............................   F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 .....   F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999 and    F-5
  1998
Consolidated Statements of Cash Flows for the year ended December 31, 1999 and 1998 ......   F-6
Notes to Consolidated Financial Statements ...............................................   F-7
Schedule II-Valuation and Qualifying Accounts and Reserves ...............................   S-1
</TABLE>






























                                      F-1
<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
 MediaBay, Inc. (formerly Audio Book Club, Inc.)

We have audited the accompanying consolidated balance sheets of MediaBay, Inc.
(formerly Audio Book Club, Inc.) ("the Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedule listed in the index at F-1. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998,
and the results of its operations and its cash flows for the years then ended
in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.


/S/ Deloitte & Touche LLP
Parsippany, New Jersey
February 14, 2000,
except for Note 17,
as to which the date is
March 20, 2000













                                      F-2
<PAGE>

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



<TABLE>
<CAPTION>
                                                                                December 31,
                                                                             1998           1999
                                                                         ------------   ------------
<S>                                                                      <C>            <C>
                                 Assets
Current assets:
 Cash and cash equivalents ...........................................    $   2,686      $     198
 Short-term investments ..............................................          500            100
 Accounts receivable, net of allowances for sales returns and doubtful
   accounts of $1,840 and $5,911 at December 31, 1998 and 1999,
   respectively ......................................................        4,923          8,892
 Inventory ...........................................................        5,331          7,386
 Prepaid expenses and other current assets ...........................          401          1,517
 Royalty advances ....................................................          961          3,781
 Deferred member acquisition costs ...................................           --          4,368
                                                                          ---------      ---------
   Total current assets ..............................................       14,802         26,242
Fixed assets, net ....................................................        1,328          1,519
Deferred member acquisition costs ....................................           --          4,928
Deferred financing costs .............................................        1,516          1,723
Non-current prepaid expenses .........................................          122            311
Other intangibles, net ...............................................       11,300         11,601
Goodwill, net ........................................................       35,271         47,649
                                                                          ---------      ---------
                                                                          $  64,339      $  93,973
                                                                          =========      =========
                       Liabilities and Stockholders' Equity
Current liabilities:
 Accounts payable and accrued expenses ...............................    $   6,231      $  16,555
 Current portion -- long-term debt ...................................        2,000          3,720
                                                                          ---------      ---------
   Total current liabilities .........................................        8,231         20,275
                                                                          ---------      ---------
Long-term debt .......................................................       40,000         37,383
                                                                          ---------      ---------
 Preferred Stock, no par value, authorized 5,000,000 shares; no shares
   issued and outstanding ............................................           --             --
 Common stock subject to contingent put rights .......................        8,284          4,283
 Common stock; no par value, authorized 25,000,000 shares; issued and
   outstanding 7,078,920 and 9,338,272, at December 31, 1998 and 1999,
   respectively ......................................................       28,960         58,743
 Contributed capital .................................................        2,323          3,455
 Accumulated deficit .................................................      (23,459)       (30,166)
                                                                          ---------      ---------
   Total common stockholders' equity .................................        7,824         32,032
                                                                          ---------      ---------
                                                                          $  64,339      $  93,973
                                                                          =========      =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>

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



<TABLE>
<CAPTION>
                                                                           Years ended December 31,
                                                                              1998           1999
                                                                          ------------   ------------
<S>                                                                       <C>            <C>
Sales .................................................................     $ 22,242       $ 62,805
Returns, discounts and allowances .....................................        7,348         16,578
                                                                            --------       --------
   Net sales ..........................................................       14,894         46,227
Cost of sales .........................................................        9,452         23,687
                                                                            --------       --------
   Gross profit .......................................................        5,442         22,540
Expenses:
 Internet, direct mail and other advertising and promotion expenses for
   acquisition and retention of members ...............................        8,910          8,118
 General and administrative ...........................................        3,330          9,799
 Depreciation and amortization ........................................          367          6,812
                                                                            --------       --------
   Operating loss .....................................................       (7,165)        (2,189)
Interest expense ......................................................          (94)        (4,645)
Interest income .......................................................          274            127
                                                                            --------       --------
   Net loss ...........................................................     $ (6,985)      $ (6,707)
                                                                            ========       ========
Net loss per share of common stock (basic and diluted) ................     $  (1.13)      $   (.82)
                                                                            ========       ========
</TABLE>

          See accompanying notes to consolidated financial statements.





















                                      F-4
<PAGE>

                                MEDIABAY, INC.
                Consolidated Statements of Stockholders' Equity
                    Years Ended December 31, 1998 and 1999
                            (Amounts in thousands)




<TABLE>
<CAPTION>
                                              Common          Common
                                          stock subject       stock          Common
                                          to contingent     number of    stock; no par    Contributed    Accumulated
                                               puts           shares         value          capital        deficit
                                         ---------------   -----------  ---------------  -------------  ------------
<S>                                      <C>               <C>          <C>              <C>            <C>
Balance at January 1, 1998 ............     $     --          6,154        $ 25,741         $   486      $ (16,474)
 Options sold to director .............           --             --              --              75             --
 Warrants for URL and phone
   numbers ............................           --             --              --             104             --
 Warrants granted in acquisitions .....           --             --              --           1,002             --
 Warrants granted for financing and
   consulting in connection with
   the acquisitions ...................           --             --              --             656             --
 Common stock issued in the
   acquisitions .......................        8,284            925           3,219              --             --
 Net loss .............................           --             --              --              --         (6,985)
                                            --------          -----        --------         -------      ---------
Balance at December 31, 1998 ..........        8,284          7,079          28,960           2,323        (23,459)
 Sale of common stock .................           --          2,040          24,921              --             --
 Fees and costs related to
   equity offerings ...................           --             --          (1,434)             --             --
 Termination of contingent put
   rights .............................       (4,001)            --           4,001              --             --
 Proceeds from exercise of stock
   options ............................           --             21              95              --             --
 Warrants granted for financing and
   consulting services ................           --             --              --           1,132             --
 Conversion of convertible
   subordinated notes .................           --            198           2,200              --             --
 Net loss .............................           --             --              --              --         (6,707)
                                            --------          -----        --------         -------      ---------
Balance at December 31, 1999 ..........     $  4,283          9,338        $ 58,743         $ 3,455      $ (30,166)
                                            ========          =====        ========         =======      =========
</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,
                                                                                   1998           1999
                                                                               ------------   ------------
<S>                                                                            <C>            <C>
Cash flows from operating activities:
 Net loss ..................................................................    $  (6,985)     $  (6,707)
 Adjustments to reconcile net loss to net cash used in operating activities:
   Depreciation and amortization ...........................................          367          6,812
   Amortization of deferred member acquisition costs .......................           --          1,603
   Amortization of deferred financing costs ................................                         407
   Changes in asset and liability accounts, net of acquisitions:
    Increase in accounts receivable, net ...................................         (895)        (3,969)
    Increase in inventory ..................................................       (1,266)        (2,055)
    Increase in prepaid expenses and other current assets ..................       (1,122)          (383)
    Increase in royalty advances ...........................................          (72)        (1,534)
    Increase in deferred member acquisition costs ..........................           --        (10,899)
    Increase in accounts payable and accrued expenses ......................          605         10,149
                                                                                ---------      ---------
      Net cash used in operating activities ................................       (9,368)        (6,576)
Cash flows from investing activities:
 Purchase of short-term investments ........................................         (500)          (100)
 Purchase of fixed assets ..................................................         (945)          (713)
 Sale of short-term investments ............................................        5,144            500
 Cash paid in acquisitions .................................................      (37,375)       (19,985)
                                                                                ---------      ---------
      Net cash used in investing activities ................................      (33,676)       (20,298)
                                                                                ---------      ---------
Cash flows from financing activities:
 Proceeds from issuance of notes payable - related parties .................       15,000          5,350
 Proceeds from borrowings with banks .......................................       27,000         11,080
 Repayment of long-term debt ...............................................           --        (15,127)
 Increase in deferred financing costs ......................................           --           (838)
 Proceeds from issuance of options .........................................           75             --
 Proceeds from exercise of stock options ...................................           --             95
 Proceeds from sale of common stock, net of costs ..........................           --         23,826
                                                                                ---------      ---------
      Net cash provided by financing activities ............................       42,075         24,386
                                                                                ---------      ---------
Net decrease in cash and cash equivalents ..................................         (969)        (2,488)
Cash and cash equivalents at beginning of period ...........................        3,655          2,686
                                                                                ---------      ---------
Cash and cash equivalents at end of period .................................    $   2,686      $     198
                                                                                =========      =========
</TABLE>










          See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(1) Organization

     MediaBay, Inc. (formerly Audio Book Club, Inc.) (the "Company"), a Florida
corporation, was formed on August 16, 1993. MediaBay, Inc. is a leading
marketer of premium spoken word content, including audiobooks and old time
radio, and classic video programs. The Company markets audiobooks primarily
through its Audio Book Club. Its old time radio and classic video programs are
marketed through direct-mail catalogues and, on a wholesale basis, to major
retailers. All of the Company's products are also available for purchase over
the Internet through its content-rich media portal at MediaBay.com and its
channels and audiobookclub.com.

(2) Significant Accounting Policies

     Principals 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, short-term investments, 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
Company's long-term debt is at a variable rate; therefore, the carrying value
approximates market prices.

     Inventory

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

     Prepaid Expenses

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

     Fixed Assets, Computer Software and Internet Web Site Development Costs

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

     Intangible Assets

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


                                      F-7
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(2) Significant Accounting Policies  -- (Continued)

     Goodwill

     Goodwill is the excess of the purchase price over the fair value of net
assets acquired in business combinations accounted for using the purchase
method of accounting. Goodwill is amortized over the estimated period of
benefit not to exceed 20 years. Goodwill is reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable using the expected undiscounted future cash flow model.

     Revenue Recognition

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

     Income Taxes

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

     Advertising and Promotional Costs

     Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Prior to 1999, the Company had expensed these
costs as incurred. Beginning in 1999, the Company is required to capitalize
such direct response advertising costs and amortize these costs over the period
of future benefit, which has been determined to be 30 months, in accordance
with SOP 93-7, because the Company, after five years of operations, now has a
sufficient historical pattern of results. The costs are being amortized on a
straight-line basis. If the Company had expensed the cost of direct response
advertising as incurred, which resulted in new members in the Company's Audio
Book Club who will generate revenue in the future, the Company would have
reported a net loss of $16,003 and a net loss per share (basic and diluted) of
common stock of $1.95 for the year ended December 31, 1999.

     Royalties

     The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. Royalties, in excess of advances, are
payable based on contractual terms. Royalty advances not expected to be
recovered through royalties on sales are charged to royalty expense. For the
years ended December 31, 1998 and 1999, no writedowns of royalty advances were
required.


                                      F-8
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(2) Significant Accounting Policies  -- (Continued)

     Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from
those estimates.

     Reclassifications

     Certain prior year amounts have been reclassified to conform with the
current year presentation.

(3) Acquisitions

     Radio and Video Program Acquisitions

     In December 1998, through its wholly-owned subsidiary, Classic Radio
Holding Corp. ("Classic"), the Company acquired Radio Spirits, Inc. ("Radio
Spirits") for an aggregate base purchase price of $340, 425,000 shares of the
Company's common stock valued on the date of acquisition at $12.875 per share,
options to purchase an additional 175,000 shares of the Company's common stock
at an exercise price of $12.875 per share and payment of $1,841 of liabilities
at closing. The options have been valued at $3.04 per share using the
Black-Scholes valuation model. A total of 75,000 options are in escrow and are
subject to release if certain specified "EBITDA" (as defined in the purchase
agreement) levels for the acquired company are met for the year ending December
31, 2000. The acquisition was accounted for under the purchase method.

     In connection with its acquisition of Radio Spirits, through its
indirectly wholly-owned subsidiary, Classic Radio Acquisition Corp. ("CRAC"),
the Company also acquired certain assets of Buffalo Productions, Inc.
("Buffalo"), an affiliate of Carl Amari (who was the sole stockholder and
Chairman of Radio Spirits prior to the acquisition), for $369, and Mr. Amari's
50% interest in a joint venture engaged in producing, broadcasting, marketing
and distributing a series of old-time radio programs for $2,326. The Company
also incurred costs and fees of $505 related to the acquisition. The assets
acquired from Buffalo were those relating to its business of duplicating
pre-recorded compact discs. The total purchase price of the acquisitions was
$11,384. The Company has accounted for the acquisitions using the purchase
method of accounting and has allocated a portion of the total purchase price to
certain identifiable intangible assets, based on their relative fair values
which will be amortized over their useful lives. The Company has recorded
$8,470 of goodwill which will be amortized over a period not to exceed 20
years.

     In December 1998, through CRAC, the Company acquired all of the assets
used by Metacom, Inc. ("Metacom") in connection with its "Adventures in
Cassettes" business for $1,061, 50,000 shares of the Company's common stock
valued on the date of acquisition at $12.875 per share and warrants to purchase
up to 50,000 shares of the Company's common stock at an exercise price of
$8.125 per share. The warrants have been valued at $4.18 per share using the
Black-Scholes valuation model. The Company also paid costs and fees of $29 in
the acquisition. The total purchase price of $1,942 has been accounted for
under the purchase method of accounting. The Company has recorded $1,621 of
goodwill which will be amortized over a period not to exceed 20 years.

     In December 1998, through CRAC, the Company acquired all the assets used
by Premier Electronic Laboratories, Inc. ("Premier") in connection with its
business of licensing, producing, marketing and selling classic videos and
radio for $240, 125,000 shares of the Company's common stock valued at the date
of closing at $12.875. The Company also incurred costs and fees of $46 relating
to the acquisition, for a total purchase price of $1,896. The Company has
recorded $1,710 of goodwill which will be amortized over a period not to exceed
20 years.


                                      F-9
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(3) Acquisitions  -- (Continued)

     Acquisition of Columbia House's Audiobook Club Division

     On December 31, 1998, a wholly-owned subsidiary of the Company acquired
substantially all of the assets used in the audiobook club division (the "CH
Audiobook Club") of The Columbia House Company ("Columbia House").

     As part of the acquisition, the Company acquired Columbia House's
audiobook club's membership file of approximately 600,000 members, as well as
substantially all of Columbia House's other assets relating exclusively to the
CH Audiobook Club, including inventory and certain accounts receivable. The
Company also entered into a mailing agreement which allows the Company to (i)
use Columbia House's compact disc, VHS, laser and DVD video clubs' membership
lists for Audio Book Club new member acquisition campaigns, (ii) insert new
member acquisition material into Columbia House's member mailing programs sent
to various other clubs maintained by Columbia House, and (iii) be referred to
as the Columbia House recommended source for audiobooks in a club format, for a
period of seven years. In addition, Columbia House entered into a non-compete
agreement pursuant to which it agreed not to engage in certain activities that
compete with our operation of Audio Book Club for a period of five years.
Moreover, the Company entered into a transitional services agreement with
Columbia House.

     As consideration for the acquisition and the related transactions,
including the mailing agreement, the non-compete agreement and the transitional
services agreement, Columbia House received from the Company cash consideration
of $30,750 plus expenses of $24. In addition, the Company issued to Columbia
House's designees (Sony Music Entertainment Inc. and WCI Record Club Inc.) an
aggregate of 325,000 shares of its common stock (the "Shares") valued on the
date of acquisition at $11.625 and warrants to purchase an additional 100,000
shares of its common stock at a price of $11.125 per share. The warrants have
been valued at $2.61 using the Black-Scholes valuation model.

     The Company also incurred cash costs and fees of $675 and non-cash costs
and fees of $51 related to the acquisition. The total purchase price of $35,541
has been accounted for using the purchase method of accounting. The Company has
specifically identified $10,600 of intangible assets (customer lists, covenants
not to compete and certain agreements acquired in the acquisitions) which will
be amortized over their useful lives (ranging between three and seven years)
and $24,009 of goodwill which will be amortized over a period not to exceed 20
years.

     In connection with the acquisitions described above, the Company granted
the sellers the right, under specified conditions, to sell back to the Company
up to an aggregate of 675,000 shares issued to the sellers in connection with
the acquisitions. At December 31, 1999, rights have terminated as to 320,000
shares. The sellers have the right under certain conditions to sell the
remaining 355,000 shares of stock to the Company at prices ranging from $14.00
to $15.00 per share at various times commencing in December 2003 and expiring
in December 2008, unless the rights are terminated earlier as a result of the
Company's stock meeting common stock price and/or performance targets prior to
exercise. If all of the rights were exercised prior to termination, the maximum
amount the Company would be required to pay for the repurchase of all of the
shares is approximately $5,300, payable as follows: (1) $175 commencing
December 2000, (2) $300 commencing December 2001, (3) $350 commencing December
2003; (4) $3,500 commencing December 2004; and (5) $750 commencing December
2005. Subsequent to December 31, 1999, rights to sell back to the Company
50,000 shares with a required payment, if exercised, of $475, have terminated
(see Note 16).

     Acquisition of Doubleday's Direct Audiobooks Direct

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

                                      F-10
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(3) Acquisitions  -- (Continued)

     As part of the acquisition, the Company acquired Audiobooks Direct's total
membership file of over 500,000 members as well as some other assets relating
exclusively to the Audiobooks Direct Club. The Company also entered into a
reciprocal marketing arrangement with Doubleday pursuant to which it received
the exclusive rights, with respect to audiobooks, for three years, subject to a
one-year extension, at no additional cost and an additional three years, at
market rates, to insert its new member acquisition materials into the member
mailings of Doubleday's consumer book clubs and Doubleday Select's professional
book clubs, as well as rights to distribute its member solicitation packages
via direct mail campaigns to the Doubleday and Doubleday Select book club
membership lists. Subject to exceptions, we will also be Doubleday's exclusive
source for audiobooks.

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

     At the time of the acquisition, together with Doubleday, the Company
announced the launch of a co-branded website to be coupled with an online
cross-marketing and advertising campaign. The website at bestbookclubs.com was
launched on September 15, 1999.

     As consideration for the acquisition and the related transactions,
including the mailing, non-compete, and transitional services agreements,
Doubleday received from the Company cash consideration of $18,615.

     The Company also incurred costs and fees of $646. The Company has
accounted for the acquisition using the purchase method of accounting. The
total purchase price of $19,261 has been accounted for under the purchase
method of accounting. The Company has identified $4,372 of intangible assets
(representing customer lists, a covenant not to compete and certain agreements
acquired in the acquisition) and $13,576 of goodwill. Identifiable intangible
assets will be amortized over their estimated useful lives (ranging from 3 to 5
years) and goodwill will be amortized over a period not to exceed 20 years.

     The following unaudited combined pro forma results of operations for the
years ended December 31, 1998 and 1999 assume the that the following
transactions occurred as of January 1, 1998:

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

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

   (3) The acquisition of substantially all of the assets used by Premier
       Electronic Laboratories, Inc. in connection with its business of
       producing, marketing, and selling old time radio and classic video
       programs on December 14, 1998.

   (4) The acquisition of substantially all of the assets used by The Columbia
       House Company in its Audio Book Club on December 31, 1998.

   (5) The acquisition of substantially all of the assets used by Doubleday
       Direct, Inc. in its Doubleday's Audiobooks Direct Club on June 15, 1999.

                                      F-11
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(3) Acquisitions  -- (Continued)

<TABLE>
<CAPTION>
                                                           Years ended December 31,
                                                             1998             1999
                                                        --------------   -------------
<S>                                                     <C>              <C>
         Net sales ..................................     $   57,281       $  54,273
                                                          ==========       =========
         Net loss ...................................     $  (20,645)      $  (9,345)
                                                          ==========       =========
         Loss per share (basic and diluted) .........     $    (2.92)      $   (1.14)
                                                          ==========       =========
</TABLE>

     The following table represents the allocation of the purchase price of
acquisitions:

<TABLE>
<CAPTION>
                                  Audiobooks     Columbia       Radio
                                    Direct         House       Spirits      Premier     Metacom       Total
                                 ------------   ----------   -----------   ---------   ---------   -----------
<S>                              <C>            <C>          <C>           <C>         <C>         <C>
Cash .........................      $           $ --          $    269      $   --      $   --      $    269
Accounts receivable ..........           --           --         2,245          --          --         2,245
Inventory ....................           --          629         1,180         156         400         2,365
Other current assets .........        1,313          622            --          --          71         2,006
Fixed assets .................           --           --           659          30          --           689
Goodwill .....................       13,576       24,009         8,470       1,710       1,621        49,386
Other intangibles ............        4,372       10,600           700          --          --        15,672
Liabilities assumed ..........           --         (319)       (2,139)         --        (150)       (2,608)
                                    -------     --------      --------      ------      ------      --------
                                    $19,261      $35,541      $ 11,384      $1,896      $1,942      $ 70,024
                                    =======     ========      ========      ======      ======      ========
</TABLE>

(4) Short-Term Investments to be Held to Maturity

     At December 31, 1999, short-term investment to be held to maturity
consisted of a bank certificate of deposit in the amount of $100 bearing
interest at 4.9% maturing on May 16, 2000. At December 31, 1998, short-term
investments to be held to maturity consisted of a $500 bank certificate of
deposit plus accrued interest, bearing interest at 5.40%, maturing on April 1,
1999.

(5) Fixed Assets

     Fixed Assets consist of the following:

                                                     1998          1999
                                                 -----------   -----------
         Capitalized computer lease ..........     $    --       $   136
         Equipment ...........................         408           660
         Furniture and fixtures ..............          90            96
         Leasehold improvements ..............         419           419
         Web site development costs ..........         781         1,100
                                                   -------       -------
         Total ...............................       1,698         2,411
         Accumulated depreciation ............        (370)         (892)
                                                   -------       -------
                                                   $ 1,328       $ 1,519
                                                   =======       =======


     Depreciation expense for the years ended December 31, 1998 and 1999 was
$367 and $522, respectively.

                                      F-12
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(6) Long-Term Debt

<TABLE>
<CAPTION>
                                                                    1998         1999
                                                                 ----------   ----------
<S>                                                              <C>          <C>
         Credit agreement, senior secured bank debt ..........    $ 27,000     $ 28,303
         Subordinated debt ...................................          --        4,800
         Related party note ..................................      15,000        8,000
                                                                  --------     --------
                                                                    42,000       41,103
         Less: current maturities ............................      (2,000)      (3,720)
                                                                  --------     --------
                                                                  $ 40,000     $ 37,383
                                                                  ========     ========
</TABLE>

     Bank Debt

     In December 1998, the Company obtained Senior Secured Bank Debt from (i)
Fleet National Bank ("Fleet") and (ii) ING (U.S.) Capital Corporation pursuant
to a Credit Agreement dated December 31, 1998. The Company granted to the
lenders a security interest in substantially all of the Company's assets and
the assets of its subsidiaries and pledged the capital stock of its
subsidiaries to the lenders as collateral under the Credit Agreement. The
Company also agreed to a number of financial and business covenants including a
restriction on the payment of dividends. In June 1999, in connection with the
acquisition of Audiobooks Direct, the Company, Fleet National Bank and ING
(U.S.) Capital Corporation amended the terms of the Company's existing credit
agreement to provide for an additional $6,000 of term loans. The interest rate
under the credit agreement is currently 3.75% above LIBOR and interest is
payable at the expiration of the respective LIBOR contracts.

     In connection with the financings, the Company has issued to the lenders
three-year warrants to purchase up to an aggregate of 317,388 shares of our
common stock. Warrants for 197,448 shares have an expiration date of December
31, 2003, an exercise price of $9.967 per share and have been valued at $2.95
using the Black-Scholes valuation model. Warrants for 119,940 shares have an
expiration date of June 15, 2004, an exercise price of $14.20, and have been
valued at $2.63 using the Black-Scholes valuation model. All warrants are
subject to certain adjustments and the total value of the warrants has been
included in deferred financing costs.

     As a result of recent acquisition activity and sales of common stock, the
Company, Fleet and ING (U.S.) Capital Corporation amended the terms of the
Company's existing credit agreement whereby certain covenants under the
agreement were adjusted. In connection therewith, the Company paid legal
expenses and fees of $317.

     At December 31, 1999, an aggregate of $28,303 principal amount of
indebtedness was outstanding under the credit agreement, $21,223 as a term loan
and $7,080 under a revolving line of credit. The principal amount outstanding
under the term advance is payable in quarterly installments as follows: four
quarterly payments of $930 in the year 2000, four quarterly payments of $1,550
in the year 2001, four quarterly payments of $2,170 in the year 2002 and the
balance due on March 31, 2003.

     Subordinated Debt

     In December 1998, the Company obtained a portion of the financing for its
acquisitions of Columbia House's Audiobook Club and our old time radio and
classic video products from Norton Herrick, Chairman of the Company, by issuing
him a $15,000 principal amount 9% convertible subordinated promissory note due
December 31, 2004. Interest on this note is payable monthly. In January 1999,
$1,000 of the note was repaid. The note was initially convertible, in whole or
in part, at the holder's option, into shares of our common stock at $11.125 per
share. As additional consideration for the bridge loan, Mr. Herrick was issued
five-year warrants to purchase 500,000 shares of our common stock at an
exercise price of $12.00 per share, subject to

                                      F-13
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(6) Long-Term Debt  -- (Continued)

adjustment. Pursuant to the terms of a letter agreement dated December 31, 1998
between the Company and Mr. Herrick, because the bridge loan was not
refinanced, repaid or replaced by September 30, 1999, (1) the interest rate of
the note increased to 11%, (2) the conversion price of the note is adjustable
to the lesser of $11.125 per share and the average closing bid price of our
common stock for the five trading days prior to conversion, and (3) the
exercise price of the warrants was adjusted to $8.41. Also pursuant to the
letter agreement, the Company agreed that if the note was refinanced by anyone
other than Mr. Herrick, a family member or an affiliate, the Company would
issue Mr. Herrick warrants to purchase an additional 350,000 shares of common
stock, which warrants would be identical to the warrants issued to him in
connection with the subordinated note. No compensation was recognized in
relation to these warrants. The additional 2% interest on the note is being
accrued and will be due on the maturity of the note. The note is subordinated
to the Company's obligations under its credit facility with Fleet and ING and
is secured by a second lien security interest on assets of the Company's old
time radio and classic video operations. The independent members of the
Company's Board of Directors approved the terms of Mr. Herrick's loan. The
Company also received a fairness opinion in connection with this loan.

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

     In August 1999, Norton Herrick sold $5,000 of the remaining $14,000 9%
convertible senior subordinated promissory note to ABC Investment, L.L.C., an
unaffiliated third party. The $5,000 promissory note has substantially the same
terms and conditions as the original promissory note bearing interest at 9% per
annum and convertible at $11.125 per share. In August 1999, ABC Investment
converted $200 of the note into 17,977 shares of the Company's common stock.

     In December 1999, Mr. Herrick sold an additional $2,000 principal amount
of the note issued to him in December 1998 to an unaffiliated third party,
which was converted into 179,775 shares of the Company's common stock.

     Under the December 1998 letter agreement, the Company issued to Mr.
Herrick warrants to purchase 140,000 and 46,667 shares of its common stock in
September 1999 and December 1999, respectively, at an exercise price of $8.41
per share.

     In December 1999, Evan Herrick loaned the Company $1,000 for which he
received a $1,000 principal amount 9% convertible promissory note due December
31, 2004. The note is convertible into shares of the Company's common stock at
$11.125 per share. Evan Herrick is the son of the Company's Chairman and the
brother of its CEO and its Executive Vice President.

                                      F-14
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(6) Long-Term Debt  -- (Continued)

     The loan maturities for the next five years are as follows:

Year Ending December 31,
------------------------
  2000 ...............................    $ 3,720
  2001 ...............................      6,220
  2002 ...............................      8,680
  2003 ...............................      9,683
  2004 ...............................     12,800
                                          -------
  Total maturities ...................    $41,103
                                          =======

(7) Commitments and Contingencies

     Rent expense for the years ended December 31, 1998 and 1999 amounted to
$58 and $234, respectively.

     Leases - Related Parties

     The Company sublets office space from an entity, H.H. Realty Investors,
Inc., which is wholly-owned by officers and directors of the Company.

     The Company subleases 828 square feet of space in Morristown, New Jersey,
from H.H. Realty Investors, Inc., pursuant to a sublease agreement that expires
in December 2003, at a monthly rate of $1, the amount paid by the related party
to the landlord under the master lease. The Company also subleases 2,793 square
feet of space in Morristown, New Jersey, from H.H. Realty Investors, Inc.
pursuant to a sublease agreement on a month to month basis at a monthly rate of
$3, the amount paid by the related party to the landlord under the master
lease.

     The Company also leases 8,000 square feet of space in Schaumburg, Illinois
pursuant to a lease agreement from a trust owned by the President of the
Company's radio group. The lease expires in December 2005, and is subject to a
three-year renewal option. Monthly rent under this lease is $5.

     Other Real Estate Leases

     The Company leases 1,155 square feet of office space in Boca Raton,
Florida, pursuant to a lease agreement which expires in November 2000 at a
monthly rent of $1. The Company has the option to renew the lease for two
consecutive three-year periods.

     The Company also leases approximately 3,655 square feet of space in
Morristown, New Jersey, on a month to month basis at a current rent of $6 per
month.

     The Company leases a kiosk at a major shopping mall on a month to month
basis with monthly rental amounts of $5.

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

     Capital Equipment Lease

     The Company leases certain computer equipment under an agreement which is
classified as a capital lease. The lease term is three years and expires in
June 2002. Annual rent payments are $55 and the lease provides for a bargain
purchase option at the end of the lease term. Rents under this agreement in
1999 were

                                      F-15
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(7) Commitments and Contingencies  -- (Continued)

$28. The amount of equipment capitalized under the lease and included in fixed
assets on the consolidated balance sheet was $136 and the obligation of $136
under the lease was recorded in accounts payable and accrued expenses. At
December 31, 1999, accumulated amortization on the capitalized computer
equipment was $25.

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

Year ending December 31,
------------------------
  2000 ......................................    $142
  2001 ......................................     128
  2002 ......................................     100
  2003 ......................................      72
  2004 ......................................      61
  Thereafter ................................      56
                                                 ----
  Total lease commitments ...................    $559
                                                 ====

     Employment Agreements

     The Company has commitments pursuant to employment agreements with certain
of its officers. The Company's aggregate commitments under such employment
agreements are approximately $1,138 and $559 during 2000 and 2001,
respectively.

     Litigation

     The Company has been named as a co-defendant together with an established
collection agency used by the Company in a lawsuit filed in March 1999 in the
United States District Court for the Northern District of Illinois, Eastern
Division. The lawsuit alleges violations by the collection agency and the
Company of the Fair Debt Collection Practices Act. The lawsuit has been brought
as a class action on behalf of individuals who were sent certain collection
letters within the State of Illinois during the one year period preceding the
filing of the lawsuit. This lawsuit has subsequently been dismissed.

(8) Stock Option Plan

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

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


                                      F-16
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(8) Stock Option Plan  -- (Continued)

     Stock option activity under both plans is as follows:

                                                                Weighted
                                                                average
                                                Shares       exercise price
                                             ------------   ---------------
Outstanding at January 1, 1998 ...........       50,000         $ 3.50
 Granted .................................    1,808,500           5.42
 Exercised ...............................           --             --
 Canceled ................................           --             --
                                              ---------         ------
Outstanding at December 31, 1998 .........    1,858,500           5.37
 Granted .................................    1,195,950          11.29
 Exercised ...............................           --             --
 Canceled ................................      (40,500)         11.76
                                              ---------         ------
Outstanding at December 31, 1999 .........    3,013,950         $ 7.63
                                              =========         ======

The per share weighted-average fair value of stock options granted during the
year ended December 31, 1998 and 1999 is as follows using the Black-Scholes
option-pricing model with the following assumptions and no dividend yield. The
shares were granted as follows:

<TABLE>
<CAPTION>
                                 No. of                              Assumed        Risk-free       Fair Value
Date                             Shares        Exercise Price      Volatility     interest rate     per Share
----                           --------       ---------------      -----------    --------------    -----------
<S>                           <C>            <C>                  <C>            <C>               <C>
1998 Grants:
   June 1998 ..............      551,500     $  3.50                  25%              5.49%         $  .86
   September 1998 .........      750,000     $  5.25                  25%              4.58%         $ 1.21
   November 1998 ..........      450,000     $  7.875                 25%              4.50%         $ 1.82
   Various ................       57,000     $6.00 - $10.81
                               ---------
Total .....................    1,808,500
                               =========
1999 Grants:
First Quarter .............       83,600     $ 11.04                  25%              5.07%         $ 3.59
Second Quarter ............      875,500     $ 11.05                  25%              4.99%         $ 5.15
Third Quarter .............      152,750     $ 12.01                  25%              5.71%         $ 4.07
Fourth Quarter ............       84,100     $ 12.64                  25%              6.13%         $ 4.40
                               ---------
 Total ....................    1,195,950
                               =========
</TABLE>

     The following table summarizes information for options outstanding and
exercisable at December 31, 1999:

<TABLE>
<CAPTION>
                                                                                   Options Exercisable
                                 Options Outstanding                         -------------------------------
    Range of                       Weighted Average      Weighted Average                   Weighted Average
     Prices          Number         Remaining Life        Exercise Price        Number       Exercise Price
---------------   -----------   ---------------------   ------------------   -----------   -----------------
<S>               <C>           <C>                     <C>                  <C>           <C>
 $  3.50-5.25      1,374,000           8 yrs                  $ 4.48          1,280,500         $ 4.53
     6.00-8.69       516,250           8 yrs                    7.85            471,250           7.84
    9.88-13.50     1,123,700           8 yrs                   11.38            813,000          11.09
 -------------     ---------    ---------------------         ------          ---------         ------
 $ 3.50-13.50      3,013,950           8 yrs                  $ 7.63          2,564,750         $ 7.33
 =============     =========    =====================         ======          =========         ======
</TABLE>

                                      F-17
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(8) Stock Option Plan  -- (Continued)

     At December 31, 1999, there were 13,900 additional shares available for
grant under the 1997 Plan and 1,472,150 additional shares available for grant
under the 1999 Plan.

     The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under APB 25, the Company recognizes no compensation
expense related to employee stock options, as no options are granted at a price
below market price on the day of grant. In October 1995, Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" was issued. SFAS 123, which prescribes the recognition of
compensation expense based on the fair value of options on the grant date,
allows companies to continue applying APB 25 if certain pro forma disclosures
are made assuming hypothetical fair value method application. Had compensation
expense for the Company's stock options been recognized based on the fair value
on the grant date under SFAS 123, the Company's net loss and net loss per share
for the years ended December 31, 1998 and 1999 would have been $9,290 and
$1.50, and $12,508 and $1.52, respectively.

(9) Warrants and Non-Plan Options

     In addition to the 431,607 warrants granted in connection with the various
1999 financings described in note (6) above, during the year ended December 31,
1999, the Company granted non-plan options and warrants to purchase a total of
228,000 shares of the Company's common stock to officers and consultants. The
options and warrants vest at various times and have exercise periods of five
years. Exercise prices range from $9.75 to $11.00 per share, except for 8,000
shares which have an exercise price of $.10. Of the 228,000 options and
warrants granted, 158,000 options were issued to employees at market price on
the date of grant. No compensation cost has been recognized in connection
therewith. The remaining 70,000 warrants were issued to advisors and to a law
firm, and the fair values have been included in contributed capital and the
cost of acquisitions, respectively.

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

(10) Equity

     In March 1999, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 75,000,000 shares.

     From April through August 1999, the Company sold 2,040,000 shares of
common stock to qualified institutional investors for gross proceeds of $24.9
million. Fees paid to an unaffiliated third party were $295.

(11) Income Taxes

     Income tax benefit for the years ended December 31, 1998 and 1999 differed
from the amount computed by applying the U.S. Federal income tax rate of 34%
and the state income tax rate of 5.39% in 1998 and 7% in 1999 to the pre-tax
loss as a result of the following:

<TABLE>
<CAPTION>
                                                                                   1998           1999
                                                                              -------------   ------------
<S>                                                                           <C>             <C>
     Computed tax benefit .................................................     $  (2,751)      $ (2,991)
     Valuation allowance for Federal and State deferred tax assets ........         2,751          2,991
                                                                                ---------       --------
     Income tax expense ...................................................     $      --       $     --
                                                                                =========       ========
</TABLE>

                                      F-18
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(11) Income Taxes  -- (Continued)

     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>
                                                                            1998           1999
                                                                       -------------   -----------
<S>                                                                    <C>             <C>
      Federal and state net operating loss carry-forwards ..........     $ 3,099        $  7,340
      Accounts receivable, principally due to allowance for doubtful
        accounts and reserve for returns ...........................         547           1,769
      Fixed assets .................................................          (9)         (2,481)
                                                                         ----------     --------
      Total gross deferred tax assets ..............................       3,637           6,628
      Less valuation allowance .....................................      (3,637)         (6,628)
                                                                         ---------      --------
      Net deferred tax assets ......................................     $    --        $     --
                                                                         =========      ========
</TABLE>

     The Company has provided a valuation allowance of $3,637 and $6,628 for
deferred tax assets as of December 31, 1998 and 1999, respectively. In
assessing the realizability of deferred tax assets, management has determined
that the Company does not have a history of earnings on which to base its
determination. The ultimate realization of deferred tax assets is dependent on
the generation of future taxable income during the periods in which those
temporary timing differences become deductible. The Company's limited operating
history does not allow management to make a judgment regarding future taxable
income over those periods.

     The Company has approximately $7,340 of net operating loss carry-forwards
which may be used to offset possible future earnings, if any, in computing
future income tax liabilities. The net operating losses will expire between
December 31, 2018 and December 31, 2019 for federal income tax purposes. For
state purposes, the net operating losses will expire at varying times, as the
Company is subject to corporate income tax in several states.

(12) Net Loss Per Share of Common Stock

     Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the applicable reporting
periods. The computation of diluted net loss per share is similar to the
computation of basic net loss per share except that the denominator is
increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued.
However, the Company's computation of dilutive net loss per share does not
assume any conversion or exercise of securities as their effect is antidilutive
for all periods presented.

     The weighted average number of shares outstanding used in the net loss per
share computations for the years ended December 31, 1998 and 1999 were
6,187,687 and 8,204,543, respectively.

     Common equivalent shares that could potentially dilute basic earnings per
share in the future and that were not included in the computation of diluted
loss per share because of antidilution were 4,670,927 for the year ended
December 31, 1998 and 6,274,398 for the year ended December 31, 1999. Included
in the December 31, 1999 common share equivalents are 1,040,560 shares assuming
the conversion of $12,800 in convertible senior subordinated promissory notes.

(13) Supplemental Cash Flow Information

     No cash has been expended for income taxes for the years ended December
31, 1998 and 1999. Cash expended for interest was $0 and $3,937 for the years
ended December 31, 1998 and 1999, respectively.

                                      F-19
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(13) Supplemental Cash Flow Information  -- (Continued)

     In connection with its acquisitions in 1998 and 1999, the Company provided
a total of 925,000 shares of its common stock and 380,000 options and warrants
to the former owners of the acquired companies, and attorneys and advisors to
the transactions. The total value of the stock of $11,503 and warrants of
$1,002 has been recorded as part of the acquisition prices to be amortized over
periods not to exceed 20 years. The Company also provided 35,000 warrants to
advisors to the transactions. The value of these warrants of $76 has been
included in the cost of the acquisitions and recorded as goodwill. The Company
also provided 317,388 warrants to the banks providing financing for the
acquisitions. The value of the warrants of $896 has been included in deferred
financing fees.

     In May 1998, the Company, in addition to a cash payment of $20,000,
granted warrants to a third party to purchase 20,000 shares of the Company's
common stock at $4.81 per share to acquire the Universal Resource Locators
("URL"), audiobook.com and audiobook.net. The Company has included the fair
value of the warrants of $50 in the asset value of $70, the negotiated price,
and is amortizing the asset over six years.

     In March 1998, the Company granted non-plan options to purchase 21,600
shares of the Company's common stock at $4.40 per share to a company in
compensation for the costs incurred in transferring to the Company the toll
free phone numbers, (800) AUDIOBOOK and (888) AUDIOBOOK. The Company has
recorded an asset in the amount of $54, the fair value, as evidenced by the
negotiated cost of transferring the phone numbers, and is amortizing the asset
over six years. In October 1999, the options were exercised and the Company
received $95 as payment of the exercise price.

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

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

     The Company granted 96,000 warrants to advisors in connection with its
equity financings described in Note 10 above. The total value of these warrants
using the Black-Scholes method has been recorded at $380 and included in
contributed capital.

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

     In August 1999, ABC Investment L.L.C., the holder of a $5,000 9%
convertible senior subordinated promissory note due December 31, 2004 converted
$200 of the note into 17,977 shares of the Company's common stock.

     In December 1999, the unaffiliated third party, which had purchased a
portion of the Company's subordinated note, converted the note into 179,775
shares of the Company's common stock.

(14) Related Party Transactions

     Companies wholly-owned by Norton Herrick provided certain accounting,
administrative and general office services to, and obtained insurance coverage
for, the Company. In connection with such services, the

                                      F-20
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(14) Related Party Transactions  -- (Continued)

Company paid to such entities the aggregate of $73 and $90 during the years
ended December 31, 1998 and 1999, respectively. In addition, a company
wholly-owned by Norton Herrick provides us access to a corporate airplane. We
generally pay the fuel, fees and other costs related to our use of the airplane
directly to the service providers. For the use of this airplane, we paid rental
fees of less than $25 in each of 1998 and 1999 to Mr. Herrick's affiliate. The
Company anticipates obtaining similar services from time to time from companies
affiliated with Norton Herrick for which it will reimburse such companies' cost
to provide such services to the Company.

(15) Recently Issued Accounting Standards

     In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 provides a comprehensive standard for the recognition and
measurement of derivatives and hedging activities in fiscal 2000 as the
Statement is currently written. However, the FASB has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of
Effective Date of SFAS No. 133," which will defer adoption to fiscal 2001. The
statement will require all derivatives to be recorded on the balance sheet at
fair value and also prescribes special accounting for certain types of hedges.
The Company has not entered into any derivative or hedge transactions, and,
therefore, does not believe that SFAS No. 133 will have a material effect on
its financial condition or results of operations.

(16) Subsequent Events

     Subordinated Debt

     In January and February 2000, Norton Herrick sold an additional $4,224
principal amount of the note issued to him in December 1998 to two unaffiliated
third parties which was converted into 379,662 shares of the Company's common
stock. Under the December 1998 letter agreement, the Company issued to Norton
Herrick warrants to purchase an additional 98,554 shares of its common stock at
an exercise price of $8.41 per share. No compensation has been recognized in
relation to this transaction. The Company issued warrants to purchase 340,000
shares of its common stock at $12.50 per share to one of the unaffiliated third
parties as an inducement to convert the note resulting in a reduction in long
term debt.

     In January and February 2000, Evan Herrick loaned the Company an
additional $2,000 for which he received a $2,000 principal amount 9%
convertible promissory note due December 31, 2004. The note is convertible into
shares of the Company's common stock at $11.125 per share, which was the market
value on the date the note was issued.

     In February 2000, the unaffiliated third party holder of the $4.800 9%
promissory note converted an additional $600 of the note into 53,932 shares of
the Company's common stock.

     Warrants and Options

     Subsequent to December 31, 1999, in addition to the 438,554 warrants
granted above, the Company granted plan options and warrants to purchase a
total of 1,211,000 shares of the Company's common stock to officers and
consultants. The options and warrants vest at various times and have exercise
periods of five and ten years. Exercise prices range from $10.375 to $21.50 per
share. In addition, the Company canceled five-year plan options to purchase a
total of 2,700 shares of the Company's common stock.

     Termination of Contingent Put Rights

     In January 2000, rights to sell back to the Company 50,000 shares, valued
at $644, issued to one of the sellers in connection with the acquisitions,
terminated due to the Company's common stock exceeding the price agreed to in
the acquisition agreement for the period specified in the acquisition
agreement.

                                      F-21
<PAGE>

                                MEDIABAY, INC.

                  Notes to Consolidated Financial Statements
                    Years ended December 31, 1998 and 1999
                 (Dollars in thousands, except per share data)

(17) Sale of Equity

     The Company's Registration Statement on Form SB-2 for a follow-on primary
offering was declared effective by the Securities and Exchange Commission on
March 15, 2000. On March 20, 2000, the Company closed its offering of 3,650,000
shares of its Common Stock at a price of $9.00 per share for gross proceeds of
$32,850. The Company estimates expenses of approximately $3,200 related to the
offering, including the underwriting discount and accountable expenses, legal
and accounting fees and printing expenses.























                                      F-22
<PAGE>

         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                for the years ended December 31, 1999 and 1998






<TABLE>
<CAPTION>
                                                           Balance         Amounts                   Write-Offs     Balance
                                                        Beginning of     Charged to      Amounts       Against      End of
                                                           Period        Net Income     Acquired      Reserves      Period
                                                       --------------   ------------   ----------   ------------   --------
<S>                                                    <C>              <C>            <C>          <C>            <C>
Allowances for sales returns and doubtful accounts:
Year Ended December 31, 1999                               $1,840          $18,848       $1,264        $16,041      $5,911
Year Ended December 31, 1998                               $1,449          $ 8,257       $  422        $ 8,288      $1,840
</TABLE>
































                                      S-1