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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2001

OR

[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.

For the transition period from ___________ to ____________


Commission File Number 001-13469


MEDIABAY, INC.
(Exact Name of Registrant as Specified in Its Charter)


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


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

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

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)

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

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

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

Documents Incorporated by Reference:
None




MEDIABAY, INC.

Form 10-K


Table of Contents


PART I

Item 1. Description of Business 1

Item 2. Description of Property 15

Item 3. Legal Proceedings 16

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

PART II

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

Item: 6. Selected Financial Data 17

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

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

Item 8. Financial Statements and Supplementary Data 28

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

PART III

Item 10. Directors and Executive Officers 29

Item 11. Executive Compensation 32

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

Item 13. Certain Relationships and Related Transactions 37

PART IV

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





PART I

Item 1. Description of Business.

Forward-looking Statements

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

Introduction

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

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

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

Our web sites receive more than 2 million unique monthly web site visitors
and are among the most heavily trafficked bookselling web sites on the Internet.
We serve more than 400,000 classic radio and nostalgia video streams of our
content on a monthly basis to web site visitors at RadioSpirits.com and
MediaBay.com.

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


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Business Divisions

We report financial results on the basis of four business segments;
Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or "RSI") and
MediaBay.com. A fifth division, Radio Classics, is aggregated with Radio Spirits
for financial reporting purposes. Except for corporate, each segment serves a
unique market segment within the spoken word audio industry. The four segments
serving the spoken word audio industry are as follows:

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

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

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

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

Audio Book Club

We believe that we are a leading seller of audiobooks in the world through
our Audio Book Club, the largest membership-based club of its kind. Our total
member file, which includes active and inactive members, has grown significantly
from approximately 64,000 names at December 31, 1995 to approximately 2.0
million names at December 31, 2001.

In December 1998 and June 1999, MediaBay acquired its only two competitors
in the club segment of the audiobook market: The Columbia House Audiobook Club
from Time Warner and Sony and Doubleday's Audiobooks Direct club from
Bertelsmann.

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

We emphasize the timely introduction of new audiobook titles to our
catalogs and attempt to offer a balance between various genres and between
unabridged and abridged audiobooks, cassettes and compact discs to satisfy
differing member preferences.

We have created our first such specialty club for audiobooks based on
consumer preferences which we have identified from our extensive database of
member information. This first specialty club, Audio Passages, a Christian
Audiobook Club, was launched in the second quarter of 2000. We are exploring the
possibility of launching additional specialty clubs, featuring a specific
interest, such as self-help, religion, mystery and Spanish language audiobooks.


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

Audiobookclub.com

Audiobookclub.com provides visitors the opportunity to become members of
our Audio Book Club and provides our members with the ability to order online,
audiobooks offered through our catalog. Audiobookclub.com has acquired
approximately 275,000 members online, including 58,000 members in 2001, and
19,000 members online in January and February of 2002. We have significantly
reduced our cost to acquire a member online dramatically in 2001 as a result of
our revised marketing strategy. The cost to acquire a member in December 2001
was approximately $12 as compared to over $50 in January of 2000.
Audiobookclub.com currently receives over 1.6 million unique visitors per month
and is one of the most heavily trafficked bookselling web sites on the Internet.

Marketing

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

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

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

Our Internet marketing program focuses on acquiring Audio Book Club members
through advertising agreements with other web sites that require payment only
when we enroll a bona fide member in Audio Book Club. This cost -per
- -acquisition or "CPA" arrangement results in substantially lower marketing costs
and direct control over the cost of acquiring members. These agreements have
resulted in a cost to acquire new members on the Internet, which is
approximately 50% lower than our offline cost. Unlike traditional web retailers,
our members have a purchase obligation associated with their membership and
there is a strong likelihood that they will remain members and repeat buyers for
a sustained period.

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

Member Retention and Recurring Revenue

We encourage Audio Book Club members to purchase more than their minimum
purchase commitment by offering members discount pricing on their featured
selection audiobook and other incentives based on the volume of their purchases.
Audio Book Club members receive one mailing approximately every three weeks.
Audio Book Club mailings typically include a multi-page catalog

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which offers hundreds of titles, including a featured selection, which is
usually one of the most popular titles at the time of mailing; alternate
selections, which are best selling and other current popular titles; and
backlist selections, which are long-standing titles that have continuously sold
well. Each member mailing also includes an order form and a
"Member-Get-a-Member" form.

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

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

Supply and Production

We have established relationships with substantially all of the major
audiobook publishers, including Random House Audio Publishing Group, Simon &
Schuster Audio, Harper Audio and Time Warner Audio Books for the supply of
audiobooks. As a membership club, our Audio Book Club enjoys a cost of goods
advantage over traditional audiobook retailers. Retailers and other online
booksellers purchase audiobooks from the finished inventory of either a
publisher or a third-party distributor. As a club operator, we license a
recording or group of recordings from the publisher for sale in a club format on
a royalty or per copy basis and subcontract the manufacturing, including
duplicating and printing to a third party. As a result of the improved economies
of scale achieved from our acquisitions of Columbia House's Audiobook Club and
Doubleday Direct's Audiobooks Direct club, we have achieved significant cost
savings in the production of audiobooks.

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

Fulfillment and Customer Service

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

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


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

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

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

We have implemented a number of initiatives, which have reduced the returns
from our Audio Book Club members. We have substantially reduced the number of
SKUs (Stock Keeping Units) in our inventory, resulting in fewer back orders on
items ordered and less delay in fulfilling orders. We have also extended the
period of time between when a catalog is mailed and when we ship the featured
selection, allowing members additional time to decline the featured selection if
they choose.

Radio Spirits

History

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

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

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

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

RSI Content

RSI has exclusive rights to a substantial portion of its library of popular
old-time radio and classic video programs, including vintage comedy, mystery,
detective, adventure and suspense programs. In November 2001, the intellectual
property rights related to RSI's old-time radio library of programs were
appraised at $30.6 million by an accredited independent third party appraisal
firm well respected in the financial community. RSI's library consists of over
60,000 radio programs, most of which are licensed on an exclusive basis,
including:

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

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

o recordings of stars, such as Humphrey Bogart, Lucille Ball, Frank
Sinatra and Jack Benny; and

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

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


5


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

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

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

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

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

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

Marketing

RSI markets its library of old-time radio and video programs through direct
marketing, Internet, and retail channels. RSI's marketing efforts are aimed at
the direct marketing channel of distribution, via internally developed catalogs,
as well as through retail and online channels of distribution. RSI produces
several catalogs per year and mails them to its customer list and selected
third-party mailing lists three times per year. RSI has developed wholesale
distribution through several large, national book retailers, including Barnes &
Noble, Borders, and Waldenbooks; gift stores such as Discovery Stores and
Cracker Barrel Old Country Stores and mass retailers like Costco, Sam's Club,
and Target as well as on the Internet at Amazon.com. RSI also sells its products
through its web site at Radiospirits.com.

Direct Mail

RSI maintains a list of over 600,000 names of customers of radio and video
programs through RSI's catalogs and other channels. This list includes all
customers to which RSI's radio and video programs or catalogs have been mailed.
RSI engages in list rental programs to maximize the revenue generation potential
of its customer list. RSI's catalogs offer cassettes and compact discs from its
old-time radio library and videos from its classic video library and RSI's line
of DVDs, which combine classic radio and classic television programs on a single
DVD.


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Broadcast

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

Internet

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

Wholesale

RSI also sells its radio programs on a wholesale basis through major
retailers and online retailers, including Costco, Target, Sam's Club, Barnes &
Noble, Borders, Amazon.com and Cracker Barrel Old Country Stores. RSI's products
are currently sold in approximately 7,000 retail locations.

RSI markets its old-time radio and classic video programs to wholesale
customers through its in-house sales personnel, independent sales
representatives and through third-party distributors. RSI also engages in
cooperative advertising to induce retailers to purchase its products.

Supply and Production

RSI has exclusive licensing rights to a substantial majority of its
old-time radio library. These rights have been principally acquired from the
original rights holders (actors, directors, writers, producers or others) or
their estates. Engineers in our New Jersey facility use digital sound equipment
to improve the sound quality of RSI's old-time radio programs. RSI then
contracts with third-party manufacturers to duplicate and manufacture the
old-time radio cassettes and CDs, which it sells. Because RSI's old-time radio
content is acquired under license from the rights holders, which give the
ability to manufacture the programs, RSI enjoys a cost of goods advantage,
resulting in favorable product margins. RSI uses third parties to manufacture
most of its videos.

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

Fulfillment and Customer Service

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

Video Library

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


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DVDs

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

MediaBay.com

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

RadioClassics

Our RadioClassics subsidiary intends to syndicate our old-time radio
library across multiple distribution platforms including traditional radio,
digital cable television, satellite television (DBS), satellite radio and the
Internet. We produce and syndicate three national "classic" radio programs:
"When Radio Was" hosted by Stan Freberg, "Radio Movie Classics" hosted by
Jeffrey Lyons, and "Radio Super Heroes." These three programs are collectively
heard on more than 500 radio stations in more than 350 markets including one of
the nation's largest radio stations, KNX1070 Los Angeles, by over 3 million
listeners weekly. Our library of old-time radio programs provides the content
and the basis for these programs.

Our current syndicated radio shows provide an excellent forum to introduce
our old-time radio programs to existing and potential new listeners. The
syndication agreements also provide us with an average of 1 to 2 minutes per
hour for our own advertising and promotional use. We use this advertising and
promotional forum as a means to develop broader name recognition for Radio
Spirits and additional sales of old-time radio products from existing and first
time buyers as well. Our success with our traditional radio syndication programs
provides a natural extension for the syndication of our content on a 24/7 basis
via numerous other distribution platforms through our RadioClassics subsidiary.
RadioClassics is currently in discussions with leading cable television,
satellite radio and satellite television companies to establish distribution
capabilities for Radio Spirit's old-time radio content.

Industry Overview

Audiobooks

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

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

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

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

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

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


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

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

Old-time Radio

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

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

Digital Downloads

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

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

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

Competition

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


9



The audiobook and mail order industries are intensely competitive. We
compete with all other outlets through which audiobooks and other spoken word
content are offered, including:

o bookstores;

o audiobook stores which rent or sell only audiobooks;

o mail order companies that offer audiobooks for rental and sale through
catalogs; and

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

Intellectual Property

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

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

Employees

As of March 25, 2002, we had 48 full-time employees. Of these employees, 5
served in corporate management; 27 served in operational positions at our Audio
Book Club operations; 1 served in management and 4 served in operational
positions at our MediaBay.com operations and 11 served in operational positions
at our old-time radio and classic video operations. We believe our employee
relations to be good. None of our employees are covered by a collective
bargaining agreement.

Risk Factors

Risks Related to Our Operations

Our products are sold in a niche market that is still evolving and may have
limited future growth potential.

We believe that the market for audiobooks and old-time radio and classic
video programs has expanded rapidly in recent years. However, consumer interest
in audiobooks and old-time radio and classic video programs may decline in the
future, and growth trends in these markets may stagnate or decline. The sale of
audiobooks through mail order clubs and over the Internet are emerging retail
concepts, and audiobooks are still evolving as a niche market. As is typically
the case in an evolving industry, the ultimate level of demand and market
acceptance for our products is subject to a high degree of uncertainty. A
decline in the popularity of audiobooks and old-time radio and classic video
programs would limit our future growth potential and negatively impact our
future operating results.

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

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

o plan for catalog offerings;

o introduce new titles;

o anticipate order lead time;


10



o accurately assess inventory requirements; and

o develop new product delivery methods.

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

We may experience system interruptions, which affect access to our web sites and
our ability to sell products over the Internet.

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

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

We could lose sales opportunities if we are unable to continue to obtain
the rights to additional audiobook libraries or selected audiobook titles. Many
of our license agreements with audiobook publishers are one to three years in
length, and some of our agreements will expire over the next several months
unless they are renewed. We may not be able to renew existing license and supply
arrangements for audiobook publishers' libraries or enter into additional
arrangements for the supply of new audiobook titles.

If our third-party providers fail to perform their services properly, our
business and results of operations could be adversely affected.

Third-party providers conduct a substantial portion of our customer service
operations, process orders and collect payments for us. If these providers fail
to perform their services properly, Audio Book Club members and Radio Spirits
customers could develop negative perceptions of our business, collections of
receivables could be delayed and our operations might not function efficiently.

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

If our direct mail and other marketing strategies are not successful, our
per member acquisition costs may increase and we may acquire fewer new members
than anticipated. As a result, our operating results would be negatively
impacted and our sales growth would be inhibited.

The public may become less receptive to unsolicited direct mail campaigns.

The success of our direct mail campaigns is dependent on many factors
including the public's acceptance of direct mail solicitations. Events in the
Fall of 2001, including individuals contracting Anthrax through unsolicited
mail, could alter the public's acceptance of direct mail. Negative public
reception of direct mail solicitations will result in lower customer acquisition
rates, higher customer acquisition costs and will negatively impact operating
results and sales growth.

Increased member attrition could negatively impact our future revenues and
operating results.

Increases in membership attrition above the rates we anticipate could
materially reduce our future revenues. We incur significant up front
expenditures in connection with acquiring new members. A member may not honor
his or her commitment, or we may choose to terminate a specific membership


11



for several reasons, including failure to pay for purchases, excessive returns
or cancelled orders. As a result, we may not be able to fully recoup our costs
associated with acquiring new members. In addition, once a member has satisfied
his or her initial commitment to purchase additional audiobooks at regular
prices, the member has no further commitment to make purchases.

The closing of retail stores, which carry our products, could negatively impact
our wholesale sales of these products.

If the recent trend of bankruptcy filings by major retailers continues, the
number of outlets for our old-time radio product will become limited. With fewer
chains and stores available as distribution outlets, competition for shelf space
will increase and our ability to sell our products could be impacted negatively.
Moreover, our wholesale sales could be negatively impacted if any of our
significant retail customers were to close a significant number of their
locations or otherwise discontinue selling our products.

If third parties obtain unauthorized access to our member and customer databases
and other proprietary information, we would lose the competitive advantage they
provide.

We believe that our Audio Book Club member file and customer lists are
valuable proprietary resources, and we have expended significant amounts of
capital in acquiring these names. Our member and customer lists, trade secrets,
trademarks and other proprietary information have limited protection. Third
parties may copy or obtain unauthorized access to our member and customer
databases and other proprietary know-how, trade secrets, ideas and concepts.

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

If we are unable to pay our accounts payable in a timely manner, our suppliers
and service providers may refuse to supply us with products or provide services
to us.

At December 31, 2001, we owed approximately $13.9 million to trade and
other creditors. Approximately $2.8 million of these accounts payable were more
than 60 days past due. If we do not make satisfactory payments to our vendors
they may refuse to continue to provide us products or services on credit, which
could interrupt our supply of products or services.

Higher than anticipated product return rates could reduce our future operating
results.

We experienced a product return rate of approximately 26% during the year
ended December 31, 2000 and a return rate of approximately 24% during the year
ended December 31, 2001. If members and customers return products to us in the
future at higher rates than in the past or than we currently anticipate, our net
sales would be reduced and our operating results would be adversely affected.

If we are unable to collect our receivables in a timely manner, it may
negatively impact our cash flow and our operating results.

We are subject to the risks associated with selling products on credit,
including delays in collection or uncollectibility of accounts receivable. If we
experience significant delays in collection or uncollectibility of accounts
receivable, our liquidity and working capital position could suffer and we could
be required to increase our allowance for doubtful accounts, which would
increase our expenses.


12



Increases in costs of postage could negatively impact our operating results.

We distribute millions of mailings each year, and postage is a significant
expense in the operation of our business. We do not pass on the costs of member
mailings and member solicitation packages. Unanticipated increases in the cost
of postage multiplied by the millions of mailings we conduct would result in
increased expenses and would negatively impact our operating results.

We face significant competition from a wide variety of sources for the sale of
our products.

We compete with other web sites which offer similar entertainment products
or content, including digital download of spoken word content. New competitors,
including large companies, may elect to enter the markets for audiobooks and
spoken word content. We also compete for discretionary consumer spending with
mail order clubs and catalogs, other direct marketers and retailers that offer
products with similar entertainment value as audiobooks and old-time radio and
classic video programs, such as music on cassettes and compact discs, printed
books, videos, and laser and digital video discs. Many of these competitors are
well-established companies, which have greater financial resources that enable
them to better withstand substantial price competition or downturns in the
market for spoken word content.

The audiobook and mail order industries are intensely competitive. We
compete with all other outlets through which audiobooks and other spoken word
content are offered, including:

o bookstores;

o audiobook stores which rent or sell only audiobooks;

o mail order companies that offer audiobooks for rental and sale through
catalogs; and

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

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

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

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

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

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

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


13



Risks Related to Our Financial Condition

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

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

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

We granted sellers in our acquisitions the right to sell back to us shares
of our common stock that we issued to them. Unless our common stock satisfies
specific price targets and/or trading volume requirements, these rights could
require us to purchase up to 305,000 shares in the future at a cost to us of
approximately $4.6 million. We may not have sufficient funds to meet these
obligations to repurchase stock in the future.

Risks Related to Our Capital Structure

The Herrick family exerts significant influence over shareholder matters.

As of December 31, 2001, Norton Herrick, Michael Herrick and Howard Herrick
and their affiliates own approximately 32.7% of our outstanding common stock. As
significant shareholders and directors, they are generally able to direct our
affairs and exert significant influence over matters, which require director or
shareholder vote, including the election of directors, amendments to our
Articles of Incorporation or approval of the dissolution, merger, or sale of
MediaBay, our subsidiaries or substantially all of our assets. This
concentration of ownership by the Herrick family could delay or prevent a change
in our control, even when a change in control might be in the best interests of
other shareholders.

The terms of our debt impose restrictions on our business.

As of December 31, 2001, we had approximately $6.2 million of debt
outstanding under our revolving line of credit and $12.5 million principal
amount of debt outstanding under convertible promissory notes. Our line of
credit restricts our ability to raise financing for working capital purposes
because it requires us to use any proceeds from equity or debt financings, with
limited exceptions, to repay amounts outstanding under the credit agreement. In
addition to limiting our ability to incur additional indebtedness, our existing
indebtedness under our revolving line of credit limits or prohibits us from,
among other things:

o merging into or consolidating with another corporation;

o selling all or substantially all of our assets;

o declaring or paying cash dividends; or

o materially changing the nature of our business.

We may have to make substantial payments on our debt and may not have the funds
to do so.

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

In addition, if an event of default occurs under the convertible promissory
notes or senior credit facility, the indebtedness could become due and payable.

Our ability to use our net operating losses may be limited in future periods,
which could increase our tax liability.

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


14



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

Our stock price has been and could continue to be extremely volatile.

The market price of our common stock has been subject to significant
fluctuations since our initial public offering in October 1997. The securities
markets have experienced, and are likely to experience in the future,
significant price and volume fluctuations, which could adversely affect the
market price of our common stock without regard to our operating performance. In
addition, the trading price of our common stock could be subject to significant
fluctuations in response to:

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

o actual or anticipated variations in our quarterly operating results;

o announcements by us or other industry participants;

o factors affecting the market for spoken word content;

o changes in national or regional economic conditions;

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

o general market conditions.

Substantially all of our restricted shares of common stock are currently
eligible for sale and could be sold in the market in the near future, which
could depress our stock price.

As of December 31, 2001, we have outstanding approximately 13.9 million
shares of common stock. Substantially all of our shares are currently freely
trading without restriction under the Securities Act of 1933, having been
registered for resale or held by their holders for over two years and are
eligible for sale under Rule 144(e). There are currently outstanding options and
warrants and other convertible securities to purchase an amount of shares
substantial to the public float. Substantially all of these shares have been
registered for resale. To the extent they are exercised or converted, your
percentage ownership will be further diluted and our stock price could be
further adversely affected. Moreover, as the underlying shares are sold, the
market price could drop significantly if the holders of these restricted shares
sell them or if the market perceives that the holders intend to sell these
shares.

Item 2. Description of Property.

We lease approximately 12,000 square feet of office space in Cedar Knolls,
New Jersey pursuant to a lease agreement that expires in August 2003 at a
monthly rate of $16,000. We have the option to renew the lease for an additional
three-year period.

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

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

Item 3. Legal Proceedings

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


15



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

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

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

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

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

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

PART II

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

MediaBay's common stock has been quoted in the Nasdaq National Market under
the symbol "MBAY" since November 15, 1999. The following table shows the high
and low sales prices of our common stock as reported by the Nasdaq National
Market.

High Low
---- ---
Fiscal Year Ended December 31, 2000
First Quarter 16.875 6.625
Second Quarter 7.625 2.938
Third Quarter 3.125 1.406
Fourth Quarter 3.813 .563
Fiscal Year Ended December 31, 2001
First Quarter 1.625 .531
Second Quarter 1.05 .50
Third Quarter 1.06 .56
Fourth Quarter .99 .43
Fiscal Year Ended December 31, 2002
First Quarter (through March 25, 2002) 3.44 .59

On March 25, 2002 the last reported sale price of our common stock on the
Nasdaq National Market was $3.30 per share. As of March 25, 2002, there were
approximately 110 record owners of our common stock. We believe that there are
more than 400 beneficial owners of our common stock.

Dividend Policy

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


16



Sales of Securities and Use of Proceeds

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

Item 6. Selected Financial Data

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

The balance sheet and statement of operations data for the year ended
December 31, 1999 gives effect to the purchase of Doubleday Direct's Audiobooks
Direct club on June 15, 1999. Additionally, the balance sheet and statement of
operations data for the year ended December 31, 1998 gives effect to the
following transactions:

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

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

o The acquisition of substantially all of the assets used by Premier
Electronics Laboratories, Inc. in connection with its old-time radio
and classic video businesses on December 14, 1998.

o The acquisition of substantially all of the assets of Columbia House's
Audiobook Club on December 31, 1998.

Beginning in January 1999, the Company was required to capitalize direct
response marketing costs for the acquisition of new members in accordance with
AICPA Statement of Position 93-7 "Reporting on Advertising Costs" and amortizes
these costs over the period of future benefit. Since 1999 was the first year we
capitalized new member acquisitions costs, we capitalized a very large portion
of direct response advertising expenditures.

Beginning in July 2000, we conducted a review of our operations, including
product offerings, marketing methods and fulfillment. In the third quarter of
2001, we began to implement a series of actions and decisions designed to
improve gross profit margin, refine our marketing efforts and reduce general and
administrative costs. In connection with the movement of the fulfillment of
old-time radio products to a third party provider, in the first quarter of 2002,
we closed our old-time radio operations in Schaumburg, Illinois and now run all
of our operations, except for fulfillment, from our corporate headquarters
located in Cedar Knolls, New Jersey. In the third quarter of 2001, as a result
of the actions and decisions made after our aforementioned review of our
operations, we recorded $11.3 million of strategic charges. In addition to these
strategic charges, we recorded a charge of $2.0 million to write-off the entire
carrying amount of our cost method investment in I-Jam.


17



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

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

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



Years Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
-------- -------- -------- -------- --------
(thousands, except per share data)

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


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



18



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

Introduction

Beginning in July 2000, we conducted a review of our operations, including
product offerings, marketing methods and pricing. In the third quarter of 2001,
we began to implement a series of actions and decisions designed to improve
gross profit margin, refine our marketing efforts and reduce general and
administrative costs. Specifically, we (i) reduced the number of items offered
for sale at both its Radio Spirits and Audio Book Club subsidiaries, (ii) moved
fulfillment of our old-time radio products to a third party fulfillment
provider, (iii) limited our investment and marketing efforts in downloadable
audio due to lack of customer acceptance at this time, and the limited number
and high price point of digital audio download players currently produced and
(iv) refined our marketing of old-time radio products and our marketing efforts
to existing Audio Book Club members. In connection with the movement of the
fulfillment of old-time radio products to a third party provider, in the first
quarter of 2002, we closed our old-time radio operations in Schaumburg, Illinois
and now run all of our operations, except for fulfillment, from our corporate
headquarters located in Cedar Knolls, New Jersey. In the third quarter of 2001,
as a result of the actions and decisions made after our aforementioned review of
our operations, we recorded $11.3 million of write-downs and strategic charges.
In addition to these strategic charges, we recorded a charge of $2.0 million to
write-off the entire carrying amount of our cost method investment in I-Jam.

During the fourth quarter of 2000, we reviewed long-lived assets and
certain related identifiable intangibles, including goodwill, for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("FASB 121") due to a change in facts and circumstances. We determined that
the revised estimates of cash flows from certain of our acquired operations
would no longer be sufficient to recover the carrying value of goodwill
associated with these businesses. As a result, in the fourth quarter of 2000, we
determined that the goodwill associated with these businesses was impaired and
recorded an impairment charge of $38.2 million. The impairment charge was
measured as the difference between the carrying value of the goodwill and its
fair value, which was based upon discounted cash flows.

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

As a result of the recording of the goodwill write-off, the strategic
charges and the income tax benefit, as well as fluctuations in operating results
depending on the timing, magnitude and success of Audio Book Club new member
advertising campaigns, comparisons of our historical operating results from year
to year may not be meaningful.

Critical Accounting Policies

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


19



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

o We record reductions to our revenue for future returns and record an
estimate of future bad debts arising from current sales. These
allowances are based upon historical experience and evaluation of
current trends. If members and customers return products to us in the
future at higher rates than in the past or than we currently
anticipate, our net sales would be reduced and our operating results
would be adversely affected. Also, if the financial condition of our
customers, including both individual consumers or retail chains, were
to deteriorate, resulting in their inability to make payment to us,
additional allowances would be required.

o We are required to capitalize direct response marketing costs for the
acquisition of new members in accordance with AICPA Statement of
Position 93-7 "Reporting on Advertising Costs" and amortize these
costs over the period of probable future benefits. In order to
determine the amount of advertising to be capitalized and the manner
and period over which the advertising should be amortized, we prepare
estimates of probable future revenues arising from the direct-response
advertising in excess of future costs to be incurred in realizing
those revenues. If future revenue does not meet our estimates or if
members buying patterns were to shift, adjustments to the amount and
manner of amortization would be required. Actual amounts incurred for
advertising and promotion, net of settlements with certain vendors
principally for unprofitable Internet marketing campaigns, for the
year ended December 31, 2001 were $8.2 million. The difference between
the amount expended of $8.2 million for the year ended December 31,
2001 and the amount recorded as advertising and promotion expense, of
$11.9 million, for the year ended December 31, 2001 is due to
amortization of previously capitalized direct response advertising.

o The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which
temporary timing differences become deductible. As a result of a
series of strategic initiatives, our operations have improved.
Although realization of net deferred tax assets is not assured,
management has determined, based on the Company's improved operations,
that it is more likely than not that a portion of our deferred tax
asset relating to temporary differences between the tax bases of
assets or liabilities and their reported amounts in the financial
statements will be realized in future periods. Should we determine we
would be able to realize deferred tax assets in the future in excess
of the net recorded amount, an adjustment to our deferred tax asset
would increase income in the period such determination is made.
Likewise, should we determine that we will not be able to realize all
or part of our net deferred tax asset in the future, an adjustment to
the deferred tax asset would be charged to income in the period such
determination is made.

o Goodwill represents the excess of the purchase price over the fair
value of net assets acquired in business combinations accounted for
using the purchase method of accounting. In July 2001, the Financial
Accounting Standards Board issued SFAS No. 142, "Goodwill and Other
Intangible Assets". SFAS No. 142 requires that an intangible asset
that is acquired shall be initially recognized and measured based on
its fair value. The statement also provides that goodwill should not
be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a
comparison of fair value to its carrying amount. At December 31, 2001,
we had unamortized goodwill in the amount of $8.6, which is subject to
the transition provisions of SFAS No. 142. We do not believe the
transitional impairment provisions of this statement will have any
impact on our financial statements


20



Overview

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

We report financial results on the basis of four business segments;
Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or "RSI") and
MediaBay.com. A fifth division, Radio Classics, is aggregated with Radio Spirits
for financial reporting purposes. Except for corporate, each segment serves a
unique market segment within the spoken word audio industry. In 2001, our Audio
Book Club segment had net sales of approximately $31.8 million, our Radio
Spirits segment had net sales of approximately $10.0, our MediaBay.com segment
had sales of approximately $0.25 million and we had inter-segment sales of $0.26
million.

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

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

Our web sites receive more than 2 million unique monthly web site visitors
and are among the most heavily trafficked bookselling web sites on the Internet.
We serve more than 400,000 classic radio and nostalgia video streams of our
content on a monthly basis to web site visitors at RadioSpirits.com and
MediaBay.com.

Our marketing programs have consisted primarily of direct mail, media
advertising and marketing on the Internet. We capitalize direct response
marketing costs for the acquisition of new members in accordance with AICPA
Statement of Position 93-7 "Reporting on Advertising Costs" and amortize these
costs over the period of future benefit, based on our historical experience.

Results of Operations

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



Year Ended
December 31,
1999 2000 2001
---- ---- ----

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



21



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

Gross sales decreased $5.0 million, or 8.3%, to $54.9 million for the year
ended December 31, 2001 from $59.9 million for the year ended December 31, 2000.
The decrease in gross sales is primarily attributable to more focused marketing
at Audio Book Club to concentrate on more profitable new members and
non-recurring I-Jam marketing revenue we recorded in 2000. In addition, in the
beginning of 2001, we revised the logic used in determining customer product
shipments, which resulted in lower gross sales but also lower return rates.
Returns, discounts and allowances declined $2.4 million, or 15.2%, to $13.1
million for the year ended December 31, 2001 from $15.5 million for the year
ended December 31, 2000. Returns, discounts and allowances as a percentage of
gross sales were 23.9% in 2001 as compared to 25.8% of gross sales for the prior
comparable period due to aforementioned revisions in the logic used in
determining customer shipments.

Principally as a result of lower gross sales, partially offset by lower
return rates, net sales for the year ended December 31, 2001 decreased $2.6
million, or 5.9%, to $41.8 million from $44.4 million.

Cost of sales for the year ended December 31, 2001 was $22.0 million, of
which $2.3 million represented a charge for the write-down of inventory in the
third quarter of 2001. Excluding the write-down, cost of sales for the year
ended December 31, 2001 decreased $3.3 million, or 14.2%, to $19.8 million for
the year ended December 31, 2001 from $23.0 million for the year ended December
31, 2000. The decrease in cost of sales as a percentage of net sales, is
principally due to revisions in the merchandising of our products, including
increases in our selling prices and selection of products, which contribute
greater gross profit. As a result, gross profit as a percentage of net sales,
excluding the write-down, increased to 52.7% for the year ended December 31,
2001 from 48.1% for the year ended December 31, 2000.

Advertising and promotion expenses for the year ended December 31, 2001 was
$15.9 million of which, $4.0 million represented write-downs to deferred member
acquisition costs as described below. Excluding the write-downs, advertising and
promotion expenses increased $0.9 million or 8.2%, to $11.9 million for the year
ended December 31, 2001 compared to $11.0 million for the year ended December
31, 2000. Actual amounts incurred for advertising and promotion, net of
settlements with certain vendors principally for unprofitable Internet marketing
campaigns, for the year ended December 31, 2001 were $8.2 million, a decrease of
$6.1 million, from the amount incurred in the year ended December 31, 2000 of
$14.3 million. The difference between the amount expended and the amount
recorded as expense is due to amortization of previously capitalized direct
response advertising costs.

General and administrative expenses decreased $2.5 million, or 17.8%, to
$11.5 million for the year ended December 31, 2001 from $14.0 million for the
prior comparable period. General and administrative expense decreases are
principally attributable to decreases in bad debt expenses commensurate with the
reduction in net sales, payroll and related costs due to previously announced
staff reductions, office expenses, telephone costs related to a reduction in
"800" service calls, travel costs, public relations costs and consulting
services principally relating to Internet maintenance and development. We also
benefited from settlements with certain vendors in 2001.

As a result of the actions and decisions made after our aforementioned
review of our operations, we recorded $11.3 million of strategic charges in
2001. These charges include the following:

o $2.2 million of inventory written down to net realizable value due to
a reduction in the number of stock keeping units (SKU's);

o $2.4 million of write-downs to deferred member acquisition costs at
Audio Book Club related to new member acquisition campaigns that have
been determined to be no longer profitable and recoverable through
future operations based upon historical performance and future
projections;

o $1.9 million of write-downs to royalty advances paid to audiobook
publishers and other license holders primarily associated with
inventory titles that will no longer be carried and sold to members;


22



o $1.6 million of write-downs to deferred member acquisition costs at
Radio Spirits related to old-time radio new customer acquisition
campaigns that have been determined to be no longer profitable and
recoverable through future operations based upon historical
performance and future projections;

o a write-down of $0.7 million of customer lists acquired in the
Columbia House Audiobook Club purchase due to the inability to recover
this asset through future operations;

o $0.6 million of fixed assets of the old-time radio operations written
down to net realizable value due to the closing of the Schaumburg,
Illinois facility;

o $0.5 million of write-downs of royalty advances paid for downloadable
licensing rights that are no longer recoverable due to the strategic
decisions made;

o $0.4 million of write-downs of prepaid assets,

o $0.3 million of write-offs to receivables that are deemed
uncollectible,

o $0.2 million of net write-offs of capitalized website development
costs related to downloadable audio all of which are no longer
recoverable due to the strategic changes in the business; and

o $0.5 million accrued for lease termination costs in connection with
the closing of the Schaumburg, Illinois facility.

Of these charges, $2.3 million related to inventory write-downs has been
recorded to costs of sales - strategic charges, $4.0 million has been recorded
to advertising and promotion - write-downs and the remaining $5.0 million has
been recorded to asset write-downs and strategic charges.

In addition to these strategic charges, we have recorded a charge of $2.0
million to write-off the entire carrying amount of our cost method investment in
I-Jam. This charge has been recorded to asset write-downs and strategic charges.
We have determined that an other than temporary decline in the value of this
investment has occurred, triggered by a strategic change in the direction of the
investee as a result of continued losses and operating deficiencies, along with
projected future losses.

Depreciation and amortization expenses decreased $2.8 million to $5.2
million for the year ended December 31, 2001 from $8.0 million for the year
ended December 31, 2000. The decrease is principally attributable to the
write-down of goodwill taken in the fourth quarter of 2000.During the fourth
quarter of 2000, we reviewed long-lived assets and certain related identifiable
intangibles, including goodwill, for impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("FASB 121") due
to a change in facts and circumstances. In the fourth quarter of 2000, we made a
strategic decision to reduce spending on marketing to customers acquired in the
acquisitions of the Columbia House Audiobook Club, Doubleday Direct's Audiobooks
Direct and Adventures in Cassettes in order to focus its resources on more
profitable revenue sources. In addition, we sold the remaining inventory
acquired in its acquisition of Adventures in Cassettes and do not expect to
derive any future revenues associated with this business. Consequently, we
determined that the revised estimates of cash flows from such operations would
no longer be sufficient to recover the carrying value of goodwill associated
with these businesses. As a result, in the fourth quarter of 2000, we determined
that the goodwill associated with these businesses was impaired and recorded an
impairment charge of $38.2 million. The impairment charge was measured as the
difference between the carrying value of the goodwill and its fair value, which
was based upon discounted cash flows.

Net interest expense for the year ended December 31, 2001 decreased $0.5
million to $2.2 million as compared to net interest expense of $2.7 million for
the year ended December 31, 2000. The reduction in interest expense is due to a
lower average outstanding principal balance on our debt, as well as lower
interest rates on the portion of our debt, which has adjustable interest rates.

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


23



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

In April 2000, we repaid $20.3 million of our bank debt out of the net
proceeds from our follow-on primary offering. Accordingly, the Company recorded
an extraordinary loss of $2.2 million relating to the write-off of deferred
financing fees incurred in connection with such debt.

Due, in part, to the reduction in the valuation allowance for deferred tax
assets offset by the strategic charges enumerated above, we had a net loss of
$4.9 million, or $0.35 per share of common stock for the year ended December 31,
2001, as compared to a net loss of $54.6 million or $4.30 per share of common
stock for the year ended December 31, 2000.

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

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

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

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

Advertising and promotion expenses increased $2.9 million or 35.8%, to
$11.0 million for the year ended December 31, 2000 compared to $8.1 million for
the year ended December 31, 1999. Actual amounts expended for advertising and
promotion in the year ended December 31, 2000 were $14.3 million, a decrease of
$3.1 million from the amount expended in the year ended December 31, 1999 of
$17.4 million. The difference between the amount expended and the amount
recorded as expense is due to the capitalization of direct response advertising.
Beginning in January 1999, the Company was required to capitalize direct
response marketing costs for the acquisition of new members in accordance with
AICPA Statement of Position 93-7 "Reporting on Advertising Costs" and amortize
these costs over the period of future benefit. Since 1999 was the first year we
capitalized new member acquisitions costs, we capitalized a very large portion
of direct response advertising expenditures.


24



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

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

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

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

In April 2000, we repaid $20.3 million of our bank debt out of the net
proceeds from our follow-on primary offering. Accordingly, the Company recorded
an extraordinary loss of $2.2 million relating to the write-off of deferred
financing fees incurred in connection with such debt.

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

Liquidity and Capital Resources

Historically, we have funded our cash requirements through sales of our
equity and debt securities and borrowings from financial institutions and our
principal shareholders. We have implemented a series of initiatives to increase
cash flow. While these initiatives have successfully reduced cash used in
operations in 2001, there can be no assurance that we will not require
additional financing to repay debt, fund the expansion of operations,
acquisitions, working capital or other related uses. The asset write-downs and
strategic charges taken in 2001 are not expected to impact future cash flows
except for $0.5 million of accrued lease termination costs in connection with
the closing of the Schaumburg, Illinois facility, assuming the facility is not
sub-leased.

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

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

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

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

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

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

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


25



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

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

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

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

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

On January 18, 2002, Evan Herrick, a principal shareholder of the
Registrant, exchanged $2.5 million principal amount of a $3.0 million principal
amount convertible note of MediaBay, Inc. in exchange for 25,000 shares of
Series A Preferred Stock of MediaBay, having a liquidation preference of $2.5
million. The preferred share dividend rate of 9% ($9.00 per share) is the same
as the interest rate of the note, and is payable in additional preferred shares,
shares of common stock of MediaBay or cash, at the holder's option, provided
that if the holder elects to receive payment in cash, the payment will accrue
until MediaBay is permitted to make the payment under its existing credit
facility.

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

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

As partial consideration for the loan and pursuant to an agreement dated
April 30, 2001, the Company granted to Huntingdon warrants to purchase 250,000
of Common Stock at an exercise price of $0.56 per share. The warrants are
exercisable until May 14, 2011.


26



Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.

SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill continued to be amortized through the remainder of fiscal 2001 at which
time amortization ceased, and we are currently performing a transitional
goodwill impairment test. SFAS No. 142 is effective for our fiscal periods
beginning January1, 2002. At December 31, 2001, we had unamortized goodwill in
the amount of $8.6, which is subject to the transition provisions of SFAS No.
142. We do not believe the transitional impairment provisions of this statement
will have any impact on our financial statements.

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

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


27



Net Operating Losses

Our net operating loss carryforwards expire beginning in 2018. Under
Section 382 of the Internal Revenue Code of 1986, utilization of prior net
operating losses is limited after an ownership change, as defined in Section
382, to an annual amount equal to the value of the corporation's outstanding
stock immediately before the date of the ownership change multiplied by the
long-term tax exempt rate. The additional equity financing we obtained in 2000
may result in an ownership change and, thus, may limit our use of our prior net
operating losses. In the event we achieve profitable operations, any significant
limitation on the utilization of net operating losses would have the effect of
increasing our tax liability and reducing net income and available cash
reserves. We are unable to determine the availability of net operating losses
since this availability is dependent upon profitable operations, which we have
not achieved in prior periods. We have provided a full valuation allowance for
our net operating loss carryforwards.

Item 7A. Quantitative and Qualitative Disclosure of Market Risk

We are exposed to market risk for the impact of interest rate changes. As a
matter of policy, we do not enter into derivative transactions for hedging,
trading or speculative purposes.

Our exposure to market risk for changes in interest rates relate to our
long-term debt. Interest on $8,680 of our long-term debt is payable at the prime
rate plus 2%. If the prime rate were to increase our interest expense would
increase, however a hypothetical 10% change in interest rates would not have had
a material impact on our fair values, cash flows or earnings for either 2001 or
2000.

Item 8. Financial Statements.

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

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

Not applicable.


28



PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.

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

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

Michael Herrick 35 Chief Executive Officer and Director

Howard Herrick 37 Executive Vice President and Director

Hakan Lindskog 41 President and Chief Operating Officer

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

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

Robert Toro 37 Senior Vice President of Finance

Roy Abrams 58 Director

Paul Ehrlich 57 Director

Carl T. Wolf 58 Director


Norton Herrick, 63, is our co-founder and has been Chairman and Director
since our inception. Mr. Herrick served as our President from our inception
until January 1996 and was Chief Executive Officer from January 1996 through
January 2000. Mr. Herrick has been a private businessman for over 30 years and
through his wholly-owned affiliates, Mr. Herrick has completed transactions,
including building, managing and marketing primarily real estate valued at an
aggregate of approximately $2 billion. Mr. Herrick serves on the National Board
of Directors for People for the American Way. Mr. Herrick served on the advisory
board of the Make-A-Wish Foundation and the advisory committee of the National
Multi Housing Council. Mr. Herrick is the father of Michael Herrick, our Chief
Executive Officer and a director, and Howard Herrick, our Executive Vice
President and a director.

Michael Herrick, 35, is our co-founder and has been our Chief Executive
Officer since January 2000 and a director since our inception. Mr. Herrick was
our Co-Chief Executive officer from April 1998 to January 2000 and has held
various other offices with us since our inception. Since August 1993, Michael
Herrick has been an officer (since January 1994, Vice President) of the
corporate general partner of a limited partnership, which is a principal
shareholder of The Walking Company, a nationwide retailer of comfort and walking
footwear and related apparel and accessories. Mr. Herrick is a former member of
the Board of Directors of the Audio Publisher's Association. Mr. Herrick is the
son of Norton Herrick, our Chairman, and brother of Howard Herrick, our
Executive Vice President and a director. Mr. Herrick received his B.A. degree
from the University of Michigan.

Howard Herrick, 37, is our co-founder and has been our Executive Vice
President, Editorial Director and a director since our inception. Since August
1993, Howard Herrick has been Vice President of the corporate general partner of
a limited partnership, which is a principal shareholder of The Walking Company.
Since 1988, Mr. Herrick has been an officer of The Herrick Company, Inc. and is
currently its President. Mr. Herrick is also an officer of the corporate general
partners of numerous limited partnerships, which acquire, finance, market,
manage and lease office, industrial, motel and retail properties; and which
acquire, operate, manage, redevelop and sell residential rental properties. Mr.
Herrick is the son of Norton Herrick, our Chairman and brother of Michael
Herrick, our Chief Executive Officer, President and director.


29



Hakan Lindskog, 41, joined MediaBay in July 2000 as Chief Operating Officer
of MediaBay and Chief Executive Officer for its Audio Book Club division and
became President of MediaBay in November 2001. Mr. Lindskog has 15 years
management experience in direct marketing, publishing and Internet consumer
services. Before joining our company, he was the former Executive Vice President
and Chief Operating Officer of RealHome.com, a free membership web service that
provides information and services regarding home buying and home ownership.
Prior to joining RealHome.com, Mr. Lindskog was Group Executive Vice President
and Chief Operating Officer of International Masters Publishers Group (IMP), a
$740 million direct marketer, operating in 19 countries. Mr. Lindskog doubled
revenue of its U.S. subsidiary to $330 million and took net income from a $1
million loss to a $33 million profit over a three-year period.

Stephen M. McLaughlin, 35, has been our Executive Vice President and Chief
Technology Officer since February 1999. Prior to joining us, Mr. McLaughlin was
Vice President, Information Technology for Preferred Healthcare Staffing, Inc.,
a nurse-staffing division of Preferred Employers Holdings, Inc. Mr. McLaughlin
co-founded and was a director, Chief Operating Officer and Chief Information
Officer of NET Healthcare, Inc., from 1997 until it was acquired by Preferred
Employers Holdings in August 1998. In 1994, Mr. McLaughlin founded FX Media,
Inc., an Internet and multimedia development company. As CEO of FX Media, he
served as senior software engineer for all of its projects. Mr. McLaughlin holds
a degree in Computer Science and Engineering from the Massachusetts Institute of
Technology and conducted research at the MIT Media and Artificial Intelligence
labs.

John F. Levy, 46, joined us in November 1997 and has served as our
Executive Vice President and Chief Financial Officer since January 1998. Prior
to joining us, Mr. Levy was Senior Vice President of Tamarix Capital Corporation
and had previously served as Chief Financial Officer of both public and private
entertainment and consumer goods companies. Mr. Levy is a Certified Public
Accountant with nine years experience with the national public accounting firms
of Ernst & Young, Laventhol & Horwath and Grant Thornton.

Robert Toro, 37, has been our Senior Vice President of Finance since July
1999, Chief Financial Officer of our Audio Book Club division since November
2001 and an employee since April 1999. Before joining us, Mr. Toro was Senior
Vice President of AM Cosmetics Co. and had previously served in senior financial
positions in both public and private entertainment and publishing companies.
From 1992 through early 1997, Mr. Toro served in various senior financial
positions with Marvel Entertainment Group, Inc., a publicly traded youth
entertainment company. Mr. Toro is a Certified Public Accountant with six years
of progressive experience with the national public accounting firm of Arthur
Andersen where he was employed immediately prior to joining Marvel Entertainment
Group.

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

Paul D. Ehrlich, 57, has been a director since May 2001. Mr. Ehrlich is a
Certified Public Accountant and tax and financial consultant. Since August 2000,
Mr. Ehrlich has been a Partner with Edwards & Topple, LLP as well as President
of Paul D. Ehrlich, CPA, P.C., a tax and financial consulting corporation. From
1981 to August 1, 2000, Mr. Ehrlich was a Shareholder, Tax Specialist and
Director of Personal Financial Services of Feldman Sherb & Co., P.C. Mr. Ehrlich
has served on the Boards of Directors of several companies and is a member of
the American Institute of Certified Public Accountants, the New York State
Society of Certified Public Accountants (appointed committee member), and the
International Association for Financial Planning.


30



Carl T. Wolf, 58, has been a director of MediaBay since March 1998. Mr.
Wolf is the managing partner of the Lakota Investment Group. Mr. Wolf was
formerly Chairman of the Board, President and Chief Executive Officer of Alpine
Lace Brands, Inc. Mr. Wolf founded Alpine Lace and its predecessors and had been
the Chief Executive Officer of each of them since the inception of Alpine Lace
in 1983. Mr. Wolf became a director of Alpine Lace shortly after its
incorporation in February 1986.

Our Board of Directors is classified into three classes, each with a term
of three years, with only one class of directors standing for election by the
shareholders in any year. Michael Herrick and Roy Abrams are Class II directors
and stand for re-election at the 2002 annual meeting of shareholders. Howard
Herrick and Carl Wolf are Class III directors and stand for re-election at the
2003 annual meeting of shareholders. Norton Herrick and Paul Ehrlich are Class I
directors and will stand for re-election at the 2004 annual meeting of
shareholders. Our executive officers serve at the direction of the Board and
until their successors are duly elected and qualified.

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

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

Board Committee

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

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

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

Technology Advisory Board

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



Name Position Company
- ---- -------- -------

Stephen McLaughlin, Executive Vice President and
Chairman Chief Technology Officer MediaBay, Inc.

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

Mort Greenberg Director, Integrated Partnerships AskJeeves

Timothy W. Mattox Technology Fund Director Dell Corporation

John Ramsey Chief Technology Officer Virtacon, Inc.

Michael Schoen Managing Director Credit Suisse First Boston

Harvey Stober Managing Partner Greystone Partners, L.P.

Carl T. Wolf (*) Managing Partner Lakota Investment Group


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


31



Compliance with Section 16(a) of the Exchange Act

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

Based solely upon our review of the copies of such forms that we received,
we believe that, during the year ended December 31 2001, all filing requirements
applicable to our officers, directors, and greater than 10% shareholders were
complied with.

Item 11. Executive Compensation

The following table discloses, for the periods indicated, compensation paid
to our Chief Executive Officer and each of the four most highly compensated
executive officers.

Summary Compensation Table



Long-Term Compensation
Annual Compensation Awards
------------------------------- Securities Underlying
Name and Principal Position Year Salary Bonus Options/SAR's (#)
- ---------------------------------------- ---- -------- ----- -----------------------

Michael Herrick 2001 $175,000 50,000 150,000
Chief Executive Officer 2000 154,167 50,000 600,000
1999 125,000 -- --

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

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

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

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


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


32



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

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



Number of % of Total
Shares Options
Underlying Granted to
Options Employees in Exercise Price
Name Granted Fiscal Year ($/share) Expiration Date
- ---- ---------- ------------ -------------- ---------------

Michael Herrick 150,000 16.7% $ .50 11/23/11

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

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

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

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


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

Aggregated Option Exercises And Fiscal Year-End Option Values



Number of Securities
Underlying Unexercised Value of Unexercised In-the
Options at December 31, 2001 Money Options at December 31, 2001
--------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------

Michael Herrick 1,000,000 -- 18,000 --

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

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

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

Robert Toro 70,000 50,000 -- --


The year-end values for unexercised in-the-money options represent the positive
difference between the exercise price of such options and the fiscal year-end
market value of the common stock. An option is "in-the-money" if the fiscal
year-end fair market value of the common stock exceeds the option exercise
price. The closing sale price of our common stock on December 31, 2001 was $.62.


33



Employment Agreements

Effective as of October 22, 2001, we entered into a one-year employment
agreement with Norton Herrick, which provides for an annual base salary of
$100,000 and such increases and bonuses as the Board of Directors may determine
from time to time. The employment agreement does not require that Mr. Herrick
devote any stated amount of time to our business and activities and contains
non-competition and non-solicitation provisions for the term of the employment
agreement and for two years thereafter. If Mr. Herrick's employment is
terminated under circumstances described in the employment agreement, including
as a result of a change in control, Mr. Herrick will be entitled to receive
severance pay equal to the greater of $200,000 or two times the total
compensation received by Mr. Herrick from us during the twelve months prior to
the date of termination.

Effective January 1, 2002, we entered into a one-year employment agreement
with Michael Herrick, which provides for an annual base salary of $175,000 and a
minimum annual bonus of $50,000. Mr. Herrick's salary and bonus shall be
reconsidered at least once during the term of the agreement and shall not
necessarily be limited to such increase granted other officers. The employment
agreement requires Mr. Herrick to devote substantially all of his business time
to our business and affairs. The agreement contains non-competition and
non-solicitation provisions for the term of the employment agreements and for
two years thereafter. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to the
greater of $525,000 or three times the total compensation received from us
during the twelve months prior to the date of termination.

We have entered into a 39-month employment agreement with Hakan Lindskog
effective October 1, 2001. The agreement provides for an annual base salary of
$306,250 in the first 12 months of his employment, $350,000 in the next 15
months of the agreement and an annual base compensation of $375,000 in the final
12 months of the agreement. Mr. Lindskog's agreement also provides for a minimum
bonus of $45,000 payable August 15, 2002, August 15, 2003 and August 15, 2004.
Mr. Lindskog may also receive performance-based bonuses based on our achieving
minimum adjusted EBITDA targets. These performance bonuses, if any, would be
payable on April 1, 2003, 2004 and 2005. Pursuant to the agreement, we agreed to
grant to Mr. Lindskog options to purchase 150,000 shares of common stock. Of the
total options granted, options with respect to 50,000 shares have an exercise
price of $1.00 and vest on December 31, 2002; options with respect to 50,000
shares have an exercise price of $3.00 and vest on December 31, 2003 and options
with respect to 50,000 shares have an exercise price of $5.00 and vest on
December 31, 2004 . In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to the
greater of 50% of the balance of Mr. Linskog's base salary for the unexpired
period of his employment under the agreement or his last six months base salary
immediately prior to the termination.

We have entered into a two-year employment agreement with John Levy
effective November 10, 2001. The agreement provided for an annual base salary of
$180,000, in the first year of the agreement and an annual base compensation of
$190,000 in the second year of the agreement. Mr. Levy's agreement also provided
for a minimum bonus of $27,000 in the first year of the agreement and a minimum
bonus of $30,000 in the second year of the agreement. Pursuant to the agreement,
we agreed to grant to Mr. Levy options to purchase 50,000 shares of common
stock. Of the total options granted, options with respect to 17,000 shares have
an exercise price of $1.00 and vested on January 2, 2002; options with respect
to 17,000 shares have an exercise price of $1.50 and vest on November 10, 2002
and options with respect to 16,000 shares have an exercise price of $2.00 and
vest on November 10, 2003. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to
$100,000.


34



We have entered into a two-year employment agreement with Robert Toro
effective July 19, 2001. The agreement provided for an annual base salary of
$170,000 in the first year of the agreement and $185,000 in the second year of
the agreement. Mr. Toro's agreement also provided for a minimum bonus of $16,500
in the first year of the agreement and a minimum bonus of $18,000 in the second
year of the agreement. Pursuant to the agreement, we agreed to grant to Mr. Toro
options to purchase 40,000 shares of common stock at an exercise price of $1.00
per share. Of the total options granted, 20,000 vest on July 19,2002 and 20,000
vest on July 19, 2003. In the event of termination of employment under
circumstances described in the employment agreement, including as a result of a
change in control, we will be required to provide severance pay equal to Mr.
Toro's base salary for the unexpired period of his employment under the
agreement.

Stock Plans

Our 1997 Stock Option Plan provides for the grant of stock options to
purchase up to 2,000,000 shares. As of March 25, 2002, options to purchase an
aggregate of 1,805,000 shares of our common stock have been granted under the
1997 plan.

Our 1999 Stock Option Plan provides for the grant of to purchase 2,500,000
shares. As of March 25, 2002, options to purchase an aggregate of 1,174,600
shares of our common stock have been granted under the 1999 plan.

Our 2000 Stock Incentive Plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other stock-based awards. A total of 3,500,000 shares of common
stock have been reserved for distribution pursuant to the 2000 plan. As of March
25, 2002, options to purchase an aggregate of 3,191,250 shares of our common
stock have been granted under the 2000 plan.

Our 2001 Stock Incentive Plan provides for the grant of any or all of the
following types of awards: (1) stock options, which may be either incentive
stock options or non-qualified stock options, (2) restricted stock, (3) deferred
stock and (4) other stock-based awards. A total of 3,500,000 shares of common
stock have been reserved for distribution pursuant to the 2001 plan. As of March
25, 2002, no options to purchase shares of our common stock have been granted
under the 2001 plan.

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

Item 12. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding the beneficial
ownership of common stock, based on information provided by the persons named
below in publicly available filings, as of March 25, 2002:

o each of MediaBay's directors and executive officers;

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

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

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


35



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



Number of Shares Percentage of Shares
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned
- ---------------------------------------------------- ------------------ --------------------

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


* Less than 1%

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

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


36



(3) Represents (a) 2,964,180 shares held by the Norton Herrick Irrevocable ABC
Trust, (b) 488,460 shares of common stock held by Howard Herrick, and (c)
650,000 shares of common stock issuable upon exercise of options. Howard
Herrick is the sole trustee and Norton Herrick is the sole beneficiary of
the Norton Herrick Irrevocable ABC Trust. The trust agreement provides that
Howard Herrick shall have sole voting and dispositive power over the shares
held by the trust. Howard Herrick has irrevocably granted to Norton Herrick
sole dispositive power with respect to the shares of common stock held by
Howard Herrick.

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

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

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

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

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

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

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

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

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


Item 13. Certain Relationships and Related Transactions

Companies wholly owned by Norton Herrick, our Chairman, have in the past
provided accounting, administrative and general office services to us and
obtained insurance coverage for us at cost since our inception. We paid these
entities $88,000 and $133,000 for these services during the years ended December
31, 2001 and 2000, respectively. In addition, a company wholly owned by Norton
Herrick provides us access to a corporate airplane. We generally pay the fuel,
fees and other costs related to our use of the airplane directly to the service
providers. For use of this airplane, we paid rental fees of approximately
$14,000 and $25,000 in each of 2001 and 2000, respectively to Mr. Herrick's
affiliate. We anticipate obtaining similar services from time to time from
companies affiliated with Norton Herrick, and we will reimburse their costs in
providing the services to us.

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


37



In January and February 2000, Norton Herrick sold $4.2 million principal
amount of the note issued to him in December 1998 to two unaffiliated third
parties. Under a December 1998 letter agreement, we issued to Norton Herrick
warrants to purchase an additional 98,554 shares of its common stock at an
exercise price of $8.41 per share. No compensation has been recognized in
relation to this transaction.

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

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

In August 2000, Norton Herrick sold the remaining $2.8 million principal
amount of a note issued to him in December 1998 to two unaffiliated third
parties. The terms of subordinated debt were modified so that the third parties
agreed to waive any interest due to them and convert the entire subordinated
debt by December 31, 2000. One of the unaffiliated third parties converted $0.8
million principal amount of the note into 440,000 shares of our common stock.
The third parties failed to pay Mr. Herrick the entire purchase price of the
note they purchased. In December 2000, the parties rescinded the transaction as
to $2.0 million principal amount of the note, which was not converted or paid
for. As a result of these transactions, under a December 1998 letter agreement,
we issued to Mr. Herrick warrants to purchase an additional 18,480 shares of our
common stock at an exercise price of $8.41 per share. No compensation has been
recognized in relation to this transaction.

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

Interest on subordinated debentures held by a third party in the amount of
$97,000 for the three months ended September 30, 2000 was advanced by a company
wholly-owned by the Herrick family in November 2000. In 2001, the same company
advanced an additional $97,000 in interest for the three months ended December
31, 2000 to the same third party. The Company subsequently paid the interest,
and neither Mr. Herrick nor his wholly owned company received any compensation
for or profit from these transactions.

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


38



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

On May 14, 2001, we issued a $2.5 million secured senior convertible note
to Huntingdon, in consideration for loans made by Huntingdon to the Company in
the amount of $2.5 million. This note is convertible into MediaBay common stock
at a conversion rate of $0.56 per share. The convertible note, in certain
respects, ranks pari passu with the current revolving credit facility and has a
security interest in all our assets, except inventory, receivables and cash. The
note bears interest at the prime rate plus 2% and matures on January 15, 2003.
Interest, at Huntingdon's option, (i) is payable in-kind, (ii) is payable in
shares of common stock or (iii) will accrue until the revolving credit facility
is repaid in full and, thereafter, payable in cash.

On May 14, 2001, the Company also modified a $2.0 million senior
subordinated convertible note held by Norton Herrick as consideration for Mr.
Herrick's consent to the above transactions, elimination of the variable
conversion price feature of the note and foregoing current cash interest until
MediaBay's revolving credit facility is repaid. The modified note is convertible
into common stock at a conversion rate of $0.56 per share and interest, at Mr.
Herrick's option, (i) is payable in-kind, (ii) is payable in shares of common
stock or (iii) will accrue until the revolving credit facility is repaid in full
and, thereafter, payable in cash. Mr. Herrick was granted registration rights
relating to the shares of common stock issuable upon conversion of the notes and
exercise of the warrants.

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

On January 18, 2002, Evan Herrick, a principal shareholder of the Company,
exchanged $2.5 million principal amount of a $3.0 million principal amount
convertible note of MediaBay (the "Note") in exchange for 25,000 shares of
Series A Preferred Stock of MediaBay (the "Preferred Shares"), having a
liquidation preference of $2.5 million. The Preferred Share dividend rate of 9%
($9.00 per share) is the same as the interest rate of the Note, and is payable
in additional Preferred Shares, shares of common stock of MediaBay or cash, at
the holder's option, provided that if the holder elects to receive payment in
cash, the payment will accrue until MediaBay is permitted to make the payment
under its existing credit facility. The conversion rate of the Preferred Shares
is the same as the conversion rate of the Note. The Preferred Shares vote
together with the Common Stock as a single class on all matters submitted to
stockholders for a vote, and certain matters require the majority vote of the
Preferred Shares. The holder of each Preferred Shares shall have a number of
votes for each Preferred Share held multiplied by a fraction, the numerator of
which is the liquidation preference and the denominator of which is $1.75.

As previously agreed to with us, if we required, on February 22, 2002,
Huntingdon purchased a $500 principal amount convertible senior promissory note
due June 30, 2003 (the "Note"). The Note is convertible into shares of Common
Stock at the rate of $0.56 of principal and/or interest per share. The Note was
issued in consideration of a $500,000 loan made by Huntingdon to us. As partial
consideration for the loan and pursuant to an agreement dated April 30, 2001, we
granted to Huntingdon warrants to purchase 250,000 of Common Stock at an
exercise price of $0.56 per share. The warrants are exercisable until May 14,
2011.

On March 1, 2002, we acquired inventory and licensing agreements, including
the exclusive license to The Shadow radio programs. A payment of $333,000 has
been paid and additional payments of nine monthly installments of $74,000
commence on June 15, 2002. Norton Herrick, our chairman, has guaranteed the
payments for no consideration from the Company.

Companies affiliated with Norton Herrick may continue to provide accounting
and general and administrative services to us, provide us with access to a
corporate airplane and obtain insurance coverage for us at cost.


39



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

PART IV

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

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

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

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

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

3.5 Articles of Amendment to Articles of Incorporation of the Registration
filed with the Department of State of the State of Florida on January
18, 2002.+++++++++++

10.1 Employment Agreement between the Registrant and Norton Herrick.

10.2 Employment Agreement between the Registrant and Michael Herrick.

10.3 Employment Agreement between the Registrant and Robert Toro.

10.4 Employment Agreement between the Registrant and John Levy.

10.5 Employment Agreement between our subsidiary and Hakan Lindskog.

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

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

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

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

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

10.11 1997 Stock Option Plan+

10.12 1999 Stock Incentive Plan++++

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

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

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

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

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

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


40



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

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

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

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

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

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

23.1 Consent of Deloitte and Touche LLP.

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

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

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

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

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

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

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

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

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

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

+++++++++++ Incorporated by reference to the applicable exhibit contained in
our Current Report on Form 8-K for reportable event dated January
18, 2002.


(b) Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts and Reserves

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

None.


41



SIGNATURES


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


MEDIABAY, INC.



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

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



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

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


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


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


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


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


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


/s/ Paul Ehrlich Director April 1, 2002
- ------------------------------
Paul Ehrlich



42



MediaBay, Inc.

Form 10-K

Item 8

Index to Financial Statements


Independent Auditors' Report F-2

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

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

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

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

Notes to Consolidated Financial Statements F-7

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


F-1



INDEPENDENT AUDITORS' REPORT

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


We have audited the accompanying consolidated balance sheets of MediaBay,
Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the index at
Item 14-b. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule based
on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of MediaBay, Inc. and subsidiaries
at December 31, 2001 and 2000, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.



/S/ Deloitte & Touche LLP

Parsippany, New Jersey

April 1, 2002


F-2



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



December 31,
2001 2000
-------- --------

Assets
Current assets:
Cash and cash equivalents ........................................................... $ 64 $ 498
Accounts receivable, net of allowances for sales returns and doubtful accounts of
$4,539 and $4,516 at December 31, 2001 and 2000,
respectively .................................................................... 4,798 5,415
Inventory ........................................................................... 4,061 6,687
Prepaid expenses and other current assets ........................................... 1,807 1,104
Royalty advances .................................................................... 773 3,712
Deferred member acquisition costs ................................................... 3,435 7,520
Deferred income taxes - current ..................................................... 550 --
-------- --------
Total current assets .............................................................. 15,488 24,936
Fixed assets, net ..................................................................... 467 1,708
Deferred member acquisition costs ..................................................... 1,433 5,062
Non-current prepaid expenses .......................................................... 24 177
Deferred income taxes - non-current ................................................... 16,650 --
Investment in I-Jam Multimedia LLC .................................................... -- 2,000
Other intangibles, net of accumulated amortization of $4,590 and $8,781 at December 31,
2001 and 2000, respectively ....................................................... 2,292 6,891
Goodwill, net of accumulated amortization of $1,518 and $1,009 at December 31, 2001 and
2000, respectively ................................................................ 8,649 9,158
-------- --------
$ 45,003 $ 49,932
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses ............................................... $ 13,891 $ 16,703
Current portion -- long-term debt ................................................... 1,600 400
-------- --------
Total current liabilities ......................................................... 15,491 17,103
-------- --------
Long-term debt ........................................................................ 17,064 15,864
-------- --------
Preferred Stock, no par value, authorized 5,000,000 shares; no shares issued and
outstanding ....................................................................... -- --
Common stock subject to contingent put rights ......................................... 4,550 4,550
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
13,861,866 at December 31, 2001 and 2000 .......................................... 93,468 93,468
Contributed capital ................................................................... 4,094 3,761
Accumulated deficit ................................................................... (89,664) (84,814)
-------- --------
Total common stockholders' equity ..................................................... 7,898 12,415
-------- --------
$ 45,003 $ 49,932
======== ========


See accompanying notes to consolidated financial statements.


F-3



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



Years ended December 31,
2001 2000 1999
-------- -------- --------

Sales ..................................................... $ 54,904 $ 59,881 $ 62,805
Returns, discounts and allowances ......................... 13,099 15,455 16,578
-------- -------- --------
Net sales ........................................... 41,805 44,426 46,227
Cost of sales ............................................. 19,783 23,044 23,687
Cost of sales - write-downs ............................... 2,261 -- --
Advertising and promotion ................................. 11,922 11,023 8,118
Advertising and promotion write-downs ..................... 3,971 -- --
General and administrative ................................ 11,483 13,964 9,799
Asset write-downs and strategic charges ................... 7,044 -- --
Depreciation and amortization ............................. 5,156 7,984 6,812
Non-cash write-down of goodwill ........................... -- 38,226 --
-------- -------- --------
Operating loss ...................................... (19,815) (49,815) (2,189)
Interest expense .......................................... (2,235) (2,787) (4,645)
Interest income ........................................... -- 106 127
-------- -------- --------
Loss before income tax benefit and extraordinary item (22,050) (52,496) (6,707)
Benefit for income taxes .................................. 17,200 -- --
-------- -------- --------
Loss before extraordinary item ...................... (4,850) (52,496) (6,707)
Extraordinary loss on early extinguishment of debt ........ -- (2,152) --
-------- -------- --------
Net loss ............................................ $ (4,850) $(54,648) $ (6,707)
======== ======== ========
Basic and diluted loss per share:
Loss before extraordinary item .......................... $ (.35) $ (4.13) $ (.82)
Extraordinary loss on early extinguishment of debt ...... -- (.17) --
-------- -------- --------
Net loss ............................................ $ (.35) $ (4.30) $ (.82)
======== ======== ========


See accompanying notes to consolidated financial statements.


F-4



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



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

Balance at January 1, 1999 ........................... 7,079 $ 28,960 $ 2,323 $ (23,459)
Sale of common stock ................................. 2,040 24,921 -- --
Fees and costs related to equity offerings ........... -- (1,434) -- --
Contingent put activity .............................. -- 4,001 -- --
Proceeds from exercise of stock options .............. 21 95 -- --
Warrants granted for financing and consulting services -- -- 1,132 --
Conversion of convertible subordinated notes ......... 198 2,200 -- --
Net loss ............................................. -- -- -- (6,707)
------------ ------------ ------------ ------------
Balance at December 31, 1999 ......................... 9,338 58,743 3,455 (30,166)
Sale of common stock ................................. 3,650 32,850 -- --
Fees and costs related to equity offerings ........... -- (3,474) -- --
Contingent put activity .............................. -- (267) -- --
Warrants granted for financing and consulting services -- -- 306 --
Conversion of convertible subordinated notes ......... 874 5,616 -- --
Net loss ............................................. -- -- -- (54,648)
------------ ------------ ------------ ------------
Balance at December 31, 2000 ......................... 13,862 $ 93,468 $ 3,761 $ (84,814)
Warrants granted for financing and consulting services -- -- 333 --
Net loss ............................................. -- -- -- (4,850)
------------ ------------ ------------ ------------
Balance at December 31, 2001 ......................... 13,862 $ 93,468 $ 4,094 $ (89,664)
============ ============ ============ ============


See accompanying notes to consolidated financial statements.


F-5



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



Years ended December 31,
2001 2000 1999
-------- -------- --------

Cash flows from operating activities:
Net loss .................................................................... $ (4,850) $(54,648) $ (6,707)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 5,156 7,984 6,812
Amortization of deferred member acquisition costs ....................... 7,489 6,029 1,603
Amortization of deferred financing costs ................................ 456 349 407
Deferred income tax benefit ............................................. (17,200) -- --
Asset write-downs and strategic charges ................................. 13,276 -- --
Non-cash write-down of goodwill ......................................... -- 38,226 --
Extraordinary loss on early extinguishment of debt ...................... -- 2,152 --
Changes in asset and liability accounts, net of acquisitions and asset
write-downs and strategic charges:
Decrease (increase) in accounts receivable, net ....................... 321 3,476 (3,969)
Decrease (increase) in inventory ...................................... 365 495 (2,055)
(Increase) decrease in prepaid expenses and other current assets ..... (558) 251 (383)
Decrease (increase) in royalty advances ............................... 590 (777) (1,534)
Increase in deferred member acquisition costs ......................... (3,748) (9,313) (10,899)
(Decrease) increase in accounts payable and accrued expenses .......... (3,360) 148 10,149
-------- -------- --------
Net cash used in operating activities ............................... (2,063) (5,628) (6,576)
-------- -------- --------
Cash flows from investing activities:
Purchase of short-term investments ........................................ -- -- (100)
Purchase of fixed assets .................................................. (188) (873) (713)
Maturity of short-term investments ........................................ -- 100 500
Investment in I-Jam Multimedia LLC ........................................ -- (2,000) --
Additions to intangible assets ............................................ (110) -- --
Cash paid in acquisitions ................................................. -- (1,250) (19,985)
-------- -------- --------
Net cash used in investing activities ............................... (298) (4,023) (20,298)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable - related parties ................. 2,800 2,500 5,350
Proceeds from borrowings with banks ....................................... -- -- 11,080
Repayment of long-term debt ............................................... (400) (21,723) (15,127)
Increase in deferred financing costs ...................................... (473) (203) (838)
Proceeds from exercise of stock options ................................... -- -- 95
Proceeds from sale of common stock, net of costs .......................... -- 29,377 23,826
-------- -------- --------
Net cash provided by financing activities ........................... 1,927 9,951 24,386
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ........................ (434) 300 (2,488)
Cash and cash equivalents at beginning of period ............................ 498 198 2,686
-------- -------- --------
Cash and cash equivalents at end of period .................................. $ 64 $ 498 $ 198
======== ======== ========


See accompanying notes to consolidated financial statements.


F-6



MEDIABAY, INC.

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

(1) Organization

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

(2) Significant Accounting Policies

Principles of Consolidation

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

Cash and Cash Equivalents

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

Fair Value of Financial Instruments

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

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

Inventory

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

Prepaid Expenses

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

Fixed Assets, Computer Software and Internet Web Site Development Costs

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

Intangible Assets

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


F-7



MEDIABAY, INC.

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

(2) Significant Accounting Policies (continued)

Goodwill

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

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

Revenue Recognition

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

Income Taxes

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


F-8



MEDIABAY, INC.

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

(2) Significant Accounting Policies (continued)

Deferred Member Acquisition Costs

Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Prior to 1999, the Company had expensed these
costs as incurred. Beginning in 1999, a determination was made that the Company
had developed sufficient history on its customers to capitalize such costs.
Accordingly, the Company has capitalized direct response advertising costs and
amortizes these costs over the period of future benefit, which has been
determined to be generally 30 months. The costs are being amortized consistent
with the recognition of related revenue.

Royalties

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

Use of Estimates

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

(3) Acquisitions

Acquisition of Doubleday Direct's Audiobooks Direct

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

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

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


F-9



MEDIABAY, INC.

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

(3) Acquisitions (continued)

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

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

Year ended December 31, 1999

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

(4) Asset Write-Downs and Strategic Charges

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

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

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

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


F-10



MEDIABAY, INC.

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

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

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

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

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

o $635 of fixed assets of the old-time radio operations written down to
net realizable value due to the closing of the Schaumburg, Illinois
facility;

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

o $357 of write-downs of prepaid assets,

o $297 of write-offs to receivables

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

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

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

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

(5) Fixed Assets

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

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

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


F-11



MEDIABAY, INC.

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

(6) Goodwill

During the fourth quarter of 2000, the Company reviewed long-lived assets
and certain related identifiable intangibles, including goodwill, for impairment
in accordance with FASB 121 due to a change in facts and circumstances. In the
fourth quarter of 2000, the Company made a strategic decision to reduce spending
on marketing to customers acquired in the Company's acquisitions of the Columbia
House Audiobook Club, Doubleday Direct's Audiobooks Direct and Adventures in
Cassettes in order to focus its resources on more profitable revenue sources. In
addition, the Company has sold the remaining inventory acquired in its
acquisition of Adventures in Cassettes and does not expect to derive any future
revenues associated with this business. Consequently, the Company determined
that the revised estimates of cash flows from such operations would no longer be
sufficient to recover the carrying value of goodwill associated with these
businesses. As a result, in the fourth quarter of 2000, the Company determined
that the goodwill associated with these businesses was impaired and has recorded
an impairment charge of $38,226. The impairment charge was measured as the
difference between the carrying value of the goodwill and its fair value, which
was based upon discounted cash flows. The remaining balance of goodwill
outstanding pertains to the Company's Radio Spirits' business.

(7) Long-Term Debt

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

Bank Debt

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

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

In March 2000, the Company made a quarterly payment of principal on its
term debt of $930. In April 2000, the Company repaid $20,293 of its bank debt
out of the net proceeds from the follow-on primary offering, (See Note 12)
representing the remaining term portion of such debt. Accordingly, the Company
recorded an extraordinary loss of $2,152 relating to the write-off of deferred
financing fees incurred in connection with such


F-12



MEDIABAY, INC.

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

(7) Long-Term Debt (continued)

debt. Also in April 2000, the Company amended the terms of its remaining
revolving debt with its lenders to calculate the amount available to be borrowed
based on a formula of eligible receivables and inventory, as defined. In June
2000, the Company paid down its bank debt by an additional $500.

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

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

Related Party Debt

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

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

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


F-13



MEDIABAY, INC.

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

(7) Long-Term Debt (continued)

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

From December 1999 to February 2000, Evan Herrick, loaned the Company $3.0
million for which he received $3.0 million principal amount 9% convertible
promissory notes due December 31, 2004. At the time of issuance of the
convertible notes, the Company's board of directors resolved to seek to replace
or refinance the convertible notes and accept a proposal for refinancing,
whether or not the refinancing was as favorable as the convertible notes. Such
refinancing could include, without limitation, a higher interest rate, lower
conversion price, issuance of equity securities and/or the payment of fees.

In April and August 2000, the Company's Board of Directors determined that
reducing the conversion price of the $3,000 principal amount 9% convertible
notes due December 31, 2004 issued to Evan Herrick to the then current market
value of the Company's common stock would be more favorable to the Company than
accepting the alternatives available to the Company to refinance or replace the
notes. The Company revised the terms of the $3,000 principal amount 9%
convertible promissory notes due December 31, 2004 to Evan Herrick. Evan Herrick
waived interest on the notes from July 1, 2000 to December 31, 2000 and after
December 31, 2000 agreed to accept payment of interest in cash or common stock
at the Company's option under certain circumstances.

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

In August 2000, Mr. Herrick sold the remaining $2,776 principal amount of
the note issued to him in December 1998 to two unaffiliated third parties. The
terms of subordinated debt were modified so that the third parties agreed to
waive any interest due to them and convert the entire subordinated debt by
December 31, 2000. One of the unaffiliated third parties converted $792
principal amount of the note into 440,000 shares of our common stock. The third
parties failed to pay Mr. Herrick the entire purchase price of the note they
purchased. In December 2000, the parties rescinded the transaction as to $1,984
principal amount of the note, which was not converted or paid for. As a result
of these transactions under a December 1998 letter agreement, the Company issued
to Norton Herrick warrants to purchase an additional 18,480 shares of its common
stock at an exercise price of $8.41 per share. No compensation has been
recognized in relation to this transaction.


F-14



MEDIABAY, INC.

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

(7) Long-Term Debt (continued)

On May 14, 2001 the Company issued a $2,500 secured senior convertible note
to Huntingdon Corporation ("Huntingdon"), a company wholly owned by MediaBay's
chairman, Norton Herrick, in consideration for loans made by Huntingdon to the
Company in the amount of $2,500. This note is convertible into MediaBay common
stock at a conversion rate of $0.56 per share. The convertible note, in certain
respects, ranks pari passu with the current revolving credit facility and has a
security interest in all of the assets of the Company, except inventory,
receivables and cash. The note bears interest at the prime rate plus 2% and
matures on January 15, 2003. Interest, at Huntingdon's option, (i) is payable
in-kind, (ii) is payable in shares of common stock or (iii) will accrue until
the revolving credit facility is repaid in full and, thereafter, payable in
cash.

The Company also issued an $800 secured senior subordinated convertible
note to Huntingdon in consideration of $800 of advances made by Huntingdon in
December 2000 and February 2001. The note bears interest at 12% per annum and
interest, at Huntingdon's option, (i) is payable in-kind, (ii) is payable in
shares of common stock or (iii) will accrue until the revolving credit facility
is repaid in full and, thereafter, payable in cash. The note is convertible into
MediaBay common stock at a conversion rate of $0.56 per share and is secured by
a second security interest in all of the assets of the Company, except
inventory, receivables and cash. The note matures on April 15, 2003.

In connection with these transactions, Huntingdon was granted ten-year
warrants to purchase 1,650,000 shares of common stock at an exercise price of
$0.56 per share as consideration of the $800 of advances and the $2,500 of
loans, plus ten-year warrants to purchase an additional 250,000 shares of common
stock at an exercise price of $0.56 per share if Huntingdon loans the Company an
additional $500. Huntingdon was granted registration rights relating to the
shares of common stock issuable upon conversion of the notes and exercise of the
warrants.

On May 14, 2001, the Company also modified a $1,984 senior subordinated
convertible note held by Norton Herrick as consideration for Mr. Herrick's
consent to the above transactions, elimination of the variable conversion price
feature of the note and foregoing current cash interest until MediaBay's
revolving credit facility is repaid. The modified note is convertible into
common stock at a conversion rate of $0.56 per share and interest, at Mr.
Herrick's option, (i) is payable in-kind, (ii) is payable in shares of common
stock or (iii) will accrue until the revolving credit facility is repaid in full
and, thereafter, payable in cash. Mr. Herrick was granted registration rights
relating to the shares of common stock issuable upon conversion of the notes and
exercise of the warrants.

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


F-15



MEDIABAY, INC.

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

(7) Long-Term Debt (continued)

On January 18, 2002, Evan Herrick, a principal shareholder of the
Registrant, exchanged $2,500 million principal amount of a $3,000 million
principal amount convertible note of MediaBay, Inc. (the "Note") in exchange for
25,000 shares of Series A Preferred Stock of MediaBay (the "Preferred Shares"),
having a liquidation preference of $2,500 million. The Preferred Share dividend
rate of 9% ($9.00 per share) is the same as the interest rate of the Note, and
is payable in additional Preferred Shares, shares of common stock of MediaBay or
cash, at the holder's option, provided that if the holder elects to receive
payment in cash, the payment will accrue until MediaBay is permitted to make the
payment under its existing credit facility. The conversion rate of the Preferred
Shares is the same as the conversion rate of the Note. The Preferred Shares vote
together with the Common Stock as a single class on all matters submitted to
stockholders for a vote, and certain matters require the majority vote of the
Preferred Shares. The holder of each Preferred Shares shall have a number of
votes for each Preferred Share held multiplied by a fraction, the numerator of
which is the liquidation preference and the denominator of which is $1.75.

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

Year Ending December 31,

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

(8) Commitments and Contingencies

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

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

The Company leases approximately 12,000 square feet of space in Cedar
Knolls, New Jersey pursuant to a lease agreement, which expires in August 2003
at a monthly rent of $16. The Company has the option to renew the lease for an
additional three-year period.

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

Capital Equipment Leases

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


F-16



MEDIABAY, INC.

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

(8) Commitments and Contingencies (continued)

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

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

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

Employment Agreements

The Company has commitments pursuant to employment agreements with certain
of its officers. The Company's minimum aggregate commitments under such
employment agreements are approximately $920, $423 and $188 during 2002, 2003
and 2004, respectively.

Licensing Agreements

The Company has numerous licensing agreements for both audiobooks and old
time radio shows with terms generally ranging from one to five years, which
require the Company to pay, in some instances, non-refundable advances upon
signing agreements, against future royalties. The Company is required to pay
royalties based on net sales. Royalty expenses were $3,199, $2,483 and $2,955
for 2001, 2000 and 1999, respectively.

Litigation

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

(9) Stock Option Plan

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

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


F-17



MEDIABAY, INC.

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

(9) Stock Option Plan (continued)

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

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

Stock option activity under the plans is as follows:

Weighted average
Shares exercise price
---------- ----------------
Outstanding at January 1, 1999 1,858,500 $ 5.37
Granted 1,195,950 11.29
Exercised -- --
Canceled (40,500) 11.76
---------- ----------
Outstanding at December 31, 1999 3,013,950 7.63
Granted 4,118,500 5.69
Exercised -- --
Canceled (479,350) 6.35
---------- ----------
Outstanding at December 31, 2000 6,653,100 6.52
Granted 898,000 1.23
Exercised -- --
Canceled (1,561,750) 9.01
---------- ----------
Outstanding at December 31, 2001 5,989,350 $ 5.06
========== ==========

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

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

2000 Grants:
First Quarter 931,000 $ 10.42 100% 6.46% $ 9.78
Second Quarter 2,950,500 $ 4.37 100% 6.40% $ 3.04
Third Quarter 113,000 $ 3.32 100% 6.01% $ 1.63
Fourth Quarter 124,000 $ 3.94 100% 5.78% $ 2.31
---------
Total 4,118,500
=========


F-18



MEDIABAY, INC.

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

(9) Stock Option Plan (continued)

No. of Exercise Assumed Risk-free Fair Value
Date Shares Price Volatility interest rate per Share
---- ------ ----- ---------- ------------- ---------
2001 Grants:
First Quarter -- $ -- -- -- $ --
Second Quarter 84,000 $ 2.07 165% 4.81% $ 0.12
Third Quarter 6,000 $ 2.00 165% 4.63% $ 0.14
Fourth Quarter 808,000 $ 1.14 165% 4.85% $ 0.19
--------
Total 898,000
========

The following table summarizes information for options outstanding and
exercisable at December 31, 2001:


Options Exercisable
-----------------------------
Options Outstanding Weighted
Weighted Average Average Weighted Average
Range of Prices Number Remaining Life in Years Exercise Price Number Exercise Price
- ----------------- ------------ ----------------------- --------------- ------------ ----------------

$0.50-4.00 3,675,000 7.64 $3.20 3,174,250 $2.80
$4.13-8.00 1,434,750 6.22 6.20 1,270,500 5.49
$8.13-14.88 879,600 6.28 10.94 869,600 10.82
- ----------------- ------------ ----------------------- --------------- ------------ ----------------
$0.50-14.88 5,989,350 7.10 $5.06 5,314,350 $5.21
================= ============ ======================= =============== ============ ================


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

The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." Under APB 25, the Company recognizes no compensation
expense related to employee stock options, as no options are granted at a price
below market price on the day of grant. In October 1995, Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
was issued. SFAS 123, which prescribes the recognition of compensation expense
based on the fair value of options on the grant date, allows companies to
continue applying APB 25 if certain pro forma disclosures are made assuming a
hypothetical fair value method application. Had compensation expense for the
Company's stock options been recognized based on the fair value on the grant
date under SFAS 123, the Company's net loss and net loss per share for the years
ended December 31, 2001, 2000 and 1999 would have been $5,013, and $0.36;
$73,185 and $5.75, and $12,508 and $1.52, respectively.


F-19


MEDIABAY, INC.

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

(10) Warrants and Non-Plan Options

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

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

(11) Common Stock Subject to Contingent Put Rights

In connection with its various acquisitions, the Company granted the
sellers the right, under specified conditions, to sell back to the Company up to
an aggregate of 675,000 shares issued to the sellers in connection with the
acquisitions. At December 31, 2001, rights have terminated as to 370,000 shares.
The sellers have the right under certain conditions to sell the remaining
305,000 shares of stock to the Company at prices ranging from $14.00 to $15.00
per share at various times commencing in December 2003 and expiring in December
2008, unless the rights are terminated earlier as a result of the Company's
stock meeting common stock price and/or performance targets prior to exercise.
If all of the rights were exercised prior to termination, the maximum amount the
Company would be required to pay for the repurchase of all of the shares is
approximately $4,550, payable as follows: (1) $350 commencing December 2003; (2)
$3,450 commencing December 2004; and (3) $750 commencing December 2005.

(12) Equity

In June 2000, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 150,000,000 shares.

The Company's Registration Statement on Form SB-2 for a follow-on primary
offering was declared effective by the Securities and Exchange Commission on
March 15, 2000. On March 20, 2000, the Company closed its offering of 3,650,000
shares of Common Stock at a price of $9.00 per share for gross proceeds of
$32,850. The Company incurred expenses of $3,473 related to the offering,
including the underwriting discount and accountable expenses, legal and
accounting fees and printing expenses.

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


F-20


MEDIABAY, INC.

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

(13) Income Taxes

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



2001 2000 1999
-------- -------- -------

Computed tax benefit $ (9,041) $(22,473) $(2,991)
(Decrease) increase in valuation allowance for
Federal and State deferred tax assets (8,159) 22,473 2,991
-------- -------- -------
Income tax benefit $(17,200) $ -- $ --
======== ======== =======


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

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



Deferred tax assets: 2001 2000 1999
-------- -------- -------

Federal and state net operating loss carry-forwards $ 23,122 $ 14,801 $ 7,340
Loss in I-Jam, LLC 85 -- --

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


The Company has approximately $56,395 of net operating loss carry-forwards,
which may be used to offset possible future earnings, if any, in computing
future income tax liabilities. The net operating losses will expire between
December 31, 2018 and December 31, 2021 for federal income tax purposes. For
state purposes, the net operating losses will expire at varying times, as the
Company is subject to corporate income tax in several states.

(14) Net Loss Per Share of Common Stock

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


F-21


MEDIABAY, INC.

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

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

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

Common equivalent shares totaling 11,787,000, including 11,520,000 shares
associated with the conversion of $12,484 of convertible debt and the related
reduction in interest expense for the twelve-month period ended December 31,
2001 of $1,070, were not included in the computation of diluted loss per share
for the year ended December 31, 2001 because they would have been anti-dilutive.
Common equivalent shares not included in the computation of diluted loss per
share for the years ended December 31, 2000 and 1999 because they would have
been anti-dilutive were 472,589 and 1,658,980, respectively.

(15) Supplemental Cash Flow Information

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

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

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

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

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

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

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


F-22


MEDIABAY, INC.

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

(16) Related Party Transactions

Companies wholly owned by Norton Herrick provided certain accounting,
administrative and general office services to, and obtained insurance coverage
for, the Company. In connection with such services, the Company paid or accrued
to such entities the aggregate of $88, $133 and $90 during the years ended
December 31, 2001, 2000 and 1999, respectively. In addition, a company wholly
owned by Norton Herrick provides the Company access to a corporate airplane. The
Company generally pays the fuel, fees and other costs related to its use of the
airplane directly to the service providers. For the use of this airplane, the
Company paid rental fees of approximately $14 in 2001 and $25 in each of 2000
and 1999 to Mr. Herrick's affiliate. The Company anticipates obtaining similar
services from time to time from companies affiliated with Norton Herrick for
which it will reimburse such companies' cost to provide such services to the
Company.

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

Interest on subordinated debentures held by a third party in the amount of
$97 for the three months ended September 30, 2000 was advanced by a company
wholly-owned by the Herrick family in November 2000. In 2001, the same company
advanced an additional $97 in interest for the three months ended December 31,
2000 to the same third party. The Company subsequently paid the interest, and
neither Mr. Herrick nor his wholly owned company received any compensation for
or profit from these transactions.

In 2001, Glebe, on MediaBay's behalf, advanced a security deposit to a
vendor in the amount of $100. The advance was subsequently repaid and Glebe
received no compensation for and did not profit from this transaction. See Notes
7 and 12 for other related party transactions.

(17) Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.

SFAS No. 142 requires that an intangible asset that is acquired shall
be initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and we will perform a transitional goodwill
impairment test. SFAS No. 142 is effective for fiscal periods beginning after
December 15, 2001. We are currently evaluating the impact of the new accounting
standards on existing goodwill and other intangible assets. While the ultimate
impact of the new accounting standards has yet to be determined, goodwill
amortization expense for the year ended December 31, 2001 was $509.


F-23


MEDIABAY, INC.

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

(17) Recently Issued Accounting Standards (continued)

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

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

(18) Segment Reporting

For 2001, 2000 and 1999, the Company has divided its operations into four
reportable segments: Corporate, Audio Book Club ("ABC") a membership-based club
selling audiobooks in direct mail and on the Internet; Radio Spirits ("RSI")
which produces, sells, licenses and syndicates old-time radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees and interest expenses.
The Company evaluates performance and allocates resources among its three
operating segments based on operating income and opportunities for growth. The
Company did not expend any funds or receive any income in the years ended
December 31, 2001, 2000 and 1999 from its newest subsidiary RadioClassics. The
accounting policies of the reportable segments are the same as those described
in Note 2. Inter-segment sales are recorded at prevailing sales prices.


F-24


MEDIABAY, INC.

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

(18) Segment Reporting (continued)

Year ended December 31, 2001



Audio Book Radio MediaBay. Inter-
Corporate Club Spirits com segment Total
--------- ---- ------- --- ------- -----

Net sales $ -- $31,793 $10,021 $ 249 $(258) $41,805
Profit (loss) before asset
write-downs and strategic
charges depreciation,
amortization, interest expense
and income tax benefit (2,239) 2,058 15 (1,225) 8 (1,383)
Asset write-downs and strategic
charges 2,000 6,031 4,342 903 -- 13,276
Depreciation and amortization -- 3,942 910 304 -- 5,156
Net interest expense 2,224 -- 11 -- -- 2,235
Income tax benefit -- 14,035 3,165 -- -- 17,200
Net (loss) income (6,463) 6,120 (2,083) (2,432) 8 (4,850)
Total assets -- 28,291 16,785 3 (76) 45,003
Net reductions to deferred member
acquisition costs -- (3,730) (11) -- -- (3,741)
Additions to fixed assets -- 58 130 -- -- 188



Year ended December 31, 2000



Audio Book Radio MediaBay. Inter-
Corporate Club Spirits com segment Total
--------- ---- ------- --- ------- -----

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



F-25


MEDIABAY, INC.

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

(18) Segment Reporting (continued)

Year ended December 31, 1999



Audio Book Radio MediaBay. Inter-
Corporate Club Spirits com segment Total
--------- ---- ------- --- ------- -----

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



(19) Quarterly Operating Data (Unaudited)

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



Year Ended 1st 2nd 3rd 4th
December 31, 2000 Quarter Quarter Quarter Quarter

Net revenue $ 10,946 $ 12,476 $ 9,729 $ 11,275

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

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

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

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

Net loss per common share $ (0.34) $ (0.39)(*) $ (0.31) $ (3.03)




Year Ended 1st 2nd 3rd 4th
December 31, 2001 Quarter Quarter Quarter Quarter

Net revenue $ 9,601 $ 10,915 $ 9,879 $ 11,410

Cost of sales 3,816 5,455 5,285 5,227

Cost of sales - write-downs -- -- 2,261 --

Net loss 10,624(***) (2,043) (16,748)(****) 3,317(*****)
Basic and diluted income (loss) per share:

Basic earnings (loss) per common share $ 0.77(***) $ (0.15) $ (1.21)(****) $ 0.24

Diluted earnings (loss) per common share $ 0.58(***) $ (0.15) $ (1.21)(****) $ 0.12


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

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

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

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

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


F-26


(19) Subsequent Events

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

As previously agreed to with the Company, if the Company required, on
February 22, 2002, Huntingdon purchased a $500 principal amount convertible
senior promissory note due June 30, 2003 (the "Note"). The Note is convertible
into shares of Common Stock at the rate of $.56 of principal and/or interest per
share. The Note was issued in consideration of a $500 loan made to the Company
by Huntingdon. As partial consideration for the loan and pursuant to an
agreement dated April 30, 2001, the Company granted to Huntingdon warrants to
purchase 250,000 of Common Stock at an exercise price of $.56 per share. The
warrants are exercisable until May 14, 2011.

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

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

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


F-27


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

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



Balance Amounts Write-Offs
Beginning of Charged to Amounts Against Balance End
Period Net Income Acquired Reserves of Period
------------ ---------- -------- --------- -----------

Allowances for sales returns
and doubtful accounts:
Year Ended December 31, 2001 $4,516 $15,496 -- $15,473 $4,539
Year Ended December 31, 2000 5,911 18,038 -- 19,433 4,516
Year Ended December 31, 1999 1,840 18,848 1,264 16,041 5,911