##### 













SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K/A

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2002                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from                       to                                     



Commission File Number: 000-26529




Audible, Inc.


(Exact Name of Registrant as Specified in Its
Charter)


|                                            |  |                    
|------------------------------------------- |  | -------------------
|Delaware                                    |  | 22-3407945         
|(State or Other Jurisdiction of             |  | (IRS Employer      
|Incorporation or Organization)              |  | Identification No.)
|                                           
|65 Willowbrook Boulevard                    |  | 07470 - 7056       
|Wayne, New Jersey                           |  | (Zip Code)         
|(Address of Principal Executive
    Office) |  |                    



Registrants telephone number, including
area code:


(973) 837-2700


Securities Registered Pursuant to
Section 12(b) of the Act:


|                     |  |                                           
|-------------------- |  | ------------------------------------------
|Title of Each Class: |  | Name of Each Exchange on which Registered:
|                     |  |                                           
|None                 |  |                                           



Securities Registered Pursuant to
Section 12 (g) of the Act:




Common Stock, par value $0.01


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 þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K.     þ

Indicate by check mark whether the Registrant is
an accelerated filer (as defined in Rule 12b-2 under the
Act).     Yes o          No þ

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
Registrant, based upon the closing sale price of Common Stock on
December 31, 2002 (the last business day of the Registrants
most recently completed fiscal year) as reported on the NASDAQ
was approximately $9.1 million. Shares of Common Stock held
by each officer and director and by each person who owns 5% of
more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination
is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the
Registrants Common Stock, as of March 20, 2003 was
31,627,869 shares of Common Stock.



---






---



##### 



AUDIBLE, INC.

FORM 10-K




TABLE OF CONTENTS


|              |  |                                                                                           |  |     
|------------- |  | ----------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                           |  | PAGE
|PART I       
|Item 1.       |  | Business                                                                                  |  | 3   
|              |  | Overview                                                                                  |  | 3   
|              |  | Industry Background                                                                       |  | 3   
|              |  | Our Solution                                                                              |  | 4   
|              |  | Our Strategy                                                                              |  | 6   
|              |  | The Audible Service                                                                       |  | 7   
|              |  | Competition                                                                               |  | 9   
|              |  | Intellectual Property and Proprietary Rights                                              |  | 10  
|              |  | General                                                                                   |  | 11  
|              |  | Employees                                                                                 |  | 11  
|Item 2.       |  | Properties                                                                                |  | 11  
|Item 3.       |  | Legal Proceedings                                                                         |  | 11  
|Item 4.       |  | Submission of Matters to a Vote of Security
    Holders                                   |  | 12  
|PART II      
|Item 5.       |  | Market for the Companys Common Equity and
    Related Stockholder Matters                |  | 12  
|Item 6.       |  | Selected Financial Data                                                                   |  | 15  
|Item 7.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  | 16  
|Item 7A.      |  | Quantitative and Qualitative Disclosure about
    Market Risk                             |  | 33  
|Item 8.       |  | Financial Statements and Supplementary Data                                               |  | 33  
|Item 9.       |  | Changes in the Disagreements with Accountants on
    Accounting and Financial Disclosure  |  | 33  
|PART III     
|Item 10.      |  | Directors and Executive Officers of the Registrant                                        |  | 34  
|Item 11.      |  | Executive Compensation                                                                    |  | 35  
|Item 12.      |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  | 37  
|Item 13.      |  | Certain Relationships and Related Transactions                                            |  | 39  
|Item 14.      |  | Controls and Procedures                                                                   |  | 40  
|PART IV      
|Item 15.      |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  | 40  
|Exhibit Index |  | 41                                                                                       
|Signatures    |  | 44                                                                                       

1



---



##### 



FORWARD-LOOKING STATEMENTS

In addition to historical information, this
Annual Report on Form 10-K contains forward-looking statements
that involve risks and uncertainties that could cause actual
results to differ materially. Factors that might cause or
contribute to such differences include, but are not limited to,
those discussed in the section entitled Managements
Discussion and Analysis of Financial Condition and Results of
Operations. Readers should carefully review the risks
described in other documents we file from time to time with the
Securities and Exchange Commission, including our Quarterly
Reports on Form 10-Q which we filed in 2002. Readers are
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual
Report on Form 10-K. We undertake no obligation to publicly
release any revisions to the forward-looking statements or
reflect events or circumstances after the date of this document.

2



---



##### 



PART I

Item 1.     Business.

Overview

We are the leading provider of subscription
based, premium spoken audio content, such as audio versions of
books, newspapers, newsletters, magazines and radio programs,
that is delivered over the Internet. The Audible service allows
consumers to purchase and download content from our Web site
www.audible.com®. Our customers listen to their audio in a
variety of ways. Most of our customers download their audio to
personal computers and then either transfer the audio to
portable digital audio players or burn the content
to CDs for playback on their CD players.

We offer customers the opportunity to subscribe
to AudibleListener®, a monthly audio service. For a fixed
monthly fee, AudibleListener® customers may download their
choice of programs from our Web site. More than 34,000 hours of
audio content, much of which is available in digital audio
format only at www.audible.com®, is currently available on
our Web site. We also sell at our web site our own digital audio
player under the brand name of Otis®, which is manufactured
to our specifications in Korea. Customers can also access
content products sold by Audible through www.amazon.com. Several
manufacturers, including Apple Corp., Palm, Hewlett-Packard,
Sony Electronics, Kenwood, Handspring, Franklin Electronic
Publishers, Digisette, LLC., and SONICblue Incorporateds
Rio Audio Group, have agreed to support and promote the playback
of our content on all or some of their hand-held electronic
devices by including our Audible software on their devices. We
have added a CD burning feature to the Audible service, enabling
our customers to listen on their CD players. We currently have
over 225,000 customers in over 120 countries.

The market for the Audible service results from
the increasing usage of the Internet and the growth of hand-held
electronic devices that have digital audio capabilities. In
contrast to traditional radio broadcasts or satellite radio, the
Audible service offers customers access to content of their
choice and the ability to listen to what they want, when and
where they want  whether commuting, exercising,
relaxing or sitting at their personal computers. Unlike
traditional and online bookstores, which are subject to physical
inventory constraints and shipping delays, we provide a
selection that is readily available in digital format that can
be quickly delivered over the Internet directly to our customers.

We provide new sources of revenue for publishers
of newspapers, magazines, journals, newsletters, professional
publications and business information and producers of radio
broadcasts. In addition, our service provides companies that
distribute or promote our service and manufacturers of
electronic devices that have digital audio capabilities with a
wide selection of digital audio content to offer to their
customers.

Industry Background

Public demand for new sources of entertainment,
information and educational media continues to grow as amounts
of content and its sources proliferate. Veronis,
Suhler & Associates estimates that consumer spending on
media and information will rise at a compound rate of 5.6% per
year reaching $180 billion in 2005. During 2001, Americans
on average spent more than 3,400 hours reading, watching or
listening to media content. We believe that many consumers seek
a better way to manage this content.

Listening is a way for individuals to consume
content at times when they are unable to read, such as when they
are driving. A 1996 market study by the Yankee Group indicates
that 87% of automobile commuters listened to the radio an
average of 50 minutes a day while commuting. According to
the 2000 United States Census, 97 million people drive to
and from work alone, an increase of 15% from 1989. The mean
travel time to work increased to 24.3 minutes each way, an
increase of 7% from 1990. The US Department of Transportation
estimates that people spend 550 million hours in traffic
each week. As individuals look to use their commuting time more
efficiently and manage an increasing amount of available
content, audiobooks have emerged as a personalized
pay-to-listen alternative to radio, which does not
allow listeners to control when they listen to a particular
program. A 2001 study by the Audio Publishers Association
indicated that 23 million American households listened to
audiobooks, an increase of 7.5% from 1999. An eBrain® survey

3



---



##### 



conducted in July 2002 for the Consumer
Electronics Association found 20% of their sample currently
listen to audiobooks and 24% expect to increase their
consumption in coming months.


This increasing usage of audiobooks exists
despite limited types of content, high prices and the
limitations of cassette tapes. For instance, the audiobook
market does not address timely print content such as newspapers,
newsletters, magazines and journals.

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

According to International Data Corporation
(IDC), mobile access to the Internet, instant messaging, music
and more are seen spurring a nearly fivefold run-up in worldwide
sales of smart handheld devices by 2004, creating a market for
those products valued at approximately $26 billion. To
enable the widest possible distribution of the Audible service,
our strategy is to work with digital device manufacturers to
enable their devices to be AudibleReady.

Audible is also developing relationships with
cell phone companies and other high technology providers. Cell
phone technology is the ideal match for hand-held digital audio
players. This combination of wireless freedom and digital
transmission will in the future allow a consumer to download
from a library of audio recordings and bypass the anchored
desktop PC. This freedom to download wirelessly will allow
unprecedented convenience for consumers. Micrologic Research
reports that the number of worldwide cellular subscribers grew
by 255 million in 2001.

Our CD burning feature makes the Audible service
attractive to a wider audience. IDC estimates that the number of
CD burners will increase from 120 million in 2001 to
546 million in 2005 and that sales of blank audio CDs have
surpassed sales of music CDs.

The confluence of the Internet as an increasingly
accepted media distribution channel, the widespread adoption of
audio-enabled mobile devices and the continuing growth in
consumer demand for content in a variety of formats has resulted
in new challenges for the media industry. These challenges
include creating a system that takes advantage of revenue
opportunities by making content readily accessible through the
Internet by compensating publishers and other content creators
for quality entertainment and information while preventing
unauthorized duplication and distribution. This creates an
opportunity for a provider such as Audible that has established
a secure system for Internet delivery of premium audio content.

Our Solution

We have created the Audible service to give
consumers the ability to download spoken audio content of their
choice from the Internet and to listen to this audio when, where
and how they want. The Audible service addresses the market
opportunity created by consumer demand for audio content, the
emergence of the Internet and the availability of a wide range
of hand-held audio-enabled digital players. We created the first
service for secure delivery of premium digital spoken audio
content over the Internet for playback on personal computers and
these devices. Our service allows customers to program their
listening time with personalized selections from a wide
collection of spoken audio content available at our Web site,
audible.com®, including entertainment, news, education and
business information. We believe that we have assembled the
largest and most diverse collection of premium spoken audio
content available for download on the Internet for playback on
personal computers, hand-held digital audio players, or to burn
to CD for playback on a CD player. We have more than 34,000
hours of audio content currently available on our Web site,
including daily selected audio content from publications such as
The Wall Street Journal and The New York Times, audio versions
of books and periodicals such as Forbes, Scientific American,
Harvard Business Review, and radio programs such as Car Talk,
Fresh Air, Marketplace and All Things Considered. We provide
over 5,000 audiobooks from publishers, including Random House
Audio Publishing, Harper Audio, Simon & Schuster Audio
and Time Warner AudioBooks, and written by authors such as Tom
Clancy, John Grisham, Stephen King, Sidney Sheldon and Mary
Higgens Clark. Additionally, Audible is strategically aligned
with Random House, Inc.,

4



---



##### 



with the first-ever imprint to produce spoken
word content specifically suited for digital distribution,
Random House Audible. We believe that our extensive audio
content collection and our secure delivery system provide
benefits to our customers, content providers, manufacturers of
AudibleReady hand-held electronic devices and other companies,
which distribute or promote our service.


Benefits to Customers.

Unlike the traditional ways consumers select,
organize and consume spoken audio content, Audible customers can
access content of their choice and listen when, where and how
they want  whether commuting, exercising, relaxing or
sitting at their personal computers.

Selection.At our
Web site, audible.com®, customers can browse and purchase
from a large and diverse collection of readily available premium
spoken audio content, most of which is currently available in
digital format for Internet distribution only through us either
pursuant to exclusive arrangements or because, to our knowledge,
no one else currently has or is exploiting these rights. Our
collection currently includes over 5,000 digital audiobooks in a
wide variety of categories. We are the only source of timely
digital audio editions of leading newspapers and selected
periodicals. We also offer popular and special interest radio
programming, including interviews, commentaries and talk radio.
Our collection also contains selections that are difficult to
find or may not otherwise be readily or conveniently available
to customers, such as lectures, speeches and works developed
exclusively for Audible.com. We have over 12,000 of these other
audio selections in addition to our audiobooks.

Convenience.Audible.com provides customers with one-stop shopping for their
premium digital spoken audio. Our customers can browse and
sample spoken audio selections through our easy to navigate Web
site. Our customers can enroll in AudibleListener, a
monthly subscription program entitling customers to download
content of their choice, purchase bundled packages of selected
audio titles as well as choose automated delivery of timely
audio content on a subscription basis. Unlike traditional and
online bookstores, which are subject to physical inventory
constraints and shipping delays, we provide a service that is
readily available in digital format and can be quickly delivered
over the Internet directly to our customers.

Listening
Experience.Unlike terrestrial and
satellite radio, which offer limited programming and no ability
for the listener to control broadcast times, our service enables
customers to take greater control of their time and their
listening experience. Customers choose to listen to what they
want, when and where they want. Additionally, customers can
choose from five different fidelity options for their listening.
Our service also allows customers to skip between selections or
individual articles or chapters within selections. Customers can
pause and resume listening where they left off and can
bookmark multiple sections of content, rather than
be constrained by the rewind and fast forward functions of
cassette tape players.

Mobility.We offer
our customers a choice of listening options tailored to their
lifestyle. Customers can listen to their audio with an
AudibleReady digital audio device, using a CD player, via an
automobile jukebox or from their audio equipped desktop computer.

Value.We provide
customers with what we believe is a terrific value proposition
in our AudibleListener program, where for a fixed monthly fee,
the customer can download programs of their choice. Individual
titles are typically priced 35% less than the same audiobook on
cassette or CD, and if purchased within the
AudibleListener® membership plan, discounts compared to
cassette or CD move into the 60% range.

Benefits to Business
Affiliates.

We help content creators, device manufacturers
and other companies that distribute our products or promote our
service to their customers to create incremental sources of
revenue by aggregating premium audio content and providing a
widely-accepted system for digital spoken audio distribution.

Content creators.We
provide a new source of revenue for publishers of newspapers,
magazines, journals, newsletters, professional publications and
business information and producers of radio broadcasts by
creating a new market for content that is too timely for
distribution on cassette tape or compact disc and generally too
specialized for widely-broadcast radio programs. Additionally,
our electronic delivery service

5



---



##### 



offers publishers of audiobooks a new
distribution channel for their existing audiobook content. In a
strategic alliance with Random House, Inc., Random House Audible
has been established as a publishing imprint of Random House,
Inc.s Random House Audio Publishing Group Division. All
titles published by the imprint will be distributed exclusively
on the Internet by Audible.


Older publications, including archived or
out-of-print content, when converted to digital audio form, can
also provide additional revenue while incurring relatively low
costs for storing and delivering electronic inventory. Our
solution has the benefit of reducing the risk of audio files
being copied without authorization by employing a system
designed to limit playback of audio files to specifically
identified personal computers and digital audio players. Unlike
the new online music services, as of December 31, 2002,
Audible was the only commercially viable source on the Internet
that provided secure audio downloads for listening on portable
digital audio players.

CD burning software
providers.Leading CD burning software
providers have agreed to support and promote the capability for
Audible customers to burn the content they purchase to CD for
playback in portable CD players or in CD players installed in
automobiles. These CD burning software providers usually receive
a percentage of revenue Audible receives from customers who burn
their content to CD.

Device manufacturers.Major manufacturers of audio-enabled
digital players, such as Apple Corp., Handspring, Compaq
Computer Corporation, Hewlett-Packard, Kenwood, and Palm, have
agreed to support and promote the secure playback of our content
on their devices. SONICblue Incorporateds Rio Audio Group
has agreed to promote our service with its Rio 500, 600, 800 and
900 hand-held digital audio players. The PhatNoise Car Audio
System, among the first high-capacity media jukeboxes designed
specifically for automobiles, is capable of playing content
purchased from Audible. Our service provides these manufacturers
with an attractive application that takes advantage of the audio
capability of their digital audio devices, which may in turn,
increase their sales. In most cases, these manufacturers also
receive a percentage of the revenue generated over a specified
period of time by each new Audible customer referred by them.
Such costs are recorded in sales and marketing expense.

We also sell our own hand-held digital audio
player called the Otis. The Otis is manufactured to our
specifications and sold to customers on our website. Marketing
the Otis gives Audible the added flexibility of pricing,
inventory control and special sales opportunities.

Companies, which distribute our products or
promote our service.We have entered
into marketing agreements with Apple Corp., Roxio, Palm,
Toshiba, Cox Communications, Amazon.com, Microsoft, The New York
Times Company and Dow Jones (The Wall Street Journal) to
promote our content to their customers, either directly or
indirectly. In return, we have access to additional distribution
outlets. We have agreed with these companies to compensate them
from sales of our content to their customers.

Our Strategy

Our objective is to enhance our position as the
leading provider of subscription based, Internet-delivered,
premium spoken audio content to the extent our cash flow
permits. Key elements of our strategy to achieve this goal
include:

Increase
brand awareness.

We seek to make Audible a
recognizable brand. We continue to use the AudibleReady®
brand to signify that a player is enabled to play back Audible
content. We are continuing to enhance brand awareness of the
Audible service and increase visitors to our Web site by
expanding our marketing efforts through online initiatives as
well as co-marketing agreements. Online initiatives include a
wide range of promotion vehicles that we use to communicate with
existing customers as well as prospective customers. We also
have a well-developed customer-get-customer program.
Our co-marketing agreements and business relationships with
cable television operators, CD burning software providers, our
retail partners, Amazon.com and AudibleReady® player
manufacturers are key elements of our plans to make potential
customers aware of, and to encourage them to try our service. We
continue to seek to enter into agreements with content providers
as well

6



---



##### 



as owners of Internet portals, destinations and
commerce sites to promote co-branded services to Internet users.


Expand
content collection.

We plan to acquire more Internet distribution
rights to digital audio versions of books, newspapers, radio
broadcasts, magazines, journals, newsletters, conferences,
seminars, performances, lectures and speeches. With selected
content providers, we plan to create additional timely digital
audio editions of newspapers, periodicals and other content not
otherwise available to consumers in audio format. We intend to
continue to differentiate our service by expanding our
collection of exclusive, original and topic-specific content,
building a collection unconstrained by traditional physical
inventory concerns.

Enable
additional electronic devices, wireless phones and systems to be
AudibleReady®.

We intend to continue to work with the
manufacturers of hand-held electronic devices to support and
promote the playback of Audible content on their players. We
also seek to make AudibleReady® future generations of audio
players that use the MP3 audio format, a digital compression
format that is currently used primarily for music playback. We
are seeking to expand the AudibleReady® program to include
other mobile players, such as wireless phones, other hand-held
computing devices as they become audio-enabled, and
automobile-based media jukeboxes and personal computers. We
continue to offer a packaged software library to partners who
wish to add Audible support to their desktop end-user audio
management application.

Continue
to improve the customer experience.

We intend to make the Audible service
increasingly easy for customers to use and personalize. We
intend to take advantage of the flexibility of our online
distribution system to offer a variety of selections, pricing
and subscription models designed to maximize customer
satisfaction and to generate recurring revenue. We continue to
enhance audible.com® to make it easier for customers to
find specific selections and to actively suggest selections that
might be of interest to them based on their prior purchasing
patterns. We also are enhancing our AudibleManager®
software to make it simpler for customers to manage their
personal audio content selections and automate downloads and
transfers of content to mobile players. We provide customer
service via telephone and email.

The Audible Service

Audibles integrated spoken audio delivery
service includes five components: (1) our Web site,
audible.com®; (2) our collection of digital audio content;
(3) our software for securing, downloading, managing,
scheduling and playing audio selections; (4) a variety of
AudibleReady® players; and (5) other services.

Audible.com®.

Our Web site, audible.com®, delivers a large
and diverse selection of premium digital spoken audio content in
a secure format through the Internet. At audible.com®,
visitors can browse, search for, sample, purchase, subscribe to,
schedule, stream and download digital audio content. Customers
can also contribute reviews and rate the content at
www.audible.com, which other customers may use as part of their
purchasing decision. One hour of spoken audio in our Format 1,
requires about two megabytes of storage, takes approximately
12-15 minutes to download to a personal computer using a 28 kbps
modem, approximately eight minutes using a 56 kbps modem or
approximately ten seconds using a high speed Internet
connection, and less than one minute to transfer the content
from the personal computer to an AudibleReady® player.
Customers are offered up to five different fidelity options,
allowing them to trade off between fidelity and speed of
download from the Internet. According to The Wall Street
Journal, more than 15 million American households have
broadband connections. Veronis Suhler projects that by 2005,
68.4 million U.S. households will be online and that by
2006, 41% of online households will subscribe to a broadband
Internet connection.

7



---



##### 



Digital
audio content.

We currently offer more than 5,000 digital
audiobooks and more than 12,000 other audio selections
comprising over 34,000 hours of digital spoken audio content,
segmented in four categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Audiobooks.We offer
    a wide selection of audiobooks. We offer both abridged
    (typically three to ten hours long) and unabridged (typically
    five to 20 hours long) versions of books, read by the authors or
    by professional narrators.                                                                                                                                                                                                                   
|
| |  | Timely audio editions of print
    publications. Our service enables the
    timely distribution of audio editions of newspapers and
    periodicals previously available only in print. We offer a
    40-minute daily audio edition of The New York Timesand
    selected audio content from The Wall Street Journal. We
    also offer audio editions of Forbes, Scientific American,
    Science News, Harvard Management Update, Harvard Health Letter,and others.
|
| |  | Radio broadcasts.We
    offer popular and special-interest public radio programs shortly
    after they are originally broadcast so our customers have the
    flexibility to listen to these programs when and where they
    want. We offer audio versions of broadcasts such as Fresh
    Air, Marketplace, This American Life, The News from Lake
    Wobegon, Car Talk, and Science Friday.                                                                       
|
| |  | Lectures, speeches, performances and other
    audio.We offer a broad selection of
    lectures, speeches, dramatic and comedy performances,
    educational and self-improvement materials, religious and
    spiritual content and other forms of spoken audio, many of which
    are difficult to find from any other source. We also offer
    specialty content created exclusively for audible.com®, for
    example, programs featuring actor Robin Williams.   

We currently have licensed Internet distribution
rights to audio content from more than 125 publishers, producers
of radio content and other content creators. Our license
agreements are typically for terms of one to three years, and
many provide us with exclusive Internet distribution rights.
Under most licensing arrangements, we pay the content creator a
portion of the revenue we receive. In some of our current
arrangements, we also pay a guaranteed advance against the
content creators revenue share.

In most cases, we license audio recordings from
publishers and content creators. In other cases, such as with
The New York Timesand The Wall Street Journal, we
record and produce audio versions from the print publications.
In all cases, we convert the audio into our compressed, secure,
digital format.

Audible
software.

Our software consists of AudibleManager® for
downloading, managing, scheduling and playing audio selections
and AudiblePlayer® for Pocket PC personal digital
assistants (PDAs) and for Palm OS5 PDAs.

AudibleManager® enables our customers to
download and listen to digital spoken audio content and transfer
it to an AudibleReady® player for mobile playback.
AudibleManager implements Audibles system for
ensuring that downloaded content is playable by authorized
players and devices. AudibleManager® can also be used to
organize individual selections, to specify listening
preferences, to manage delivery options for subscriptions, and
burn purchased audio to CDs. Selections that exceed playback
time limitations on a customers hand-held electronic
device can be listened to over successive sessions by
reconnecting the player to the customers personal computer
and initiating a synchronization command that automatically
replaces the sections that have been played with new content.

Our AudiblePlayer® software enables users of
hand-held PDAs to control and customize their listening
experience. Unlike cassette tape, AudibleReady® players
allow fast navigation of the content through section markers and
bookmarks that can be set by the user. Users can skip between
selections, individual articles or chapters, effectively
allowing them to control the listening experience.

8



---



##### 



AudibleReady®
devices.

AudibleReady® players are personal computers
and other electronic devices that have a speaker or an audio
output jack and can play back our audio content. The
AudibleManager® and AudiblePlayer®software enable
these devices to receive and play back Audible content and are
available for download from audible.com®. Several player
manufacturers have bundled the AudiblePlayer® software with
their devices. The audio output jack of these players can work
with headphones or a cassette adaptor to enable the content to
be played through a car stereo system. Audible customers may
also burn their audio to audio compact discs for listening
through a CD player. Apple iTunes3 incorporates
AudibleReady®features to enable owners of the Apple iPod
and the Audible Otis to download and listen to spoken audio from
Audible using their Apple computer.

We have formed co-marketing relationships with a
number of consumer electronics and computer companies to promote
AudibleReady® electronic devices and our content to
consumers. The device manufacturers are generally required to
promote the Audible service through a variety of means, which
may include (1) displaying the AudibleReady® logo on
their players, (2) displaying the AudibleReady® logo
on the outside of the player package, (3) including our
brochures inside the player package and (4) referring to
Audible and AudibleReady® in their brochures and manuals.
In most cases, the device manufacturers receive a percentage of
the revenue related to the content purchased by owners of their
AudibleReady® players. These revenue sharing arrangements
typically last a period of time from the date the device owner
becomes an Audible customer.

We have a co-marketing agreement with Roxio,
under which its CD burning software has been made capable of
burning content purchased from Audible onto CDs. Under this
agreement, Roxio will promote the Audible service. Audible will
pay Roxio a percentage of the revenue collected from customers
who begin using the Audible service as a direct result of the
software companys marketing efforts.

Other
services.

We also provide the Audible® service to over
50 public library and school library systems .

Competition

The market for the sale and delivery of spoken
audio is highly competitive and rapidly changing. Principal
competitive factors in the spoken audio market include:



| |   |                                     
| | - | ------------------------------------
| |  | selection;                          
|
| |  | price;                              
|
| |  | speed of delivery;                  
|
| |  | protection of intellectual property;
|
| |  | timeliness;                         
|
| |  | convenience; and                    
|
| |  | sound quality.                      

Although we believe that we currently compete
favorably with respect to these factors, we cannot be sure that
we can maintain our competitive position against current or new
competitors, especially those with longer operating histories,
greater name recognition and substantially greater financial,
technical, marketing, management, service, support and other
resources.

We compete with (1) traditional and online
retail stores, catalogs, clubs and libraries that sell, rent or
loan audiobooks on cassette tape or compact disc, (2) Web
sites that offer streaming access to spoken audio content using
tools such as the RealPlayer or Windows Media Player and
(3) other companies offering other pay-to-listen audio
services, such as satellite radio.

9



---



##### 



Audiobooks on cassette tape or compact disc have
been available from a variety of sources for a number of years.
Traditional bookstores, such as Borders and Barnes &
Noble, and online bookstores, such as barnesandnoble.com offer a
variety of audiobooks. The Audio Book Club offers discounted
audiobooks by mail order. MediaBay offers a small number of
digital downloads of spoken audio. Rental services, such as
Books on Tape, offer low pricing for time-limited usage of
audiobooks, and libraries loan a limited selection of
audiobooks. One or more of these competitors might develop a
competing electronic service for delivering audio content.

Competition from Web sites that provide streaming
audio content is intense and is expected to increase
significantly in the future. Online music services such as
Pressplay, MusicNet, Listen.com and Full Audio offer a wide
selection of streaming and downloadable music content. These
companies and portal companies including America Online, Yahoo!
or MSN may in the future compete directly with us by selling
premium spoken audio content for digital download.

Our content providers and other media companies
may choose to provide digital audio content directly to
consumers. In addition, a small number of companies control
primary or secondary access to a significant percentage of
Internet users and therefore have a competitive advantage in
marketing to those users. These providers could use or adapt
their current technology, or could purchase technology, to
provide a service that directly competes with the Audible
service.

Many of these companies have significantly
greater brand recognition and financial, technical, marketing
and other resources than we do. We also expect competition to
intensify and the number of competitors to increase
significantly in the future as technology advances providing
alternative methods to deliver digital audio content through the
Internet, satellite, wireless data, digital radio or other means.

Intellectual Property and Proprietary
Rights

We regard our patents, copyrights, service marks,
trademarks, trade dress, trade secrets and similar intellectual
property as critical to our success. To protect our proprietary
rights, we rely on a combination of patent, trademark and
copyright law, trade secret protection and confidentiality and
license agreements with our employees, customers, business
affiliates and others. Notwithstanding these precautions, others
may be able to use our intellectual property or trade secrets
without our authorization. If we are unable to adequately
protect our intellectual property, it could materially affect
our financial performance. In addition, potential competitors
may be able to develop technologies or services similar to ours
without infringing our patents.

We hold nine patents and have filed several
continuations cases containing multiple claims covering and
further expanding various aspects of the Audible system. We do
not know if the other pending patents will ever be issued and,
if issued, if they will survive legal challenges. Legal
challenges to our patents, whether successful or not, may be
very expensive to defend.

We have applied for registration in the United
States of several of our trademarks and service marks, including
but not limited to Audible Entertainment,
Audible Entertainment Network,
AudibleListener, Audible Hear, There, and
Everywhere, and Who You Gonna Listen To.
Audible, audible.com,
AudibleManager AudibleReady and
AudiblePlayer® have been registered. We do not
know if all of these marks will be registered or that we will
effectively protect the use of these names. In addition, we have
begun to take affirmative steps to protect our trademarks
outside of the United States and effective trademark, service
mark, and copyright protection is not necessarily available in
every country in which our services are available online.

We also license some of our intellectual property
to others, including our AudibleReady® technology and
various trademarks and copyrighted material. While we attempt to
ensure that the quality of our brand is maintained, others might
take actions that materially harm the value of either these
proprietary rights or our reputation.

We license technology from others, including
elements of our compression-decompression technology that we
incorporate into the Audible® system. If these technologies
become unavailable to us, we would need to license other
technology, which would require us to redesign our system and
recode our content. Although

10



---



##### 



we are generally indemnified against claims that
technology licensed by us infringes the intellectual property
rights of others, such indemnification is not always available
for all types of intellectual property and proprietary rights
and in some cases the scope of such indemnification is limited.
Even if we receive broad indemnification, third party
indemnitors may not have the financial resources to fully
indemnify us in the event of infringement, resulting in
substantial exposure to us. We cannot assure you that
infringement or invalidity claims arising from the incorporation
of this technology, resulting from these claims, will not be
asserted or prosecuted against us. These claims, even if not
meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential
redevelopment costs and delays, all of which could materially
adversely effect our business, operating results and financial
condition.


General

We were incorporated in 1995 in the State of
Delaware and commenced commercial operations in 1997. Our
principal offices are located at 65 Willowbrook Boulevard,
Wayne, NJ 07470. Our telephone number is (973) 837-2700.

Employees

As of December 31, 2002, we had a total of
65 full-time employees; 13 in production, 29 in sales and
marketing which includes 19 in customer support, 20 in
development, and three in general and administrative.

Item 2.     Properties.

Our principal administrative, sales and
marketing, research and development and production facility is
located at 65 Willowbrook Boulevard, Wayne, New Jersey, 07470,
where we lease approximately 22,000 square feet. Our lease
expires on June 30, 2003. Prior to the expiration date we
expect to negotiate a new lease extension.

Item 3.     Legal
Proceedings.

On May 21, 2001, a complaint was filed in
the District Court of Larimer County, Colorado on behalf of a
plaintiff who is under indictment for attempted fraud and
extortion against Audible, Inc. in early 2000. The Complaint
alleged breach of contract, promissory stoppel, fraud, unjust
enrichment, breach of duty of good faith and fair dealing, and
outrageous conduct based on negotiations
conducted over the Internet with the assistance of the FBI in
order to locate and arrest the plaintiff. The damages sought
include the items negotiated for (approximately $107,000 in
value), attorneys fees and costs, exemplary damages in an
unspecified amount, and punitive damages. Audible has noticed
the removal of the case to the Federal District Court for
Colorado based on diversity jurisdiction. The plaintiff agreed
to dismiss his case with prejudice based on the claims we made
in our Answer to the complaint and the final dismissal order was
issued on October 2, 2001 at no cost to the Company.

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

11



---



##### 



specify the amount of the compensatory damages
the plaintiffs are seeking, but the market loss at issue was in
excess of $50 million.


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

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

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

None.

PART II



|        |                                                                                  
|------- | ---------------------------------------------------------------------------------
|Item 5. | Market for the Companys Common Stock
    Equity and Related Stockholder Matters.

Our common stock was traded on the Nasdaq
National Market under the symbol ABDL from our
public offering on July 16, 1999 through August 6,
2002, at which time we moved to the Nasdaq Small Cap Market. On
February 18, 2003 our stock began trading on the
Over-the-Counter Market (OTCBB) under the symbol
ADBL.OB. Prior to July 16, 1999, there was no
established public trading market for any of our securities.

On October 29, 2002, we received a Nasdaq
Listing Qualifications letter advising us that our stock had
closed below the $1.00 per share requirement for the last 180
consecutive trading days. On November 27, 2002, we received
notification from Nasdaq that we did not comply with the
shareholders equity/market value of listed securities/net
income requirement, as set forth in Nasdaq Marketplace
Rule 4310(c)(2)(B). On December 19, 2002, we attended
an oral hearing before the Nasdaq Listing Qualifications Panel.
On January 13, 2003 the Nasdaq Listing Qualifications Panel
granted us an exception through February 18, 2003. The
exception required us to demonstrate a minimum bid price per
share and a minimum amount of shareholders equity in order
to maintain our stock listing on the Nasdaq SmallCap Market. We
concluded that it would not be in the best interest of our
shareholders to take the steps required to meet these minimums.
As a result, we notified Nasdaq that we would not meet these
minimums and on February 18, 2003 our stock began trading
on the OTCBB.

12



---



##### 



The following table sets forth, for the periods
indicated, the range of high and low closing sales prices for
our common stock as reported on the Nasdaq National Market,
Nasdaq Small Cap Market or Over-the-Counter BB.

|     |                                        |      |   |      |  |  |   |      | 
|---- | -------------------------------------- | ---- | - | ---- |  |  | - | ---- | 
|     |                                        | High |   | Low 
|     |                                        |      |   |     
|2001 |                                        |      |   |      |  |  |   |     
|     | First Quarter                          |      | $ | 1.78 |  |  | $ | 0.41 | 
|     | Second Quarter                         |      |   | 1.40 |  |  |   | 0.62 | 
|     | Third Quarter                          |      |   | 0.68 |  |  |   | 0.34 | 
|     | Fourth Quarter                         |      |   | 0.80 |  |  |   | 0.36 | 
|    
|2002 |                                        |      |   |      |  |  |   |     
|     | First Quarter                          |      | $ | 1.46 |  |  | $ | 0.75 | 
|     | Second Quarter                         |      |   | 0.85 |  |  |   | 0.32 | 
|     | Third Quarter                          |      |   | 0.52 |  |  |   | 0.30 | 
|     | Fourth Quarter                         |      |   | 0.55 |  |  |   | 0.27 | 
|    
|2003 |                                        |      |   |      |  |  |   |     
|     | First Quarter (through March 20, 2003) |      | $ | 0.35 |  |  | $ | 0.20 | 

On March 20, 2003, the last reported sale
price of our common stock was $0.28 per share. As of
March 20, 2003, we had approximately 190 stockholders.

We have never paid or declared any cash dividends
on our common stock. Our present policy is to retain any
earnings to finance the growth and development of the business
and, therefore, we do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered
Securities

From January 2002 through December 2002, we sold
and issued the following unregistered securities:

In January 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.46 per share, which expires
January 1, 2007.

In February 2002, in connection with a services
agreement, we issued a warrant to purchase 5,000 shares of
common stock at a price of $0.88 per share, which expires
February 22, 2007.

In February 2002, in connection with a services
agreement, we issued a warrant to purchase 2,500 shares of
common stock at a price of $0.85 per share, which expires
February 28, 2007.

In June 2002, in connection with a services
agreement, we issued a warrant to purchase 5,000 shares of
common stock at a price of $0.50 per share, which expires
June 4, 2007.

In June 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.32 per share, which expires
June 28, 2007.

In August 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.45 per share, which expires
August 2, 2007.

In September 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.40 per share, which expires
September 3, 2007.

In October 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.32 per share, which expires
October 1, 2007.

In November 2002, in connection with a technology
license, we issued 50,000 shares of common stock.

In November 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.55 per share, which expires
November 1, 2007.

13



---



##### 



In December 2002, in connection with a services
agreement, we issued a warrant to purchase 6,000 shares of
common stock at a price of $0.46 per share, which expires
December 2, 2007.

The above securities were offered and sold by us
in reliance upon exemptions from registration pursuant to
Section 4(2) of the Securities Act of 1933 as transactions
not involving any public offering.

14



---



##### 





|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The selected financial data set forth below
should be read in conjunction with the financial statements and
related notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations
and other financial information appearing elsewhere in this
Form 10-K. The selected financial data set forth below as
of December 31, 2001 and 2002 and for the years ended
December 31, 2000, 2001 and 2002, are derived from, and are
qualified by reference to, our audited financial statements
included elsewhere in this Form 10-K. The selected
financial data set forth below as of December 31, 1998,
1999 and 2000, and for the years ended December 31, 1998
and 1999 are derived from our audited financial statements not
included in this Form 10-K.

Selected Financial Data

|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |        |        |         |  
|----------------------------------------------- | --------------------------------------- | ------------------------------------- | --------------------------- | ----- | ----- | ------ | ------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                |                                         |                                      
|                                                |                                         | Year Ended December 31,              
|                                                |                                         |                                      
|                                                |                                         | 1998                                  |                             | 1999  |       | 2000   |         | 2001  |        | 2002   
|                                                |                                         |                                       |                             |       |       |        |         |       |        |        
|                                                |                                         |                                      
|                                                |                                         | (in thousands, except per share data)
|Statement of operations data:                   |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Revenue, net:                                   |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                | Consumer content                        |                                       | $                           | 84    |       |        | $       | 364   |        |         | $       | 1,443  |        |         | $       | 5,143  |        |         | $       | 10,940 |       
|                                                | Services                                |                                       |                             | 48    |       |        |         | 114   |        |         |         | 576    |        |         |         | 884    |        |         |         | 348    |       
|                                                | Bulk content                            |                                       |                             |      |       |        |         |      |        |         |         | 500    |        |         |         | 1,435  |        |         |         |       |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                | Total content and services              |                                       |                             | 132   |       |        |         | 478   |        |         |         | 2,519  |        |         |         | 7,462  |        |         |         | 11,288 |       
|                                                | Hardware                                |                                       |                             | 244   |       |        |         | 314   |        |         |         | 1,273  |        |         |         | 1,293  |        |         |         | 932    |       
|                                                | Other                                   |                                       |                             |      |       |        |         | 951   |        |         |         | 757    |        |         |         | 316    |        |         |         | 150    |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                | Total revenue, net                      |                                       |                             | 376   |       |        |         | 1,743 |        |         |         | 4,549  |        |         |         | 9,071  |        |         |         | 12,370 |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Operating expenses:                             |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                | Cost of content and services revenue    |                                       |                             | 372   |       |        |         | 812   |        |         |         | 3,668  |        |         |         | 4,902  |        |         |         | 4,970  |       
|                                                | Cost of hardware revenue                |                                       |                             | 556   |       |        |         | 308   |        |         |         | 2,572  |        |         |         | 2,858  |        |         |         | 2,718  |       
|                                                | Production                              |                                       |                             | 1,639 |       |        |         | 3,397 |        |         |         | 6,458  |        |         |         | 5,636  |        |         |         | 3,882  |       
|                                                | Development                             |                                       |                             | 1,642 |       |        |         | 2,680 |        |         |         | 4,444  |        |         |         | 3,322  |        |         |         | 2,271  |       
|                                                | Write-down related to hardware business |                                       |                             | 952   |       |        |         |      |        |         |         |       |        |         |         |       |        |         |         |       |       
|                                                | Sales and marketing                     |                                       |                             | 1,453 |       |        |         | 6,109 |        |         |         | 16,052 |        |         |         | 15,187 |        |         |         | 12,468 |       
|                                                | General and administrative              |                                       |                             | 1,838 |       |        |         | 3,015 |        |         |         | 5,548  |        |         |         | 4,727  |        |         |         | 3,647  |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                |                                         | Total operating expenses              |                             |       | 8,452 |        |         |       | 16,321 |         |         |        | 38,742 |         |         |        | 36,632 |         |         |        | 29,956 |        
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|                                                |                                         |                                       | Loss from operations        |       |       | (8,076 | )       |       |        | (14,578 | )       |        |        | (34,193 | )       |        |        | (27,561 | )       |        |        | (17,586 | )
|                                                |                                         |                                       | Other (expense) income, net |       |       | (62    | )       |       |        | 1,102   |         |        |        | 1,602   |         |        |        | 565     |         |        |        | 85      |  
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Loss before state income tax benefit            |                                         |                                       | (8,138                      | )     |       |        | (13,476 | )     |        |         | (32,591 | )      |        |         | (26,996 | )      |        |         | (17,501 | )     
|State income tax benefit                        |                                         |                                       |                            |       |       |        |        |       |        |         | 316     |        |        |         | 327     |        |        |         | 314     |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Net loss                                        |                                         | $                                     | (8,138                      | )     |       | $      | (13,476 | )     |        | $       | (32,275 | )      |        | $       | (26,669 | )      |        | $       | (17,187 | )     
|Accrued dividends on redeemable preferred stock |                                         |                                       |                            |       |       |        |        |       |        |         |        |        |        |         | (1,049  | )      |        |         | (1,366  | )     
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Net loss applicable to common shareholders      |                                         | $                                     | (8,138                      | )     |       | $      | (13,476 | )     |        | $       | (32,275 | )      |        | $       | (27,718 | )      |        | $       | (18,553 | )     
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       
|Basic and diluted net loss per common share     |                                         | $                                     | (1.15                       | )     |       | $      | (0.85   | )     |        | $       | (1.21   | )      |        | $       | (1.03   | )      |        | $       | (0.61   | )     
|Weighted average common shares outstanding      |                                         |                                       | 7,097                       |       |       |        | 15,890  |       |        |         | 26,644  |        |        |         | 26,918  |        |        |         | 30,508  |       
|                                                |                                         |                                       |                             |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |         |       

|                                     |  |                    |         |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |         |  
|------------------------------------ |  | ------------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | - |  | - | ------- | -
|                                     |  |                   
|                                     |  | As of December 31,
|                                     |  |                   
|                                     |  | 1998               |         | 1999 |  | 2000 |        | 2001 |  | 2002
|                                     |  |                    |         |      |  |      |        |      |  |     
|Balance sheet data:                  |  |                    |         |      |  |      |        |      |  |      |        |  |  |   |        |   |  |   |         |  
|Cash and cash equivalents            |  | $                  | 10,526  |      |  | $    | 12,030 |      |  | $    | 14,149 |  |  | $ | 7,628  |   |  | $ | 2,822   |  
|Short-term investments               |  |                    |        |      |  |      | 24,404 |      |  |      | 1,957  |  |  |   |       |   |  |   |        |  
|Total assets                         |  |                    | 12,147  |      |  |      | 39,926 |      |  |      | 20,732 |  |  |   | 10,999 |   |  |   | 4,608   |  
|Noncurrent liabilities               |  |                    | 1,688   |      |  |      | 538    |      |  |      | 713    |  |  |   | 220    |   |  |   | 135     |  
|Redeemable preferred stock           |  |                    | 27,725  |      |  |      |       |      |  |      |       |  |  |   | 10,319 |   |  |   | 12,290  |  
|Total stockholders (deficit) equity |  |                    | (19,529 | )    |  |      | 4,578  |      |  |      | 14,593 |  |  |   | (5,549 | ) |  |   | (13,326 | )

15



---



##### 





|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | 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 financial statements and related notes
thereto, and other financial information included elsewhere in
this Annual Report on Form 10-K.

This Annual Report on Form 10-K contains
forward-looking statements and information relating to our
company. We generally identify forward-looking statements in
this prospectus 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

We are the leading provider of subscription
based, premium spoken audio content, such as audio versions of
books, newspapers, newsletters, magazines and radio programs,
that is delivered over the Internet. The Audible service allows
consumers to purchase and download content from our Web site
www.audible.com®. Our customers listen to their audio in a
variety of ways. Most of our customers download their audio to
personal computers and then either transfer the audio to
portable digital audio players or burn the content to CDs for
playback on their CD players. We were incorporated in 1995,
commenced commercial operations in October 1997, and through
March 31, 1999, we were in the development stage for
financial reporting purposes. Subsequent to March 31, 1999,
we substantially completed our development efforts in
establishing our business and accordingly no longer consider
ourselves a development stage company.

We offer customers the opportunity to subscribe
to AudibleListener®, a monthly audio service. For a fixed
monthly fee, AudibleListener® customers may download their
choice of programs from our Web site. More than 34,000 hours of
audio content, much of which is available in digital audio
format only at www.audible.com®, is currently available on
our Web site. We also sell at our web site our own digital audio
player under the brand name of Otis®, which is manufactured
to our specifications in Korea. Customers can also access
content products sold by Audible through www.amazon.com. Several
manufacturers, including Apple Corp., Palm, Hewlett-Packard,
Sony Electronics, Kenwood, Handspring, Franklin Electronic
Publishers, Digisette, LLC., and SONICblue Incorporateds
Rio Audio Group, have agreed to support and promote the playback
of our content on their hand-held electronic devices by
including our Audible software on their devices. We have added a
CD burning feature to the Audible service, enabling our
customers to listen on their CD players.

Revenue from the sale of audio content and
services has increased in each of the last four quarters. Over
225,000 customers have purchased content from our Website.

Although we have experienced revenue growth in
our content sales in recent periods, there can be no assurance
that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future
operating results. There can also be no assurance that we will
be able to continue to increase our revenue or attain
profitability or, if increases in revenue and profitability are
achieved, that they 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.

In November 1998, we entered into an agreement
with Microsoft Corporation (Microsoft), one of our
stockholders, to integrate some of our products, grant various
rights and licenses and provide for Microsoft to be paid future
royalties for content distributed as a result of the customized
software developed under the agreement. Microsoft has paid us
the minimum committed payments of $2,000,000 to integrate
products and acquire various products, rights and licenses.
Microsoft advanced us $1,500,000 of the total $2.0 million
in November 1998 in consideration of Audible granting Microsoft
the right to distribute software enabling users of Microsoft
platforms to access and use Audible content. We allocated
$50,000 of this advance to certain business development work
that was recognized as a reduction of general and administrative
expense during

16



---



##### 



2001. The remaining $1,450,000 of this advance
was recognized as revenue on a straight-line basis which began
in the quarter ended June 30, 1999 through the initial term
of the agreement which ended in the second quarter of 2001.
During the years ended December 31, 2000 and 2001,
$757,000, and $252,000, respectively, of this advance was
recognized as other revenue. No revenue from this agreement was
recognized in the year ended December 31, 2002. The balance
of the $2.0 million in committed payments was received
during the year ended December 31, 1999, as Audible
(i) performed technology integration services for which we
recognized other revenue of $200,000, (ii) delivered a
license for certain technology rights for which we recognized
other revenue of $250,000, and (iii) delivered 300 Audible
MobilePlayers for which we recognized hardware revenue of
$50,000.


We are party to several joint marketing
agreements with device manufacturers such as Apple, Palm,
Hewlett-Packard, Sony Electronics, Kenwood, and SONICblue
Incorporateds Rio Audio Group. Under these agreements,
device manufacturers receive a portion of the revenue generated
over a specified period of time by each new Audible customer
referred by them through the purchase of a new player. For
example, a purchaser of Compaqs hand-held electronic
device is able to use the device and our AudibleManager software
to access audible.com and download content. Compaq receives a
percentage of the revenue related to content downloaded by this
customer. These revenue sharing arrangements typically last one
or two years from the date the player user becomes an Audible
customer.

In January 2000, we entered into two agreements
with Amazon.com. We became the exclusive provider of digital
spoken audio to Amazon.com, as defined in the Co-Branding,
Marketing and Distribution Agreement, as amended. During the
three-year term of this agreement, in consideration for certain
services, Amazon is entitled to $22,500,000 plus a specified
percentage of revenue earned over a threshold amount in addition
to common stock warrants. Under the Securities Purchase
Agreement dated January 30, 2000, Amazon.com purchased
1,340,033 shares of common stock from the Company for
$20,000,000. The first $20,000,000 in payments due to Amazon.com
under the amended Co-Branding, Marketing and Distribution
Agreement, were offset against the $20,000,000 in consideration
due to Audible for the purchase of common stock and no cash was
exchanged. Of the remaining $2,500,000 due in cash to Amazon.com
under the agreement, $1,000,000 has been paid through
December 31, 2002 while the remaining $1,500,000 which was
due in 2002 remains unpaid. Resolution of this remaining
obligation is currently under discussion between Amazon.com and
Audible.

In May 2000, we entered into a 50-month
Co-Publishing, Marketing, and Distribution Agreement with Random
House to form a strategic alliance to establish Random House
Audible, a publishing imprint, as defined in the agreement, to
produce spoken word content specifically suited for digital
distribution. All titles published by the imprint will be
distributed exclusively on the Internet by Audible. As part of
this alliance, Random House, through its Random House Ventures,
LLC subsidiary, purchased 169,780 shares of Audible common stock
from us for $1,000,000. Over the term of the agreement, we were
to contribute towards the funding the acquisition and creation
of digital audio titles through Random House Audible. On
March 26, 2002, the agreement was amended to waive the cash
payment due to Random House in 2002 of $1,250,000, thereby
reducing the total payments due under the agreement from
$4,000,000 to $2,750,000. In exchange for this waiver, under the
amendment we agreed to issue 1,250,000 shares of Series B
Convertible Preferred Stock. 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
we no longer are required to pay the $1,500,000 imprint fees
that were due in 2003 and 2004.

In February 2001, Microsoft purchased 2,666,666
shares of Audible Series A Redeemable Convertible Preferred
stock for $10,000,000 at a per share price of $3.75. Each share
of preferred stock may be converted into four shares of common
stock (equivalent to a price of $.9375 per share, which was
greater than the common stock price at the date of grant,
therefore, no beneficial conversion feature is associated with
these preferred shares), subject to adjustment under certain
conditions. The Series A Redeemable Convertible Preferred
stock is convertible at the option of the holder at any time
prior to the fifth anniversary of the original issue date.
Dividends are payable semi-annually at a annual rate of 12% in
either additional preferred shares or in cash at our option. On
the fifth anniversary of the original issue date, we are
required to redeem all remaining outstanding shares at a per
share price of $3.75 plus all accrued and unpaid dividends.

17



---



##### 



In February 2002, Special Situations Funds
purchased 4,069,768 shares of common stock for $3,500,000 at a
per share price of $0.86. We received proceeds net of direct
costs, of $3,159,000. In connection with this transaction, we
issued warrants to purchase an additional 1,220,930 shares of
common stock. The warrants are exercisable at a price of $1.15
anytime prior to the fifth anniversary of the issue date. We may
demand the warrantholder exercise its rights in the event that
the closing bid price of a share of our common stock exceeds
$2.30 for twenty consecutive trading sessions.

Results of Operations

The following table sets forth certain financial
data as a percentage of total revenue during 2000, 2001 and 2002.

|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |     |     |  
|------------------------------------------ | ----------------------------------------------- | ---------------------------- | ---- | ---- | --- | ---- | ---- | --- | --- | - | ---- | --- | --- | -
|                                           |                                                 |                             
|                                           |                                                 | Year Ended December 31,     
|                                           |                                                 |                             
|                                           |                                                 | 2000                         |      | 2001 |     | 2002
|                                           |                                                 |                              |      |      |     |     
|Revenue, net:                              |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           | Consumer content                                |                              |      | 32   | %   |      |      | 56  | %   |   |      | 88  | %  
|                                           | Services                                        |                              |      | 12   |     |      |      | 10  |     |   |      | 3   |    
|                                           | Bulk content                                    |                              |      | 11   |     |      |      | 16  |     |   |      |    |    
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           | Total content and services                      |                              |      | 55   |     |      |      | 82  |     |   |      | 91  |    
|                                           | Hardware                                        |                              |      | 28   |     |      |      | 14  |     |   |      | 8   |    
|                                           | Other                                           |                              |      | 17   |     |      |      | 4   |     |   |      | 1   |    
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           |                                                 | Total revenue, net           |      |      | 100 | %    |      |     | 100 | % |      |     | 100 | %
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Operating expenses:                        |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           | Cost of content and services revenue            |                              |      | 81   |     |      |      | 54  |     |   |      | 40  |    
|                                           | Cost of hardware revenue                        |                              |      | 56   |     |      |      | 32  |     |   |      | 22  |    
|                                           | Production                                      |                              |      | 142  |     |      |      | 62  |     |   |      | 31  |    
|                                           | Development                                     |                              |      | 98   |     |      |      | 37  |     |   |      | 18  |    
|                                           | Sales and marketing                             |                              |      | 353  |     |      |      | 167 |     |   |      | 101 |    
|                                           | General and administrative                      |                              |      | 122  |     |      |      | 52  |     |   |      | 30  |    
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           |                                                 | Total operating expenses     |      |      | 852 |      |      |     | 404 |   |      |     | 242 |  
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Loss from operations                       |                                                 |                              | (752 | )    |     |      | (304 | )   |     |   | (142 | )  
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Other income (expense):                    |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           | Interest income                                 |                              |      | 36   |     |      |      | 6   |     |   |      | 1   |    
|                                           | Interest expense                                |                              |      | (1   | )   |      |      |    |     |   |      |    |    
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|                                           |                                                 | Total other (income) expense |      |      | 35  |      |      |     | 6   |   |      |     | 1   |  
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Loss before state income tax benefit       |                                                 |                              | (717 | )    |     |      | (298 | )   |     |   | (141 | )  
|State income tax benefit                   |                                                 |                              | 7    |      |     |      | 4    |     |     |   | 2    |    
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Net loss                                   |                                                 |                              | (710 | )%   |     |      | (294 | )%  |     |   | (139 | )% 
|                                           | Accrued dividends on redeemable preferred stock |                              |      |     |     |      |      | (12 | )   |   |      | (11 | )  
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    
|Net loss applicable to common shareholders |                                                 |                              | (710 | )%   |     |      | (306 | )%  |     |   | (150 | )% 
|                                           |                                                 |                              |      |      |     |      |      |     |     |   |      |    

2002 Compared
to 2001

Total revenue, net.Total revenue for 2002 was $12,370,000, as compared to
$9,071,000 for 2001, an increase of $3,299,000, or 36%.

18



---



##### 



Total content and services
revenue.Total content and services
revenue for 2002 was $11,288,000, as compared to $7,462,000 for
2001, an increase of $3,826,000, or 51%.

Consumer content.Consumer content revenue for 2002 was $10,940,000, as compared
to $5,143,000 for 2001, an increase of $5,797,000, or 113%. This
increase was primarily the result of our increased customer base
as well as the effect of an increase in the prices of our
AudibleListener® Memberships.

Services.Services
revenue for 2002 was $348,000, as compared to $884,000 for 2001,
a decrease of $536,000, or 61%. This decrease was primarily the
result of fewer corporate projects.

Bulk content.Bulk
content revenue for 2001 consisted of one cash bulk content sale
of $150,000 and four barter bulk content sales totaling
$1,285,000. There were no bulk content sales during 2002.

Hardware.Hardware
revenue for 2002 was $932,000, as compared to $1,294,000 for
2001, a decrease of $362,000, or 28%. Hardware revenue decreased
as a result of providing our customers with an Audible Otis
free of charge when the customer signed up for a one
year commitment to AudibleListener® Membership.

Other.Other revenue
for 2002, was $150,000, as compared to $316,000 for 2001. Other
revenue decreased as a result of the end of the amortization in
April 2001 of the advance from Microsoft relating to granting
Microsoft the right to distribute software platforms to enable
users to access and use Audible content. Other revenue for 2002
included revenue earned from our profit participation from hard
copy sales of products in connection with our Random House
Audible agreement. Other revenue in both years also included
royalties earned from a license granted for certain technology
rights to a device manufacturer.

Operating
expenses.

Cost of content and services
revenue.Cost of content and services
revenue includes the royalties that we pay publishers, as well
as the amortization of publisher royalty advances and equity
securities issued in connection with Random House Audible. Cost
of content and services revenue was $4,970,000, or 44% of
content and services revenue, for 2002, as compared to
$4,902,000, or 66% of content and services revenue, for 2001.
Included in cost of content and services revenue for 2001, was a
charge of $709,000 to reflect the net realizable value of
royalty advances, as compared to a charge of $80,000 for 2002.
Cost of content and services revenue as a percentage of content
and services revenue decreased for 2002 due to the reduction in
unrecoupable royalty advances.

Cost of hardware
revenue.Cost of hardware revenue was
$2,718,000, or 292% of hardware revenue, for 2002, as compared
to $2,858,000, or 221% of hardware revenue, for 2001. This
decrease was primarily due to reduced unit costs of hand-held
electronic devices in 2002 versus 2001. The increase in cost of
hardware revenue as a percentage of hardware revenue was due to
providing more customers with and Audible Otis free of
charge when the customer signed up for a one year
commitment to AudibleListener®.

Production expenses.Production expenses are primarily related to hosting and
bandwidth costs incurred in the operation of www.audible.com.
Production expenses also include staff costs related to Web site
operations, audio production and content acquisition. Production
expenses were $3,882,000 for 2002, as compared to $5,636,000 for
2001, a decrease of $1,754,000, or 31%. This decrease was
primarily due to a reduction in personnel costs and reduced
outside services as a result of our streamlining initiative of
July 23, 2001.

Development.Development costs are primarily staff expenses related to our
information technology and Web site infrastructure. Development
costs were $2,271,000 for 2002, as compared to $3,322,000 for
2001, a decrease of $1,051,000, or 32%. This decrease was
primarily due to a reduction in outside consultants as well as
reduced personnel cost as a result of our streamlining
initiative of July 23, 2001 offset in part by expenses
associated with a technology license.

Sales and marketing.Sales and marketing expenses were $12,468,000 for 2002, as
compared to $15,187,000 for 2001, a decrease of $2,719,000, or
18%. This decrease was due to a reduction in certain advertising
costs such as advertising received in connection in barter
transactions, web related advertising, tradeshow expenses,
warrant charges in connection with a services agreement, reduced
personnel costs as well

19



---



##### 



as expenses recognized in connection with our
Co-Branding, Marketing and Distribution Agreement with
Amazon.com.


General and
administrative.General and
administrative expenses include legal fees, audit fees, public
company expenses, the Company paid portion of medical plan
costs, staff costs, insurance, postage, rent, leasehold
improvement amortization and telephone costs. General and
administrative expenses were $3,647,000 for 2002, as compared to
$4,727,000 for 2001, a decrease of $1,080,000, or 23%. This
decrease was primarily due to a reduction in personnel costs as
a result of our streamlining initiative of July 23, 2001
offset in part by higher professional fees.

Other income, net.Other income, net in both periods consisted of interest income
offset by interest expense. Interest income was $85,000 for
2002, as compared to $575,000 for 2001, a decrease of $490,000.
This decrease was due to less interest income being earned from
lower cash and cash equivalent balances available. No interest
expense was recognized for 2002, as compared to $10,000 for
2001. This decrease was the result of the expiration of the
capital leases entered into for capital equipment.

State income tax
benefit.As a result of selling
certain of our New Jersey state income tax loss benefits for
cash the Company realized $314,000 in state income tax benefit
for 2002, as compared to $327,000 for 2001. Both of these
benefits are unique and cannot be considered recurring.

Accrued dividends on redeemable preferred
stock.Accrued dividends on redeemable
preferred stock was $1,366,000 for 2002 as compared to
$1,049,000 for 2001. This increase was due to the 12% dividends
payable to Microsoft as a result of Microsofts purchase of
2,666,666 shares of our Series A Redeemable Convertible
Preferred Stock in February 2001 as well as additional shares
being outstanding during 2002. We have elected to pay dividends
due by issuing additional stock rather than by cash.

2001 Compared
to 2000

Total revenue, net.Total revenue for 2001 was $9,071,000, as compared to $4,549,000
for 2000, an increase of $4,522,000, or 99%.

Content and
services.Content and services revenue
for 2001 was $7,462,000, as compared to $2,519,000 for 2000, an
increase of $4,943,000, or 196%. Approximately 75% of this
increase is the result of our customer base increasing from
51,000 customers to approximately 123,000 customers at the end
of 2001. Growth in bulk content sales accounted for 19% of the
increase and growth in corporate services accounted for 6% of
the increase. Bulk content sales in 2001 of $1,435,000 included
barter arrangements whereby $1,285,000 in bulk content was
exchanged for advertising. Of the $1,285,000 in advertising
purchased approximately $1,071,000 was expensed by the Company
during 2001 and $214,000 remained in prepaid expenses.

Hardware.Hardware
revenue for 2001 was $1,293,000, as compared to $1,273,000 for
2000, an increase of $20,000, or 2%. Hardware revenue increased
due to selling over 23,000 AudibleReady® digital audio
players in 2001, primarily the Rio 600, at a discount when the
customer signed up for a one year commitment to
AudibleListener®Membership, as compared to 11,000 in 2000.

Other.Other revenue
for 2001 was $316,000, as compared to $757,000 for 2000, a
decrease of $441,000, or 58%. Other revenue in 2001 consisted of
revenue recognized in connection with our agreement with
Microsoft, granting Microsoft the right to distribute software
platforms enabling users to access and use Audible content which
ended in April 2001, as well as royalties earned from a license
granted for certain technology rights to a device manufacturer.
Other revenue in 2000 consisted solely of revenue recognized in
connection with our agreement with Microsoft, granting Microsoft
the right to distribute software platforms enabling users to
access and use Audible content.

Operating
expenses.

Cost of content and services
revenue.Cost of content and services
revenue includes the royalties that we pay publishers, as well
as the amortization of publisher royalty advances. Cost of
content and services revenue was $4,902,000, or 66% of content
and services revenue, for 2001, as compared to $3,668,000, or
146% of

20



---



##### 



content and services revenue, for 2000. This
increase in cost was primarily due to the royalties incurred on
higher content and services revenue, an increase of $320,000
related obligations under our agreement with Random House, Inc.
to create the Random House Audible imprint for twelve months in
2001 versus eight months in 2000, and an increase of $268,000 in
the amortization of warrants issued to content providers. These
increases were offset in part by approximately $700,000 in lower
amortization of content agreement minimum guarantees because
most of our content agreement minimum guarantees were fully
amortized in 2001. In addition, in 2001 we recorded a charge of
$669,000 to reflect the net realizable value of content
agreement guarantees, as compared to a similar charge of
$871,000 in 2000. In addition to lower amortization of content
agreement minimum guarantees, cost of content and services
revenue as a percent of content services revenue decreased to
66% in 2001 from 146% in 2000 as a result of reduced royalties
on bulk content sales due to the product mix sold.


Cost of hardware
revenue.Cost of hardware revenue was
$2,858,000, or 221% of hardware revenue, for 2001, as compared
to $2,572,000, or 202% of hardware revenue, for 2000. This
increase was primarily due to our selling more than twice as
many digital audio players during 2001 than 2000, mostly offset
by a significant reduction in the unit cost per player.

Production expenses.Production expenses are primarily related to hosting and
bandwidth costs incurred in the operation of www.audible.com.
Production expenses also include staff costs related to Web site
operations, audio production and content acquisition. Production
expenses were $5,636,000 for 2001, as compared to $6,458,000 for
2000, a decrease of $822,000, or 13%. This decrease was
primarily due to a reduction in personnel costs, decreased use
of outside services and consultants, and a decrease of $200,000
in charges associated with the warrants issued in connection
with the Microsoft agreement which expired in April 2001.

Development.Development costs are primarily staff
expenses related to our information technology and Web site
infrastructure. Development costs were $3,322,000 for 2001, as
compared to $4,445,000 for 2000, a decrease of $1,123,000, or
25%. This decrease was primarily due to a reduction in outside
consultants as well as reduced personnel costs as a result of
completing in early 2001 the upgrade of our Web site.

Sales and marketing.Sales and marketing expenses were $15,187,000 for 2001, as
compared to $16,052,000 for 2000, a decrease of $865,000, or 5%.
This decrease was primarily due to a decrease of approximately
$2,600,000 in expenses in connection with our Co-Marketing
Agreement with Amazon.com as a result of the amendment signed in
January 2002, offset in part by higher advertising costs
associated with increased marketing efforts. Included in our
2001 advertising costs is $1,071,000 related to barter
advertising. No barter transactions were completed during 2000.

General and
administrative.General and
administrative expenses include legal fees, audit fees, public
company expenses, the Company paid portion of medical plan
costs, staff costs, insurance, postage, rent, leasehold
improvement amortization and telephone costs. General and
administrative expenses were $4,727,000 for 2001, as compared to
$5,548,000 for 2000, a decrease of $821,000, or 15%. This
decrease was primarily due to a reduction in personnel costs and
decreased professional fees such as legal and recruiting
expenses, offset in part by an increase in depreciation expense
associated with leasehold improvements in our corporate offices
and severance expenses recognized in 2001 in connection with our
streamlining initiative.

Other (income) expense,
net.Interest income was $575,000 for
2001, as compared to $1,624,000 for 2000, a decrease of
$1,049,000. This decrease was due to less interest income being
earned from our lower cash and cash equivalent and short-term
investment balances in 2001. Interest expense was $10,000 for
2001, as compared to $22,000 for 2000, a decrease of $12,000.
This decrease was due to the end of our capital leases in 2001.

State income tax
benefit.As a result of selling
certain of our New Jersey state income tax loss benefits for
cash the Company realized $327,000 in state income tax benefit
for 2001, as compared to $316,000 for 2000. Both of these
benefits are unique and cannot be considered recurring.

Accrued dividends on redeemable preferred
stock.Accrued dividends on redeemable
preferred stock was $1,049,000 for 2001. These dividends
represent the 12% dividends payable to Microsoft as a result of

21



---



##### 



Microsofts purchase of 2,666,666 shares of
our Series A Redeemable Convertible Preferred Stock in
February 2001. During 2001 $318,902 in accrued dividends was
paid by the issuance of additional Series A Redeemable
Convertible Preferred Stock.


Critical Accounting Policies

Our critical accounting policies are as follows:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | revenue recognition;                                                        
|
| |  | royalty expense;                                                            
|
| |  | warrants issued to non-employees in exchange for
    goods and services; and
|
| |  | employee stock-based compensation arrangements.                             

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

Content
and Services:

Consumer content revenue consists of content
sales made from our website. Revenue from the sale of individual
content titles is recognized in the period when the content is
downloaded and the customers credit card is processed.
Revenue from the sale of content subscriptions is recognized pro
rata over the term of the subscription period. Revenue from the
sale of AudibleListener® memberships is recognized
straight-line each month the customer participates in the
program. Revenue from the sale of prepaid discounted content
packages and gift programs are recognized the earlier of when
the content is downloaded or expiration. Rebates are recorded as
a reduction of revenue over the period in which the related
revenue is recognized. Bad debt expense resulting from
uncollectible credit card transactions is expensed as a
component of general and administrative expenses. Bad debt
expense has not been material. In addition, beginning in late
2001 our credit card authorization process is being conducted on
a real-time basis, thereby increasing collectibility.

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

Bulk content revenue consisted of sales of
negotiated numbers of downloadable rights of selected content
material to entities for their distribution. Bulk content sales
potentially allow for additional exposure of our products
through distribution channels not normally available to us. Bulk
content revenue is recognized after the agreement has been
finalized, the price is fixed, collectibility is assured and the
content is delivered via either CD-ROM or electronic transfer
and accepted without further obligation on our part.
Collectibility is based on past transaction history and credit
worthiness of the customer.

In 2001 the majority of our bulk content revenue
was the result of barter transactions in which we exchanged bulk
content for advertising. Revenue from barter transactions is
recognized based on the fair value of the consideration
surrendered or received, whichever is more readily determinable.
Advertising received under barter arrangements is recognized in
the period the advertising is broadcasted. There were no bulk
content revenue transactions in 2002.

Hardware:

Hardware revenue consists of sales of
AudibleReady digital audio players sold primarily at a discount
or given away when a customer signs up for a one year commitment
to our AudibleListener® Membership. For these
multiple-element arrangements in which a customer signs up for a
one year membership and receives an

22



---



##### 



audio player, revenue is recognized using the
residual method whereby the fair value of the undelivered
content element is deferred until the content is delivered and
the remaining revenue (if any) is recognized on the delivered
hardware element. The discounted selling price of the hardware
device reflects the subsidy that we incur to acquire a customer
with a one year commitment to AudibleListener®. For players
sold separately, hardware revenue is recognized upon shipment of
the device, pursuant to a customer order and credit card
authorization and includes amounts received for shipping and
handling. Cost of hardware revenue, regardless of whether the
player is bundled with a membership or sold separately, is
recognized upon shipment.


Other:

Other revenue from our profit participation from
hard copy sales of products in connection with our agreement
with Random House is recognized upon receipt of the final sales
data from Random House. Other revenue from a license granted for
certain technology rights to a device manufacturer is recognized
on a straight-line basis over the term of the agreement. Other
revenue recognized in 2001 was in connection with our agreement
with Microsoft, granting Microsoft the right to distribute
software platforms enabling users to access and use Audible
content which ended in April 2001. We recognized this revenue on
a straight-line basis beginning in the quarter ended
September 30, 1999 through the term of the agreement which
ended in April 2001.

Royalty Expense:Royalty expense is a component of
Cost of Content and Services Revenue, and includes amortization
of guaranteed royalty obligations to various content providers,
earned royalties on sales of content, and net realizable value
adjustments to royalty advances. Many of our early content
provider agreements contained guaranteed amounts due to the
provider. Anticipating that sales from these agreements would
not be sufficient to offset the amount of the guarantees, we
adopted a policy of amortizing royalty guarantees straight-line
over the term of the royalty agreement, or expensing the royalty
guarantees as earned, whichever was sooner. In addition, each
quarter we review and compare any remaining unamortized
guarantee balance with current and projected sales by provider
to determine if any additional net realizable value adjustments
are required. Royalty expense for sales of content where the
provider royalty agreement has no guarantee advance is
calculated by multiplying the net sales generated by that
provider by the percentage indicated in the royalty agreement.

Warrants issued to non employees in
exchange for goods and services:We occasionally issue warrants to
purchase shares of common stock to non employees as part of
their compensation for providing goods and services. We account
for these warrants in accordance with the Emerging Issues Task
Force (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.

Employee Stock-Based Compensation
arrangements:Our 1999 Stock
Incentive Plan permits the granting of stock options, stock
appreciation rights, restricted or unrestricted stock awards,
performance rights and other stock based awards to employees.
For options granted to new Audible employees as part of their
compensation package, the exercise price is determined by the
closing price of Audibles stock on the day immediately
proceeding the employees start date. For additional option
grants made to existing employees, the exercise price is
determined by the closing price on the day immediately
proceeding 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. We apply Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and Financial Accounting Standards
Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation  an
Interpretation of APB Opinion No. 25, in accounting
for our stock-based compensation, as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148. For options

23



---



##### 



granted at an exercise price lower than the fair
market value of the stock on the grant date, the intrinsic value
is recorded as deferred compensation with a credit to additional
paid-in capital and is expensed on a straight-line basis over
the vesting term. If we had adopted the fair value-based method
of accounting for stock-based compensation pursuant to
SFAS No. 123, as amended by SFAS No. 148,
compensation expense would increase.


Factors Affecting Operating Results

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



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | acquire and retain customers;                                                                       
|
| |  | build awareness and acceptance of audible.com,
    the AudibleReady format and AudibleReady devices;
|
| |  | extend existing and acquire new content provider
    relationships;                                 
|
| |  | manage growth to stay competitive and fulfill
    customer demand; and                              
|
| |  | generate cash from operations and/or raise
    capital.                                             

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

As of December 31, 2002, we had not entered
into any derivative financial instruments, other financial
instruments or derivative commodity investments that expose us
to material market risk. We currently do not and do not plan to
engage in derivative instruments or hedging activities.

We have incurred significant losses since
inception, and as of December 31, 2002, we had an
accumulated deficit of $111,748,000. We believe that our success
will depend largely on our ability to extend our leadership
position as a provider of premium digital spoken audio content
over the Internet. Accordingly, we plan to continue to invest in
sales and marketing, content acquisition and production over the
next several quarters.

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

Our limited operating history and the emerging
nature of our market make prediction of future revenue
difficult. We have no assurance that we will be able to predict
our future revenue accurately. Because we have a number of fixed
expenses, we may be unable to adjust our spending in a timely
manner to compensate for unexpected revenue shortfalls.
Accordingly, any significant shortfall in relation to our
expectations could cause significant declines in our operating
results. We believe that our quarterly revenue, expenses and
operating results could vary significantly in the future, and
that period-to-period comparisons should not be relied upon

24



---



##### 



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 (IPO), 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 IPO were $28,719,000
since inception.

In July 1999, we completed an initial public
offering of 4,600,000 shares of common stock at $9.00 per share.
Total proceeds were $36,856,000, net of underwriting discounts
and commissions of $2,898,000 and offering costs of $1,641,000.
Concurrent with the offering, all shares of our redeemable
convertible preferred stock were converted into 13,400,985
shares of common stock.

In February 2001, Microsoft purchased 2,666,666
shares of our Series A Redeemable Convertible Preferred
stock for $10,000,000 at a per share price of $3.75. Each share
of preferred stock may be converted into four shares of Common
Stock, (equivalent to a price of $.9375 per share), subject to
adjustment under certain conditions. The Series A
Redeemable Convertible Preferred stock is convertible at the
option of the holder at any time prior to the fifth anniversary
of the original issue date. Dividends are payable semi-annually
at a annual rate of 12% either in additional preferred shares or
in cash at our option. On the fifth anniversary of the original
issue date, Audible is required to redeem all remaining
outstanding shares at a per share price of $3.75 plus all
accrued and unpaid dividends.

In February 2002, Special Situations Funds
purchased 4,069,768 shares of common stock for $3,500,000 at a
per share price of $0.86. We received proceeds net of direct
costs, of $3,159,000. In connection with this transaction, the
we issued warrants to purchase an additional 1,220,930 shares of
common stock. The warrants are exercisable at a price of $1.15
per share anytime prior to the fifth anniversary of the issue
date. We may demand the warrantholder exercise its rights in the
event that the closing bid price of a share of the our common
stock exceeds $2.30 for twenty consecutive trading sessions.

At December 31, 2002, our principal source
of liquidity was $2,822,000 in cash and cash equivalents.

At December 31, 2002, our principal
commitments consisted of operating lease commitments, dividends
payable to Microsoft in connection with the sale of
Series A Redeemable Convertible Preferred Stock,
contractual commitments with content providers and commitments
under our agreement with Amazon.com.

The following table shows future payments due
under our commitments and obligations as of December 31,
2002 and incorporates the February 10, 2003 amendment to
our Random House agreement.

|      |  |           |         |             |  |               |           |           |  |            |            |            |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 
|----- |  | --------- | ------- | ----------- |  | ------------- | --------- | --------- |  | ---------- | ---------- | ---------- |  | ----- | ------- |  |  | - | --------- |  |  |  | - |  |  | - | ---------- | 
|      |  |           |         | (1)         |  |               |           |           |  |            |            |            |  |      
|      |  |           |         | Dividends   |  | (2)           |           |           |  |            |            |            |  |      
|      |  |           |         | payable     |  | Redemption of |           |           |  |            |            |            |  |      
|      |  |           |         | Microsoft   |  | Microsoft     |           |           |  |            |            |            |  |      
|      |  |           |         | Series A    |  | Series A      |           |           |  |            |            |            |  |      
|      |  |           |         | Redeemable  |  | Redeemable    |           | Payments  |  | (3)        |            | (4)        |  |      
|      |  |           |         | Convertible |  | Convertible   |           | due       |  | Payments   |            | Payments   |  |      
|      |  | Operating |         | Preferred   |  | Preferred     |           | Content   |  | due        |            | due Random |  |      
|Year  |  | Leases    |         | Stock       |  | Stock         |           | Providers |  | Amazon.com |            | House      |  | Total
|      |  |           |         |             |  |               |           |           |  |            |            |            |  |      
|2003  |  | $         | 197,344 |             |  | $             | 1,659,779 |           |  |            |           |            |  | $     | 598,500 |  |  | $ | 1,500,000 |  |  |  |  |  |  |   | 3,955,623  | 
|2004  |  |           |        |             |  |               | 1,724,190 |           |  |            |           |            |  |       | 25,000  |  |  |   |          |  |  |  |  |  |  |   | 1,749,190  | 
|2005  |  |           |        |             |  |               | 1,937,299 |           |  |            |           |            |  |       |        |  |  |   |          |  |  |  |  |  |  |   | 1,937,299  | 
|2006  |  |           |        |             |  |               | 223,532   |           |  | $          | 12,289,976 |            |  |       |        |  |  |   |          |  |  |  |  |  |  |   | 12,513,508 | 
|      |  |           |         |             |  |               |           |           |  |            |            |            |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 
|Total |  | $         | 197,344 |             |  | $             | 5,544,800 |           |  | $          | 12,289,976 |            |  | $     | 623,500 |  |  | $ | 1,500,000 |  |  |  |  |  |  | $ | 20,155,620 | 
|      |  |           |         |             |  |               |           |           |  |            |            |            |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 



---



|     |                                                                                                                                                                                                                                                                                                                                   
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1): | Dividends payable in 2003 include $125,257 due as
    of December 31, 2002, which the Company intends to pay by
    the issuance of additional Series A Redeemable Convertible
    Preferred Stock. The remaining 2003 balance of $1,534,522 as
    well as all future dividends payable can be paid by either the
    issuance of

25



---



##### 



|     |                                                                                                                                                                                                                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | additional preferred shares or in cash at the
    option of the Company. The schedule above was prepared assuming
    that all future dividends would be paid by the issuance of
    additional preferred shares.                                                                                       
|    
|(2): | If the Series A Redeemable Convertible
    Preferred Stock is not converted into common stock prior to the
    fifth anniversary of the original issue date, Audible is
    required to redeem all remaining outstanding shares at a per
    share price of $3.75 plus all accrued and unpaid dividends.
|    
|(3): | The $1,500,000 shown due to Amazon was due in
    2002 and was payable in four installments of $375,000, each due
    on January 30, April 30, July 31, and
    October 30, 2002. The resolution of this remaining
    obligation is currently under discussion between Amazon.com and
    Audible.     
|    
|(4): | On February 10, 2003 the Random House
    agreement was amended to waive the $1,500,000 in imprint fees
    that were due in 2003 and 2004.                                                                                                                                                             

Net cash used in operating activities was
$18,605,000 for 2000, $17,500,000 for 2001, and $7,853,000 for
2002. Net cash used in 2000 was primarily attributable to our
net loss and decrease in advances, offset in part by
depreciation and amortization, services rendered for common
stock and warrants, increases in accounts payable, accrued
expenses and compensation, and royalty obligations. Net cash
used in 2001 was primarily attributable to our net loss, an
increase in inventory and a decrease in royalty obligations,
offset in part by services rendered for common stock and
warrants, depreciation and amortization, and a decrease in
royalty advances. Net cash used in 2002 was primarily
attributable to our net loss, a decrease in accounts payable, a
decrease in accrued compensation, and a decrease in royalty
obligations, offset in part by services rendered for common
stock and warrants, depreciation and amortization, and a
decrease accrued expenses and a decrease in inventory.

Net cash provided by investing activities was
$19,791,000 for 2000 and $965,000 for 2001. Net cash used in
investing activities in 2002 was $150,000. Net cash provided by
investing activities for 2000 was primarily related to
$22,446,000 in net redemptions of short-term investments and
$100,000 repayment of a note issued to a shareholder, offset in
part by $2,763,000 of purchases of property and equipment. Net
cash provided by investing activities for 2001 was primarily
related to $1,958,000 in net redemptions of short-term
investments offset in part by $997,000 of purchases of property
and equipment. Net cash used by investing activities for 2002
was primarily related to purchases of property and equipment.

Net cash provided by financing activities was
$933,000 for 2000, $10,013,000 for 2001, and $3,197,000 for
2002. Net cash provided by financing activities during 2000
resulted primarily from the sale of common stock and repayment
of notes due from shareholders offset in part by capital lease
payments. Net cash provided by financing activities during 2001
resulted primarily from the issuance of our redeemable
convertible preferred stock and repayment of notes due from
shareholders, offset in part by capital lease payments. Net cash
provided by financing activities during 2002 resulted primarily
from the sale of common stock, repayment of notes due from
shareholders, and the exercise of employee options.

As of December 31, 2002, we had available
net operating loss carryforwards totaling approximately
$105,466,000, which expire beginning in 2010. The Tax Reform Act
of 1986 imposes limitations on our use of net operating loss
carryforwards because certain stock ownership changes have
occurred.

Based on our currently proposed business plans
and related assumptions, we believe that our cash and cash
equivalents balance, will enable us to meet our anticipated cash
requirements for operations and capital expenditures through the
second quarter of 2003.

The auditors report on our financial
statements contains an explanatory paragraph indicating there is
substantial doubt about our ability to continue as a going
concern. We are attempting to secure additional funding through
a variety of channels. We cannot assure you that we will be
successful in doing so. We have no lines of credit. In seeking
funding to meet our working capital requirements, we may
consider licensing our technology or selling certain assets. We
cannot assure you that additional funds will be available from
any of these sources on favorable terms, if at all.

26



---



##### 



New Accounting Standards

In July 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities
(SFAS 146). SFAS 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)
(EITF 94-3) and requires that a liability for
costs associated with an exit or disposal activity be recognized
and measured initially at fair value in the period in which the
liability is incurred. Under EITF 94-3, a liability for an
exit cost was recognized at the date of an entitys
commitment to an exit plan. The adoption of SFAS 146 is
expected to result in delayed recognition for certain types of
costs as compared to the provisions of EITF 94-3.
SFAS 146 is effective for new exit or disposal activities
that are initiated after December 31, 2002, and does not
affect amounts currently reported in our financial statements.
SFAS 146 will affect the types and timing of costs included
in future restructuring programs, if any, but is not expected to
have a material impact on our financial position or results of
operations.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which amends
SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based
compensation. SFAS 148 also amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method on reported results. Although the Company
intends to continue applying APB Opinion No. 25 and related
interpretations, the Company has adopted the disclosure
requirements of SFAS 148 as of December 31, 2002.

RISK FACTORS

Auditors Report  Going
Concern Considerations.

The auditors report on our financial
statements contains an explanatory paragraph indicating there is
substantial doubt about our ability to continue as a going
concern. There can be no assurance that we will be able to
obtain additional funding for our business, or that unforeseen
expenses will not be incurred so that our cash will not last us
as long as we currently anticipate. We do not have any
commitments or arrangements to obtain any additional funding and
we cannot assure you that funding will be available to us. In
the event that we are unable to raise additional funds, we may
be required to significantly curtail our operations.

We have a limited operating history with which
you can evaluate our business and our future
prospects.

Our limited operating history and limited number
of customers makes predicting our future operating results
difficult. From the time we were incorporated in November 1995
until September 1997, we generated no revenue while we developed
our secure delivery system and a prototype audio playback
device, created our audible.com® Web site and established
relationships with providers of audio content. Although we began
earning limited revenue in October 1997, we have continued to
focus our resources on refining and enhancing our Web site and
our playback and management software and in expanding our
content selections and developing relationships with
manufacturers of digital audio players. We have limited history
of selling content and content subscription services to users of
portable electronic devices manufactured by other parties. We
expect to spend resources on growing our customer base and
expanding our service and promoting our brand name. These
activities will result in significant losses until such time as
the Company is able to generate sufficient revenue to support
its operations.

We have limited revenue, we have a history of
losses, we may not be profitable in the future, and will need
additional financing.

Our limited revenue and history of losses makes
it uncertain when or if we will become profitable. Our failure
to achieve profitability within the time frame expected by
investors may adversely affect our business and the market price
of our common stock. We had total revenue of $4,549,000,
$9,071,000 and $12,370,000

27



---



##### 



for 2000, 2001 and 2002, respectively. This
limited revenue makes it difficult to predict our future
quarterly results and our revenue and operating results can vary
significantly quarter to quarter. Our limited revenue will make
relatively minor fluctuations in revenue much more significant
on a percentage basis. Our revenue is dependent on the
availability and sales of AudibleReady players by third-party
manufacturers. We had content and services revenue of
$2,519,000, $7,462,000 and $11,288,000 for 2000, 2001 and 2002,
respectively. Bulk content sales of $1,435,000 were recognized
in 2001 and of this amount $1,285,000 related to barter
arrangements; there is no assurance that we will be able to sell
bulk content in the future. We had operating expenses of
$38,742,000, $36,632,000 and $29,956,000 for 2000, 2001 and
2002, respectively. Because most of our expenses, such as
employee compensation and rent, are relatively fixed in the
short term, we may be unable to significantly adjust our
spending to compensate for unexpected revenue shortfalls. We
will to need to raise additional funds through public or private
financing or other arrangements in the second half of 2003.
There can be no assurance that additional financing will be
available to the Company when needed, if at all. This would
likely affect the market price of our common stock in a manner
which, may be unrelated to our long-term operating performance.
As of December 31, 2002, we have incurred net operating
losses of approximately $111,748,000 since inception, and we
expect to continue to incur significant losses for the
foreseeable future.


Our common stock has been relatively thinly
traded and we cannot predict the extent to which a trading
market will develop.

Our common stock trades on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to
larger more widely known companies in our industry. Thinly
traded common stock can be more volatile than common stock
trading in an active public market. We cannot predict the extent
to which an active public market for the common stock will
develop or be sustained in the future.

We must retain a significant portion of our
AudibleListener customers.

Our AudibleListener service is a major source of
our revenue. If too many AudibleListener customers cancel their
membership, our revenue will suffer. The funds we spend on
marketing to acquire new customers reflect assumptions about how
many customers we can acquire and how long they will remain
customers. If our actual experience falls short of our
assumptions, our revenue will be materially affected.

The market for our service is uncertain and
consumers may not be willing to use the Internet to purchase
spoken audio content.

There can be no assurance that the Companys
current business strategy will enable it to achieve profitable
operations. Downloading of audio content from the Internet is a
relatively new method of distribution and its growth and market
acceptance is highly uncertain. Our success will depend in large
part on consumer willingness to purchase and download spoken
audio content over the Internet. Purchasing this content over
the internet involves changing purchasing habits, and if
consumers are not willing to purchase and download this content
over the Internet, our revenue will be limited and our business
will be materially adversely affected. We believe that
acceptance of this method of distribution may be subject to
network capacity constraints, hardware limitations, company
computer security policies, the ability to change user habits
and the quality of the audio content delivered. Our revenue from
services is dependent upon corporate clients deciding to
purchase our audio download service for staff training and
development as well as wireless carriers wanting to deliver a
spoken audio solution to their customers. Our bulk content sales
depend upon selling our content to other companies that may want
to distribute our content as part of a potentially competitive
digital audio service.

We may not be able to license or produce
sufficiently compelling audio content to attract and retain
customers and grow our revenue.

If we are unable to obtain licenses from the
creators and publishers of content to have that content
available on our Web site on terms acceptable to us or if a
significant number of content providers terminate their
agreements with us, we would have less content available for our
customers, which would limit our

28



---



##### 



revenue growth and materially adversely affect
our financial performance. Our future success depends upon our
ability to accumulate and deliver premium spoken audio content
over the Internet. Although we currently collaborate with the
publishers of periodicals and other branded print materials to
convert their written material into original spoken audio
content, the majority of our content originates from producers
of audiobooks, radio broadcasts and other forms of spoken audio
content. Although many of our agreements with content providers
are for initial terms of one to three years, our content
providers may choose not to renew their agreements with us or
may terminate their agreements early if we do not fulfill our
contractual obligations. We cannot be certain that our content
providers will enter into new agreements with us on the same or
similar terms as those currently in effect or that additional
content providers will enter into agreements on terms acceptable
to us.


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

If manufacturers of electronic devices do not
manufacture, make available or sell a sufficient number of
players promoted as AudibleReady, or if these players do not
achieve sufficient market acceptance, we will not be able to
grow revenue and our business will be materially adversely
affected. Manufacturers of electronic devices have experienced
delays in their delivery schedule of their digital players due
to parts shortages and other factors. Although the content we
sell can be played on personal computers, we believe that a key
to our future success is the ability to playback this content on
hand-held electronic devices that have digital audio
capabilities. In addition to selling our own Otis digital audio
player, we depend in large measure on manufacturers, such as
Apple Corp., Palm, Compaq Computer Corporation, Handspring and
SONICblue Incorporateds Rio Audio Group to develop and
sell their own products and promote them as AudibleReady.

We must establish, maintain and strengthen our
brand names, trademarks and service marks in order to acquire
customers and generate revenue.

If we fail to promote and maintain our brand
names, our business, operating results and financial condition
could be materially adversely affected. We believe that building
awareness of the Audible®,
Audible.com® and AudibleReady®
brand names is critical to achieving widespread acceptance of
our service by customers, content providers, device
manufacturers and marketing and distribution companies with
which we have business relationships. To promote our brands, we
will need to increase our marketing expenditures. We have
applied for registration in the United States of several of our
trademark and service marks, including but not limited to
AudibleListener, Audible Entertainment
Network, AudibleOriginals,
AudibleComedy, AudibleErotica and
Who You Gonna Listen To. We cannot assure you that
these trademarks and service marks will be granted.

Increasing availability of digital audio
technologies may increase competition and reduce our gross
margins, market share and profitability.

If we do not continue to enhance our service and
adapt to new technology, we will not be able to compete with new
and existing distributors of spoken audio. As a result, we may
lose market share and our business would be materially adversely
affected. The market for the Audible service is rapidly evolving
and intensely competitive. We expect competition to intensify as
advances in and standardization of digital audio distribution,
download, security, management and playback technologies reduce
the cost of starting a digital audio delivery system or a
service that gathers audio content. To remain competitive, we
must continue to either license or internally develop technology
that will enhance the features of the Audible service, our
software that manages the downloading and playback of audio
content, our ability to compress audio files for downloading and
storage and our download, and our security and playback
technologies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any
of which could materially adversely affect our financial
performance.

29



---



##### 



Our industry is highly competitive and we
cannot assure you that we will be able to compete
effectively.

We face competition in all aspects of our
business and we cannot assure you that we will be able to
compete effectively. We compete for consumers of audio content
with other Internet-based audio distributors and distributors of
audio on cassette tape or compact disc. We compete with others
for relationships with manufacturers of electronic devices with
audio playback capabilities. The business of providing content
over the Internet is experiencing rapid growth and is
characterized by rapid technological changes, changes in
consumer habits and preferences and the emergence of new and
established companies. We compete with (1) traditional and
online retail stores, catalogs, clubs and libraries that sell,
rent or loan audiobooks on cassette tape or compact disc, such
as Audio Book Club, Borders, and Barnes & Noble,
(2) Web sites that offer streaming access to spoken audio
content using tools such as the RealPlayer or Windows Media
Player, (3) other companies offering services similar to
ours, such as Media Bay and (4) on-line and Internet portal
companies such as America Online, Inc., Yahoo! Inc., and
Microsoft Network, with the potential to offer audio content.
Many of these companies have financial, technological,
promotional and other resources that are much greater than those
available to us and could use or adapt their current technology,
or could purchase technology, to provide a service directly
competitive with the Audible® service.

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

Any capacity constraints or sustained failure or
delay in using our Web site could reduce the attractiveness of
the Audible® service to consumers, which would materially
adversely affect our financial performance. Our success depends
on our ability to electronically distribute spoken audio content
through our Web site to a large number of customers efficiently
and with few interruptions or delays. Accordingly, the
performance, reliability and availability of our Web site, our
transaction processing systems and our network infrastructure
are critical to our operating results. We have experienced
periodic systems interruptions including planned system
maintenance, hardware and software failures triggered by high
traffic levels, and network failure in the Internet and our
Internet service providers. We believe the complexities of our
software and hardware and the potential instability of the
Internet due to rapid user growth mean that periodic
interruptions to our service are likely to continue. A
significant increase in visitors to our Web site or simultaneous
download requests could strain the capacity of our Web site,
software, hardware and telecommunications systems, which could
lead to slower response times or system failures. These
interruptions may make it difficult to download audio content
from our Web site in a timely manner.

We could be liable for substantial damages if
there is unauthorized duplication of the content we
sell.

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

We do not have a comprehensive disaster
recovery plan and we have limited back-up systems, and a
disaster could severely damage our operations.

If our computer systems are damaged or
interrupted by a disaster for an extended period of time, our
business, results of operations and financial condition would be
materially adversely affected. We do not have a comprehensive
disaster recovery plan in effect and do not have fully redundant
systems for the Audible® service at an alternate site. Our
operations depend upon our ability to maintain and protect our
computer systems, all of which are located in our headquarters
and at a third party offsite hosting facility. Although we

30



---



##### 



maintain insurance against general business
interruptions, we cannot assure you that the amount of coverage
will be adequate to compensate us for our losses.


Problems associated with the Internet could
discourage use of Internet-based services like ours.

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



| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | the secure transmission of customer credit card
    numbers and other confidential information;     
|
| |  | the reliability and availability of Internet
    service providers;                                 
|
| |  | the cost of access to the Internet;                                                                 
|
| |  | the availability of sufficient network capacity;
    and                                            
|
| |  | the ability to download audio content through
    computer security measures employed by businesses.

The loss of key employees could jeopardize our
growth prospects.

The loss of the services of any of our executive
officers or other key employees could materially adversely
affect our business. Our future success depends on the continued
service and performance of our senior management and other key
personnel, particularly Donald R. Katz, our Chairman and CEO,
and Robert Kramer, President. We do not have employment
agreements with any of our executive officers or other key
employees.

Our inability to hire new employees may hurt
our growth prospects.

The failure to hire new personnel could damage
our ability to grow and expand our business. Our future success
depends on our ability to attract, hire and retain highly
skilled technical, managerial, editorial, marketing and customer
service personnel, and competition for these individuals is
intense.

We may not be able to protect our intellectual
property.

If we fail to protect our intellectual property,
we may be exposed to expensive litigation or risk jeopardizing
our competitive position. The steps we have taken may be
inadequate to protect our technology and other intellectual
property. Our competitors may learn or discover our trade
secrets or may independently develop technologies that are
substantially equivalent or superior to ours. We rely on a
combination of patents, licenses, confidentiality agreements and
other contracts to establish and protect our technology and
other intellectual property rights. We also rely on un-patented
trade secrets and know-how to maintain our competitive position.
We may have to litigate to enforce our intellectual property
rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and the diversion
of our management and technical resources, which would harm our
business.

Other companies may claim that we infringe
their copyrights or patents.

If the Audible service violates the proprietary
rights of others, we may be required to redesign our software,
and re-encode the Audible content, or seek to obtain licenses
from others to continue offering the Audible service without
substantial redesign and such efforts may not be successful. We
do not conduct comprehensive patent searches to determine
whether our technology infringes patents held by others. In
addition, software development is inherently uncertain in a
rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are
confidential when filed, with regard to similar technologies.
Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid,
and could distract our management from our business. A party
making a claim could secure a judgment that requires us to pay
substantial damages. A judgment could also

31



---



##### 



include an injunction or other court order that
could prevent us from offering the Audible service. Any of these
events could have a material adverse effect on our business,
operating results and financial condition.


We could be sued for content that we
distribute over the Internet.

A lawsuit based on the content we distribute
could be expensive and damaging to our business. Our service
involves delivering spoken audio content to our customers. As a
distributor and publisher of content over the Internet, we may
be liable for copyright, trademark infringement, unlawful
duplication, negligence, defamation, indecency and other claims
based on the nature and content of the materials that we publish
or distribute to customers. Although we generally require that
our content providers indemnify us for liability based on their
content and we carry general liability insurance, the indemnity
and the insurance may not cover claims of these types or may not
be adequate to protect us from the full amount of the liability.
If we are found liable in excess of the amount of indemnity or
of our insurance coverage, we could be liable for substantial
damages and our reputation and business may suffer.

Future government regulations may increase our
cost of doing business on the Internet.

Laws and regulations applicable to the Internet
covering issues such as user privacy, pricing and copyrights are
becoming more prevalent. The adoption or modification of laws or
regulations relating to the Internet could force us to modify
the Audible service in ways that could adversely affect our
business.

We may become subject to sales and other taxes
for direct sales over the Internet.

Increased tax burden could make our service too
expensive to be competitive. We do not currently collect sales
or other similar taxes for download of content into states other
than in New Jersey. Nevertheless, one or more local, state or
foreign jurisdictions may require that companies located in
other states collect sales taxes when engaging in online
commerce in those states. If we open facilities in other states,
our sales into such states may be taxable. If one or more states
or any foreign country successfully asserts that we should
collect sales or other taxes on the sale of our content, the
increased cost to our customers could discourage them from
purchasing our services, which would materially adversely affect
our business.

Our contractual obligations, charter and
by-laws could discourage an acquisition of our company that
would benefit our stockholders.

Provisions of our agreement with Microsoft and of
our certificate of incorporation and bylaws may make it more
difficult for a third party to acquire control of our company,
even if a change in control would benefit our stockholders.
These provisions include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Prior to accepting an acquisition proposal or
    initiating a sale of substantially all of our assets, we must
    provide to Microsoft a notice specifying in general the proposed
    terms of such acquisition proposal or sale. Microsoft shall have
    ten days in which to present an offer to acquire us, during
    which period we must refrain from entering into definitive
    transaction documentation with respect to such acquisition
    proposal or sale. Nothing in the foregoing sentence shall
    obligate us to negotiate with Microsoft on an exclusive basis
    during such 10-day period.
|
| |  | our board of directors, without stockholder
    approval, may issue preferred stock on terms that they
    determine. This preferred stock could be issued quickly with
    terms that delay or prevent the change in control of our company
    or make removal of management more difficult. Also, the issuance
    of preferred stock may cause the market price of our common
    stock to decrease;                                                                                                                                                                                                              
|
| |  | our board of directors is staggered
    so that only a portion of its members are elected each year;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | only our board of directors, our chairman of the
    board, our president or stockholders holding a majority of our
    stock can call special stockholder meetings; and                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | special procedures which must be followed in
    order for stockholders to present proposals at stockholder
    meetings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

32



---



##### 



These provisions could have the effect of
delaying, deterring or preventing a change in the control of our
company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of
our company, or may otherwise discourage a potential acquirer
from attempting to obtain control of us, which in turn could
materially adversely affect the market price of our common stock.



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure
    about Market Risk.

See Item 7 for discussion.



|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

The information required by Item 8 of
Part II is incorporated herein by reference to the
financial statements filed with this report; see Item 15 of
Part IV.



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

None.

33



---



##### 



PART III

Item 10.     Directors
and Executive Officers of the Company.

DIRECTORS

Donald R.
Katz,age 50, has been the
Chairman of the board of directors since April 1999, and a
director since co-founding Audible in November 1995. Since July
2001, Mr. Katz has been serving as our Chief Executive
Officer. From October 1999 to February 2000 and from November
1995 to March 1998, Mr. Katz served as our President and Chief
Executive Officer. Prior to co-founding Audible, Mr. Katz
was an author, business journalist and media consultant for over
twenty years.

Richard
Sarnoff,age 43, has been a
director since February 2001. Mr. Sarnoff currently also serves
on the board of directors of Princeton Review. Mr. Sarnoff
has been serving as President of Random House Ventures since
March 2000, and as President of Random House Corporate
Development Group since June 2000. From 1996 to 1998,
Mr. Sarnoff served as Chief Financial Officer of Bantam
Doubleday Dell, and after the merger with Random House in 1998,
he has been serving as Executive Vice President and Chief
Financial Officer of Random House. From 1995 to 1998,
Mr. Sarnoff served as Senior Vice President of Corporate
Development of Bertelsmann Book Group. From 1987 to 1998, Mr.
Sarnoff served Bantam Doubleday Dell (predecessor to Random
House), in various management positions, including Director of
Planning for the Sales and Marketing Division, Director of
Marketing for the Bantam Publishing Division, Vice President of
Strategic Planning, and Senior Vice President of Diversified
Publishing and New Media.

Andrew P.
Kaplan,age 48, has been a
director since February 2002. Mr. Kaplan has been our Executive
Vice President and Chief Financial Officer since June 1999. From
June 1997 to May 1999, Mr. Kaplan served as Chief Financial
Officer of Thomson Corporation Publishing International, a
division of The Thomson Corporation. From September 1995 to May
1997, Mr. Kaplan served as Senior Vice President and Chief
Financial Officer of Vertis, Inc., an advertising services
company. From March 1989 to August 1995, Mr. Kaplan served
as Vice President and Chief Financial Officer of Time Life, a
division of AOL Time Warner Inc.

Gary L.
Ginsberg,age 39, has been a
director since April 2001. Since January 1999, Mr. Ginsberg
has been serving as Executive Vice President of Investor
Relations and Corporate Communications of News Corporation, and
as a member of the Executive Management Committee since June
2000. Prior to joining News Corporation, Mr. Ginsberg
served as managing director at the New York based strategic
consulting firm of Clark & Weinstock from November 1996
until December 1998. Mr. Ginsberg also served as Senior
Editor and Counsel of GeorgeMagazine from March 1995
until November 1996.

Johannes
Mohn,age 52, has been a director
since April 2001. Since June 2001, Mr. Mohn has been
serving as Vice President of Media Technology at Bertelsmann
A.G. From December 1998 to May 2001, Mr. Mohn served as
Vice President of Technology Management at Direct Group,
Bertelsmann A.G. From May 1995 to November 1998, Mr. Mohn
served as Managing Director of Bertelsmann Kalendar GmbH, a
subsidiary of Bertelsmann A.G. and also served as Managing
Director of Mohndruck Kalendar und Promotion Verlag GmbH, a
subsidiary of Bertelsmann A.G., and Dohse & Broelemann GmbH.

Richard
Brass,age 50, has been a director
since April 1999. Since November 1997, Mr. Brass has been
serving as Vice President, Technology Development at Microsoft
Corporation. From 1989 to July 1997, Mr. Brass served as
Senior Vice President of Oracle Corporation.

Winthrop
Knowlton,age 71, has been a
director since November 1996. Since 1989, Mr. Knowlton has
been serving as Chairman and Chief Executive Officer of Knowlton
Brothers, Inc., a management company for limited partnerships
and offshore funds investing in the U.S.

34



---



##### 



EXECUTIVE OFFICERS

In addition to Messrs. Katz and Kaplan,
Mr. Kramer is our other executive officer.

Robert O.
Kramer,age 43, has been serving
as our President since July 2001. From May 2000 to July 2001,
Mr. Kramer served as our Chief Technology Officer. From
July 1984 to April 2000, Mr. Kramer served as senior
executive of American Management Systems.

Our officers are elected by the board of
directors on an annual basis and serve until their successors
have been duly elected and qualified. There are no family
relationships among any of our directors or executive officers.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE

Our directors and executive officers must file
reports with the Securities and Exchange Commission indicating
the number of shares of our common stock they beneficially own
and any changes in their beneficial ownership. Copies of these
reports must be provided to us. Based on our review of these
reports and written representations from the persons required to
file them, we believe each of our directors and executive
officers filed all required reports during 2002 in a timely
fashion.

Item 11.     Executive
Compensation.

EXECUTIVE COMPENSATION

The following summary compensation table sets
forth the compensation paid by us during the last three years
ending December 31, 2002, to our chief executive officer,
and the other most highly compensated executive officers, other
than our chief executive officer, whose total compensation for
services in all capacities exceeded $100,000 during such year,
whom we refer to as our Named Executive Officers.

Summary Compensation Table

|                            |                          |      |      |                     |  |              |         |              |     |              |        |         |  |  |   |         |     |  |         |         | 
|--------------------------- | ------------------------ | ---- | ---- | ------------------- |  | ------------ | ------- | ------------ | --- | ------------ | ------ | ------- |  |  | - | ------- | --- |  | ------- | ------- | 
|                            |                          |      |      |                     |  |              |         |              |     | Long Term   
|                            |                          |      |      |                     |  |              |         |              |     | Compensation
|                            |                          |      |      |                     |  |             
|                            |                          |      |      | Annual Compensation |  | Awards      
|                            |                          |      |      |                     |  |             
|                            |                          |      |      |                     |  | Other Annual |         | Securities  
|                            |                          |      |      |                     |  | Bonus        |         | Compensation |     | Underlying  
|Name and Principal Position |                          | Year |      | Salary ($)          |  | ($) (1)      |         | ($)          |     | Options/SARs
|                            |                          |      |      |                     |  |              |         |              |     |             
|Donald R. Katz              |                          |      | 2002 |                     |  |              | 190,000 |              |     |              |       |         |  |  |  |         |     |  | 400,000 |        
|                            | Chief Executive Officer  |      |      | 2001                |  |              |         | 225,000      | (2) |              |        |        |  |  |   |        |     |  |         | 600,000 | 
|                            | And Chairman, Board of   |      |      | 2000                |  |              |         | 250,000      |     |              |        | 112,500 |  |  |   |        |     |  |         |        | 
|                            | Directors                |      |      |                     |  |              |         |              |     |              |        |         |  |  |   |         |     |  |         |         | 
|                           
|Robert O. Kramer            |                          |      | 2002 |                     |  |              | 250,000 |              |     |              |       |         |  |  |  |         |     |  | 250,000 |        
|                            | President                |      |      | 2001                |  |              |         | 250,000      | (3) |              |        |        |  |  |   | 100,000 | (5) |  |         | 425,000 | 
|                            |                          |      | 2000 |                     |  |              | 149,680 |              |     |              | 49,844 |         |  |  |  |         |     |  | 250,000 |        
|                           
|Andrew P. Kaplan            |                          |      | 2002 |                     |  |              | 190,000 |              |     |              |       |         |  |  |  |         |     |  | 300,000 |        
|                            | Executive Vice President |      |      | 2001                |  |              |         | 181,396      | (4) |              |        |        |  |  |   | 100,000 | (5) |  |         | 300,000 | 
|                            | Chief Financial Officer  |      |      | 2000                |  |              |         | 157,917      |     |              |        | 29,246  |  |  |   |        |     |  |         | 100,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reflects bonuses earned in the fiscal year
    indicated, paid during the following fiscal year.                                                                                                                                                                                                                                                                           
|   
|(2) | The salary paid to Mr. Katz in 2001 is based
    on an annual base salary of $250,000 for the period starting on
    January 1, 2001 to July 31, 2001, and based on an
    annual base salary of $190,000 for the period starting on
    August 1, 2001 to December 31, 2001. Currently, the
    salary paid to Mr. Katz is based on an annual base salary of
    $190,000.
|   
|(3) | The salary paid to Mr. Kramer is based on an
    annual base salary of $250,000.                                                                                                                                                                                                                                                                                           

35



---



##### 





|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|(4) | The salary paid to Mr. Kaplan is based on an
    annual base salary of $190,000.                    
|   
|(5) | Reflects a $100,000 retention payment in return
    for continuous employment through June 30, 2001.

Options Granted in 2002

The following table provides the specified
information concerning options granted to our Named Executive
Officers for the fiscal year ended December 31, 2002:

|                 |  |              |         |                  |  |          |      |            |  |                         |      |     |  |  |         |  |  |   |         |  |  |   |         | 
|---------------- |  | ------------ | ------- | ---------------- |  | -------- | ---- | ---------- |  | ----------------------- | ---- | --- |  |  | ------- |  |  | - | ------- |  |  | - | ------- | 
|                 |  |              |         |                  |  |          |      |            |  |                        
|                 |  |              |         |                  |  |          |      |            |  | Potential Realizable   
|                 |  |              |         |                  |  |          |      |            |  | Value at Assumed Annual
|                 |  | Number of    |         | Percent of Total |  |          |      |            |  | Rates of Stock Price   
|                 |  | Securities   |         | Options/SARs     |  | Exercise |      |            |  | Appreciation for Option
|                 |  | Underlying   |         | Granted to       |  | Price    |      |            |  | Term                   
|                 |  | Options/SARs |         | Employees in     |  | Per      |      | Expiration |  |                        
|Name             |  | Granted      |         | Fiscal Year      |  | Share    |      | Date       |  | 5%                      |      | 10%
|                 |  |              |         |                  |  |          |      |            |  |                         |      |    
|Donald R. Katz   |  |              | 400,000 |                  |  |          | 16.0 | %          |  | $                       | 0.99 |     |  |  | 2/13/12 |  |  | $ | 249,200 |  |  | $ | 631,200 | 
|Robert O. Kramer |  |              | 250,000 |                  |  |          | 10.0 | %          |  | $                       | 0.99 |     |  |  | 2/13/12 |  |  | $ | 155,750 |  |  | $ | 394,500 | 
|Andrew P. Kaplan |  |              | 300,000 |                  |  |          | 12.0 | %          |  | $                       | 0.99 |     |  |  | 2/13/12 |  |  | $ | 186,900 |  |  | $ | 473,400 | 

Option Exercises in 2002 and Year-End Values
Table

The following table provides information
concerning option exercises in 2002 and unexercised options held
as of December 31, 2002, by our Named Executive Officers.

|                 |  |             |   |          |  |                        |   |                      |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|---------------- |  | ----------- | - | -------- |  | ---------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                 |  |             |   |          |  |                        |   |                     
|                 |  |             |   |          |  | Number of Securities   |   | Value of Unexercised
|                 |  |             |   |          |  | Underlying             |   | In-the-Money        
|                 |  |             |   |          |  | Unexercised Options at |   | Options at          
|                 |  | Shares      |   |          |  | December 31, 2002      |   | December 31, 2002(1)
|                 |  | Acquired    |   | Value    |  |                        |   |                     
|                 |  | on Exercise |   | Received |  | Exercisable            |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                 |  |             |   |          |  |                        |   |                      |  |             |         |              
|Donald R. Katz   |  |             |  |          |  |                        |  |                      |  |             | 487,225 |               |  |  | 512,775 |  |  |  |  |  |  |  |  | 
|Robert O. Kramer |  |             |  |          |  |                        |  |                      |  |             | 532,417 |               |  |  | 392,583 |  |  |  |  |  |  |  |  | 
|Andrew P. Kaplan |  |             |  |          |  |                        |  |                      |  |             | 623,474 |               |  |  | 401,526 |  |  |  |  |  |  |  |  | 



---



|    |                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on $0.30 per share, the closing price of
    our common stock on the Nasdaq SmallCap Market on
    December 31, 2002, none of the options were
    in-the-money.

EMPLOYMENT ARRANGEMENTS

We have not entered into formal employment
agreements with any of our Named Executive Officers. Our
employment arrangements with our Named Executive Officers, which
are embodied in enforceable offer letters, provide for a base
salary, which may be increased by our board of directors, and
bonus, which may take the form or a combination of an annual
bonus, transaction bonus, and/or retention payment.

Donald R. Katz.Mr. Katzs employment
arrangement provides him with an annual base salary of $190,000.
In 2002, Mr. Katz was granted an option to acquire 400,000
shares of our common stock in lieu of any cash bonus.
Mr. Katz is entitled, under the Companys Management
Incentive Plan, to a one-time bonus of $200,000 if the Company
is sold or if it obtains additional funding in an amount of
$15 million or more (transaction bonus).

Robert O. Kramer.Mr. Kramers employment
arrangement provides him with an annual base salary of $250,000.
In 2002, Mr. Kramer was granted an option to acquire
250,000 shares of our common stock in lieu of any cash bonus. In
2001, the Company paid Mr. Kramer a retention payment of
$100,000 for remaining employed with the Company during 2001
pursuant to the terms of a letter agreement. Mr. Kramer
also has access to a corporate apartment.

Andrew P. Kaplan.Mr. Kaplans employment
arrangement provides him with an annual base salary of $190,000.
In 2002, Mr. Kaplan was granted an option to acquire
300,000 shares of our common stock in lieu of any cash bonus.
Mr. Kaplan is entitled to six-month severance if we terminate
his employment. We also

36



---



##### 



provide him access to a corporate apartment. In
2001, the Company paid Mr. Kaplan a retention payment of
$100,000 for remaining employed with the Company during 2001
pursuant to the terms of a letter agreement. Mr. Kaplan is
entitled, under the Companys Management Incentive Plan, to
a one-time bonus of $200,000 if the Company is sold or if it
obtains additional funding in an amount of $15 million or
more (transaction bonus).


We require all our employees to sign agreements
that prohibit the disclosure of our confidential or proprietary
information. Each of these employees also has agreed to
non-competition and non-solicitation provisions that will be in
effect during his employment and for one year thereafter.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION.

None of the members of the Compensation Committee
was, during 2002, one of our officers or employees at any time.

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

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information
regarding our equity compensation plans as of December 31,
2002.

|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 
|-------------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ----------------------- | ---- |  |  |  | --------- | 
|                                                               |  |                         |           |                      |  | Number of securities   
|                                                               |  |                         |           |                      |  | remaining available for
|                                                               |  |                         |           |                      |  | future issuance under  
|                                                               |  | Number of securities to |           | Weighted-average     |  | equity compensation    
|                                                               |  | be issued upon exercise |           | exercise price of    |  | plans (excluding       
|                                                               |  | of outstanding options, |           | outstanding options, |  | securities reflected   
|Plan Category                                                  |  | warrants and rights (1) |           | warrants and rights  |  | in first column) (1)   
|                                                               |  |                         |           |                      |  |                        
|Equity compensation plans approved by security
    holders     |  |                         | 7,547,150 |                      |  | $                       | 2.40 |  |  |  | 1,428,038 | 
|Equity compensation plans not approved by
    security holders |  |                         |          |                      |  |                         |     |  |  |  |          | 
|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 
|Total                                                          |  |                         | 7,547,150 |                      |  | $                       | 2.40 |  |  |  | 1,428,038 | 
|                                                               |  |                         |           |                      |  |                         |      |  |  |  |           | 



---



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(1) | Represents shares of common stock issuable in
    connection with such equity compensation plans.

PRINCIPAL STOCKHOLDERS

The following table shows the number of shares of
our common stock beneficially owned as of April 1, 2003 by:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | each person who we know beneficially owns more
    than 5% of the common stock;
|
| |  | each member of our board of directors;                                         
|
| |  | each of our Named Executive Officers; and                                      
|
| |  | all of the directors and executive officers as a
    group.                    

Unless otherwise indicated, (i) the persons
named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially
owned by them, subject to community property laws where
applicable, and (ii) the address for the persons named in
the table is c/o Audible, Inc., 65 Willowbrook Boulevard, Wayne,
New Jersey 07470.

37



---



##### 



|                                                                               |                                                                                                                                                       |              |            |                   |  |  |      |   | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ----------------- |  |  | ---- | - | 
|                                                                               |                                                                                                                                                       | Number of    |            |                  
|                                                                               |                                                                                                                                                       | Shares       |            |                  
|                                                                               |                                                                                                                                                       | Beneficially |            | Percent of Shares
|Name of Beneficial Owner                                                       |                                                                                                                                                       | Owned        |            | Outstanding (1)  
|                                                                               |                                                                                                                                                       |              |            |                  
|Microsoft Corporation (2)                                                      |                                                                                                                                                       |              | 15,718,771 |                   |  |  | 35.1 | %
|                                                                               | One Microsoft Way
    Redmond, WA 98052-6399                                                                                                          |              |            |                   |  |  |      |   | 
|Special Situations Fund III, L.P. (3)                                          |                                                                                                                                                       |              | 4,950,851  |                   |  |  | 15.9 | %
|Special Situations Private Equity Fund, L.P.                                   |                                                                                                                                                       |              |            |                   |  |  |      |  
|Special Situation Technology Fund                                              |                                                                                                                                                       |              |            |                   |  |  |      |  
|                                                                               | 153 East 53rd Street
    New York, NY 10022                                                                                                           |              |            |                   |  |  |      |   | 
|Special Situations Cayman Fund, L.P.                                           |                                                                                                                                                       |              |            |                   |  |  |      |  
|                                                                               | C/o CIBC Bank and Trust Company
    (Cayman) Limited
    CIBC Bank Building
    P.O. Box 694
    Grand Cayman, Cayman Islands
    British East Indies |              |            |                   |  |  |      |   | 
|Amazon.com, Inc. (4)                                                           |                                                                                                                                                       |              | 1,840,033  |                   |  |  | 5.9  | %
|Amazon.com Commerce Services, Inc.                                             |                                                                                                                                                       |              |            |                   |  |  |      |  
|Amazon.com Holdings, Inc.                                                      |                                                                                                                                                       |              |            |                   |  |  |      |  
|Amazon.com NV Investment Holdings, Inc.                                        |                                                                                                                                                       |              |            |                   |  |  |      |  
|                                                                               | 1200 12th Avenue South
    Suite 1200
    Seattle, WA 98144                                                                                           |              |            |                   |  |  |      |   | 
|Random House (5)                                                               |                                                                                                                                                       |              | 1,419,780  |                   |  |  | 4.4  | %
|                                                                               | 1540 Broadway
    New York, NY 10036                                                                                                                  |              |            |                   |  |  |      |   | 
|Richard Brass                                                                  |                                                                                                                                                       |              | 0          |                   |  |  | *    |  
|Winthrop Knowlton (6)                                                          |                                                                                                                                                       |              | 151,875    |                   |  |  | *    |  
|Donald R. Katz (7)                                                             |                                                                                                                                                       |              | 1,862,825  |                   |  |  | 6.0  | %
|Robert O. Kramer (8)                                                           |                                                                                                                                                       |              | 607,944    |                   |  |  | 1.9  | %
|Andrew Kaplan (9)                                                              |                                                                                                                                                       |              | 725,322    |                   |  |  | 2.3  | %
|Richard Sarnoff (10)                                                           |                                                                                                                                                       |              | 35,000     |                   |  |  | *    |  
|Gary L. Ginsberg (11)                                                          |                                                                                                                                                       |              | 35,000     |                   |  |  | *    |  
|Johannes Mohn (12)                                                             |                                                                                                                                                       |              | 35,000     |                   |  |  | *    |  
|All Named Executive Officers and directors as a
    group
    (8 persons) (13) |                                                                                                                                                       |              | 3,452,966  |                   |  |  | 11.1 | %



---



| | 
| | 
| | 



|  |             
|- | ------------
|* | less than 1%



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of April 1, 2003, we had outstanding
    30,988,644 shares of common stock, 3,408,420 shares of
    Series A convertible preferred stock (each share of which
    is convertible into 4.0323 shares of common stock) and 1,250,000
    shares of Series B convertible preferred stock (each share
    of which is convertible into one share of common stock). Unless
    otherwise noted, the persons named in this table have sole
    voting power with respect to all shares of common stock. In
    compliance with the SEC rules, for purposes of calculating the
    percentage of common stock outstanding, any securities not
    outstanding which are subject to options, warrants or conversion
    privileges, including our Series A convertible preferred
    stock and Series B convertible preferred stock, are deemed
    outstanding for the purposes of computing the percentage of the
    outstanding securities owned by such person but are not deemed
    to be outstanding for the purpose of computing the percentage
    owned by any other person. Share ownership in each case includes
    shares

38



---



##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | issuable upon exercise of outstanding options and
    warrants that are exercisable within 60 days of
    April 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Includes 13,743,771 shares of common stock
    issuable upon conversion of 3,408,420 shares of our
    Series A convertible preferred stock, and 100,000 shares
    issuable upon exercise of warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) | The number of shares beneficially owned is based
    on the information contained in that certain Schedule 13G
    that was filed with the SEC on March 4, 2002, as amended on
    November 8, 2002 and February 14, 2003, reporting
    beneficial ownership of securities of the Company held by
    Special Situations Fund III, L.P., Special Situations Private
    Equity Fund, L.P., Special Situations Cayman Fund, L.P., and
    Special Situations Technology Fund, L.P. As reported in the
    Schedule 13G, Austin Marxe and David Greenhouse
    beneficially own 4,950,851 shares of common stock, of which:
    (i) 1,924,623 shares of common stock and 627,906 shares of
    common stock issuable upon exercise of warrants are held by
    Special Situations Fund III, L.P., (ii) 791,193 shares of
    common stock and 261,628 shares of common stock issuable upon
    exercise of warrants are held by Special Situations Private
    Equity Fund, L.P., (iii) 536,949 shares of common stock and
    174,419 shares of common stock issuable upon exercise of
    warrants are held by Special Situations Cayman Fund, L.P., and
    (iv) 477,156 shares of common stock and 156,977 shares of
    common stock issuable upon exercise of warrants are held by
    Special Situations Technology Fund, L.P. As reported in the
    Schedule 13G, (i) MGP Advisers Limited Partnership
    acts as general partner of and investment adviser to Special
    Situations Fund III, L.P., (ii) MG Advisers, L.L.C. acts as
    general partner of and investment adviser to Special Situations
    Private Equity Fund, L.P., (iii) AWM Investment Company,
    Inc. acts as the general partner of MGP Advisers Limited
    Partnership, and general partner of and investment adviser to
    Special Situations Cayman Fund, L.P., and (iv) SST
    Advisers, L.L.C. acts as general partner of and investment
    adviser to Special Situations Technology Fund, L.P. Austin Marxe
    and David Greenhouse have shared power to vote or to direct the
    vote of and to dispose or to direct the disposition of
    securities reported in the Schedule 13G which are
    beneficially owned by Austin Marxe and David Greenhouse by
    virtue of being executive officers of the investment advisers of
    each of the four funds.
|   
|(4) | The number of shares beneficially owned is based
    on the information contained in that certain Schedule 13G
    that was filed with the SEC on February 14, 2002, reporting
    beneficial ownership of securities of the Company held by
    Amazon.com, Inc. As reported in the Schedule 13G,
    Amazon.com, Inc. is the indirect beneficial owner of:
    (i) 1,340,033 shares of common stock, which shares are held
    directly by Amazon.com Commerce Services, Inc., a wholly owned
    subsidiary of Amazon.com Holdings, Inc. which, in turn, is a
    wholly owned subsidiary of Amazon.com, Inc., and (ii) 500,000
    shares of common stock issuable upon exercise of warrants held
    by Amazon.com NV Investment Holdings, Inc. Amazon.com NV
    Investment Holdings, Inc. is also a wholly owned subsidiary of
    Amazon.com, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(5) | Includes 1,250,000 shares issuable upon
    conversion of our Series B convertible preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(6) | Includes 50,000 shares issuable upon exercise of
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(7) | Includes 563,325 shares issuable upon exercise of
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(8) | Includes 1,200 shares held in trust for minor
    child of which Mr. Kramer controls and 604,644 shares
    issuable upon exercise of options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(9) | Includes 718,322 shares issuable upon exercise of
    options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



|     |                                                                 
|---- | ----------------------------------------------------------------
|(10) | Includes 35,000 shares issuable upon exercise of
    options.   
|    
|(11) | Includes 35,000 shares issuable upon exercise of
    options.   
|    
|(12) | Includes 35,000 shares issuable upon exercise of
    options.   
|    
|(13) | Includes 1,833,116 shares issuable upon exercise
    of options.

Item 13.     Certain
Relationships and Related Transactions.

Random House, Inc.On May 5, 2000, we entered
into a four-year Co-publishing, Marketing, and Distribution
Agreement with Random House, Inc. to form a strategic alliance
to establish Random House Audible, a publishing imprint. We are
obligated to contribute $1,000,000 annually for four years
towards the

39



---



##### 



funding of this alliance. During the years ended
December 31, 2000 and 2001, $640,000 and $960,000
respectively, were recorded as the cost of content and services
revenue related to this contribution. As part of this alliance,
Random House, through its Random House Ventures, LLC subsidiary,
purchased 169,780 shares of our common stock for $1,000,000. On
March 26, 2002, the agreement was amended to waive the cash
payment due to Random House in 2002 of $1,250,000, thereby
reducing the total payments due under the agreement from
$4,000,000 to $2,750,000. In exchange for this waiver, under the
amendment we agreed to issue 1,250,000 shares of Series B
Convertible Preferred Stock. 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 we no longer
are required to pay the $1,500,000 imprint fees that were due in
2003 and 2004. Mr. Sarnoff, who serves as a director on our
board of directors, is President of Random House, Inc.s
New Media and Corporate Development Group. In addition, Mr.
Mohn, who serves as a director on our board of directors, is
Vice President of Media Technology of Bertelsmann A.G.


Special Situations Fund III, L.P., Special
Situations Private Equity Fund, L.P., Special Situations Cayman
Fund, L.P. and Special Situations Technology Fund, L.P.In January 2002, Special
Situations Fund III, L.P., Special Situations Private Equity
Fund, L.P., Special Situations Cayman Fund, L.P. and Special
Situations Technology Fund, L.P. purchased an aggregate of
4,069,758 shares of our common stock and warrants to purchase an
aggregate of 1,220,930 shares of our common stock for
$3,500,000.48. Special Situations Fund III, L.P., Special
Situations Private Equity Fund, L.P., Special Situations Cayman
Fund, L.P. and Special Situations Technology Fund, L.P. in the
aggregate, own more than 5% of our common stock.

We believe that the transactions described above
were made on terms no less favorable to us than if such
transactions were with non-affiliates.

Item 14.     Controls
and Procedures

Our management, under the supervision of Donald
Katz, our Chief Executive Officer, and Andrew Kaplan, our Chief
Financial Officer, performed an evaluation of the design and
operation of our disclosure controls and procedures within
90 days of the filing of this annual report. Based on that
evaluation, Messers. Katz and Kaplan concluded that our
disclosure controls and procedures are effective. There have
been no significant changes in our internal control or in
factors that could significantly affect internal controls
subsequent to this evaluation.

PART IV

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

(a) Documents filed as part of the
report:

|    |  |                                                                                                                                                                     |  |        |     | 
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|    |  |                                                                                                                                                                     |  | Page  
|    |  |                                                                                                                                                                     |  | Number
|    |  |                                                                                                                                                                     |  |       
|(1) |  | Independent Auditors Report                                                                                                                                        |  |        | F-1 | 
|    |  | Balance Sheets at December 31, 2001 and 2002                                                                                                                        |  |        | F-2 | 
|    |  | Statements of Operations for the years ended
    December 31, 2000, 2001 and 2002                                                                                   |  |        | F-3 | 
|    |  | Statements of Stockholders Equity (Deficit)
    for the years ended December 31, 2000, 2001 and 2002                                                               |  |        | F-4 | 
|    |  | Statements of Cash Flows for the years ended
    December 31, 2000, 2001 and 2002                                                                                   |  |        | F-6 | 
|    |  | Notes to Financial Statements                                                                                                                                       |  |        | F-7 | 
|(2) |  | Financial Statement Schedules                                                                                                                                       |  |        |     | 
|    |  | All Financial Statement Schedules have been
    omitted because they are either in the accompanying footnotes to
    the financial statements or are not applicable |  |        |     | 
|(3) |  | Exhibits                                                                                                                                                            |  |        |     | 

40



---



##### 



The following exhibits are filed or incorporated
by reference, as stated below:

|        |          |             |  |                                                                                                                                                                                                                
|------- | -------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1*     |             |  | Amended and Restated Certificate of Incorporation
    of Audible                                                                                                                                               
|        | 3.1.1*** |             |  | Certificate of Designation of Designations,
    Limitations, Restrictions And Relative Rights of the Series A
    Convertible Preferred Stock of Audible, Inc.                                                 
|        | 3.1.2*** | *           |  | Certificate of Amendment to the Amended and
    Restated Certificate of Incorporation of Audible                                                                                                               
|        | 3.2*     |             |  | Amended and Restated Bylaws of Audible                                                                                                                                                                         
|        | 10.1*   |             |  | License Agreement dated November 4, 1998, by and
    between Microsoft Corporation and Audible                                                                                                                 
|        | 10.2*   |             |  | Digital Rights Management Agreement dated
    November 4, 1998, between Microsoft Corporation and Audible                                                                                                      
|        | 10.3*   |             |  | Development Agreement dated November 12, 1998, by
    and between RealNetworks, Inc. and Audible                                                                                                               
|        | 10.4*    |             |  | RealMedia Architecture Partner Program Internet
    Agreement dated November 12, 1998, between RealNetworks, Inc.
    and Audible                                                                              
|        | 10.5*    |             |  | Master Lease Agreement dated November 19, 1996,
    by and between Comdisco, Inc. as lessor, and Audible as lessee                                                                                             
|        | 10.5.1*  |             |  | Addendum to Master Lease Agreement dated November
    20, 1996, by and between Comdisco, Inc., as lessor, and Audible,
    as lessee (relating to Exhibit 10.5)                                                
|        | 10.8*    |             |  | Loan and Security Agreement dated April 6, 1998,
    by and between Silicon Valley Bank, as lender, and Audible, as
    borrower, for a revolving line of credit of up to $1,000,000                           
|        | 10.10*   |             |  | Security and Loan Agreement dated November 20,
    1996, between Audible, as borrower, and Imperial Bank, as
    lender, for up to $500,000                                                                    
|        | 10.14*   |             |  | Amended and Restated Registration Rights
    Agreement dated February 26, 1998, by and among Audible and
    certain stockholders named therein                                                                
|        | 10.14.1* |             |  | Amendment No. 1 to Amended and Restated
    Registration Rights Agreement dated December 18, 1998 (relating
    to Exhibit 10.14)                                                                              
|        | 10.14.2* |             |  | Amendment No. 2 to Amended and Restated
    Registration Rights Agreement dated June 17, 1999 (relating
    to Exhibit 10.14)                                                                                  
|        | 10.15*   |             |  | 1999 Stock Incentive Plan                                                                                                                                                                                      
|        | 10.16*   |             |  | Form of Common Stock Warrants issued March 31,
    1997 by Audible to various investors in connection with the
    Series C preferred stock financing                                                          
|        | 10.17*   |             |  | Form of Stock Restriction Agreement by and
    between Audible and the Named Executive Officers made in
    connection with various purchases and sales of shares of
    restricted common stock               
|        | 10.18*   |             |  | Form of Promissory Note made by the Named
    Executive Officers in favor of Audible in connection with
    various purchases and sales of shares of restricted common stock                                   
|        | 10.19*   |             |  | Office Lease dated June 20, 1997, by and between
    Audible, as tenant, and Passaic Investment LLC, Sixty-Five
    Willowbrook Investment LLC and Wayne Investment LLC, as
    tenants-in- common, as landlord
|        | 10.20*   |             |  | Sublease Agreement dated July 19, 1996, by and
    between Audible, as sublessee, and Painewebber Incorporated, as
    sublessor                                                                               
|        | 10.21*  |             |  | Agreement dated April 3, 1999 by and between
    Audible and Diamond Multimedia Systems, Inc.                                                                                                                  
|        | 10.22*   |             |  | Common Stock Purchase Warrant, issued April 22,
    1999, to Microsoft Corporation                                                                                                                             
|        | 10.23*   |             |  | Employment Offer Letter from Audible to Guy Story
    dated September 10, 1996                                                                                                                                 
|        | 10.24*   |             |  | Employment Offer Letter from Audible to Brian
    Fielding dated April 25, 1997                                                                                                                                
|        | 10.25*   |             |  | Employment Offer Letter from Audible to Travis
    Millman dated September 29, 1997                                                                                                                            

41



---



##### 



|        |           |             |  |                                                                                                                                                                                                                                                            
|------- | --------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.26*    |             |  | Employment Offer Letter from Audible to Andrew
    Kaplan dated May 25, 1999                                                                                                                                                                               
|        | 10.27**   |             |  | Employment Offer Letter from Audible to Thomas G.
    Baxter dated February 3, 2000                                                                                                                                                                        
|        | 10.28**   |             |  | 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 to National Public Radio, Inc.                                                                                 
|        | 10.29*    |             |  | Common Stock Purchase Warrant, W-1, issued June
    17, 1999, to Robin Williams                                                                                                                                                                            
|        | 10.30*    |             |  | Common Stock Purchase Warrant, W-2, issued June
    17, 1999, to Robin Williams                                                                                                                                                                            
|        | 10.30.1## |             |  | Amendment No. 1 to Common Stock Purchase Warrant,
    W-2, issued January 25, 2001, to Robin Williams (relating to
    Exhibit 10.30)                                                                                                                      
|        | 10.31## |             |  | Securities Purchase Agreement dated January 30,
    2000 by and between Audible and Amazon.com Commerce Services,
    Inc.                                                                                                                                 
|        | 10.32## |             |  | Co-Branding, Marketing and Distribution Agreement
    dated January 30, 2000 by and between Audible and Amazon.com
    Commerce Services, Inc.                                                                                                             
|        | 10.33***  |             |  | Series A Convertible Preferred Stock Purchase
    Agreement by and between Audible, Inc. and Microsoft Corporation
    dated as of February 8, 2001.                                                                                                       
|        | 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 (relating
    to Exhibit 10.32)                                                    
|        | 10.35**** |             |  | Securities Purchase Agreement dated January 25,
    2002 by and between Audible, 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.
|        | 10.36**** |             |  | Registration Rights Agreement dated January 25,
    2002 by and between Audible, 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.
|        | 10.37**** |             |  | Form of Common Stock Purchase Warrant issued in
    connection with the sale of common stock to Special Situation
    Funds.                                                                                                                               
|        | 23.1      |             |  | Consent of KPMG LLP, Independent Accountants                                                                                                                                                                                                               
|        | 99.1***** |             |  | Annual Certifications of the Chief Executive
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                    
|        | 99.2***** |             |  | Annual Certifications 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, 2000                                                                                                                                                
|     
|****  | Incorporated by reference from the Companys
    10-K for the fiscal year ended December 31, 2001                                                                                                                                                
|     
|***** | Incorporated by reference from the Companys
    10-K for the fiscal year ended December 31, 2002.                                                                                                                                               
|     
|#     | 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 10-Q for the quarterly period ended September 30,
    2001.                                                                                                                                
|     
|     | 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.

42



---



##### 





|   |                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

43



---



##### 



(b) Reports on Form 8-K

None

(c) Exhibits

The exhibits required by this Item are listed
under Item 15(a)(3).

(d) Financial Statement Schedules

All schedules have been omitted because they are
either included in the accompanying footnotes to the financial
statements or are not applicable.

43



---



##### 



SIGNATURES

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



| |              
| | -------------
| | AUDIBLE, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ DONALD R. KATZ

| |                                     
| | ------------------------------------
| |                                     
| | Donald R. Katz                      
| | Chairman and Chief Executive Officer

Date: April 30, 2003

44



---



##### 



CERTIFICATION

I, Andrew Kaplan, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K/A of Audible, Inc.;                                                                                                                                                                                                                                                                     
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of the registrants board of directors (or
    persons performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | I have indicated in this annual report whether or
    not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

April 30, 2003

| |    |                                                               
| | -- | --------------------------------------------------------------
| | By | /s/ ANDREW KAPLAN 
     ______________________________________

| |                    
| | -------------------
| | Name: Andrew Kaplan

| |        |                          
| | ------ | -------------------------
| | Title: | Executive Vice President,

| |                                  
| | ---------------------------------
| | Chief Financial Officer and      
| | Director (Principal Financial and
| | Accounting Officer)              

45



---



##### 



CERTIFICATION

I, Donald Katz, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K/A of Audible, Inc.;                                                                                                                                                                                                                                                                     
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | Presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | I have disclosed, based on our most recent
    evaluation, to the registrants auditors and the audit
    committee of the registrants board of directors (or
    persons performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | Any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | I have indicated in this annual report whether or
    not there were significant changes in internal controls or in
    other factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

April 30, 2003

| |     |                
| | --- | ---------------
| | By: | /s/ DONALD KATZ

| |                                       
| | --------------------------------------
| | ______________________________________
| | Name: Donald Katz                     

| |        |                            
| | ------ | ---------------------------
| | Title: | Chief Executive Officer and

| |                                   
| | ----------------------------------
| | Chairman of the Board of Directors
| | (Principal Executive Officer)     

46



---



##### 



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                      |  |      |     | 
|----------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                      |  | Page
|                                                                                                      |  |     
|Independent Auditors Report                                                                          |  |      | F-1 | 
|Balance Sheets at December 31, 2001 and 2002                                                          |  |      | F-2 | 
|Statements of Operations for the years ended
    December 31, 2000, 2001 and 2002                     |  |      | F-3 | 
|Statements of Stockholders Equity (Deficit)
    for the years ended December 31, 2000, 2001 and 2002 |  |      | F-4 | 
|Statements of Cash Flows for the years ended
    December 31, 2000, 2001 and 2002                     |  |      | F-6 | 
|Notes to Financial Statements                                                                         |  |      | F-7 | 

47



---



##### 



INDEPENDENT AUDITORS REPORT

Board of Directors and Stockholders 
 Audible, Inc.:

We have audited the accompanying balance sheets
of Audible, Inc. as of December 31, 2001 and 2002, and the
related statements of operations, stockholders equity
(deficit), and cash flows for each of the years in the
three-year period ended December 31, 2002. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Audible, Inc. as of December 31, 2001 and 2002, and
the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2002 in
conformity with accounting principles generally accepted in the
United States of America.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the
Company has suffered recurring losses from operations and has a
net capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



| |             
| | ------------
| | /S/ KPMG LLP

Short Hills, New Jersey

March 24, 2003


F-1



---



##### 



AUDIBLE, INC.

BALANCE SHEETS

|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |              |             |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ----------- | ---------- | - | ------- | ------------ | ----------- | -
|                                                 |                                                                                                                                                                                                                                          |                                            
|                                                 |                                                                                                                                                                                                                                          | December 31,                               
|                                                 |                                                                                                                                                                                                                                          |                                            
|                                                 |                                                                                                                                                                                                                                          | 2001                                        |           | 2002       
|                                                 |                                                                                                                                                                                                                                          |                                             |           |            
|ASSETS                                          
|Current assets:                                  |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 | Cash and cash equivalents                                                                                                                                                                                                                |                                             | $         | 7,627,802   |            |   | $       | 2,822,080    |            
|                                                 | Accounts receivable, net of allowance for
    doubtful accounts of $12,400 and $9,500 at December 31,
    2001 and 2002, respectively                                                                                                    |                                             |           | 153,122     |            |   |         | 189,263      |            
|                                                 | Royalty advances                                                                                                                                                                                                                         |                                             |           | 56,682      |            |   |         | 58,425       |            
|                                                 | Prepaid expenses                                                                                                                                                                                                                         |                                             |           | 661,192     |            |   |         | 736,823      |            
|                                                 | Inventory                                                                                                                                                                                                                                |                                             |           | 449,220     |            |   |         | 77,262       |            
|                                                 | Note receivable due from stockholder, current                                                                                                                                                                                            |                                             |           | 10,000      |            |   |         |             |            
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 |                                                                                                                                                                                                                                          | Total current assets                        |           |             | 8,958,018  |   |         |              | 3,883,853   |  
|Property and equipment, net                      |                                                                                                                                                                                                                                          |                                             | 1,990,670 |             |            |   | 633,400 |             
|Note receivable due from stockholder, noncurrent |                                                                                                                                                                                                                                          |                                             | 35,000    |             |            |   |        |             
|Other assets                                     |                                                                                                                                                                                                                                          |                                             | 15,805    |             |            |   | 90,805  |             
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 |                                                                                                                                                                                                                                          | Total assets                                |           | $           | 10,999,493 |   |         | $            | 4,608,058   |  
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|LIABILITIES AND STOCKHOLDERS
    DEFICIT       
|Current liabilities:                             |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 | Accounts payable                                                                                                                                                                                                                         |                                             | $         | 1,519,586   |            |   | $       | 1,077,509    |            
|                                                 | Accrued expenses                                                                                                                                                                                                                         |                                             |           | 1,635,140   |            |   |         | 2,952,314    |            
|                                                 | Royalty obligations-current                                                                                                                                                                                                              |                                             |           | 896,950     |            |   |         | 598,500      |            
|                                                 | Accrued compensation                                                                                                                                                                                                                     |                                             |           | 710,148     |            |   |         | 279,579      |            
|                                                 | Advances-current                                                                                                                                                                                                                         |                                             |           | 517,813     |            |   |         | 476,053      |            
|                                                 | Accrued dividends on redeemable convertible
    preferred stock                                                                                                                                                                          |                                             |           | 730,612     |            |   |         | 125,257      |            
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 |                                                                                                                                                                                                                                          | Total current liabilities                   |           |             | 6,010,249  |   |         |              | 5,509,212   |  
|Deferred cash compensation                       |                                                                                                                                                                                                                                          |                                             | 93,550    |             |            |   | 90,550  |             
|Royalty obligations-noncurrent                   |                                                                                                                                                                                                                                          |                                             | 48,500    |             |            |   | 25,000  |             
|Advances-noncurrent                              |                                                                                                                                                                                                                                          |                                             | 77,780    |             |            |   | 19,448  |             
|Redeemable convertible preferred stock:          |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 | Series A, par value $0.01, Authorized
    4,500,000 shares at December 31, 2001 and 2002, 2,751,708
    and 3,277,327 shares issued as of December 31, 2001 and
    2002, respectively                                                   |                                             |           | 10,318,902  |            |   |         | 12,289,976   |            
|Stockholders deficit:                           |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 | Convertible Series B preferred stock, par
    value $0.01, Authorized none and 1,250,000 shares at
    December 31, 2001 and 2002, respectively; none and
    1,250,000 shares issued as of December 31, 2001 and 2002,
    respectively |                                             |           |            |            |   |         | 1,137,500    |            
|                                                 | Common stock, par value $.01. Authorized
    50,000,000 shares at December 31, 2001 and 2002; 27,546,989
    and 31,677,869 shares issued at December 31, 2001 and 2002,
    respectively                                                |                                             |           | 275,470     |            |   |         | 316,779      |            
|                                                 | Additional paid-in capital                                                                                                                                                                                                               |                                             |           | 93,728,564  |            |   |         | 98,033,060   |            
|                                                 | Deferred compensation                                                                                                                                                                                                                    |                                             |           | (467,600    | )          |   |         | (174,488     | )          
|                                                 | Deferred services                                                                                                                                                                                                                        |                                             |           | (5,416,667  | )          |   |         | (416,667     | )          
|                                                 | Notes due from stockholders for common stock                                                                                                                                                                                             |                                             |           | (294,456    | )          |   |         | (289,545     | )          
|                                                 | Treasury stock at cost: 676,725 and 689,225
    shares of common stock at December 31, 2000 and 2001,
    respectively                                                                                                                   |                                             |           | (179,990    | )          |   |         | (184,740     | )          
|                                                 | Accumulated deficit                                                                                                                                                                                                                      |                                             |           | (93,194,809 | )          |   |         | (111,748,027 | )          
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 |                                                                                                                                                                                                                                          | Total stockholders deficit                 |           |             | (5,549,488 | ) |         |              | (13,326,128 | )
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|Commitments and contingencies                    |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             
|                                                 |                                                                                                                                                                                                                                          | Total liabilities and stockholders deficit |           | $           | 10,999,493 |   |         | $            | 4,608,058   |  
|                                                 |                                                                                                                                                                                                                                          |                                             |           |             |            |   |         |             

See accompanying notes to financial statements.

F-2



---



##### 



AUDIBLE, INC.

STATEMENTS OF OPERATIONS

|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |            |            |             |  
|----------------------------------------------- | ------------------------------------ | ------------------------ | ----------------------- | ---------- | ---------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | ---------- | ----------- | -
|                                                |                                      |                         
|                                                |                                      | Year ended December 31, 
|                                                |                                      |                         
|                                                |                                      | 2000                     |                         | 2001       |            | 2002       
|                                                |                                      |                          |                         |            |            |            
|Revenue, net:                                   |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                | Consumer content                     |                          | $                       | 1,443,554  |            |             | $           | 5,143,002  |            |             | $           | 10,939,871 |           
|                                                | Services                             |                          |                         | 575,791    |            |             |             | 883,921    |            |             |             | 347,816    |           
|                                                | Bulk content                         |                          |                         | 500,000    |            |             |             | 1,435,048  |            |             |             |           |           
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                | Total content and services           |                          |                         | 2,519,345  |            |             |             | 7,461,971  |            |             |             | 11,287,687 |           
|                                                | Hardware                             |                          |                         | 1,273,117  |            |             |             | 1,293,533  |            |             |             | 931,785    |           
|                                                | Other                                |                          |                         | 756,518    |            |             |             | 315,909    |            |             |             | 150,067    |           
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Total revenue, net      |            |            | 4,548,980   |             |            |            | 9,071,413   |             |            |            | 12,369,539  |  
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Operating expenses:                             |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                | Cost of content and services revenue |                          |                         | 3,667,799  |            |             |             | 4,901,866  |            |             |             | 4,970,017  |           
|                                                | Cost of hardware revenue             |                          |                         | 2,571,994  |            |             |             | 2,858,495  |            |             |             | 2,717,542  |           
|                                                | Production                           |                          |                         | 6,457,638  |            |             |             | 5,635,977  |            |             |             | 3,882,320  |           
|                                                | Development                          |                          |                         | 4,444,531  |            |             |             | 3,322,133  |            |             |             | 2,270,912  |           
|                                                | Sales and marketing                  |                          |                         | 16,052,207 |            |             |             | 15,187,584 |            |             |             | 12,467,569 |           
|                                                | General and administrative           |                          |                         | 5,548,085  |            |             |             | 4,726,694  |            |             |             | 3,647,415  |           
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                |                                      | Total operating expenses |                         |            | 38,742,754 |             |             |            | 36,632,749 |             |             |            | 29,955,775 |            
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Loss from operations    |            |            | (34,193,274 | )           |            |            | (27,561,336 | )           |            |            | (17,586,236 | )
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Other income (expense):                         |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                |                                      | Interest income          |                         |            | 1,623,640  |             |             |            | 575,287    |             |             |            | 85,158     |            
|                                                |                                      | Interest expense         |                         |            | (21,810    | )           |             |            | (9,722     | )           |             |            |           |            
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Total other income, net |            |            | 1,601,830   |             |            |            | 565,565     |             |            |            | 85,158      |  
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Loss before state income tax benefit            |                                      |                          | (32,591,444             | )          |            |             | (26,995,771 | )          |            |             | (17,501,078 | )         
|State income tax benefit                        |                                      |                          | 316,310                 |            |            |             | 326,898     |            |            |             | 313,580     |           
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Net loss                                        |                                      | $                        | (32,275,134             | )          |            | $           | (26,668,873 | )          |            | $           | (17,187,498 | )         
|Accrued dividends on redeemable preferred stock |                                      |                          |                        |            |            |             | (1,049,516  | )          |            |             | (1,365,720  | )         
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Net loss applicable to common shareholders      |                                      | $                        | (32,275,134             | )          |            | $           | (27,718,389 | )          |            | $           | (18,553,218 | )         
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Basic and diluted net loss per common share     |                                      | $                        | (1.21                   | )          |            | $           | (1.03       | )          |            | $           | (0.61       | )         
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           
|Weighted average common shares outstanding      |                                      |                          | 26,643,589              |            |            |             | 26,917,513  |            |            |             | 30,508,217  |           
|                                                |                                      |                          |                         |            |            |             |             |            |            |             |             |           

See accompanying notes to financial statements.

F-3



---



##### 



AUDIBLE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)

|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |          |  |   |            |   |  |   |            |   |  |   |             |  
|----------------------------------------------------------------------------------------------- |  | --------- | --------- | ------------ |  | ---------- | ---------- | --------------- |  | ------------ | ------- | -------- |  | - | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                                                |  |           |           |              |  |            |            |                 |  |             
|                                                                                                |  | Series B  |           | Common stock |  |            |            |                 |  |             
|                                                                                                |  | Preferred |           |              |  | Additional |            | Deferred        |  | Deferred    
|                                                                                                |  | Stock     |           | Shares       |  | Par Value  |            | paid-in capital |  | compensation |         | services
|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |         
|Balance at December 31, 1999                                                                    |  | $         |          |              |  |            | 25,709,586 |                 |  | $            | 257,096 |          |  | $ | 68,969,417 |   |  | $ | (725,764   | ) |  | $ |            |  
|Common stock repurchases                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Deferred compensation related to stock options
    issued below fair market value               |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 870,000    |   |  |   | (870,000   | ) |  |   |            |  
|Common stock issued in connection with
    Co-Marketing and Distribution agreement              |  |           |          |              |  |            | 1,340,033  |                 |  |              | 13,400  |          |  |   | 19,986,600 |   |  |   |           |   |  |   | (20,000,000 | )
|Common stock issued in connection with
    Co-Publishing and Distribution agreement             |  |           |          |              |  |            | 169,780    |                 |  |              | 1,698   |          |  |   | 998,302    |   |  |   |           |   |  |   |            |  
|Amortization of deferred compensation                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   | 561,740    |   |  |   |            |  
|Amortization of deferred services                                                               |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   | 9,166,666   |  
|Amortization of warrants for services                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 1,243,445  |   |  |   |           |   |  |   |            |  
|Exercise of common stock warrants                                                               |  |           |          |              |  |            | 326,390    |                 |  |              | 3,264   |          |  |   | (3,264     | ) |  |   |           |   |  |   |            |  
|Exercise of common stock options                                                                |  |           |          |              |  |            | 1,200      |                 |  |              | 12      |          |  |   | 9,588      |   |  |   |           |   |  |   |            |  
|Reversal of initial public offering issuance costs                                              |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 122,086    |   |  |   |           |   |  |   |            |  
|Payments received on notes due from stockholders                                                |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Net loss                                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |          |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2000                                                                    |  |           |          |              |  |            | 27,546,989 |                 |  |              | 275,470 |          |  |   | 92,196,174 |   |  |   | (1,034,024 | ) |  |   | (10,833,334 | )
|Common stock repurchases                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Deferred compensation related to stock options
    issued below fair market value               |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 25,000     |   |  |   | (25,000    | ) |  |   |            |  
|Reversal of deferred compensation related to
    employee terminations                          |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | (258,049   | ) |  |   | 258,049    |   |  |   |            |  
|Amortization of deferred compensation                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   | 333,375    |   |  |   |            |  
|Amortization of deferred services                                                               |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   | 5,416,667   |  
|Amortization of warrants for services                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 1,765,439  |   |  |   |           |   |  |   |            |  
|Payments received on notes due from stockholders                                                |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Net loss                                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Accrued dividends on redeemable preferred stock                                                 |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |          |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2001                                                                    |  |           |          |              |  |            | 27,546,989 |                 |  |              | 275,470 |          |  |   | 93,728,564 |   |  |   | (467,600   | ) |  |   | (5,416,667  | )
|Common stock repurchases                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Sale of common stock                                                                            |  |           |          |              |  |            | 4,069,768  |                 |  |              | 40,698  |          |  |   | 3,118,552  |   |  |   |           |   |  |   |            |  
|Common stock issued in connection with a
    technology license                                 |  |           |          |              |  |            | 50,000     |                 |  |              | 500     |          |  |   | 26,500     |   |  |   |           |   |  |   |            |  
|Amortization of deferred compensation                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   | 293,112    |   |  |   |            |  
|Amortization of deferred services                                                               |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   | 5,547,500   |  
|Amortization of warrants for services                                                           |  |           |          |              |  |            |           |                 |  |              |        |          |  |   | 1,153,998  |   |  |   |           |   |  |   |            |  
|Exercise of common stock options                                                                |  |           |          |              |  |            | 11,112     |                 |  |              | 111     |          |  |   | 5,445      |   |  |   |           |   |  |   |            |  
|Series B Preferred stock issued in
    connection with Co-Publishing and Distribution agreement |  |           | 1,137,500 |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   | (547,500    | )
|Payments received on notes due from stockholders                                                |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Net loss                                                                                        |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|Accrued dividends on redeemable preferred stock                                                 |  |           |          |              |  |            |           |                 |  |              |        |          |  |   |           |   |  |   |           |   |  |   |            |  
|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |          |  |   |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2002                                                                    |  | $         | 1,137,500 |              |  |            | 31,677,869 |                 |  | $            | 316,779 |          |  | $ | 98,033,059 |   |  | $ | (174,488   | ) |  | $ | (416,667    | )
|                                                                                                |  |           |           |              |  |            |            |                 |  |              |         |          |  |   |            |   |  |   |            |   |  |   |             |  

See accompanying notes to financial statements.

F-4



---



##### 



AUDIBLE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)

|                                                                                                |  |              |          |                |  |             |          |               |  |                  |          |   |  |   |              |   |  |   |             |  
|----------------------------------------------------------------------------------------------- |  | ------------ | -------- | -------------- |  | ----------- | -------- | ------------- |  | ---------------- | -------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                                                                |  | Notes due    |          |                |  |             |          |              
|                                                                                                |  | stockholders |          | Treasury stock |  |             |          | Total        
|                                                                                                |  | for common   |          |                |  | Accumulated |          | stockholders
|                                                                                                |  | stock        |          | Shares         |  | Cost        |          | deficit       |  | equity (deficit)
|                                                                                                |  |              |          |                |  |             |          |               |  |                 
|Balance at December 31, 1999                                                                    |  | $            | (579,025 | )              |  |             | (532,350 | )             |  | $                | (142,015 | ) |  | $ | (33,201,286  | ) |  | $ | 34,578,423  |  
|Common stock repurchases                                                                        |  |              | 1,046    |                |  |             | (4,155   | )             |  |                  | (1,046   | ) |  |   |             |   |  |   |            |  
|Deferred compensation related to stock options
    issued below fair market value               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   |            |  
|Common stock issued in connection with Co-
    Marketing and Distribution agreement             |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   |            |  
|Common stock issued in connection with Co-
    Publishing and Distribution agreement            |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 1,000,000   |  
|Amortization of deferred compensation                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 561,740     |  
|Amortization of deferred services                                                               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 9,166,666   |  
|Amortization of warrants for services                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 1,243,445   |  
|Exercise of common stock warrants                                                               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   |            |  
|Exercise of common stock options                                                                |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 9,600       |  
|Reversal of initial public offering issuance costs                                              |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 122,086     |  
|Payments received on notes due from stockholders                                                |  |              | 186,276  |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 186,276     |  
|Net loss                                                                                        |  |              |         |                |  |             |         |               |  |                  |         |   |  |   | (32,275,134  | ) |  |   | (32,275,134 | )
|                                                                                                |  |              |          |                |  |             |          |               |  |                  |          |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2000                                                                    |  |              | (391,703 | )              |  |             | (536,505 | )             |  |                  | (143,061 | ) |  |   | (65,476,420  | ) |  |   | 14,593,102  |  
|Common stock repurchases                                                                        |  |              | 31,162   |                |  |             | (140,220 | )             |  |                  | (36,929  | ) |  |   |             |   |  |   | (5,767      | )
|Deferred compensation related to stock options
    issued below fair market value               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   |            |  
|Reversal of deferred compensation related to
    employee terminations                          |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   |            |  
|Amortization of deferred compensation                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 333,375     |  
|Amortization of deferred services                                                               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 5,416,667   |  
|Amortization of warrants for services                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 1,765,439   |  
|Payments received on notes due from stockholders                                                |  |              | 66,085   |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 66,085      |  
|Net loss                                                                                        |  |              |         |                |  |             |         |               |  |                  |         |   |  |   | (26,668,873  | ) |  |   | (26,668,873 | )
|Accrued dividends on redeemable preferred stock                                                 |  |              |         |                |  |             |         |               |  |                  |         |   |  |   | (1,049,516   | ) |  |   | (1,049,516  | )
|                                                                                                |  |              |          |                |  |             |          |               |  |                  |          |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2001                                                                    |  |              | (294,456 | )              |  |             | (676,725 | )             |  |                  | (179,990 | ) |  |   | (93,194,809  | ) |  |   | (5,549,488  | )
|Common stock repurchases                                                                        |  |              |         |                |  |             | (12,500  | )             |  |                  | (4,750   | ) |  |   |             |   |  |   | (4,750      | )
|Sale of common stock                                                                            |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 3,159,250   |  
|Common stock issued in connection with a
    technology license                                 |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 27,000      |  
|Amortization of deferred compensation                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 293,112     |  
|Amortization of deferred services                                                               |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 5,547,500   |  
|Amortization of warrants for services                                                           |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 1,153,998   |  
|Exercise of common stock options                                                                |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 5,556       |  
|Series B Preferred stock issued in
    connection with Co-Publishing and Distribution agreement |  |              |         |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 590,000     |  
|Payments received on notes due from stockholders                                                |  |              | 4,911    |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 4,911       |  
|Net loss                                                                                        |  |              |         |                |  |             |         |               |  |                  |         |   |  |   | (17,187,498  | ) |  |   | (17,187,498 | )
|Accrued dividends on redeemable preferred stock                                                 |  |              |         |                |  |             |         |               |  |                  |         |   |  |   | (1,365,720   | ) |  |   | (1,365,720  | )
|                                                                                                |  |              |          |                |  |             |          |               |  |                  |          |   |  |   |              |   |  |   |             |  
|Balance at December 31, 2002                                                                    |  | $            | (289,545 | )              |  |             | (689,225 | )             |  | $                | (184,740 | ) |  | $ | (111,748,027 | ) |  | $ | (13,326,129 | )
|                                                                                                |  |              |          |                |  |             |          |               |  |                  |          |   |  |   |              |   |  |   |             |  

See accompanying notes to financial statements.

F-5



---



##### 



AUDIBLE, INC.

STATEMENTS OF CASH FLOWS

|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |             |           |            |            |  
|---------------------------------------------- | ------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ---------- | ---------- | ----------- | ----------- | --------- | ---------- | ----------- | ----------- | --------- | ---------- | ---------- | -
|                                               |                                                                                 |                                                                      
|                                               |                                                                                 | Year ended December 31,                                              
|                                               |                                                                                 |                                                                      
|                                               |                                                                                 | 2000                                                                  |                                                         | 2001                                  |            | 2002      
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |           
|Cash flows from operating activities:          |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               | Net loss                                                                        |                                                                       | $                                                       | (32,275,134                           | )          |            | $           | (26,668,873 | )         |            | $           | (17,187,498 | )        
|                                               | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |             |          
|                                               |                                                                                 | Depreciation and amortization                                         |                                                         |                                       | 1,367,348  |            |             |             | 1,825,466 |            |             |             | 1,506,815 |           
|                                               |                                                                                 | Gain on disposal of property and equipment                            |                                                         |                                       | (7,560     | )          |             |             |          |            |             |             |          |           
|                                               |                                                                                 | Services rendered for common stock and warrants                       |                                                         |                                       | 10,410,111 |            |             |             | 7,182,106 |            |             |             | 6,153,998 |           
|                                               |                                                                                 | Services rendered for preferred stock                                 |                                                         |                                       |           |            |             |             |          |            |             |             | 547,500   |           
|                                               |                                                                                 | Noncash compensation charge                                           |                                                         |                                       | 561,740    |            |             |             | 333,375   |            |             |             | 293,112   |           
|                                               |                                                                                 | Noncash bonus in satisfaction of note receivable
    from stockholder |                                                         |                                       |           |            |             |             |          |            |             |             | 40,250    |           
|                                               |                                                                                 | Deferred cash compensation                                            |                                                         |                                       | 33,303     |            |             |             | (117,515  | )          |             |             | (3,000    | )         
|                                               |                                                                                 | Noncash barter revenue exchanged for prepaid
    advertising          |                                                         |                                       |           |            |             |             | (213,788  | )          |             |             |          |           
|Changes in assets and liabilities:             |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               |                                                                                 | Interest receivable on short-term investments                         |                                                         |                                       | 350,326    |            |             |             | 95,336    |            |             |             | 1,260     |           
|                                               |                                                                                 | Accounts receivable, net                                              |                                                         |                                       | (142,862   | )          |             |             | 40,630    |            |             |             | (36,141   | )         
|                                               |                                                                                 | Royalty advances                                                      |                                                         |                                       | (195,054   | )          |             |             | 790,714   |            |             |             | (1,743    | )         
|                                               |                                                                                 | Prepaid expenses                                                      |                                                         |                                       | 208,393    |            |             |             | 16,727    |            |             |             | (76,891   | )         
|                                               |                                                                                 | Inventory                                                             |                                                         |                                       | (118,170   | )          |             |             | (331,050  | )          |             |             | 371,958   |           
|                                               |                                                                                 | Other assets                                                          |                                                         |                                       | 59,470     |            |             |             | 21,705    |            |             |             | (75,000   | )         
|                                               |                                                                                 | Accounts payable                                                      |                                                         |                                       | 240,948    |            |             |             | (234,854  | )          |             |             | (442,077  | )         
|                                               |                                                                                 | Accrued expenses                                                      |                                                         |                                       | 275,338    |            |             |             | (705      | )          |             |             | 1,907,174 |           
|                                               |                                                                                 | Royalty obligations                                                   |                                                         |                                       | 710,700    |            |             |             | (329,250  | )          |             |             | (321,950  | )         
|                                               |                                                                                 | Accrued compensation                                                  |                                                         |                                       | 649,951    |            |             |             | (51,886   | )          |             |             | (430,569  | )         
|                                               |                                                                                 | Advances                                                              |                                                         |                                       | (733,463   | )          |             |             | 142,117   |            |             |             | (100,092  | )         
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               |                                                                                 |                                                                       |                                                         | Net cash used in operating activities |            |            | (18,604,615 | )           |           |            | (17,499,745 | )           |           |            | (7,852,894 | )
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|Cash flows from investing activities:          |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               | Purchases of property and equipment                                             |                                                                       |                                                         | (2,763,137                            | )          |            |             | (997,344    | )         |            |             | (149,545    | )        
|                                               | Proceeds from disposal of property and equipment                                |                                                                       |                                                         | 7,560                                 |            |            |             |            |           |            |             |            |          
|                                               | Purchases of short-term investments                                             |                                                                       |                                                         | (25,462,949                           | )          |            |             |            |           |            |             |            |          
|                                               | Redemptions of short-term investments                                           |                                                                       |                                                         | 47,909,220                            |            |            |             | 1,957,733   |           |            |             |            |          
|                                               | Notes receivable repaid by stockholders                                         |                                                                       |                                                         | 100,000                               |            |            |             | 5,000       |           |            |             |            |          
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               |                                                                                 |                                                                       | Net cash provided by (used in) investing
    activities |                                       |            | 19,790,694 |             |             |           | 965,389    |             |             |           | (149,545   | )         
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|Cash flows from financing activities:          |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               | Proceeds from issuance of Series A
    redeemable convertible preferred stock   |                                                                       |                                                         |                                      |            |            |             | 10,000,000  |           |            |             |            |          
|                                               | Proceeds from the sale of common stock                                          |                                                                       |                                                         | 1,000,000                             |            |            |             |            |           |            |             | 3,186,250   |          
|                                               | Payments received on notes due from stockholders
    for common stock           |                                                                       |                                                         | 186,276                               |            |            |             | 66,085      |           |            |             | 4,911       |          
|                                               | Proceeds from exercise of common stock options                                  |                                                                       |                                                         | 9,600                                 |            |            |             |            |           |            |             | 5,556       |          
|                                               | Payment of principal on obligations under capital
    leases                    |                                                                       |                                                         | (263,320                              | )          |            |             | (47,187     | )         |            |             |            |          
|                                               | Cash payment for purchase of treasury stock                                     |                                                                       |                                                         |                                      |            |            |             | (5,767      | )         |            |             |            |          
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               |                                                                                 |                                                                       | Net cash provided by financing activities               |                                       |            | 932,556    |             |             |           | 10,013,131 |             |             |           | 3,196,717  |           
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|                                               |                                                                                 |                                                                       | Increase (decrease) in cash and cash
    equivalents    |                                       |            | 2,118,635  |             |             |           | (6,521,225 | )           |             |           | (4,805,722 | )         
|Cash and cash equivalents at beginning of year |                                                                                 |                                                                       | 12,030,392                                              |                                       |            |            | 14,149,027  |             |           |            | 7,627,802   |            
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            
|Cash and cash equivalents at end of year       |                                                                                 | $                                                                     | 14,149,027                                              |                                       |            | $          | 7,627,802   |             |           | $          | 2,822,080   |            
|                                               |                                                                                 |                                                                       |                                                         |                                       |            |            |             |             |           |            |             |            

See note 17 for supplemental disclosure of cash
flow information.

See accompanying notes to financial statements.

F-6



---



##### 



AUDIBLE, INC.



NOTES TO FINANCIAL STATEMENTS


December 31, 2000, 2001 and
2002


(1) Description of Business and Business
Conditions

Audible, Inc. (Audible or the Company),
incorporated on November 3, 1995, was formed to create the
Audible service, a solution delivering premium digital spoken
audio content from its Web site, audible.com, over the Internet
for playback on personal computers and mobile devices. The
Company commenced commercial operations in October 1997. From
its inception through March 31, 1999, the Company was in the
development stage for financial reporting purposes. Subsequent
to March 31, 1999, Audible substantially completed its
development efforts in establishing its business and
accordingly, is no longer considered a development stage company.

The Company has experienced recurring losses from
operations of $34,193,274, $27,561,336 and $17,586,236 during
the years ended December 31, 2000, 2001, and 2002, and has
a net capital deficiency of $13,326,128 as of December 31,
2002. As a result of these losses, the Companys cash and
cash equivalent balances has declined to $2,822,080 in the
aggregate as of December 31, 2002. The Company believes
that its cash and cash equivalents balance will enable it to
meet its anticipated cash requirements for operations and
capital expenditures through the second quarter of 2003. Beyond
that the Company will need to raise additional funds through
public or private financing or other arrangements. No assurance
can be given that such additional financing, when needed, will
be available on terms favorable to the Company or to the
stockholders, if at all.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. Continuation of the Company as a going concern is
dependent upon whether the Company will be able to raise enough
funds for its operations. If the Company is unable to obtain new
funding the Companys operations may be materially
affected. The accompanying financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.

(2) Summary of Significant Accounting
Policies

Risks and
Uncertainties

Inherent in the Companys business are
various risks and uncertainties, including its limited operating
history, unproven business model and the limited history of
electronic commerce on the Internet. The Companys success
will depend in part upon the emergence of the Internet as a
communications medium, the availability of spoken audio content,
sales of third party mobile devices and market acceptance of the
Audible service.

Reclassifications

Certain items in the 2000 financial statements
have been reclassified to conform to the 2001 and 2002
presentation.

Revenue
Recognition

Content revenue from the sale of individual
content titles is recognized in the period when the content is
downloaded and the customers credit card is processed.
Content revenue from the sale of content subscriptions is
recognized pro rata over the term of the subscription period.
Content revenue from the sale of AudibleListener memberships is
recognized straight-line each month the customer participates in
the program. Content revenue from the sale of prepaid discounted
content packages and gift programs is recognized the earlier of
when the content is downloaded or expiration. Rebates are
recorded as a reduction of revenue over the period in which the
related revenue is recognized. Bad debt expense resulting from
un-collectible credit card transactions is expensed as a
component of General and Administrative expenses.

F-7



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

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

Bulk content revenue is recognized after the
agreement has been finalized, the price is fixed, collectibility
is assured and the content is delivered via either CD-ROM or
electronic transfer and accepted without further obligation on
the part of the Company. In 2001, 90% of our bulk content
revenue was the result of barter transactions in which we
exchanged bulk content for advertising. Revenue from barter
transactions is recognized based on the fair value of the
consideration surrendered or received, whichever is more readily
determinable. There were no bulk content transactions in 2002.

Hardware revenue consists of sales of
AudibleReady digital audio players sold primarily at a discount
when the customer signs up for a one year commitment to an
AudibleListener Membership. For these multiple-element
arrangements in which a customer signs up for a one year
membership and receives an audio player, revenue is recognized
using the residual method whereby the fair value of the
undelivered content element is deferred until the content is
delivered and the remaining revenue (if any) is recognized on
the delivered hardware element. The discounted selling price of
the hardware device reflects the subsidy the Company incurs to
acquire a customer with a one year commitment to
AudibleListener. For players sold separately, hardware revenue
is recognized upon shipment of the device, pursuant to a
customer order and credit card authorization and includes
amounts received for shipping and handling. Cost of hardware
revenue, regardless of whether the player is bundled with a
membership or sold separately, is recognized upon shipment.

Other revenue for the year ended
December 31, 2002 related to our profit participation from
hard copy sales of products in connection with our agreement
with Random House, as well as from a license granted for certain
technology rights to a device manufacturer. Other revenue for
the year ended December 31, 2001 relates to fees billed and
recognized for licensing under agreements with Microsoft (see
note 6) and royalties earned from a license granted for certain
technology rights to a device manufacturer. Other revenue in
2000 consisted of revenue recognized in connection with the
agreement with Microsoft.

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
December 31, 2001 and 2002 were $2,822,080 and $7,627,802,
respectively, and consisted primarily of money market funds.

Allowance for
Doubtful Accounts

The allowance for doubtful accounts is estimated
based on a percentage of revenue, taking into account historical
experience.

F-8



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The activity in the allowance for doubtful
accounts during the years ended December 31, 2000, 2001,
and 2002 was as follows:

|                             |  |   |         |  
|---------------------------- |  | - | ------- | -
|Balance at December 31, 1999 |  | $ | 3,353   |  
|Provisions                   |  |   | 64,889  |  
|Less: Write-offs             |  |   | 61,259  |  
|                             |  |   |         |  
|Balance at December 31, 2000 |  |   | 6,983   |  
|Provisions                   |  |   | 168,240 |  
|Less: Write-offs             |  |   | 162,823 |  
|                             |  |   |         |  
|Balance at December 31, 2001 |  |   | 12,400  |  
|Provisions/(reversal)        |  |   | (2,900  | )
|                             |  |   |         |  
|Balance at December 31, 2002 |  | $ | 9,500   |  
|                             |  |   |         |  

Royalties

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 noncurrent based on the payment terms specified in the
agreements. These guarantees are being amortized on a
straight-line basis over the term of the royalty agreements or
are expensed as royalties are earned by the content providers
under the agreements, whichever is sooner. In addition, 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 statements of operations.

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, amortization of guaranteed royalty
obligations expensed straight-line over the term of the royalty
agreement, periodic net realizable value adjustments to royalty
advances, amortization of warrants issued to content providers
in connection with content agreements, and all other
non-recoupable content costs. Cost of content and services
revenue for the years ended December 31, 2000, 2001, and
2002 was as follows:

|                                                 |  |                         |           |      |  |      |           |  |  |   |           | 
|------------------------------------------------ |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                 |  |                        
|                                                 |  | Year ended December 31,
|                                                 |  |                        
|                                                 |  | 2000                    |           | 2001 |  | 2002
|                                                 |  |                         |           |      |  |     
|Earned royalties                                 |  | $                       | 507,868   |      |  | $    | 2,117,163 |  |  | $ | 3,418,220 | 
|Amortization of minimum guarantees               |  |                         | 984,378   |      |  |      | 156,283   |  |  |   |          | 
|Net realizable value adjustment                  |  |                         | 870,963   |      |  |      | 668,567   |  |  |   | 79,702    | 
|Amortization of warrants issued to providers     |  |                         | 347,941   |      |  |      | 664,383   |  |  |   | 496,705   | 
|Random House Audible content costs (see note 14) |  |                         | 640,000   |      |  |      | 960,000   |  |  |   | 922,497   | 
|Other content costs                              |  |                         | 316,649   |      |  |      | 335,470   |  |  |   | 52,893    | 
|                                                 |  |                         |           |      |  |      |           |  |  |   |           | 
|                                                 |  | $                       | 3,667,799 |      |  | $    | 4,901,866 |  |  | $ | 4,970,017 | 
|                                                 |  |                         |           |      |  |      |           |  |  |   |           | 

F-9



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Inventory

Inventory is stated at the lower of cost,
principally using the first-in, first-out method, or market (net
realizable value). As of December 31, 2001 and 2002,
inventory consisted of digital audio players manufactured by
third party manufacturers primarily the Audible Otis, a digital
audio player manufactured specially for Audible.

Stock-Based
Compensation

In December 2002, the FASB issued Statement
No. 148, Accounting for Stock Based
Compensation-Transition and Disclosure, an Amendment of FASB
Statement No. 123 (SFAS 148). SFAS 148 amends
FASB Statement No. 123, Accounting for Stock-based
Compensation (SFAS 123), to provide
alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based compensation.
However, it allows an entity to continue to measure compensation
cost for those instruments using the intrinsic-value method of
accounting prescribed by Accounting Principles Board Opinion
No. 25 (APB 25), Accounting for Stock
Issued to Employees, provided it discloses the effect of
SFAS 123, as amended by SFAS 148, in footnotes to the financial
statements. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method. The
Company was required to adopt SFAS 148 for the year ended
December 31, 2002. The adoption of SFAS 148 did not have an
impact on the 2002 results of operations or financial position
of the Company and is not expected to have an impact on the
results of operations or financial position of the Company in
future periods as the Company expects to continue to apply the
intrinsic value based method prescribed by APB 25.

The Companys 1999 Stock Incentive Plan
permits the granting of stock options, stock appreciation
rights, restricted or unrestricted stock awards, performance
rights and other stock based awards to employees. For options
granted to new Audible employees as part of their compensation
package, the exercise price is determined by the closing price
of Audibles common stock on the day immediately proceeding
the employees start date. For additional option grants made to
existing employees, the exercise price is determined by closing
price of the day immediately proceeding 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.

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 123, as amended by SFAS 148, such
costs would have been recognized ratably over the vesting period
of the underlying instruments and the Companys net loss
and net loss per common share would have changed to the pro
forma amounts indicated in the table below.

|                                       |                                                                                                                       |      |             |            |   |      |             |           |   |   |             |           |  
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ---- | ----------- | ---------- | - | ---- | ----------- | --------- | - | - | ----------- | --------- | -
|                                       |                                                                                                                       | 2000 |             | 2001       |   | 2002
|                                       |                                                                                                                       |      |             |            |   |     
|Net Loss as Reported                   |                                                                                                                       | $    | (32,275,134 | )          |   | $    | (27,718,389 | )         |   | $ | (18,553,218 | )        
|                                       | Add: Total stock based employee compensation cost
    included in reported net loss (based on intrinsic value method) |      |             | 114,837    |   |      |             | 117,182   |   |   |             | 76,000    |  
|                                       | Deduct: Total stock based employee compensation
    expense determined under fair value method for all awards         |      |             | 11,128,518 |   |      |             | 5,830,610 |   |   |             | 6,126,730 |  
|                                       |                                                                                                                       |      |             |            |   |      |             |           |   |   |             |          
|Pro-forma net loss                     |                                                                                                                       | $    | (43,288,815 | )          |   | $    | (33,431,817 | )         |   | $ | (24,603,948 | )        
|                                       |                                                                                                                       |      |             |            |   |      |             |           |   |   |             |          
|Basic and diluted net loss per common: |                                                                                                                       |      |             |            |   |      |             |           |   |   |             |          
|                                       | As Reported                                                                                                           |      | $           | (1.21      | ) |      | $           | (1.03     | ) |   | $           | (0.61     | )
|                                       | Pro Forma                                                                                                             |      | $           | (1.62      | ) |      | $           | (1.24     | ) |   | $           | (0.81     | )

F-10



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The Company has used the Black-Scholes option
pricing model in calculating the fair value of options granted.
The assumptions used and the weighted-average information for
the years ended December 31, 2002, 2001 and 2002 are as
follows:

|                                                                              |  |              |         |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                              |  |             
|                                                                              |  | December 31,
|                                                                              |  |             
|                                                                              |  | 2000         |         | 2001 |  | 2002
|                                                                              |  |              |         |      |  |     
|Risk-free interest rate                                                       |  |              | 6.00    | %    |  |      | 5.00    | % |  |   | 5.00    | %
|Expected dividend yield                                                       |  |              |        |      |  |      |        |   |  |   |        |  
|Expected lives                                                                |  |              | 7 years |      |  |      | 7 years |   |  |   | 7 years |  
|Expected volatility                                                           |  |              | 126     | %    |  |      | 163     | % |  |   | 109     | %
|Weighted-average grant date fair value of options
    granted during the year |  | $            | 9.87    |      |  | $    | 0.68    |   |  | $ | 0.87    |  

Property and
Equipment

Property and equipment is stated at cost.
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 Web site equipment, and two
years for office furniture and equipment, and studio equipment.

Leasehold improvements are amortized on a
straight-line basis over the lease term or the estimated useful
life of the improvement, whichever is shorter.

Maintenance and repairs are expensed as incurred.

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 Emerging Issues Task Force
(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.

Use of
Estimates

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

Development

Development expenses are expensed as incurred.
Included in development expenses are costs incurred to develop
and enhance the Companys Web site, AudibleManager, which
is the software that enables customers to download content from
the Companys Web site, and various AudibleReady third
party player formats.

F-11



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Production
Expenses

Production expenses are expensed as incurred and
consist primarily of personnel and outsourced costs to support
the Companys infrastructure and systems including its Web
site, internal data communications, audio production activities
and acquisition of content.

Advertising
Expenses

The Company expenses the costs of advertising and
promoting its products and services as incurred. These costs are
included in sales and marketing in the accompanying statements
of operations and totaled $2,113,850, $3,48 7,256 and $1,511,788
for the years ended December 31, 2000, 2001, and 2002,
respectively. Included in the 2001 and 2002 advertising expense
is $1,071,260 and $213,786, respectively, resulting from barter
transactions.

Income
Taxes

The Company accounts for income taxes using the
asset and liability method of SFAS No. 109,
Accounting for Income Taxes. 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.

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 144) adopted on January 1, 2002, which
supercedes both SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (Opinion 30), for the disposal of a segment
of a business (as previously defined in that Opinion). The
Company reviews its long-lived assets (property, plant 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 any asset, an
impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value. The
adoption of SFAS 144 did not have a material impact on the
Companys financial statements.

Basic and
Diluted Net Loss Per Common Share

Basic and diluted net loss per common share is
presented in accordance with the provisions of SFAS
No. 128, Earnings Per Share. Basic net loss per
common share is computed by dividing net loss available to
common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net loss 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. Diluted net loss per common share is
equal to basic net loss per common share, since all common stock
equivalents are antidilutive for all periods presented.

Basic and diluted net loss per common share for
the years ended December 31, 2000, 2001 and 2002 does not
include the effects of warrants to purchase 1,878,654, 2,455,654
and 3,523,271 shares of common stock;

F-12



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

options to purchase 5,365,900, 6,010,150 and
7,547,150 shares of common stock; 0, 11,006,828 and 13,215,166
shares of common stock on conversion of outstanding
Series A Redeemable Convertible Preferred Stock
(Series A), and 0, 0, and 1,250,000 shares of
common stock on conversion of outstanding Series B
Convertible Preferred Stock (Series B) as the
effect of their inclusion is antidilutive during each period.

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 payable and accrued expenses. At
December 31, 2001 and 2002, the fair values of these
financial instruments approximated their carrying value due to
the short-term nature of these instruments.

Comprehensive
Loss

The Companys comprehensive loss is equal to
its net loss for all periods presented.

(3) Stockholders Equity
(Deficit)

Common
Stock

At a special meeting of stockholders of Audible
Inc. held on March 12, 2002 (see note 16) the Company
increased the number of common stock authorized from 50,000,000
to 75,000,000.

In November 2002, in connection with a technology
license, the Company issued 50,000 shares of common stock.

At December 31, 2001 and 2002, the Company
had 27,546,989, and 31,677,869, respectively, common stock
shares issued. At December 31, 2001 and 2002, the Company
had 8,465,804 and 11,070,421, respectively, common shares
reserved for common stock warrants and options. Additionally, at
December 31, 2001 and 2002, the Company had 11,006,828 and
13,215,166, respectively, shares of common stock reserved for
the conversion of outstanding Series A Redeemable
Convertible Preferred Stock, and 0 and 1,250,000, respectively,
shares of common stock reserved for the conversion of
outstanding Series B Convertible Preferred Stock.

Prior to the Companys initial public
offering, shares of common stock outstanding were purchased
under the Companys Stock Restriction Agreements, which
contain certain restrictions related to the sale and transfer of
the shares and certain vesting and buyback provisions. Under the
Stock Restriction Agreements, shares were purchased by employees
and consultants of the Company through the issuance of full
recourse promissory notes (see note 11). In general, shares sold
to employees vest over a 50-month period, with the Company
maintaining an option to repurchase unvested shares. Shares of
common stock were also, on occasion, issued in exchange for
services.

F-13



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

A summary of common stock issued under Stock
Restriction Agreements follows:

|                                                             |  |           |           |                  |  |   |      | 
|------------------------------------------------------------ |  | --------- | --------- | ---------------- |  | - | ---- | 
|                                                             |  | Number of |           | Weighted average
|                                                             |  | Shares    |           | issue price     
|                                                             |  |           |           |                 
|Balance at December 31, 1999                                 |  |           | 7,069,919 |                  |  |   |      | 
|Repurchased                                                  |  |           | (4,155    | )                |  | $ | 0.25 | 
|                                                             |  |           |           |                  |  |   |      | 
|Balance at December 31, 2000.                                |  |           | 7,065,764 |                  |  |   |      | 
|Repurchased                                                  |  |           | (140,220  | )                |  | $ | 0.27 | 
|                                                             |  |           |           |                  |  |   |      | 
|Balance at December 31, 2001.                                |  |           | 6,925,544 |                  |  |   |      | 
|Received as partial payment of note due from
    stockholder |  |           | (12,500   | )                |  | $ | 0.54 | 
|                                                             |  |           |           |                  |  |   |      | 
|Balance at December 31, 2002.                                |  |           | 6,913,044 |                  |  |   |      | 
|                                                             |  |           |           |                  |  |   |      | 

Employee
Stock-based Compensation

In March 1999, the Company issued common shares
to employees at a price less than the fair value of the stock at
the time of issuance. These shares, which are subject to vesting
over four years, were paid for by full recourse promissory notes
executed by the employees. The difference between the fair value
and the issuance price of these common shares of $907,214 was
recorded as deferred compensation, a component of
stockholders equity, and is being recorded as an expense
straight-line over the vesting term.

In February 2000, the Company offered 100,000
common shares to its new Chief Executive Officer in connection
with his offer of employment at five dollars per share less than
the fair value of the stock. The Company recorded $500,000 as
deferred compensation in February 2000 and was recording the
compensation expense straight-line over the vesting term. The
offer to purchase these shares was rescinded in August 2000, and
the CEO did not purchase any of the offered shares. In August
2000, the Company issued to its CEO 500,000 stock options at an
exercise price equal to the fair value of the common stock at
the time of issuance. The Company was recording the original
compensation expense over the vesting term of the new option
grant, and was accounting for 100,000 of the 500,000 newly
issued options as replacement options using variable accounting
by adjusting the compensation expense associated with these
100,000 options based on the closing price of the Companys
common stock in accordance with FIN No. 44. In July 2001,
as a result of the CEO no longer being employed by the Company,
the Company is no longer recording any further expense related
to these options and has reversed the remaining unexpensed
deferred compensation related to unvested options against
additional paid-in-capital.

In March 2000, the Company issued 370,000 options
to purchase shares of common stock to employees at $1.00 less
than the fair value of the common stock at the time of issuance.
These options are subject to vesting over four years. The
difference between the fair value and the issue price of these
options of $370,000 was recorded as deferred compensation, and
is being amortized as an expense straight-line over the vesting
term. In May 2001, the Company issued 50,000 options to purchase
shares of common stock to an employee at $0.50 less than the
fair value of the common stock at the time of issuance. These
options are subject to vesting over four years. The difference
between the fair value and the issue price of these options of
$25,000 was recorded as deferred compensation, and was being
amortized as an expense straight-line over the vesting term. In
July 2001, as a result of the employee no longer being employed
by the Company, the Company is no longer recording any further
expense related to these 50,000 options and has reversed the
remaining unexpensed deferred compensation related to unvested
options against paid-in-capital.

During the years ended December 31, 2000,
2001 and 2002, $561,740, $333,375 and $293,112, respectively, of
compensation expense was recognized related to these
transactions. During the year ended December 31, 2001,
$258,049 of deferred compensation was reversed against
paid-in-capital related to

F-14



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

unvested options due to employees leaving the
Company. No such reversal was required in the years ended
December 31, 2000 and 2002.

Employee
Stock Incentive Plan

In April 1999, the Company established the 1999
Stock Incentive Plan (the Plan) which permits up to 9,000,000
shares of common stock to be issued under the Plan. The Plan
permits the granting of stock options, stock appreciation
rights, restricted or unrestricted stock awards, phantom stock,
performance awards and other stock-based awards. The majority of
the options granted vest over a fifty month period and expire
ten years from the date of the grant.

A summary of the stock option activity under the
Plan is as follows:

|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|-------------------------- |  | --------- | ---------- | -------------- |  | ---------------- | -------------- |  |  | - | ----- | 
|                           |  | Number of |            | Exercise Price |  | Weighted Average
|                           |  | Shares    |            | Per Share      |  | Exercise Price  
|                           |  |           |            |                |  |                 
|Balance, December 31, 1998 |  |           |           |                |  |                  |               |  |  |   |      | 
|Granted                    |  |           | 1,501,100  |                |  |                  | $2.00  $15.38 |  |  | $ | 9.65  | 
|Canceled                   |  |           | (40,000    | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|Exercised                  |  |           | (12,500    | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 1999 |  |           | 1,448,600  |                |  |                  | $2.00  $15.38 |  |  | $ | 9.71  | 
|Granted                    |  |           | 4,575,500  |                |  |                  | $0.44  $40.00 |  |  | $ | 10.61 | 
|Canceled                   |  |           | (657,000   | )              |  |                  | $1.25  $40.00 |  |  | $ | 21.74 | 
|Exercised                  |  |           | (1,200     | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2000 |  |           | 5,365,900  |                |  |                  | $0.44  $15.88 |  |  | $ | 9.01  | 
|Granted                    |  |           | 4,157,000  |                |  |                  | $0.36  $ 1.78 |  |  | $ | 0.68  | 
|Canceled                   |  |           | (3,512,750 | )              |  |                  | $0.41  $15.88 |  |  | $ | 9.38  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2001 |  |           | 6,010,150  |                |  |                  | $0.36  $15.56 |  |  | $ | 3.04  | 
|Granted                    |  |           | 2,507,000  |                |  |                  | $0.31  $ 1.18 |  |  | $ | 0.95  | 
|Canceled                   |  |           | (958,888   | )              |  |                  | $0.39  $15.56 |  |  | $ | 2.60  | 
|Exercised                  |  |           | (11,112    | )              |  |                  | $0.50          |  |  | $ | 0.50  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2002 |  |           | 7,547,150  |                |  |                  | $0.31  $15.50 |  |  | $ | 2.40  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Exercisable:               |  |           |            |                |  |                  |                |  |  |   |       | 
|December 31, 2002          |  |           | 2,655,494  |                |  |                  | $0.31  $ 1.00 |  |  | $ | 0.54  | 
|                           |  |           | 550,230    |                |  |                  | $1.02  $ 6.06 |  |  | $ | 3.78  | 
|                           |  |           | 896,800    |                |  |                  | $8.00  $15.50 |  |  | $ | 8.87  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|                           |  |           | 4,102,524  |                |  |                  | $0.31  $15.50 |  |  | $ | 2.80  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 

A summary of the total stock options outstanding
as of December 31, 2002 is as follows:

|          |           |                |  |                  |                |                  |  |     |      |  |  |  |            | 
|--------- | --------- | -------------- |  | ---------------- | -------------- | ---------------- |  | --- | ---- |  |  |  | ---------- | 
|          |           |                |  |                  |                | Weighted Average
|Number of |           | Exercise Price |  | Weighted Average |                | Remaining       
|Options   |           | Per Share      |  | Exercise Price   |                | Contractual     
|          |           |                |  |                  |                |                 
|          | 5,365,000 |                |  |                  | $0.31  $ 1.0  |                  |  | 0 $ | 0.73 |  |  |  | 8.80 years | 
|          | 984,250   |                |  |                  | $1.02  $ 6.06 |                  |  | $   | 3.52 |  |  |  | 7.68 years | 
|          | 1,197,900 |                |  |                  | $8.00  $15.50 |                  |  | $   | 8.99 |  |  |  | 6.82 years | 
|          |           |                |  |                  |                |                  |  |     |      |  |  |  |            | 
|          | 7,547,150 |                |  |                  | $0.31  $15.50 |                  |  | $   | 2.40 |  |  |  | 8.35 years | 
|          |           |                |  |                  |                |                  |  |     |      |  |  |  |            | 

F-15



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

At December 31, 2002, approximately
1.4 million shares of common stock were available for
future grants under the Plan.

Warrants

The Company frequently issues common stock
warrants to third parties in exchange for services. The relative
fair values of warrants issued in exchange for services are
determined in accordance with EITF Issue No. 96-18 and are
being 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 date of grant. Expected dividend yield of
zero was used for all calculations. For the years ended
December 31, 2000, 2001 and 2002, $1,243,445, $1,765,439
and $1,153,998 was recognized as expense related to warrants, as
follows:

|                                     |  |      |           |      |  |      |           |  |  |   |           | 
|------------------------------------ |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                     |  | 2000 |           | 2001 |  | 2002
|                                     |  |      |           |      |  |     
|Cost of content and services revenue |  | $    | 347,941   |      |  | $    | 664,383   |  |  | $ | 496,705   | 
|Production expenses                  |  |      | 268,860   |      |  |      | 89,611    |  |  |   |          | 
|Sales and marketing expenses         |  |      | 568,570   |      |  |      | 989,861   |  |  |   | 642,813   | 
|General and administrative           |  |      | 58,074    |      |  |      | 21,584    |  |  |   | 14,480    | 
|                                     |  |      |           |      |  |      |           |  |  |   |           | 
|                                     |  | $    | 1,243,445 |      |  | $    | 1,765,439 |  |  | $ | 1,153,998 | 
|                                     |  |      |           |      |  |      |           |  |  |   |           | 

A summary of the warrant activity for the years
ended December 31, 2000, 2001, and 2002 is as follows:

|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|-------------------------- |  | --------- | --------- | -------------- |  | ---------------- | --------------- |  |  | - | ----- | 
|                           |  | Number of |           | Exercise Price |  | Weighted Average
|                           |  | Warrants  |           | Per Share      |  | Exercise Price  
|                           |  |           |           |                |  |                 
|Balance, December 31, 1999 |  |           | 1,410,954 |                |  |                  | $0.01  $9.00   |  |  | $ | 5.30  | 
|Issued                     |  |           | 906,841   |                |  |                  | $1.03  $50.00  |  |  | $ | 10.08 | 
|Exercised                  |  |           | (439,141  | )              |  |                  | $1.79  $4.00   |  |  | $ | 2.96  | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|Balance, December 31, 2000 |  |           | 1,878,654 |                |  |                  | $0.01  $50.00  |  |  | $ | 7.98  | 
|Issued                     |  |           | 1,077,000 |                |  |                  | $0.38  $1.50   |  |  | $ | 1.11  | 
|Cancelled                  |  |           | (500,000  | )              |  |                  | $8.00           |  |  | $ | 8.00  | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|Balance, December 31, 2001 |  |           | 2,455,654 |                |  |                  | $0.01  $50.00  |  |  | $ | 4.96  | 
|Issued                     |  |           | 1,275,430 |                |  |                  | $0.31  $1.15   |  |  | $ | 1.12  | 
|Cancelled                  |  |           | (207,813  | )              |  |                  | $8.00           |  |  | $ | 8.00  | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|Balance, December 31, 2002 |  |           | 3,523,271 |                |  |                  | $0.01  $50.00  |  |  | $ | 3.63  | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|Exercisable:               |  |           |           |                |  |                  |                 |  |  |   |       | 
|December 31, 2002          |  |           | 150,000   |                |  |                  | $0.01           |  |  | $ | 0.01  | 
|                           |  |           | 636,500   |                |  |                  | $0.32  $1.03   |  |  | $ | 0.75  | 
|                           |  |           | 1,220,930 |                |  |                  | $1.15           |  |  | $ | 1.15  | 
|                           |  |           | 1,287,508 |                |  |                  | $1.50  $9.00   |  |  | $ | 4.51  | 
|                           |  |           | 56,917    |                |  |                  | $10.00  $12.00 |  |  | $ | 10.24 | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 
|                           |  |           | 3,351,855 |                |  |                  | $0.01  $12.00  |  |  | $ | 2.47  | 
|                           |  |           |           |                |  |                  |                 |  |  |   |       | 

The warrants exercised in 2000 were exercised
through cashless transactions in accordance with the warrant
agreements. Accordingly, the number of common stock shares
issued as result of these exercises were 326,390. No warrants
were exercised during 2001 and 2002.

F-16



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

A summary of the total common stock warrants
outstanding as of December 31, 2002 is as follows:

|          |           |                |  |                  |               |                  |  |   |       |  |  |  |            | 
|--------- | --------- | -------------- |  | ---------------- | ------------- | ---------------- |  | - | ----- |  |  |  | ---------- | 
|          |           |                |  |                  |               | Weighted Average
|Number of |           | Exercise Price |  | Weighted Average |               | Remaining       
|Warrants  |           | Per Share      |  | Exercise Price   |               | Contractual Life
|          |           |                |  |                  |               |                 
|          | 150,000   |                |  |                  | $0.01         |                  |  | $ | 0.01  |  |  |  | 6.37 years | 
|          | 636,500   |                |  |                  | $0.32$1.03   |                  |  | $ | 0.75  |  |  |  | 5.22 years | 
|          | 1,220,930 |                |  |                  | $1.15         |                  |  | $ | 1.15  |  |  |  | 4.07 years | 
|          | 1,287,508 |                |  |                  | $1.50$9.00   |                  |  | $ | 4.51  |  |  |  | 4.46 years | 
|          | 228,333   |                |  |                  | $10.00$50.00 |                  |  | $ | 22.34 |  |  |  | 4.29 years | 
|          |           |                |  |                  |               |                  |  |   |       |  |  |  |            | 
|          | 3,523,271 |                |  |                  | $0.01$50.00  |                  |  | $ | 3.63  |  |  |  | 4.53 years | 
|          |           |                |  |                  |               |                  |  |   |       |  |  |  |            | 

(4) Redeemable Convertible Preferred
Stock

Microsoft
Investment

On February 8, 2001, Microsoft purchased
2,666,666 shares of Audible Series A Redeemable Convertible
Preferred stock for $10,000,000 at a per share price of $3.75.
Each share of preferred stock may be converted into four shares
of Common Stock, (equivalent to a price of $.9375 per share,
which was greater than the common stock price at the date of
grant, therefore, no beneficial conversion feature was
associated with these preferred shares), subject to adjustment
under certain conditions. The Series A Redeemable
Convertible Preferred stock is convertible at the option of the
holder at any time prior to the fifth anniversary of the
original issue date. Dividends are payable semi-annually at a
annual rate of 12% in either additional preferred shares or in
cash at the option of the Company. On the fifth anniversary of
the original issue date, Audible is required to redeem all
remaining outstanding shares at a per share price of $3.75 plus
all accrued and unpaid dividends. In 2001 the Company issued
85,041 additional shares of Series A Redeemable Convertible
Preferred stock for payment of dividends due. In 2002 the
Company issued 525,620 additional shares of Series A
Redeemable Convertible Preferred stock for payment of dividends
due. As of December 31, 2002, $125,257 in accrued dividend
remains unpaid and are included in current liabilities on the
accompanying December 31, 2002 balance sheet. It is
Companys intention to pay the remaining balance due
related to 2002 by issuing additional Series A Redeemable
Convertible Preferred Stock.

(5) Property and Equipment

Property and equipment at December 31, 2001
and 2002 consists of the following:

|                                               |  |              |           |      |  |   |           | 
|---------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2001         |           | 2002
|                                               |  |              |           |     
|Studio equipment                               |  | $            | 755,004   |      |  | $ | 759,258   | 
|Computer server and Web site equipment         |  |              | 3,566,629 |      |  |   | 3,676,773 | 
|Office furniture and equipment                 |  |              | 1,165,909 |      |  |   | 1,198,364 | 
|Leasehold improvements                         |  |              | 824,625   |      |  |   | 827,317   | 
|                                               |  |              |           |      |  |   |           | 
|                                               |  |              | 6,312,167 |      |  |   | 6,461,712 | 
|Less accumulated depreciation and amortization |  |              | 4,321,497 |      |  |   | 5,828,312 | 
|                                               |  |              |           |      |  |   |           | 
|                                               |  | $            | 1,990,670 |      |  | $ | 633,400   | 
|                                               |  |              |           |      |  |   |           | 

Depreciation and amortization expense on property
and equipment, totaled $1,367,348, $1,825,466 and $1,506,815 in
2000, 2001 and 2002, respectively.

F-17



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(6) Microsoft Corporation
Agreement

In November 1998, the Company entered into a
five-year agreement with Microsoft. The agreement provides for
services related to integration of products, the granting of
various rights and licenses, and the provision for Microsoft to
be paid future royalties for content distributed as a result of
the software developed in the agreement. Under the terms of the
agreement, Microsoft has paid the Company the minimum committed
payments of $2.0 million to integrate certain products and
acquire various products, rights and licenses. Microsoft
advanced Audible $1,500,000 of the $2.0 million in November
1998 in consideration of Audible granting Microsoft the right to
distribute software enabling users of Microsoft platforms to
access and use Audible content. The Company allocated $50,000 of
this advance to certain business development work that was
recognized as a reduction of general and administrative expense
in 2001. The remaining $1,450,000 of this advance was recognized
as revenue on a straight line basis beginning in the quarter
ended June 30, 1999 through the initial term of the
agreement which ended in April 2001. During the years ended
December 31, 2000, and 2001, $756,518 and $252,174,
respectively, of this advance was recognized and is recorded as
other revenue on the accompanying statements of operations. No
revenue related to this transaction was recognized in the year
ended December 31, 2002. The balance of the
$2.0 million in committed payments was received during the
year ended December 31, 1999, as Audible (i) performed
technology integration services for which we recognized other
revenue of $200,000, (ii) delivered a license for certain
technology rights for which we recognized other revenue of
$250,000, and (iii) delivered 300 Audible MobilePlayers for
which Audible recognized hardware revenue of $50,000.

Audible will pay Microsoft a royalty on content
licensed and distributed by Audible to each end user that
accesses its content using the developed software. Royalties
will be recognized during the period that the related content
revenue is earned. Through December 31, 2002, Audible had
not recognized any royalties under this agreement.

In April 1999, in connection with an amendment to
the agreement with Microsoft, the Company issued to Microsoft a
warrant which expires November 18, 2003 to purchase 100,000
shares of common stock at the IPO price of $9.00 per share. The
fair value of this warrant was determined in accordance with
EITF Issue No. 96-18 and was amortized as an expense on a
straight-line basis over the same period as the $1,450,000
advance described above. During the years ended
December 31, 2000 and 2001, respectively, $268,860 and
$89,611, respectively, was recorded as a production expense
related to this agreement with the non-cash credit for services
to additional paid-in-capital in the statement of
stockholders equity (deficit). No expense related to this
transaction was recognized in the year ended December 31,
2002 as the fair value was fully amortized during 2001.

(7) Services Agreement

In June 1999, in connection with a services
agreement, the Company issued a warrant to purchase 150,000
shares of common stock at $0.01 per share, which is fully
vested, and a warrant to purchase 500,000 shares of common stock
at $8.00 per share, which is subject to vesting over a
three-year period. The agreement allows for an additional
warrant to purchase 250,000 shares of common stock at $8.00 per
share upon extension of the agreement for an additional year,
also subject to vesting. In addition to the warrants, the
agreement also allowed for the purchase of 150,000 shares of
common stock at the IPO price of $9.00 per share on the IPO
date. In January 2001, the services agreement was amended
whereby the warrant to purchase 500,000 shares of common stock
was cancelled and a new warrant to purchase 400,000 shares of
common stock at $0.91 per share was issued. The second warrant
to purchase 400,000 shares of common stock at $0.91 per share
vested over a 20 month period ending December 31, 2002.

The fair value of these warrants and purchase
option was determined in accordance with EITF Issue
No. 96-18 and is being amortized as an expense on a
straight-line basis using variable plan accounting over the
initial term of the service agreement of three years. During the
years ended December 31, 2000, 2001 and

F-18



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

2002, $568,570, $813,530 and $479,869,
respectively, was recorded primarily as a marketing expense
related to this agreement with the non-cash credit for services
to additional paid-in capital in the 2000, 2001 and 2002
statement of stockholders equity (deficit).

(8) Income Taxes

There is no provision for income tax expense in
2000, 2001 or 2002 due to the Companys net losses in each
of the years. As a result of selling certain of its New Jersey
state income tax loss benefits for cash, the Company realized
$316,310, $328,898 and $313,580, respectively, in state income
tax benefit during the years ended December 31, 2000, 2001
and 2002, respectively.

The difference between the actual income tax
provision and that computed by applying the U.S. federal income
tax rate of 34% to pretax loss is summarized below:

|                                                       |                                             |                         |             |            |   |      |            |           |   |   |            |           |  
|------------------------------------------------------ | ------------------------------------------- | ----------------------- | ----------- | ---------- | - | ---- | ---------- | --------- | - | - | ---------- | --------- | -
|                                                       |                                             |                        
|                                                       |                                             | Year ended December 31,
|                                                       |                                             |                        
|                                                       |                                             | 2000                    |             | 2001       |   | 2002
|                                                       |                                             |                         |             |            |   |     
|Computed expected tax benefit                        |                                             | $                       | (11,081,091 | )          |   | $    | (9,178,562 | )         |   | $ | (5,950,271 | )        
|Decrease (increase) in tax benefit resulting
    from: |                                             |                         |             |            |   |      |            |           |   |   |            |          
|                                                       | State tax benefit, net of federal benefit   |                         |             | (208,765   | ) |      |            | (215,753  | ) |   |            | (206,962  | )
|                                                       | Increase in the federal valuation allowance |                         |             | 10,963,000 |   |      |            | 9,064,000 |   |   |            | 5,839,000 |  
|                                                       | Other, net                                  |                         |             | 10,546     |   |      |            | 3,417     |   |   |            | 4,653     |  
|                                                       |                                             |                         |             |            |   |      |            |           |   |   |            |          
|                                                       |                                             | $                       | (316,310    | )          |   | $    | (326,898   | )         |   | $ | (313,580   | )        
|                                                       |                                             |                         |             |            |   |      |            |           |   |   |            |          

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities as of December 31, 2001 and 2002 are as follows:

|                     |                                                 |                            |                           |            |            |  |            |            |            |  |            | 
|-------------------- | ----------------------------------------------- | -------------------------- | ------------------------- | ---------- | ---------- |  | ---------- | ---------- | ---------- |  | ---------- | 
|                     |                                                 |                           
|                     |                                                 | December 31,              
|                     |                                                 |                           
|                     |                                                 | 2001                       |                           | 2002      
|                     |                                                 |                            |                           |           
|Deferred tax assets: |                                                 |                            |                           |            |            |  |            |           
|                     | Net operating loss carryforwards                |                            | $                         | 36,494,000 |            |  | $          | 44,432,000 |           
|                     | Capitalized start-up costs                      |                            |                           | 260,000    |            |  |            |           |           
|                     | Capitalized research and developmental costs    |                            |                           | 855,000    |            |  |            | 291,000    |           
|                     | Book depreciation in excess of tax depreciation |                            |                           | 875,000    |            |  |            | 1,123,000  |           
|                     | Deferred compensation and accrued vacation      |                            |                           | 156,000    |            |  |            | 77,000     |           
|                     | Advances                                        |                            |                           | 33,000     |            |  |            | 8,000      |           
|                     | Other, net                                      |                            |                           | 85,000     |            |  |            | 152,000    |           
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Total deferred tax assets  |                           |            | 38,758,000 |  |            |            | 46,083,000 | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 |                            | Less valuation allowance: |            |            |  |            |            |            |  |           
|                     |                                                 |                            |                           | Federal    |            |  | 31,294,000 |            |            |  | 37,133,000 | 
|                     |                                                 |                            |                           | State      |            |  | 7,464,000  |            |            |  | 8,950,000  | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Total valuation allowance: |                           |            | 38,758,000 |  |            |            | 46,083,000 | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Net deferred taxes         |                           | $          |           |  |            | $          |           | 
|                     |                                                 |                            |                           |            |            |  |            |           

In assessing the realizability of deferred tax
assets, the Company considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. Based on
the Companys historical net losses, management believes it
is more likely than not that the Company will not realize the
benefits of these

F-19



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

deferred tax assets and, accordingly, a full
valuation allowance has been recorded on the deferred tax assets
as of December 31, 2001 and 2002.

As of December 31, 2002, the Company has net
operating loss carryforwards for federal income tax purposes of
approximately $105,446,000 which begin to expire in 2010 if not
used to offset future taxable income. The Company has
experienced certain ownership changes which, under the
provisions of Section 382 of the Internal Revenue Code of 1986,
as amended, may result in an annual limitation on the
Companys ability to utilize its net operating losses in
the future.

(9) Related-party Transactions

On April 11, 2001, the Company amended the
payment terms of the $50,000 note receivable due from a
stockholder-employee due on March 27, 2001. The amendment
required semi-annual principal payments of at least $5,000
beginning July 15, 2001 until the note and all accrued
interest is repaid. The interest rate on the note was 5.42%
annually. On September 3, 2002, the remaining outstanding
principal balance of $45,000 and all accrued interest was paid
to the Company by the stockholder-employee giving the Company
12,500 shares of Audible common stock with the fair value at the
date of the transaction of $4,750, and with the proceeds of a
salary bonus paid to the stockholder-employee on the same date.

(10) Commitments and
Contingencies

Lease
Obligations

The Company entered into a capital lease line of
credit with Comdisco, Inc., whereby the Company had leased
$1,240,585 of equipment under this capital lease line as of
December 31, 2000. This lease line is now closed and all
lease obligations have been paid as of December 31, 2002.
The Company has operating leases on its office space which
expire in June 2003. Future minimum lease obligations under
these lease arrangements in 2003 are $197,344. Prior to the
expiration of the current lease, the Company expects to
negotiate a new lease extension.

Rent expense of $330,019, $466,984 and $449,072
was recorded under operating leases for the years ended
December 31, 2000, 2001 and 2002, respectively.

License
Agreements

The Company has entered into several agreements
with certain consumer electronics and computer companies to
license and promote the AudibleReady software for handheld
electronic players. Under the terms of these agreements, the
Company is required to pay the device manufacturer a percentage
of the revenue related to the content downloaded by the
purchasers of these AudibleReady players. These revenue sharing
arrangements typically last one to two years from the date the
player user becomes an Audible customer.

F-20



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Summary of
Commitments and Obligations

The following table shows future payments due
under our commitments and obligations as of December 31,
2002 incorporates the February 10, 2002 amendment to our
Random House agreement.

|      |  |           |         |                    |  |                    |           |              |  |              |            |              |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 
|----- |  | --------- | ------- | ------------------ |  | ------------------ | --------- | ------------ |  | ------------ | ---------- | ------------ |  | ----- | ------- |  |  | - | --------- |  |  |  | - |  |  | - | ---------- | 
|      |  |           |         | (1)                |  | (2)                |           |              |  |              |            |              |  |      
|      |  |           |         | Dividends payable  |  | Redemption of      |           |              |  |              |            |              |  |      
|      |  |           |         | Microsoft Series A |  | Microsoft Series A |           |              |  |              |            | (4)          |  |      
|      |  |           |         | Redeemable         |  | Redeemable         |           | Payments due |  | (3)          |            | Payments due |  |      
|      |  | Operating |         | Convertible        |  | Convertible        |           | Content      |  | Payments due |            | Random       |  |      
|Year  |  | Leases    |         | Preferred Stock    |  | Preferred Stock    |           | Providers    |  | Amazon.com   |            | House        |  | Total
|      |  |           |         |                    |  |                    |           |              |  |              |            |              |  |      
|2003  |  | $         | 197,344 |                    |  | $                  | 1,659,779 |              |  |              |           |              |  | $     | 598,500 |  |  | $ | 1,500,000 |  |  |  |  |  |  |   | 3,955,623  | 
|2004  |  |           |        |                    |  |                    | 1,724,190 |              |  |              |           |              |  |       | 25,000  |  |  |   |          |  |  |  |  |  |  |   | 1,749,190  | 
|2005  |  |           |        |                    |  |                    | 1,937,299 |              |  |              |           |              |  |       |        |  |  |   |          |  |  |  |  |  |  |   | 1,937,299  | 
|2006  |  |           |        |                    |  |                    | 223,532   |              |  | $            | 12,289,976 |              |  |       |        |  |  |   |          |  |  |  |  |  |  |   | 12,513,508 | 
|      |  |           |         |                    |  |                    |           |              |  |              |            |              |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 
|Total |  | $         | 197,344 |                    |  | $                  | 5,544,800 |              |  | $            | 12,289,976 |              |  | $     | 623,500 |  |  | $ | 1,500,000 |  |  |  |  |  |  | $ | 20,155,620 | 
|      |  |           |         |                    |  |                    |           |              |  |              |            |              |  |       |         |  |  |   |           |  |  |  |   |  |  |   |            | 



---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1): | Dividends payable in 2003 include $125,257 due as
    of December 31, 2002, which the Company intends to pay by
    the issuance of additional Series A Redeemable Convertible
    Preferred Stock. The remaining 2003 balance of $1,534,522 as
    well as all future dividends payable can be paid by either the
    issuance of additional preferred shares or in cash at the option
    of the Company. The schedule above was prepared assuming that
    all future dividends would be paid by the issuance of additional
    preferred shares.
|    
|(2): | If the Series A Redeemable Convertible
    Preferred Stock is not converted into common stock prior to the
    fifth anniversary of the original issue date, Audible is
    required to redeem all remaining outstanding shares at a per
    share price of $3.75 plus all accrued and unpaid dividends.                                                                                                                                                                                                                                            
|    
|(3): | The $1,500,000 shown due to Amazon was due in
    2002 and was payable in four installments of $375,000 each due
    on January 30, April 30, July 31, and
    October 30, 2002. The resolution of this remaining
    obligation is currently under discussion between Amazon.com and
    Audible.                                                                                                                                                                                                                                                  
|    
|(4): | On February 10, 2003 the Random House
    agreement was amended to waive the $1,500,000 in imprint fees
    that were due in 2003 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                         

Contingencies

On May 21, 2001, a complaint was filed in
the District Court of Larimer County, Colorado on behalf of a
plaintiff who is under indictment for attempted fraud and
extortion against Audible, Inc. in early 2000. The Complaint
alleged breach of contract, promissory estoppel, fraud, unjust
enrichment, breach of duty of good faith and fair dealing, and
outrageous conduct based on negotiations
conducted over the Internet with the assistance of the FBI in
order to locate and arrest the plaintiff. The damages sought
include the items negotiated for (approximately $107,000 in
value), attorneys fees and costs, exemplary damages in an
unspecified amount, and punitive damages. Audible has noticed
the removal of the case to the Federal District Court for
Colorado based on diversity jurisdiction. The plaintiff agreed
to dismiss his case with prejudice based on the claims we made
in our Answer to the complaint and the final dismissal order was
issued on October 2, 2001 at no cost to the Company.

In September 2001, the Company and certain of its
officers, directors and former directors, were named as
defendants in several putative class actions filed in the United
States District Court for the Southern District of New York. The
investment banking firms that were involved in the
Companys 1999 initial public offering (the
IPO) have also been named as defendants. The gist of
the plaintiffs claims is that the underwriter defendants
allegedly allocated the opportunity to participate in the IPO by
requiring their customers to pay kickbacks in excess
of the normal commissions and to make subsequent purchases in
the after market at prices in excess of the IPO price.
Allegedly, the amounts of the kickbacks were
sometimes calculated as a percentage of the customers
paper profits over some specified period of time after the IPO.
It

F-21



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

is alleged that these practices were not
disclosed in the registration statement and prospectus for the
IPO and that, as a result, the defendants violated various
provisions of the federal securities laws. Certain of the
complaints purport to set forth claims on behalf of persons who
acquired the Companys common stock from July 16, 1999
to September 11, 2001. One other complaint purports to
represent a class of persons who acquired the Companys
common stock between July 16, 1999 and December 6,
2000. The complaints do not specify the amount of the
compensatory damages the plaintiffs are seeking, but the market
loss at issue was in excess of $50 million.

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

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

(11) Notes Due from Stockholders for
Common Stock

Notes due from stockholders that are current
employees and former directors of $294,456 and $289,545 at
December 31, 2001 and 2002, respectively, were received by
the Company for payment for shares of common stock purchased
under the Companys Stock Restriction Agreements (see note
3). These notes have been reflected as a reduction to
stockholders equity. The notes are full recourse
promissory notes bearing interest at fixed rates ranging from
7.0% to 8.5% through December 31, 2002 and at 4% subsequent
thereto until December 31, 2003. The notes began maturing
in the year 2000.

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

As of January 29, 2003, the unpaid principal
and unpaid interest balance due to the Company from stockholders
that are employees, net of bonuses due to the employees, on
these notes was $263,240. On January 29, 2003 the employees
were notified that the Company will not require them to repay
the unpaid principal nor the unpaid interest on the notes
payable. The employees will be individually responsible for the
personal income tax consequences of this debt forgiveness. In
connection with this debt forgiveness, the Company will record a
non-cash charge of $263,240 in the first quarter of 2003. In
addition, for the remaining notes issued to former directors in
the amount of $58,750 not covered under this debt forgiveness,
the Company has extended the due dates to December 31, 2003
and reduced the interest rate in 2003 to 4%.

F-22



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

The Company has exercised its right to purchase
shares of unvested stock from employees who were terminated
(under the terms of the Companys Stock Restriction
Agreements). During 2000, 2001 and 2002, the Company repurchased
4,155, 140,220 and 0 shares, respectively. The Company paid for
these shares by reducing the indebtedness under the promissory
notes issued to the Company. During the year ended
December 31, 2002, the Company received as partial payment
of a note due from a stockholder 12,500 previously vested shares
of common stock.

(12) Employee Benefit Plan

The Company has a 401(k) based on contributions
from employees and discretionary Company contributions. The
Company has not contributed to the 401(k) Plan to date.

(13) Amazon Agreement

In January 2000, the Company entered into two
agreements with Amazon.com. Under the Co-Branding, Marketing and
Distribution Agreement the Company will be the exclusive
provider of digital spoken audio (as defined) to Amazon.com. On
January 24, 2001, the Company signed Amendment No. 1
to its Co-Branding, Marketing, and Distribution Agreement with
Amazon.com. Under the amendment, the annual fee for Year 3 of
the agreement was reduced from $10,000,000 to $1,500,000 and an
additional fee of $1,000,000 is payable in Year 2 of the
agreement, making the total amount to be paid by the Company
under the agreement $22,500,000. Also in connection with
Amendment No. 1, the Company issued 500,000 common stock
warrants to Amazon.com at an exercise price of $1.50 per share,
which are exercisable after January 31, 2002. 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 remaining term of the agreement.
During each year ended December 31, 2001 and 2002, $172,800
was recorded as a marketing expense related to these warrants
with the non-cash credit for services to additional paid-in
capital.

During the three-year term of this agreement, in
consideration for certain services, Amazon is entitled to
receive $22,500,000 (as amended) plus a specified percentage of
revenue earned over a specified amount. Under a Securities
Purchase Agreement, Amazon.com purchased 1,340,033 shares of
common stock from the Company for $20,000,000. Under the two
agreements, the consideration of $20,000,000 paid by Amazon for
the purchase of the common stock, and the Companys
obligation for the annual fee for the first two years per the
original Co-Branding, Marketing, and Distribution Agreement,
were offset and no cash was exchanged. Accordingly, $20,000,000
was recorded as deferred services, a component of
stockholders equity, and was being amortized over the
first two years of the agreement on a straight-line basis. Prior
to Amendment No. 1, through January 2001, $10,000,000 had
been amortized as a marketing expense related to the initial
$20,000,000 of deferred services. Subsequent to Amendment
No. 1, the unamortized payment for year 2 of $10,000,000
plus the additional $2,500,000 in payments required under the
amendment, or $12,500,000, is being amortized on a straight-line
basis over the remaining term of the agreement of
24 months. During the years ended December 31, 2000,
2001 and 2002, $9,166,666, $5,416,667 and $5,000,000,
respectively, was recorded as a marketing expense, with the
non-cash credit to deferred services. During the years ended
December 31, 2000, 2001 and 2002, $0, $1,145,833 and
1,250,000, respectively, was recorded as a marketing expense
representing the straight-line amortization of the cash portion
of payments due under this agreement.

As of December 31, 2002, a total of
$1,500,000 in cash payments, which were payable in four
installments of $375,000 each, due on January 30,
April 30, July 31, and October 30, 2002,
respectively, under this agreement remains unpaid. The
resolution of this remaining obligation is currently under
discussion between Amazon.com and Audible.

Of this amount, $1,395,500 has been accrued based
on the straight-line amortization and is included in Accrued
Expenses on the accompanying December 31, 2002 Balance
Sheet.

F-23



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(14) Random House, Inc.
Agreement

On May 5, 2000, Audible and Random House
entered into a 50-month Co-Publishing, Marketing, and
Distribution Agreement to form a strategic alliance to establish
Random House Audible, a publishing imprint, as defined in the
agreement, to produce spoken word content specifically suited
for digital distribution. All titles published by the imprint
will be distributed exclusively on the Internet by Audible. As
part of this alliance, Random House, through its Random House
Ventures, LLC subsidiary, purchased 169,780 shares of Audible
common stock from the Company for $1,000,000. Over the term of
the agreement Audible was to contribute towards the funding the
acquisition and creation of digital audio titles through Random
House Audible. On March 26, 2002, the agreement was amended
to waive the cash payment due to Random House in 2002 of
$1,250,000, thereby reducing the total payments due under the
agreement from $4,000,000 to $2,750,000. In exchange for this
waiver, under the amendment the Company agreed to issue
1,250,000 shares of Series B Convertible Preferred Stock.
At any time on or after March 26, 2004, subject to certain
conditions, all outstanding shares of Series B Preferred
Stock shall automatically convert to shares of common stock at
the then effective conversion price. Through December 31,
2001, $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 shall no longer be required to pay the $1,500,000
imprint fees that were due in 2003 and 2004. At
December 31, 2002, $135,000 of this payment had been
expensed and is included in Accrued Expenses in the accompanying
December 31, 2002 Balance Sheet. This accrual will be
reversed in the first quarter of 2003.

During the years ended December 31, 2000,
2001 and 2002, $640,000, $960,000 and $922,497, respectively was
recorded as a cost of content and services revenue related to
this agreement. Under the agreement Random House was granted a
warrant to purchase 878,333 shares of Audible common stock at
various exercise prices that vest over the term of the
agreement. The fair value of these warrants is being amortized
as an expense on a straight-line basis over the 50-month term of
the agreement, and most of the warrants are accounted for using
variable plan accounting and compensation costs vary each
accounting period until the measurement date. During the years
ended December 31, 2001 and 2002, $603,496 and $448,336,
respectively, was recorded as a cost of content and services
revenue related to these warrants with the non-cash credit for
services to additional paid-in capital. Additionally, the
agreement contains provisions for profit participation,
bounties, and the right to purchase additional warrants based on
future performance. Random House Audible is an imprint of Random
House, Inc.s Random House Audio Publishing Group division.

(15) Streamlining Initiative

On July 23, 2001, the Company announced a
streamlining initiative. Under this initiative 33 staff
positions were eliminated including the resignation of the
Companys CEO. The Company incurred a charge of $181,939 in
the third quarter of 2001, primarily related to severance costs,
included in general and administrative expense on the
accompanying condensed statements of operations for the year
ended December 31, 2001. All of the charge related to the
streamlining initiative had been paid as of December 31,
2001.

(16) Amendment to Certificate of
Incorporation

On March 12, 2002, stockholders of Audible
approved an amendment to the Companys Amended and Restated
Certificate of Incorporation to increase the number of
authorized shares on common stock from 50,000,000 shares to
75,000,000 shares.

F-24



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(17) Supplemental Disclosure of Cash Flow
Information

The following supplemental information relates to
the Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002:

No income tax payments have been made in 2000,
2001 or 2002. Total cash paid for interest expense for the years
ended December 31, 2000, 2001 and 2002, was $21,810, $9,722
and $0, respectively.

Non-cash operating activities which occurred in
the years ended December 31, 2000, 2001 and 2002 included:



| |  |                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Content revenue exchanged for advertising (barter
    transactions); $0, $1,285,048 and $0. Of the $1,285,048 in
    barter revenue in 2001, $1,071,260 of barter advertising had
    been expensed in 2001, and the balance of $213,788 was expensed
    in 2002.

Non-cash investing and financing activities which
occurred in the years ended December 31, 2000, 2001 and
2002 included:



| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Purchase of treasury stock at cost through
    reductions in notes receivable; $1,046 $31,162, and $0,
    respectively.                                                                                                                                         
|
| |  | Common stock issued for deferred services in
    connection with a Co-Branding, Marketing and Distribution
    agreement; 20,000,0000, $0, and $0, respectively.                                                                                                 
|
| |  | Issuance of common stock upon the cashless
    exercise of common stock warrants; 326,930 shares, 0 shares, and
    0 shares, respectively.                                                                                                                      
|
| |  | Payment of dividends on redeemable convertible
    preferred stock in the form of preferred shares; $0, $318,902
    and $1,971,075, respectively.                                                                                                               
|
| |  | The Company received 12,500 shares of Audible
    common stock with a fair value at the date of the transaction of
    $4,750 in partial payment of a note receivable due from a
    shareholder-employee during the year ended December 31,
    2002.           
|
| |  | The Company issued 1,250,000 shares of
    Series B Convertible Preferred Stock in connection with its
    agreement with Random House in exchange for a reduction of
    $1,250,000 in payments due under the agreement in the year ended
    December 31, 2002.

(18) Customer Concentration

Total revenues attributable to Microsoft
represented 17%, 3% and 0%, of total revenue for the years ended
December 31, 2000, 2001 and 2002, respectively. During the
year ended December 31, 2001, barter bulk content sales to
Real Networks, Inc. accounted for 11% of our total revenue in
2001. At December 31, 2001, one customer had an accounts
receivable balance totaling 26% of the Companys total
accounts receivable balance. As of December 31, 2002, there
were no customers who had an accounts receivable balance greater
than 10% of our total accounts receivable balance.

(19) Special Situation Funds
Investment

On February 15, 2002, Special Situations
Funds purchased 4,069,768 shares of common stock for $3,500,000
at a per share price of $0.86. Net proceeds received by the
Company was $3,159,000 after deducting direct costs of $331,000
in finders fees and $10,000 in legal fees. In connection with
this transaction, the Company issued warrants to purchase an
additional 1,220,930 shares of common stock. The warrants are
exercisable at a price of $1.15 per share anytime prior to the
fifth anniversary of the issue date. The Company may demand the
warrantholder exercise its rights in the event that closing bid
price of a share of the Companys common stock exceeds
$2.30 for twenty consecutive trading sessions.

F-25



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL
STATEMENTS  (Continued)

(20) Quarterly Results
(Unaudited)

The following tables contain selected unaudited
quarterly financial data for each quarter of 2001 and 2002. The
Company believes that the following information reflects all
normal recurring adjustments necessary for a fair presentation
of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of
results for any future period.

|                                                    |  |                              |            |             |  |             |            |             |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ---------------------------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  |                             
|                                                    |  | Year Ended December 31, 2001
|                                                    |  |                             
|                                                    |  | 1st Quarter                  |            | 2nd Quarter |  | 3rd Quarter |            | 4th Quarter
|                                                    |  |                              |            |             |  |             |            |            
|Revenue, net                                        |  | $                            | 2,182,577  |             |  | $           | 2,042,791  |             |  | $ | 2,160,932  |   |  | $ | 2,685,113  |  
|Operating expenses                                  |  |                              | 9,893,120  |             |  |             | 10,323,910 |             |  |   | 8,202,051  |   |  |   | 8,213,668  |  
|Loss before state income tax benefit                |  | $                            | (7,474,922 | )           |  | $           | (8,097,999 | )           |  | $ | (5,940,594 | ) |  | $ | (5,482,256 | )
|Net loss                                            |  | $                            | (7,474,922 | )           |  | $           | (8,097,999 | )           |  | $ | (5,940,594 | ) |  | $ | (5,155,358 | )
|Accrued dividends on redeemable
    preferred stock |  |                              | (170,958   | )           |  |             | (299,208   | )           |  |   | (302,496   | ) |  |   | (276,854   | )
|Net loss applicable to common shareholders          |  | $                            | (7,645,880 | )           |  | $           | (8,397,207 | )           |  | $ | (6,243,090 | ) |  | $ | (5,432,212 | )
|Basic and diluted loss per common share             |  | $                            | (0.28      | )           |  | $           | (0.31      | )           |  | $ | (0.23      | ) |  | $ | (0.20      | )
|Weighted average common shares outstanding          |  |                              | 26,995,860 |             |  |             | 26,919,837 |             |  |   | 26,885,820 |   |  |   | 26,870,264 |  

|                                                    |  |                              |            |             |  |             |            |             |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | ---------------------------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  |                             
|                                                    |  | Year Ended December 31, 2002
|                                                    |  |                             
|                                                    |  | 1st Quarter                  |            | 2nd Quarter |  | 3rd Quarter |            | 4th Quarter
|                                                    |  |                              |            |             |  |             |            |            
|Revenue, net                                        |  | $                            | 2,547,738  |             |  | $           | 2,742,805  |             |  | $ | 3,287,307  |   |  | $ | 3,791,689  |  
|Operating expenses                                  |  |                              | 7,173,584  |             |  |             | 7,481,780  |             |  |   | 7,833,997  |   |  |   | 7,466,414  |  
|Loss before state income tax benefit                |  | $                            | (4,596,040 | )           |  | $           | (4,709,516 | )           |  | $ | (4,529,556 | ) |  | $ | (3,665,966 | )
|Net loss                                            |  | $                            | (4,596,040 | )           |  | $           | (4,709,516 | )           |  | $ | (4,529,556 | ) |  | $ | (3,352,386 | )
|Accrued dividends on redeemable
    preferred stock |  |                              | (326,945   | )           |  |             | (333,802   | )           |  |   | (354,195   | ) |  |   | (350,778   | )
|Net loss applicable to common shareholders          |  | $                            | (4,922,985 | )           |  | $           | (5,043,318 | )           |  | $ | (4,883,751 | ) |  | $ | (3,703,164 | )
|Basic and diluted loss per common share             |  | $                            | (0.17      | )           |  | $           | (0.16      | )           |  | $ | (0.16      | ) |  | $ | (0.12      | )
|Weighted average common shares outstanding          |  |                              | 29,140,383 |             |  |             | 30,951,144 |             |  |   | 30,947,340 |   |  |   | 30,969,079 |  

F-26