**SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C. 20549**




**Form 10-Q**







**(Mark One)**
**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF**x
**THE SECURITIES EXCHANGE ACT OF 1934****For the quarterly period ended June 30, 2004****OR**o
**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: 000-26529**





**AUDIBLE, INC.**


(Exact name of Registrant as specified in its Charter)





**DELAWARE**
(State or other jurisdiction of
incorporation or organization)

**22-3407945**
(I.R.S. employer
identification number)**65 WILLOWBROOK BLVD.**
**WAYNE, NEW JERSEY**
(Address of principal executive offices)

**07470**
(Zip Code)





**(973) 837-2700**


(Registrant's telephone number, including area code)





**None**


(Former name, former address and former


fiscal year - if changed since last report)








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





Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


**Yes**o**No**x








The aggregate market value of voting stock of the registrant was $270,581,178 based upon the closing price of NASDAQ as of June 30, 2004.








As of August 6, 2004, 21,238,711 shares of common stock ("Common Stock"), of the Registrant were outstanding.


1




**AUDIBLE, INC.**





**INDEX**





FORM 10-Q




**PART I -**
**FINANCIAL INFORMATION**
PageItem 1.
Financial Statements:Condensed Balance Sheets as of June 30, 2004 (unaudited)and December 31, 2003
3Condensed Statements of Operations for the three and sixmonths ended June 30, 2004 and 2003 (unaudited)
4Condensed Statements of Cash Flows for the sixmonths ended June 30, 2004 and 2003 (unaudited)
5Notes to Condensed Financial Statements (unaudited)
6Item 2.
Management's Discussion and Analysis ofFinancial Condition and Results of Operations
23Item 3.
Qualitative and Quantitative Disclosureabout Market Risk
36Item 4.
Controls and Procedures
36**PART II -**
**OTHER INFORMATION**Item 1.
Legal Proceedings
36Item 2.
Changes in Securities and Use of Proceeds
37Item 3.
Defaults Upon Senior Securities
37Item 4.
Submission of Matters to a Vote of Securities Holders
37Item 5.
Other Information
38Item 6.
Exhibits and Reports on Form 8-K
38Signatures

40
 2


**PART I - FINANCIAL INFORMATION**





**ITEM 1. Financial Statements**





**AUDIBLE, INC.**


**CONDENSED BALANCE SHEETS**


**June 30, 2004**

**December 31, 2003****Assets**

**(unaudited)**Current assets:Cash and cash equivalents

$
10,412,267

$
9,074,987Accounts receivable, net


442,984


245,641Royalty advances


13,800


72,338Prepaid expenses and other current assets


934,340


596,720Inventory


202,932


99,936Total current assets


12,006,323


10,089,622Property and equipment, net


998,538


272,851Other assets


20,805


418,524Total assets

$
13,025,666

$
10,780,997**Liabilities and Stockholders' Equity**Current liabilities:Accounts payable

$
489,934

$
526,359Accrued expenses and compensation


3,449,855


2,809,860Royalty obligations


280,500


408,000Capital lease obligations


424,737


--Deferred revenue and advances


1,071,838


873,520Total current liabilities


5,716,864


4,617,739Deferred cash compensation


--


58,750Commitments and contingencies (see note 8)Stockholders' equity:Convertible preferred stock:
Series A, par value $.01, 4,500,000 shares authorized, none and 3,277,327 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively


--


13,027,375Convertible preferred stock, Series B, par value $.01, 1,250,000 shares authorized, none and 1,250,000 shares issued and outstanding at June 30, 2004 and December 31, 2003, respectively


--


1,137,500Common stock, par value $.01, 40,000,000 shares authorized, 21,493,458 and 15,015,561 shares issued at June 30, 2004 and December 31, 2003 respectively


214,935


150,156Additional paid-in capital


139,253,697


110,507,840Deferred compensation


(183,999
)

(239,425
)Notes due from stockholders for common stock


--


(58,750
)Treasury stock at cost: 229,741 shares of common stock at June 30, 2004 and December 31, 2003


(184,740
)

(184,740
)Accumulated deficit


(131,791,091
)

(118,235,448
)Total stockholders equity


7,308,802


6,104,508Total liabilities and stockholders equity

$
13,025,666

$
10,780,997





See accompanying notes to condensed financial statements.


3




**AUDIBLE, INC.**


**CONDENSED STATEMENTS OF OPERATIONS**


**Three Months Ended**
**June 30,**

**Six Months Ended**
**June 30,****2004**

**2003**

**2004**

**2003****(unaudited)**

**(unaudited)**

**(unaudited)**

**(unaudited)**Revenue, net:Content and services:Consumer content

$
7,938,062

$
4,204,999

$
14,613,500

$
8,092,584Point of sale rebates


(67,755
)

--


(184,005
)

--Services


12,901


30,485


30,003


58,581Net content and services


7,883,208


4,235,484


14,459,498


8,151,165Hardware


162,749


175,109


344,466


352,324Other


16,131


16,126


32,257


32,252Total revenue, net


8,062,088


4,426,719


14,836,221


8,535,741Operating expenses:Cost of content and services revenue:Royalties and other content charges


2,600,606


1,137,954


4,654,768


2,103,583Discount certificate rebates


305,235


--


344,335


--Total cost of content and services revenue


2,905,841


1,137,954


4,999,103


2,103,583Cost of hardware revenue


613,568


512,508


1,131,603


1,060,812Operations


1,196,685


912,476


2,339,932


1,886,326Technology and development


1,280,970


1,188,460


2,536,102


2,440,433Marketing


999,711


1,095,215


2,151,997


2,558,279General and administrative


840,537


497,213


1,407,715


1,207,088Total operating expenses


7,837,312


5,343,826


14,566,452


11,256,521Income (loss) from operations


224,776


(917,107
)

269,769


(2,720,780
)Other income (expense)Interest income


44,688


4,097


59,655


10,012Interest expense


(14,090
)

--


(16,278
)

--Other income, net


30,598


4,097


43,377


10,012Net income (loss) before income taxes


255,374


(913,010
)

313,146


(2,710,768
)Income taxes


(18,789
)

--


(18,789
)

--Net income (loss)


236,585


(913,010
)

294,357


(2,710,768
)Dividends on convertible preferred stock


--


(376,982
)

(614,116
)

(740,631
)Charges related to conversion of convertible preferred stock


--


--


(9,873,394
)

--Total preferred stock expense


--


(376,982
)

(10,487,510
)

(740,631
)Net income (loss) applicable to common stockholders

$
236,585

$
(1,289,992
)
$
(10,193,153
)
$
(3,451,399
)Basic net income (loss) per common share

$
0.01

$
(0.12
)
$
(0.51
)
$
(0.33
)Basic weighted average common shares outstanding


21,238,711


10,332,648


19,936,969


10,332,648Diluted net income (loss) per common share

$
0.01

$
(0.12
)
$
(0.51
)
$
(0.33
)Diluted weighted average common shares outstanding


23,620,502


10,332,648


19,936,969


10,332,648





See accompanying notes to condensed financial statements.


4




**AUDIBLE, INC.**


**CONDENSED STATEMENTS OF CASH FLOWS**





****




**Six months Ended**
**June 30,****2004**

**2003****(unaudited)**

**(unaudited)**Cash flows from operating activities:Net income (loss)

$
294,357

$
(2,710,768
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


255,426


308,066Services rendered for common stock and warrants


432,328


740,690Non-cash compensation charge


55,426


110,488Non-cash forgiveness of notes due from stockholders for common stock


--


198,995Deferred cash compensation


(58,750
)

--Changes in assets and liabilities:Accounts receivable, net


(197,343
)

(121,468
)Royalty advances


58,538


(130,700
)Prepaid expenses and other current assets


(337,620
)

210,358Inventory


(102,996
)

(222,928
)Other assets


397,719


(86,769
)Accounts payable


(36,425
)

(79,276
)Accrued expenses and compensation


647,495


389,926Royalty obligations


(127,500
)

(18,500
)Deferred revenue and advances


198,318


217,020Net cash provided by (used in) operating activities


1,478,973


(1,194,866
)Cash flows from investing activities:Purchases of property and equipment


(237,811
)

(41,187
)Net cash used in investing activities


(237,811
)

(41,187
)Cash flows from financing activities:Proceeds from exercise of common stock warrants


27,500


--Proceeds from exercise of common stock options


328,433


--Principal payments made on capital lease obligations


(318,565
)

--Payments received on notes due from stockholders for common stock


58,750


--Net cash provided by financing activities


96,118


--Increase (decrease) in cash and cash equivalents


1,337,280


(1,236,053
)Cash and cash equivalents at beginning of period


9,074,987


2,822,080Cash and cash equivalents at end of period

$
10,412,267

$
1,586,027





See note 9 for supplemental disclosure of cash flow information.





See accompanying notes to condensed financial statements.


5




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





( **1)   Reverse Stock Split**





At the annual meeting of stockholders held on June 3, 2004, the stockholders approved a proposal to amend and restate the Companys certificate of incorporation to effect a reverse stock split and to decrease the authorized number of shares of common stock on a proportional basis. The proposal granted the Companys Board of Directors ("Board") authority to effect a reverse stock split of the Companys common stock of between and including two and four shares to be combined into one share of common stock. No fractional shares were to be converted.





On June 3, 2004, the Board approved a reverse stock split in the ratio of one for three shares effective June 17, 2004. On the effective date, each holder of record was deemed to hold one share of common stock for every three shares of common stock held immediately prior to the effective date. The 64,480,374 common shares then issued and outstanding were converted into 21,493,458 shares of common stock. Following the effective date of the reverse stock split, the par value of the common stock remained at $.01 per share.





All share amounts have been retroactively stated for all periods presented to reflect the 1-for-3 reverse stock split.








( **2)   Description of Business and Business Conditions**





Audible, incorporated on November 3, 1995, was formed to create the Audible service, a solution delivering premium digital spoken audio content from its Web site, audible.com, over the Internet for playback on personal computers and mobile devices. The Company commenced commercial operations in October 1997.





While the Company has reported net income for the three month period ended June 30, 2004, the Company has experienced prior recurring losses since its inception and as a result as of June 30, 2004, has an accumulated deficit of $131,791,091. The Companys cash and cash equivalent balance as of June 30, 2004 was $10,412,267. The Company believes that its cash and cash equivalents balance will enable it to meet its anticipated future cash requirements for operations and capital expenditures for the foreseeable future.





While the Company believes that its cash and cash equivalents balance will enable it to meet its anticipated cash requirements for operations and capital expenditures for the foreseeable future, beyond that the Company may need to raise additional funds through public or private financing or other arrangements. No assurance can be given that such additional financing, when needed, will be available on terms favorable to the Company or to the stockholders, if at all.


6




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





**(3)   Summary of Significant Accounting Policies**





*Reclassifications*





To enhance the clarity of operating expenses and to better reflect the Companys current business operations, as fully described in the Companys 2003 Form 10-K, presentation of the following operating expenses for the three and six months ended June 30, 2003, have been reclassified to conform to the 2004 presentations. **





**Three months ended**
**June 30, 2003**

**Previously****Reported**

**Reclassifications**



**After**
**Reclassification**Cost of content and services revenue


1,157,131


(19,177
)
(1
)

1,137,954Operations


811,233


101,243

(2
)

912,476(formerly Production)Technology and development


608,556


579,904

(3
)

1,188,460(formerly Development)Marketing


1,525,782


(430,567
)
(4
)

1,095,215(formerly Sales and marketing)General and administrative


728,616


(231,403
)
(5
)

497,213




**Six months e****nded**
**June 30, 2003**

**Previously****Reported**

**Reclassifications**



**After**
**Reclassification**Cost of content and services revenue


2,141,934


(38,351
)
(1
)

2,103,583Operations


1,751,156


135,170

(2
)

1,886,326(formerly Production)Technology and development


1,217,988


1,222,445

(3
)

2,440,433(formerly Development)Marketing


3,410,395


(852,116
)
(4
)

2,558,279(formerly Sales and marketing)General and administrative


1,674,236


(467,148
)
(5
)

1,207,088





(1)
Reclassification of royalties incurred in connection with a technology license to technology and development.


7




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





Three months

Six monthsended

ended(2)   Operations:

June 30, 2004

June 30,2004System infrastructure expenses


($ 468,763
)

($993,223
)Allocated general and administrative, net


72,952


155,169Customer service


319,119


644,034Credit card fees


177,935


329,190Total reclassification

$
101,243

$
135,170(3)   Technology and development:System infrastructure expenses

$
468,763

$
993,223Allocated general and administrative, net


81,896


170,737Technology licenses


29,245


58,485Total reclassification

$
579,904

$
1,222,445(4)   Marketing:Customer service


($ 319,119
)

($644,034
)Credit cards fees


(177,935
)

(329,190
)Technology license


(10,068
)

(20,134
)Allocated general and administrative, net


76,555


141,242Total reclassification


($ 430,567
)

($852,116
)





(5)
Reclassification of $(231,403) and $(467,148), respectively, in net allocated overhead expenses to the other operating expense line items.


8




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





*Basis of Presentation*





The accompanying condensed financial statements as of June 30, 2004, and for the three and six months ended June 30, 2004 and 2003, are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the results for the periods presented in accordance with accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2003, from the Companys Annual Report on Form 10-K.








*Revenue Recognition*





*Consumer Content Revenue*





Consumer content revenue consists of content sales made from the Companys website and content sold through the Companys agreement with the Apple iTunes Music Store. Revenue from the sale of individual content titles is recognized in the period when the content is purchased. Revenue from the sale of content subscriptions is recognized pro rata over the term of the subscription period. Revenue from the sale of monthly AudibleListener memberships is recognized ratably over the AudibleListener's monthly membership period. This results in approximately 50% of the AudibleListener membership fees received during each calendar month being deferred and recognized as content revenue in the following month. At the end of each reporting period, approximately 50% of the AudibleListener membership fees received during the last calendar month in the period is deferred as Deferred Revenue. Revenue from the sale of UltimateListener, a prepaid discounted content package, and gift programs are recognized the earlier of when the content is downloaded or expiration.








*Point of Sale Rebates and Discount Certificate Rebates*





Part of the Companys marketing strategy to acquire new AudibleListeners includes retail promotions. These retail promotions consist of offering rebates to consumers in the form of a discount on their purchase of digital audio players from certain retailers if the customer commits to a twelve-month AudibleListener membership. These rebates take one of two forms. The first type, reflected as point of sale rebates on the statement of operations, relates to a discount given by a third party retailer to a customer on the purchase of a digital audio player at the point of sale of the Audible membership. The cost of these rebates is accounted for as a reduction in content revenue in the period the rebate is given. The second type, reflected


9




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





as discount certificate rebates on the statement of operations, relate to retailer gift certificates that are given to a customer by Audible at the time the customer purchases the Audible membership. These gift certificates are honored by third party retailers and allow for the customer to purchase a digital audio player at a discounted price from the third party retailer. The cost of these gift certificates is accounted for as a cost of content revenue in the period the gift certificate is given. The accounting for both types of customer rebates as described above is pursuant to Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)."







*Services Revenue*




Services revenue consists of library sales and audio production services. Service revenue is recognized as services are performed after the agreement has been finalized, the price is fixed, and collectibility is assured. Collectibility is based on past transaction history and credit- worthiness of the customer. Under multiple element corporate service arrangements, the fair value of different elements cannot usually be determined since the items are not sold separately, therefore revenue is recognized on a straight-line basis over the term of the agreement.






*Hardware Revenue*




Hardware revenue consists of sales of AudibleReady digital audio players. Most of the Companys AudibleReady digital audio devices are sold at a discount or given away for free when a customer signs up for a one year commitment to an AudibleListener Membership. For multiple-element arrangements in which a customer signs up for a one year membership and receives an audio player for free, revenue is recognized using the relative fair value method under EITF Issue No. 21, "Revenue Arrangements with Multiple Deliverables", whereby each separate unit of accounting is recognized as revenue at its relative fair value, where the delivered item (hardware) is limited to the non-contingent consideration. Since all the consideration paid by the customer is contingent upon delivery of the content, no amount is recorded as hardware revenue under these multiple-element arrangements. The free hardware device reflects the subsidy incurred to acquire a customer with a one-year commitment to AudibleListener. For players sold separately, hardware revenue is recognized upon shipment of the device, pursuant to a customer order and credit card authorization and includes amounts received for shipping and handling.


**





10







**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





*Basic and Diluted Net Loss Per Common Share*





Basic and diluted net income (loss) per common share is presented in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 128, ''Earnings Per Share.'' Basic net income (loss) per common share is computed by dividing net income (loss) applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. Potential common shares consist primarily of incremental shares issuable upon the assumed exercise of stock options and warrants to purchase common stock using the treasury stock method, and shares issuable upon the conversion of Convertible Preferred Stock using the if-converted method.





For the three month period ended June 30, 2004, diluted net income per common share is computed by dividing net income applicable to common stockholders by the diluted weighted average common shares outstanding. For all other periods presented, diluted net loss per common share is equal to basic net loss per common share, since all potential common stock is anti-dilutive for each of the other periods presented.





The reconciliation of weighted average basic common shares outstanding to weighted average diluted common shares outstanding is as follows:





Three Months ended
June 30,

Six Months ended
June 30,2004

2003

2004

2003Weighted average basic common shares outstanding


21,238,711


10,332,648


18,664,387


10,332,648Effect of dilutive potential common shares:Stock Options


2,063,465


--


--


--Warrants


318,326


--


--


--Weighted average diluted common shares outstanding


23,620,502


10,332,648


18,664,387


10,332,648




For the three month period ended June 30, 2004, warrants and stock options with exercise prices greater than the average market price of the common stock in the period of $12.50 per share, were excluded from the diluted calculation as their inclusion would have been anti-dilutive. For all other periods presented, all potential common shares have been excluded from the diluted calculation because the Company was in a net loss position, and their inclusion would have been anti-dilutive. The following table summarizes the potential common shares excluded from the diluted calculation:


11




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





Three Months ended
June 30,

Six Months ended
June 30,2004

2003

2004

2003Stock Options


1,089,418


2,497,633


3,152,883


2,497,633Warrants


737,077


1,180,757


1,055,439


1,180,757Preferred Series A Stock


--


4,669,359


--


4,669,359Preferred Series B Stock


--


416,666


--


416,666





*Stock-Based Compensation*





SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure, an Amendment of FASB Statement No. 123" ("SFAS 148"), amended FASB Statement No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"), to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based compensation. However, it allows an entity to continue to measure compensation cost for those instruments using the intrinsic-value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees," provided it discloses the effect of SFAS 123, as amended by SFAS 148, in footnotes to the financial statements. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method.








The Companys 1999 Stock Incentive Plan permits the granting of stock options, stock appreciation rights, restricted or unrestricted stock awards, performance rights and other stock based awards to employees. For options granted to new Audible employees as part of their compensation package, the exercise price is determined by the closing price of Audibles common stock on the day immediately preceding the employees start date. For additional option grants made to existing employees, the exercise price is determined based on the closing price of the day immediately preceding the grant date. The majority of the options granted vest over a fifty month period and expire ten years from the date of the grant.





The Plan originally permitted up to 3,000,000 common stock shares to be issued under the Plan. In September 2003, at the annual meeting of stockholders, the stockholders approved an amendment to the Plan increasing the number of authorized common shares available for issuance under the plan to 4,200,000 shares. As of June 30, 2004 and 2003, options to purchase 3,152,883 and 2,497,633, respectively, shares of common stock were outstanding.





Compensation expense, if any, based on the intrinsic value method is recognized on a straight-line basis over the vesting term. Had the Company elected to recognize compensation cost based on fair value of the stock options at the date of grant under SFAS 148, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Companys net income (loss) and net income (loss) per common share would have changed to the pro forma amounts indicated in the table below.


12




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS******


**June 30, 2004 and 2003**


**(unaudited)**





Three Months Ended

Six Months EndedJune 30,

June 30,2004

2003

2004

2003Net income (loss) applicable to common shareholders as reported

$
236,585

$
(1,289,992
)
$
(10,936,153
)
$
(3,451,399
)Add: Total stock-based employee compensation cost included in reported net income (loss) applicable to common shareholders (based on intrinsic value method)

$
21,313

$
19,200

$
55,426

$
38,400Deduct: Total stock based employee compensation expense determined under fair value method for all awards

$
(895,261
)
$
(970,409
)
$
(1,730,606
)
$
(1,939,910
)Pro-forma net loss

$
(637,363
)
$
(2,241,201
)
$
(11,868,333
)
$
(5,352,909
)Basic net income (loss) per common share:As Reported

$
0.01

$
(0.12
)
$
(0.51
)
$
(0.33
)Pro Forma

$
(0.03
)
$
(0.22
)
$
(0.60
)
$
(0.52
)Diluted net income (loss) per common share:As Reported

$
0.01

$
(0.12
)
$
(0.51
)
$
(0.33
)Pro Forma

$
(0.03
)
$
(0.22
)
$
(0.60
)
$
(0.52
)


13




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**





The Company has used the Black-Scholes option pricing model in calculating the fair value of options and restricted stock awards granted. The assumptions used and the weighted-average information for the three and six months ended June 30, 2004 and 2003, are as follows:





Three Months ended
June 30,

Six Months ended
June 30,2004

2003

2004

2003Riske-free interest rate


3.66
%

5.00
%

3.66
%

5.00
%Expected dividend yield


--


--


--


--Expected lives


7 years


7 years


7 years


7 yearsExpected volatility


94
%

98
%

85
%

97
%




**(4)   Stockholders' Equity**





The following is a summary of the Stockholders Equity activity for the six months ended June 30, 2004. All share data has been retroactively stated for all periods presented to reflect the 1-for-3 reverse stock split.


14




**AUDIBLE, INC.**


**NOTES TO CONDENSED FINANCIAL STATEMENTS**


**June 30, 2004 and 2003**


**(unaudited)**


**Series A**
****
**Series B**
****
****
****
****
****
****
****
****
********
****
**Preferred**
****
**Preferred**
****
**Common Stock**
****
**Treasury Stock**
********
****
**Stock**
****
**Stock**
****
**Shares**
****
**Par value**
****
**Shares**
****
**Cost**Balance, December 31, 2003

$
13,027,375

$
1,137,500


15,015,561

$
150,156


(229,741
)
$
(184,740
)Conversion of Series A Preferred Stock


(13,027,375
)

-


4,669,347


46,693


-


-Conversion of Series B Preferred Stock


-


(1,137,500
)

416,666


4,167


-


-Preferred dividends and conversion inducement


-


-


1,166,666


11,667


-


-Cashless exercise of common stock warrants


-


-


7,653


77


-


-Exercise of warrants


-


-


18,332


184


-


-Exercise of options


-


-


199,233


1,991


-


-Non-cash compensation charge


-


-


-


-


-


-Amortization of warrant charges


-


-


-


-


-


-Repayment of note receivable from shareholders


-


-


-


-


-


-Reversal of unused accrued expense related to Series C financing


-


-


-


-


-


-Preferred stock expense


-


-


-


-


-


-Net income


-


-


-


-


-


-Balance, June 30, 2004

$
-

$
-


21,493,458

$
214,935


(229,741
)
$
(184,740
)****
****
****
****
****
****
**Notes due**
****
****
****
****
****
****
****
****
****
********
****
****
**Additional**
****
****
****
****
****
**from stock-**
****
****
****
****
****
**Total**
****
****
****
********
****
****
**paid-in**
****
****
**Deferred**
****
****
**holders for**
****
****
**Accumulated**
****
****
**Stockholders'**
****
****
****
********
****
****
**capital**
****
****
**Compensation**
****
****
**common stock**
****
****
**deficit**
****
****
**Equity**Balance, December 31, 2003

$
110,507,840

$
(239,425
)
$
(58,750
)
$
(118,235,448
)
$
6,104,508Conversion of Series A Preferred Stock


12,980,682


-


-


-


-Conversion of Series B Preferred Stock


1,133,333


-


-


-


-Preferred dividends and conversion inducement


13,838,333


-


-


(3,362,490
)

10,487,510Cashless exercise of common stock warrants


(77
)

-


-


-


-Exercise of warrants


27,317


-


-


-


27,501Exercise of options


326,441


-


-


-


328,432Non-cash compensation charge





55,426


-


-


55,426Amortization of warrant charges


432,328


-


-


-


432,328Repayment of note receivable from shareholders


-


-


58,750


-


58,750Reversal of unused accrued expense related to Series C financing


7,500


-


-


-


7,500Preferred stock expense


-


-


-


(10,487,510
)

(10,487,510
)Net income


-


-


-


294,357


294,357Balance, June 30, 2004

$
139,253,697

$
(183,999
)
$
-

$
(131,791,091
)
$
7,308,80215**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

*Common Stock*

On February 6, 2004, in connection with the conversion of the outstanding Series A Preferred Stock ("Series A"), the Company issued 5,836,013 shares of common stock to Apax Partners ("Apax"). The Series A conversion was the result of a negotiated agreement where, in addition to the 4,669,347 shares of common stock issuable upon conversion of the outstanding Series A shares in accordance with the terms of conversion, the Company issued to Apax 1,166,666 common shares of common stock and warrants to purchase 333,333 shares of common stock. Of the additional 1,166,666 shares issued, 389,863 shares were issued in payment of cumulative accrued dividends at the date of conversion, and 776,803 shares together with the 333,333 warrants were issued as an inducement to Apax to convert its Series A shares. The warrants are exercisable at $21.00 a share and expire on February 5, 2011. The fair value of the 776,803 shares of common stock and the 333,333 warrants of approximately $9,873,394 has been recorded as an inducement charge in the Statement of Operations for the six months ended June 30, 2004.

On February 6, 2004, the Company issued 416,666 shares of common stock to Random House upon conversion of their outstanding Series B Preferred Stock ("Series B") in accordance with the original terms of conversion.

As of June 30, 2004 and December 31, 2003, the Company had issued 21,493,458 and 15,015,561, respectively, shares of common stock. As of June 30, 2004 and December 31, 2003, the Company had 3,152,883 and 2,483,633 shares of common stock, respectively, reserved for issuance upon exercise of outstanding common stock options, and 1,055,439 and 1,180,757 shares of common stock, respectively, reserved for issuance upon exercise of outstanding warrants. As of December 31, 2003, the Company had 4,669,359 shares of common stock reserved for issuance upon conversion of outstanding Series A stock, and 416,666 shares of common stock reserved for issuance upon conversion of outstanding Series B stock.

The Company has on occasion issued options to purchase shares of common stock to employees at a price less than the fair value of the stock at the time of issuance. The difference between the fair value and the price of options issued is recorded as deferred compensation, a component of stockholders equity, and is amortized as an expense straight-line over the vesting term of the option. When employees who have these options leave the Company, the remaining unexpensed deferred compensation is reversed against additional paid-in-capital.
16

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

*Convertible Preferred Stock*

In February 2001, Microsoft purchased 2,666,666 shares of Series A stock for $10,000,000 at a per share price of $3.75. Each share of Series A was originally convertible into four shares of Common Stock, (equivalent to a price of $.9375 per share), subject to adjustment under certain conditions. As a result of the investment in the Company made by Special Situations Funds in the first quarter of 2002, the conversion rate was adjusted as per the Series A Certificate of Designation to 4.0323 shares of Common Stock. The stock was convertible at the option of the holder at any time. Dividends were payable semi-annually at an annual rate of 12% in either additional preferred shares or in cash at the option of the Company. On the fifth anniversary of the original issue date, the Company was required to redeem all remaining outstanding shares at a per share price of $3.75 plus all accrued and unpaid dividends. As of August 2003, the Company had issued to Microsoft an aggregate of 807,301 additional shares of Series A covering the dividends payable through June 1, 2003.

In August 2003, Apax purchased from Microsoft the 3,473,967 outstanding shares of Audible Series A stock and agreed to certain amendments to the security. As amended, the Series A was no longer mandatorily redeemable, was convertible at any time by the holders into shares of common stock, and dividends would accrue and compound semi-annually for a period of four years at the rate of 12% per annum. In the event of the conversion of the Series A stock, all accrued but unpaid preferred dividends would be converted into shares of Common Stock. In liquidation, the Audible Series A stock was ranked pari passu with the Companys Series B and Series C stock.

On February 6, 2004, Apax converted all of its Series A as previously described.


During the three and six months ended June 30, 2004, none and $614,116, respectively, was recognized as dividends on the Series A stock. During the three and six months ended June 30, 2003, $376,982 and $740,631, respectively, was recognized as dividends on the Series A stock.

In March 2002, the Company issued 1,250,000 shares of Series B stock in connection with an amendment to its contract with Random House (see note 6). At any time on or after March 26, 2004, subject to certain conditions, all outstanding shares of Series B stock would have automatically converted to shares of common stock at the then effective conversion price. Effective August 2003, the Audible Series B stock was ranked pari passu with the Companys Series A stock and Series C stock. On February 6, 2004, Random House converted all of its outstanding Series B stock into 333,333 shares of common stock in accordance with the original terms of conversion.

As of February 6, 2004, following the conversion of all preferred Stock, the Company no longer has any special preferences or privileges in the its capital structure.
17

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

**(5)   Amazon Agreements**

In January 2000, the Company entered into two agreements with Amazon.com. Under the Co-Branding, Marketing and Distribution Agreement the Company was the exclusive provider of digital spoken audio (as defined) to Amazon.com. On January 24, 2002, the Company signed Amendment No.1 to its Co-Branding, Marketing, and Distribution Agreement with Amazon.com. Under the amendment, the annual fee for Year 3 (which ended January 24, 2003) of the agreement was reduced from $10,000,000 to $1,500,000 and an additional fee of $1,000,000 was payable in Year 2 of the agreement. Also in connection with Amendment No.1, the Company issued 500,000 fully vested common stock warrants to Amazon.com at an exercise price of $1.50 per share, which are exercisable after January 31, 2003. The fair value of these warrants was determined in accordance with EITF Issue No. 96-18 and was being amortized as an expense on a straight-line basis over the remaining term of the agreement which ended in January 2003. During the six months ended June 30, 2004 and 2003, none and $14,400, respectively, was recorded as a marketing expense related to these warrants with the non-cash credit for services to additional paid-in capital. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.

During the three-year term of this agreement, as amended, in consideration for certain services, Amazon received $22,500,000 plus a specified percentage of revenue earned over a specified amount. Under the Securities Purchase Agreement, Amazon.com purchased 446,677 shares of common stock from the Company for $20,000,000. Under the agreements, the consideration due from Amazon for the purchase of the common stock, and the Companys obligation for the annual fee for the first two years per the original Co-Branding, Marketing, and Distribution Agreement, which are identical amounts, were offset and no cash was exchanged. Accordingly, $20,000,000 was recorded as deferred services, a component of stockholders equity, and was being amortized over the first two years of the agreement on a straight-line basis. Prior to Amendment No. 1, through January 2002, $10,000,000 had been amortized as a marketing expense related to the initial $20,000,000 of deferred services. Subsequent to Amendment No. 1, the unamortized payment for year 2 of $10,000,000 plus the additional $2,500,000 payment required under the amendment, or $12,500,000, was being amortized on a straight-line basis over the remaining term of the agreement of 24 months which ended in January 2003. During the six months ended June 30, 2004 and 2003, none and $416,667, respectively, was recorded as a marketing expense related to the straight-line amortization of the non-cash portion of deferred services. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.
18

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

**(6)   Random House Agreement**

On May 5, 2000, Audible and Random House entered into a 50-month Co-Publishing, Marketing, and Distribution Agreement to form a strategic alliance to establish Random House Audible, a publishing imprint, as defined in the agreement, to produce spoken word content specifically suited for digital distribution. All titles published by the imprint are distributed exclusively over the Internet by Audible. As part of this alliance, Random House, through its Random House Ventures, LLC subsidiary, purchased 169,780 shares of Audible common stock from the Company for $1,000,000. Over the term of the agreement Audible was to contribute towards the funding the acquisition and creation of digital audio titles through Random House Audible. On March 26, 2002, the agreement was amended to waive the cash payment due to Random House in 2002 of $1,250,000, thereby reducing the total payments due under the agreement from $4,000,000 to $2,750,000. In exchange for this waiver, under the amendment the Company issued 1,250,000 shares of Series B stock. At any time on or after March 26, 2004, subject to certain conditions, all outstanding shares of Series B stock would have automatically converted to shares of common stock at the then effective conversion price. Through December 31, 2002, $1,250,000 of the $2,750,000 obligation had been paid, with the remaining amount of $1,500,000 due in 2003 and 2004. On February 10, 2003, the agreement was further amended so that Audible was no longer required to pay the $1,500,000 in imprint fees that were due in 2003 and 2004.

The fair value of the Series B stock issued was determined in accordance with EITF Issue No. 01-1, "Accounting for a Convertible Instrument Granted or Issued to a Nonemployee for Goods or Services or a Combination of Goods or Services and Cash". Accordingly, using the measurement date of March 26, 2002, the fair value of the Series B stock issued was determined to be $1,137,500. On April 1, 2002 when the Series B was issued, the Company recorded $547,500 (the difference between the fair value of the shares and the previously recognized accrued liability of $590,000) as deferred services, a component of stockholders equity. During the six months ended June 30, 2004 and 2003, none and a credit of $134,997 representing the reversal of the accrual was recorded as a credit to cost of content and services revenue related to this agreement. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.

The original agreement further provided for Random House to be granted a warrant to purchase 292,777 shares of Audible common stock at various exercise prices that vest over the term of the agreement as well as the granting of additional warrants to Random House to purchase Audible common shares based on future performance. The fair value of these warrants was determined in accordance with EITF Issue No. 96-18 and is being amortized as an expense on a straight-line basis over the 50-month term of the agreement. The warrants are accounted for using variable plan accounting whereby compensation costs vary each accounting period until the final measurement date. During the three and six months ended June 30, 2004, $163,246 and $165,256, respectively, was recorded as a cost of content and services revenue related to these warrants with the non-cash credit for services to additional paid-in capital. During the three and six months ended June 30, 2003, $149,925 and $279,334, respectively, was recorded as a cost of content and services revenue related to these warrants with the non-cash credit for services to additional paid-in capital.
19

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

The Company and Random House continue to operate under the general terms of the agreement which expired on June 30, 2004, with the exception that the works produced under the imprint are no longer exclusive to Audible.
**(7)   Notes Due from Stockholders for Common Stock**

Notes due from stockholders that are current employees and former directors were received by the Company for payment of shares of common stock purchased under the Company's Stock Restriction Agreements. The notes were full recourse promissory notes bearing interest at fixed rates ranging from 7.0% to 8.5% through December 31, 2002 and at 4% subsequent thereto until December 31, 2003. The notes began maturing in the year 2000.

Certain employee employment agreements prior to 1998 contained a provision whereby the employee would be awarded a one-time bonus if still employed by the Company on the due date of the promissory note equal to the amount of the promissory note and any accrued interest payable on the note. Compensation expense is recognized on a straight-line basis over the term of the promissory note. Deferred cash compensation related to bonuses in the accompanying balance sheets represents the earned, unpaid portion of such bonuses.

As of January 29, 2003, the unpaid principal and unpaid interest balance due on these notes to the Company from stockholders that were employees, net of deductions from the bonuses due to the employees, was $263,240. On January 29, 2003 the employees were notified that the Company would not require them to repay the unpaid principal nor the unpaid interest on the notes payable. The employees are individually responsible for the personal income tax consequences of this debt forgiveness. In connection with this debt forgiveness, the Company recorded a charge of $212,566 in the three months ended March 31, 2003 as a general and administrative expense. This expense is the net of the total amount forgiven by the Company, less the combined offset of all accrued interest. Of this $212,566 forgiveness of debt charge, $198,995 is a non-cash charge, with the remaining $13,571 representing the Companys payroll taxes obligations in connection with the bonuses paid.

In addition, for the remaining notes issued to former directors in the amount of $58,750 not covered under this debt forgiveness, the Company extended the due dates to December 31, 2003 and reduced the interest rate in 2003 to 4%. In January 2004, the Company received payment of $3,750 on one of the notes from a former director. In May 2004, the Company received payment of the last remaining $55,000 balance of notes outstanding.
20

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

**(8)   Contingencies**

In September 2001, the Company and certain of our officers, directors, and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in the Companys 1999 initial public offering (the "IPO") have also been named as defendants. The essence of the plaintiffs' claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay "kickbacks" in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the "kickbacks" were sometimes calculated as a percentage of the customer's paper profits over some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set forth claims on behalf of persons who acquired the Companys common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired the Companys common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.

The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. The Company along with the individual defendants, have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. The Company believes that the claims have no merit and, more specifically, the Company and the individual defendants were not aware of the alleged practices, if they occurred. The Company along with the individual defendants has notified the underwriters who were involved in our IPO that the Company expects those underwriters to indemnify the Company and the individual defendants pursuant to the terms of the underwriting agreement between the Company and the underwriters.

On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving the Company. On July 15, 2002, the Company along with other non-underwriter defendants in the coordinated cases also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively. Those motions have not yet been decided. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot accurately predict the ultimate outcome of the motions. In addition, the individual defendants in the IPO Litigation signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.

The Company is not otherwise a party to any lawsuit or proceeding, which management believes is likely to have a material effect on its business.
21

**AUDIBLE, INC.**
**NOTES TO CONDENSED FINANCIAL STATEMENTS**
**June 30, 2004 and 2003**
**(unaudited)**

**(9)   Supplemental Disclosure of Cash Flow Information**
**Non-Cash Financing and Investing Activities**

Capital lease obligations of $743,302 were incurred during the six month period ended June 30, 2004, when the Company entered into leases for new property and equipment. No capital leases were entered into during the 2003 period.

Reversal of unused accrued expense related to Series C financing of $7,500 was recorded to additional paid in capital during the six month period ended June 30, 2004.

**Cash Paid for Interest and Taxes**
Interest expense paid was $14,090 during the six month period ended June 30, 2004. No interest expense was paid during the 2003 period.

No income taxes were paid in the six month period ended June 30, 2004 and 2003.
22**ITEM 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations**

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and notes thereto appearing in our 2003 Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors.*

**Overview**

Audible is the Internets largest, most diverse provider of premium spoken audio services for content download and playback on personal computers, CD or AudibleReady computer based mobile listening devices. Our customers purchase and download their choice of content, and generally listen during their daily commute or while exercising, when "their eyes are busy but their minds are free." We believe that the Audible service allows our customers to make better use of their time, allowing them to listen to books, newspapers, magazines and time shifted radio programs that due to their busy lives, they would not have the time to read. Our online store is located atwww.audible.comand our single location of operations is Wayne, New Jersey.

Audible has more than 50,000 hours of audio programs and 165 content partners that include leading audiobook publishers, broadcasters, entertainers, magazine and newspaper publishers and business information providers. Most of our customers join the AudibleListener program, where for a monthly fee of either $14.95 or $19.95, they may download and listen to the content of their choice. AudibleListeners provide us with their credit card information and are billed monthly in advance for the AudibleListener service. Customers may also purchase individual audio titles from us on an a la carte basis.

Our customer count has grown to approximately 379,000 as of June 30, 2004. We believe our growth has been driven primarily by our strong collection of content, by the growing trends of downloading and listening to audio on-the-go, and by the growing market for digital audio devices that securely play content from Audible.com. We promote the Audible service through co-marketing partnerships with device manufactures, online promotions, promotions with retailers and our customer-get-customer referral program. In addition, customers at Amazon.com and the Apple iTunes music store can purchase and download Audible content of their choice.

The key drivers of our business include new customer growth, the cost of acquiring a customer, the customer cancellation rate, controlling our costs and sales of Audible content through the Apple iTunes music store.

Our new customer growth is a function of developing compelling advertising and promotion programs to encourage people to try the Audible service for the first time, as well as the creation of marketing partnerships that similarly encourage consumers to try our service. One of our growing sources of new AudibleListeners is via our device rebate program. Under this program, AudibleListeners that subscribe to our AudibleListener service for twelve months qualify for a $75 or $100 rebate on their AudibleReady device purchase. Other sources of new AudibleListeners include our "tell a friend" customer-get-customer program and our marketing efforts directed at converting a la carte purchasers to AudibleListener members. We manage customer acquisition costs by entering primarily into co-marketing deals where we pay for results, rather than advertising impressions. We believe that the customer cancellation rate is minimized by providing the customer with a wide range of high value content, a compelling value proposition and solid customer service.
23

We plan to continue to focus on new customer growth, expanding our content selection, improving the Audible service, broadening the range of AudibleReady listening devices, broadening our range of marketing and sales partnerships, providing solid customer service and controlling our costs.

Revenue from the sale of consumer content has increased in each of the last four quarters. We expect this trend to continue as we expand our customer count. As of June 30, 2004, more than 379,000 customers in over 120 countries had purchased content from our Web site.

Although we have experienced revenue growth in our content sales in recent periods, there can be no assurance that such growth rates are sustainable, and therefore such growth rates should not be considered indicative of future operating results. There can also be no assurance that we will be able to continue to increase our revenue, or maintain profitability as we did in the three month period ended June 30, 2004, or if increases in revenue and profitability can be sustained. We believe that period-to-period comparisons of our historical operating results are not meaningful and should not be relied upon as an indication of future performance.

Our revenue is derived from three main categories: (1) content and services revenue, which includes consumer content and corporate services; (2) hardware revenue; and (3) other revenue.

Consumer content revenue consists of content sales made from our website and content sold through our agreement with the Apple iTunes Music Store. Revenue from the sale of individual content titles is recognized in the period when the content is purchased. Revenue from the sale of content subscriptions is recognized pro rata over the term of the subscription period. Revenue from the sale of monthly AudibleListener memberships is recognized ratably over the AudibleListeners monthly membership period. This results in approximately 50% of the AudibleListener membership fees received during each calendar month being deferred and recognized as content revenue in the following month. At the end of each reporting period, approximately 50% of the AudibleListener membership fees received during the last calendar month in the period is deferred as Deferred Revenue. Revenue from the sale of UltimateListener, our prepaid discounted content package, and gift programs are recognized the earlier of when the content is downloaded or expiration.

Part of our marketing strategy to acquire new AudibleListeners includes retail promotions in which we pay retailers to offer discounts to consumers on their purchase of AudibleReady devices if they become AudibleListener members for twelve months. We also have retail promotions in which we purchase gift certificates from retailers and give them away to our customers for free when they sign up to be AudibleListeners for twelve months. The point of sale rebates which are discounts given by a third party retailer to a customer on the purchase of a digital audio player at the point of sale of the Audible membership, are recorded as a reduction of revenue in the period the discount is given in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products)". The cost of discount certificate rebates which relate to retailer gift certificates that are given to a customer by Audible at the time the customer purchases the Audible membership, are recorded as a cost of content and services revenue in accordance with EITF 01-9. As a result of this GAAP accounting treatment, these costs, which we consider marketing, are not included in Marketing expense, but instead, are recorded either as a reduction of revenue, or as part of cost of content and services revenue as described above. Customer refunds, although not material, are also recorded as a reduction in revenue in the period the refund is paid.

Corporate service revenue consists of library sales and audio production services. Where applicable, corporate service revenue is recognized as services are performed after the agreement has been finalized, the price is fixed, and collectibility is assured. Collectibility is based on past transaction history and credit-worthiness of the customer.
24

Hardware revenue consists of sales of AudibleReady digital audio players sold primarily at a discount or given away when a customer signs up for a one year commitment to our AudibleListener Membership. For multiple-element arrangements in which a customer signs up for a one year membership and receives an audio player for free, revenue is recognized using the relative fair value method under EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", whereby each separate unit of accounting is recognized as revenue at its relative fair value, whereby the delivered item (hardware) is limited to the non-contingent consideration. Since all the consideration paid by the customer is contingent upon delivery of the content, no amount is recorded as hardware revenue under these multiple-element arrangements. The free hardware device reflects the subsidy that we incur to acquire a customer with a one year commitment to AudibleListener. For players sold separately, hardware revenue is recognized upon shipment of the device, pursuant to a customer order and credit card authorization and includes amounts received for shipping and handling. Cost of hardware revenue, regardless of whether the player is bundled with a membership or sold separately, is recognized upon shipment.

Other revenue consists of revenue from a license granted for certain technology rights to a device manufacturer which is being recognized on a straight-line basis over the term of the agreement.

We have joint marketing agreements with device manufacturers such as Apple Corp., Creative Labs, Rio Audio, palmOne, and Hewlett-Packard. Under these agreements, the device manufacturer will receive a portion of the content revenue generated over a specified period of time from each new Audible customer referred by them or using their hand-held electronic device. For example, a purchaser of Hewlett-Packard's hand-held electronic device will be able to use the device and our AudibleManager software to access audible.com and download content. Hewlett-Packard will receive a percentage of the revenue related to content downloaded by this purchaser. These revenue sharing arrangements typically last one or more years from the date the device user becomes an Audible customer.

We have entered into co-marketing agreements whereby where our marketing partners will receive payments from us. The payments to these marketing partners are generally based upon driving potential customers to the Audible website who then become customers.

As of February 6, 2004, following the conversion of all preferred stock, we no longer have any special preferences or privileges in our capital structure.

**Results of Operations**

The following table sets forth certain financial data for the periods indicated as a percentage of total revenue for the three and six months ended June 30, 2004 and 2003.
25

**Three Months**

**Six Months****Ended June 30,**

**Ended June 30,****2004**

**2003**

**2004**

**2003****(unaudited)**

**(unaudited)**Revenue:Content and servicesConsumer content


98
%

95
%

98
%

95
%Point of sale rebates


0


-


(1
)

-Services


0


1


0


1Net content and services


98


96


97


96Hardware


2


4


3


4Other


0


0


0


0Total revenue, net


100
%

100
%

100
%

100
%Operating expenses:Cost of content and services revenueRoyalties and other content charges


32


26


31


25Discount certificate rebates


4


-


3


-Total cost of content and services revenue


36


26


34


25Cost of hardware revenue


8


12


8


12Operations


15


20


16


22Technology and development


16


27


17


29Marketing


12


25


14


30General and administrative


10


11


9


14Total operating expenses


97


121


98


132Income (loss) from operations.


3


(21
)

2


(32
)Other income, net


0


0


0


0Net income (loss) before taxes


3


(21
)

2


(32
)Income taxes


0


--


0


--Net income (loss)


3


(21
)

2


(32
)Dividends on convertible preferred stock.


--


(8
)

(4
)

(8
)Charges related to conversion of convertible preferred stock


--


--


(66
)

--Total preferred stock expense


--


(8
)

(70
)

(8
)Net income (loss) applicable to common stockholders


3
%

(29
)%

(68
)%

(40
)%
**Three months ended June 30, 2004 compared to three months ended June 30, 2003.**

***Content and Services Revenue***

The following is our net content and services revenue for the three months ended June 30, 2004, and 2003:
****
Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$7,883,000
$4,235,000
86.1%

*Net content and services revenue*consists of AudibleListener membership revenue, revenue from single title sales, revenue from sales at the Apple iTunes music store, library revenue, point of sale rebates and corporate services revenue.

Net content and services revenue has grown due to the growth in our customer count, revenue from sales at the Apple iTunes music store, and strong results from single titles sold during our summer sale in June 2004. Our customer count has grown from 253,000 as of June 30, 2003 to 379,000 as of June 30, 2004. Our customer count includes all customers that have purchased Audible content at www.audible.com. Our customer count does not include customers that purchased our content at the Apple iTunes Music Store. We believe continuing consumer adoption of digital downloading, increased consumer awareness of the Audible service, customer satisfaction and improved marketing drove the increase in our customer count.
26***Hardware Revenue:***

The following is our hardware revenue for the three months ended June 30, 2004, and 2003:

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$163,000
$175,000
(6.9%)

*Hardware revenue*consists of revenue derived primarily from the shipping and handling charge to customers on devices that Audible provides for free to AudibleListeners that commit to a twelve month AudibleListener membership. Also included are separate sales of digital audio players to consumers and libraries.

Hardware revenue has decreased during the period as we gave away for free more digital audio players s to customers who commit to a 12-month AudibleListener membership. Under EITF No. 00-21, with these multiple-element arrangements, no revenue is recognized for the delivery of hardware because all consideration paid by the customer is contingent upon delivery of the content.


***Other Revenue:***

The following is our other revenue for the three months ended June 30, 2004, and 2003:

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$16,000
$16,000
-- %

*Other revenue*consists of the straight-line amortization of revenue derived from technology licensing fees and was consistent period to period.


**Cost of Content and Services Revenue:**

The following is our cost of content and services revenue for the three months ended June 30, 2004, and 2003:

Cost of Content and Services

Three Months Ended June 30,

As a Percentage of Content and Services Revenue2004

2003

2004

2003Royalties and other content charges

$
2,601,000

$
1,138,000


33.3
%

26.9
%Discount certificate rebates

$
305,000

$
---


3.9
%

---Total cost of content and services revenue

$
2,906,000

$
1,138,000


36.9
%

26.9
%27

*Cost of content and services revenue*consists primarily of royalties paid to publishers, the amortization of publisher royalty advances and equity securities issued in connection with Random House Audible, as well as discount certificate rebates.

Cost of content and services increased in the 2004 period as a percentage of content and services revenue increased in part due to the addition of $305,000 in discount certificate rebates, the mix of titles sold in the period, as well as the introduction ofsales at the Apple iTunes Music Store which began in October 2003 which have a lower margin for us.


**Cost of Hardware Revenue:**

The following is our cost of hardware revenue for the three months ended June 30, 2004, and 2003:

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$614,000
$513,000
19.7%

*Cost of hardware revenue*consists of the cost of digital audio players that are given away or sold to customers.

The cost of hardware revenue increased as we gave away for free more digital audio players to customers who commit to a 12-month AudibleListerner membership.


**Operations:**

The following is our operations expense for the three months ended June 30, 2004, and 2003:

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$1,197,000
$912,000
31.3%

*Operations*expense consists of payroll and related expenses for content acquisition, editorial, audio conversion and customer service and credit card fees.

Operation expenses increased primarily due to $142,000 in higher credit card fees, $74,000 in higher customer service costs, and $38,000 in higher allocated overhead expenses. These increases are related to customer and revenue growth.


**Technology and Development:**

The following is our technology and development expense for the three months ending June 30, 2004 and 2003:
28

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$1,281,000
$1,188,000
7.8%

*Technology and development*expense consists of payroll and related expenses for information technology, systems and telecommunications infrastructure, as well as technology licensing fees.

The increase in technology and development expenses was primarily due to $95,000 in higher bandwidth costs and $54,000 in higher consultant expenses offset in part by a decline in personnel expenses. As our customer count grows and the number of titles downloaded increases, we continually expand our bandwidth in order for our customers to be able to download their content.


**Marketing:**

The following is our marketing expense for the three months ended June 30, 2004, and 2003:****

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$1,000,000
$1,095,000
(8.7%)

**
*Marketing*expense consists of payroll and related expenses for personnel in marketing and business development, as well as advertising expenditures and other promotional activities. Also included are revenue sharing and bounty payments which we make to our marketing partners.

Marketing expenses were lower in the 2004 period primarily due to $101,000 in reduced consultant expense and $65,000 in lower co-marketing and bounty payments, offset in part by higher advertising and personnel expenses.


**General and Administrative:**

The following is our general and administrative expense for the three months ended June 30, 2004, and 2003:

Three Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$841,000
$497,000
69.2%

*General and administrative*expenses consist primarily of payroll and related expenses for executive, finance and administrative personnel. Also included are legal fees, audit fees, public company expenses and other general corporate expenses.
29

The increase in expense in the 2004 period is primarily due to $253,000 in increased legal fees related to our international expansion plans, $50,000 in NASDAQ relisting fees, $37,000 in increased professional fees, and $28,000 in increased audit fees, offset in part by reduced compensation expense.


**Six months ended June 30, 2004 compared to six months ended June 30, 2003.**

***Net Content and Services Revenue***

The following is our content and services revenue for the six months ended June 30, 2004, and 2003:
****
Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$14,460,000
$8,152,000
77.4%

*Net content and services revenue*consists of AudibleListener membership revenue, revenue from single title sales, revenue from sales at the Apple iTunes music store, library revenue, point of sale rebates and corporate services revenue.

Net content and services revenue has grown due to the growth in our customer count, revenue from sales at the Apple iTunes music store, and strong results from single titles sold during our summer sale in June 2004. Our customer count has grown from 253,000 as of June 30, 2003 to 379,000 as of June 30, 2004. Our customer count includes all customers that have purchased Audible content at www.audible.com. Our customer count does not include customers that purchased our content at the Apple iTunes Music Store. We believe continuing consumer adoption of digital downloading, increased consumer awareness of the Audible service, customer satisfaction and improved marketing drove the increase in our customer count


***Hardware Revenue:***

The following is our hardware revenue for the six months ended June 30, 2004, and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$344,000
$352,000
(2.3%)

*Hardware revenue*consists of revenue derived primarily from the shipping and handling charge to customers on devices that Audible provides for free to AudibleListeners that commit to a twelve month AudibleListener membership. Also included are separate sales of digital audio players to consumers and libraries.

Hardware revenue has decreased as we gave more digital audio players away for free to customers who commit to a 12-month AudibleListener membership. Under EITF No. 00-21, with these multiple-element arrangements, no revenue is recognized for the delivery of hardware because all consideration paid by the customer is contingent upon delivery of the content.


***Other Revenue:***
30

The following is our other revenue for the six months ended June 30, 2004, and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$32,000
$32,000
-- %

*Other revenue*consists of the straight-line amortization of revenue derived from technology licensing fees and was consistent period to period.


**Cost of Content and Services Revenue:**

The following is our cost of content and services revenue for the six months ended June 30, 2004, and 2003:
Cost of Content and Services

Six Months Ended June 30,

As a Percentage of Content and Services Revenue2004


2003


2004


2003Royalties and other content charges

$
4,655,000

$
2,104,000


32.1
%

25.8
%Discount certificate rebates

$
344,000

$
---


2.4
%

---Total cost of content and services revenue

$
4,999,000

$
2,104,000


34.5
%

25.8
%

*Cost of content and services revenue*consists primarily of royalties paid to publishers, the amortization of publisher royalty advances and equity securities issued in connection with Random House Audible, as well as discount certificate rebates.

Cost of content and services increased in the 2004 period as a percentage of content and services revenue increased in part due to the addition of $344,000 in point of sale rebates, the mix of titles sold in the period, as well as the introduction ofsales at the Apple iTunes Music Store which began in October 2003.


**Cost of Hardware Revenue:**

The following is our cost of hardware revenue for the six months ended June 30, 2004, and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$1,132,000
$1,061,000
6.7%

*Cost of hardware revenue*primarily consists of the cost of digital audio players that are given away or sold to customers.
31

The cost of hardware revenue increased primarily due to additional costs associated with more digital audio players given away for free when customers commit to a 12-month AudibleListener Membership.


**Operations:**

The following is our operations expense for the six months ended June 30, 2004, and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$2,340,000
$1,886,000
24.1%

*Operations*expense consists of payroll and related expenses for content acquisition, editorial, audio conversion and customer service and credit card fees.

Operation expenses increased primarily due to $255,000 in higher credit card fees, $166,000 in higher customer service costs, and $73,000 in higher allocated overhead costs, offset in part by lower content acquisition and audio conversion costs. These increases are related to customer and revenue growth.


**Technology and Development:**

The following is our technology and development expense for the six months ended June 30, 2004 and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$2,536,000
$2,440,000
3.9%

*Technology and development*expense consists of payroll and related expenses for information technology, systems and telecommunications infrastructure, as well as technology licensing fees.

The increase in technology and development expenses was primarily due to $155,000 in higher bandwidth costs and $126,000 in higher consultant expenses offset in part by a decline in personnel expenses. As our customer count grows and the number of titles downloaded increases, we need to expand the bandwidth in order for our customers to be able to download their content.


**Marketing:**

The following is our marketing expense for the six months ending June 30, 2004, and 2003:****

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$2,152,000
$2,558,000
(15.9%)
32
*Marketing*expense consists of payroll and related expenses for personnel in marketing and business development, as well as advertising expenditures and other promotional activities. Also included are revenue sharing and bounty payments which we make to our marketing partners.

Marketing expenses were lower in the 2004 period primarily due to the elimination of $535,000 in amortization related to the expiration of our amended agreement with Amazon.com, and the reduction of $221,000 in consultant expenses, offset in part by $257,000 in new warrant charges issued in connection with a services agreement and higher personnel costs.


**General and Administrative:**

The following is our general and administrative expense for the six months ending June 30, 2004, and 2003:

Six Months Ended June 30,
Percentage Change2004
2003
2004 vs. 2003$1,408,000
$1,208,000
16.6%

*General and administrative*expenses consist primarily of payroll and related expenses for executive, finance and administrative personnel. Also included are legal fees, audit fees, public company expenses and other general corporate expenses.

The increase in expense in the 2004 period is primarily due to $293,000 in increased legal fees, related to our international expansion plans, $60,000 in increased professional fees, $50,000 in NASDAQ relisting fees, and $53,000 in increased audit fees, offset in part by the absence of $213,000 in forgiveness of debt which occurred in the 2003 period in connection with promissory notes issued for shares of common stock to stockholders, and $45,000 in lower depreciation charges on leasehold improvements due to certain leasehold improvements becoming fully depreciated.****

**Factors Affecting Operating Results**

We have only a limited operating history with which to evaluate our business and prospects. Our limited operating history and emerging nature of the market for Internet-delivered audio content makes predicting our future operating results difficult. In addition, our prospects must be considered in light of the risks and uncertainties encountered by companies in the early stages of development in new and rapidly evolving markets, specifically the rapidly evolving market for delivery of audio content over the Internet. These risks include our ability to:

acquire and retain customers;
sell Audible content through the Apple iTunes Music Store
control customer acquisition costs
minimize customer cancellation rates
build awareness and acceptance of audible.com, the AudibleReady format and AudibleReady devices;
extend existing and acquire new content provider relationships;
manage growth to stay competitive and fulfill customer demand; and
generate cash from operations and/or raise capital.
33

If we fail to manage these risks successfully, it would materially adversely affect our financial performance.

As of June 30, 2004, we had not entered into any derivative financial instruments, other financial instruments or derivative commodity investments that expose us to material market risk. We currently do not and do not plan to engage in derivative instruments or hedging activities.

We have incurred significant losses since inception, and as of June 30, 2004, we had an accumulated deficit of approximately $131,791,000. We believe that our success will depend largely on our ability to extend our leadership position as a provider of premium digital spoken audio content over the Internet. Accordingly, we plan to continue to invest in marketing, content acquisition and operations.

Our operating results have varied on a quarterly basis during our short operating history and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. Factors that may affect our operating results include but are not limited to: (1) the demand for the Audible service; (2) Sales of Audible content through the Apple iTunes Music Store, (3) the availability of premium audio content; (4) sales and consumer usage of AudibleReady devices; (5) our ability to acquire new customers; (6) our ability to retain existing customers (7) the introduction of new products or services by a competitor; (8) the cost and availability of acquiring sufficient Web site capacity to meet our customers' needs; (9) technical difficulties with our computer system or the Internet or system downtime; (10) the cost of acquiring audio content; (11) the amount and timing of capital expenditures and other costs relating to the expansion of our operations; and (12) general economic conditions and economic conditions specific to electronic commerce and online media. In the past, we experienced fluctuations in demand for the Audible service based on the level of marketing expenditures, the occurrence of external publicity and the quality of our software and Web site. Any one of these factors could cause our revenue and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, we may from time to time make pricing, service or marketing decisions that could cause significant declines in our quarterly revenue.

Our limited operating history and the emerging nature of our market make prediction of future revenue difficult. We have no assurance that we will be able to predict our future revenue accurately. Because we have a number of fixed expenses, we may be unable to adjust our spending in a timely manner to compensate for unexpected revenue shortfalls. Accordingly, any significant shortfall in relation to our expectations could cause significant declines in our operating results. We believe that our quarterly revenue, expenses and operating results could vary significantly in the future, and that period-to- period comparisons should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future quarters our operating results will fall below the expectations of securities analysts and investors, which could have a material adverse effect on the trading price of our common stock.


**Liquidity and Capital Resources**

From inception through the date prior to our initial public offering, we financed our operations through private sales of our redeemable convertible preferred stock and warrants. Net proceeds from the sales of redeemable convertible stock and warrants prior to our initial public offering were $28,719,000. In July 1999, we completed our IPO and received net proceeds of $38,856,000. Since our IPO, we have raised an additional $15,860,000 in net proceeds through the private sale of our redeemable convertible stock, and an additional $4,186,000 in net proceeds through the private sales of our common stock.
34

As of June 30, 2004, our cash and equivalents balance was approximately $10,412,000. Based on our currently proposed business plans and related assumptions, we believe that our cash and cash equivalents balance will enable us to meet our anticipated cash requirements for operations and capital expenditures for the foreseeable future. Beyond that, we may need to raise additional funds through public or private financing or other arrangements. No assurance can be given that such additional financing, when needed, will be available on terms favorable to us, if at all.


Cash Requirements:

At June 30, 2004, our principal source of liquidity was approximately $10,412,000 in cash and cash equivalents.

The following table shows future cash payments due under our commitments and obligations as of June 30, 2004.

**Year**

**Operating Leases**
**Capital Leases**
**Royalty Obligations**
**Total**2004 (remaining)

$
165,061

$
274,760

$
280,500

$
720,3212005

$
352,889

$
149,977


-

$
502,8662006

$
375,656


-


-

$
375,6562007

$
398,423


-


-

$
398,4232008

$
398,423


-


-

$
398,423Total

$
1,690,452

$
424,737

$
280,500

$
2,395,689


**Sources and Uses of Cash**

Net cash provided by operating activities for the six months ended June 30, 2004 was approximately $1,479,000. Net cash provided by operating activities was primarily attributable to our net income, increase in accrued expenses and compensation, services rendered for common stock and warrants, and depreciation and amortization, offset in part by an increase in prepaid expenses and other current assets, accounts receivable and inventory and a decrease in royalty obligations. Net cash used in operating activities for the six months ended June 30, 2003 was approximately $1,195,000. Net cash used was primarily attributable to our net loss, an increase in inventory, an increase in royalty advances, and an increase in accounts receivable, offset in part by services rendered for common stock and warrants, an increase in accrued expenses and compensation, depreciation and amortization, and the non-cash portion of the forgiveness of employee notes.

Net cash used in investing activities for the six months ended June 30, 2004 and 2003, was approximately $238,000 and $41,000, respectively. Net cash used during both periods was related to purchases of property and equipment.

Net cash provided by financing activities for the six months ended June 30, 2004 was approximately $96,000 resulting primarily from the exercise of common stock options by employees offset in part by principal payments made on capital lease obligations. There was no net cash provided by or used in financing activities for the six months ended June 30, 2003.
35

**New Accounting Standards**

In December 2003, the FASB issued Interpretation No. 46,*Consolidation of Variable Interest Entities*("FIN 46") that addresses the consolidation of variable interest entities. FIN 46 provides guidance for determining when a primary beneficiary should consolidate a variable interest entity, or equivalent structure, that functions to support the activities of the primary beneficiary. We adopted FIN 46 on March 31, 2004. As a result of its continuing evaluation of the effect that the adoption of FIN 46 will have on the Companys results of operations and financial condition, the Company believes that it is reasonably possible that future agreements will qualify as variable interest entities.  We hold no variable interests as of June 30, 2004.

**ITEM 3.   Qualitative and Quantitative Disclosure about Market Risk**
****
We do not have operations subject to risk of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. The interest bearing portion of our cash and cash equivalent balances are kept in money-market accounts so we are exposed to interest risk only to the extent of interest income.

**ITEM 4.   Controls and Procedures**

Our management, under the supervision and with the participation of Donald Katz, our Chief Executive Officer, and Andrew Kaplan, our Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by the report. Based on that evaluation, Messrs. Katz and Kaplan concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.


**PART II - OTHER INFORMATION**

**ITEM 1.****Legal Proceedings.**

In September 2001, we and certain of our officers, directors, and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in our 1999 initial public offering (the "IPO") have also been named as defendants. The essence of the plaintiffs' claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay "kickbacks" in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the "kickbacks" were sometimes calculated as a percentage of the customer's paper profits over some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set
36

forth claims on behalf of persons who acquired our common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired our common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.

The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. We along with the individual defendants, have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. We believe that the claims against us have no merit and, more specifically, we and the individual defendants were not aware of the alleged practices, if they occurred. We along with the individual defendants have notified the underwriters who were involved in our IPO that we expect those underwriters to indemnify us pursuant to the terms of the underwriting agreement between us and the underwriters.

On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving us. On July 15, 2002, we along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively. Those motions have not yet been decided. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome of the motions. In addition, the individual defendants in the IPO Litigation signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.

We are not otherwise party to any lawsuit or proceeding, which management believes is likely to have a material effect on us.

**ITEM 2.****Changes in Securities and Use of Proceeds**
**Recent Sales of Unregistered Securities**
None

**Report of Offering of Securities and Use of Proceeds There from**
None

**ITEM 3.****Defaults Upon Senior Securities**
Inapplicable

**ITEM 4.****Submission of Matters to a Vote of Security Holders**
37

(a) The Company held its Annual Meeting of Stockholders on June 3, 2004 (the "Annual Meeting").

(b) Inapplicable

(c) The following matters were voted upon at the Annual Meeting:

(i) The election of two directors to serve until the 2007 annual meeting of stockholders, and until their successors are elected and duly qualified, by 98.6% of the common stock present and voting at the meeting voting for Messers Knowlton, Patricof, and Zeev as follows:

Nominee
For
Against or WithheldWinthrop Knowlton
11,367,170
184,298Allan Patricof
11,419,120
132,348Oren Zeev
11,369,807
181,662

(ii) The appointment of KPMG LLP as our independent auditors for the year ending December 31, 2004 was ratified by 99.9% of the shares of common stock present and voting at the meeting (votes for: 11,616,657; votes against or withheld: 728; abstention 750).

(iii) An amendment to the Companys Amended and Restated Certificate of Incorporation to Effect Reverse Stock Split and Decrease the Authorized Number of Shares of the Companys Common Stock on a Proportional Basis was ratified by the holders of 53.8% of the shares of Companys outstanding shares of common stock (votes for: 11,415,110; votes against or withheld: 135,455; abstention: 903.)

(d) Inapplicable
None


**ITEM 5.****Other Information**

None

**ITEM 6.****Exhibits and Reports on Form 8-K**

(a) Exhibits

3.1*
Amended and Restated Certificate of Incorporation of Audible3.1.2 !
Certificate of Amendment to the Amended and Restated Certificate of Incorporation.3.2*
Amended and Restated Bylaws of Audible10.1+*
License Agreement dated November 4, 1998, by and between Microsoft Corporation and Audible10.15*
1999 Stock Incentive Plan10.15.1
Amendment No. 1 to Stock Incentive Plan10.19*
Office Lease dated June 20, 1997, by and between Audible, as tenant, and Passaic Investment LLC, Sixty-Five Willowbrook Investment LLC and Wayne Investment LLC, as tenants-in-common, as landlord
38

10.20*
Sublease Agreement dated July 19, 1996, by and between Audible, as sublessee, and PainewebberIncorporated, as sublessor10.26*
Employment Offer Letter from Audible to Andrew Kaplan dated May 25, 199910.28**
Warrant Agreement to purchase 3,333 shares of Common Stock at a price of $22.95 per share, dated October 8, 1999, issued by Audible to National Public Radio, Inc.10.29*
Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin Williams10.30*
Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin Williams10.30.1##
Amendment No. 1 to Common Stock Purchase Warrant, W-2, issued January 25, 2002, to Robin Williams (relating to Exhibit 10.30)10.40***
Settlement Agreement by and between Audible Inc. and investor parties thereto dated February 6, 2004.10.41***
Form of common stock warrant issued by Audible Inc. to investor parties in connection with the Series A Settlement Agreement dated February 6, 2004.31.1
Quarterly Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.31.2
Quarterly Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.32.1
Quarterly Certifications of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.32.2
Quarterly Certifications of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.

*
Incorporated by reference from the Company's Registration Statement on Form S-1 (No. 333-76985)
**
Incorporated by reference from the Companys Form 10K/A for the fiscal year ended December 31, 1999
#
Incorporated by reference from the Companys Form 10-Q for the quarterly period ended September 30, 2000
##
Incorporated by reference from the Companys Form 10-Q for the quarterly period ended September 30, 2001
!
Incorporated by reference from the Companys Form 10-K for the fiscal year ended December 31, 2001.
>
Incorporated by reference from the Companys Form 8-K filed on August 5, 2003.
***
Incorporated by reference from the Companys Form 10-K for the fiscal year ended December 31, 2003.
&
Incorporated by reference from the Companys Definitive Proxy Statement on Schedule 14A filed with the Commission on September 2, 2003.
+
Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Companys Application requesting Confidential Treatment under Rule 406 of the Securities Act of 1933.39

++
Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Companys Application requesting Confidential Treatment under Rule 24b-2 of the Securities Exchange Act of 1934.

(b) Reports on Form 8-K
(1) On May 4, 2004, we filed a Form 8-K containing the press release we issued on May 4, 2004, announcing our financial results for the quarter ended March 31, 2004.

(2) On June 3, 2004, we filed a Form 8-K containing the press release we issued on June 3, 2004, announcing the approval by the Companys stockholders of the reverse split at the Companys annual meeting.

(3) On June 17, 2004, we filed a Form 8-K containing the press release we issued on June 16, 2004, announcing the June 17, 2004 effectiveness of the one for three reverse split of the Companys Common Stock.



**SIGNATURES**

Pursuant to the requirements 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.

**AUDIBLE, INC.**Date: August 13, 2004
By:
/s/Name:
Andrew P. KaplanTitle:
Chief Financial Officer andExecutive Vice President, Finance and Administration


40