**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





**FORM
10-Q**





**(Mark
      One)****x**
    **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**For
      the quarterly period ended March 31, 2005o
    **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934**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 **x**** **No** o





As of
May 9, 2005 24,096,024 shares of the registrant’s common stock were
outstanding.





1




**AUDIBLE, INC.**
 ****
 **TABLE
OF CONTENTS**


**PART
      I**
    **FINANCIAL
      INFORMATION**
    **PAGE**Item
      1.
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2005
      (unaudited) and December 31, 2004
    3Condensed
      Consolidated Statements of Operations for the threemonths ended
      March 31, 2005 and 2004 (unaudited)
    4Condensed
      Consolidated Statements of Cash Flows for the threemonths ended
      March 31, 2005 and 2004 (unaudited)
    5Notes to Condensed Consolidated Financial Statements
      (unaudited)
    6Item
      2.
    Management's
      Discussion and Analysis ofFinancial Condition and Results of
      Operations
    25Item
      3.
    Quantitative and Qualitative Disclosures about Market
      Risks
    35Item
      4.
    Controls and Procedures
    35**PART
      II**
    **OTHER
      INFORMATION**Item
      1.
    Legal Proceedings
    36Item
      2.
    Unregistered Sales of Equity Securities and Use of Proceeds
    37Item
      3.
    Defaults Upon Senior Securities
    37Item
      4.
    Submission of Matters to a Vote of Security
      Holders
    37Item
      5.
    Other Information
    37Item
      6.
    Exhibits
    38**Signatures**
    40




2
 *Table of Contents*




**PART
I - FINANCIAL INFORMATION**
 **ITEM1.**
    **Financial
      Statements**
 **AUDIBLE, INC. AND SUBSIDIARY**
 **CONDENSED
CONSOLIDATED BALANCE SHEETS**


**March
      31,**
      **2005**
    
    **December
      31,**
      **2004****Assets**
    
    **(unaudited)**Current
      assets:Cash
      and cash equivalents
    
    $
    9,839,698
    
    $
    13,296,006Short-term
      investments
    
    
    55,403,380
    
    
    48,386,399Interest
      receivable on short-term investments
    
    
    27,145
    
    
    76,151Accounts
      receivable, net of allowance for returns and chargebacks of $14,600 at
      March 31, 2005 and December 31, 2004
    
    
    928,477
    
    
    786,987Accounts
      receivable - related parties
    
    
    149,436
    
    
    87,625Royalty
      advances
    
    
    204,741
    
    
    140,634Prepaid
      expenses and other current assets
    
    
    424,691
    
    
    665,984Inventory
    
    
    373,997
    
    
    394,109Total
      current assets
    
    
    67,351,565
    
    
    63,833,895Property
      and equipment, net
    
    
    1,242,006
    
    
    919,090Other
      assets
    
    
    31,891
    
    
    20,805Total
      assets
    
    
    68,625,462
    
    
    64,773,790**Liabilities
      and Stockholders' Equity**Current
      liabilities:Accounts
      payable
    
    
    1,957,842
    
    
    850,906Accrued
      expenses
    
    
    4,963,829
    
    
    3,628,556Royalty
      obligations
    
    
    189,250
    
    
    150,800Accrued
      compensation
    
    
    522,056
    
    
    448,156Capital
      lease obligations
    
    
    --
    
    
    120,795Deferred
      revenue
    
    
    2,568,496
    
    
    2,445,868Total
      current liabilities
    
    
    10,201,473
    
    
    7,645,081Royalty
      obligations - non-current
    
    
    44,380
    
    
    38,000Commitments
      and contingenciesStockholders'
      equity:Common
      stock, par value $.01, 40,000,000 shares authorized, 24,068,128 and
      24,169,775
      shares
      issued at March 31, 2005 and December 31, 2004,
    respectively
    
    
    240,681
    
    
    241,697Additional
      paid-in capital
    
    
    187,877,474
    
    
    187,248,675Deferred
      compensation
    
    
    (567,739
    )
    
    (154,173
    )Accumulated
      other comprehensive income
    
    
    552
    
    
    --Treasury
      stock at cost, none and 229,741 shares of common stock at March 31, 2005
      and December 31, 2004, respectively
    
    
    --
    
    
    (184,740
    )Accumulated
      deficit
    
    
    (129,171,359
    )
    
    (130,060,750
    )Total
      stockholders’ equity
    
    
    58,379,609
    
    
    57,090,709Total
      liabilities and stockholders’ equity
    
    $
    68,625,462
    
    $
    64,773,790





See
accompanying notes to condensed consolidated financial statements.





3
 *Table of Contents*


**AUDIBLE, INC. AND SUBSIDIARY**
 **CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS**


**Three
      Months Ended**
      **March
      31,****2005**
    
    **2004****(unaudited)**
    
    **(unaudited)**Revenue,
      net:Content
      and services:Consumer
      content
    
    $
    12,838,041
    
    $
    6,675,438Point
      of sale rebates
    
    
    (355,575
    )
    
    (116,250
    )Services
    
    
    19,444
    
    
    17,102Total
      content and services
    
    
    12,501,910
    
    
    6,576,290Hardware
    
    
    103,656
    
    
    181,717Related
      party revenue
    
    
    274,436
    
    
    --Other
    
    
    24,868
    
    
    16,126Total
      revenue, net
    
    
    12,904,870
    
    
    6,774,133Operating
      expenses:Cost
      of content and services revenue:Royalties
      and other content charges
    
    
    4,152,886
    
    
    2,054,162Discount
      certificate rebates
    
    
    601,221
    
    
    39,100Total
      cost of content and services revenue
    
    
    4,754,107
    
    
    2,093,262Cost
      of hardware revenue
    
    
    301,752
    
    
    518,035Operations
    
    
    1,847,794
    
    
    1,143,247Technology
      and development
    
    
    1,616,182
    
    
    1,255,132Marketing
    
    
    2,289,253
    
    
    1,152,286General
      and administrative
    
    
    1,537,929
    
    
    567,178Total
      operating expenses
    
    
    12,347,017
    
    
    6,729,140Income
      from operations
    
    
    557,853
    
    
    44,993Other
      income (expense):Interest
      income
    
    
    414,053
    
    
    14,967Interest
      expense
    
    
    (1,495
    )
    
    (2,188
    )Other
      income, net
    
    
    412,558
    
    
    12,779Income
      before income tax expense
    
    
    970,411
    
    
    57,772Income
      tax expense
    
    
    (81,020
    )
    
    --Net
      income
    
    
    889,391
    
    
    57,772Dividends
      on preferred stock
    
    
    --
    
    
    (614,116
    )Charges
      related to conversion of convertible preferred stock
    
    
    --
    
    
    (9,873,394
    )Total
      preferred stock expense
    
    
    --
    
    
    (10,487,510
    )Net
      income (loss) applicable to common shareholders
    
    $
    889,391
    
    $
    (10,429,738
    )Basic
      net income (loss) applicable to common shareholders per common
      share
    
    $
    0.04
    
    $
    (0.56
    )Diluted
      net income (loss) applicable to common shareholders per common
      share
    
    $
    0.03
    
    $
    (0.56
    )Basic
      weighted average common shares outstanding
    
    
    24,008,188
    
    
    18,664,387Diluted
      weighted average common shares outstanding
    
    
    26,117,932
    
    
    18,664,387





See
accompanying notes to condensed consolidated financial statements.




4
 *Table of Contents*


**AUDIBLE, INC. AND SUBSIDIARY**
 **CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS**


**Three
      months Ended****March
      31,****2005**
    
    **2004****(unaudited)**
    
    **(unaudited)**Cash
      flows from operating activities:Net
      income
    
    $
    889,391
    
    $
    57,772Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
    
    
    139,507
    
    
    110,525Services
      rendered for common stock and warrants
    
    
    --
    
    
    269,081Non-cash
      compensation charge
    
    
    37,342
    
    
    34,113Deferred
      cash compensation
    
    
    --
    
    
    (3,750
    )Accretion
      of discounts on short-term investments
    
    
    (300,779
    )
    
    --Income
      tax benefit from exercise of stock options
    
    
    22,490Changes
      in assets and liabilities:Interest
      receivable on short-term investments
    
    
    49,006
    
    
    --Accounts
      receivable, net
    
    
    (141,490
    )
    
    (91,445
    )Accounts
      receivable from related parties
    
    
    (61,811
    )
    
    --Royalty
      advances
    
    
    (64,107
    )
    
    33,126Prepaid
      expenses and other current assets
    
    
    241,244
    
    
    35,356Inventory
    
    
    20,112
    
    
    (88,616
    )Other
      assets
    
    
    (11,163
    )
    
    (804
    )Accounts
      payable
    
    
    1,106,936
    
    
    161,626Accrued
      expenses
    
    
    1,335,340
    
    
    66,919Royalty
      obligations
    
    
    44,830
    
    
    (87,500
    )Accrued
      compensation
    
    
    74,017
    
    
    (19,258
    )Deferred
      revenue
    
    
    122,628
    
    
    (5,384
    )Net
      cash provided by operating activities
    
    
    3,503,493
    
    
    471,761Cash
      flows from investing activities:Purchases
      of property and equipment
    
    
    (462,423
    )
    
    (124,501
    )Purchases
      of short-term investments
    
    
    (11,716,202
    )
    
    --Proceeds
      from maturity of short-term investments
    
    
    5,000,000
    
    
    --Net
      cash used in investing activities
    
    
    (7,178,625
    )
    
    (124,501
    )Cash
      flows from financing activities:Proceeds
      from exercise of common stock warrants
    
    
    273,000
    
    
    2,500Proceeds
      from exercise of common stock options
    
    
    66,125
    
    
    223,578Principal
      payments made on obligations under capital
    leases
    
    
    (120,795
    )
    
    (35,466
    )Payments
      received on notes due from stockholders for common stock
    
    
    --
    
    
    3,750Net
      cash provided by financing activities
    
    
    218,330
    
    
    194,362Effect
      of exchange rate changes on cash and cash equivalents
    
    
    494
    
    
    --(Decrease)
      increase in cash and cash equivalents
    
    
    (3,456,308
    )
    
    541,622Cash
      and cash equivalents at beginning of period
    
    
    13,296,006
    
    
    9,074,987Cash
      and cash equivalents at end of period
    
    $
    9,839,698
    
    $
    9,616,609





See Note
12 for supplemental disclosure of cash flow information.





See
accompanying notes to condensed consolidated financial statements.




5
 *Table of Contents*


**AUDIBLE, INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**
 ****


**(1)**
    **Description
      of Business and Business
Conditions**





*The
Business*


Audible,
Inc. (the "Company") incorporated on November 3, 1995, was formed to create the
Audible service, a solution delivering premium digital spoken audio content from
its website, audible.com, over the internet for playback on personal computers
and mobile devices. The Company commenced commercial operations in October
1997.
 
 For the
three month period ended March 31, 2005, the Company reported net income of
$889,391. However due to prior losses since its inception, the Company has an
accumulated deficit of $129,171,359 as of March 31, 2005. The Company's cash and
cash equivalent balance as of March 31, 2005 is $9,839,698. In addition, the
Company has short-term investments of $55,403,380. The Company believes that its
cash and cash equivalents and short-term investments balance will enable it to
meet its anticipated future cash requirements for operations and capital
expenditures for the foreseeable future.


The
Company may, in the future, need to raise additional funds to finance its
continued growth. No assurance can be given that such additional financing, if
needed, will be available on terms favorable to the Company or to its
stockholders, if at all.








**(2)**
    **Summary
      of Significant Accounting Policies**





*Basis
of Presentation*


Commencing
in the first quarter of 2005, the Company began its international operations in
the United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a
wholly-owned subsidiary of Audible, Inc. and is therefore consolidated as of the
end of each reporting period. The accompanying unaudited condensed consolidated
financial statements as of and for the three-month period ended March 31, 2005
includes the accounts of Audible, Inc. and Audible UK. All inter-company
transactions and balances have been eliminated.
 The
accompanying condensed consolidated financial statements as of March 31, 2005
and for the three months ended March 31, 2005 and 2004, 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 U.S. generally accepted accounting
principles. Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. These condensed consolidated financial statements should be
read in conjunction with the audited financial statements and notes thereto for
the year ended December 31, 2004, from the Company's Annual Report on Form 10-K,
as amended.


*Cash
and Cash Equivalents*


The
Company considers short-term, highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents. Cash
equivalents at March 31, 2005 and December 31, 2004 were $9,079,805 and
$13,033,728, respectively, and consisted primarily of money market funds and
notes due from governmental agencies. Cash balances at March 31, 2005 and
December 31, 2004 were $759,893 and $262,278, respectively, and consisted of
funds held in the Company's checking account.


6
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


*Restricted
Cash*





In
addition, the Company has restricted cash deposits being held as a reserve by
the Company’s credit card processors. These restricted cash deposits at March
31, 2005 and December 31, 2004 were $5,000, and are included in Other Assets on
the accompanying condensed consolidated Balance Sheets.





*Short-Term
Investments*





Investments
purchased with a maturity of more than three months, and less than twelve
months, are classified as short-term investments. The Company's short-term
investments, as of March 31, 2005 and December 31, 2004, of $55,403,380 and
$48,386,399, respectively, consisted of governmental agency notes and
mortgage-backed securities that are to be held to maturity because the Company
has the positive intent and ability to hold these securities to maturity. Held
to maturity securities are stated at amortized cost, adjusted for amortization
of premiums and accretion of discounts to maturity. Dividend and interest income
are recognized when earned. Premiums and discounts are amortized or accreted
over the life of the related held-to-maturity security as an adjustment to yield
using the effective interest method. A decline in the market value of
held-to-maturity security below that is deemed to be other-than-temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to operations and a new cost basis for the security is established. To
determine whether an impairment is other-than-temporary, the Company considers
whether it has the ability and intends to hold the investment until a market
price recovery and considers whether evidence indicating the cost of the
investment is recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in the value subsequent to
year-end, and forecasted performance of the investee.





The
amortized cost, gross unrealized holding losses and the fair value of
held-to-maturity debt securities at March 31, 2005 was $55,403,380, $87,891 and
$55,315,489, respectively.





All of
the debt securities classified as held-to-maturity mature during
2005.





*Allowance
for Returns and Chargebacks*





The
allowance for returns and chargebacks is recorded as a reduction of revenue and
is estimated based on a percentage of revenue, taking into account historical
experience. A portion of the allowance is recorded as a reduction of accounts
receivable based on an estimate of returns that will be made related to sales
that were unpaid at period-end. The remaining portion of the allowance is
reflected as an accrued liability at period-end.




The
amount of the allowance that was recorded as a reduction of accounts receivable
as of March 31, 2005 and December 31, 2004 was $14,600. The amount of the
allowance reflected in the accrued liability was $183,893 and $168,584 at March
31, 2005 and December 31, 2004, respectively.


*Inventory*





Inventory
is stated at the lower of cost or market using the first-in, first-out method.
Inventory consists of digital audio players manufactured by third party
manufacturers.





*Property
and Equipment*





Property
and equipment are stated at cost. Property and equipment under capital leases
are stated at the present value of minimum lease payments. Depreciation is
calculated using the straight-line method over the
estimated useful lives of the respective assets, which are three years for
computer server and website equipment, and two years for office furniture and
equipment, and studio equipment.




7
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


Property
and equipment held under capital leases are amortized on a straight-line basis
over the estimated useful life of the asset. Leasehold improvements are
amortized on a straight-line basis over the lease term or the estimated useful
life of the asset, whichever is shorter. The amortization is included within
depreciation expense.





Maintenance
and repairs are expensed as incurred.


**


*Impairment
of Long-Lived Assets*





The
Company accounts for long-lived assets in accordance with the provisions of SFAS
No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* (“SFAS
No.144”). The Company reviews its long-lived assets (property and equipment) for
impairment when events or circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
related asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value.





*Royalty
Advances and Royalty Obligations*





Royalty
advances and the corresponding royalty obligations represent payments made and
payments to be made to various content providers pursuant to minimum guarantees
under their royalty agreements, net of royalties expensed. These agreements give
the Company the right to sell digital audio content over the internet. The
royalty obligations recorded in the accompanying balance sheets are classified
between current and non-current based on the payment terms specified in the
agreements. The Company periodically adjusts the balance of these advances to
reflect their estimated net realizable value. Royalty expense is included in
cost of content and services revenue in the accompanying condensed consolidated
Statements of Operations.





*Fair
Value of Financial Instruments*





Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
accounts receivable, accounts receivable from related parties, accounts payable
and accrued expenses. At March 31, 2005 and December 31, 2004, the fair
values of these financial instruments approximated their carrying values due to
the short-term nature of these instruments.





*Foreign
Currency Translation*


In
accordance Statement of Financial Accounting Standard No. 52, *Foreign
Currency Translation* , ** the
Company’s UK subsidiary, whose functional currency is the British Pound,
translates their balance sheet into U.S. dollars at prevailing rates at the
balance sheet date and translates their revenues, costs and expenses at the
average rates prevailing during each reporting period. Net gains or losses
resulting from the translation of Audible UK’s financial statements are
accumulated and charged directly to foreign currency translation adjustment, a
component of stockholders’ equity.


8
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


*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 from both the Company’s
website and the Apple iTunes music store 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 at month-end and recognized as content
revenue in the following month. Revenue from the sale of UltimateListener, a
prepaid discounted content package, and gift programs are recognized when the
content is downloaded.


*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 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 condensed
consolidated 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 discount is given. The
second type, reflected as discount certificate rebates on the statement of
operations, relates to retailer promotional codes or retailer gift cards that
are given to a customer by Audible at the time the customer purchases the
Audible membership. These promotional codes are honored by third party retailers
and allow the customer to purchase a digital audio player at a discounted price
from the third party retailer. The gift cards are honored by third party
retailers on a future purchase. The cost of these promotional codes and gift
cards is accounted for as a cost of content revenue when the customer commits to
a twelve-month AudibleListener membership under one of the retailer promotion
programs. 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 reasonably assured. Collectibility is
based on past transaction history and credit-worthiness of the customer.





*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 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. 00-21, *Revenue
Arrangements with Multiple Deliverables* . 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, which consists of shipping and handling. 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.




9
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


*Related
Party Revenue*





Related
party revenue consists of revenue earned under agreements with Audible Germany
(see Note 8) and France Loisirs (see Note 9). Revenue under the France Loisirs
agreement includes a $1,000,000 technology licensing fee that is being
recognized on a straight-line basis over the initial 24-month term of the
agreement. Revenue under the Audible Germany agreement includes $30,000 earned
per month over the initial 30-month term of the agreement. The Company
recognizes $30,000 per month only after Audible Germany has agreed that the
services delivered for the prior 60-day period were satisfactory and collection
of the amount is reasonably assured. Revenue earned under each of these
agreements also includes reimbursement of certain incremental out-of-pocket
costs incurred by the Company that are billed to France Loisirs and Audible
Germany in accordance with EITF Issue 01-14, *Income
Statement Characterization of Reimbursement Received for ‘Out-of-Pocket’
Expenses Incurred* .





*Other
Revenue*





Other
revenue for the three months ended March 31, 2004, included revenue from a
license granted for certain technology rights to a device manufacturer which was
recognized on a straight-line basis over the term of the agreement which expired
in June 2004. Other revenue for the three months ended March 31, 2005 primarily
included revenue from commissions earned by the Company for referring customers
to a retail partner to purchase a digital audio device, which is recognized in
the period when the purchase is completed.




Shipping and Handling Costs




Shipping
and handling costs, which consist of costs and fees associated with warehousing,
fulfillment, and shipment of digital audio devices to customers, are recorded as
a component of marketing expense in the condensed consolidated Statements of
Operations. These costs totaled $86,518 and $98,444, for the three months ended
March 31, 2005 and 2004, respectively.




*Cost
of Content and Services Revenue*





Cost of
content and services revenue includes earned royalties on sales of content as
specified by the terms of the content agreements, periodic net realizable value
adjustments to royalty advances, amortization of warrants issued to content
providers in connection with content agreements, other non-recoupable content
costs, and discount certificate rebates. Royalty expense for sales of content is
either paid based upon a percentage of revenue or as a fixed price per title as
per the royalty agreement. In certain cases, the cost per title may differ
depending upon whether the title is sold as part of the AudibleListener
membership or sold as an a la carte sale.




*Advertising
Expenses*





The
Company expenses the costs of advertising and promoting its products and
services as incurred. These costs are included in marketing expense in the
accompanying condensed consolidated Statements of Operations and totaled
$575,737 and $264,727 for the three months ended March 31, 2005 and 2004,
respectively.




10
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


*Use
of Estimates*





The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and





reported
amounts of revenues and expenses during the period. Significant items subject to
estimates include the recoverability of the carrying amount of property and
equipment, the allowance for returns and chargebacks, recoverability of royalty
advances, valuation of deferred tax assets and fair value of equity based
compensation. Actual results could differ from those estimates.





*Income
Taxes*





The
Company accounts for income taxes using the asset and liability method of SFAS
No. 109, *Accounting
for Income Taxes* (“SFAS
No. 109”). Under the asset and liability method, deferred tax assets and
deferred tax liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operations in the period in which the tax
change occurs. Deferred tax assets are reduced, if necessary, by a valuation
allowance for any tax benefits, which are more likely than not, not going to be
realized.





*Basic
and Diluted Net Income (Loss) Applicable to Common Shareholders Per Common Share*





Basic and
diluted net income (loss) applicable to common shareholders per common share is
presented in accordance with the provisions of Statement of Financial Accounting
Standard No. 128, *Earnings
Per Share* , (“SFAS
No. 128”). Basic net income (loss) applicable to common shareholders per common
share is computed by dividing net income (loss) applicable to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted net income (loss) applicable to common shareholders 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, warrants and restricted stock using the treasury stock method.





For the
three month period ended March 31, 2005, diluted net income applicable to common
shareholders per common share is computed by dividing net income applicable to
common stockholders by the diluted weighted average common shares outstanding.
For the three month period ended March 31, 2004, diluted net loss applicable to
common shareholders per common share is equal to basic net loss applicable to
common shareholders per common share, since all potential common stock was
anti-dilutive for the period ended March 31, 2004.


11
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


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





Three
      Months ended
      March
      31,2005
    
    2004Weighted
      average basic common shares outstanding
    
    
    24,008,188
    
    
    18,664,387Effect
      of dilutive potential common shares:Stock
      Options
    
    
    1,796,152
    
    
    --Warrants
    
    
    311,901
    
    
    --Restricted
      Stock
    
    
    1,691
    
    
    --Weighted
      average diluted common shares outstanding
    
    
    26,117,932
    
    
    18,664,387





For the
three-month period ended March 31, 2005, warrants and stock options with
exercise prices greater than the average market price of the common stock in the
period of $20.10 per share, were excluded from the diluted calculation as their
inclusion would have been anti-dilutive. For the three-month period ended March
31, 2004, 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:






Three
      Months endedMarch
      31,2005
    
    2004Stock
      Options
    
    
    356,860
    
    
    3,019,593Warrants
    
    
    429,443
    
    
    1,074,447Restricted
      Stock
    
    
    4,000
    
    
    --





*Stock-Based
Compensation*





SFAS No.
148, *Accounting
for Stock Based Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123* , (“SFAS
No. 148”), amended FASB Statement No. 123, *Accounting
for Stock-based Compensation* , (“SFAS
No. 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, *Accounting
for Stock Issued to Employees* , (“APB
No. 25”), provided it discloses the effect of SFAS No. 123, as amended by SFAS
No. 148, in the 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 (the "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 each employee's 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.


12
 *Table of Contents*


**AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**




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 March
31, 2005 and 2004, options to purchase 2,571,094 and 3,019,593, respectively,
shares of common stock were outstanding. As of March 31, 2005 and 2004, 28,000
and zero, respectively, of restricted share awards had been issued.
 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 No. 148, such costs would have been recognized ratably over the
vesting period of the underlying instruments and the Company's net income (loss)
applicable to common shareholders and net income (loss) applicable to common
shareholders per common share would have changed to the pro forma amounts
indicated in the table below.


Three
      Months Ended
      March
      31,2005
    
    2004Net
      income (loss) applicable to common shareholders as
reported
    
    $
    889,391
    
    $
    (10,429,738
    )Add:
      Total stock-based employee compensation cost included in reported net
      income (loss) applicable to common shareholders (based on intrinsic value
      method)
    
    
    37,342
    
    
    34,113Deduct:
      Total stock-based employee compensation expense determined under the fair
      value method for all awards
    
    
    (509,528
    )
    
    (841,050
    )Pro-forma
      net income (loss) applicable to common shareholders
    
    $
    417,205
    
    $
    (11,236,675
    )Basic
      net income (loss) ) applicable to common shareholders per common
      share:As
      Reported
    
    $
    0.04
    
    $
    (0.56
    )Pro
      Forma
    
    $
    0.02
    
    $
    (0.60
    )Diluted
      net income (loss) ) applicable to common shareholders per common
      share:As
      Reported
    
    $
    0.03
    
    $
    (0.56
    )Pro
      Forma
    
    $
    0.02
    
    $
    (0.60
    )


13
 *Table of Contents*


****


**AUDIBLE,
INC. AND SUBSIDIARY**


**NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(unaudited)**


****


The
Company has used the Black-Scholes option pricing model in calculating the fair
value of options. The assumptions used and the weighted-average information for
the three months ended March 31, 2005 and 2004, are as follows:





Three
      Months ended
      March
      31,2005
    
    2004Risk-free
      interest rate
    
    
    4.19
    %
    
    3.66
    %Expected
      dividend yield
    
    
    --
    
    
    --Expected
      lives
    
    
    5
      years
    
    
    5
      yearsExpected
      volatility
    
    
    121
    %
    
    124
    %





*Restricted
Stock*


During
the three months ended March 31, 2005, the Company granted awards to receive
28,000 restricted shares to employees under the Plan. The restricted shares
either cliff-vest or vest periodically between three months to forty-eight
months after the grant date. The fair value of the restricted stock on the grant
date, as determined by the closing price of Audible’s stock on the day
immediately preceding the grant date, is recorded as deferred compensation, a
component of stockholders’ equity, and is amortized as compensation expense
straight-line over the vesting term of the restricted stock award. When
employees who have these restricted stock awards leave the Company prior to
vesting, the remaining un-expensed deferred compensation is reversed against
additional paid-in-capital, and the previously recognizedcompensation
expense is reversed against additional paid-in-capital since the awards are not
vested. Total non-cash compensation expense relating to the amortization of
restricted shares was $22,995 and $0 during the three month periods ended March
31, 2005 and 2004, respectively. Actual shares under these awards are not issued
until vesting is complete.


*Stock
and Equity Instruments Issued for Goods and Services*





The
Company issues warrants to purchase shares of common stock to non-employees as
part of their compensation for providing goods and services. The Company
accounts for these warrants in accordance with the EITF Issue No. 96-18, *Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services* . The
exercise price of the warrants is determined by the closing price of Audible’s
common stock on the day of the agreement. Fair value of the warrant issued is
estimated using the Black-Scholes model with the best available assumptions
concerning risk-free interest rate, life of the warrant, dividend yield and
expected volatility. The fair value of the warrant is expensed on a
straight-line basis over the term of the agreement and is recorded within the
operating expense line item that best represents the nature of the goods and
services provided. Depending on the terms of the warrant, the Company applies
variable plan or fixed plan accounting in accordance with EITF No. 96-18.





(**2)**
    **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.




14
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


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 64,480,245 common shares then
issued and outstanding were converted into 21,493,415 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
numbers and amounts have been retroactively restated for all periods presented
to reflect the one for three reverse stock split.





**(3)**
    **Property
      and Equipment**





Property
and equipment consists of the following:





**March
      31,**
      **2005**
    
    **December
      31,**
      **2004**Studio
      equipment
    
    $
    574,877
    
    $
    549,359Computer
      server and website equipment
    
    
    4,868,926
    
    
    4,567,189Office
      furniture and equipment
    
    
    928,405
    
    
    850,750Leasehold
      improvements
    
    
    827,317
    
    
    827,317Equipment
      in process
    
    
    85,896
    
    
    28,384Total
      property and equipment
    
    
    7,285,421
    
    
    6,822,999Less:
      accumulated depreciation and amortization
    
    
    (6,043,415
    )
    
    (5,903,909
    )Total
      property and equipment, net
    
    $
    1,242,006
    
    $
    919,090





Depreciation
and amortization expense on property and equipment totaled $139,507 and
$110,525, during the three-month periods ended March 31, 2005 and 2004,
respectively.





At March
31, 2005 and December 31, 2004, respectively, the gross amount of plant and
equipment and related accumulated amortization recorded under capital leases
were as follows:
 
 **March
      31,**
      **2005**
    
    **December
      31,**
      **2004**Computer
      server and website equipment
    
    $
    743,302
    
    $
    743,302Less:
      accumulated amortization
    
    
    226,722
    
    
    189,483Total
      computer server and website equipment, net
    
    $
    516,580
    
    $
    553,819


**(4)**
    **Accrued
      Expenses**





The
components of the accrued expenses balance are as follows:





**March
      31,**
      **2005**
    
    **December
      31,**
      **2004**Royalties
    
    $
    3,063,695
    
    $
    1,882,039Retail
      rebates and discounts
    
    
    371,515
    
    
    461,182Professional
      fees
    
    
    412,253
    
    
    346,000Revenue
      sharing and bounty payments
    
    
    398,064
    
    
    304,718Other
      accrued expenses
    
    
    718,302
    
    
    634,617Total
      accrued expenses
    
    $
    4,963,829
    
    $
    3,628,556




15
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


**(5)**
    **Stockholders'
      Equity**





The
following is a summary of the Stockholders’ Equity activity for the three months
ended March 31, 2005:




**Common
      Stock**
    
    **Treasury
      Stock**
    
    ****
    
    ******Shares**
    
    **Par
      value**
    
    **Shares**
    
    **Cost**
    
    **APIC**
    
    **Def
      Comp**
    
    **Accumulated
      other comprehensive income**
    
    **Accumulated
      deficit**
    
    **Total
      Stockholders' Equity******Balance
      at December 31, 2004
    
    
    24,169,775
    
    $
    241,697
    
    
    (229,741
    )
    $
    (184,740
    )
    $
    187,248,675
    
    $
    (154,173
    )
    
    -
    
    $
    (130,060,750
    )
    $
    57,090,709Cashless
      exercise of common stock warrants
    
    
    3,790
    
    
    38
    
    
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    (0
    )Exercise
      of warrants
    
    
    100,000
    
    
    1,000
    
    
    
    
    
    
    
    
    272,000
    
    
    
    
    
    
    
    
    
    
    
    273,000Exercise
      of options
    
    
    24,304
    
    
    243
    
    
    
    
    
    
    
    
    65,882
    
    
    
    
    
    
    
    
    
    
    
    66,125Reversal
      of compensation charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,492
    )
    
    8,492
    
    
    
    
    
    
    
    
    -Non-cash
      compensation charge - options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,347
    
    
    
    
    
    
    
    
    14,347Issuance
      of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    459,400
    
    
    (459,400
    )
    
    
    
    
    
    
    
    -Non-cash
      compensation charge - restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,995
    
    
    
    
    
    
    
    
    22,995Retirement
      of treasury stock
    
    
    (229,741
    )
    
    (2,297
    )
    
    229,741
    
    
    184,740
    
    
    (182,443
    )
    
    
    
    
    
    
    
    
    
    
    (0
    )Income
      tax benefit from stock options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,490
    
    
    
    
    
    
    
    
    
    
    
    22,490Foreign
      currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    552
    
    
    
    
    
    552Net
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    
    889,391
    
    
    889,391Balance
      at March 31, 2005
    
    
    24,068,128
    
    $
    240,681
    
    
    -
    
    
    -
    
    $
    187,877,474
    
    $
    (567,739
    )
    $
    552
    
    $
    (129,171,359
    )
    $
    58,379,609




16
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(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 under which, 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 warrants to purchase 333,333 shares were issued as an
inducement to Apax to convert its Series A shares. The warrants are exercisable
at $21.00 per share and expire on February 5, 2011. The fair value of the
776,803 shares of common stock and the warrants to purchase 333,333 shares of
$9,873,394 was recorded as a charge to the net loss applicable to common
shareholders in the condensed consolidated Statement of Operations for the three
months ended March 31, 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.





On
November 17, 2004 the Company issued 2,022,500 shares of common stock in
connection with a secondary public offering at a price of $24.50 per share. Net
proceeds received by the Company were $46,456,593, net of direct
costs.





As of
March 31, 2005 and December 31, 2004, the Company had issued 24,068,128 and
24,169,775 respectively, shares of common stock. As of March 31, 2005 and
December 31, 2004, the Company had 3,526,580 and 3,635,660, respectively, shares
of common stock reserved for common stock warrants, options and restricted
stock.





*Employee
Stock-Based Compensation*





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 on grant date and the exercise
price of options issued is recorded as deferred compensation, a component of
stockholders’ equity, and is amortized as compensation expense straight-line
over the vesting term of the option. When employees who have these options leave
the Company, the remaining un-expensed deferred compensation is reversed against
additional paid-in-capital. During the three-months ended March 31, 2005 and
2004, $14,347 and $34,113, respectively of compensation expense was recognized,
related to these transactions.





*Restricted
Stock*


During
the three months ended March 31, 2005, the Company granted awards to receive
28,000 restricted shares to employees under the Plan. The restricted shares
either cliff-vest or vest periodically between three months to forty-eight
months, after the grant date. The fair value of the restricted stock issued on
the grant date, as determined by the closing price of Audible’s stock on the day
immediately preceding the grant date, is recorded as deferred compensation, a
component of stockholders’ equity, and is amortized as compensation expense
straight-line over the vesting term of the restricted stock award. When
employees who have these restricted stock awards leave the Company prior to
vesting, the remaining un-expensed deferred compensation is reversed against
additional paid-in-capital, and the previously recognized compensation expense
is reversed against additional paid-in-capital since the awards are not vested.
Total non-cash compensation expense relating to the amortization of restricted
shares was $22,995 and $0 during the three month periods ended March 31, 2005
and 2004, respectively. Actual shares under these awards are not issued until
vesting is complete.


17
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


*Warrants*





The
Company frequently issues common stock warrants to third parties in exchange for
services. The fair values of warrants issued in exchange for services are
determined in accordance with EITF Issue No. 96-18 and are recognized as an
expense under fixed plan or variable accounting using the Black-Scholes pricing
model depending on the terms of the agreements over the periods in which
services are being performed. The assumptions used in the Black-Scholes pricing
model to calculate fair values, including risk-free interest rate and
volatility, were determined using available information on the measurement date.
Expected dividend yield of zero was used for all calculations. For the three
months ended March 31, 2005 and 2004, $0 and $269,081 was recognized as expense
related to warrants.





*Treasury
Stock*


During
the February 8, 2005 Board of Directors meeting, the Board voted that all
229,741 shares of common stock held as treasury shares by the Company were
to be retired, and the Company subsequently legally retired the treasury stock.
Consequently, as of March 31, 2005 and December 31, 2004 the Company held zero
and 229,741, respectively, shares of common stock as treasury stock.


*Comprehensive
Income*





The
following table sets forth comprehensive income for the periods indicated:





**March
      31, 2005**
    
    **March
      31,****2004**Net
      income
    
    $
    889,391
    
    $
    57,772Other
      comprehensive incomeforeign
      currency translation adjustment
    
    
    552
    
    
    --Comprehensive
      income
    
    $
    889,943
    
    $
    57,772





**(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, 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 subsidiary Random House Ventures, LLC, purchased
56,593 shares of Audible common stock from the Company for $1,000,000. Over the
term of the agreement Audible was to contribute toward 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 from the Company
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 to
Random House Ventures. If they had not been converted, then on March 26, 2004
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.




18
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****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


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. There was
no expense related to this agreement during the three month period ended March
31, 2005 and 2004.





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 warrant expense was $0 and
$1,910 for the three months ended March 31, 2005 and March 31, 2004,
respectively.





The
warrants are accounted for using variable plan accounting whereby compensation
costs vary each accounting period until the final measurement date.





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)**
    **Audible
      UK**







In
February 2005, the Company launched Audible UK, which is being developed to be a
spoken audio website service mirroring Audible, Inc. services, but focused on
the UK marketplace. Audible, Inc. purchased one share of Audible UK stock on
February 7, 2005, which at that date became a wholly-owned subsidiary of Audible
Inc. As of March 31, 2005 minimal costs have been incurred, such as rent
expense, office expenses, and payroll expense for the general manager. No
revenue was recognized for the three-month period ended March 31,
2005.


**(8)**
    **Audible
      Germany Agreement**





On August
30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
(the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
approximately 5.7% of Audible’s common stock, inclusive of certain common stock
warrants held by the entities.
 
 Audible
Germany has the exclusive rights to operate a German language Audible website.
Under the Joint Venture, Random House and Holtzbrinck each contributed
approximately $16,542 in exchange for each receiving a 24.5% interest in Audible
Germany. The Company was required to contribute $34,384 in exchange for a 51%
interest in Audible Germany. After the initial formation, Random House and
Holtzbrinck will provide additional financing of approximately $1,490,000 each
in certain installments, subject to Audible Germany meeting certain milestones.
As of March 31, 2005 approximately $1,980,000 in total has been funded by Random
House and Holtzbrinck. In the event of liquidation of Audible Germany, this
additional financing by Random House and Holtzbrinck accrues interest at 8% per
annum and is senior to Audible’s capital investment. The Company may, but is not
obligated to, contribute additional capital to the entity. Any profits
distributed by Audible Germany are to be distributed in accordance with the
ownership interests.
 
 The
Company has determined that Audible Germany is not a variable interest entity as
defined in FASB Interpretation No. 46R, *Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51* (“FIN
46R”) because, as a development stage enterprise, Audible Germany will have
sufficient equity to permit it
to finance the activities in which it is currently engaged in without additional
subordinated financial support. In addition, the other criteria within FIN 46R
that would characterize Audible Germany as a variable interest entity have not
been met. Rather, Audible Germany is a voting interest entity.


19
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****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


Under
EITF 96-16, *Investor’s
Accounting for an Investee When the Investor has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights* , the
Company has determined that the minority shareholders, together, have
significant participatory rights, allowing them to participate in significant
decisions of Audible Germany and to block significant decisions proposed by
Audible. As a result of the significant participatory rights held by the
minority shareholders, the Company does not have unilateral control over Audible
Germany. Therefore, Audible does not consolidate the results of Audible Germany
but rather accounts for its investment in Audible Germany under the equity
method of accounting. Under the equity method of accounting, the Company records
51% of the profits, if any, and 51% of the equity losses but only until such
time that the Company records losses equal to the initial investment of the
Company plus any profits previously recorded. Audible has no further obligation
to fund the operations of Audible Germany. The Company will continue to monitor
its portion of unreported equity losses in the event that Audible Germany
subsequently generates income. The Company would resume applying the equity
method after its share of profits equals the unreported equity method losses.





In
connection with the Joint Venture, on August 30, 2004, the Company entered into
a license and services agreement with Audible Germany (the “License”). Under the
License, Audible Germany intends to launch a German language spoken word audio
service. The terms provide for the Company to provide intellectual property and
substantially all of the technological infrastructure for the operation of the
service. In return, Audible Germany is required to pay Audible $30,000 each
month for a period of 30 months, beginning in September 2004. Every 60-days
during this agreement, the parties will meet to review and accept the services.
The monthly payments are subject to refund if Audible Germany does not accept
the services, subject to reasonable cure. Under the License, Audible recognizes
$30,000 of revenue per month once Audible Germany has agreed that the services
delivered for the prior 60-day period were satisfactory and collection of the
amount is reasonably assured. Also under the License, Audible Germany will pay
the Company royalties ranging from 0.5% to 3% of revenue up to an annual royalty
cap of the U.S. dollar equivalent of €1.5 million, subject to Audible Germany
achieving certain operating margins.





During
the three-month period ended March 31, 2005 the Company recognized $120,000 in
related party revenue under the license agreement as the related services were
delivered and accepted on or before March 31, 2005. No revenue was recognized
under this agreement during the three months ended March 31, 2004. In
addition, the Company also recognized $19,556 in billings for certain
incremental reimbursable costs incurred in connection with the License in
accordance with EITF 01-14 during the three months ended March 31, 2005. These
amounts are included in related party revenue on the condensed consolidated
Statements of Operations.





**(9)**
    **France
      Loisirs Agreement**





On
September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann AG
and its affiliates own 5.7% of Audible’s common stock, inclusive of certain
common stock warrants held by the entities.


20
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


On
September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann AG
and its affiliates own 5.7% of Audible’s common stock, inclusive of certain
common stock warrants held by the entities.

Under the
Agreement, in the first quarter of 2005, France Loisirs launched a French
language spoken word audio service through Audio Direct. The terms provide for
Audible to provide intellectual property and substantially all of the
technological infrastructure for the operation of the service. In return, France
Loisirs is required to pay Audible $1,000,000, payable as follows: $250,000 in
September 2004, $250,000 in October2004, $250,000 in January 2005 and $20,833
for each of the following 12 months. Commencing the first fiscal year after the
business achieves positive net income, the Company will receive a royalty of 5%
of the business’s net paid revenue. Net paid revenue refers to net revenues for
digital spoken word content after the deduction of taxes but excluding certain
hardware revenue. The 5% royalty will apply until the business’s net paid
revenue exceeds €20,000,000. Once net paid revenue exceeds €20,000,000, the
Company will receive a flat fee of €1,000,000. If net paid revenue exceeds
€33,300,000, the Company will receive a royalty payment of €1,000,000, plus 3%
of net paid revenue in excess of €33,300,000. An additional royalty is payable
equal to one-half of the distributable pre-tax profits of the business.

FIN46R
addresses the consolidation by business enterprises of variable interest
entities (VIEs) and requires that if an enterprise is the primary beneficiary of
a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be consolidated in the
financial statements of the enterprise.

Audio
Direct is considered a VIE because its equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support. Audible and France Loisirs form a related party group, as defined in
FIN 46R, as a result of the Bertelsmann affiliation and the number of seats that
Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the entity
within the related party group that is most closely associated with the variable
interest entity is the primary beneficiary.

Based
upon analysis, the Company determined that France Loisirs is more closely
associated with Audio Direct, primarily because France Loisirs is required to
fund the operations of Audio Direct, including the $1,000,000 payment due to
Audible. France Loisirs is therefore considered to be the primary beneficiary of
Audio Direct. As a result, the Company does not consolidate the results of Audio
Direct but rather accounts for its variable interest in Audio Direct under the
cost method of accounting.

Because
the Company has not made and is not required to provide any funding to France
Loisirs or Audio Direct, it has no exposure to loss under the Agreement.

The
$1,000,000 in fees are non-refundable and not subject to any acceptance
provisions. Since fair values do not exist for the different services (elements)
that Audible is providing, the services are considered one unit of accounting
under EITF 00-21 and accordingly, the $1,000,000 in fees is recognized as
related party revenue on a straight-line basis over the 24-month term at the
rate of $41,667 per month, provided collectibility is reasonably assured.

During
the three month period ended March 31, 2005, the Company recognized $125,000 in
related party revenue in connection with this agreement, representing the
straight-line recognition of $1,000,000 in revenue being recognized over the
24-month term of the agreement. No revenue was recognized under this agreement
during the three months ended March 31, 2004.In
addition, the Company recognized $9,880 in billings for certain incremental
reimbursable costs incurred in connection with the License in accordance with
EITF 01-14. These amounts are included in related party revenue on the
condensed consolidated Statements of Operations.

**(10)
  Employee Benefit Plan**

The
Company has a 401(K) plan based on contributions from employees and
discretionary Company contributions. As of December 31, 2004, the Company had
never contributed to the 401(K) plan. Beginning January 1, 2005, the Company has
adopted a policy to match up to the first two percent of salary contributions
made from employees into the 401(K) plan. During the three months ended March
31, 2005 the Company made contributions of $22,236.


21
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


**(11)**
    **Commitments
      and Contingencies**





*Lease
Obligations*


The
Company has an operating lease on its office space in Wayne, New Jersey that
expires in December 2008. The lease contains a renewal option for a period of
three years. In February 2005, Audible UK signed a one year lease for office
space, which includes office amenities. This lease expires in February 2006, at
which time Audible UK intends to renew the lease. Total future minimum lease
obligations as of March 31, 2005 under these lease arrangements are
$1,981,341.





Rent
expense of $102,836 and $92,776 was recorded under operating leases for the
three months ended March 31, 2005 and 2004, respectively.





There are
no future minimum lease payments due under capital leases as of March 31, 2005,
which were paid in full during the first quarter of 2005.





*Royalty
Obligations*
 Royalty
obligations represent payments to be made to various content providers pursuant
to minimum guarantees under their royalty agreements, net of royalties expensed.
The royalty obligations recorded in the accompanying condensed consolidated
Balance Sheets are classified between current and non-current based on the
payment terms specified in the agreements.
  *Inventory
Purchase*
  The
Company has entered into a commitment to purchase certain inventory units from a
third party digital player manufacturer. These devices will primarily be given
to customers for free when they sign up for a one-year commitment to an
AudibleListener membership.
 
 *Service
Agreements*
   The
Company has entered in operational and marketing agreements with various vendors
to provide certain services. The majority of the amounts committed relate to
hosting services of the Company’s website.


22
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****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


**Summary
of Cash Commitments and Obligations**
**
The
following table shows future cash payments due under the Company’s commitments
and obligations as of March 31, 2005:


**Year**
    
    **Operating
      Leases**
    
    **Royalty
      Obligations (1)**
    
    **Inventory
      Purchase**
    
    **Service
      Agreements**
    
    **Total**2005
    
    $
    380,838
    
    $
    189,250
    
    $
    93,880
    
    $
    646,888
    
    $
    1,310,8562006
    
    
    522,271
    
    
    44,380
    
    
    —
    
    
    719,184
    
    
    1,285,8352007
    
    
    539,116
    
    
    —
    
    
    —
    
    
    544,320
    
    
    1,083,4362008
    
    
    539,116
    
    
    —
    
    
    —
    
    
    —
    
    
    539,116Total
    
    $
    1,981,341
    
    $
    233,630
    
    $
    93,880
    
    $
    1,910,392
    
    $
    4,219,243
  (1)
Reflected in the current and non-current liabilities respectively, on the
accompanying March 31, 2005 condensed consolidated Balance Sheet.


Contingencies
 
 In June
2001, the Company and certain of its officers were named as a defendant in a
securities class action filed in United States District Court for the Southern
District of New York related to the Company’s initial public offering (“IPO”) in
July 1999. The lawsuits also named certain of the underwriters of the IPO as
well as certain of the Company’s directors and former directors as defendants.
Approximately 300 other issuers and their underwriters have had similar suits
filed against them, all of which are included in a single coordinated proceeding
in the Southern District of New York (the “IPO Litigations”). The complaints
allege that the prospectus and the registration statement for the Company’s IPO
failed to disclose that the underwriters allegedly solicited and received
“excessive” commissions from investors and that some investors in the Company’s
IPO allegedly agreed with the underwriters to buy additional shares in the
aftermarket in order to inflate the price of the Company’s stock. An amended
complaint was filed April 19, 2002. The Company and certain of its officers,
directors, and former directors were named in the suits pursuant to Section 11
of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and
other related provisions. The complaints seek unspecified damages, attorney and
expert fees, and other unspecified litigation costs.
 
 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, the Company along with other non-underwriter defendants in the coordinated
cases also moved to dismiss the IPO Litigations. On February 19, 2003, the court
ruled on the motions. The court granted the Company’s motion to dismiss the
claims against the Company under Rule 10b-5, due to the insufficiency of the
allegations against the Company. The motions to dismiss the claims under Section
11 of the Securities Act were denied as to virtually all of the defendants in
the consolidated cases, including the Company. The Company’s individual
officers, directors and former director defendants in the IPO Litigation signed
a tolling agreement and were dismissed from the action without prejudice on
October 9, 2002.


In June
2003, a proposed settlement of this litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers' insurance
companies. The settlement would provide, among other things, a release for the
Company and for the individual defendants for the conduct alleged to be wrongful
in the amended complaint. The Company would agree to undertake other
responsibilities under the partial settlement, including agreeing to assign
away, not assert, or release certain potential claims the Company that may have
against the underwriters. Any direct financial impact of the proposed settlement
is expected to be borne by the Company's insurance carriers.
  In June
2004, an agreement of settlement was submitted to the court for preliminary
approval. The court requested that any objections to preliminary approval of the
settlement be submitted by July 14, 2004, and the underwriter defendants
formally objected to the settlement. The plaintiffs and issuer defendants
separately filed replies to the underwriter defendants’ objections to the
settlement on August 4, 2004. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. The parties are directed
to report back to the court regarding the modifications. If the parties are able
to agree upon the required modifications, and such modifications are acceptable
to the court, notice will be given to all class members of settlement, a
“fairness” hearing will be held and if the court determines that the settlement
is fair to the class members, the settlement will be approved. There can be no
assurance that this proposed settlement will be approved and implemented in its
current form, or at all.


23
 *Table of Contents*


****
 **AUDIBLE,
INC. AND SUBSIDIARY**
 **NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(unaudited)**


Due to
the inherent uncertainties of litigation and because the settlement approval
process is at a preliminary stage, the Company cannot accurately predict the
ultimate outcome of the matter.


Starting
on or about February 22, 2005, several class actions were filed against Audible
and two of the Company’s executives in the United States District Court for the
District of New Jersey.  The plaintiffs purport to represent a class
consisting of all persons (other than Audible’s officers and directors and their
affiliates) who purchased the Company’s securities between November 2, 2004 and
February 15, 2005 (the "Class Period").  The plaintiffs allege that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 thereunder by failing to make complete and accurate disclosures
concerning the Company’s future plans and prospects.  The individual
defendants are also alleged to be liable under Section 20(a) of the Exchange
Act.  All of the defendants are alleged to have sold stock at inflated
prices during the Class Period.

In April
2005, a derivative suit was filed in the state court of New Jersey against
Audible, the two executives named as individual defendants in the class actions
described above, six of the Company’s outside directors, and three of the
Company’s stockholders.  The derivative suit makes the same factual
allegations as the class actions described above and adds allegations that the
six outside directors named as defendants and/or the stockholders who nominated
them sold stock at inflated prices during the Class Period.  The plaintiff
in this derivative action purports to seek a recovery of the damages allegedly
sustained by Audible rather than by investors who allegedly purchased securities
at inflated prices.

In May
2005, the Company learned of a second derivative action which was filed during
April 2005 in the United States District Courtfor the
District of New Jersey against Audible, the two executives named as individual
defendants in the class actions described above, and all seven of the Company’s
outside directors. The derivative action makes the same allegations as the class
actions described above and adds allegations that all of the individual
defendants are responsible for an alleged failure of internal controls that
resulted in the recent delay in the filing of the Company’s Form 10-K for 2004.
The plaintiff in this derivative action purports to seek a recovery of the
damages allegedly sustained by Audible rather than by investors who allegedly
purchased securities at inflated prices.

The
Company believes that all of the claims described above are without merit and
intends to defend the actions vigorously.Due to
the inherent uncertainties of litigation and because these actions are at a
preliminary stage, the Company cannot accurately predict the ultimate outcome of
these matters. It is possible that additional complaints may be filed in the
future.
 
 On March 23, 2005,
Digeo, Inc filed, but did not serve, a complaint for patent infringement in
Federal District Court in the State of Washington. The Company believes the
claims made in the complaint are without merit and will not have a material
adverse impact on its financial position or results of operations.
 
 **(12)**
    **Supplemental
      Disclosure of Cash Flow
Information**





**Cash
Paid for Interest and Taxes**





Interest paid
was $1,495 and $2,188 during the three-month periods ended March 31, 2005 and
March 31, 2004, respectively.




No
income taxes were paid in the three-month periods ended March 31, 2005 and
2004.





**(13)**
    **Customer
      Concentration**





For the
three months ended March 31, 2005 and March 31, 2004, Apple Computer accounted
for 14.0% and 9.4% of total revenue, respectively.





As of
March 31, 2005 and December 31, 2004, Apple Computer accounted for 70% and 67%,
respectively, of the Company’s accounts receivable.




24
 *Table of Contents*


****


**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 2004 Annual Report on Form 10-K, as amended.
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.*


*This
Quarterly Report on Form 10-Q contains forward-looking statements and
information relating to our Company. We generally identify forward-looking
statements using words like “believe,” “intend,” “will,” “expect,” “may,”
“should,” “plan,” “project,” “contemplate,” “anticipate,” “seek” or similar
terminology. These statements are based on our beliefs as well as assumptions we
made using information currently available to us. Because these statements
reflect our current views concerning future events, these statements involve
risks, uncertainties and assumptions. Actual results may differ significantly
from the results discussed in these forward-looking statements.*





**Overview**





Audible,
Inc. is the internet’s largest, most diverse provider of premium spoken audio
services for content download and playback on personal computers, CD or
AudibleReady 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 and magazines that, due to their
busy lives, they would not have the time to read, as well as to listen to time
shifted radio programs on their own schedules. Our online store is located at
audible.com and our main location of operations is in Wayne, New Jersey.
Audible.com is also the Apple iTunes Music Store’s exclusive provider of spoken
word content for digital distribution.





Audible
has more than 70,000 hours of audio programs and over 200 content providers 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
$21.95, they may download and listen to a prescribed number of audio titles 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 á la carte basis.





Since
launching the service in 1997, over 539,000 customers in 120 countries have
purchased content at audible.com. We believe our growth has been driven
primarily by our strong collection of content, value to our customers 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 advertising and promotion
programs, co-marketing partnerships with device manufacturers, online
promotions, promotions with retailers and our customer-get-customer referral
program. In addition, customers at the Apple iTunes Music Store and Amazon.com
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, our 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 $100 rebate or discount
on the purchase of certain AudibleReady devices, such as an iPod. Other sources
of new AudibleListeners include our “tell a friend” customer-get-customer
program and our marketing efforts directed at converting á 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 providing our customers with a wide
range of high value content, a compelling value proposition and solid customer
service minimizes our customer cancellation rate.




25
 *Table of Contents*





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, controlling our costs, pursuing our strategic
initiatives of international expansion, entering the consumer and institutional
learning markets, as well as facilitating wireless delivery of content to our
customers.





Although
we have experienced revenue growth in our content sales in recent periods, we
cannot assure you that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results. We
cannot assure you that we will be able to continue to increase our revenue, or
that 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 four main categories: (1) content and services revenue,
which includes consumer content and corporate services, (2) hardware revenue,
(3) related party revenue, and (4) 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. We recognize revenue
from the sale of individual content titles in the period when the content is
purchased. We recognize revenue from the sale of content subscriptions pro rata
over the term of the subscription period. We recognize revenue from the sale of
monthly AudibleListener memberships 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 at month end
and recognized as content revenue in the following month. We recognize revenue
from the sale of UltimateListener, our prepaid discounted content package, and
gift programs when the content is downloaded.





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 AudibleListeners for twelve
months. We also have retail promotions in which we purchase electronic discount
certificates or gift cards from retailers and give them away to our customers
when they sign up to be AudibleListeners for twelve months. 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, or EITF, Issue No. 01-9, *Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products)* , or EITF
01-9. The cost of discount certificate rebates and gift cards 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, 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
returns and chargebacks are also recorded as a reduction in revenue. Estimates
for future returns and chargebacks are made and recorded as an allowance for
returns and chargebacks at each period end.





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




26
 *Table of Contents*


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 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. 00-21, *Revenue
Arrangements with Multiple Deliverables* . 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, which consists of shipping and handling. 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.
 
 Related party
revenue consists of revenue recognized in connection with our agreements with
Audible Germany, France Loisirs S.A.S. and Audio Direct S.A.S., which we entered
into during 2004.





Other
revenue consists of revenue from a license for certain technology rights granted
to a device manufacturer recognized on a straight-line basis over the term of
the agreement, and commissions earned from a retail partner related to our
referral of customers to purchase their digital mobile players. Such commissions
are based on a percentage of the purchase price of the players and are
recognized when customer purchases are made.





We have
marketing agreements with device manufacturers such as Apple Corp., Creative
Labs, Hewlett-Packard, Kenwood, Motorola, palmOne, Rio Audio, and Toshiba. 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, when a
purchaser of an Apple iPod accesses audible.com to download content, Apple Corp.
receives 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 also entered
into marketing agreements with Cox Communications, Cablevision System’s Optimum
Online broadband service, Time Warner Cable’s Roadrunner broadband service,
Amazon.com, Microsoft, The New York Times Company, Dow Jones ( *The
Wall Street Journal* ) and
others to promote our content to their customers, either directly or indirectly
under which these 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.





We have
also established relationships with electronics retailers such as Crutchfield,
J&R ComputerWorld, Micro Center, MobilePlanet.com, and Tweeter to promote
our AudibleListener membership plan at the point of purchase, offering consumers
a discount against the cost of an AudibleReady device.


In
February 2005, we launched Audible UK, which is being developed to be a spoken
audio website service mirroring the U.S. company's services, but focused on the
UK marketplace. Our operations in the United Kingdom will be conducted through
our wholly-owned subsidiary, Audible Ltd. Audible UK commenced operations in the
first quarter of 2005. As of March 31, 2005 minimal costs have been incurred,
such as rent expense, office expenses, and payroll expense for the general
manager. We did not recognize any revenue for Audible UK for the three-month
period ended March 31, 2005.


27
 *Table of Contents*


On August
30, 2004, Audible Inc., Verlagsgruppe Random House GmbH, and Holtzbrinck
networXs AG entered into a joint venture agreement to form Audible GmbH, or
Audible Germany. Audible Germany has the exclusive rights to operate a German
language Audible website. Under the joint venture, Random House and Holtzbrinck
each contributed approximately $16,000 in exchange for each receiving a 24.5%
interest in Audible Germany.
We contributed approximately $34,000 in exchange for a 51% interest in Audible
Germany. Following initial formation, Random House and Holtzbrinck are obligated
to provide additional financing of approximately $1,490,000 each in certain
installments subject to Audible Germany meeting certain milestones. As of March
31, 2005, approximately $1,980,000 in total has been funded by Random House and
Holtzbrinck. In the event of liquidation of Audible Germany, this additional
financing by Random House and Holtzbrinck, which accrues interest at 8% per
annum, is senior in right of payment to our investment. We may, but we are not
obligated to, contribute additional capital to the entity. Pursuant to a license
agreement, beginning in September 2004, Audible Germany is required to pay us
$30,000 per month for thirty months subject to certain conditions. The agreement
also requires Audible Germany to pay us a royalty ranging from 0.5% to 3% of
Audible Germany's revenue up to an annual royalty cap of the U.S. dollar
equivalent of €1.5 million, subject to Audible Germany achieving certain
operating margins. Audible Germany is a related party to Audible.
  On
September 15, 2004, Audible Inc., France Loisirs S.A.S. and Audio Direct S.A.S.,
a wholly-owned subsidiary of France Loisirs entered into a 24-month service and
license agreement, under which France Loisirs launched in the first quarter of
2005 a French language spoken word audio service through Audio Direct. Under the
agreement, we provide intellectual property and substantially all of the
technological infrastructure for the operation of the service. In return, France
Loisirs is required to pay us a total of $1,000,000 over the term of the
agreement. Commencing the first fiscal year after the business achieves positive
net income, we will receive a royalty of 5% of the business's net paid revenue.
Net paid revenue means net revenues for digital spoken word content after the
deduction of taxes but excluding certain hardware revenue. The 5% royalty will
apply until the business's net paid revenue exceeds €20 million. Once net paid
revenue exceeds €20 million, we will receive a flat fee of €1 million. If net
paid revenue exceeds €33.3 million, we will receive a royalty payment of €1
million, plus 3% of net paid revenue in excess of €33.3 million. An additional
royalty is payable equal to one-half of the distributable pre-tax profits of the
business. Audio Direct S.A.S. is a related party to Audible Inc.


In
September 2003, we entered into a four year agreement with Apple Computer, Inc.
under which Audible is the Apple iTunes Music Store’s exclusive provider of
spoken word content for digital distribution. Under the agreement, Apple is
required to incorporate into the Apple iTunes jukebox software AudibleReady
features to enable owners of personal computers and the Apple iPod to download
and listen to spoken audio from audible.com. The iTunes Music Store is the only
digital download music service through which we are permitted to distribute our
content. We began selling content at the Apple iTunes Music Store in October
2003. Apple may convert the agreement to a non-exclusive arrangement for both us
and Apple upon 120 days prior written notice, although Apple will have a
continuing obligation to incorporate AudibleReady features into the Apple iPod
and Apple iTunes jukebox software. Under the agreement, when the Apple iTunes
Music Store sells Audible content, we receive from Apple a fixed price per
content title.





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




28
 *Table of Contents*




Results
of Operations





The
following table sets forth certain financial data for the periods indicated as a
percentage of total revenue for the three months ended March 31, 2005 and
2004.


**Three
      Months Ended**
      **March
      31,****2005**
    
    **2004****(unaudited)**
    
    **(unaudited)**Revenue,
      net:Content
      and services:Consumer
      content
    
    
    99.5
    %
    
    98.5
    %Point
      of sale rebates
    
    
    (2.8
    )
    
    (1.7
    )Services
    
    
    0.2
    
    
    0.3Total
      content and services
    
    
    96.9
    
    
    97.1Hardware
    
    
    0.8
    
    
    2.7Related
      party revenue
    
    
    2.1
    
    
    0.0Other
    
    
    0.2
    
    
    0.2Total
      revenue, net
    
    
    100.0
    
    
    100.0Operating
      expenses:Cost
      of content and services revenue:Royalties
      and other content charges
    
    
    32.1
    
    
    30.3Discount
      certificate rebates
    
    
    4.7
    
    
    0.6Total
      cost of content and services revenue
    
    
    36.8
    
    
    30.9Cost
      of hardware revenue
    
    
    2.3
    
    
    7.6Operations
    
    
    14.3
    
    
    16.9Technology
      and development
    
    
    12.6
    
    
    18.5Marketing
    
    
    17.8
    
    
    17.0General
      and administrative
    
    
    11.9
    
    
    8.4Total
      operating expenses
    
    
    95.7
    
    
    99.3Income
      from operations
    
    
    4.3
    
    
    0.7Other
      income (expense):Interest
      income
    
    
    3.2
    
    
    0.2Interest
      expense
    
    
    0.0
    
    
    0.0Other
      income, net
    
    
    3.2
    
    
    0.2Income
      before income tax expense
    
    
    7.5
    
    
    0.9Income
      tax expense
    
    
    (0.6
    )
    
    0.0Net
      income
    
    
    6.9
    
    
    0.9Dividends
      on preferred stock
    
    
    0.0
    
    
    (9.1
    )Charges
      related to conversion of convertible preferred stock
    
    
    0.0
    
    
    (145.8
    )Total
      preferred stock expense
    
    
    0.0
    
    
    (154.9
    )Net
      income (loss) applicable to common shareholders
    
    
    6.9
    %
    
    (154.0
    )%




29
 *Table of Contents*




**Three
Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004.**




**March
      31, 2005**
    
    **March
      31, 2004****(unaudited)**
    
    **(unaudited)**
    
    **$
      Change**
    
    **%
      Change**Content
      and service revenue
    
    $
    12,501,910
    
    $
    6,576,290
    
    $
    5,925,620
    
    
    90.1
    %Hardware
      revenue
    
    
    103,656
    
    
    181,717
    
    
    ($78,061
    )
    
    -43.0
    %Related
      party revenue
    
    
    274,436
    
    
    --
    
    
    274,436
    
    
    --Other
      revenue
    
    
    24,868
    
    
    16,126
    
    $
    8,742
    
    
    54.2
    %Royalty
    
    
    4,119,268
    
    
    2,033,934
    
    
    2,085,334
    
    
    102.5
    %Direct
      customer rebates
    
    
    601,221
    
    
    39,100
    
    
    562,121
    
    
    1437.6
    %Cost
      of content and service revenue
    
    
    4,754,107
    
    
    2,093,262
    
    $
    2,660,845
    
    
    127.1
    %Cost
      of hardware revenue
    
    
    301,752
    
    
    518,035
    
    
    ($216,283
    )
    
    -41.8
    %Operations
      expense
    
    
    1,847,794
    
    
    1,143,247
    
    $
    704,547
    
    
    61.6
    %Technology
      and development
    
    
    1,616,182
    
    
    1,255,132
    
    $
    361,050
    
    
    28.8
    %Marketing
    
    
    2,289,253
    
    
    1,152,286
    
    $
    1,136,967
    
    
    98.7
    %General
      and administrative
    
    
    1,537,929
    
    
    567,178
    
    $
    970,751
    
    
    171.2
    %Other
      income, net
    
    
    412,558
    
    
    12,779
    
    $
    399,779
    
    
    3128.4
    %Income
      tax expense
    
    
    81,020
    
    
    --
    
    $
    81,020
    
    
    --




*Content
and services revenue* consists
of AudibleListener membership revenue, revenue from single title sales, revenue
from subscriptions, revenue from sales at the Apple iTunes music store and
library revenue. We offset the cost of point of sale rebates from content and
services revenue.


Content
and services revenue grew during the three months ended March 31, 2005 compared
to the three months ended March 31, 2004 due primarily to the growth in our
customer count as well as sales at the Apple iTunes music store. We recognized
approximately $1,805,000 in revenue during the three months ended March 31, 2005
from sales of Audible content at the Apple iTunes music store, compared to
approximately $635,000 in the same period in 2004. Our customer count grew from
approximately 344,000 as of March 31, 2004 to approximately 539,000 as of March
31, 2005. Included in these numbers are new AudibleListener memberships added
during the period, which increased to approximately 55,000 new members in the
2005 period from approximately 23,000 new members in the 2004 period. The
revenue growth is mainly due to new AudibleListener members, which was due to
increases in marketing spending and our continued development of the various
channels we use to recruit new customers. Our customer count includes all
customers who have purchased Audible content at www.audible.com. Our customer
count does not include customers who 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* consists
of revenue derived primarily from the shipping and handling charge to customers
on devices that Audible provides for free to AudibleListeners who commit to a
twelve month AudibleListener membership. Also included are separate sales of
digital audio players to consumers and libraries.





Hardware
revenue decreased during the 2005 period primarily as a result of a decrease in
the shipments of digital audio devices we give away, which resulted in lower
shipping and handling revenues. Under EITF No. 00-21, with these
multiple-element arrangements, we recognize only shipping and handling fees
as revenue for the delivery of hardware because all other consideration paid by
the customer is contingent upon delivery of the content.




30
 *Table of Contents*





*Related
Party revenue* consists
of revenue recognized in connection with our agreements with France Loisirs and
Audible Germany which were entered into during 2004.





Related
party revenue for the three months ended March 31, 2005 included approximately
$125,000 in fees earned from our agreement with France Loisirs representing the
prorated amount of the straight-line recognition of $1,000,000 in fees being
recognized over the 24-month term of the agreement and $9,880 in billings to
Audible France Loisirs for reimbursement of certain incremental costs incurred
by us in connection with the joint venture in accordance with EITF 01-14. Also
included in related party revenues were $120,000 in fees earned from our
agreement with Audible Germany and $19,556 in billings to Audible Germany for
reimbursement of certain incremental costs incurred by us in connection with the
joint venture in accordance with EITF 01-14. There was no related party revenue
in the three months ended March 31, 2004.





*Other
revenue* for the
three months period ended March 31, 2005 primarily consisted of commissions
earned by us for referring customers to a retail partner to purchase a digital
audio device, which is recognized in the period when the purchase is completed.
For the three months ended March 31, 2004, other revenue consisted of the
straight-line amortization of revenue derived from technology licensing fees.


*Cost
of content and services revenue* consists
primarily of royalties incurred, discount certificate rebates, and the
amortization of publisher royalty advances.
 Royalties
and other content charges increased primarily due to the product mix and
quantity of titles sold, including sales at the Apple iTunes Music Store
beginning in October 2003. Discount certificate rebates, introduced in 2004, are
electronic discount certificates or gift cards given to certain AudibleListeners
who commit to joining the AudibleListener program for twelve months.
AudibleListener customers use these when purchasing an AudibleReady digital
audio player.
 
 *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 decreased in the 2005 period primarily due to the decrease
in the number of digital audio players given away to customers.
 
 *Operations* expense
consists of payroll and related expenses for content acquisition, editorial,
audio conversion and customer service and credit card fees.


Operation
expenses increased in the 2005 period primarily due to approximately $244,000 in
higher customer service costs, approximately $164,000 in higher credit card
fees, approximately $130,000 in higher personnel expenses and approximately
$84,000 in higher outside services expenses. These increases were primarily
related to customer and revenue growth.





*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 in the 2005 period was primarily
due to approximately $224,000 in higher consultant expenses and approximately
$120,000 in higher personnel costs, offset in part by a decline of approximately
$109,000 in web-hosting fees.





*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, and shipping and handling costs associated with
selling digital devices.




31
 *Table of Contents*





Marketing
expenses were higher in the 2005 period primarily due to approximately $746,000
in higher co-marketing and bounty payments, approximately $478,000 in higher
advertising and promotional expenses and approximately $134,000 in higher
personnel expenses. This increase was offset in part by the absence during the
2005 period of approximately $267,000 in warrant charges incurred during the
2004 period. As we continue to obtain new customers through our marketing
partners, these expenses will continue to grow.





*General
and administrative* expense
consists 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 general and administrative expense in the 2005 period was primarily
due to approximately $503,000 in increased audit and related fees, which
included fees related to Sarbanes-Oxley compliance activities, approximately
$114,000 in inc reased
personnel expenses, approximately $77,000 in increased legal fees, approximately
$64,000 in increased other professional fees, approximately $42,000 in increased
consulting expenses and approximately $38,000 in expenses related to the start
up of our Audible UK subsidiary.


*Other
Income, net* consists
of interest income and interest expense. The increase in other income, net was
mainly due to interest earned on the investment of funds in short-term
investments, which consisted of governmental agency notes and mortgage-backed
securities. We had no such investments as of March 31,
2004*.*


We have
recorded a provision for current income tax expense of approximately $81,000 for
the three-month period ended March 31, 2005. This expense is based upon our
estimated 2005 effective tax rate of approximately 8%. The estimated effective
rate includes both our estimated federal and state income tax expense and
assumes the use of available net operating loss carryforwards. Future use of
previous loss carryforwards may be affected by the Tax Reform Act of 1986 which
imposes limitations on our use of net operating loss carryforwards because
certain stock ownership changes have occurred. There was no income tax expense
recorded in 2004.


****


**Factors
Affecting Operating Results**





We have
only a limited operating history with which to evaluate our business and
prospects. Our limited operating history and the emerging nature of the market
for internet-delivered audio content makes predicting our future operating
results difficult. In addition, while we commenced operations in 1997, our
prospects nonetheless should 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 and other 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;


•
    Compete
      against other companies that provide services similar to ours;
      and


•
    Generate
      cash from operations and/or raise additional
capital.





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




32
 *Table of Contents*





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.





As of
March 31, 2005, we were not a party to any derivative financial instruments or
other financial instruments or hedging investments that expose us to material
market risk. We currently do not plan to enter into any derivative instruments
or engage in any hedging activities.





We have
incurred significant losses since inception and as of March 31, 2005, we had an
accumulated deficit of $129,171,359.





Our
operating results have varied on a quarterly basis during our 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 website
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 international operations; (12) successful
introduction of the Audible service in the UK; (13) continuous management and
compliance with Sarbanes-Oxley requirements; and (14) 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 website. 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.





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 approximately $28,719,000. In
July 1999, we completed our initial public offering and received net proceeds of
approximately $36,856,000. From the time of our IPO we have raised approximately
$15,860,000 in net proceeds through the private sale of shares of our
convertible stock (all of which were subsequently converted to common stock),
approximately $4,186,000 in net proceeds through the private sales of our common
stock, approximately $2,404,000 in net proceeds through the exercise of common
stock options and approximately $1,567,000 in net proceeds through the exercise
of common stock warrants. In November 2004, we completed a public offering of
our common stock resulting in net proceeds to us of approximately $46,457,000.




33
 *Table of Contents*





As of
March 31, 2005, our cash and cash equivalents balance was approximately
$9,840,000. In addition, as of March 31, 2005 we had approximately $55,403,000
in short-term investments which we intend to hold until maturity. Based on our
currently proposed business plans and related assumptions, we believe that our
cash and cash equivalents balance and short-term investment balance as of March
31, 2005 will enable us to meet our anticipated cash requirements for operations
and capital expenditures for the foreseeable future. Beyond that, we may need
additional cash to fund our business and finance our continued growth. We cannot
assure you that such additional financing, if needed, will be available on terms
favorable to us or our stockholders, if at all.





***Cash
Requirements***





At March
31, 2005 our principal source of liquidity was approximately $9,840,000 in cash
and cash equivalents and $55,403,000 in short-term investments.





The
following table shows future cash payments due under our commitments and
obligations as of March 31, 2005:




**Year**
    
    **Operating
      Leases**
    
    **Royalty
      Obligations (1)**
    
    **Inventory****Purchase**
    
    **Service****Agreement**s
    
    **Total**2005
    
    $
    380,838
    
    $
    189,250
    
    $
    93,880
    
    $
    646,888
    
    $
    1,310,8562006
    
    
    522,271
    
    
    44,380
    
    
    —
    
    
    719,184
    
    
    1,285,8352007
    
    
    539,116
    
    
    —
    
    
    —
    
    
    544,320
    
    
    1,083,4362008
    
    
    539,116
    
    
    —
    
    
    —
    
    
    —
    
    
    539,116Total
    
    $
    1,981,341
    
    $
    233,630
    
    $
    93,880
    
    $
    1,910,392
    
    $
    4,219,243
  (1)
Reflected in the current and non-current liabilities respectively, on the
accompanying March 31, 2005 condensed consolidated Balance Sheet.


***Sources
and Uses of Cash***





Net cash
provided by operating activities for the three months ended March 31, 2005 was
approximately $3,503,000. This was primarily attributable to our net income, and
increases in accounts payable, accrued expenses, accrued compensation, and
deferred revenue, offset in part by an increase in accounts receivable, accounts
receivable from related parties and accretion of discounts on short-term
investments. Net cash
provided by operating activities for the three months ended March 31, 2004 was
approximately $472,000. This was primarily attributable to our net income,
services rendered for common stock and warrants, increased accounts payable, and
depreciation and amortization, offset in part by an increase in accounts
receivable and inventory and a decrease in royalty obligations




Net cash
used in investing activities for the three months ended March 31, 2005 was
approximately $7,179,000. This was attributable to additional purchases of
property and equipment of approximately $462,000 and net short-term investing
activity of approximately $6.7 million. Net cash used in investing activities
for the three months ended March 31, 2004 was approximately $124,500,
attributable to purchases of property and equipment.


Net cash
provided by financing activities for the three months ended March 31, 2005 and
2004 was approximately $218,000 and $194,000, respectively, resulting primarily
from proceeds from the exercise of common stock options and common stock
warrants offset by principal payments made on capital lease obligations.





**New
Accounting Standards**


In
November 2004, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 151, *Inventory
Costs, an amendment of ARB No. 43, Chapter 4* . SFAS
No. 151, amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current period charges. In addition, SFAS No. 151 requires that
allocation of fixed production overhead to the cost of conversion be based on
the normal capacity of the production facilities. The provision of SFAS No. 151
is effective for us beginning on September 1, 2005 and is not expected to have a
significant impact on our financial statements.


34
 *Table of Contents*





In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
153, *Exchanges
of Nonmonetary Assets - An Amendment of APB Opinion No. 29* , which
addresses the measurement of exchanges of nonmonetary assets. It eliminates the
exception from fair value accounting for nonmonetary exchanges of similar
productive assets and replaces it with an exception for exchanges that do not
have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
has commercial substance if the future cash flows of an entity are expected to
change significantly as a result of the exchange. This statement is effective
beginning after June 15, 2005 and is not expected to have a significant impact
on our financial statements.





In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123(R), *Share-Based
Payment* , which
is a revision of SFAS No. 123, *Accounting
for Stock-Based Compensation* . SFAS
No. 123(R) supersedes APB Opinion No. 25, *Accounting
For Stock Issued To Employees* , and
amends SFAS No. 95, *Statements
Of Cash Flows* .
Generally, the approach in SFAS No. 123(R) is similar to the approach described
in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
condensed consolidated Statement of Operations based on their fair values. Pro
forma disclosure is no longer an alternative. The new standard will be
effective, for us, beginning January 1, 2006. We have not yet completed our
evaluation but we expect the adoption to have a material effect on our financial
statements.





**ITEM
3.   Qualitative and Quantitative Disclosures about
Market Risk**





None





**ITEM
4.   Controls and Procedures**





**Evaluation
of Disclosure Controls and Procedures**





The
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, has conducted an evaluation of the effectiveness of the Company’s
disclosure controls and procedures pursuant to Securities Exchange Act
Rule 13a-14 as of the end of the period covered by this quarterly report.
Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company has in place effective controls and
procedures designed to ensure that information required to be disclosed by the
Company in the report it files or submits under the Securities Exchange Act and
the rules there under, is recorded, processed, summarized and reported within
the time periods specified in the Commission’s rules and forms.





**Changes
in Internal Control Over Financial Reporting**





The
following changes to our internal control over financial reporting were made in
the first quarter of 2005:





Accounting
for Retail Promotion Programs





We have
implemented system application controls and automated processes to capture the
total number of customers participating in our various retail promotion
programs. We are also tracking our inventory of discount certificates and gift
cards to ensure the movement in these items reconciles to the system-generated
information.




35
 *Table of Contents*


****


Accounting
for Content Costs
 
 We are
now properly reconciling royalty expense to revenue earned to enable us to
accurately record royalty expense. We have strengthened our review process over
the royalty rates used in the computation of royalties and over the calculation
of the royalty allocation factor used to calculate royalties on revenue from our
membership programs by implementing a more detailed manual review to ensure that
the appropriate rates and factors are being used.
 
 
 Financial
Statement Closing and Reporting Process
 
 We have
strengthened our internal controls related to the review and approval of journal
entries, calculations and assumptions, and account analyses used in the
preparation of our financial statements by implementing a thorough review of the
related supporting documentation. We have redesigned certain key spreadsheets
used in the financial statement preparation process so that they are more
transparent to the user and the reviewer and the calculations are simpler to
review. We have added a staff member with technical accounting and public
company reporting skills who will enhance our financial reporting capabilities,
including the preparation and review of required footnote
disclosures.
 
 
 **ITEM
1. Legal Proceedings.**
 
 In June
2001, we and certain of our officers were named as a defendant in a securities
class action filed in United States District Court for the Southern District of
New York related to our initial public offering (“IPO”) in July 1999. The
lawsuits also named certain of the underwriters of the IPO as well as certain of
our directors and former directors as defendants. Approximately 300 other
issuers and their underwriters have had similar suits filed against them, all of
which are included in a single coordinated proceeding in the Southern District
of New York (the “IPO Litigations”). The complaints allege that the prospectus
and the registration statement for our IPO failed to disclose that the
underwriters allegedly solicited and received “excessive” commissions from
investors and that some investors in our IPO allegedly agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the
price of our stock. An amended complaint was filed April 19, 2002. We and
certain of our officers, directors, and former directors were named in the suits
pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the
Exchange Act of 1934, and other related provisions. The complaints seek
unspecified damages, attorney and expert fees, and other unspecified litigation
costs.
 
 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, we
along other non-underwriter defendants in the coordinated cases also moved to
dismiss the IPO Litigations. On February 19, 2003, the court ruled on the
motions. The court granted our motion to dismiss the claims against us under
Rule 10b-5, due to the insufficiency of the allegations against us. The motions
to dismiss the claims under Section 11 of the Securities Act were denied as to
virtually all of the defendants in the consolidated cases, including us. Our
individual officers, directors and former director defendants in the IPO
Litigation signed a tolling agreement and were dismissed from the action without
prejudice on October 9, 2002.
 
 In June
2003, a proposed settlement of this litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The settlement would provide, among other things, a release for us
and for the individual defendants for the conduct alleged to be wrongful in the
amended complaint. We would agree to undertake other responsibilities under the
partial settlement, including agreeing to assign away, not assert, or release
certain potential claims us that may have against our underwriters. Any direct
financial impact of the proposed settlement is expected to be borne by our
insurance carriers.
 
 In June
2004, an agreement of settlem ent was submitted to the court for preliminary
approval. The court requested that any objections to preliminary approval of the
settlement be submitted by July 14, 2004, and the underwriter defendants
formally objected to the settlement. The plaintiffs and issuer defendants
separately filed replies to the underwriter defendants’ objections to the
settlement on August 4, 2004. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. The parties are directed
to report back to the court regarding the modifications. If the parties are able
to agree upon the required modifications, and such modifications are acceptable
to the court, notice will be given to all class members of settlement, a
“fairness” hearing will be held and if the court determines that the settlement
is fair to the class members, the settlement will be approved. There can be no
assurance that this proposed settlement would be approved and implemented in its
current form, or at all.


36
 *Table of Contents*





Due to
the inherent uncertainties of litigation and because the settlement approval
process is at a preliminary stage, we cannot accurately predict the ultimate
outcome of the matter.





Starting
on or about February 22, 2005, several class actions were filed against Audible
and two of our executives in the United States District Court for the District
of New Jersey.  The plaintiffs purport to represent a class consisting of
all persons (other than Audible’s officers and directors and their affiliates)
who purchased our securities between November 2, 2004 and February 15, 2005 (the
"Class Period").  The plaintiffs allege that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
by failing to make complete and accurate disclosures concerning our future plans
and prospects.  The individual defendants are also alleged to be liable
under Section 20(a) of the Exchange Act.  All of the defendants are alleged
to have sold stock at inflated prices during the Class Period.





In April
2005, a derivative suit was filed in the state court of New Jersey against
Audible, the two executives named as individual defendants in the class actions
described above, six of our outside directors, and three of our
stockholders.  The derivative suit makes the same factual allegations as
the class actions described above and adds allegations that the six outside
directors named as defendants and/or the stockholders who nominated them sold
stock at inflated prices during the Class Period.  The plaintiff in this
derivative action purports to seek a recovery of the damages allegedly sustained
by Audible rather than by investors who allegedly purchased securities at
inflated prices.


In May
2005, we learned of a second derivative action which was filed during April 2005
in the United States District Court for the
District of New Jersey against Audible, the two executives named as individual
defendants in the class actions described above, and all seven of our outside
directors. The derivative action makes the same allegations as the class actions
described above and adds allegations that all of the individual defendants are
responsible for an alleged failure of internal controls that resulted in the
recent delay in the filing of our Form 10-K for 2004. The plaintiff in this
derivative action purports to seek a recovery of the damages allegedly sustained
by Audible rather than by investors who allegedly purchased securities at
inflated prices.


We
believe that all of the claims described above are without merit and intend to
defend the actions vigorously. Due to
the inherent uncertainties of litigation and because these actions are at a
preliminary stage, we cannot accurately predict the ultimate outcome of these
matters. It is possible that additional complaints may be filed in the
future.





On March
23, 2005, Digeo, Inc filed, but did not serve, a complaint for patent
infringement in Federal District Court in the State of Washington. We believe
the claims made in the complaint are without merit and will not have a material
adverse impact on our financial position or results of operations.





**ITEM
      2.**
    **Unregistered Sales of Equity Securities and Use of
      Proceeds**





None





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





None





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





None





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





None







37
 *Table of Contents*




**ITEM
      6.**
    **Exhibits**





Exhibit
      Number
    
    Description3.1*
    
    Amended
      and Restated Certificate of Incorporation of Audible3.1.2***
    
    Certificate
      of Amendment to the Amended and Restated Certificate of Incorporation of
      Audible3.2*
    
    Amended
      and Restated Bylaws of Audible3.3!
    
    Certificate
      of Retirement dated March 12, 200410.1+*
    
    License
      Agreement dated November 4, 1998, by and between Microsoft Corporation and
      Audible10.2+*
    
    Digital
      Rights Management Agreement dated November 4, 1998, between Microsoft
      Corporation and Audible10.3+*
    
    Development
      Agreement dated November 12, 1998, by and between RealNetworks, Inc. and
      Audible10.4*
    
    RealMedia
      Architecture Partner Program Internet Agreement dated November 12, 1998,
      between RealNetworks, Inc. and Audible10.15*
    
    1999
      Stock Incentive Plan10.19*
    
    Office
      lease dated June 20, 1997, by and between Audible, Inc., as tenant, and
      Passaic Investment LLC, Sixty-Five Willowbrook Investment LLC and Wayne
      Investment LLC, as tenants-in-common, as landlord10.20*
    
    Sublease
      Agreement dated July 19, 1996, by and between Audible, Inc., as sublessee,
      and Painewebber Incorporated, as sublessor10.26*
    
    Employment
      Offer Letter from Audible, Inc. to Andrew Kaplan dated May 25,
      199910.28**
    
    Warrant
      Agreement to purchase 10,000 Shares of common stock at a price of $7.65
      per share, dated October 8, 1999, issued by Audible, Inc. 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, 2001, to
      Robin Williams (relating to Exhibit 10.30)10.32++#
    
    Co-Branding,
      Marketing and Distribution Agreement dated January 30, 2000 by and between
      Audible, Inc. and Amazon.com Commerce Services, Inc.10.34++##
    
    Amendment
      No. 1 to Co-Branding, Marketing and Distribution Agreement dated as of
      January 24, 2001 by and between Amazon.com Commerce Services, Inc. and
      Audible, Inc. (relating to Exhibit 10.32)10.36***
    
    Registration
      Rights Agreement dated January 25, 2002 by and between Audible, Inc.,
      Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P.,
      Special Situations Private Equity Fund, L.P. and Special Situations
      Technology Fund, L.P.10.38>
    
    Series
      C Convertible Preferred Stock Purchase Agreement by and between Audible,
      Inc. and the investor parties thereto dated as of August 1,
      2003.10.39>
    
    Series
      A Investor Rights Agreement.10.40!
    
    Series
      A 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,
      2004.10.43++@
    
    License
      and Services Agreement by and between Audible, Inc., and Audible GmBH
      dated August 30, 2004.10.44++@
    
    Master
      Alliance Agreement by and between Audible, Inc., France Loisirs S.A.S. and
      Audio Direct S.A.S. dated September 15, 2004.10.45@
    
    Articles
      of Association of Audible GmBH.10.46++!!
    
    Digital
      Download sales agreement with Apple Computer, Inc.31.1
    
    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
    
    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
    
    Certification
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
    
    Certification
      of the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.*
    
    Incorporated
      herein by reference to the Company's Registration Statement on Form S-1,
      No. 333-76985**
    
    Incorporated
      by reference from the Company's 10-K/A for the period ended December 31,
      1999***
    
    Incorporated
      by reference from the Company's 10-K for the fiscal year ended December
      31, 2001
  38
 *Table of Contents*
  #
    
    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
      June 30, 2001.>
    
    Incorporated
      by reference from the Company's Form 8-K filed on August 5,
      2003.!
    
    Incorporated
      by reference from the Company's 10-K for the fiscal year ended December
      31, 2003.@
    
    Incorporated
      by reference from the Company's Form 10-Q for the quarterly period ended
      September 30, 2004.!!
    
    Incorporate
      by reference from the Company’s 10-K/A for the fiscal year ended December
      31, 2004.^
    
    Executive
      Compensation Plans and Arrangements.





+
    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.





++
    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.




39
 *Table of Contents*




**SIGNATURE**





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.**By:
    /s/
      Andrew P KaplanName:
    Andrew
      P. KaplanTitle:
      Executive Vice President, Chief Financial Officer and Director (Principal
      Financial and Accounting Officer)




Dated:  May 9,
2005




40