**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **Form
        10-K**
  **(Mark
                  One)**
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF****x**
              **THE
                  SECURITIES EXCHANGE ACT OF 1934****For
                  the Fiscal Year ended December 31, 2005****OR**o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE
                  SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the transition period from _________ to __________**
 
 **Commission
        File Number: 000-26529**
 
 **AUDIBLE,
        INC.**
 (Exact
        name of Registrant as specified in its Charter)
 
 **DELAWARE**
                (State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              **22-3407945**
                (I.R.S.
                  Employer
                Identification
                  Number)**65
                  WILLOWBROOK BLVD.**
                **WAYNE,
                  NEW JERSEY**
                (Address
                  of principal executive offices)
              
              **07470**
                (Zip
                  Code)
 
 **(973)
        837-2700**
 (Registrant's
        telephone number, including area code)
  Securities
        Registered Pursuant to Section 12(b) of the Act:
 
 Title
                  of Each Class:
              
              Name
                  of Each Exchange on which Registered:None
              
              None
 
 Securities
        Registered Pursuant to Section 12 (g) of the Act:
  Common
        Stock, par value $0.01
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.
 **Yes** **o** **No** **x**
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act.
 **Yes** **o** **No** **x**
 
 Indicate
        by check mark whether the Registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the Registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 **Yes** **x** **No** **o**
 
 Indicate
        by 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 or any amendment
        to this
        Form 10-K. **x**
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
        accelerated filer [ ]    Accelerated
        filer [x]   Non-accelerated
        filer [ ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 **Yes**  **o** **No** **x**
 
 The
        aggregate market value of voting stock held by non-affiliates of the registrant was
        $257,365 ,488
        based upon the closing price on the NASDAQ National Market on the last business
        day of the registrant's most recently completed second fiscal quarter. (Based
        upon the closing price of $17.37 per share on June 30, 2005).
  As
        of
        March 27, 2006, 24,517,015 shares of
        common stock of the Registrant were outstanding.
 
 Documents
        Incorporated by Reference
 
 Portions
        of the definitive Proxy Statement to be delivered to shareholders in connection
        with the Annual Meeting of shareholders to be held June 16, 2006.
 
  **AUDIBLE,
        INC.**
 **FORM
        10-K**
 
 
 
 
 **TABLE
        OF CONTENTS**
 
 PART
                  I
              PAGEItem
                  1.
              Business
              3Item
                  1A.
              Risk
                  Factors
              8Item
                  1B.
              Unresolved
                  Staff Comments
              12Item
                  2.
              Properties
              12Item
                  3.
              Legal
                  Proceedings
              12Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              13PART
                  IIItem
                  5.
              Market
                  for the Registrant's Common Equity, Related Stockholder Matters
                  and Issuer
                  Purchases of Equity Securities
              13Item
                  6.
              Selected
                  Financial Data
              14Item
                  7.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              16Item
                  7A.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              25Item
                  8.
              Financial
                  Statements and Supplementary Data
              26Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              26Item
                  9A.
              Controls
                  and Procedures
              26Item
                  9B.
              Other
                  Information
              28PART
                  IIIItem
                  10
              Directors
                  and Executive Officers of the Registrant
              28Item
                  11.
              Executive
                  Compensation
              28Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              28Item
                  13.
              Certain
                  Relationships and Related Transactions
              28Item
                  14.
              Principal
                  Accounting Fees and Services
              28PART
                  IVItem
                  15.
              Exhibits,
                  Financial Statement Schedules
              28Exhibit
                  Index
              29Signatures
              30
  -2-
 Table
            of Contents
 **PART
        I**
 
 **Item
        1. Business.**
 
 **Overview**
 
 We
        are a
        leading provider of audio entertainment, information, and educational
        programming on the Internet. We specialize in the spoken experience, providing
        digital audio editions of books, newspapers and magazines, original programming
        and television and radio subscriptions. Our service provides a way for
        individuals to consume content at times when they are otherwise unable to
        read,
        such as when driving, but it also provides listeners with the opportunity
        to
        simply enjoy what they want, when they want.
 
 Consumers
        shop, purchase and download audio content from our Web sites, www.audible.com (United
        States) and www.audible.co.uk (United
        Kingdom), and from our related parties Web sites, www.audible.de (Germany) and www.audible.fr (France), directly to personal computers for listening in a variety of ways.
        Most of our customers download audio to their PCs and Macs and then transfer
        the
        audio to MP3 players, personal digital assistants (PDAs), or to smart mobile
        devices (SMDs) for listening on the go. Others transfer, or “burn”, the content
        to audio CDs, while some customers simply listen at their computers or through
        a
        digital home entertainment network. Our customers can also have their Audible
        content wirelessly delivered to their SMDs every day, taking the computer
        out of
        the equation. Our digital content is available at our and our related parties
        Web sites, as well as at the Apple iTunes Music Store, where we are the
        exclusive provider of paid spoken audio products, and at Amazon.com.
  In
        addition to the value of our content, we offer customers value, convenience
        and
        flexibility. Our customers have the option to buy our content either a la
        carte,
        or to join any one of our AudibleListener membership plans that offer
        significant savings from what consumers typically will find at other traditional
        or online retail store. Our basic AudibleListener membership plan provides
        customers with access to a 30% discount on any individual content purchase,
        exposure to periodic sales, and six free audio channels of content all for
        the
        low price of $9.95 per year. For even greater savings, customers can also
        join
        the AudibleListener Gold or Platinum membership plans for a fixed monthly
        or
        annual fee that provides them with a predetermined number of credits to be
        used
        for downloading audio content. These credits may be rolled over month to
        month,
        should members elect to do so. In addition to our AudibleListener membership
        plans, our customers may also subscribe to any one of close to 50 daily,
        weekly,
        or monthly subscription products.
 
 On
        our
        Web sites, customers can select from more than 90,000 hours of audio content,
        comprising 28,000 different programs. Our selection of audio in our stores
        ranges from 12,000 audiobooks and performances, to audio editions of national
        periodicals such as *The
        New York Times, The Wall Street Journal, Forbes, The New Yorker* and *Scientific
        American* ;
        to
        radio and TV programming such as *Fresh
        Air* , *Charlie
        Rose* , *Car
        Talk* , *Marketplace* , *The
        Bob Edwards Show* ,
        and *Opie
        & Anthony* .
        Language instruction, personal development, stand-up comedy, children’s audio,
        study guides, historic speeches and readings, fiction, business, mystery
        and
        romance are only some of the categories of listening available to our customers.
  But
        compelling content is only part of the story. Also helping us capitalize
        on
        these strong consumer trends is our ability to build strong partnerships
        throughout the emerging market for handheld devices that play digital or
        compressed audio. Our AudibleReady ® initiative was designed to exploit this market by entering into multiple
        technology and comarketing relationships with companies that manufacture
        digital
        audio-enabled devices. The AudibleReady brand exists as a standard for digital
        downloads and playback that ensures satisfactory interoperability between
        the
        Audible service and digital audio-enabled devices.
 
 Consumers
        are able to enjoy our digital content on more than 190 different mobile devices
        made by more than 40 manufacturers. These devices include MP3 players, PDAs,
        SMDs, or entertainment systems made by companies such as Web site., Creative
        Labs, Dell, Hewlett-Packard, Motorola, Palm, Philips, Samsung, Sandisk, Sonos,
        and Thomson. Our device manufacturing partners support us by including our
        AudibleReady software on their devices. They may also include audio samples
        on
        the device, insert marketing brochures in device boxes, provide
        point-of-purchase sales support, after-market promotions, and web-based and
        e-mail customer outreach. We also work with original equipment manufacturers
        of
        mobile audio devices, original design manufacturers, and integrated circuit
        vendor partners to simply and rapidly adopt our technology for use in electronic
        devices with digital audio capabilities.
  Since
        launching our service in 1997, 790,000 customers from approximately 120
        countries have purchased content from us, and hundreds of thousands more
        have
        purchased our content at the Apple iTunes Music Store. We acquire new customers
        through a variety of marketing and public relations methods, including e-mail,
        targeted Web advertising, paid and natural search, word-of-mouth, marketing
        partnerships with device manufacturers and retailers, targeted radio
        advertising, content-based public relations and other online and traditional
        promotions. Beyond leveraging our first-to-market technology in the English
        language, together with our joint venture partners, we launched the German
        language version of the Audible service (www.audible.de) in December 2004.
        We
        have also entered into a license and service agreement to support a French
        language version of the Audible service ( www.audible.fr ),
        which
        launched in the first quarter of 2005. In February 2005, we established our
        wholly-owned subsidiary in the United Kingdom, known as Audible UK ( www.audible.co.uk ),
        which
        began commercial operations in June 2005.
 
 Also
        in
        2005, we launched AudibleEducation, which we established to focus on the
        educational market, AudibleAir, our wireless delivery service, and a completely
        redesigned Web site with new AudibleListener membership plans. In early 2006,
        we
        launched Audible Wordcast, along with our podcasting tools.
 
 The
        market for the Audible service is driven by the increasing usage of
        the Internet, the growth of handheld electronic devices that have digital
        audio
        capabilities, and the increasing number of hours commuters spend in traffic
        when
        they cannot otherwise read. 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, working around the house, traveling, or simply
        relaxing. Unlike traditional and online bookstores, which are subject to
        physical inventory constraints and shipping delays, we provide a selection
        that
        is readily available in a digital format that can be quickly delivered over
        the
        Internet directly to our customers.
  We
        provide new sources of revenue for publishers, writers and producers of books,
        newspapers, magazines, newsletters, radio and television shows, professional
        journals and business information. We not only add the utility of audio
        entertainment, but of information, education and productivity to a broad
        array
        of digital audio-enabled devices. We provide companies that distribute or
        promote our service with a wide selection of digital audio content to offer
        to
        their customers.
  **Industry
        Background**
  Demand
        for new sources of entertainment, information and educational programming
        continues to grow as the quantity and variety of content and its sources
        proliferate. Veronis Suhler Stevenson estimates that total communications
        spending in the U.S. was more than $800 billion in 2004, and forecasts the
        market to increase to more than $1.1 trillion by the end of 2009. Although
        digital media continues to be a growth driver of this industry at the margin,
        we
        see the “marketplace for words” making up approximately 20% of the U.S.
        communications market when considering books, newspapers, magazines, radio
        and
        certain sectors of the TV industry.
 
 A
        significant catalyst to the digital media industry has been the proliferation
        of
        mobile digital players, ranging from iPods to PocketPCs and Palms to SMDs.
        Apple
        alone sold nearly 32 million iPods in 2005, reflecting annual growth of nearly
        300%. On the horizon are SMDs, where global shipments continue to grow in
        the
        high double digits. We currently expect that by the end of 2009, SMDs will
        have
        become the device of choice for our customers in receiving and consuming
        our
        content.
  Driving
        these trends is the increasing consumer need for content on the go, whether
        entertainment, information or education. In today’s world, demand for increased
        productivity and efficiency and long hours of commuting continue to take
        away
        from leisure time and preferred media consumption, whether in the form of
        books,
        magazines, newspapers, radio shows or TV programming. According to the 2000
        United States Census, 97 million people drive to and from work alone, an
        increase of 15% from 1989. In 2005, the U.S. Census Bureau reported that
        Americans spent more than 100 hours per year commuting to work, with the
        average
        daily commute lasting about 24.3 minutes. As individuals look to use their
        commuting time more efficiently and manage an increasing amount of available
        content, digital audio content has emerged as a personalized “pay-to-listen”
alternative to radio, because radio does not allow listeners to control when
        they listen to a particular program.
 
 -3-
 Table
            of Contents
 The
        Internet has emerged as a powerful global communications and entertainment
        medium, giving millions of people the ability to access
        large amounts of valuable information and media in a timely fashion. As of
        December 2005, Nielsen//NetRatings estimated that there were 204 million
        Internet users in the United States, representing 68% of the population of
        the
        country. The Pew
        Internet & American Life Project estimated that by the end of June 2005, 53% of all Internet users in the
        U.S.
        were connected via broadband, which allows for more convenient and
        faster downloading of digital media. But perhaps a more important indicator
        is
        the finding by Nielsen//Net Ratings that 14% of the active Internet population
        in the U.S. visited the Apple’s iTunes Music Store in December 2005.
  Currently,
        we are focused on two primary device categories and one emerging device category
        for the AudibleReady initiative. The primary categories are commonly referred
        to
        as “MP3 players” and “personal digital assistants” or PDAs. The emerging device
        category of smart mobile devices are commonly known as “smartphones”, or SMDs,
        because they combine the function of PDAs such as on-board memory, and the
        ability to play digital audio with cellular phone services.
 
 According
        to an October 2005 report published by IDC, global MP3 player shipments,
        including flash-based players, are expected to grow from 26 million in 2004
        to
        124 million in 2009, representing a 37% 5-year compounded annual growth rate
        (CAGR). IDC also suggests that the global market for total “compressed audio
        players”, which includes portable, home and automotive audio-focused devices,
        will grow to 946 million units.
 
 At
        the
        same time, we estimate that global SMDs grew by more than 70% in 2005 and
        the
        Company expects similar, if not stronger, growth in 2006. As global consumer
        demand for SMDs continues on this steep trajectory, we would expect that
        by the
        end of 2009, SMDs will have become the device of choice for our customers
        in
        receiving and consuming our content.
  The
        confluence of the Internet as an increasingly accepted media distribution
        channel, the widespread adoption of and innovation in audio-enabled mobile
        devices and the continuing growth in consumer demand for digital content
        has
        resulted in new challenges for the media industry. These challenges include
        creating a system for selling media over the Internet, and compensating
        publishers and other content creators for quality entertainment and information,
        while preventing unauthorized duplication and distribution. This continues
        to
        present an opportunity for a content creator, aggregator and distributor
        to
        establish a secure technology system and an attractive consumer service focused
        on the delivery of premium audio content.
  **Our
        Solution******
  We
        have
        created the Audible service to give consumers the ability to download spoken
        digital content of their choice and to listen to this content when and where
        they want. The Audible service addresses the market opportunity created by
        consumer demand for audio content, the emergence of the commercial Internet
        and
        the availability of a wide range of mobile, audio-enabled digital devices.
        We
        created the first service and platform for secure, digital delivery of premium
        spoken audio content over the Internet for playback on personal computers
        and
        mobile devices. Our service allows customers to program their listening time
        with personalized selections from a wide collection of spoken content available
        at our Web sites, including entertainment, news, education and business
        information. We believe that we have assembled the largest and most diverse
        collection of premium spoken content available for download on the Internet
        for
        playback on personal computers, handheld digital audio players, or to burn
        to CD
        for playback on a CD player.
  We
        believe that our extensive spoken content collection and our secure delivery
        system provide benefits to our customers, content providers, manufacturers
        of
        AudibleReady handheld electronic devices and other partners that they won’t find
        anywhere else.
  **Benefits
        to Customers**
  Unlike
        the traditional ways consumers select, organize and consume spoken audio
        content, our customers can access content of their choice and listen when
        they
        want, where, and how they want - whether commuting, exercising, relaxing
        or
        sitting at their personal computers. And they can do so at an unmatched
        value.
  ***Selection***
  At
        our
        Web sites, www.audible.com and www.audible.co.uk ,
        and at
        our related parties Web sites, www.audible.fr and www.audible.de ,
        customers can browse and purchase from a large and diverse collection of
        readily
        available premium spoken content, most of which is only available through
        us for
        Internet distribution pursuant to exclusive arrangements. Our collection
        currently consists of more than 28,000 programs, 12,000 of which are digital
        audiobooks in a wide variety of categories. We also offer timely digital
        spoken
        editions of leading newspapers and selected periodicals and popular and special
        interest radio and TV programming, including interviews and commentaries.
        Our
        collection also contains selections that are difficult to find or may not
        otherwise be readily or conveniently available to consumers elsewhere.
  ***Convenience***
 
 Our
        Web
        sites provide 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 sites. They can enroll in AudibleListener monthly or
        annual
        membership plans, where depending on the plan, the customer may receive a
        prescribed number of credits, entitling them to download content of their
        choice. Our custmers may also 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 are never “out of stock” and 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 four 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 while
        driving, exercising, relaxing or otherwise multitasking. Customers can listen
        to
        their audio with an AudibleReady MP3 player or PDA, using a CD player, certain
        SMDs, via an automobile jukebox or from their audio equipped desktop computer.
        Customers who subscribe to a recurring title (newspaper, magazine, radio
        program, etc.) can have it automatically delivered to their PC, Mac, or
        wirelessly to their SMDs before they get up in the morning or leave the office
        for the day.
  ***Value***
  We
        provide customers with what we believe is a strong value proposition in our
        AudibleListener membership plans, where for a fixed monthly or annual fee,
        the
        customer may download a prescribed number of audio titles of their choice.
        Individual titles, at our list price, are typically priced 20% to 30% less
        than
        the same cassette or CD audiobook, and if purchased within an AudibleListener
        membership plan, discounts on individual titles can be up to 70% compared
        to a
        cassette or CD audiobook.
  -4-
 Table
            of Contents
 **Benefits
        to Business Affiliates**
  We
        help
        content creators, device manufacturers, online e-commerce companies, consumer
        electronics retailers 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 or TV 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 offers publishers of audiobooks a new and profitable
        distribution channel for their existing audiobook content.
 
 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.
  ***Device
        Manufacturers***
  Major
        manufacturers of audio-enabled digital players, such as Apple Computer, Inc.,
        Creative Labs, Dell, Hewlett-Packard, Motorola, Palm, Samsung, Sandisk, Thomson
        Inc., and Toshiba have agreed to support and promote the secure playback
        of our
        content on their devices. In addition, during certain promotion, new customers
        who agree to join an AudibleListener membership plan for a set period of
        time
        have the option to receive Apple’s iPod digital audio player. 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 receive a percentage
        of
        the revenue generated over a specified period of time by each new customer
        referred by them. Such costs are recorded in marketing expenses.
  ***Companies
        That Distribute Our Products or Promote Our Service***
  We
        have
        entered into marketing agreements with a number of partners, including
        Amazon.com, Apple Computer, Best Buy, Dell, Dow Jones ( *The
        Wall Street Journal* ),
        The
        New York Times Company, Palm, Target, and WalMart, to promote our content
        to
        their customers, either directly or indirectly. We have agreed with these
        companies to compensate them from sales of our content to their customers.
        In
        return, we have access to additional distribution channels.
   **Audible’s
        Strategy**
  Our
        objective is to enhance our position as the leading provider of premium spoken
        content on the Internet. Key elements of our strategy to achieve this goal
        include:
  ***Increase
        Brand Awareness***
 
 We
        seek
        to make “Audible” a more recognizable brand. We are working to enhance Audible’s
        brand awareness and affinity and, in turn, increase visitors to our Web sites
        by
        focusing our marketing efforts on online initiatives, as well as comarketing
        agreements. Online initiatives include a wide range of promotional vehicles
        that
        we use to communicate with existing and prospective customers. We also have
        a
        well-developed “customer-get-customer” program. Our comarketing agreements and
        business relationships with our content partners, cable television operators,
        CD
        burning software providers, retail partners, the Apple iTunes Music Store,
        Amazon.com and AudibleReady player manufacturers are key elements of our
        plans
        to make potential customers aware of, and to encourage them to use our service.
        We continue to seek to enter into agreements with content providers as well
        as
        owners of Internet portals and e-commerce sites to promote the Audible service
        to Internet users.
  ***Expand
        Content Collection***
  We
        plan
        to acquire more digital distribution rights to audio versions of books,
        newspapers, radio and TV broadcasts, magazines, journals, newsletters,
        conferences, performances, comedy, lectures, speeches, as well as other
        educational and original programming. 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 MP3 players, handheld electronic
        devices and SMDs to support and promote the playback of our content on their
        players. We are expanding the AudibleReady system within a variety of mobile
        players, such as SMDs, automobile-based media jukeboxes, personal computers
        and
        in-home digital entertainment systems. We continue to offer a packaged software
        library to partners who wish to add Audible support to their desktop end-user
        audio management applications.
  ***Continue
        To Improve the Customer Experience***
  In
        2005,
        we launched a redesigned Web site and new AudibleListener membership plans
        aimed
        at making the Audible service more flexible and increasingly easy for customers
        to use and personalize. We intend to continue to take advantage of the
        efficiency of our online distribution system to offer various pricing,
        membership, and subscription models designed to maximize customer satisfaction
        and to generate recurring revenue. We continue to enhance our Web sites 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. Also in 2005, we enhanced 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 also provide
        customer service via telephone and e-mail.
 
 ***Continue
        International Expansion***
 
 In
        December 2004, together with our joint venture partners, we launched Audible
        Germany, a German language version of the Audible service. We have also entered
        into a license and service agreement to support a French language version
        of the
        Audible service, which launched in first quarter 2005. In February 2005 we
        established Audible UK, a wholly-owned subsidiary in the United Kingdom
        ( www.audible.co.uk ),
        which
        began commercial operations in June 2005. We also began selling local content
        in
        Japan in 2005 through the Apple iTunes Music Store, through which consumers
        in
        approximately 20 other countries also now have access to our content. Going
        forward, we will continue to leverage our resources to build the existing
        international Web sites and work toward expanding into additional countries.
 
 **The
        Audible Service******
  Our
        integrated spoken audio delivery service includes five components: (1) our
        Web
        sites, (2) our collection of digital audio content, (3) software for securing,
        downloading, managing, transferring, burning and playing audio selections,
        (4) a
        variety of AudibleReady players which include proprietary technology and
        features that manage the listening experience, and (5) other services.
  -5-
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            of Contents
 ***Web
        sites***
 
 There
        are
        Audible-branded Web sites in the United States, the United Kingdom, France
        and
        Germany. Our U.S. Web site, www.audible.com, offers a large and diverse
        selection of premium digital spoken content in a secure format for download
        by
        customers. 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 Audible’s most popular format, requires about eight megabytes of
        storage, and downloads to a listener’s computer in approximately ten seconds
        using a high speed Internet connection, and less than thirty seconds to transfer
        the content from the computer to an AudibleReady player. Customers are offered
        up to four different fidelity options, allowing them to trade off between
        fidelity and speed of download from the Internet.
  ***Digital
        Audio Content***
  We
        currently offer digital spoken content, in four major categories:
 
 •
              *Audiobooks.*We
                  offer a wide selection of audiobooks, in both abridged (typically
                  three to
                  10 hours long) and unabridged (typically five to 20 hours long)
                  versions,
                  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,
                  magazines and newsletters previously available only in print. We
                  offer a
                  daily spoken digest edition of*The
                  New York Times*and
                  selected audio content from*The
                  Wall Street Journal.*We
                  also offer audio editions of*Forbes,
                  The New Yorker, The Atlantic Monthly, Scientific American, Science
                  News,**Harvard
                  Management Update, Harvard Health Letter,*and
                  others.
 
 •
              *Radio
                  and TV broadcasts.*We
                  offer popular and special-interest public radio and TV programs
                  shortly
                  after they are originally broadcast so 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, The News from Lake Wobegon, Car Talk The Bob
                  Edwards
                  Show, Opie & Anthony a*nd*Charlie
                  Rose.*
  •
              *Lectures,
                  speeches, performances and other audio.*We
                  offer a broad selection of lectures, speeches, dramatic and comedic
                  performances, educational and self-improvement materials, religious
                  and
                  spiritual content, and other forms of spoken content, many of which
                  are
                  difficult to find from any other source. We also offer specialty
                  content
                  created exclusively for our Web site, for example, programs featuring
                  actor Robin Williams.
  We
        currently have licensed Internet distribution rights to audio content from
        almost 300 publishers, producers of radio and TV content and other content
        creators. Our license agreements are typically for terms of one to five years,
        and many provide us with exclusive Internet distribution rights. Under most
        licensing arrangements, we pay the content creator a portion of the revenue
        it
        receives. In some of our arrangements, we also pay a guaranteed advance against
        the content creator’s revenue share.
  In
        most
        cases, we license existing audio recordings from publishers and content
        creators. In other cases, such as with *The
        New York Times, The Wall Street Journal, Pearson Higher Education* and *Harlequin,* we
        record
        and produce audio versions of the print publications. In all cases, we convert
        the audio into a compressed, secure, digital format.
 
 ***Audible
        Software***
  Our
        compilation of software consists of AudibleManager for downloading, managing,
        scheduling and playing audio selections, AudiblePlayer for Pocket PC PDAs
        and
        for devices running the Palm Operating System, and AudibleAir for SMDs.
  AudibleManager
        enables customers to download and listen to spoken content and transfer it
        to
        AudibleReady players for mobile playback. AudibleManager implements Audible’s
        security system for ensuring that downloaded content is playable only 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 to burn purchased audio to audio CDs. Selections
        that exceed playback time limitations on a customer’s handheld 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.
  AudiblePlayer
        software enables users of handheld PDAs to control and customize their listening
        experience, as does AudibleAir for SMDs. Unlike cassette tapes, 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 their
        listening experience.
  ***AudibleReady
        Devices***
 
 AudibleReady
        devices are personal computers, mobile devices, SMDs or entertainment systems
        that have speakers or audio output jacks and can play back Audible audio
        content. The AudibleManager, AudiblePlayer, and AudibleAir software enable
        these
        devices to receive and play back Audible content and are available for download
        for free from our Web site. Several device manufacturers have bundled the
        AudibleManager and AudiblePlayer software with their devices. The audio output
        jack of these players can work with headphones, an FM transmitter, or a cassette
        adapter to enable the content to be played through a car stereo system. Audible
        customers may also burn their audio to CDs for listening through a CD player.
        The Apple iTunes jukebox software incorporates AudibleReady features to enable
        owners of personal computers and Apple iPods to download and listen to spoken
        audio from our Web site.
  A
        formal
        set of specifications defines the technical requirements that must be met
        by
        devices and by application software before they can be deemed AudibleReady.
        These requirements define internal functions, user experience related features,
        and aspects of the communication protocol between a device and the host software
        used to update its digital content. These specifications are provided to
        our
        partners when additional work is required to have their devices and/or
        applications meet the requirements.
  We
        have
        formed comarketing 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) providing
        audio samples, (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 software, 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 one or more years from the date
        the
        device owner becomes an Audible customer.
  ***Other
        Services***
  We
        also
        provide the Audible service to nearly 100 public library and school library
        systems.
  -6-
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            of Contents
 **Competition******
  The
        market for the sale and delivery of digital spoken content is competitive
        and
        rapidly changing. Principal competitive factors in the spoken content market
        include:
 
 •
              selection•
              price•
              speed
                  of delivery•
              protection
                  of intellectual property•
              timeliness•
              convenience•
              functionality•
              sound
                  quality
 
 Although
        we believe that we currently address these factors favorably in terms of
        technology and service, we cannot be certain that we can maintain its
        competitive position against current or new competitors, especially those
        new
        competitors 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 content using tools such
        as
        RealPlayer or Windows Media Player and (3) other companies vying for consumers’
time, such as satellite radio, as well as digital music streaming, podcasting
        and download services.
 
 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 bn.com, offer a variety of audiobooks.
        The
        Audio Book Club offers discounted audiobooks by mail order. Various rental
        services offer low pricing for time-limited usage of physical audiobooks
        on tape
        or CD, and libraries loan a limited selection of audiobooks. soundsgood.com
        offers digital downloads of spoken audio and supplies MSN Music with spoken
        audio content. One or more of these competitors may develop a competing
        electronic service for delivering audio content
  Companies
        and portal companies including America Online, Amazon.com or Yahoo! may in
        the
        future compete directly with us by selling premium spoken content for digital
        download. 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 Napster, Sony Connect and Real Network’s Rhapsody offer a wide
        selection of streaming and downloadable music content. Other companies have
        announced their intention to launch music services in the future.
  Content
        providers and other media companies may choose to provide digital spoken
        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 currently have greater brand recognition and more financial,
        technical, marketing and other resources than us. 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.
 -7-
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            of Contents
 **Intellectual
        Property and Proprietary Rights**
 
 We
        rely
        on a combination of patent, copyright and trademark laws, trade secrets and
        confidentiality and other contractual provisions to establish and protect
        our
        proprietary rights, each of which is important to our business.
 
 Our
        success depends in part on our ability to protect our proprietary technologies.
        We hold 10 issued U.S. Letters patents and certain pending corresponding
        foreign
        counterparts and other pending U.S. patent applications. Our pending or future
        patent applications may not be approved and the claims covered by our
        applications may be limited in scope. If allowed, our patents may not be
        of
        sufficient scope or strength, and others may independently develop similar
        technologies or products. Further, patents held by third parties may prevent
        the
        commercialization of products incorporating our technologies or third parties
        may challenge or seek to narrow, invalidate or circumvent any of our pending
        or
        future patents. We also believe that foreign patents, if obtained, and the
        protection afforded by such foreign patents and foreign intellectual property
        laws, may be more limited than that provided under U.S. patents and intellectual
        property laws. Litigation, which could result in substantial costs and diversion
        of effort by us, may also be necessary to enforce any patents issued or licensed
        to us or to determine the scope and validity of third-party proprietary rights.
        Any litigation, regardless of outcome, could be expensive and time-consuming,
        and adverse determinations in any such litigation could seriously harm our
        business.
 
 We
        also
        rely on unpatented trade secrets and know-how and proprietary technological
        innovation and expertise which are protected in part by confidentiality and
        invention assignment agreements with our employees, advisors and consultants
        and
        nondisclosure agreements with certain of our suppliers and distributors.
        These
        agreements may be breached, we may not have adequate remedies for any breach
        or
        our unpatented proprietary intellectual property may otherwise become known
        or
        independently discovered by competitors. Further, the laws of certain foreign
        countries may not protect our products or intellectual property rights to
        the
        same extent as do the laws of the U.S.
 
 We
        license certain technology from others, including elements of our
        compression-decompression technology that we incorporate into the Audible
        system. If these technologies become unavailable to us, it may become necessary
        to license other technology, which may require us to redesign our system
        and
        recode our content to a certain extent. Although we may be indemnified against
        claims that technology licensed by us infringes the intellectual property
        rights
        of others, such indemnification is not always available, 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 from our use of
        licensed technology, resulting in potentially substantial exposure to us.
        It
        cannot be determined with certainty that infringement or invalidity claims
        arising from the incorporation of licensed technology and/or 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 and adversely affect our business, operating
        results, and financial condition.
 
 From
        time
        to time, third parties, including our competitors, may assert patent, copyright
        and other intellectual property rights to technologies that are important
        to us.
        We may be increasingly subject to license offers and infringement claims
        as the
        number of products and competitors in our market grows and the functionality
        of
        products overlap.
  Patents
        of competitors or others may be determined to be valid, or some or all of
        our
        products may ultimately be determined to infringe those patents. Patent holders
        may pursue litigation with respect to these or other claims. The results
        of any
        litigation are inherently uncertain. In the event of an adverse result in
        any
        litigation with respect to intellectual property rights relevant to our products
        that could arise in the future, we could be required to obtain licenses to
        the
        infringing technology, pay substantial damages under applicable law, to cease
        the manufacture, use and sale of infringing products or to expend significant
        resources to develop non-infringing technology. Licenses may not be available
        from third parties, either on commercially reasonable terms or at all. In
        addition, litigation frequently involves substantial expenditures and can
        require significant management attention, even if we ultimately prevail.
        Accordingly, any infringement claim or litigation against us could significantly
        harm our business, operating results and financial condition.
 
 We
        believe that building awareness of the Audible â ,
        and
“Audible.com â ,”
brand
        names is important 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 intend to continue to register, maintain, and enforce our
        registrations and other rights in these marks in the markets where we do
        business and plan to expand. However, if we fail in our efforts to promote
        and
        maintain our brand names, our business, operating results and financial
        condition could be materially adversely affected.
 
 We
        also
        license some of our intellectual property to others, including our
        AudibleReady â 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.
 
 **Employees**
  As
        of
        December 31, 2005, we had a total of 193 employees in the United States and
        United Kingdom: 107 in operations, 45 in technology and development, 29 in
        marketing, and 12 in general and administrative.
 
 We
        are a
        Delaware corporation that was incorporated in November 1995. Our principal
        executive offices are located at 65 Willowbrook Blvd., Wayne, New Jersey
        07470,
        and our telephone number is (973) 837-2700. Our Internet address is
        www.audible.com. We make available free of charge, on or through the investor
        relations section of our Web site, annual reports on Form 10-K, quarterly
        reports on Form 10-Q, current reports on Form 8-K and amendments to such
        reports
        filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
        Act of 1934 as soon as reasonably practicable after we electronically file
        such
        material with, or furnish it to, the Securities and Exchange Commission.
        These
        filings also are available on the SEC’s Web site at www.sec.gov.
 
 **Item
        1A. RISK FACTORS**
 
 Prior
        to
        making a decision about investing in our common stock, you should carefully
        consider the specific factors discussed below or appearing or incorporated
        by
        reference in this annual report.
  **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
        Web site, www.audible.com, and established relationships with providers of
        audio
        content. We began earning limited revenue in October 1997, and have continued
        to
        focus our resources on refining and enhancing our Web site, playback and
        management software, expanding our content selections, and developing
        relationships with manufacturers of digital audio players. We have a 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, expanding internationally, building
        AudibleEducation and AudibleAir, improving customer service and investing
        in
        other areas where we believe our business can be strengthened.
  -8-
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 **We
        have limited revenue, we have a history of losses, we may not be profitable
        in
        the future, and we may need additional financing, which may not be available
        to
        us.**
 
 We
        had
        total revenue of approximately $19,325,000, $34,319,000 and $63,237,000,
        in
        2003, 2004, and 2005, 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 revenue is dependent upon continuing
        to obtain new customers, increase customer purchase rates, decrease customer
        cancellation rates and the availability and sales of AudibleReady players
        by
        third-party manufacturers. We had content and services revenue of approximately
        $18,594,000, $33,210,000 and $61,310,000 in 2003, 2004, and 2005, respectively.
        We had operating expenses of approximately $23,160,000, $33,238,000 and
        $66,706,000 in 2003, 2004, and 2005, respectively. Because many 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. As of December 31, 2005, we have an accumulated
        deficit of approximately $130,714,000.
  **We
        have identified material weaknesses in internal control over financial reporting
        which may adversely affect our operations.**
 
 Section
        404 of the Sarbanes-Oxley Act of 2002 requires us to report on management’s
        assessment of the effectiveness of our internal control over financial
        reporting. Additionally, our independent registered public accounting firm
        is
        also required to issue a report on management’s assessment of, and the effective
        operation of, our internal control over financial reporting.
 
 During
        our 2005 compliance efforts, we identified material weaknesses involving
        insufficient accounting personnel resources, inadequate information and
        communication, inadequate risk assessment, ineffective contract management,`
        and
        ineffective control over retail promotions. See Item 9A of our Annual Report
        for
        2005 for additional details regarding these material weaknesses. As a result,
        our independent registered public accounting firm has issued an adverse opinion
        on the effectiveness of internal control over financial reporting.
 
 Although
        we are in the process of implementing new controls to remediate these material
        weaknesses, we cannot assure you that any of the measures we implement will
        effectively mitigate or remediate such material weaknesses.
 
 Ongoing
        compliance with Section 404 and remediation of any additional deficiencies,
        significant deficiencies or other material weaknesses that we or our independent
        registered public accounting firm may identify, will require us to incur
        significant costs and expend significant time and management resources. We
        cannot assure you that any of the measures we implement to remedy potential
        future deficiencies will effectively mitigate or remediate such deficiencies.
        In
        addition, we cannot assure you that we will be able to complete the work
        necessary for our management to issue its annual management report for 2006
        or
        in future years. We also can give no assurance that our independent registered
        public accounting firm will agree with our management’s assessment in future
        years.
 
 **If
        too many AudibleListener members refrain from using their audio credits on
        a timely basis, there will be a delay in recognizing the revenue until the
        credits are either used or expire.**
 
 Our
        new
        AudibleListener plans include the ability for AudibleListener members to
        roll
        over a certain number of audio credits and download audio later in their
        membership period. To the extent AudibleListener members roll over audio
        credits, the cash received from the sale of those audio credits will be
        reflected as deferred revenue. As the rolled-over credits are used to download
        audio or expire, the value of the credits will be recognized as revenue.
        If a
        significant number of AudibleListeners delay in using their audio credits,
        the
        recognition of revenue related to those audio credits will be delayed and
        can
        adversely affect our recognized revenue.
 
 **If
        our efforts to attract new AudibleListeners are not successful, our revenues
        will be affected adversely.**
 
 We
        must
        continue to attract new AudibleListeners. In December 2005, we launched a
        redesigned Web site and new AudibleListener membership plans aimed at making
        the
        Audible service more flexible and convenient for our customers. The result
        we
        believe will be improved customer satisfaction and retention. If consumers
        do
        not perceive our new AudibleListener plans to be of value, we may not be
        able to
        attract additional AudibleListeners, and as a result, our revenues will be
        affected adversely. The funds we spend on marketing and promotional activities
        to acquire new members reflect assumptions about how many members we can
        acquire
        and how long they will remain members. If our actual experience falls short
        of
        our assumptions, our revenue and profit will be materially affected.
 
 **If
        we experience excessive rates of churn, our revenues and business will be
        harmed.**
 
 We
        must
        minimize the rate of loss of existing AudibleListeners while adding new
        AudibleListeners. AudibleListeners cancel their memberships for many reasons,
        including reasons related to changes in the available time they have for
        listening to spoken audio, a perception that they are not using their membership
        entirely, customer service issues that are not satisfactorily resolved, or
        competitive service offerings. We must continually add new AudibleListener
        members both to replace members who cancel and to grow our business beyond
        our
        current AudibleListener membership base. If too many AudibleListener members
        cancel their memberships, or if we are unable to attract new members in numbers
        sufficient to grow our business, our operating results will be adversely
        affected. Further, if excessive numbers of AudibleListener members cancel
        their
        memberships, we may be required to incur significantly higher marketing
        expenditures than we currently anticipate to replace these members.
  **The
        market for our service is uncertain and consumers may not be willing to use
        the
        Internet to purchase spoken audio content, which could harm our business.**
 
 There
        can
        be no assurance that our current business strategy will enable us to sustain
        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 more widespread
        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. While we believe
        we have
        had some measure of success in gaining market acceptance of this method of
        distribution, particularly through our sales of content at the Apple iTunes
        Music Store, there can be no assurance that this will continue. Under our
        Apple
        arrangement, Apple may convert the spoken-word provision elements of the
        agreement related to the Apple iTunes Music Store from an exclusive arrangement
        to a nonexclusive arrangement for both us and Apple upon 120 days notice.
  -9-
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 **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
        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 terms of one to five 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 handheld electronic devices
        that have digital audio capabilities. We depend in large measure on
        manufacturers, such as Apple Computer, Inc., Creative Labs, Palm, Inc.,
        Hewlett-Packard, Rio Audio, and Samsung 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, or our
        business will be harmed.**
 
 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” and “Audible.com” 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 and continue to register, maintain, and enforce our
        registrations and other rights in these marks in the markets where we do
        business and plan to expand.
 
 **Increasing
        availability of digital audio technologies may increase competition and reduce
        our revenue, 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 content.
        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 license or develop technology internally 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 security and playback technologies. Increased competition
        is likely to result in price reductions, reduced revenues, higher customer
        cancellation rates, higher content licensing costs, higher marketing costs
        and
        loss of market share, any of which could materially adversely affect our
        financial performance.
  **Our
        industry is highly competitive and we cannot assure you that we will be able
        to
        compete effectively, which would harm our business.**
 
 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 podcasts
        and streaming access to spoken audio content, (3) other companies offering
        services similar to ours, such as soundsgood.com, Simply Audiobooks, Net
        Library
        and Overdrive Inc. and (4) online companies such as Amazon.com, Google, Inc.,
        America Online, Inc., Yahoo! Inc., and Microsoft Network, with the potential
        to
        offer spoken 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, efficiently and with few interruptions or
        delays
        distribute spoken audio content through our Web site to a large number of
        customers. 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, which would adversely affect our business.**
 
 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 and could result
        in
        loss of customers.**
 
 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 maintain insurance against
        general business interruptions, we cannot assure you that the amount of coverage
        will be adequate to compensate us for our losses.
 -10-
 Table
            of Contents
  **Problems
        associated with the Internet could discourage use of Internet-based services
        like ours and adversely affect our business.**
 
 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:
 
 •
              Secure
                  transmission of customer credit card numbers and other confidential
                  information•
              Reliability
                  and availability of Internet service providers•
              Cost
                  of access to the Internet•
              Availability
                  of sufficient network capacity•
              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. We do not have
        employment agreements with any of our executive officers or other key employees.
        We maintain a $2.5 million key-man life insurance policy on Mr.
        Katz.
  **Our
        common stock has been relatively thinly traded and we cannot predict the
        extent
        to which a trading market will develop, which may adversely affect our share
        price.**
 
 Our
        common stock currently trades on the NASDAQ National Market. Our common stock
        is
        thinly traded compared to larger more widely known companies in our industry.
        In
        addition, there is a significant short interest in our common stock. Thinly
        traded or common stock with a significant short interest 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.
 
 **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 financial, 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, which could jeopardize
        our
        competitive position.**
 
 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 unpatented 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, which could
        subject us to substantial damages.**
 
 If
        the
        Audible service violates the proprietary rights of others, we may be required
        to
        redesign our software, and reencode 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 are a defendant
        in a lawsuit filed by Digeo, Inc. in which Digeo has asserted that we infringe
        one of its patents. While we are vigorously defending the suit, there can
        be no
        assurance that we will be successful in doing so. We do not conduct
        comprehensive patent searches to determine whether our technology infringes
        patents held by others. Furthermore, technology 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 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, which could
        subject us to substantial damages.**
 
 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 and errors and omission 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,
        which could adversely affect our cost structure.**
 
 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,
        which could affect our revenue growth.**
 
 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.
 
 **A
        variety of risks could adversely affect our international
        activities.**
 
 The
        operation of our international activities will require significant management
        attention as well as financial resources. If international content publishers
        fail to provide us with sufficient content, we may not be able to attract
        customers with the broad selection of local content required to be successful.
        In addition, the concept of digital spoken audio is not as well developed
        in
        Germany, France, and the UK as it is in the United States. This may make
        it more
        difficult to acquire new customers in Germany, France, and the UK. These
        factors
        may have a material adverse affect on our financial performance.
 
 -11-
 Table
            of Contents
 **Our
        charter and bylaws could discourage an acquisition of our company that would
        benefit our stockholders.**
 
 The
        following 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:
  •
              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.
  •
              Special
                  procedures must be followed in order for stockholders to present
                  proposals
                  at stockholder meetings.
  **Item
        1B. Unresolved Staff
        Comments**
 
 None
 
 **Item
        2. Properties.**
 
 Our
        principal administrative, marketing, technology and development, and operations
        facility is located at 65 Willowbrook Boulevard, Wayne, New Jersey, 07470,
        where
        we lease approximately 29,000 square feet. Our lease expires on December
        31,
        2008.  In February 2005, Audible UK signed a one year lease in London,
        England, for office space, which includes office amenities. This lease was
        subsequently amended in the second quarter of 2005 for additional space and
        will
        expire in May 2006.
  **Item
        3. Legal Proceedings.**
 
 Various
        legal actions, claims, assessments and other contingencies arising in the
        normal
        course of business, in addition to the matters described below, are pending
        against us. All of these matters are subject to many uncertainties, and it
        is
        possible that some of these matters could be ultimately decided, resolved
        or
        settled adversely. We have recorded accruals for losses related to those
        matters
        which we consider to be probable and that can be reasonably estimated. Although
        the ultimate amount of liability at December 31, 2005 that may result from
        those
        matters for which accruals have been recorded is not ascertainable, we believe
        that any amounts exceeding the recorded accruals would not materially affect
        our
        financial condition.
 
 In
        June
        2001, we and certain of our officers were named as defendants in a securities
        class action filed in United States District Court for the Southern District
        of
        New York related to our initial public offering in July 1999. The lawsuits
        also
        named certain of the underwriters of the IPO as well as certain of our officers
        and directors and former directors as defendants. Approximately 300 other
        issuers and their underwriters have had similar suits filed against them,
        all of
        which are included in a single coordinated proceeding in the Southern District
        of New York (the “IPO Litigations”). An amended complaint was filed on April 19,
        2002. The complaints allege that the prospectus and the registration statement
        for our IPO failed to disclose that the underwriters allegedly solicited
        and
        received “excessive” commissions from investors and that some investors in our
        IPO allegedly agreed with the underwriters to buy additional shares in the
        aftermarket in order to inflate the price of our stock. We and certain of
        our
        officers, directors, and former directors were named in the suits pursuant
        to
        Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act
        of
        1934, and other related provisions. The complaints seek unspecified damages,
        attorneys' and expert fees, and other unspecified litigation costs.
  On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        2002
        we, along with other nonunderwriter defendants in the coordinated cases,
        also
        moved to dismiss the IPO Litigations. On February 19, 2003, the court ruled
        on
        the motions. The court granted our motion to dismiss the claims against us
        under
        Rule 10b-5, due to the insufficiency of the allegations against us. The motions
        to dismiss the claims under Section 11 of the Securities Act were denied
        as to
        virtually all of the defendants in the consolidated cases, including ours.
        Our
        individual officers, directors and former director defendants in the IPO
        Litigation signed a tolling agreement and were dismissed from the action
        without
        prejudice on October 9, 2002.
  In
        June
        2003, a proposed settlement of this litigation was reached among the plaintiffs,
        the issuer defendants in the consolidated actions, the issuer officers and
        directors named as defendants, and the issuers' insurance companies. The
        settlement would provide, among other things, a release for us and for the
        individual defendants for the conduct alleged to be wrongful in the amended
        complaint. We would agree to undertake other responsibilities under the partial
        settlement, including agreeing to assign away, not assert, or release certain
        potential claims that we may have against the underwriters. Any direct financial
        impact of the proposed settlement is expected to be borne by our insurance
        carriers.
 
 In
        June
        2004, the proposed settlement was submitted to the court for preliminary
        approval. The court requested that any objections to preliminary approval
        of the
        settlement be submitted by July 14, 2004, and the underwriter defendants
        formally objected to the settlement. The plaintiff and issuer defendants
        separately filed replies to the underwriter defendants' objections to the
        settlement on August 4, 2004. The court granted preliminary approval on February
        15, 2005, subject to certain modifications. On August 31, 2005, the court
        issued
        a preliminary order further approving the modifications to the settlement
        and
        certifying the settlement cases. The court also appointed the Notice
        Administrator for the settlement and ordered that notice of the settlement
        be
        distributed to all settlement class members beginning on November 15, 2005.
        The
        settlement fairness hearing has been set for April 24, 2006. Following the
        hearing, if the court determines that the settlement is fair to the class
        members, the settlement will be approved. There can be no assurance that
        this
        proposed settlement would be approved and implemented in its current form,
        or at
        all.
  Due
        to
        the inherent uncertainties of litigation and because the settlement approval
        process is at a preliminary stage, we cannot accurately predict the ultimate
        outcome of the matter.
  -12-
 Table
            of Contents
  Starting
        on or about February 22, 2005, several class actions were filed against us
        and
        two of our executives in the United States District Court for the District
        of
        New Jersey.  The plaintiffs purport to represent a class consisting of all
        persons (other than our officers and directors and their affiliates) who
        purchased our securities between November 2, 2004 and February 15, 2005 (the
        "Class Period").  The plaintiffs allege that the defendants violated
        Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there
        under
        by failing to make complete and accurate disclosures concerning our future
        plans
        and prospects.  The individual defendants are also alleged to be liable
        under Section 20(a) of the Exchange Act.  All of the defendants are alleged
        to have sold stock at inflated prices during the Class Period.
  In
        April
        2005, a derivative action was filed in the state court of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, six of our outside directors, and three of our stockholders.  The
        derivative action makes the same factual allegations as the class actions
        described above and adds allegations that the six outside directors named
        as
        defendants and/or the stockholders who nominated them sold stock at inflated
        prices at or about the time of the secondary offering of securities that
        we made
        in November 2004.  The plaintiff in this derivative action purports to seek
        a recovery of the damages sustained by us rather than by investors who allegedly
        purchased securities at inflated prices.
 
 In
        May
        2005, we learned of a second derivative action which was filed during April
        2005
        in the United States District Court for the District of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, and all seven of our outside directors. The derivative action makes
        the
        same allegations as the class actions described above and adds allegations
        that
        all of the individual defendants are responsible for an alleged failure of
        internal controls that resulted in the 45-day delay in the filing of our
        Form
        10-K for 2004. The plaintiff in this derivative action purports to seek a
        recovery of the damages allegedly sustained by us rather than by investors
        who
        allegedly purchased securities at inflated prices.
 
 The
        plaintiffs in the derivative actions voluntarily agreed to stay those actions
        pending the outcome of our anticipated motion to dismiss the class actions
        described above.
 
 In
        December 2005, the United States District Court for the District of New Jersey
        consolidated the class action, appointed a group of lead plaintiffs and
        appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
        consolidated amended complaint was filed on February 14, 2006, and the
        defendant’s motion to dismiss will be due on or about April 15,
        2006.
 
 We
        believe that all of the claims described above are without merit and we intend
        to defend the actions vigorously. Due to the inherent uncertainties of
        litigation and because these actions are at a preliminary stage, we cannot
        accurately predict the ultimate outcome of these matters.
 
 In
        May
        2005, Digeo, Inc. commenced an action against us for patent infringement
        in
        Federal District Court in the State of Washington. We have filed an answer
        asserting the patent is invalid and unenforceable and that its services do
        not
        fall within the scope of the claims of the Digeo patent. Discovery is scheduled
        to be completed by June 2, 2006, and the trial is currently scheduled for
        mid-November 2006. We believe the claims made in the complaint are without
        merit
        and will not have a material adverse impact on our financial position or
        results
        of operations.
 
 **Item
        4. Submission of Matters to a Vote of
        Security Holders.**
 
 None
 
 **Part
        II**
 
 **Item
        5. Market for Registrant's Common Equity, Related
        Stockholder Matters and Issuer Purchases of Equity
        Securities**
 
 Our
        common stock was traded on the NASDAQ National Market under the symbol "ADBL"
        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
        was
        delisted from the NASDAQ Small Cap Market and began trading on the
        Over-the-Counter Market (OTCBB) under the symbol "ADBLD". On July 1, 2004,
        our
        stock was relisted on the NASDAQ Small Cap Market under the symbol “ADBL”, and
        on November 16, 2004, returned to trading on the NASDAQ National Market.
        Prior
        to July 16, 1999, there was no established public trading market for any
        of our
        securities.
   -13-
 Table
            of Contents
  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 Market, as adjusted
        for a one-for-three reverse stock split of our common stock
        effective June 17, 2004.
  High
                
                Low**2004**First
                    Quarter
                
                $
                12.42
                
                $
                8.88Second
                    Quarter
                
                $
                14.70
                
                $
                10.65Third
                    Quarter
                
                $
                17.93
                
                $
                10.60Fourth
                    Quarter
                
                $
                29.97
                
                $
                15.35**2005**First
                    Quarter
                
                $
                28.90
                
                $
                12.37Second
                    Quarter
                
                $
                18.64
                
                $
                12.36Third
                    Quarter
                
                $
                19.63
                
                $
                10.22Fourth
                    Quarter
                
                $
                14.29
                
                $
                10.12**2006**First
                    Quarter (through March 27, 2006)
                
                $
                13.08
                
                $
                9.23
  On
        March
        27, 2006, the last reported sale price of our common stock was $10.27 per
        share.
        As of March 27, 2006, we had approximately 160 stockholders of record of
        our
        common stock, although there are a significantly larger number of beneficial
        owners of our common stock.
  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**
 
 None
  **Securities
        Authorized for Issuance under Equity Compensation Plans**
 
 The
        information set forth under the caption “Executive Compensation” in our
        definitive Proxy Statement to be used in connection with our 2006 Annual
        Meeting
        of Stockholders to be held on June 16, 2006, which will be filed within 120
        days
        of our fiscal year ended December 31, 2005, is incorporated herein by
        reference.
 
 **Item
        6. Selected Financial
        Data**
  The
        selected financial data set forth below should be read in conjunction with
        the
        consolidated 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, 2004 and 2005 and for the
        years ended December 31, 2003, 2004 and 2005, are derived from, and are
        qualified by reference to, our audited consolidated financial statements
        included elsewhere in this Form 10-K. The selected financial data set forth
        below as of December 31, 2001, 2002 and 2003, and for the years ended December
        31, 2001 and 2002 are derived from our audited consolidated financial statements
        not included in this Form 10-K. All share data shown reflects the one for
        three
        reverse stock split that occurred on June 17, 2004.
 
 Certain
        operating expenses within the following selected financial data for 2001,
        2002,
        and 2003 have been reclassified to conform to the presentation for later
        periods. These reclassifications had no effect on consolidated net income
        or net
        loss.
  -14-
 Table
            of Contents
  
 **Year
                  Ended December 31,****(dollars
                  in thousands, except share and per share data)****2001**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005****Consolidated
                  statement of operations data:**Revenue,
                  net:Content
                  and services revenue:Consumer
                    Content
              
              $
              5,143
              
              $
              10,940
              
              $
              18,594
              
              $
              33,838
              
              $
              62,185Point
                  of sales rebates
              
              
              --
              
              
              --
              
              
              (105
              )
              
              (696
              )
              
              (1,006
              )Services
              
              
              884
              
              
              348
              
              
              105
              
              
              68
              
              
              131Bulk
                  content
              
              
              1,435
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
                  content and services revenue
              
              
              7,462
              
              
              11,288
              
              
              18,594
              
              
              33,210
              
              
              61,310Hardware
                  revenue
              
              
              1,294
              
              
              932
              
              
              666
              
              
              695
              
              
              612Related
                  party revenue
              
              
              --
              
              
              --
              
              
              --
              
              
              362
              
              
              1,146Other
                  revenue
              
              
              316
              
              
              150
              
              
              65
              
              
              52
              
              
              169Total
                  revenue, net
              
              
              9,072
              
              
              12,370
              
              
              19,325
              
              
              34,319
              
              
              63,237Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              4,844
              
              
              4,904
              
              
              5,319
              
              
              10,650
              
              
              22,613Discount
                  certificate rebates
              
              
              --
              
              
              --
              
              
              --
              
              
              1,462
              
              
              1,556Total
                  cost of content and services revenue
              
              
              4,844
              
              
              4,904
              
              
              5,319
              
              
              12,112
              
              
              24,169Cost
                  of hardware revenue
              
              
              2,858
              
              
              2,717
              
              
              2,085
              
              
              2,188
              
              
              2,934Cost
                  of related party revenue
              
              
              --
              
              
              --
              
              
              --
              
              
              126
              
              
              256Operations
              
              
              4,529
              
              
              3,743
              
              
              3,843
              
              
              5,146
              
              
              9,355Technology
                  and development
              
              
              6,354
              
              
              4,998
              
              
              4,785
              
              
              5,030
              
              
              8,239Marketing
              
              
              14,210
              
              
              11,108
              
              
              4,495
              
              
              5,097
              
              
              13,387General
                  and administrative
              
              
              3,838
              
              
              2,485
              
              
              2,633
              
              
              3,539
              
              
              8,366Total
                  operating expenses
              
              
              36,633
              
              
              29,955
              
              
              23,160
              
              
              33,238
              
              
              66,706(Loss)
                  income from operations
              
              
              (27,561
              )
              
              (17,585
              )
              
              (3,835
              )
              
              1,081
              
              
              (3,469
              )Other
                  income, net
              
              
              566
              
              
              85
              
              
              25
              
              
              221
              
              
              2,077(Loss)
                  income before income taxes
              
              
              (26,995
              )
              
              (17,500
              )
              
              (3,810
              )
              
              1,302
              
              
              (1,392
              )Income
                  tax expense
              
              
              --
              
              
              --
              
              
              --
              
              
              (1
              )
              
              (1
              )State
                  income tax benefit
              
              
              327
              
              
              314
              
              
              250
              
              
              724
              
              
              740Net
                  (loss) income
              
              
              (26,668
              )
              
              (17,186
              )
              
              (3,560
              )
              
              2,025
              
              
              (653
              )Dividends
                  on  preferred stock
              
              
              (1,050
              )
              
              (1,366
              )
              
              (5,657
              )
              
              (614
              )
              
              --Preferred
                  stock discount
              
              
              --
              
              
              --
              
              
              (1,444
              )
              
              --
              
              
              --Charges
                  related to conversion of convertible preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              (9,873
              )
              
              --Total
                  preferred stock expense
              
              
              (1,050
              )
              
              (1,366
              )
              
              (7,101
              )
              
              (10,487
              )
              
              --Net
                  loss applicable to common shareholders
              
              $
              (27,718
              )
              $
              (18,552
              )
              $
              (10,661
              )
              $
              (8,462
              )
              $
              (653
              )Basic
                  and diluted net loss applicable to common shareholders per common
                  share
              
              $
              (3.09
              )
              $
              (1.82
              )
              $
              (1.01
              )
              $
              (0.40
              )
              $
              (0.03
              )Basic
                  and diluted weighted average common shares
                  outstanding
              
              
              8,972,504
              
              
              10,169,406
              
              
              10,506,704
              
              
              20,912,997
              
              
              24,195,771
 
  -15-
 Table
            of Contents
  
 **As
                  of December 31,**
                **(dollars
                  in
                  thousands)****2001**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005****Consolidated
                  balance sheet data:**Cash
                  and cash equivalents
              
              $
              7,628
              
              $
              2,822
              
              $
              9,075
              
              $
              13,296
              
              $
              11,549Short-term
                  investments
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              48,386
              
              $
              55,616Total
                  assets
              
              $
              10,999
              
              $
              4,608
              
              $
              10,781
              
              $
              64,774
              
              $
              80,665Noncurrent
                  liabilities
              
              $
              220
              
              $
              135
              
              $
              59
              
              $
              38
              
              $
              287Redeemable
                  convertible preferred stock
              
              $
              10,319
              
              $
              12,290
              
              $
              --
              
              $
              --
              
              $
              --Total
                  stockholders' equity (deficit)
              
              $
              (5,549
              )
              $
              (13,326
              )
              $
              6,104
              
              $
              57,091
              
              $
              58,395
 
 **Item
        7.  Management's Discussion and Analysis of Financial Condition and Results
        of Operations**
 (dollars
        in thousands, except share and per share data)
  *The
        following discussion and analysis of our financial condition and results
        of
        operations should be read in conjunction with our consolidated financial
        statements and related notes thereto, and other financial information included
        elsewhere in this 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
        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**
 
 **Our
        Business**
 
 Our
        goal
        is to be the preeminent supplier of spoken-word digital audio on the Internet.
        At our Web sites, our customers can select, purchase, and download spoken
        audio
        of their choice from more than 90,000 hours and 28,000 different programs
        amongst a wide range of categories. Our AudibleListener membership plans
        provide
        our customers a wide variety of monthly and annual membership options, depending
        upon their listening preferences. Customers can access our content at our
        Web
        sites, www.audible.com (United
        States) and www.audible.co.uk (United
        Kingdom), or at our related parties Web sites, www.audible.de (Germany) and www.audible.fr (France), or at Amazon.com and at the Apple iTunes music store.
 
 **Key
        Business Metrics**
 
 For
        the
        year ended December 31, 2005, we generated total revenue of $63,237 and a
        net
        loss of $653. During 2005, we acquired approximately 237,000 new
        AudibleListeners, up from approximately 117,000 acquired in 2004. This increase
        in new AudibleListeners acquired resulted in total AudibleListeners of
        approximately 248,000 as of December 31, 2005, compared to approximately
        159,000
        as of December 31, 2004.
 
 Churn,
        a
        measure of AudibleListener member cancellation, increased in 2005 over 2004,
        due
        primarily to the increase in new AudibleListeners acquired through free trial
        programs, which subsequently paid for a membership after the free trial and
        then
        cancelled. On a quarterly basis, we calculate monthly churn as the number
        of
        member cancellations in the period divided by the sum of AudibleListener
        members
        at the beginning of the period plus gross member additions, divided by three
        months. As a result of experiencing higher churn on free trial programs,
        we have
        reduced our reliance on acquiring new AudibleListeners through trial
        programs.
 
  -16-
 Table
            of Contents
  The
        following table sets forth the average monthly churn in AudibleListener Members
        in 2004 and 2005:
 
 **2004**
              
              **2005**First
                  Quarter
              
              
              2.8
              %
              
              4.0
              %Second
                  Quarter
              
              
              3.3
              %
              
              5.1
              %Third
                  Quarter
              
              
              3.2
              %
              
              5.7
              %Fourth
                  Quarter
              
              
              3.0
              %
              
              4.6
              %
 
 During
        2005, we launched four important initiatives:
  ·
            Audible
                UK, ·
            AudibleAir, ·
            AudibleEducation,
                and ·
            New
                AudibleListener membership plans. 
 In
        February 2005, we established Audible UK, a spoken audio Web site service
        mirroring the U.S.
        company service,
        but focused on the UK marketplace. We purchased one share of Audible UK stock
        on
        February 7, 2005, at which date it became a wholly-owned subsidiary. Audible
        UK
        began commercial operations in June 2005.
 
 AudibleAir
        is an innovative new service that allows the automated wireless download
        of
        secure digital audio files to certain smart digital phones. Customers can
        now
        bypass connecting to the desktop and program their Audible content to be
        delivered wirelessly anytime and anywhere. Customers can refresh their content
        automatically as AudibleAir recognizes how much of a downloaded audio program
        they have heard. The application retains the portion they haven't listened
        to,
        while refreshing the device with new audio. Any content in the Audible My
        Library can be accessed by our customers and downloaded at any
        time.
 
 AudibleEducation
        is a section of our Web site that provides a selection of education content
        designed for students of all ages. We intend to capitalize on the significant
        demand for strategic partnerships with entities positioned within the numerous
        multi-billion dollar markets in corporate learning, higher education,
        professional certification, test preparation, continuing education, and
        direct-to-consumer education.
 
 Our
        new
        AudibleListener membership plans, launched in December 2005, provide an array
        of
        new member benefits, ranging from greater flexibility in using AudibleListener
        membership credits, to everyday 30% discounts on a la carte purchases, and
        a
        daily New York Times or Wall Street Journal subscription included in the
        membership fee.
 
 For
        2006,
        our major goals include increasing the number of new AudibleListeners we
        acquire, reducing our churn rate and increasing customer
        satisfaction.
 
 Subsequent
        to our earnings announcement on February 16, 2006, we revised our
        previously reported results of operations for the three months
        ended December 31, 2005 and for 2005. The revisions resulted from
        corrections discussed in Item 9A, changes in estimates and reclassifications
        and
        audit adjustments that took place during the completion of our 2005 financial
        reporting process.  As a result, the following changes occurred from
        our February 16, 2006 earnings announcement to the results in this Form
        10-K, respectively: for the three months ended December 31, 2005, total revenue
        net, increased from $18,002 to $18,264; operating expenses increased from
        $21,589 to $21,934; income tax benefit increased from $94 to $96; net loss
        increased from $2,099 to $2,180; our net loss per share of $0.09 did not
        change;
        for 2005 total revenue net, increased from $62,974 to $63,237; operating
        expenses increased from $66,364 to $66,706; income tax expense decreased
        from $4 to $1; net loss increased from $577 to $653; and our net loss per
        share increased from $0.02 to $0.03 per share.
 
  -17-
 Table
            of Contents
  **Results
        of Operations**
 
 The
        following table sets forth certain financial data, as a percentage of total
        revenue during 2003, 2004, and 2005.
  **Year
                    Ended December 31,****2003**
                
                **2004**
                
                **2005**Revenue,
                    net:Content
                    and services revenue:Consumer
                    content
                
                96.2%
                
                98.6%
                
                98.3%Point
                    of sale rebates
                
                (0.5)%
                
                (2.0)%
                
                (1.6)%Services
                
                0.5%
                
                0.2%
                
                0.2%Total
                    content and services revenue
                
                96.2%
                
                96.8%
                
                96.9%Hardware
                    revenue
                
                3.5%
                
                2.0%
                
                1.0%Related
                    party revenue
                
                --
                
                1.0%
                
                1.8%Other
                    revenue
                
                0.3%
                
                0.2%
                
                0.3%Total
                    revenue, net
                
                
                100.0
                %
                
                100.0
                %
                
                100.0
                %Operating
                    expenses:Cost
                    of content and services revenue:Royalties
                    and other content charges
                
                
                27.5
                %
                
                31.0
                %
                
                35.8
                %Discount
                    certificate rebates
                
                
                --
                
                
                4.3
                %
                
                2.5
                %Total
                    cost of content and services revenue
                
                
                27.5
                %
                
                35.3
                %
                
                38.3
                %Cost
                    of hardware revenue
                
                
                10.8
                %
                
                6.4
                %
                
                4.6
                %Cost
                    of related party revenue
                
                
                --
                
                
                0.4
                %
                
                0.4
                %Operations
                
                
                19.9
                %
                
                15.0
                %
                
                14.8
                %Technology
                    and development
                
                
                24.8
                %
                
                14.7
                %
                
                13.0
                %Marketing
                
                
                23.3
                %
                
                14.9
                %
                
                21.2
                %General
                    and administrative
                
                
                13.6
                %
                
                10.3
                %
                
                13.2
                %Total
                    operating expenses
                
                
                119.9
                %
                
                97.0
                %
                
                105.5
                %(Loss)
                    income from operations
                
                
                (19.9
                )%
                
                3.0
                %
                
                (5.5
                )%Other
                    income, net
                
                
                0.1
                %
                
                0.6
                %
                
                3.3
                %(Loss)
                    income before income taxes
                
                
                (19.8
                )%
                
                3.6
                %
                
                (2.2
                )%Income
                    tax expense
                
                
                --
                
                
                --
                
                
                --State
                    income tax benefit
                
                
                1.3
                %
                
                2.1
                %
                
                1.2
                %Net
                    (loss) income
                
                
                (18.5
                )%
                
                5.7
                %
                
                (1.0
                )%Dividends
                    on preferred stock
                
                
                (29.3
                )%
                
                (1.8
                )%
                
                --Preferred
                    stock discount
                
                
                (7.5
                )%
                
                --
                
                
                --Charges
                    related to conversion of convertible preferred stock
                
                
                --
                
                
                (28.8
                )%
                
                --Total
                    preferred stock expense
                
                
                (36.8
                )%
                
                (30.6
                )%
                
                --Net
                    loss applicable to common shareholders
                
                
                (55.2
                )%
                
                (24.9
                )%
                
                (1.0
                )%
 
 -18-
 Table
            of Contents
 ***Total
        Content and Services Revenue***
  The
        following is our content and services revenue for the last three
        years:
  **Year
                    Ended December 31,**
                
                **Percentage Change****2003**
                
                **2004**
                
                **2005**
                
                **2004
                    vs. 2003**
                
                **2005 vs. 2004**$
                18,594
                
                $
                33,210
                
                $
                61,310
                
                
                78.6%
                
                
                84.6%
  *Content
        and services revenue* consists
        of AudibleListener membership revenue, revenue from single title sales, revenue
        from subscriptions, revenue from sales at the Apple iTunes Music Store and
        library revenue. We deduct the cost of point of sale rebates from content
        and
        services revenue.
  Content
        and services revenue grew due to growth in AudibleListener memberships and
        sales
        at the Apple iTunes Music Store. AudibleListener membership growth was driven mainly
        through online channels, free trial promotions, and our marketing partnerships
        with retailers and device manufacturers .
        Year-end AudibleListener membership grew from approximately 96,000 members
        at
        December 31, 2003, to approximately 159,000 at December 31, 2004, and 248,000
        at
        December 31, 2005. We recognized in revenue approximately $9,464, $3,677,
        and
        $395 from sales of Audible content at the Apple iTunes Music Store, in 2005,
        2004, and 2003, respectively. Our customer count and AudibleListener membership
        count excludes customers that purchase Audible content directly from the
        Apple
        iTunes Music Store. We believe continuing consumer adoption of digital
        downloading, increased consumer awareness of the Audible service, customer
        satisfaction and improved marketing will continue to drive AudibleListener
        membership growth and growth in sales at the Apple iTunes Music Store. As
        we
        enter 2006, and acquire new AudibleListener members who may choose to roll
        over
        their audio credits, our ability to recognize revenue will be dependent upon
        audio credit usage patterns of individual members. This will result in an
        increase in deferred revenue and may result in a decrease or slower growth
        in
        our revenue as compared to prior periods.
  ***Hardware
        Revenue***
  The
        following is our hardware revenue for the last three years:
  **Year
                  Ended December 31,**
              
              **Percentage Change****2003**
              
              **2004**
              
              **2005**
              
              **2004
                  vs. 2003**
              
              **2005 vs. 2004**$
              666
              
              $
              695
              
              $
              612
              
              
              4.4%
              
              
              (11.9)%
 
 *Hardware
        revenue* consists
        of revenue derived primarily from the shipping and handling charge to customers
        on devices that Audible provides for free to AudibleListeners who commit
        to a
        six or twelve month AudibleListener membership. Also included are separate
        sales
        of digital audio players to consumers and libraries.
  Hardware
        revenue decreased from 2004 to 2005 primarily as a result of a reduction
        in
        shipments of digital audio devices we gave away, which resulted in lower
        shipping and handling revenues. Hardware revenue increased from 2003 to 2004
        primarily as a result of a higher number of free digital audio player device
        shipments, partially offset by lower sales of digital audio players to consumers
        and libraries. Under EITF No. 00-21, *Revenue
        Arrangements with Multiple Deliverables* ,
        with
        these multiple-element arrangements (membership plus device), we recognize
        only shipping and handling fees as revenue for the delivery of hardware because
        all other consideration paid by the customer is contingent upon delivery
        of the
        content. Revenue is recognized upon shipment, assuming all other criteria
        are
        met.
 
 ***Related
        Party Revenue***
  The
        following is our related party revenue for the last three years:
 
 **Year
                  Ended December 31,**
              
              **Percentage Change****2003**
              
              **2004**
              
              **2005**
              
              **2004
                  vs. 2003**
              
              **2005 vs. 2004**$
              --
              
              $
              362
              
              $
              1,146
              
              
              --
              
              
              216.6%
  *Related
        party revenue* consists
        of revenue recognized in connection with our agreements with France Loisirs
        and
        Audible Germany, which were entered into in September 2004.
  Related
        party revenue for 2004 and 2005 included $146 and $500, respectively, in
        fees
        earned from our agreement with France Loisirs, representing the straight-line
        recognition of $1,000 in fees we will receive pursuant to the arrangement,
        which
        is being recognized over the initial 24-month term of the agreement through
        September 14, 2006, as well as $54 and $122, respectively, in billings to
        France
        Loisirs for reimbursement of certain incremental costs. Related party revenue
        for 2004 and 2005 also included $90 and $390, respectively, in fees earned
        from
        our agreement with Audible Germany, as well as $72 and $134, respectively,
        in
        billings to Audible Germany for reimbursement of certain incremental costs
        incurred by us in connection with our license and services
        agreement.
   -19-
 Table
            of Contents
  ***Other
        Revenue***
  The
        following is our other revenue for the last three years:
  **Year
                  Ended December 31,**
              
              **Percentage Change****2003**
              
              **2004**
              
              **2005**
              
              **2004
                  vs. 2003**
              
              **2005 vs. 2004**$
              65
              
              $
              52
              
              $
              169
              
              
              (20.0)%
              
              
              225.0%
 
 *Other
        revenue* in 2005
        primarily included $115 of revenue earned under a new product development
        agreement with a publishing partner that is being recognized on a straight-line
        basis over a 58 month period. The remaining balance of other revenue in 2005
        included commissions earned by us for referring customers to a retail partner
        to
        purchase a digital audio device. We recognize the commissions in the period
        when
        the purchase is completed and the amounts are known and
        determinable.
  *Other
        revenue* in 2004
        and 2003 consisted primarily of straight-line amortization of revenue earned
        from a technology licensing fee arrangement which ended June 30, 2004.
 
 ***Cost
        of Content and Services Revenue***
  The
        following is our cost of content and services revenue for the last three
        years:
 
 **Cost
                  of Content and Services**
              
              **Year
                  Ended December 31,**
              
              **As
                  a Percentage of Total Content and**
                **Services
                  Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**Royalties
                  and other content charges
              
              $
              5,319
              
              $
              10,650
              
              $
              22,613
              
              
              28.6
              %
              
              32.1
              %
              
              36.9
              %Discount
                  certificate rebates
              
              
              --
              
              
              1,462
              
              
              1,556
              
              
              --
              
              
              4.4
              %
              
              2.5
              %Total
                  cost of content and services revenue
              
              $
              5,319
              
              $
              12,112
              
              $
              24,169
              
              
              28.6
              %
              
              36.5
              %
              
              39.4
              %
 
 *Cost
        of content and services revenue* consists
        primarily of royalties incurred, discount certificate rebates, and the
        amortization of publisher royalty advances.
 
 Royalties
        and other content charges as a percentage of total content and services revenue
        increased in 2003, 2004 and 2005 to 28.6%, 32.1% and 36.9% respectively.
        This
        increase was primarily due to the increasing percentage of revenue from sales
        at
        the Apple iTunes music store, which yields a higher royalty cost as a percentage
        of revenue; the impact of higher royalty rates from publishers; and the impact
        of discounted single title sales to our customers during certain periods
        in
        2005. Discount certificate rebates, introduced in 2004, are electronic discount
        certificates or gift cards given to certain AudibleListeners who commit to
        joining an AudibleListener plan for twelve months. AudibleListener customers
        use
        these when purchasing an AudibleReady digital audio player from a third-party
        retailer.
 
 ***Cost
        of Hardware Revenue***
  The
        following is our cost of hardware revenue for the last three years:
  **Year
                  Ended December 31,**
              
              **As
                  a Percentage of**
                **Hardware
                  Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              2,085
              
              $
              2,188
              
              $
              2,934
              
              
              313.1
              %
              
              314.8
              %
              
              479.4
              %
 
 *Cost
        of hardware revenue* consists
        of the cost of digital audio players that are given away or sold to
        customers.
  In
        the
        2005 period, we changed the model of the digital audio player to an iPod
        we give
        for free to certain AudibleListener members. The iPod was more expensive
        than
        the device we previously provided. As a result, cost of hardware revenue
        increased in 2005.
 
 The
        increase in cost of hardware revenue in 2004 from 2003 was due to the increase
        in the quantity of digital devices given away for free to customers who commit
        to an AudibleListener membership.
  ***Cost
        of Related Party Revenue***
  The
        following is our cost of related party revenue for the last three
        years:
 
 **Year
                  Ended December 31,**
              
              **As
                  a Percentage of**
                **Related
                  Party Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              --
              
              $
              126
              
              $
              256
              
              
              --
              
              
              34.8
              %
              
              22.3
              %
 
 *Cost
        of Related Party Revenue*
 
 *Cost
        of related party revenue* consists
        of costs we have incurred in connection with our agreements with France Loisirs
        and Audible Germany, which were entered into in September 2004.
 
 Cost
        of
        related party revenue for 2004 and 2005 included $54 and $122 respectively,
        for
        France Loisirs, and $72 and $134 respectively, for Audible Germany. These
        costs
        primarily consisted of payroll costs related to services for France and Germany
        operations, performed by certain employees of our technology, development,
        and
        audio departments.  -20-
 Table
              of Contents
 ***Operations***
  The
        following is our operations expense for the last three years:
  **Year
                  Ended December 31,**
              
              **As a Percentage of 
                  Total Content**
                **and
                  Services Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              3,843
              
              $
              5,146
              
              $
              9,355
              
              
              20.7
              %
              
              15.5
              %
              
              15.3
              %
 
 *Operations* expense
        consists of payroll and related expenses for content acquisition, education,
        editorial, audio conversion, programming, customer service and credit card
        fees.
        Related expenses include outside consultants and professional fees, credit
        card
        processing fees, and audio recording fees.
  Operations
        expense increased in 2005 versus 2004 primarily due to $1,933 in higher
        personnel expenses (107 employees at December 31, 2005 compared to 53 employees
        at December 31, 2004), $1,007 in higher outside service expenses, and $835
        in
        higher credit card fees. These increases were primarily related to the increased
        scale of our business. Many of these higher costs were directed at improving
        the
        quality of customer service as well as the launch of Audible UK.
 
 Increases
        in operation expense from 2003 to 2004 were primarily due to $703 in higher
        personnel expenses (53 employees at December 31, 2004 compared to 42 employees
        at December 31, 2003) and $520 in higher credit card fees. These increases
        were
        primarily related to the increased scale of our business.
  ***Technology
        and Development***
  The
        following is our technology and development expense for the last three
        years:
  **Year
                  Ended December 31,**
              
              **As a Percentage of
                  Total Content**
                **and
                  Services Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              4,785
              
              $
              5,030
              
              $
              8,239
              
              
              25.7
              %
              
              15.1
              %
              
              13.4
              %
 
 *Technology
        and development* expense
        consists of payroll and related expenses for information technology, systems
        and
        telecommunications infrastructure, as well as technology licensing
        fees.
 
 The
        increase in technology and development expense from 2004 to 2005 was primarily
        due to $933 in higher personnel expenses (45 employees at December 31, 2005
        compared to 24 employees at December 31, 2004), $925 in higher outside services
        expenses, and $911 in higher maintenance and repair costs, as well as an
        increase in supplies purchased. Many of these higher costs were related to
        the
        development of our new AudibleListener plans, enhancing the performance of
        our
        Web site, and the launch of Audible UK.
  The
        increase in technology and development expense from 2003 to 2004 was primarily
        due to $344 of higher outside service fees, and $86 in higher Web site expenses
        due to higher bandwidth charges to support higher revenues. These were partially
        offset by reduced personnel and related expenses.
  ***Marketing***
  The
        following is our marketing expense for the last three years:
  **Year
                  Ended December 31,**
              
              **As a Percentage of 
                  Total Content**
                **and
                  Services Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              4,495
              
              $
              5,097
              
              $
              13,387
              
              
              24.2
              %
              
              15.3
              %
              
              21.8
              %
 
 *Marketing* expense
        consists of payroll and related expenses for personnel in marketing and business
        development, as well as advertising expenditures and other promotional
        activities. Also included are revenue sharing and bounty payments which we
        make
        to our marketing partners, and shipping and handling costs associated with
        selling digital devices.
 
 Marketing
        expenses were higher in 2005 than 2004 primarily due to increases of $3,377
        in
        higher advertising and promotional expenses, $3,202 in higher revenue sharing
        and bounty payments, and $1,072 in higher personnel expenses (29 employees
        at
        December 31, 2005 compared to 15 employees at December 31, 2004), partially
        offset by a decrease of $313 resulting from the issuance of warrants. Most
        of
        these higher expenses were directed towards obtaining new AudibleListeners,
        the
        launch of Audible UK and the rollout of our new AudibleListener plans. New
        AudibleListeners obtained in 2005 were approximately 237,000 compared to
        117,000
        in 2004.
 
 The
        increase in marketing expenses from 2003 to 2004 was primarily due to $564
        in
        higher advertising and promotional costs, $309 in higher warrant charges
        incurred in connection with entering into certain service agreements, and
        $240
        in higher personnel costs. These increases were offset in part by a decrease
        of
        $535, which was incurred in connection with our co-branding, marketing and
        distribution agreement with Amazon.com. New AudibleListeners acquired in
        2004
        were 117,000 compared with 65,000 in 2003.
 
 As
        we
        continue to build the AudibleListener membership base, we expect our marketing
        expenses to continue to grow.
 -21-
 Table
              of Contents
 ***General
        and Administrative***
  The
        following is our general and administrative expense for the last three
        years:
  **Year
                  Ended December 31,**
              
              **As a Percentage of 
                  Total Content**
                **and
                  Services Revenue****2003**
              
              **2004**
              
              **2005**
              
              **2003**
              
              **2004**
              
              **2005**$
              2,633
              
              $
              3,539
              
              $
              8,366
              
              
              14.2
              %
              
              10.7
              %
              
              13.6
              %
 
 *General
        and administrative* expense
        consists primarily of payroll and related expenses for executive, finance
        and
        administrative personnel. Also included are legal fees, audit fees, public
        company expenses and other general corporate expenses.
  The
        increase in general and administrative expense in 2005 was primarily due
        to
        $1,473 in increased legal and other professional fees, $1,174 in increased
        personnel expenses (12 employees at December 31, 2005 compared to 5 employees
        at
        December 31, 2004), $1,218 in increased audit and related fees, which included
        fees related to Sarbanes-Oxley compliance activities, and $338 in increases
        related to expenses in international operations.
 
 The
        increase in general and administrative expense from 2003 to 2004 was primarily
        due to $595 in higher legal and other professional fees, related in part
        to our
        international expansion plans, $387 in higher audit and related fees and
        higher
        professional fees related to our Sarbanes-Oxley compliance activities, $204
        in
        higher office and administrative costs, and $169 in higher NASDAQ fees. These
        increases were offset in part by the absence during 2004 of $400 in payments
        made during 2003 to our officers pursuant to an incentive plan, as well as
        the absence in 2004 of a $213 expense incurred during 2003 in connection
        with
        our forgiveness of employee promissory notes issued to us in exchange for
        shares
        of our common stock.
 
 ***Other
        Income, net***
  The
        following is our other income, net for the last three years:
  **Year
                  Ended December 31,**
              
              **Percentage Change****2003**
              
              **2004**
              
              **2005**
              
              **2004
                  vs. 2003**
              
              **2005 vs. 2004**$
              25
              
              $
              221
              
              $
              2,077
              
              
              784.0
              %
              
              839.8
              %
 
 *Other
        Income, net* consists
        of interest income and interest expense. The increase in other income, net
        during 2005 versus 2004, was mainly due to interest earned on the investment
        of
        funds in short-term investments, which consisted of governmental agency notes
        and mortgage-backed securities. We began to make these investments in November
        2004.
 
 **Critical
        Accounting Policies**
 
 The
        Securities and Exchange Commission defines “critical accounting policies” as
        those accounting policies that require application of management’s most
        difficult, subjective and complex judgments, often as a result of the need
        to
        make estimates about the effect of matters that are inherently uncertain
        and may
        change in subsequent periods. Based on this definition, we have identified
        the
        critical accounting policies and judgments addressed below. We have other
        significant accounting policies, which involve the use of estimates, judgments,
        and assumptions that are significant to understanding our results. For
        additional information, see Note 2, *Summary
        of Significant Accounting Policies,* of
        our
        consolidated financial statements. Although we believe that our estimates,
        judgments and assumptions are reasonable, they are based upon information
        presently available. Actual results may differ significantly from these
        estimates under different assumptions, judgments or conditions.
  Our
        critical accounting policies are as follows:
  ***Revenue
        Recognition***
  We
        derive
        our revenue from four main categories:
 
 ·
            Content
                and services revenue, which includes consumer content and corporate
                services; ·
            Hardware
                revenue; ·
            Related
                party revenue; and ·
            Other
                revenue. 
 *Content
        and Services.* Consumer
        content revenue consists primarily of content sales made from our Web sites
        and
        content sold through our agreement with the Apple iTunes Music Store. At
        our Web
        site, customers purchase content either through an AudibleListener membership
        plan or on an a la carte basis. When purchased on an a la carte basis, we
        recognize revenue from the sale of individual content titles in the period
        when
        the content is purchased and delivered. We generally recognize revenue from
        the
        sale of content subscriptions pro rata over the term of the subscription
        period,
        depending on the terms of the plan.
 
 Our
        “legacy” AudibleListener monthly membership plans generally provide customers
        two audio credits for a fixed monthly fee. Customers may use these audio
        credits
        to select content of their choice from our Web site. Through November 2005
        “legacy” AudibleListener audio credits provided under a monthly membership
        program had a life of 30 days, after which they expired. We recognize revenue
        from the sale of legacy AudibleListener memberships ratably over the
        AudibleListener’s monthly membership period. This results in approximately 50%
        of the AudibleListener membership fees received during each calendar month
        being
        deferred at month end and recognized as content revenue in the following
        month.
 -22-
 Table
              of Contents
  In
        December 2005, we introduced new AudibleListener membership plans, designed
        to
        provide our customers more flexibility in using their audio credits. Depending
        upon the AudibleListener membership plan, customers can receive and “bank” or
        delay using up to a maximum of six or twelve audio credits, depending on
        the
        membership plan. The banking feature will result in audio credits being used
        (delivered) over different periods for different customers. In addition,
        some of
        the new AudibleListener plans include new membership benefits, ranging from
        a
        complimentary daily newspaper to everyday discounts of 30% on a la carte
        purchases. The daily newspaper and 30% discount benefits are “serial” elements
        that are delivered continuously over the membership period, whereas the content
        selections underlying the audio credits are discrete elements that are delivered
        at different times based on individual customer behavior. As a result of
        the
        characteristics of the new AudibleListener memberships, they are considered
        revenue arrangements with multiple deliverables, however under Emerging Issues
        Task Force, or EITF, issue No. 00-21, *Revenue
        Arrangements with Multiple Deliverables* ,
        because
        the deliverables are not eligible for separation, they are accounted for
        as a
        single unit of accounting. As a result, we recognize revenue for these new
        AudibleListener plans using the lesser of straight-line or proportional
        performance (based on content delivery) over the maximum membership period.
        This
        may result in a decrease in revenue or slower revenue growth than we experienced
        in prior periods because the customer has a longer period of time to use
        their
        audio credits. For example, a customer may pre-pay an annual membership for
        twelve audio credits and not use any credits for six months. Due to the revenue
        recognition model, this revenue will be deferred until the customer uses
        the
        audio credits.
 
 Upon
        launch of the new AudibleListener plans in December 2005, the legacy
        AudibleListener programs were no longer available to new customers. Customers
        who have legacy memberships have the option of either converting to one of
        the
        new AudibleListener membership plans or continuing their legacy membership.
 
 *Provision
        for Refunds and Chargebacks*
 
 In
        the
        normal course of business, customers may contact us or contact their credit
        card
        company to request an adjustment for a purchase the customer paid us for
        in the
        past. Customers may contact us to request a refund for various reasons. We
        record a provision for expected refunds and chargebacks relating to revenue
        that
        was recognized in a previous period. The calculation of the provision for
        estimated refunds and chargebacks is based on historical refund rates and
        sales
        patterns. The provision is recorded as a reduction of revenue. A portion
        of the
        resulting reserve is classified as a reduction of accounts receivable based
        on
        an estimate of refunds and chargebacks that will be made related to sales
        that
        were collected by the credit card processor but not remitted to us at
        period-end. The remaining portion of the reserve is reflected as an accrued
        liability at period-end. Actual results could differ from our
        estimates.
 
 *Customer
        Concessions*
 
 In
        the
        normal course of business, customers may contact us to request a concession
        for
        a purchase the customer paid us for in the past, which they are unsatisfied
        with. Depending on the specific customer facts and circumstances, we will
        provide the customer a replacement or complimentary credit or a coupon. With
        our
        legacy AudibleListener plans, customers on occasion request that we replace
        an
        audio credit that expired before the customer had an opportunity to use it.
        Other customers may request an audio credit or coupon because they have had
        a
        specific problem with content downloading or audio quality. We defer revenue
        for
        expected replacement audio credits based on historical experience of the
        credits
        issued. We defer revenue for other audio credits and coupons when they are
        delivered to the customers based on estimated values. The concessions are
        recorded as a reduction of revenue and an increase to deferred revenue. Actual
        customer credit and coupon issuance and usage patterns could differ from
        our
        estimates.
 
 ***Royalty
        Expense***
  Royalty
        expense is the largest component of cost of content and services revenue,
        and
        includes amortization of guaranteed royalty obligations to various content
        providers, royalties incurred on sales of content, and net realizable value
        adjustments to royalty advances. Many of our early content provider agreements
        contained a requirement to pay guaranteed amounts to the provider. Anticipating
        that sales from these agreements would not be sufficient to recoup 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 incurred, 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 is incurred
        based upon either a percentage of revenue or a fixed price per title in
        accordance with the terms of the applicable royalty agreement. The royalty
        cost
        per title may differ depending upon whether the title is sold as part of
        an
        AudibleListener membership or sold as an a la carte sale. Actual sales could
        differ from our estimates of projected sales.
 
 ***Internal-Use
        Software***
 
 In
        accordance with Statement of Position 98-1, *Accounting
        for the Costs of Computer Software Developed or Obtained for Internal
        Use* ,
        all
        costs incurred for the development of internal use software that relate to
        the
        planning and post implementation phases of the development are expensed.
        Direct
        costs incurred in the development phase are capitalized and recognized over
        the
        software's estimated useful life, generally two years, commencing at the
        time the software is ready for its intended use. Research and development
        costs
        and other computer software maintenance costs related to software development
        are expensed as incurred. We review the capitalized software costs for
        impairment when events or circumstances indicate that the carrying amount
        of an
        asset may not be recoverable. If the sum of the expected cash flows,
        undiscounted and without interest, is less than the carrying amount of the
        related asset, an impairment loss is recognized as the amount by which the
        carrying amount of the asset exceeds its fair value. There has been no
        impairment loss recognized as of December 31, 2005. Actual cash flows could
        differ from our expectations.
 
 ***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 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* ,
        or EITF
        96-18. The exercise price of the warrants is determined by the closing price
        of
        our common stock on the day of the agreement. The fair value of the warrant
        issued is estimated using the Black-Scholes model. Application of management’s
        judgment is required in determining the assumptions concerning risk free
        interest rate, expected term of the warrant, dividend yield and expected
        volatility to be used in the Black-Scholes model. 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,
        we
        apply variable plan or fixed plan accounting in accordance with EITF
        96-18.
  ***Employee
        Stock-Based Compensation Arrangements***
  As
        of
        December 31, 2005, we account for our employee stock-based compensation in
        accordance with the provisions of Accounting Principles Board Opinion No.
        25, *Accounting
        for Stock Issued to Employees* ,
        and
        related interpretations. For options 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. We are required
        to adopt Statement of Financial Accounting Standard 123, *Share-Based
        Payment* ,
        SFAS
        No. 123R, on January 1, 2006. Under SFAS No. 123R, we must select an appropriate
        option valuation model to value future share-based payments, determine the
        attribution method for compensation cost and select the transition method
        to be
        used at date of adoption. The transition methods for public companies include
        modified prospective and modified retrospective adoption options. Under the
        modified retrospective options, prior periods are restated either as of the
        beginning of the year of adoption or for all periods presented. The modified
        prospective method requires that compensation expense be recorded for all
        unvested stock options and other unvested employee share-based awards starting
        on the date of adoption of SFAS No. 123R.
 
 We
        expect
        to use the modified prospective transition method when adopting SFAS No.
        123R
        and expect to continue to use the Black-Scholes model in valuing stock options.
        We expect stock-based compensation expense to be significant for the year
        ended
        December 31, 2006 as a result of the adoption of SFAS No. 123R. Compensation
        expense for 2006 calculated under SFAS No. 123R for unvested options and
        non-vested (restricted) stock outstanding as of December 31, 2005 may differ
        from the 2005 pro-forma amounts currently disclosed in our footnotes as a
        result
        of expected and actual forfeitures and the timing of the end of the related
        requisite service periods as well as the tax impact on our share-based payments.
        Further, we may make additional grants of share-based awards in the future,
        and
        the impact of these grants cannot be predicted at this time because it will
        depend on the number of share-based awards granted, the fair values of such
        awards and the related requisite service periods.
 -23-
 Table
                of Contents
 **Liquidity
        and Capital Resources**
 
 From
        inception through the date prior to our initial public offering, we financed
        our
        operations through private sales of our redeemable convertible preferred
        stock
        and warrants. Net proceeds from the sales of redeemable convertible stock
        and
        warrants prior to our initial public offering were $28,719. In July 1999,
        we
        completed our initial public offering and received net proceeds of $36,856.
        From
        the time of our IPO, we have raised $15,860 in net proceeds through the private
        sale of shares of our convertible preferred stock (all of which were
        subsequently converted to common stock), $4,186 in net proceeds through the
        private sales of our common stock, $3,029 in net proceeds through the exercise
        of common stock options, and $1,588 in net proceeds through the exercise
        of
        common stock warrants.  In November 2004, we completed a follow-on public
        offering of our common stock resulting in net proceeds to us of approximately
        $46,457.
 
 As
        of
        December 31, 2005, our cash and cash equivalents balance was 11,549. In
        addition, as of December 31, 2005 we had approximately $55,616 in short-term
        investments which we intend to hold until maturity. Based on our
        currently proposed business plans and related assumptions, we believe that
        our
        cash and cash equivalents balance and short-term investment balance as of
        December 31, 2005 will enable us to meet our anticipated cash requirements
        for
        operations and capital expenditures for the foreseeable future. Beyond that,
        we
        may need additional cash to fund our business and finance our continued growth.
        No assurance can be given that such additional financing, if needed, will
        be
        available on terms favorable to us or our stockholders, if at all.
 
 ***Cash
        Requirements***
  At
        December 31, 2005, our principal source of liquidity was approximately $11,549
        in cash and cash equivalents and $55,616 in short-term investments which we
        intend to hold until maturity.
  The
        following table shows future cash payments due under our commitments and
        obligations as of December 31, 2005:
  **Year**
              
              **Operating
                  Leases**
              
              **Service
                  Agreements**
              
              **Royalty
                  Obligations**
                **(1)**
              
              **Purchase
                  Commitments**
              
              **Total**2006
              
              $
              585
              
              $
              2,597
              
              $
              293
              
              $
              34
              
              $
              3,5092007
              
              
              558
              
              
              1,775
              
              
              188
              
              
              --
              
              
              2,5212008
              
              
              547
              
              
              1,263
              
              
              --
              
              
              --
              
              
              1,8102009
              
              
              --
              
              
              1
              
              
              --
              
              
              --
              
              
              12010
                  and thereafter
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
              
              $
              1,690
              
              $
              5,636
              
              $
              481
              
              $
              34
              
              $
              7,841
 
 (1)
        Reflected in current and non-current liabilities respectively, on the
        accompanying December 31, 2005 consolidated Balance Sheet.
 
 ***Lease
        Obligations***
  We
        have
        an operating lease on our office space in Wayne, New Jersey that expires
        in
        December 2008. The lease contains a renewal option for a period of three
        years.
        In February 2005, Audible UK signed a one year lease for office space, which
        includes office amenities. This lease was subsequently amended in the second
        quarter of 2005 for additional space and will expire in May 2006. Total future
        minimum lease obligations as of December 31, 2005 under these lease arrangements
        are $1,690.
  Rent
        expense of $484, $389, and $561 ,
        respectively, was recorded under operating leases for the years ended December
        31, 2003, 2004 and 2005.
 
 There
        are
        no future minimum lease payments due under capital leases as of December
        31,
        2005, which were paid in full during the first quarter of 2005.
 
 ***Service
        Agreements***
 
 We
        have
        entered into operational and marketing agreements or purchase orders with
        various vendors to provide certain contracted services. The majority of the
        amounts committed are for hosting services related to our Web site.
  ***Royalty
        Obligations***
 
 Royalty
        obligations represent payments to be made to various content providers pursuant
        to minimum guarantees under their royalty agreements, net of royalties paid.
        The
        royalty obligations recorded in the accompanying consolidated Balance Sheets
        are
        classified between current and non-current based on the payment terms specified
        in the agreements.
  ***Purchase
        Commitments***
 
 Purchase
        commitments represent agreements we have made for future purchases of goods
        and
        services. The balance primarily consists of purchases for network and operating
        systems equipment.
 
 ***Sources
        and Uses of Cash***
 (dollars
        in thousands)
 
 ***Operating
        Activities.*** Net
        cash
        used in operating activities was $1,144 in 2003. ****** Net
        cash
        provided by operating activities was $5,188 and $11,779 in 2004 and 2005,
        respectively. Net cash used in operating activities in 2003 was primarily
        attributable to our net loss, offset in part by services rendered for common
        stock and warrants, depreciation and amortization, and an increase in accrued
        expenses. Net cash provided by operating activities in 2004 was primarily
        attributable to our net income, an increase in deferred revenue, accrued
        expenses, services rendered for common stock and warrants, depreciation and
        amortization, and accounts payable, offset in part by an increase in accounts
        receivable, inventory, and a decrease in royalty obligations. Net cash provided
        by operating activities in 2005 was primarily attributable to an increase
        in
        accrued expenses, deferred revenue, accounts payable, depreciation and
        amortization, offset in part by our net loss, increase in accounts receivable,
        accretion of discounts on short-term investments, royalty advances, and accounts
        receivable due from related parties.
  ***Investing
        Activities.*** Net cash
        used in investing activities was $137, $48,702, and $14,392 in 2003, 2004,
        and
        2005 respectively.  Net cash used in investing activities in 2003 related
        to purchases of property and equipment of $137.  Net cash used in 2004 was
        attributable to the purchase of short-term investments of $48,300, using
        the
        proceeds of our November 2004 public offering, as well as purchases of property
        and equipment of $402. Net cash used in investing activities in 2005 related
        to
        net purchases of short-term investments of $6,046, purchases of property
        and
        equipment of $3,706, and expenditures on software development costs of
        $4,640.
  ***Financing
        Activities.*** Net cash
        provided by financing activities was $7,534, $47,735, and $864 in 2003, 2004,
        and 2005, respectively. Net cash provided by financing activities in 2003
        resulted primarily from the issuance of our shares of convertible preferred
        stock, exercise of warrants, and the exercise of employee stock options.
        Net
        cash provided by financing activities in 2004 resulted primarily from the
        follow-on November 2004 public offering and from the exercise of employee
        stock
        options, offset in part by principal payments on capital lease obligations.
        Net
        cash provided by financing activities in 2005 resulted primarily from proceeds
        from the exercise of common stock options and common stock warrants, offset
        by
        principal payments made on capital lease obligations.
 -24-
 Table
                  of Contents
 As
        of
        December 31, 2005, we had available net operating loss carryforwards totaling
        $120,350, which expire beginning in 2010. We
        have
        experienced certain ownership change, which under the provisions of Section
        382
        of the Internal Revenue Code 1986, as amended, may result in an annual and
        aggregate limitation on our ability to utilize our net operating losses in
        the
        future.
 
 We
        have
        conducted a study to determine the extent of the limitations. Based on the
        study, we have had three separate changes in control. However, in each case,
        the
        annual and aggregate limitations are not expected to hinder our ability to
        utilize our net operating losses in the future.
 
 As
        a
        result of selling certain of our New Jersey state income tax loss benefits
        for
        cash, we realized $250, $724, and $740 in state income tax benefits during
        the
        years ended December 31, 2003, 2004, and 2005 respectively. We cannot assure
        you
        that this program will be available to us in the future.
  **New
        Accounting Standards**
  In
        November 2004, the Financial Accounting Standards Board, or FASB, issued
        SFAS
        No. 151 *,
        Inventory Costs, an amendment of ARB No. 43, Chapter 4.* SFAS
        No.
        151, amends ARB No. 43, Chapter 4, to clarify that abnormal amounts of idle
        facility expense, freight, handling costs, and wasted material (spoilage)
        should
        be recognized as current period charges. In addition, SFAS No. 151 requires
        that
        allocation of fixed production overhead to the cost of conversion be based
        on
        the normal capacity of the production facilities. The provision of SFAS No.
        151
        is effective for us beginning on January 1, 2006 and we do not expect
        it to have a significant impact on our consolidated financial
        statements.
 
 In
        December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
        Payment* ,
        which
        replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS 123R addresses
        the
        accounting for transactions in which an enterprise receives employee services
        in
        exchange for (a) equity instruments of the enterprise or (b) liabilities
        that
        are based on the fair value of the enterprise's equity instruments or that
        may
        be settled by the issuance of such equity instruments. SFAS 123R requires
        all
        share-based payments to employees, including grants of employee stock options
        and non-vested (restricted) stock grants, to be recognized as compensation
        cost
        based on their fair values. The pro forma disclosures previously permitted
        under
        SFAS No. 123 no longer will be an alternative to financial statement recognition
        beginning in fiscal year 2006. SFAS 123R also requires the benefit of tax
        deductions in excess of recognized compensation cost to be reported as a
        financing cash flow, rather than operating cash flow.
 
 We
        were
        required to adopt SFAS No. 123R on January 1, 2006. Under SFAS No. 123R,
        we must
        select an appropriate fair value model to value future share-based payments,
        determine the attribution method for compensation cost and select the transition
        method to be used at date of adoption. The transition methods for public
        companies include modified prospective and modified retrospective adoption
        options. Under the modified retrospective options, prior periods are restated
        either as of the beginning of the year of adoption or for all periods presented.
        The modified prospective method requires that compensation expense be recorded
        for all unvested stock options and other unvested employee share-based awards
        starting on the date of adoption of SFAS No. 123R.
 
 We
        expect
        to use the modified prospective transition method when adopting SFAS No.
        123R
        and expect to continue to use the Black-Scholes model in valuing stock options.
        We expect stock-based compensation expense to be significant for the year
        ended
        December 31, 2006 as a result of the adoption of SFAS No. 123R. Compensation
        expense for 2006 calculated under SFAS No. 123R for unvested options and
        non-vested (restricted) stock outstanding as of December 31, 2005 may differ
        from the 2005 pro-forma amounts currently disclosed in our footnotes as a
        result
        of expected and actual forfeitures and the timing of the end of the related
        requisite service periods as well as the tax impact on our share-based payments.
        Further, we may make additional grants of share-based awards in the future,
        and
        the impact of these grants cannot be predicted at this time because it will
        depend on the number of share-based awards granted, the fair values of such
        awards and the related requisite service periods.
 
 In
        December 2004, the FASB issued SFAS No. 153, *Exchanges
        of Nonmonetary Assets - An Amendment of APB Opinion No. 29* ,
        which
        addresses the measurement of exchanges of nonmonetary assets. It eliminates
        the
        exception from fair value accounting for nonmonetary exchanges of similar
        productive assets and replaces it with an exception for exchanges that do
        not
        have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
        has commercial substance if the future cash flows of an entity are expected
        to
        change significantly as a result of the exchange. This statement is effective
        for us beginning on January 1, 2006, and we do not expect it to have a
        significant impact on our consolidated financial statements.
 
 In
        May
        2005, the FASB issued SFAS No. 154, *Accounting
        Changes and Error Corrections, a replacement of APB Opinion No. 20 and
        FASB Statement No. 3* .
        Among
        other changes, this Statement requires retrospective application for voluntary
        changes in accounting principles, unless it is impractical to do so. Guidance
        is
        provided on how to account for changes when retrospective application is
        impractical. This Statement is effective on a prospective basis beginning
        January 1, 2006.
  **Item
        7A. Quantitative and Qualitative Disclosures about
        Market Risk.**
  We
        are
        exposed to fluctuations in foreign currency exchange rates as the financial
        results of our foreign subsidiary are translated into U.S. dollars in
        consolidation. We do not use derivative instruments or hedging to manage
        our
        exposures and do not hold any market risk sensitive instruments for trading
        purposes.
  **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.
  **Item
          9A. Controls and Procedures.**
 **a.)
          Evaluation of Disclosure Controls and Procedures**
  Under
          the
          supervision and with the participation of our management, including our
          chief
          executive officer and chief financial officer, we conducted an evaluation
          of the
          effectiveness of our disclosure controls and procedures, as such term is
          defined
          under Rule 13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as
          of the end of the period covered by this report. Based on this evaluation,
          our
          chief executive officer and our chief financial officer concluded that
          our
          disclosure controls and procedures were not effective as of the end of
          the
          period covered by this Annual Report on Form 10-K because of the material
          weaknesses discussed below.
 -25-
 Table
                of Contents
 **b.)
          Management's Report on Internal Control Over Financial
          Reporting**
  Our
          management is responsible for establishing and maintaining adequate internal
          control over financial reporting, as such term is defined in the Exchange
          Act
          Rule 13a-15(f). Internal control over financial reporting is a process
          designed
          to provide reasonable assurance regarding the reliability of our financial
          reporting and the preparation of financial statements for external purposes
          in
          accordance with U.S. generally accepted accounting principles. A company's
          internal control over financial reporting includes those policies and procedures
          that:
 
 (i.)
              Pertain
                  to the maintenance of records that, in reasonable detail, accurately
                  and
                  fairly reflect the transactions and dispositions of the assets
                  of the
                  Company; 
 (ii.)
              Provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  preparation of financial statements in accordance with U.S. generally
                  accepted accounting principles, and that receipts and expenditures
                  of the
                  Company are being made only in accordance with authorizations of
                  management and directors of the Company;
                  and 
 (iii.)
              Provide
                  reasonable assurance regarding prevention or timely detection of
                  unauthorized acquisition, use, or disposition of the Company's
                  assets that
                  could have a material effect on the financial
                  statements. 
 Our
          management conducted an evaluation of the effectiveness of our internal
          control
          over financial reporting as of December 31, 2005, using the criteria set
          forth
          in the *Internal Control - Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO).
          Because of its inherent limitations, internal control over financial reporting
          may not prevent or detect misstatements. Also, projections of any evaluation
          of
          effectiveness to future periods are subject to the risk that controls may
          become
          inadequate because of changes in conditions, or that the degree of compliance
          with the policies or procedures may deteriorate.
  A
          material weakness is a control deficiency, or combination of control
          deficiencies, that results in more than a remote likelihood that a material
          misstatement of the annual or interim financial statements will not be
          prevented
          or detected. As a result of our assessment, we identified the following
          material weaknesses in internal control over financial reporting as of
          December
          31, 2005:
  **Insufficient
          Accounting Personnel**
  We
          did
          not employ sufficient accounting personnel possessing an appropriate level
          of
          technical expertise. Our accounting function  lacked
          adequate technical expertise related to accounting for and reporting of
          non-routine or complex transactions in accordance with U.S. generally accepted
          accounting principles and we lacked sufficient resources to address, communicate
          and remediate material weaknesses and significant deficiencies on a timely
          basis. This deficiency resulted in more than a remote likelihood that a
          material
          misstatement of the annual or interim consolidated financial statements
          would
          not be prevented or detected, and was a contributing factor in the development
          of other material weaknesses described below.
  **Inadequate
          Information and Communication**
 We
          did
          not have adequate policies and procedures to ensure that financial reporting
          information related to certain transactions was properly captured and
          communicated within our business processes and information systems.
          Specifically, the following two individual material weaknesses were identified:
 
 1)
              We
                  did not have effective policies and procedures to adequately develop
                  and
                  validate system-generated reports. Specifically, we relied on
                  system-generated reports to record journal entries related to gift
                  revenue
                  and deferred gift revenue in our general ledger, which reports
                  did not
                  accurately reflect gift transactions in accordance with U.S. generally
                  accepted accounting principles. As a result of this deficiency,
                  there were
                  errors in consumer content revenue and deferred revenue in our
                  2005
                  consolidated financial statements. The errors were corrected prior
                  to the
                  issuance of our consolidated financial statements. 
 2)
              We
                  had insufficient processes and controls in place to ensure the
                  identification, capture and timely communication of financially
                  significant information between certain parts of our organization
                  and the
                  accounting department, which precluded us from being able to account
                  for
                  transactions in a complete, appropriate and timely manner. Specifically,
                  there was inadequate communication between our customer service
                  department
                  and our accounting department related to customer concessions issued
                  by
                  the customer service department. As a result of this deficiency,
                  there
                  were errors in consumer content revenue and deferred revenue in
                  our 2005
                  consolidated financial statements. The errors were corrected prior
                  to the
                  issuance of our consolidated financial statements.  **Inadequate
            Risk Assessment**
 
 We
            had
            inadequate controls and procedures for ensuring that financial reporting
            risks
            associated with our new membership programs launched in December 2005
            were
            addressed at a sufficient level of detail so the financial implications
            could be
            identified and appropriate action plans could be formulated and implemented
            prior to the launch of such programs. This deficiency resulted in our
            inability
            to close our 2005 books on a timely basis and resulted in errors in consumer
            content revenue and deferred revenue in our 2005 consolidated financial
            statements. The errors were corrected prior to the issuance of our consolidated
            financial statements.
 
 **Ineffective
            Contract Management**
 
 We
            did
            not have policies and procedures to ensure the effective monitoring of
            the
            financial statement implications of contracts throughout their life cycle.
            As a
            result of this deficiency, there were errors in operating expenses and
            accrued
            expenses in our 2005 consolidated financial statements. The errors were
            corrected prior to the issuance of our consolidated financial statements.
 
 **Ineffective
            Control over Retail Promotions**
 
 We
            did
            not have effective controls to ensure the accuracy of costs and accruals
            related
            to retail promotion programs. Specifically, we did not have controls
            to ensure
            that we maintained and monitored the inventory of retail promotion codes
            pre-purchased from retailers and did not reconcile on a timely basis
            amounts
            accrued for retail promotion codes to amounts subsequently paid. As a
            result of
            this deficiency, there were errors in point of sale rebates, discount
            certificate rebates and accrued expenses in our 2005 consolidated financial
            statements. The errors were corrected prior to the issuance of our consolidated
            financial statements.
 
 Our
            management has determined that each of the aforementioned deficiencies
            constitutes a material weakness in internal control over financial reporting
            as
            of December 31, 2005, based on its evaluation under the criteria in *Internal Control - Integrated Framework* issued
            by the Committee of Sponsoring Organizations of the Treadway Commission
            (COSO).
            Accordingly, management concluded that we did not maintain effective
            internal
            control over financial reporting as of December 31, 2005.
  KPMG
          LLP,
          our independent registered public accounting firm, has issued an audit
          report on
          our assessment of internal control over financial reporting. This audit
          report
          is included in item c.) below.
 
 **c.)
          Independent Registered Public Accounting Firm's Report on Internal Control
          Over
          Financial Reporting**
 -26-
 Table
              of Contents
 **Report
        of Independent Registered Public Accounting Firm**
 Board
          of
          Directors and Stockholders
 Audible,
          Inc.:
 
 We
          have
          audited management's assessment, included in the accompanying *Management’s
          Report on Internal Control Over Financial Reporting* (Item
          9A.b.), that Audible, Inc. (the Company) did not maintain effective internal
          control over financial reporting as of December 31, 2005, because of the
          effect
          of the material weaknesses identified in management's assessment, based
          on
          criteria established in *Internal
          Control - Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO).
          The Company's management is responsible for maintaining effective internal
          control over financial reporting and for its assessment of the effectiveness
          of
          internal control over financial reporting. Our responsibility is to express
          an
          opinion on management's assessment and an opinion on the effectiveness
          of the
          Company's internal control over financial reporting based on our
          audit.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether effective
          internal control over financial reporting was maintained in all material
          respects. Our audit included obtaining an understanding of internal control
          over
          financial reporting, evaluating management's assessment, testing and evaluating
          the design and operating effectiveness of internal control, and performing
          such
          other procedures as we considered necessary in the circumstances. We believe
          that our audit provides a reasonable basis for our opinion.
 
 A
          company's internal control over financial reporting is a process designed
          to
          provide reasonable assurance regarding the reliability of financial reporting
          and the preparation of financial statements for external purposes in accordance
          with generally accepted accounting principles. A company's internal control
          over
          financial reporting includes those policies and procedures that (1) pertain
          to
          the maintenance of records that, in reasonable detail, accurately and fairly
          reflect the transactions and dispositions of the assets of the company;
          (2)
          provide reasonable assurance that transactions are recorded as necessary
          to
          permit preparation of financial statements in accordance with generally
          accepted
          accounting principles, and that receipts and expenditures of the company
          are
          being made only in accordance with authorizations of management and directors
          of
          the company; and (3) provide reasonable assurance regarding prevention
          or timely
          detection of unauthorized acquisition, use, or disposition of the company's
          assets that could have a material effect on the financial
          statements.
 
 Because
          of its inherent limitations, internal control over financial reporting
          may not
          prevent or detect misstatements. Also, projections of any evaluation of
          effectiveness to future periods are subject to the risk that controls may
          become
          inadequate because of changes in conditions, or that the degree of compliance
          with the policies or procedures may deteriorate.
 
 A
          material weakness is a control deficiency, or combination of control
          deficiencies, that results in more than a remote likelihood that a material
          misstatement of the annual or interim financial statements will not be
          prevented
          or detected. The following material weaknesses have been identified and
          included
          in management's assessment as of December 31, 2005:
  **Insufficient
          Accounting Personnel**
 
 The
          Company did not employ sufficient accounting personnel possessing an appropriate
          level of technical expertise. The Company’s accounting function  lacked
          adequate technical expertise related to accounting for and reporting of
          non-routine or complex transactions in accordance with U.S. generally accepted
          accounting principles and the Company lacked sufficient resources to address,
          communicate and remediate material weaknesses and significant deficiencies
          on a
          timely basis. This deficiency resulted in more than a remote likelihood
          that a
          material misstatement of the Company’s annual or interim consolidated financial
          statements would not be prevented or detected, and was a contributing factor
          in
          the development of other material weaknesses described below.
  **Inadequate
          Information and Communication**
 
 The
          Company did not have adequate policies and procedures to ensure that financial
          reporting information related to certain transactions was properly captured
          and
          communicated within the Company’s business processes and information systems.
          Specifically, the following two individual material weaknesses were identified:
 
 1) The
          Company did not have effective policies and procedures to adequately develop
          and
          validate system-generated reports. Specifically, the Company relied on
          system-generated reports to record journal entries related to gift revenue
          and
          deferred gift revenue in the Company’s general ledger, which reports did not
          accurately reflect gift transactions in accordance with U.S. generally
          accepted
          accounting principles. As a result of this deficiency, there were errors
          in
          consumer content revenue and deferred revenue in the Company’s 2005 consolidated
          financial statements.
  2) The
          Company had insufficient processes and controls in place to ensure the
          identification, capture and timely communication of financially significant
          information between certain parts of the Company’s organization and accounting
          department, which precluded the Company from being able to account for
          transactions in a complete, appropriate and timely manner. Specifically,
          there
          was inadequate communication between the Company’s customer service department
          and accounting department related to customer concessions issued by the
          customer
          service department. As a result of this deficiency, there were errors in
          consumer content revenue and deferred revenue in the Company’s 2005 consolidated
          financial statements.
 
 **Inadequate
          Risk Assessment**
 
 The
          Company had inadequate controls and procedures for ensuring that financial
          reporting risks associated with the Company’s new membership programs launched
          in December 2005 were addressed at a sufficient level of detail so the
          financial
          implications could be identified and appropriate action plans could be
          formulated and implemented prior to the launch of such programs. This deficiency
          resulted in the Company’s inability to close its 2005 books on a timely basis
          and resulted in errors in consumer content revenue and deferred revenue
          in the
          Company’s 2005 consolidated financial statements.
 
 **Ineffective
          Contract Management**
 
 The
          Company did not have policies and procedures to ensure the effective monitoring
          of the financial statement implications of contracts throughout their life
          cycle. As a result of this deficiency, there were errors in operating expenses
          and accrued expenses in the Company’s 2005 consolidated financial statements.
 
 **Ineffective
          Control over Retail Promotions**
 
 The
          Company did not have effective controls to ensure the accuracy of costs
          and
          accruals related to retail promotion programs. Specifically, the Company
          did not
          have controls to ensure that the Company maintained and monitored the inventory
          of retail promotion codes pre-purchased from retailers and did not reconcile
          on
          a timely basis amounts accrued for retail promotion codes to amounts
          subsequently paid. As a result of this deficiency, there were errors in
          point of
          sale rebates, discount certificate rebates and accrued expenses in the
          Company’s
          2005 consolidated financial statements.
  We
          also
          have audited, in accordance with the standards of the Public Company Accounting
          Oversight Board (United States), the consolidated balance sheets of Audible,
          Inc. and subsidiary as of December 31, 2005 and 2004, and the related
          consolidated statements of operations, comprehensive (loss) income,
          stockholders’ (deficit) equity, and cash flows for each of the years in the
          three-year period ended December 31, 2005. The aforementioned material
          weaknesses were considered in determining the nature, timing, and extent
          of
          audit tests applied in our audit of the 2005 consolidated financial statements,
          and this report does not affect our report dated March 30, 2006, which
          expressed
          an unqualified opinion on those consolidated financial statements.
 
 In
          our
          opinion, management's assessment that the Company did not maintain effective
          internal control over financial reporting as of December 31, 2005, is fairly
          stated, in all material respects, based on criteria established in *Internal
          Control - Integrated Framework* issued
          by the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO).
          Also, in our opinion, because of the effect of the material weaknesses
          described
          above on the achievement of the objectives of the control criteria, the
          Company
          has not maintained effective internal control over financial reporting
          as of
          December 31, 2005, based on criteria established in *Internal
          Control - Integrated Framework* issued
          by
          the Committee of Sponsoring Organizations of the Treadway Commission
          (COSO).
 
 /s/
          KPMG
          LLP
 Short
          Hills, New Jersey
 March
          30,
          2006  -27-
 Table
                of Contents
 **d.) Changes
          in Internal Control Over Financial Reporting**
 
 There
          were no changes to internal control over financial reporting during the
          fourth
          quarter of 2005 that have materially affected, or are reasonably likely
          to
          materially affect, the Company’s internal control over financial
          reporting.
 **Item
        9B. Other Information.**
  None.
  **PART
        III**
 
 **Item
        10. Directors and Executive Officers of the
        Registrant.**
 
 The
        information required by Item 10 is hereby incorporated by reference from
        the
        Proxy Statement for our 2006 Annual Meeting of Stockholders.
 
 **Item
        11. Executive Compensation.**
 
 The
        information required by Item 11 is hereby incorporated by reference from
        the
        Proxy Statement for our 2006 Annual Meeting of Stockholders.
 
 **Item
        12. Security Ownership of Certain Beneficial
        Owners and Management and Related Stockholder Matters.**
 
 The
        information required by Item 12 is hereby incorporated by reference from
        the
        Proxy Statement for our 2006 Annual Meeting of Stockholders.
 
 **Item
        13. Certain Relationships and Related
        Transactions.**
 
 The
        information required by Item 13 is hereby incorporated by reference from
        the
        Proxy Statement for our 2006 Annual Meeting of Stockholders.
  **Item
        14.  Principal Accounting Fees and
        Services.**
 
 The
        information required by Item 14 is hereby incorporated by reference from
        the
        Proxy Statement for our 2006 Annual Meeting of Stockholders.
  **PART
        IV**
 
 **Item
        15. Exhibits, Consolidated Financial Statement
        Schedules.**
  (a)
                  Documents filed as part of the report:
              
              Page
                  Number(1)
              Consolidated
                  Financial StatementsReport
                  of Independent Registered Public Accounting Firm
              
              F-1Consolidated
                  Balance Sheets at December 31, 2004 and 2005
              
              F-2Consolidated
                  Statements of Operations for the years ended December 31, 2003,
                  2004 and
                  2005
              
              F-3Consolidated
                  Statements of Comprehensive (Loss) Income for the years ended December
                  31,
                  2003, 2004 and 2005
              
              F-4Consolidated
                  Statements of Stockholders' (Deficit) Equity for the years ended
                  December
                  31, 2003, 2004 and 2005
              
              F-5Consolidated
                  Statements of Cash Flows for the years ended December 31, 2003,
                  2004 and
                  2005
              
              F-8Notes
                  to Consolidated Financial Statements
              
              F-9(2)
              Consolidated
                  Financial Statement SchedulesAll
                  consolidated financial statement schedules have been omitted
                  because the applicable information has been included in the
                  accompanying footnotes to the consolidated financial
                  statements(3)
              ExhibitsThe
                  following exhibits are filed or incorporated by reference, as stated
                  below:
 
  -28-
 Table
            of Contents
  
 Exhibit
                  Number
              
              Description3.1*
              
              Amended
                  and Restated Certificate of Incorporation of Audible,
                  Inc.3.1.2***
              
              Certificate
                  of Amendment to the Amended and Restated Certificate of Incorporation
                  of
                  Audible3.2*
              
              Amended
                  and Restated Bylaws of Audible, Inc.3.3!
              
              Certificate
                  of Retirement dated March 12, 200410.15*
              
              1999
                  Stock Incentive Plan10.19*
              
              Office
                  lease dated June 20, 1997, by and between Audible, Inc., as tenant,
                  and
                  Passaic Investment LLC, Sixty-Five Willowbrook Investment LLC and
                  Wayne
                  Investment LLC, as tenants-in-common, as landlord10.19.1$
              
              Fifth
                  modification, dated December 18, 2003, to the office
                  lease.10.19.2$
              
              Sixth
                  modification, dated March 23, 2005, to the office lease
                  .10.26*
              
              Employment
                  Offer Letter from Audible, Inc. to Andrew Kaplan dated May 25,
                  199910.29*
              
              Common
                  stock Purchase Warrant, W-1, issued June 17, 1999, to Robin
                  Williams10.30*
              
              Common
                  stock Purchase Warrant, W-2, issued June 17, 1999, to Robin
                  Williams10.30.1##
              
              Amendment
                  No. 1 to common stock Purchase Warrant, W-2, issued January 25,
                  2001, to
                  Robin Williams (relating to Exhibit 10.30)10.41!
              
              Form
                  of common stock warrant issued by Audible Inc. to investor parties
                  in
                  connection with the Series A Settlement Agreement dated February
                  6,
                  2004.10.43++@
              
              License
                  and Services Agreement by and between Audible Inc., and Audible
                  GmbH dated
                  August 30, 2004.10.44++@
              
              Master
                  Alliance Agreement by and between Audible Inc., France Loisirs
                  S.A.S. and
                  Audio Direct S.A.S. dated September 15, 2004.10.45@
              
              Articles
                  of Association of Audible GmbH.10.46++!!
              
              Digital
                  Download sales agreement with Apple Computer, Inc.14.1
              
              Audible
                  Code of Ethics and Business Conduct21.1
              
              List
                  of subsidiary23.1
              
              Consent
                  of KPMG LLP, Independent Registered Public Accounting
                  Firm24.1
              
              Power
                  of attorney (included on signature page)31.1
              
              Annual
                  Certifications of the Chief Executive Officer pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.31.2
              
              Annual
                  Certifications of the Chief Financial Officer pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002.32.1
              
              Annual
                  Certifications of the Chief Executive Officer pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002.32.2
              
              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 for the fiscal year ended
                  December
                  31, 2001##
              
              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 10-K for the fiscal year ended
                  December
                  31, 2003.@
              
              Incorporated
                  by reference from the Company's Form 10-Q for the quarterly period
                  ended
                  September 30, 2004.!!
              
              Incorporated
                  by reference from the Company's 10-K/A for the period ended December
                  31,
                  2004.$
              
              To
                  be filed by amendment.^
              
              Executive
                  Compensation Plans and
                  Arrangements.
  +
         Portions of these Exhibits were omitted and have been filed separately
        with the Secretary of the Commission pursuant to the Company's Application
        requesting Confidential Treatment under Rule 406 of the Securities Act of
        1933.
  ++
        Portions of these Exhibits were omitted and have been filed separately with
        the
        Secretary of the Commission pursuant to the Company's Application requesting
        Confidential Treatment under Rule 24b-2 of the Securities Exchange Act of
        1934.
  -29-
 Table
            of Contents
  **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. KatzDonald
                  R. KatzChairman
                  and Chief Executive OfficerDate: 
                  March 31, 2006
   Pursuant
        to the requirements of the Securities Exchange Act of 1934 this report has
        been
        signed below by the following persons on behalf of the registrant, in the
        capacities and on the dates indicated. Each person whose signature appears
        below
        in so signing also makes, constitutes, and appoints Donald R. Katz and Glenn
        Rogers, and each of them, his or her true and lawful attorney-in-fact, with
        full
        power of substitution, for him in any and all capacities, to execute and
        cause
        to be filed with the SEC any and all amendments to this report, with exhibits
        thereto and other documents in connections therewith, and hereby ratifies
        and
        confirms all that said attorney-in-fact or his substitute or substitutes
        may do
        or cause to be done by virtue hereof.
  Name
              
              Title
              
              Date/s/
                  Donald R. Katz
              
              
              
              March
                  31, 2006Donald
                  R. Katz
              
              Chairman
                  and Chief Executive Officer/s/
                  Andrew P. Kaplan
              
              
              
              March
                  31, 2006Andrew
                  P. Kaplan
              
              Chief
                  Financial Officer, Executive Vice President, Finance/s/
                  Richard Sarnoff
              
              
              
              March
                  31, 2006Richard
                  Sarnoff
              
              Director/s/ Gary
                  L. Ginsberg
              
              
              
              March
                  31, 2006Gary
                  L. Ginsberg
              
              Director/s/
                  Johannes Mohn
              
              
              
              March
                  31, 2006Johannes
                  Mohn
              
              Director/s/
                  Alan Patricof
              
              
              
              March
                  31, 2006Alan
                  Patricof
              
              Director/s/
                  Oren Zeev
              
              
              
              March
                  31, 2006Oren
                  Zeev
              
              Director/s/
                  William Washecka
              
              
              
              March
                  31, 2006William
                  Washecka
              
              Director
  -30-
 Table
            of Contents
  **Report
        of Independent Registered Public Accounting
        Firm**
 
 
 The
        Board
        of Directors and Stockholders
 Audible,
        Inc.:
 
 We
        have
        audited the accompanying consolidated balance sheets of Audible, Inc. and
        subsidiary as of December 31, 2004 and 2005, and the related consolidated
        statements of operations, comprehensive (loss) income, stockholders' (deficit)
        equity, and cash flows for each of the years in the three-year period ended
        December 31, 2005. These consolidated financial statements are the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these consolidated financial statements based on our
        audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Audible, Inc. and subsidiary
        as of December 31, 2004 and 2005, and the results of their operations and
        their
        cash flows for each of the years in the three-year period ended December
        31,
        2005, in conformity with U.S. generally accepted accounting
        principles.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Audible, Inc.'s internal
        control over financial reporting as of December 31, 2005, based on criteria
        established in *Internal Control--Integrated Framework* issued
        by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
        and our report dated March 30, 2006 expressed an unqualified opinion on
        management's assessment of, and an adverse opinion on the effective operation
        of, internal control over financial reporting.
 
 
 /s/
        KPMG
        LLP
 
 
 Short
        Hills, New Jersey
 March
        30,
        2006
   F-1-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(dollars
        in thousands, except share and per share data)**
 
 **December
                  31,****2004**
              
              **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              13,296
              
              $
              11,549Short-term
                  investments
              
              
              48,386
              
              
              55,616Interest
                  receivable on short-term investments
              
              
              76
              
              
              428Accounts
                  receivable, net of provision for refunds and chargebacks of $14
                  and $31 at
                  December 31, 2004 and 2005, respectively
              
              
              787
              
              
              2,337Accounts
                  receivable - related party
              
              
              88
              
              
              594Royalty
                  advances
              
              
              141
              
              
              471Prepaid
                  expenses and other current assets
              
              
              666
              
              
              899Inventory
              
              
              394
              
              
              498Total
                  current assets
              
              
              63,834
              
              
              72,392Property
                  and equipment, net
              
              
              919
              
              
              8,159Other
                  assets
              
              
              21
              
              
              114Total
                  assets
              
              $
              64,774
              
              $
              80,665**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              851
              
              $
              4,750Accrued
                  expenses
              
              
              1,897
              
              
              4,802Accrued
                  royalties
              
              
              1,882
              
              
              5,104Accrued
                  compensation
              
              
              448
              
              
              868Capital
                  lease obligations
              
              
              121
              
              
              --Deferred
                  revenue
              
              
              2,446
              
              
              6,459Total
                  current liabilities
              
              
              7,645
              
              
              21,983Deferred
                  revenue-noncurrent
              
              
              --
              
              
              99Royalty
                  obligations-noncurrent
              
              
              38
              
              
              188Commitments
                  and contingenciesStockholders'
                  equity:Common
                  stock, par value $.01. Authorized 40,000,000 shares at December
                  31, 2004
                  and 2005; 24,169,775 and 24,326,503 shares issued at December 31,
                  2004 and
                  2005, respectively
              
              
              242
              
              
              243Additional
                  paid-in capital
              
              
              187,249
              
              
              192,547Deferred
                  compensation
              
              
              (154
              )
              
              (3,696
              )Accumulated
                  other comprehensive income
              
              
              --
              
              
              15Treasury
                  stock at cost; 229,741 and 0 shares of common stock at December
                  31, 2004
                  and 2005
              
              
              (185
              )
              
              --Accumulated
                  deficit
              
              
              (130,061
              )
              
              (130,714
              )Total
                  stockholders' equity
              
              
              57,091
              
              
              58,395Total
                  liabilities and stockholders' equity
              
              $
              64,774
              
              $
              80,665
 See
        accompanying notes to consolidated financial statements.
  F-2-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED STATEMENTS
        OF OPERATIONS**
 **(dollars
        in thousands, except share and per share data)**
 
 **Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005**Revenue,
                  net:Content
                  and services revenue:Consumer
                  content
              
              $
              18,594
              
              $
              33,838
              
              $
              62,185Point
                  of sale rebates
              
              
              (105
              )
              
              (696
              )
              
              (1,006
              )Services
              
              
              105
              
              
              68
              
              
              131Total
                  content and services revenue
              
              
              18,594
              
              
              33,210
              
              
              61,310Hardware
                  revenue
              
              
              666
              
              
              695
              
              
              612Related
                  party revenue
              
              
              --
              
              
              362
              
              
              1,146Other
                  revenue
              
              
              65
              
              
              52
              
              
              169Total
                  revenue, net
              
              
              19,325
              
              
              34,319
              
              
              63,237Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              5,319
              
              
              10,650
              
              
              22,613Discount
                  certificate rebates
              
              
              --
              
              
              1,462
              
              
              1,556Total
                  cost of content and services revenue
              
              
              5,319
              
              
              12,112
              
              
              24,169Cost
                  of hardware revenue
              
              
              2,085
              
              
              2,188
              
              
              2,934Cost
                  of related party revenue
              
              
              --
              
              
              126
              
              
              256Operations
              
              
              3,843
              
              
              5,146
              
              
              9,355Technology
                  and development
              
              
              4,785
              
              
              5,030
              
              
              8,239Marketing
              
              
              4,495
              
              
              5,097
              
              
              13,387General
                  and administrative
              
              
              2,633
              
              
              3,539
              
              
              8,366Total
                  operating expenses
              
              
              23,160
              
              
              33,238
              
              
              66,706(Loss)
                  income from operations
              
              
              (3,835
              )
              
              1,081
              
              
              (3,469
              )Other
                  income (expense):Interest
                  income
              
              
              25
              
              
              253
              
              
              2,078Interest
                  expense
              
              
              --
              
              
              (32
              )
              
              (1
              )Other
                  income, net
              
              
              25
              
              
              221
              
              
              2,077(Loss)
                  income before income taxes
              
              
              (3,810
              )
              
              1,302
              
              
              (1,392
              )Income
                  tax expense
              
              
              --
              
              
              (1
              )
              
              (1
              )State
                  income tax benefit
              
              
              250
              
              
              724
              
              
              740Net
                  (loss) income
              
              
              (3,560
              )
              
              2,025
              
              
              (653
              )Dividends
                  on preferred stock
              
              
              (5,657
              )
              
              (614
              )
              
              --Preferred
                  stock discount
              
              
              (1,444
              )
              
              --
              
              
              --Charges
                  related to conversion of convertible preferred stock
              
              
              --
              
              
              (9,873
              )
              
              --Total
                  preferred stock expense
              
              
              (7,101
              )
              
              (10,487
              )
              
              --Net
                  loss applicable to common shareholders
              
              $
              (10,661
              )
              $
              (8,462
              )
              $
              (653
              )Basic
                  and diluted net loss applicable to common shareholders per common
                  share
              
              $
              (1.01
              )
              $
              (0.40
              )
              $
              (0.03
              )Basic
                  and diluted weighted average common shares outstanding
              
              
              10,506,704
              
              
              20,912,997
              
              
              24,195,771
 
 See
        accompanying notes to consolidated financial statements.
  F-3-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE (LOSS)
        INCOME**
 **(dollars
        in thousands)**
  **Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005**Net
                  (loss) income
              
              $
              (3,560
              )
              $
              2,025
              
              $
              (653
              )Other
                  comprehensive income:Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              15Comprehensive
                  (loss) income
              
              $
              (3,560
              )
              $
              2,025
              
              $
              (638
              )
 
   See
        accompanying notes to consolidated financial statements.
 
  F-4-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' (DEFICIT)
        EQUITY**
 **(dollars
        and shares in thousands)**
  **Common
                  Stock****Series
                  A**
                **Preferred**
                **Stock**
              
              **Series
                  B**
                **Preferred**
                **Stock**
              
              **Series
                  C**
                **Preferred**
                **Stock**
              
              **Shares**
              
              **ParValue****Balance
                  at December 31, 2002**
              
              
              --
              
              $
              1,138
              
              
              --
              
              
              10,562
              
              $
              106Deferred
                  compensation related to stock options issued below fair market
                  value
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              14
              
              
              --Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              238
              
              
              2Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              409
              
              
              4Series
                  A Preferred stock reclassification due to removal of mandatory
                  redemption
                  feature
              
              
              13,027
              
              
              --
              
              
              --
              
              
              --
              
              
              --Sale
                  of Series C Preferred stock
              
              
              --
              
              
              --
              
              
              5,860
              
              
              --
              
              
              --Conversion
                  of Series C Preferred Stock and accrued dividends into common
                  stock
              
              
              --
              
              
              --
              
              
              (5,860
              )
              
              3,792
              
              
              38Forgiveness
                  of notes due from stockholders
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Elimination
                  of payments due to Amazon
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Preferred
                  stock issuance discount
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Accrued
                  dividends on preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2003**
              
              $
              13,027
              
              $
              1,138
              
              
              --
              
              
              15,015
              
              $
              150Conversion
                  of Series A Preferred Stock
              
              
              (13,027
              )
              
              --
              
              
              --
              
              
              4,669
              
              
              46Conversion
                  of Series B Preferred Stock
              
              
              --
              
              
              (1,138
              )
              
              --
              
              
              417
              
              
              4Preferred
                  dividends and conversion inducement
              
              
              --
              
              
              --
              
              
              --
              
              
              1,167
              
              
              12Sale
                  of common stock
              
              
              --
              
              
              --
              
              
              --
              
              
              2,022
              
              
              20Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              40
              
              
              1Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              802
              
              
              8Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              38
              
              
              1Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Payments
                  received on notes due from stockholders
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Reversal
                  of unused accrued expense related to Series C financing
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Preferred
                  stock expense
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Income
                  tax benefit due to exercise of stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2004**
              
              
              --
              
              
              --
              
              
              --
              
              
              24,170
              
              $
              242Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              24
              
              
              --Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              246
              
              
              2Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              117
              
              
              1Reversal
                  of deferred compensation related to forfeiture of stock
                  options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issuance
                  of restricted stock, net of cancellations
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Issuance
                  of stock options below fair market value
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Retirement
                  of treasury stock
              
              
              --
              
              
              --
              
              
              --
              
              
              (230
              )
              
              (2
              )Income
                  tax benefit from stock options exercised
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2005**
              
              
              --
              
              $
              --
              
              
              --
              
              
              24,327
              
              $
              243
 
 See
        accompanying notes to consolidated financial statements.
   F-5-
 Table
            of Contents
 **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY**
 **(dollars
        and shares in thousands)**
  **Additional
                  paid-in capital**
              
              **Deferred
                  compensation**
              
              **Deferred
                  services**
              
              **Accumulated
                  Other**
                **Comprehensive**
                **Income****Balance
                  at December 31, 2002**
              
              $
              98,244
              
              $
              (174
              )
              $
              (417
              )
              
              --Deferred
                  compensation related to stock options issued below fair market
                  value
              
              
              239
              
              
              (239
              )
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              174
              
              
              --
              
              
              --Amortization
                  of deferred services
              
              
              --
              
              
              --
              
              
              417
              
              
              --Amortization
                  of warrants for services
              
              
              719
              
              
              --
              
              
              --
              
              
              --Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              435
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock warrants
              
              
              1,233
              
              
              --
              
              
              --
              
              
              --Series
                  A Preferred stock reclassification due to removal of mandatory
                  redemption
                  feature
              
              
              --
              
              
              --
              
              
              --
              
              
              --Sale
                  of Series C Preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --Conversion
                  of Series C Preferred Stock and accrued dividends into common
                  stock
              
              
              6,693
              
              
              --
              
              
              --
              
              
              --Forgiveness
                  of notes due from stockholders
              
              
              --
              
              
              --
              
              
              --
              
              
              --Elimination
                  of payments due to Amazon
              
              
              1,500
              
              
              --
              
              
              --
              
              
              --Preferred
                  stock issuance discount
              
              
              1,444
              
              
              --
              
              
              --
              
              
              --Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --Accrued
                  dividends on preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2003**
              
              $
              110,507
              
              $
              (239
              )
              
              --
              
              
              --Conversion
                  of Series A Preferred Stock
              
              
              12,981
              
              
              --
              
              
              --
              
              
              --Conversion
                  of Series B Preferred Stock
              
              
              1,134
              
              
              --
              
              
              --
              
              
              --Preferred
                  dividends and conversion inducement
              
              
              13,838
              
              
              --
              
              
              --
              
              
              --Sale
                  of common stock
              
              
              46,437
              
              
              --
              
              
              --
              
              
              --Cashless
                  exercise of common stock warrants
              
              
              (1
              )
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              1,777
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock warrants
              
              
              56
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              85
              
              
              --
              
              
              --Amortization
                  of warrants for services
              
              
              511
              
              
              --
              
              
              --
              
              
              --Payments
                  received on notes due from stockholders
              
              
              --
              
              
              --
              
              
              --
              
              
              --Reversal
                  of unused accrued expense related to Series C financing
              
              
              8
              
              
              --
              
              
              --
              
              
              --Preferred
                  stock expense
              
              
              --
              
              
              --
              
              
              --
              
              
              --Income
                  tax benefit due to exercise of stock options
              
              
              1
              
              
              --
              
              
              --
              
              
              --Net
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2004**
              
              $
              187,249
              
              $
              (154
              )
              
              --
              
              
              --Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              689
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock warrants
              
              
              293
              
              
              --
              
              
              --
              
              
              --Reversal
                  of deferred compensation related to forfeiture of stock
                  options
              
              
              (9
              )
              
              9
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              981
              
              
              --
              
              
              --Issuance
                  of restricted stock, net of cancellations
              
              
              4,238
              
              
              (4,262
              )
              
              --
              
              
              --Issuance
                  of stock options below fair market value
              
              
              270
              
              
              (270
              )
              
              --
              
              
              --Retirement
                  of treasury stock
              
              
              (183
              )
              
              --
              
              
              --
              
              
              --Income
                  tax benefit from stock options exercised
              
              
              --
              
              
              --
              
              
              --
              
              
              --Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              --
              
              
              15Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --**Balance
                  at December 31, 2005**
              
              $
              192,547
              
              $
              (3,696
              )
              
              --
              
              $
              15
  See
        accompanying notes to consolidated financial statements.
  F-6-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY**
 **(dollars
        and shares in thousands)**
  **Treasury
                  Stock****Notes
                  due from stockholders for common stock**
              
              **Shares**
              
              **Cost**
              
              **Accumulated
                  deficit**
              
              **Total
                  stockholders’ equity (deficit)****Balance
                  at December 31, 2002**
              
              $
              (290
              )
              
              (230
              )
              $
              (185
              )
              $
              (111,748
              )
              $
              (13,326
              )Deferred
                  compensation related to stock options issued below fair market
                  value
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              174Amortization
                  of deferred services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              417Amortization
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              719Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              437Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1,237Series
                  A Preferred stock reclassification due to removal of mandatory
                  redemption
                  feature
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              13,027Sales
                  of Series C Preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              5,860Conversion
                  of Series C Preferred Stock and accrued dividends into common
                  stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              871Forgiveness
                  of notes due from stockholders
              
              
              231
              
              
              --
              
              
              --
              
              
              --
              
              
              231Elimination
                  of payments due to Amazon
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1,500Preferred
                  stock issuance discount
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,444
              )
              
              --Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              (3,560
              )
              
              (3,560
              )Accrued
                  dividends on preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,483
              )
              
              (1,483
              )**Balance
                  at December 31, 2003**
              
              $
              (59
              )
              
              (230
              )
              $
              (185
              )
              $
              (118,235
              )
              $
              6,104Conversion
                  of Series A Preferred Stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Conversion
                  of Series B Preferred Stock
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Preferred
                  dividends and conversion inducement
              
              
              --
              
              
              --
              
              
              --
              
              
              (3,363
              )
              
              10,487Sale
                  of common stock
              
              
              --
              
              
              --
              
              
              --
              
              
              
              
              
              46,457Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1,785Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              57Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              85Amortization
                  of warrants for services
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              511Payments
                  received on notes due from stockholders
              
              
              59
              
              
              --
              
              
              --
              
              
              --
              
              
              59Reversal
                  of unused accrued expense related to Series C financing
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              8Preferred
                  stock expense
              
              
              --
              
              
              --
              
              
              --
              
              
              (10,488
              )
              
              (10,488
              )Income
                  tax benefit due to exercise of stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1Net
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              2,025
              
              
              2,025**Balance
                  at December 31, 2004**
              
              
              --
              
              
              (230
              )
              $
              (185
              )
              $
              (130,061
              )
              $
              57,091Cashless
                  exercise of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Exercise
                  of common stock options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              691Exercise
                  of common stock warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              294Reversal
                  of deferred compensation related to forfeiture of stock
                  options
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Amortization
                  of deferred compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              981Issuance
                  of restricted stock, net of cancellations
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (24
              )Issuance
                  of stock options below fair market value
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Retirement
                  of treasury stock
              
              
              --
              
              
              230
              
              
              185
              
              
              --
              
              
              --Income
                  tax benefit from stock options exercised
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Foreign
                  currency translation adjustment
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              15Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              (653
              )
              
              (653
              )**Balance
                  at December 31, 2005**
              
              
              --
              
              
              --
              
              
              --
              
              $
              (130,714
              )
              $
              58,395
   See
        accompanying notes to consolidated financial statements.
  F-7-
 Table
            of Contents
  **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(dollars
        in thousands)**
 
 **Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005****Cash
                  flows from operating activities:**Net
                  (loss) income
              
              $
              (3,560
              )
              $
              2,025
              
              $
              (653
              )Adjustments
                  to reconcile net (loss) income to net cash (used in) provided by
                  operating
                  activities:Depreciation
                  and amortization
              
              
              498
              
              
              499
              
              
              1,106Services
                  received for common stock and warrants
              
              
              1,136
              
              
              511
              
              
              --Noncash
                  stock-based compensation charge
              
              
              174
              
              
              85
              
              
              957Noncash
                  forgiveness of notes due from stockholders for common
                  stock
              
              
              199
              
              
              --
              
              
              --Deferred
                  cash compensation
              
              
              --
              
              
              (59
              )
              
              --Income
                  tax benefit from exercise of stock options
              
              
              --
              
              
              1
              
              
              --Amortization
                  of discounts on investments
              
              
              --
              
              
              (86
              )
              
              (1,184
              )Changes
                  in assets and liabilities:Interest
                  receivable on short-term investments
              
              
              --
              
              
              (76
              )
              
              (352
              )Accounts
                  receivable, net
              
              
              (56
              )
              
              (541
              )
              
              (1,550
              )Accounts
                  receivable from related party
              
              
              --
              
              
              (88
              )
              
              (506
              )Royalty
                  advances
              
              
              (14
              )
              
              (68
              )
              
              (330
              )Prepaid
                  expenses and other current assets
              
              
              140
              
              
              (69
              )
              
              (233
              )Inventory
              
              
              (23
              )
              
              (294
              )
              
              (104
              )Other
                  assets
              
              
              (328
              )
              
              398
              
              
              (93
              )Accounts
                  payable
              
              
              (551
              )
              
              324
              
              
              3,903Accrued
                  expenses
              
              
              (272
              )
              
              711
              
              
              3,062Accrued
                  royalties
              
              
              1,053
              
              
              257
              
              
              3,222Accrued
                  compensation
              
              
              82
              
              
              87
              
              
              420Deferred
                  revenue
              
              
              378
              
              
              1,571
              
              
              4,114**Net
                  cash (used in) provided by operating activities**
              
              
              (1,144
              )
              
              5,188
              
              
              11,779**Cash
                  flows from investing activities:**Purchases
                  of property and equipment
              
              
              (137
              )
              
              (402
              )
              
              (3,706
              )Capitalized
                  internally developed software costs
              
              
              --
              
              
              --
              
              
              (4,640
              )Purchases
                  of short-term investments
              
              
              --
              
              
              (48,300
              )
              
              (79,546
              )Proceeds
                  from maturity of short-term investments
              
              
              --
              
              
              --
              
              
              73,500**Net
                  cash used in investing activities**
              
              
              (137
              )
              
              (48,702
              )
              
              (14,392
              )**Cash
                  flows from financing activities:**Proceeds
                  from issuance of Series C convertible preferred stock, net
              
              
              5,860
              
              
              --
              
              
              --Proceeds
                  from the sale of common stock, net
              
              
              --
              
              
              46,457
              
              
              --Payments
                  received on notes due from stockholders for common stock
              
              
              --
              
              
              59
              
              
              --Proceeds
                  from exercise of common stock options
              
              
              437
              
              
              1,785
              
              
              691Proceeds
                  from exercise of common stock warrants
              
              
              1,237
              
              
              57
              
              
              294Payment
                  of principal on obligations under capital leases
              
              
              --
              
              
              (623
              )
              
              (121
              )**Net
                  cash provided by financing activities**
              
              
              7,534
              
              
              47,735
              
              
              864Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              --
              
              
              --
              
              
              2Increase
                  (decrease) in cash and cash equivalents
              
              
              6,253
              
              
              4,221
              
              
              (1,747
              )Cash
                  and cash equivalents at beginning of year
              
              
              2,822
              
              
              9,075
              
              
              13,296**Cash
                  and cash equivalents at end of year**
              
              $
              9,075
              
              $
              13,296
              
              $
              11,549
 
 See
        note 17 for supplemental disclosure of cash flow information.
  See
        accompanying notes to consolidated financial statements.
 
 F-8-
 **AUDIBLE,
                INC. AND SUBSIDIARY**
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                in thousands, except share and per share data)**
 Table
                of Contents
 
 **(1)****Description
        of Business and Business Conditions**
  *The
        Business*
  Audible,
        Inc. and subsidiary (the “Company”), incorporated on November 3, 1995, was
        formed to create the Audible service, the Internet's leading provider of
        digital
        spoken entertainment information and educational programming for playback
        on
        personal computers and mobile devices. The Company commenced commercial
        operations in October 1997.
 
 *Business
        Conditions*
  The
        Company has experienced net losses applicable to common shareholders of $10,661,
        $8,462, and $653 during the years ended December 31, 2003, 2004, and 2005
        respectively, and has an accumulated deficit of $130,714 as of December 31,
        2005. The Company raised $46,457, net of direct costs from the sale of common
        stock in a follow-on offering in November 2004. As of December 31, 2005,
        the
        Company's cash and cash equivalents balance was $11,549, and its short-term
        investments balance was $55,616.
 
 The
        Company may, in the future, need to raise additional funds to finance its
        continued growth. No assurance can be given that such additional financing,
        if
        needed, will be available on terms favorable to the Company or to its
        stockholders, if at all.
  **(2)        Summary
        of Significant Accounting Policies**
 
 *Basis
        of Presentation*
 
 Commencing
        in the first quarter of 2005, the Company began international operations
        in the
        United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a wholly-owned
        subsidiary of Audible, Inc. and therefore its results of operations are
        consolidated as of the end of each reporting period. The accompanying
        consolidated financial statements as of and for the year ended December 31,
        2005
        include the accounts of Audible, Inc. and Audible UK since its inception.
        All
        inter-company transactions and balances have been eliminated.
 
 *Cash
        and Cash Equivalents*
  The
        Company considers short-term, highly liquid investments with original maturities
        of three months or less at the time of purchase to be cash equivalents. Cash
        equivalents consist primarily of money market funds and notes due from
        governmental agencies. Cash consists of funds held in the Company's checking
        account.
 
 *Restricted
        Cash*
 
 In
        2004,
        the Company had restricted cash deposits being held as a reserve by the
        Company’s credit card processors. During 2005, this deposit was refunded to the
        Company. In 2005, the Company deposited a retainer in an interest-bearing
        account. As of December 31, 2004 and 2005, all restricted cash is included
        in
        Other Assets on the accompanying consolidated Balance Sheets.
 
 *Short-Term
        Investments*
 
 Investments
        purchased with a maturity of more than three months, and less than twelve
        months, are classified as short-term investments. The Company's short-term
        investments, as of December 31, 2004 and 2005, of $48,386 and $55,616,
        respectively, consisted of governmental agency notes and mortgage-backed
        securities that are to be held to maturity because the Company has the positive
        intent and ability to hold these securities to maturity. Held to maturity
        securities are stated at amortized cost, adjusted for amortization of premiums
        and accretion of discounts to maturity. Dividend and interest income are
        recognized when earned. Premiums and discounts are amortized or accreted
        over
        the life of the related held-to-maturity security as an adjustment to yield
        using the effective interest method. A decline in the market value of
        held-to-maturity security below that which is deemed to be other-than-temporary
        results in a reduction in carrying amount to fair value. The impairment is
        charged to operations and a new cost basis for the security is established.
        To
        determine whether an impairment is other-than-temporary, the Company considers
        whether it has the ability and intends to hold the investment until a market
        price recovery and considers whether evidence indicating the cost of the
        investment is recoverable outweighs evidence to the contrary. Evidence
        considered in this assessment includes the reasons for the impairment, the
        severity and duration of the impairment, changes in the value subsequent
        to year
        end, and forecasted performance of the investee.
  F-9-
 **AUDIBLE,
                    INC. AND SUBSIDIARY**
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                      in thousands, except share and per share data)**
 Table
                    of
                    Contents
  The
        amortized cost, gross unrealized holding losses and the fair value of
        held-to-maturity debt securities at December 31, 2004 and 2005 was $48,386,
        $20,
        and $48,366, and $55,616, $53 and $55,563, respectively.
 
 All
        of
        the debt securities classified as held-to-maturity
        mature before December 31, 2006.
 
 *Provision
        for Refunds and Chargebacks*
 
 The
        provision for refunds and chargebacks is recorded as a reduction of revenue
        and
        is estimated based on a percentage of revenue, taking into account historical
        experience. A portion of the provision is recorded as a reduction of accounts
        receivable based on an estimate of refunds that will be made related to sales
        that were unpaid at period-end. The remaining portion of the provision is
        reflected as an accrued liability at period-end. Actual refunds and chargebacks
        could differ from the Company’s estimate.
  The
        amount of the provision that was recorded as a reduction of accounts receivable
        as of December 31, 2004 and 2005 was $14 and $31, respectively. The amount
        of
        the provision reflected in the accrued liability was $169 and $287 at December
        31, 2004 and 2005, respectively.
 
 The
        activity in the provision account during the years ended December 31, 2003,
        2004, and 2005 was as follows:
  Balance
                  at December 31, 2002
              
              $
              9Provision
                  for refunds
              
              
              324Refunds
                  provided
              
              
              (319
              )Balance
                  at December 31, 2003
              
              $
              14Provision
                  for refunds and chargebacks
              
              
              1,037Refunds
                  and chargebacks provided
              
              
              (868
              )Balance
                  at December 31, 2004
              
              $
              183Provision
                  for refunds and chargebacks
              
              
              1,917Refunds
                  and chargebacks provided
              
              
              (1,782
              )Balance
                  at December 31, 2005
              
              $
              318
 
 *Inventory*
  Inventory
        is stated at the lower of cost or market using the first-in, first-out method.
        As of December 31, 2004 and 2005, inventory consists of digital audio players
        manufactured by third party manufacturers.
 
 *Property
        and Equipment*
  Property
        and equipment, which includes computer server and Web site equipment, office
        furniture and equipment, leasehold improvements, internally developed software,
        studio equipment, and software licenses, are stated at cost. Property and
        equipment under capital leases are stated at the present value of minimum
        lease
        payments. Depreciation is calculated using the straight-line method over
        the
        estimated useful lives of the respective assets, which is three years for
        computer server, Web site equipment, and software licenses, and two years
        for
        office furniture and equipment, internally developed software, and studio
        equipment. Property and equipment held under capital leases are amortized
        on a
        straight-line basis over the estimated useful life of the asset. Leasehold
        improvements are amortized on a straight-line basis over the lease term or
        the
        estimated useful life of the asset, whichever is shorter. The amortization
        is
        included within depreciation expense in the consolidated Statement of Cash
        Flows.
 
 Work
        in
        process consists of expenditures for the development of various computer
        software projects incurred subsequent to the completion of the preliminary
        project stage. In accordance with SOP 98-1, *Accounting for Costs of Computer Software Developed or Obtained for Internal
        Use* ,
        the
        Company has capitalized external direct costs of material and services developed
        or obtained for these projects and payroll and payroll related expenses for
        employees directly associated with these projects. Amortization for each
        software project will begin when the computer software is ready for its intended
        use.
  Maintenance
        and repairs are expensed as incurred.
  *Impairment
        of Long-Lived Assets*
  The
        Company reviews its long-lived assets for impairment when events or
        circumstances indicate that the carrying amount of an asset may not be
        recoverable. If the sum of the expected cash flows, undiscounted and without
        interest, is less than the carrying amount of the related asset, an impairment
        loss is recognized as the amount by which the carrying amount of the asset
        exceeds its fair value, generally based on a discounted cash flow
        analysis.
 
 *Royalty
        Advances and Royalty Obligations*
  Royalty
        advances represent payments made and payments to be made to various content
        providers pursuant to minimum guarantees under their royalty agreements,
        net of
        royalties expensed. The corresponding royalty obligations represent payments
        to
        be made to the content providers pursuant to minimum guarantees under their
        royalty agreements. These agreements give the Company the right to sell digital
        audio content over the Internet. The royalty obligations recorded in the
        accompanying consolidated Balance Sheets are classified between current and
        non-current based on the payment terms specified in the agreements. The Company
        periodically adjusts the balance of these advances to reflect their estimated
        net realizable value based on the difference, if any, between the carrying
        amount of the asset and the discounted future revenue stream. Royalty expense
        is
        included in cost of content and services revenue in the accompanying
        consolidated Statements of Operations.
 
 F-10-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  *Fair
        Value of Financial Instruments*
  Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist of cash and cash equivalents, short-term investments,
        accounts receivable, accounts receivable from related parties, accounts payable
        and accrued expenses. At December 31, 2004 and 2005, the fair values of
        these financial instruments approximated their carrying values due to the
        short-term nature of these instruments.
 
 *Foreign
        Currency Translation*
 
 In
        accordance with the provision of Statement of Financial Accounting Standard
        No.
        52, *Foreign Currency Translation* , ** SFAS
        52,
        the Company's UK subsidiary, whose functional currency is the British Pound,
        translates its balance sheet into U.S. dollars at the prevailing rate at
        the
        balance sheet date and translates its revenues, costs and expenses at the
        average rates prevailing during each reporting period. Net gains or losses
        resulting from the translation of Audible UK's financial statements are
        accumulated and charged directly to Accumulated Other Comprehensive Income,
        a
        component of stockholders' equity.
  Since
        the
        inception of Audible UK operations, Audible Inc. has made periodic cash fundings
        to Audible UK to assist with the cash flow needs of the start-up subsidiary.
        Audible, Inc. expects these periodic fundings to continue into the foreseeable
        future. In addition to cash fundings, Audible, Inc. has paid certain expenses
        on
        behalf of the subsidiary, such as a security deposit on office space and
        payroll
        of U.S. employees working on the UK business. All of these fundings were
        made
        with the intention of treating them as a long-term investment. In
        accordance with the provisions of SFAS 52, the foreign currency gain/loss
        at
        each reporting period resulting from the inter-company account is recorded
        to Accumulated Other Comprehensive Income.
 
 *Reclassifications*
 
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation.
 
 *Investments
        Accounted For Under the Equity Method of Accounting*
 
 Audible
        Germany, an investment in which the Company owns 51%, is accounted for under
        the
        equity method of accounting. Under EITF 96-16, *Investor's Accounting for an Investee When the Investor has a Majority of
        the
        Voting Interest but the Minority Shareholder or Shareholders Have Certain
        Approval or Veto Rights* ,
        the
        Company has determined that the minority shareholders, together, have
        significant participatory rights, allowing them to participate in significant
        decisions of Audible Germany and to block significant decisions proposed
        by
        Audible. As a result of the significant participatory rights held by the
        minority shareholders of Audible Germany, the Company does not have unilateral
        control over Audible Germany. Therefore, Audible does not consolidate the
        results of Audible Germany but rather accounts for its investment in Audible
        Germany under the equity method of accounting. Under the equity method of
        accounting, the Company records 51% of the profits, if any, and 51% of the
        equity losses but only until such time that the Company records losses equal
        to
        the initial investment of the Company plus any profits previously recorded.
        The
        original investment has been written down to zero. Audible has no further
        obligation to fund the operations of Audible Germany. The Company will continue
        to monitor its portion of unreported equity losses in the event that Audible
        Germany subsequently generates income. The Company will resume applying the
        equity method after its share of profits equals the unreported equity method
        losses.
  *Revenue
        Recognition*
  Content
        and Services
 
 Consumer
        content revenue consists primarily of content sales made from the Company’s Web
        sites and content sold through its agreement with the Apple iTunes Music
        Store.
        At the Company’s Web site, customers purchase content either through an
        AudibleListener membership plan or on an a la carte basis. When purchased
        on an
        a la carte basis, the Company recognizes revenue from the sale of individual
        content titles in the period when the content is purchased and delivered.
        The
        Company generally recognizes revenue from the sale of content subscriptions
        pro
        rata over the term of the subscription period, depending on the terms of
        the
        plan.
 
 The
        “legacy” AudibleListener monthly membership plans generally provide customers
        two audio credits for a fixed monthly fee. Customers may use these audio
        credits
        to download of their choice from the Web site. Through November 2005, “legacy”
AudibleListener audio credits provided under a monthly membership plan had
        a
        life of 30 days, after which they expired. The Company recognizes revenue
        from
        the sale of legacy AudibleListener memberships ratably over the
        AudibleListener’s monthly membership period, which is 30 days. This results in
        approximately 50% of the AudibleListener membership fees received during
        each
        calendar month being deferred at month end and recognized as content revenue
        in
        the following month.
 
 In
        December 2005, the Company introduced new AudibleListener membership plans,
        designed to provide customers more flexibility in using their audio credits.
        Depending upon the AudibleListener membership plan, customers receive and
        can
“bank” or delay using up to a maximum of six or twelve audio credits, depending
        on the membership. The banking feature will result in audio credits being
        used
        (delivered) over different periods for different customers. This may result
        in
        slower revenue growth than the Company experienced in prior periods because
        the
        customer has a longer period of time to use their audio credits. In addition,
        some of the new AudibleListener plans include new membership benefits, ranging
        from a complimentary daily newspaper to everyday discounts of 30% on a la
        carte
        purchases. The daily newspaper and 30% discount benefits are “serial” elements
        that are delivered continuously over the membership period, whereas the content
        selections underlying the audio credits are discrete elements that are delivered
        at different times based on individual customer behavior. As a result of
        the
        characteristics of the new AudibleListener memberships, they are considered
        revenue arrangements with multiple deliverables; however under EITF 00-21, *Revenue
        Arrangements with Multiple Deliverables,* because
        the deliverables are not eligible for separation, they are accounted for
        as a
        single unit of accounting. As a result, revenue is recognized for these new
        AudibleListener plans using the lesser of straight-line or proportional
        performance (based on content delivery) over the maximum membership period.
 
 The
        following table displays the activity related to the new annual membership
        plans
        introduced in December 2005, which is included within deferred revenue on
        the
        accompanying consolidated Balance Sheet for 2005:
 
 **2005**Total
                  cash received
              
              $
              2,135Revenue
                  recognized
              
              
              (52)Deferred
                  revenue as of December 31, 2005
              
              $
              2,083
 
 Upon
        launch of the new AudibleListener plans in December 2005, the legacy
        AudibleListener plans were no longer available to new customers. Customers
        who
        have legacy memberships have the option of either converting to one of the
        new
        AudibleListener membership plans or continuing their legacy membership. Revenue
        is recognized from the sale of UltimateListener, the prepaid discounted content
        package, in which the customer receives twelve audio credits, and gift programs
        when the content is downloaded, over the membership period or subscription
        period, as applicable.
 
  F-11-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  Point
        of Sale Rebates and Discount Certificate Rebates
 
 Part
        of
        the Company’s marketing strategy to obtain new AudibleListeners includes retail
        promotions in which the Company pays retailers to offer discounts to consumers
        on their purchase of AudibleReady devices if they become AudibleListeners
        for
        twelve months. The Company also has retail promotions in which it purchases
        electronic discount certificates or gift cards from retailers and give them
        away
        to the Company’s customers when they sign up to be AudibleListeners for twelve
        months. Point of sale rebates, which are discounts given by a third party
        retailer to a customer on the purchase of a digital audio player at the point
        of
        sale of the Audible membership, are recorded as a reduction of revenue in
        the
        period the discount is given in accordance with Emerging Issues Task Force,
        or
        EITF, Issue No. 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including a
        Reseller of the Vendor's Products)* ,
        or EITF
        01-9. The cost of discount certificate rebates and gift cards that are given
        to
        a customer by Audible at the time the customer purchases the Audible membership
        are recorded as a cost of content and services revenue in accordance with
        EITF
        01-9.
 
 Services
        Revenue
  Corporate
        services revenue consists of library sales and audio production services.
        Where
        applicable, the Company recognizes corporate service revenue as services
        are
        performed after persuasive evidence of an agreement exists, the price is
        fixed,
        and collectibility is reasonably assured. Collectibility is based on past
        transaction history and credit-worthiness of the customer.
 
 Hardware
        Revenue
 
 Hardware
        revenue consists of sales of AudibleReady digital audio players. Most of
        the
        Company’s AudibleReady digital audio devices are sold at a discount or given
        away when a customer signs up for a three or six-month or one-year commitment
        to
        an AudibleListener membership. For multiple-element arrangements in which
        a
        customer signs up for a membership and receives an audio player for free,
        revenue is first allocated to the two elements (device and membership) using
        the
        relative fair value method under EITF Issue No. 00-21. However, the delivered
        item (hardware) is limited to the non-contingent consideration, which, for
        a
        free device, consists of only shipping and handling fees. The free hardware
        device reflects the subsidy incurred to acquire a customer with a commitment
        to
        AudibleListener. For players sold separately, hardware revenue is recognized
        upon shipment of the device, pursuant to a customer order and credit card
        authorization and includes amounts received for shipping and
        handling.
 
 Related
        Party Revenue
 
 Related
        party revenue consists of revenue earned under agreements with Audible Germany
        (see Note 11) and France Loisirs (see Note 12). Revenue under the Audible
        Germany agreement includes $30 earned per month over the initial 30-month
        term
        of the agreement, which began on August 30, 2004. The Company recognizes
        $30 per
        month only after Audible Germany has agreed that the services delivered for
        the
        prior 60-day period were satisfactory and collection of the amount is reasonably
        assured. Revenue under the France Loisirs agreement includes a $1,000 technology
        licensing fee that is being recognized on a straight-line basis over the
        initial
        24-month term of the agreement, which began on September 15, 2004. Of the
        $1,000, France Loisirs has paid approximately $833 as of December 31, 2005,
        resulting in deferred revenue of approximately $187 as of December 31, 2005.
        Revenue earned under each of these agreements also includes consulting services
        performed by certain of the Company’s employees and reimbursement of certain
        incremental costs incurred by the Company that are billed to Audible Germany
        and
        France Loisirs in accordance with EITF Issue 01-14, *Income Statement Characterization of Reimbursement Received for Out-of-Pocket'
        Expenses Incurred* .
 
 Other
        Revenue
 
 Other
        revenue in 2005 primarily included $115 of revenue earned from a new product
        development and distribution agreement, which is being recognized on a
        straight-line basis over a 58-month period. The remaining balance of Other
        Revenue in 2005 consisted of commissions earned for referring customers to
        a
        retail partner to purchase a digital audio device, which is recognized in
        the
        period when the customer’s purchase is completed.  Other
        revenue in 2004 and 2003 primarily consisted of straight-line amortization
        of
        revenue earned from technology licensing fee arrangements, which ended on
        June
        30, 2004.
 
 Customer
        Concessions
 
 The
        Company defers revenue for expected replacement audio credits based on on
        historical experience of the credits issued. The Company defers revenue for
        other audio credits and coupons when they are delivered to the customers
        based
        on estimated values. Actual customer credit and coupon issuance and usage
        patterns could differ from the Company’s estimates. The concessions are recorded
        as a reduction of revenue and an increase to deferred revenue.
 
 F-12-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  *Cost
        of Content and Services Revenue*
  Cost
        of
        content and services revenue includes royalties incurred on sales of content
        as
        specified by the terms of the content agreements, periodic net realizable
        value
        adjustments to royalty advances, amortization of warrants issued to content
        providers in connection with content agreements (2003 and 2004 only), production
        costs incurred in connection with creation of certain audio products, other
        non-recoupable content costs, and discount certificate rebates. Royalty expense
        for sales of content is incurred based on either a percentage of revenue
        or a
        fixed price per title as per the royalty agreement. In certain cases, the
        royalty cost per title may differ depending upon whether the title is sold
        as
        part of the AudibleListener membership or sold as an a la carte
        sale.
 
 Cost
        of
        content and services revenue for the years ended December 31, 2003, 2004,
        and
        2005 was as follows:
 
 **Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005**Royalties
                  incurred on content sales
              
              $
              4,742
              
              $
              10,393
              
              $
              22,399Net
                  realizable value adjustments
              
              
              18
              
              
              --
              
              
              --Amortization
                  of warrants issued to providers
              
              
              686
              
              
              181
              
              
              --Random
                  House Audible content costs (see note 9)
              
              
              (135
              )
              
              --
              
              
              --Other
                  content costs
              
              
              8
              
              
              76
              
              
              214Royalties
                  and other content charges
              
              $
              5,319
              
              $
              10,650
              
              $
              22,613Discount
                  certificate rebates
              
              
              --
              
              
              1,462
              
              
              1,556Total
                  cost of content and services revenue
              
              $
              5,319
              
              $
              12,112
              
              $
              24,169
 
 *Shipping
        and Handling Costs*
  Shipping
        and handling costs, which consist of costs and fees associated with warehousing,
        fulfillment, and shipment of digital audio devices to customers, are recorded
        as
        a component of marketing expense in the consolidated Statements of Operations.
        These costs totaled $384, $487, and $457 for the years ended December 31,
        2003,
        2004, and 2005 respectively.
 
 *Advertising
        Expenses*
  The
        Company expenses the costs of advertising and promoting its products and
        services as incurred. These costs are included in marketing expense in the
        accompanying Statements of Operations and totaled $1,067, $1,631, and $5,008
        for
        the years ended December 31, 2003, 2004, and 2005 respectively.
 
 *Legal
        Fees*
 
 The
        Company expenses legal fees, including those expenses expected to be incurred
        in
        connection with loss contingencies, as incurred.
 
 *Use
        of Estimates*
  The
        preparation of financial statements in conformity with U.S. generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities, disclosure of contingent
        assets and liabilities at the date of the financial statements, and reported
        amounts of revenues and expenses during the period. Significant items subject
        to
        estimates include the recoverability of the carrying amount of property and
        equipment (including internally-developed software), the provision for refunds
        and chargebacks, customer concessions, recoverability of royalty advances,
        valuation of deferred tax assets, certain accruals and fair value of equity
        based compensation. Actual results could differ from those
        estimates.
 
 *Income
        Taxes*
  The
        Company accounts for income taxes using the asset and liability method of
        SFAS
        No. 109, *Accounting
        for Income Taxes* .
        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 basis and operating loss and tax credit
        carryforwards. Deferred tax assets and liabilities are measured using enacted
        tax rates expected to apply to taxable income in the years in which those
        temporary differences are expected to be recovered or settled. The effect
        on
        deferred tax assets and liabilities of a change in tax rates is recognized
        in
        results of operations in the period in which the tax change occurs. Deferred
        tax
        assets are reduced, if necessary, by a valuation allowance for any tax benefits,
        which are more likely than not, not going to be realized.
 
 *Equity
        Instruments Issued for Goods and Services*
  The
        Company issues warrants to purchase shares of common stock to non-employees
        as
        part of their compensation for providing goods and services. The Company
        accounts for these warrants in accordance with the EITF Issue No.
        96-18, *Accounting for Equity Instruments that are Issued to Other than Employees
        for
        Acquiring, or in Conjunction with Selling, Goods or Services* .
        The
        exercise price of the warrants is determined by the closing price of Audible's
        common stock on the day of the agreement. Fair value of the warrant issued
        is
        estimated using the Black-Scholes model with the best available assumptions
        concerning risk-free interest rate, expected term 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.
  F-13-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  *Basic
        and Diluted Net Loss Applicable to Common Shareholders Per Common
        Share*
 
 Basic
        net
        loss applicable to common shareholders per common share is computed by dividing
        net loss applicable to common shareholders by the weighted average number
        of
        common shares outstanding for the period. Diluted net loss applicable to
        common
        shareholders per common share reflects the potential dilution that could
        occur
        if securities or other contracts to issue common stock were exercised or
        converted into common stock and resulted in the issuance of common stock.
        Potential common shares consist primarily of incremental shares issuable
        upon
        the assumed exercise of stock options, warrants and restricted stock using
        the
        treasury stock method.
  For
        2003,
        2004, and 2005, all potential common shares have been excluded from the diluted
        calculation because the Company had a net loss applicable to common
        shareholders, and their inclusion would have been anti-dilutive. The following
        table summarizes the potential common shares excluded from the diluted
        calculation:
  **Year
                  ended December 31,****2003**
              
              **2004**
              
              **2005**Stock
                  Options
              
              
              3,147,363
              
              
              2,600,331
              
              
              2,629,809Warrants
              
              
              715,438
              
              
              1,035,329
              
              
              883,389Restricted
                  Stock
              
              
              --
              
              
              --
              
              
              261,557Series
                  A Convertible Stock
              
              
              4,669,347
              
              
              --
              
              
              --Series
                  B Convertible Stock
              
              
              416,666
              
              
              --
              
              
              --
 
 *Employee
        Stock-based Compensation*
 
 SFAS
        No.
        148, *Accounting for Stock Based Compensation-Transition and Disclosure, an Amendment
        of FASB Statement No. 123* ,
        (“SFAS
        No. 148”), amended FASB Statement No. 123, *Accounting for Stock-based Compensation* ,
        (“SFAS
        No. 123”), to provide alternative methods of transition for a voluntary change
        to the fair value method of accounting for stock-based compensation. However,
        it
        allows an entity to continue to measure compensation cost for those instruments
        using the intrinsic value method of accounting prescribed by Accounting
        Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* ,
        (“APB
        No. 25”), provided it discloses the effect of SFAS No. 123, as amended by SFAS
        No. 148, in the footnotes to the consolidated financial statements. Until
        the
        adoption of SFAS No. 123R, *Share-Based
        Payment* ,
        which
        becomes effective for the Company on January 1, 2006, the Company has chosen
        to
        continue to account for stock-based compensation using the intrinsic value
        method.
 
 The
        Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
        options, stock appreciation rights, restricted or unrestricted stock awards,
        performance rights and other stock-based awards to employees. For options
        granted to new Audible employees as part of their compensation package, the
        exercise price is determined by the closing price of Audible's common stock
        on
        the day immediately preceding each employee's start date. For the majority
        of
        additional option grants made to existing employees, the exercise price is
        determined based on the closing price of the day immediately preceding the
        grant
        date. The majority of the options granted vest over a fifty-month period
        and
        expire ten years from the date of the grant.
  The
        Plan
        originally permitted up to 3,000,000 common stock shares to be issued under
        the
        plan. In September 2003, at the annual meeting of stockholders, the stockholders
        approved an amendment to the plan increasing the number of authorized common
        shares available for issuance under the plan to 4,200,000 shares. In June
        2005,
        at the annual stockholders meeting, the stockholders approved an amendment
        to
        the plan increasing the number of authorized common shares available for
        issuance under the plan to 5,700,000 shares. As of December 31, 2004 and
        2005,
        options to purchase 2,600,331 and 2,629,809, respectively, shares of common
        stock were outstanding. As of December 31, 2004 and 2005, zero and 279,750,
        respectively, of restricted share awards had been granted, of which 18,193
        were
        cancelled in 2005 due to employee termination.
 
 Compensation
        expense, if any, based on the intrinsic value method is recognized on a
        straight-line basis over the vesting term. Had the Company elected to recognize
        compensation cost based on fair value of the stock options at the date of
        grant
        under SFAS 148, such costs would have been recognized ratably over the vesting
        period of the underlying instruments and the Company's net loss applicable
        to
        common shareholders and net loss applicable to common shareholders per common
        share would have changed to the pro forma amounts indicated in the table
        below.
 
 **December
                  31,****2003**
              
              **2004**
              
              **2005**Net
                  loss applicable to common shareholders as reported
              
              $
              (10,661
              )
              $
              (8,462
              )
              $
              (653
              )Add:
                  Total stock-based employee compensation cost included in reported
                  net loss
                  applicable to common shareholders (based on intrinsic value
                  method)
              
              
              174
              
              
              85
              
              
              957Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value method for all awards
              
              
              4,103
              
              
              2,670
              
              
              3,498Pro-forma
                  net loss applicable to common shareholders
              
              $
              (14,590
              )
              $
              (11,047
              )
              $
              (3,194
              )Basic
                  and diluted net loss applicable to common shareholders per common
                  share:As
                  Reported
              
              $
              (1.01
              )
              $
              (0.40
              )
              $
              (0.03
              )Pro
                  Forma
              
              $
              (1.39
              )
              $
              (0.53
              )
              $
              (0.13
              )
 
 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, 2003, 2004, and 2005 are as
        follows:
  **December
                  31,****2003**
              
              **2004**
              
              **2005**Risk-free
                  interest rate
              
              
              5.00
              %
              
              3.66
              %
              
              4.31
              %Expected
                  dividend yield
              
              
              --
              
              
              --
              
              
              --Expected
                  lives
              
              
              7
                  years
              
              
              5
                  years
              
              
              5
                  yearsExpected
                  volatility
              
              
              117
              %
              
              122
              %
              
              114
              %Weighted-average
                  grant date fair value of stock options granted during the
                  year
              
              $
              2.58
              
              $
              10.61
              
              $
              13.52
 
  F-14-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  **(3)    Property
        and Equipment**
  Property
        and equipment at December 31, 2004 and 2005 consists of the
        following:
  **December
                  31,****2004**
              
              **2005**Studio
                  equipment
              
              $
              550
              
              $
              652Computer
                  server and Web site equipment
              
              
              4,595
              
              
              6,599Software
                  licenses
              
              
              --
              
              
              745Office
                  furniture and equipment
              
              
              851
              
              
              1,558Leasehold
                  improvements
              
              
              827
              
              
              975Internally
                  developed software
              
              
              --
              
              
              1,357Work
                  in process - internally developed software
              
              
              --
              
              
              3,283Total
                  property and equipment
              
              
              6,823
              
              
              15,169Less:
                  accumulated depreciation and amortization
              
              
              (5,904
              )
              
              (7,010
              )Total
                  property and equipment, net
              
              $
              919
              
              $
              8,159
 
 Depreciation
        and amortization expense on property and equipment totaled $498, $499, and
        $1,106 in 2003, 2004, and 2005, respectively. Included in the 2005 amount
        is
        amortization of internally developed software of $57.
 
 The
        gross
        amount of property and equipment and related accumulated amortization recorded
        under capital leases were as follows:
  **December
                  31,****2004**
              
              **2005**Computer
                  server and Web site equipment
              
              $
              743
              
              $
              743Less:
                  accumulated amortization
              
              
              (189
              )
              
              (437
              )Total
                  computer server and Web site equipment, net
              
              $
              554
              
              $
              306
  **(4)  
        Accrued Expenses**
  The
        components of the accrued expenses balance as of December 31, 2004 and 2005
        are
        follows:
 
 **December
                  31,****2004**
              
              **2005**Professional
                  fees
              
              $
              346
              
              $
              1,084Revenue
                  sharing and bounty payments
              
              
              305
              
              
              774Retail
                  rebates and discounts
              
              
              461
              
              
              578Refunds
                  and chargebacks
              
              
              169
              
              
              287Marketing
              
              
              274
              
              
              468Accrued
                  expense - related parties
              
              
              --
              
              
              333Royalty
                  obligations
              
              
              151
              
              
              293Other
                  accrued expenses
              
              
              191
              
              
              985Total
                  accrued expenses
              
              $
              1,897
              
              $
              4,802
  **(5)   Reverse
        Stock Split**
  At
        the
        annual meeting of stockholders held on June 3, 2004, the stockholders approved
        a
        proposal to amend and restate the Company's certificate of incorporation
        to
        effect a reverse stock split and to decrease the authorized number of shares
        of
        common stock on a proportional basis. The proposal granted the Company's
        Board
        of Directors (“Board”) authority to effect a reverse stock split of the
        Company's common stock of between and including two and four shares to be
        combined into one share of common stock. No fractional shares were to be
        converted.
  On
        June
        3, 2004, the Board approved a reverse stock split in the ratio of one for
        three
        shares effective June 17, 2004. On the effective date, each holder of record
        was
        deemed to hold one share of common stock for every three shares of common
        stock
        held immediately prior to the effective date. The 64,480,245 common shares
        then
        issued and outstanding were converted into 21,493,415 shares of common stock.
        Following the effective date of the reverse stock split, the par value of
        the
        common stock remained at $.01 per share.
  All
        share
        numbers and amounts have been retroactively restated for all periods presented
        to reflect the one for three reverse stock split.
  **(6)    Stockholders'
        (Deficit) Equity**
  *Common
        Stock*
  On
        February 6, 2004, in connection with the conversion of the outstanding Series
        A
        Preferred Stock (“Series A”), the Company issued 5,836,013 shares of common
        stock to Apax Partners (“Apax”). The Series A conversion was the result of a
        negotiated agreement under which, in addition to the 4,669,347 shares of
        common
        stock issuable upon conversion of the outstanding Series A shares in accordance
        with the terms of conversion, the Company issued to Apax 1,166,666 common
        shares
        of common stock and warrants to purchase 333,333 shares of common stock.
        Of the
        additional 1,166,666 shares issued, 389,863 shares were issued in payment
        of
        cumulative accrued dividends at the date of conversion, and 776,803 shares
        together with the warrants to purchase 333,333 shares were issued as an
        inducement to Apax to convert its Series A shares. The warrants are exercisable
        at $21.00 per share and expire on February 5, 2011. The fair value of the
        776,803 shares of common stock and the warrants to purchase 333,333 of $9,873
        has been recorded as a charge to the net loss applicable to common shareholders
        in the consolidated Statement of Operations for the year ended December 31,
        2004.
  F-15-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  On
        February 6, 2004, the Company issued 416,666 shares of common stock to Random
        House upon conversion of their outstanding Series B Preferred Stock (“Series B”)
        in accordance with the original terms of conversion.
 
 On
        November 17, 2004, the Company issued 2,022,500 shares of common stock in
        connection with a secondary public offering at a price of $24.50 per share.
        Net
        proceeds received by the Company were $46,457 net of direct costs.
 
 At
        December 31, 2004 and 2005, the Company had 24,169,775 and 24,326,503,
        respectively, common stock shares issued. At December 31, 2004 and 2005,
        the
        Company had 3,635,660 and 3,774,755, respectively, common shares reserved
        for
        common stock warrants, options and restricted stock. Additionally, at December
        31, 2003, the Company had 4,669,347 shares of common stock reserved for the
        conversion of outstanding Series A Convertible Preferred Stock, and 416,666
        shares of common stock reserved for the conversion of outstanding Series
        B
        Convertible Preferred Stock.
 
 *Stock
        Options*
 
 The
        Company has on occasion issued options to purchase shares of common stock
        to
        employees at a price less than the fair value of the stock at the time of
        issuance. The difference between the fair value on the grant date and the
        exercise price of options issued is recorded as deferred compensation, a
        component of stockholders' equity, and is amortized as compensation expense
        on a
        straight-line basis over the vesting term of the option. When employees who
        have
        these options leave the Company, the remaining unexpensed deferred compensation
        is reversed against additional paid-in-capital.
  During
        the years ended December 31, 2003, 2004, and 2005, $174, $85, and $97,
        respectively, of compensation expense was recognized related to these
        transactions.
  A
        summary
        of the stock option activity under the Plan is as follows:
  **Number of**
                **Shares**
              
              **Exercise Price**
                **Per
                  Share**
              
              **Weighted Average**
                **Exercise
                  Price Per Share****Balance,
                  December 31, 2002**
              
              
              2,515,633
              
              $
              0.93-$46.50
              
              $
              7.20Granted
              
              
              1,238,000
              
              $
              0.66-$12.60
              
              $
              2.67Canceled
              
              
              (367,746
              )
              $
              1.17-$46.50
              
              $
              11.40Exercised
              
              
              (238,524
              )
              $
              0.66-$3.75
              
              $
              1.83**Balance,
                  December 31, 2003**
              
              
              3,147,363
              
              $
              0.66-$38.25
              
              $
              5.34Granted
              
              
              277,691
              
              $
              9.30-$29.70
              
              $
              12.63Canceled
              
              
              (23,217
              )
              $
              0.66-$12.60
              
              $
              3.92Exercised
              
              
              (801,506
              )
              $
              0.66-$16.50
              
              $
              2.23**Balance,
                  December 31, 2004**
              
              
              2,600,331
              
              $
              0.69-$38.25
              
              $
              6.80Granted
              
              
              389,900
              
              $
              10.73-$26.58
              
              $
              15.63Canceled
              
              
              (114,352
              )
              $
              0.99-$31.32
              
              $
              14.80Exercised
              
              
              (246,070
              )
              $
              0.69-$13.69
              
              $
              2.81**Balance,
                  December 31, 2005**
              
              
              2,629,809
              
              $
              0.69-$38.25
              
              $
              8.13Exercisable:**December
                  31, 2005**
              
              
              350,743
              
              $
              0.69-$1.98
              
              $
              1.57426,637
              
              $
              2.13-$3.00
              
              $
              2.90438,916
              
              $
              3.06-$6.09
              
              $
              3.70183,983
              
              $
              9.30-$19.31
              
              $
              12.69296,649
              
              $
              20.47-$38.25
              
              $
              26.391,696,928
              
              $
              0.69-$38.25
              
              $
              8.00
  A
        summary
        of the total stock options outstanding as of December 31, 2005 is as
        follows:
  **Number
                    of Options**
                
                **Exercise
                    Price**
                  **Per
                    Share**
                
                **Weighted
                    Average**
                  **Exercise
                    Price Per Share**
                
                **Weighted
                    Average**
                  **Remaining**
                  **Contractual
                    Life**555,911
                
                
                $0.69-$1.98
                
                
                $1.58
                
                
                7.04
                    years427,057
                
                
                $2.13-$3.00
                
                
                $2.90
                
                
                5.84
                    years726,244
                
                
                $3.06-$6.09
                
                
                $3.59
                
                
                7.25
                    years602,066
                
                
                $9.30-$19.31
                
                
                $13.75
                
                
                8.83
                    years318,531
                
                
                $20.47-$38.25
                
                
                $26.33
                
                
                4.27
                    years2,629,809
                
                
                $0.69-$38.25
                
                
                $8.13
                
                
                6.98
                    years
  At
        December 31, 2005, approximately 1,496,000 shares of common stock were available
        for future grants under the Plan.
  F-16-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  *Restricted
        Stock*
 
 At
        December 31, 2004 and 2005, the Company granted awards to receive none and
        279,750 restricted shares, respectively, to employees under the Plan. The
        restricted shares either cliff-vest or vest periodically between three months
        to
        forty-eight months after the grant date. As of December 31, 2005, 18,193
        units
        of restricted stock were cancelled due to an employee termination. The fair
        value of the restricted stock units on the grant date, as determined by the
        closing price of Audible's stock on the day immediately preceding the grant
        date, is recorded as deferred compensation, a component of stockholders'
        equity,
        and is amortized as compensation expense on a straight-line basis over the
        vesting term of the restricted stock award. When employees who have these
        restricted stock awards leave the Company prior to the final vesting date,
        the
        remaining un-expensed deferred compensation is reversed against additional
        paid-in-capital, and any previously recognized compensation expense related
        to
        awards that did not vest is reversed against additional paid-in-capital.
        Total
        non-cash compensation expense relating to the amortization of restricted
        stock
        units was $0 and $860, for the years ended December 31, 2004 and 2005,
        respectively. Actual shares under these awards are not issued until vesting
        is
        complete. Under the terms of the restricted stock awards, unless different
        provisions are noted on the restricted stock award, the Company is required
        to
        issue to the recipient the number of whole shares of common stock that equals
        the number of vested whole restricted stock units following the date on which
        the restricted stock unit becomes vested.
 
 A
        summary
        of the restricted stock activity under the Plan is as follows:
  **Number of Restricted
                  Stock Units****Balance,
                  December 31, 2004**
              
              
              --Granted
              
              
              279,750Canceled
              
              
              (18,193
              )**Balance,
                  December 31, 2005**
              
              
              261,557Vested:**December
                  31, 2005**
              
              
              3,474
 
 **Warrants**
  The
        Company issues common stock warrants to third parties in exchange for services.
        The fair values of warrants issued in exchange for services are determined
        by
        the Black-Scholes model in accordance with EITF Issue No. 96-18 and are
        recognized as an expense under fixed plan or variable accounting depending
        on
        the terms of the agreements over the periods in which services are being
        performed. The assumptions used in the Black-Scholes pricing model to calculate
        fair values, including risk-free interest rate and volatility, were determined
        using available information on the measurement date. Expected dividend yield
        of
        zero was used for all calculations. For the years ended December 31, 2003,
        2004,
        and 2005, $719, $510, and $0, respectively, was recognized as expense related
        to
        warrants, as follows:
 
 
 **December
                  31,****2003**
              
              **2004**
              
              **2005**Cost
                  of content and services revenue
              
              $
              686
              
              $
              181
              
              $
              --Cost
                  of hardware revenue
              
              
              --
              
              
              17
              
              
              --Marketing
                  expenses
              
              
              33
              
              
              313
              
              
              --$
              719
              
              $
              511
              
              $
              --
 
 No
        expense was recognized in 2005 since all warrants were fully vested as of
        December 31, 2004.
 
 A
        summary
        of the warrant activity for the years ended December 31, 2003, 2004, and
        2005 is
        as follows:
  **Number of**
                  **Warrants**
                
                **Exercise Price**
                  **Per
                    Share**
                
                **Weighted Average**
                  **Exercise
                    Price Per Share****Balance,
                    December 31, 2002**
                
                
                1,174,414
                
                
                $0.03-$150.00
                
                
                $10.89Exercised
                
                
                (430,643
                )
                
                $0.96-$3.03
                
                
                $2.94Issued
                
                
                6,333
                
                
                $0.60-$0.99
                
                
                $0.84Expired
                
                
                (34,666
                )
                
                $27.00
                
                
                $27.00**Balance,
                    December 31, 2003**
                
                
                715,438
                
                
                $0.03-$150.00
                
                
                $14.55Exercised
                
                
                (81,108
                )
                
                $0.60-$2.73
                
                
                $1.77Issued
                
                
                400,999
                
                
                $1.50-$21.00
                
                
                $17.98**Balance,
                    December 31, 2004**
                
                
                1,035,329
                
                
                $0.03-$150.00
                
                
                $16.96Exercised
                
                
                (147,771
                )
                
                $1.29-$12.00
                
                
                $2.83Issued
                
                
                --
                
                
                --
                
                
                --Expired
                
                
                (4,169
                )
                
                $14.07-$22.95
                
                
                $21.24**Balance,
                    December 31, 2005**
                
                
                883,389
                
                
                $0.03-$150.00
                
                
                $19.22
  During
        2005, 31,105 warrants were exercised through cashless transactions in accordance
        with the original terms of the warrant agreements. Accordingly, the number
        of
        shares of common stock issued as a result of these cashless exercises was
        23,733
        shares. In 2004, 43,443 were exercised through cashless transactions in
        accordance with the original terms of the warrant agreements. Accordingly,
        the
        number of common stock shares issued as result of these cashless exercises
        was
        39,888. In 2003, 22,000 warrants were exercised through cashless transactions
        resulting in the issuance of 14,083 common shares.
  F-17-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  A
        summary
        of the total common stock warrants outstanding and exercisable as of December
        31, 2005 is as follows:
  **Number
                  of Warrants**
              
              **Exercise
                  Price Per Share**
              
              **Weighted
                  Average Exercise Price Per Share**
              
              **Weighted
                  Average Remaining Contractual Life**249,613
              
              
              $0.03-$4.50
              
              
              $3.36
              
              
              1.12
                  years207,666
              
              
              $12.94-$17.67
              
              
              $17.53
              
              
              1.36
                  years333,333
              
              
              $21.00
              
              
              $21.00
              
              
              5.10
                  years50,001
              
              
              $24.00-$36.00
              
              
              $30.00
              
              
              1.34
                  years42,776
              
              
              $60.00-$150.00
              
              
              $93.51
              
              
              1.34
                  years883,389
              
              
              $0.03-$150.00
              
              
              $19.22
              
              
              2.70
                  years
 
 **Convertible
        Preferred Stock**
  **Series
        A**
  In
        February 2001, Microsoft purchased 2,666,666 shares of Series A Preferred
        stock
        (“Series A”) for $10,000 at a per share price of $3.75. Each share of Series A
        was originally convertible into one and one-third shares of common stock,
        (equivalent to a price of $2.8125 per share), subject to adjustment under
        certain conditions. As a result of the investment in the Company made by
        Special
        Situations Funds in the first quarter of 2002, the conversion rate was adjusted
        as per the Series A Certificate of Designation to 1.3441 shares of Common
        Stock
        for each share of Series A stock. The stock was convertible at the option
        of the
        holder at any time. Dividends were payable semi-annually at an annual rate
        of
        12% in either additional preferred shares or in cash at the option of the
        Company. On the fifth anniversary of the original issue date, the Company
        was
        required to redeem all remaining outstanding shares at a per share price
        of
        $3.75 plus all accrued and unpaid dividends. As of August 2003, the Company
        had
        issued to Microsoft an aggregate of 807,301 additional shares of Series A
        in
        respect of the dividends payable through June 1, 2003.
 
 In
        August
        2003, Apax Partners purchased from Microsoft the 3,473,967 then-outstanding
        shares of Audible Series A Preferred Stock and agreed to certain amendments
        to
        the security. As amended, the Series A was no longer mandatory redeemable,
        therefore the Series A was reclassified into permanent equity, was convertible
        at any time by the holders into shares of common stock, and dividends would
        accrue and compound semi-annually for a period of four years at the rate
        of 12%
        per annum. In the event of the conversion of the Series A, all accrued but
        unpaid preferred dividends would have converted into shares of common stock.
        In
        liquidation, the Series A ranked pari passu with the Company's Series B
        Preferred Stock.
  On
        February 6, 2004, Apax Partners converted all of its Series A and accrued
        dividends into 4,669,347 shares of common stock. The Series A conversion
        was the
        result of a negotiated agreement with the Company, where the Company issued
        1,166,666 shares and 333,333 warrants to purchase common stock to Apax Partners.
        Of the common shares issued, 389,863 were issued as dividends due at the
        date of
        conversion, and 776,803 shares and 333,333 warrants were issued as an inducement
        to Apax Partners to immediately convert its Series A shares. The 333,333
        warrants are exercisable at $21.00 and expire on February 5, 2011. The fair
        value of the 776,803 shares of common stock and the 333,333 warrants of
        approximately $9,873 was determined in accordance with EITF Issue No. 96-18,
        and
        this expense is included in the charges related to conversion of convertible
        preferred stock in the accompanying consolidated Statement of
        Operations.
  **Series
        B**
  In
        March
        2002, the Company issued 1,250,000 shares of Series B Preferred Stock (“Series
        B”) in connection with an amendment to its contract with Random House (see
        Note
        9). At any time on or after March 26, 2004, subject to certain conditions,
        all
        outstanding shares of Series B stock were to automatically convert to shares
        of
        common stock at the then effective conversion price. Effective August 2003,
        the
        Series B stock ranked pari passu with the Company's Series A and Series C
        preferred stock. On February 6, 2004 Random House converted the Series B
        into
        416,666 shares of common stock in accordance with the original terms of
        conversion.
  **Series
        C**
  In
        August
        2003, Apax Partners purchased 740,741, shares; Bertelsmann Multimedia, Inc.
        purchased 185,185 shares; and Random House Ventures, LLC purchased 185,185
        shares of Audible Series C Preferred Stock (“Series C”) at a per share price of
        $5.40.
 
 Proceeds
        received by the Company, net of direct costs, were approximately $5,860.
        Each
        share of Series C stock was convertible into three and one-third shares of
        common stock. The Series C stock is entitled to receive dividends that accrue
        and compound semi-annually at the rate of 6% per annum for four years from
        the
        date of issuance. In the event of the conversion of the Series C stock, all
        accrued but unpaid preferred dividends would have converted into shares of
        common stock. In liquidation, the Series C stock ranked pari passu with the
        Company's Series A stock and Series B stock. At the time of issuance, the
        conversion price of the Series C stock was $0.39 per share lower than the
        fair
        market value of the Company's common stock. Since the Series C stock is
        convertible at any time at option of the holder, the entire $1,444 in preferred
        stock discount was recognized as a dividend at the time of issuance, and
        is
        reflected in the accompanying consolidated Statement of Operations within
        net
        loss applicable to common shareholders, with the credit to additional paid-in
        capital.
  The
        Series C stock automatically converted to common stock on December 23, 2003.
        The
        automatic conversion was triggered in accordance with terms based on the
        average
        price and average trading volume of the Company's common stock over a 60-day
        period. Upon conversion all 1,111,111 outstanding shares of Series C were
        converted into 3,703,703 shares of common stock. In addition, at conversion
        date, all accrued dividends were due to be paid in common stock. Upon
        conversion, 88,278 shares of common stock were issued to satisfy accrued
        dividends. The common stock issued was valued at $9.87 per share, the closing
        price of the common stock on the conversion date. This $871 expense is included
        in the dividends on preferred stock in the accompanying consolidated Statement
        of Operations.
 
 **Treasury
        Stock**
 
 At
        the
        February 8, 2005 Board of Directors meeting, the Board voted that all 229,741
        shares of common stock held as treasury shares by the Company were to be
        retired, and the Company subsequently legally retired the treasury stock.
        Consequently, as of December 31, 2005 and 2004 the Company held zero and
        229,741, respectively, shares of common stock as treasury stock.
  **(7)    Income
        Taxes**
  There
        is
        no federal provision for income tax expense in 2003 due to the Company's
        net
        losses in this year. Income tax expense in 2004 and 2005 was $1 and $1,
        respectively. As a result of selling certain of its New Jersey state income
        tax
        loss benefits for cash, the Company realized $250, $724, and $740 in state
        income tax benefits during the years ended December 31, 2003, 2004 and 2005,
        respectively.
 F-18-
 **AUDIBLE,
                    INC. AND SUBSIDIARY**
 **NOTES
                    TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                      in thousands, except share and per share data)**
 Table
                    of Contents
 The
          components of (loss) income before income taxes are as
          follows:
 **December
                    31,****2003**
                
                **2004**
                
                **2005**Domestic
                
                $
                (3,810
                )
                $
                1,302
                
                $
                113Foreign
                
                
                --
                
                
                --
                
                
                (1,505
                )Total
                
                $
                (3,810
                )
                $
                1,302
                
                $
                (1,392
                )
 The
        difference between the actual income tax benefit and that computed by applying
        the U.S. federal income tax rate of 34% to pretax (loss) income is summarized
        below:
 
 **Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005**Computed
                  “expected” tax (benefit) expense
              
              $
              (1,295
              )
              $
              443
              
              $
              (473
              )(Increase)
                  decrease in tax (benefit) expense resulting from:State
                  tax benefit, net of federal benefit
              
              
              (165
              )
              
              (477
              )
              
              (488
              )Increase/(decrease)
                  in the federal valuation allowance
              
              
              1,205
              
              
              (692
              )
              
              (301
              )Foreign
                  losses
              
              
              --
              
              
              --
              
              
              512Permanent
                  differences
              
              
              5
              
              
              3
              
              
              11$
              (250
              )
              $
              (723
              )
              $
              (739
              )
 
 The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and liabilities as of December 31, 2004 and 2005 are
        as
        follows:
 
 **December
                  31,****2004**
              
              **2005**Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              $
              48,977
              
              $
              46,323Capitalized
                  research and developmental costs
              
              
              44
              
              
              --Book
                  depreciation in excess of tax depreciation
              
              
              864
              
              
              762Deferred
                  compensation and accrued vacation
              
              
              68
              
              
              140Allowance
                  for sales refunds and chargebacks
              
              
              62
              
              
              115Stock
                  based compensation
              
              
              --
              
              
              383Accrued
                  expense
              
              
              --
              
              
              100Patents
                  and trademarks
              
              
              --
              
              
              119Other,
                  net
              
              
              74
              
              
              94Total
                  deferred tax assets
              
              
              50,089
              
              
              48,036Deferred
                  tax liability:Prepaid
                  expense
              
              
              (234
              )
              
              (234
              )Net
                  deferred tax assets
              
              
              49,855
              
              
              47,802Less valuation
                  allowance
              
              
              49,855
              
              
              47,802Net
                  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 during the periods
        in
        which those temporary differences become deductible. 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 deferred tax assets and,
        accordingly, a full valuation allowance, which increased by $1,386
        and $2,386, in 2003 and 2004, respectively, and decreased by $2,053 in 2005,
        has been recorded on the deferred tax assets as of December 31, 2004 and
        2005.
 
 Of
        the
        deferred tax asset and valuation allowance related to Federal and State net
        operating loss carry-forwards, approximately $2,344 relates to a current
        tax
        deduction attributable to stock options and warrants as of December 31, 2005.
        The Company will increase paid in capital when the benefits are realized.
        The
        change in federal valuation allowance for the year ended December 31, 2005
        includes $1,817 attributable to current tax deductions related to stock option
        activity.
 As
        of
        December 31, 2005, the Company had net operating loss carry-forwards for
        federal
        income tax purposes of approximately $120,350, which begin to expire in 2010
        if
        not used to offset future taxable income. As of December 31, 2005, the Company
        has net operating loss carry-forwards for New Jersey income tax purposes
        of
        approximately $85,304 which begin to expire in 2008 if not used to offset
        future
        taxable income. As of December 31, 2005, the Company has foreign net operating
        loss carry-forwards of $1,505, which can be carried forward indefinitely.
 
 The
        Company has experienced certain ownership changes, which under the provisions
        of
        Section 382 of the Internal Revenue Code 1986, as amended, may result in
        an
        annual and aggregate limitation on the Company’s ability to utilize its net
        operating losses in the future.
 
 The
        Company has conducted a study to determine the extent of the limitations.
        Based
        on the study, the Company has had three separate changes in control. However,
        in
        each case, the annual and aggregate limitations are not expected to hinder
        the
        Company’s ability to utilize its net operating losses in the
        future.
 F-19-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  **(8)    Amazon
        Agreement**
  In
        January 2000, the Company entered into two agreements with Amazon.com. Under
        the
        Co-Branding, Marketing and Distribution Agreement the Company was the exclusive
        provider of digital spoken audio (as defined) to Amazon.com. On January 24,
        2002, the Company signed Amendment No.1 to its Co-Branding, Marketing, and
        Distribution Agreement with Amazon.com. Under the amendment, the annual fee
        for
        Year 3 (which ended January 24, 2003) of the agreement was reduced from $10,000
        to $1,500 and an additional fee of $1,000 was payable in Year 2 of the
        agreement. Also in connection with Amendment No.1, the Company issued 166,667
        fully vested common stock warrants to Amazon.com at an exercise price of
        $4.50
        per share, which became exercisable after January 31, 2003. The fair value
        of
        these warrants was determined in accordance with EITF Issue No. 96-18 and
        was
        amortized as an expense on a straight-line basis over the remaining term
        of the
        agreement which ended in January 2003. During the year ended December 31,
        2003,
        $14 was recorded as a marketing expense related to these warrants with the
        non-cash credit for services to additional paid-in capital. No expense was
        recognized in 2004 or 2005 related to this agreement.
  During
        the three-year term of this agreement, as amended, in consideration for certain
        services, Amazon.com received $22,500 plus a specified percentage of revenue
        earned over a specified amount. Under the Securities Purchase Agreement,
        Amazon.com purchased 446,677 shares of common stock from the Company for
        $20,000. Under the agreements, the consideration due from Amazon.com for
        the
        purchase of the common stock, and the Company's obligation for the annual
        fee
        for the first two years per the original Co-Branding, Marketing, and
        Distribution Agreement, which are identical amounts, were offset and no cash
        was
        exchanged. Accordingly, $20,000 was recorded as deferred services, a component
        of stockholders' equity, and was being amortized over the first two years
        of the
        agreement on a straight-line basis. Prior to Amendment No. 1, through January
        2002, $10,000 had been amortized as a marketing expense related to the initial
        $20,000 of deferred services. Subsequent to Amendment No. 1, the unamortized
        payment for year two of $10,000 plus the additional $2,500 payment required
        under the amendment, or $12,500, was amortized on a straight-line basis over
        the
        remaining term of the agreement of 24 months, which ended in January 2003.
        During the year ended December 31, 2003, $417 was recorded as a marketing
        expense related to the straight-line amortization of the non-cash portion
        of
        deferred services, and $104 was recorded as a marketing expense representing
        the
        straight-line amortization of the cash portion of payments due under this
        agreement. No expense was recognized in 2004 or 2005 related to this
        agreement.
 
 **(9)    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, to produce spoken word content specifically
        suited for digital distribution. All titles published by the imprint are
        distributed exclusively over the Internet by Audible. As part of this alliance,
        Random House, through its subsidiary Random House Ventures, LLC, purchased
        56,593 shares of Audible common stock from the Company for $1,000. Over the
        term
        of the agreement Audible was to contribute toward funding the acquisition
        and
        creation of digital audio titles through Random House Audible. On March 26,
        2002, the agreement was amended to waive the cash payment due to Random House
        in
        2002 of $1,250, thereby reducing the total payments due from the Company
        under
        the agreement from $4,000 to $2,750. In exchange for this waiver, under the
        amendment the Company issued 1,250,000 shares of Series B stock to Random
        House
        Ventures. If they had not been converted, then on March 26, 2004 all outstanding
        shares of Series B stock would have automatically converted to shares of
        common
        stock at the then effective conversion price. These shares were converted
        on
        February 6, 2004 (see Note 6). Through December 31, 2002, $1,250 of the $2,750
        obligation had been paid, with the remaining amount of $1,500 due in 2003
        and
        2004. On February 10, 2003, the agreement was further amended so that Audible
        was no longer required to pay the $1,500 in imprint fees that were due in
        2003
        and 2004.
 
 The
        fair
        value of the Series B stock issued was determined in accordance with EITF
        Issue
        No. 01-1, *Accounting for a Convertible Instrument Granted or Issued to a Nonemployee
        for
        Goods or Services or a Combination of Goods or Services and
        Cash* .
        Accordingly, using the measurement date of March 26, 2002, the fair value
        of the
        Series B stock issued was determined to be $1,138. On April 1, 2002 when
        the
        Series B was issued, the Company recorded $548 (the difference between the
        fair
        value of the shares and the previously recognized accrued liability of $590)
        as
        deferred services, a component of stockholders' equity, which was amortized
        as
        cost of content and services revenue on a straight-line basis through November
        2002. A credit of $135 was recorded in 2003 ,
        representing the reversal of the accrual, as a credit to cost of content
        and
        services revenue related to this agreement. There
        was
        no expense related to this agreement for the years ended December 31, 2004
        and
        2005.
  The
        original agreement further provided for Random House to be granted a warrant
        to
        purchase 292,777 shares of Audible common stock at various exercise prices
        that
        vest over the term of the agreement as well as the granting of additional
        warrants to Random House to purchase Audible common shares based on future
        performance. The fair value of these warrants was determined in accordance
        with
        EITF Issue No. 96-18 and was being amortized as an expense on a straight-line
        basis over the 50-month term of the agreement. The warrants were accounted
        for
        using variable plan accounting whereby compensation costs varied each accounting
        period until the final measurement date. During the year ended December 31,
        2003, $681 was recoded as a cost of content and services revenue related
        to
        these warrants with the non-cash credit for services to additional
        paid-in-capital. There was no expense related to this warrant during the
        years
        ended December 31, 2004 and 2005.
 
 The
        Company continued to operate under the general terms of the agreement, which
        expired on June 30, 2004.
  **(10)**  **Audible
        UK**
 
 In
        February 2005, the Company established Audible UK, a spoken audio Web site
        service mirroring the U.S.
        company service,
        but focused on the UK marketplace. Audible, Inc. purchased one share of Audible
        UK stock on February 7, 2005, which at that date became a wholly-owned
        subsidiary of Audible Inc. Audible UK began commercial operations in June
        2005.
 
 **(11)    
        Audible Germany Agreement**
  On
        August
        30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
        Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
        (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
        an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
        approximately 5.6% of Audible's common stock, inclusive of certain common
        stock
        warrants held by the entities.
  Audible
        Germany has the exclusive rights to operate a German language Audible Web
        site.
        Under the Joint Venture, Random House and Holtzbrinck each contributed
        approximately $16.5 in exchange for each receiving a 24.5% interest in Audible
        Germany. The Company was required to contribute $34.4 in exchange for a 51%
        interest in Audible Germany. After the initial formation, Random House and
        Holtzbrinck were to provide additional financing of approximately $1,490
        each in
        certain installments, subject to Audible Germany meeting certain milestones.
        As
        of December 31, 2005, the full amount has been funded by Random House and
        Holtzbrinck. In the event of liquidation of Audible Germany, this additional
        financing by Random House and Holtzbrinck accrues interest at 8% per annum
        and
        is senior to Audible's capital investment. The Company may, but is not obligated
        to, contribute additional capital to the entity. Any profits distributed
        by
        Audible Germany are to be distributed in accordance with the ownership
        interests.
 
 The
        Company has determined that Audible Germany is not a variable interest entity
        as
        defined in FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities, an interpretation of ARB No.
        51,* (“FIN
        46R”) because, as a development stage enterprise, Audible Germany has sufficient
        equity to permit it to finance the activities in which it is currently engaged
        without additional subordinated financial support. In addition, the other
        criteria within FIN 46R that would characterize Audible Germany as a variable
        interest entity have not been met. Rather, Audible Germany is a voting interest
        entity.
   F-20-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  Under
        EITF 96-16, *Investor's Accounting for an Investee When the Investor has a Majority of
        the
        Voting Interest but the Minority Shareholder or Shareholders Have Certain
        Approval or Veto Rights* ,
        the
        Company has determined that the minority shareholders of Audible Germany,
        together, have significant participatory rights, allowing them to participate
        in
        significant decisions of Audible Germany and to block significant decisions
        proposed by Audible. As a result of the significant participatory rights
        held by
        the minority shareholders, the Company does not have unilateral control over
        Audible Germany. Therefore, Audible does not consolidate the results of Audible
        Germany but rather accounts for its investment in Audible Germany under the
        equity method of accounting. Under the equity method of accounting, the Company
        records 51% of the profits, if any, and 51% of the equity losses but only
        until
        such time that the Company records losses equal to the initial investment
        of the
        Company plus any profits previously recorded. The original investment has
        been
        written down to zero. Audible has no further obligation to fund the operations
        of Audible Germany. The Company will continue to monitor its portion of
        unreported equity losses in the event that Audible Germany subsequently
        generates income. The Company will resume applying the equity method after
        its
        share of profits equals the unreported equity method losses.
  In
        connection with the Joint Venture, on August 30, 2004, the Company entered
        into
        a license and services agreement with Audible Germany (the “License”). Under the
        License, Audible Germany has launched a German language spoken word audio
        service. The terms provide for the Company to provide intellectual property
        and
        substantially all of the technological infrastructure for the operation of
        the
        service. In return, Audible Germany is required to pay Audible $30 each month
        for a period of 30 months, beginning in September 2004. Every 60 days during
        this agreement, the parties meet to review and accept the services. The monthly
        payments are subject to refund if Audible Germany does not accept the services,
        subject to reasonable cure. Under the License, Audible recognizes $30 of
        revenue
        per month once Audible Germany has agreed that the services delivered for
        the
        prior 60-day period were satisfactory and collection of the amount is reasonably
        assured. Also under the License, Audible Germany will pay the Company royalties
        ranging from 0.5% to 3% of revenue up to an annual royalty cap of the U.S.
        dollar equivalent of €1.5 million, subject to Audible Germany achieving certain
        operating margins.
  During
        the years ended December 31, 2004 and 2005, the Company recognized $90 and
        $390
        of revenue, respectively, under the license agreement as the services were
        deemed to have been delivered and accepted. In addition, the Company also
        recognized $72 and $134, respectively as of December 31, 2004 and 2005, in
        billings for certain consulting services and related incremental reimbursable
        costs incurred in connection with the License in accordance with EITF 01-14.
        These amounts are included in related party revenue on the consolidated
        Statements of Operations.
 
 The
        Company recorded its 51% share of the equity losses of Audible Germany during
        2004. As a result, the Company recorded losses attributable to Audible Germany
        equal to $34 and $0, the amount of the initial investment, and the full
        investment was reduced to zero on the consolidated Balance Sheets as of December
        31, 2004 and 2005, respectively. This expense is included in General and
        Administrative expense for the year ended December 31, 2004.
  **(12)    
        France Loisirs Agreement**
  On
        September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
        Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
        Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
        France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann
        AG
        and its affiliates own 5.6% of Audible's common stock, inclusive of certain
        common stock warrants held by the entities.
  Under
        the
        Agreement, in the first quarter of 2005, France Loisirs launched a French
        language spoken word audio service through Audio Direct. The terms provide
        for
        Audible to provide intellectual property and substantially all of the
        technological infrastructure for the operation of the service. In return,
        France
        Loisirs is required to pay Audible $1,000, payable as follows: $250 in September
        2004, $250 in October 2004, $250 in January 2005, and $20.8 for each of the
        following 12 months. As of December 31, 2005, the Company had received the
        three
        installments of $250 each and four monthly payments of the $20.8. Commencing
        the
        first fiscal year after the business achieves positive net income, the Company
        will receive a royalty of 5% of the business's net paid revenue. Net paid
        revenue refers to net revenues for digital spoken word content after the
        deduction of taxes but excluding certain hardware revenue. The 5% royalty
        will
        apply until the business net paid revenue exceeds €20,000,000. Once net paid
        revenue exceeds €20,000,000, the Company will receive a flat fee of €1,000,000.
        If net paid revenue exceeds €33,300,000, the Company will receive a royalty
        payment of €1,000,000, plus 3% of net paid revenue in excess of €33,300,000. An
        additional royalty is payable equal to one-half of the distributable pre-tax
        profits of the business.
   F-21-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  FIN46R
        addresses the consolidation by business enterprises of variable interest
        entities (VIEs) and requires that if an enterprise is the primary beneficiary
        of
        a variable interest entity, the assets, liabilities, and results of the
        activities of the variable interest entity should be consolidated in the
        financial statements of the enterprise.
  Audio
        Direct is considered a VIE because its equity is not sufficient to permit
        the
        entity to finance its activities without additional subordinated financial
        support. Audible and France Loisirs form a related party group, as defined
        in
        FIN 46R, as a result of the Bertelsmann affiliation and the number of seats
        that
        Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the entity
        within the related party group that is most closely associated with the variable
        interest entity is the primary beneficiary.
  Based
        upon analysis, the Company determined that France Loisirs is more closely
        associated with Audio Direct, primarily because France Loisirs is required
        to
        fund the operations of Audio Direct, including the $1,000 payment due to
        Audible. France Loisirs is therefore considered to be the primary beneficiary
        of
        Audio Direct. As a result, the Company does not consolidate the results of
        Audio
        Direct but rather accounts for its variable interest in Audio Direct under
        the
        cost method of accounting.
  Because
        the Company has not made and is not required to provide any funding to France
        Loisirs or Audio Direct, it has no exposure to loss under the
        Agreement.
 
 The
        $1,000 in fees are non-refundable and not subject to any acceptance provisions.
        Since fair values do not exist for the different services (elements) that
        Audible is providing, the services are considered a single unit of accounting
        under EITF 00-21 and accordingly, the $1,000 in fees is recognized as related
        party revenue on a straight-line basis over the 24-month term at the rate
        of
        $41.7 per month, provided collectibility is reasonably assured.
 
 During
        the year ended December 31, 2004 and 2005, $146 and $500, respectively, of
        revenue was recognized in connection with this agreement, representing the
        straight-line recognition of $1,000 in revenue being recognized over the
        24-month term of the agreement. In addition, the Company also recognized
        $54 and
        $122, respectively, as of December 31, 2004 and 2005, in billings for certain
        consulting services and related incremental reimbursable costs incurred in
        connection with the license in accordance with EITF 01-14. These amounts
        are
        included in related party revenue on the consolidated Statements of
        Operations.
  **(13)**  **Product
        Development, Licensing, Marketing and Distribution
        Agreement**
 
 On
        May
        16, 2005, the Company entered into a five-year agreement with a new
        content provider to develop, license, market and distribute audio
        content. The Company will be paid an exclusivity fee, a product development
        fee and production fees for audio content produced under the
        agreement. In addition, the Company will make royalty and revenue
        sharing payments to the publisher based on sales of the products produced.
        As of December 31, 2005, the Company billed the publisher $466, of which
        $450
        has been received as of December 31, 2005, in connection with this
        agreement. The fees associated with this agreement are being amortized over
        a 58
        month period beginning in the month the Company commenced production of audio
        through the expiration of the agreement. During the year ended December 31,
        2005
        the Company recorded $115 as other revenue in connection with this agreement.
        As
        of December 31, 2005, the Company recorded $252 and $99
        as deferred revenue current and non-current, respectively, on the
        accompanying consolidated Balance Sheet, relating to this agreement,
        representing cash received in advance of being recognized as
        revenue.
 
 **(14)    Employee
        Benefit Plan**
  The
        Company has a 401(K) plan based on contributions from employees and
        discretionary Company contributions. As of December 31, 2004, the Company
        had
        not contributed to the 401(K) plan to date. Beginning January 1, 2005, the
        Company adopted a policy to match up to the first two-percent of salary
        contributions made from employees into the 401(K) plan. During the year ended
        December 31, 2005, the Company made contributions of $123.
  **(15)    Commitments
        and Contingencies**
  **Lease
        Obligations**
  *Lease
        Obligations*
  The
        Company has an operating lease on its office space in Wayne, New Jersey,
        that
        expires in December 2008. The lease contains a renewal option for a period
        of
        three years. In February 2005, Audible UK signed a one year lease for office
        space, which includes office amenities. This lease was subsequently amended
        in
        the second quarter of 2005 for additional space and will expire in May 2006.
        Total future minimum lease obligations as of December 31, 2005 under these
        lease
        arrangements are $1,690.
  Rent
        expense of $484, $389, and $561, respectively, was recorded under operating
        leases for the years ended December 31, 2003, 2004 and 2005.
 
 There
        are
        no future minimum lease payments due under capital leases as of December
        31,
        2005, which were paid in full during the first quarter of 2005.
 
 *Service
        Agreements*
 
 The
        Company has entered into operational and marketing agreements and purchase
        orders with various vendors to provide certain contracted services. The majority
        of the amounts committed are for hosting services related to the Company's
        Web site.
 
 *Royalty
        Obligations*
 
 Royalty
        obligations represent payments to be made to various content providers pursuant
        to minimum guarantees under their royalty agreements, net of royalties paid.
        The
        royalty obligations recorded in the accompanying consolidated Balance Sheets
        are
        classified between current and non-current based on the payment terms specified
        in the agreements.
  *Purchase
        Commitments*
 
 Committed
        purchases represent agreements the Company has made for future purchases
        of
        goods and service. The balance primarily consists of purchases for network
        and
        operating systems equipment.
 
 F-22-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  **Summary
        of Cash Commitments and Obligations**
  The
        following table shows future cash payments due under the Company's commitments
        and obligations as of December 31, 2005:
 
 **Year**
              
              **Operating
                  Leases**
              
              **Service
                  Agreements**
              
              **Royalty
                  Obligations**
                **(1)**
              
              **Purchase
                  Commitments**
              
              **Total**2006
              
              $
              585
              
              $
              2,597
              
              $
              293
              
              $
              34
              
              $
              3,5092007
              
              
              558
              
              
              1,775
              
              
              188
              
              
              --
              
              
              2,5212008
              
              
              547
              
              
              1,263
              
              
              --
              
              
              --
              
              
              1,8102009
              
              
              --
              
              
              1
              
              
              --
              
              
              --
              
              
              12010
                  and thereafter
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
              
              $
              1,690
              
              $
              5,636
              
              $
              481
              
              $
              34
              
              $
              7,841
 
 (1)
        Reflected in the current and non-current liabilities respectively, on the
        accompanying December 31, 2005 consolidated Balance Sheet.
 
 **Contingencies**
 
 Various
        legal actions, claims, assessments and other contingencies arising in the
        normal
        course of business, in addition to the matters described below, are pending
        against the Company. All of these matters are subject to many uncertainties,
        and
        it is possible that some of these matters could be ultimately decided, resolved
        or settled adversely. The Company has recorded accruals for losses related
        to
        those matters which it considers to be probable and that can be reasonably
        estimated. Although the ultimate amount of liability at December 31, 2005
        that
        may result from those matters for which accruals have been recorded is not
        ascertainable, the Company believes that any amounts exceeding the recorded
        accruals would not materially affect its financial condition.
 
 In
        June
        2001, the Company and certain of its officers were named as defendants in
        a
        securities class action filed in United States District Court for the Southern
        District of New York related to its initial public offering in July 1999.
        The
        lawsuits also named certain of the underwriters of the IPO as well as certain
        of
        the Company’s officers and directors and former directors as defendants.
        Approximately 300 other issuers and their underwriters have had similar suits
        filed against them, all of which are included in a single coordinated proceeding
        in the Southern District of New York (the “IPO Litigations”). An amendment
        complaint was filed on April 19, 2002. The complaints allege that the prospectus
        and the registration statement for the IPO failed to disclose that the
        underwriters allegedly solicited and received “excessive” commissions from
        investors and that some investors in the IPO allegedly agreed with the
        underwriters to buy additional shares in the aftermarket in order to inflate
        the
        price of the Company’s stock. The Company and certain of its officers,
        directors, and former directors were named in the suits pursuant to Section
        11
        of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934,
        and
        other related provisions. The complaints seek unspecified damages, attorneys'
        and expert fees, and other unspecified litigation costs.
  On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving the Company. On
        July
        15, 2002 the Company, along with other non-underwriter defendants in the
        coordinated cases, also moved to dismiss the IPO Litigations. On February
        19,
        2003, the court ruled on the motions. The court granted the Company’s motion to
        dismiss the claims against it under Rule 10b-5, due to the insufficiency
        of the
        allegations against it. The motions to dismiss the claims under Section 11
        of
        the Securities Act were denied as to virtually all of the defendants in the
        consolidated cases, including the Company’s. The Company’s individual officers,
        directors and former director defendants in the IPO Litigation signed a tolling
        agreement and were dismissed from the action without prejudice on October
        9,
        2002.
  In
        June
        2003, a proposed settlement of this litigation was reached among the plaintiffs,
        the issuer defendants in the consolidated actions, the issuer officers and
        directors named as defendants, and the issuers' insurance companies. The
        settlement would provide, among other things, a release for the Company and
        for
        the individual defendants for the conduct alleged to be wrongful in the amended
        complaint. The Company would agree to undertake other responsibilities under
        the
        partial settlement, including agreeing to assign away, not assert, or release
        certain potential claims that it may have against the underwriters. Any direct
        financial impact of the proposed settlement is expected to be borne by the
        Company’s insurance carriers.
 
 In
        June
        2004, the proposed settlement was submitted to the court for preliminary
        approval. The court requested that any objections to preliminary approval
        of the
        settlement be submitted by July 14, 2004, and the underwriter defendants
        formally objected to the settlement. The plaintiff and issuer defendants
        separately filed replies to the underwriter defendants' objections to the
        settlement on August 4, 2004. The court granted preliminary approval on February
        15, 2005, subject to certain modifications. On August 31, 2005, the court
        issued
        a preliminary order further approving the modifications to the settlement
        and
        certifying the settlement cases. The court also appointed the Notice
        Administrator for the settlement and ordered that notice of the settlement
        be
        distributed to all settlement class members beginning on November 15, 2005.
        The
        settlement fairness hearing has been set for April 24, 2006. Following the
        hearing, if the court determines that the settlement is fair to the class
        members, the settlement will be approved. There can be no assurance that
        this
        proposed settlement will be approved and implemented in its current form,
        or at
        all.
  Due
        to
        the inherent uncertainties of litigation and because the settlement approval
        process is at a preliminary stage, the Company cannot accurately predict
        the
        ultimate outcome of the matter.
 
 Starting
        on or about February 22, 2005, several class actions were filed against Audible
        and two of its executives in the United States District Court for the District
        of New Jersey.  The plaintiffs purport to represent a class consisting of
        all persons (other than Audible's officers and directors and their affiliates)
        who purchased the Company’s securities between November 2, 2004 and February 15,
        2005 (the "Class Period").  The plaintiffs allege that the defendants
        violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
        there under by failing to make complete and accurate disclosures concerning
        the
        Company’s future plans and prospects.  The individual defendants are also
        alleged to be liable under Section 20(a) of the Exchange Act.  All of the
        defendants are alleged to have sold stock at inflated prices during the Class
        Period.
  In
        April
        2005, a derivative action was filed in the state court of New Jersey against
        Audible, the two executives named as individual defendants in the class actions
        described above, six of its outside directors, and three of its
        stockholders.  The derivative action makes the same factual allegations as
        the class actions described above and adds allegations that the six outside
        directors named as defendants and/or the stockholders who nominated them
        sold
        stock at inflated prices at or about the time of the secondary offering of
        securities that the Company made in November 2004.  The plaintiff in this
        derivative action purports to seek a recovery of the damages sustained by
        Audible rather than by investors who allegedly purchased securities at inflated
        prices.
 
 In
        May
        2005, the Company learned of a second derivative action which was filed during
        April 2005 in the United States District Court for the District of New Jersey
        against it, the two executives named as individual defendants in the class
        actions described above, and all seven of the its outside directors. The
        derivative action makes the same allegations as the class actions described
        above and adds allegations that all of the individual defendants are responsible
        for an alleged failure of internal controls that resulted in the 45-day delay
        in
        the filing of the Company's Form 10-K for 2004. The plaintiff in this derivative
        action purports to seek a recovery of the damages allegedly sustained by
        the
        Company rather than by investors who allegedly purchased securities at inflated
        prices.
 
 F-23-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  The
        plaintiffs in the derivative actions voluntarily agreed to stay those actions
        pending the outcome of the Company’s anticipated motion to dismiss the class
        actions described above.
 
 In
        December 2005, the United States District Court for the District of New Jersey
        consolidated the class action, appointed a group of lead plaintiffs and
        appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
        consolidated amended complaint was filed on February 14, 2006 and the
        defendant’s motion to dismiss will be due on or about April 15,
        2006.
 
 The
        Company believes that all of the claims described above are without merit
        and
        intends to defend the actions vigorously. Due to the inherent uncertainties
        of
        litigation and because these actions are at a preliminary stage, the Company
        cannot accurately predict the ultimate outcome of these matters.
 
 In
        May
        2005, Digeo, Inc. commenced an action against Audible for patent infringement
        in
        Federal District Court in the State of Washington. The Company has filed
        an
        answer asserting the patent is invalid and unenforceable and that its services
        do not fall within the scope of the claims of the Digeo patent.  Discovery
        is scheduled to be completed by June 2, 2006, and the trial is currently
        scheduled for mid-November 2006. The Company believes the claims made in
        the
        complaint are without merit and will not have a material adverse impact on
        its
        financial position or results of operations.
  **(16)    Customer
        Concentration**
  During
        the years ended December 31, 2004 and 2005, Apple Computer accounted for
        10.7%
        and 15.0% of total revenue, respectively. During the year ended December
        31,
        2003, there were no customers who accounted for more than 10% of total
        revenue.
 
 As
        of
        December 31, 2004 and 2005, Apple Computer accounted for 66.7% and 62.1%,
        respectively, of the Company's accounts receivable.
  **(17)    Supplemental
        Disclosure of Cash Flow Information**
  The
        following supplemental information relates to the Statements of Cash Flows
        for
        the years ended December 31, 2003, 2004 and 2005:
  **Non-Cash
        Financing and Investing Activities**
  Capital
        lease obligations of $743 were incurred during the year ended December 31,
        2004,
        when the Company entered into leases for new property and equipment. No capital
        leases were entered into during the 2003 or 2005 years.
  Reversal
        of unused accrued expense related to the Company's Series C financing of
        $8 was
        recorded to additional paid-in capital during the year ended December 31,
        2004.
 
 In
        February 2004, Apax Partners converted all of its Series A Preferred Stock
        and
        accrued dividends, valued at $13,027, into 4,669,347 shares of common stock.
        The
        conversion was the result of a negotiated agreement with Apax Partners and
        the
        Company, where the Company issued 1,166,666 shares and 333,333 warrants to
        purchase common stock. Of the common shares issued, 389,863 shares were issued
        as dividends due at the date of conversion, and 776,803 shares and 333,333
        warrants were issued as an inducement to convert the Series A shares. The
        total dividends and inducement was valued at $13,850.
 
 In
        February 2004, Random House converted the 1,250,000 shares of Series B Preferred
        Stock, originally issued in March 2002, valued at $1,138, into 416,666 shares
        of
        common stock in accordance with the original terms of the
        conversion.
 
 In
        2004,
        43,443 warrants were exercised through cashless transactions in accordance
        with
        the original terms of the warrant agreements. Accordingly, the number of
        common
        stock shares issued as a result of these cashless exercises was 39,888. In
        2003,
        22,000 warrants were exercised through cashless transactions resulting in
        the
        issuance of 14,083 common shares.
 
 During
        2005, 31,105 warrants were exercised through cashless transactions in accordance
        with the original terms of the warrant agreements. Accordingly, the number
        of
        shares of common stock issued as a result of these cashless exercises was
        23,733
        shares.
  **Cash
        Paid for Interest**
  Interest
        paid was $32 and $1 during the years ended December 31, 2004 and 2005,
        respectively. No interest was paid during the 2003 year.
  **Taxes
        Paid**
 Amounts
        paid for income taxes were $1 during both 2004 and 2005. No amounts were
        paid
        for income taxes during 2003.
  **(18)  
          Financial Information by Geographic Area**
 
 Revenues
        and long-lived assets for the Company's United States and United Kingdom
        operations are as follows:
  **United
                    States**
                
                **United
                    Kingdom**
                
                **Consolidated****2005**Revenues
                
                $
                62,783
                
                $
                454
                
                $
                63,237Long-lived
                    assets
                
                
                8,239
                
                
                34
                
                
                8,273**2004**Revenues
                
                $
                34,319
                
                $
                --
                
                $
                34,319Long-lived
                    assets
                
                
                940
                
                
                --
                
                
                940**2003**Revenues
                
                $
                19,325
                
                $
                --
                
                $
                19,325Long-lived
                    assets
                
                
                691
                
                
                --
                
                
                691
  F-24-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  **(19)  
         Quarterly Results (UNAUDITED)**
  The
        following tables contain select unaudited quarterly consolidated financial
        data
        for each quarter of 2004 and 2005. The consolidated operating results for
        any
        quarter are not necessarily indicative of results for any future
        period.
  **YEAR
                  ENDED DECEMBER 31, 2004****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue,
                  net
              
              $
              6,774
              
              $
              8,062
              
              $
              9,279
              
              $
              10,204Cost
                  of content and services revenue
              
              
              2,093
              
              
              2,906
              
              
              3,272
              
              
              3,841Cost
                  of hardware revenue
              
              
              518
              
              
              613
              
              
              739
              
              
              318Cost
                  of related party revenue
              
              
              --
              
              
              --
              
              
              45
              
              
              81Gross
                  Margin
              
              
              4,163
              
              
              4,543
              
              
              5,223
              
              
              5,964Operations
              
              
              1,143
              
              
              1,197
              
              
              1,318
              
              
              1,488Technology
                  and development
              
              
              1,271
              
              
              1,299
              
              
              1,257
              
              
              1,203Marketing
              
              
              1,136
              
              
              982
              
              
              1,161
              
              
              1,818General
                  and administrative
              
              
              567
              
              
              840
              
              
              959
              
              
              1,173Total
                  operating expenses
              
              
              6,728
              
              
              7,837
              
              
              8,751
              
              
              9,922Income
                  before income taxes
              
              
              58
              
              
              255
              
              
              542
              
              
              447Net
                  income
              
              
              58
              
              
              237
              
              
              484
              
              
              1,246Dividends
                  on redeemable preferred stock
              
              
              (614
              )
              
              --
              
              
              --
              
              
              --Preferred
                  stock inducement charge
              
              
              (9,873
              )
              
              --
              
              
              --
              
              
              --Net
                  (loss) income applicable to common shareholders
              
              $
              (10,429
              )
              $
              237
              
              $
              484
              
              $
              1,246Basic
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              (0.56
              )
              $
              0.01
              
              $
              0.02
              
              $
              0.06Diluted
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              (0.56
              )
              $
              0.01
              
              $
              0.02
              
              $
              0.05Basic
                  weighted average common shares outstanding
              
              
              18,664,387
              
              
              21,238,711
              
              
              21,270,416
              
              
              22,457,573Diluted
                  weighted average common shares outstanding
              
              
              18,664,387
              
              
              23,620,502
              
              
              23,678,669
              
              
              25,085,716
 
 **YEAR
                  ENDED DECEMBER 31, 2005****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue,
                  net
              
              $
              12,905
              
              $
              15,297
              
              $
              16,771
              
              $
              18,264Cost
                  of content and services revenue
              
              
              4,754
              
              
              5,776
              
              
              6,316
              
              
              7,323Cost
                  of hardware revenue
              
              
              294
              
              
              301
              
              
              846
              
              
              1,493Cost
                  of related party revenue
              
              
              29
              
              
              44
              
              
              48
              
              
              135Gross
                  Margin
              
              
              7,828
              
              
              9,176
              
              
              9,561
              
              
              9,313Operations
              
              
              1,848
              
              
              2,275
              
              
              2,461
              
              
              2,771Technology
                  and development
              
              
              1,625
              
              
              1,843
              
              
              2,343
              
              
              2,428Marketing
              
              
              2,260
              
              
              2,935
              
              
              3,173
              
              
              5,019General
                  and administrative
              
              
              1,536
              
              
              1,689
              
              
              2,376
              
              
              2,765Total
                  operating expenses
              
              
              12,346
              
              
              14,863
              
              
              17,563
              
              
              21,934Income
                  (loss) before income taxes
              
              
              972
              
              
              890
              
              
              (238
              )
              
              (3,016
              )Net
                  income (loss)
              
              
              891
              
              
              823
              
              
              (187
              )
              
              (2,180
              )Net
                  income (loss) applicable to common shareholders
              
              $
              891
              
              $
              823
              
              $
              (187
              )
              $
              (2,180
              )Basic
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              0.04
              
              $
              0.03
              
              $
              (0.01
              )
              $
              (0.09
              )Diluted
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              0.03
              
              $
              0.03
              
              $
              (0.01
              )
              $
              (0.09
              )Basic
                  weighted average common shares outstanding
              
              
              24,008,188
              
              
              24,169,396
              
              
              24,291,008
              
              
              24,310,129Diluted
                  weighted average common shares outstanding
              
              
              26,117,932
              
              
              25,987,000
              
              
              24,291,008
              
              
              24,310,129
   F-25-
 **AUDIBLE,
                  INC. AND SUBSIDIARY**
 **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(dollars
                    in thousands, except share and per share data)**
 Table
                  of Contents
  **(20) Subsequent
        Events (Unaudited)**
  *Amended
        Software and License Agreement*
 
 In
        January 2006, the Company signed an amendment to a software license and services
        agreement, originally dated September 23, 1996. The Company purchased additional
        software licenses of $3,288 which will be amortized over the estimated useful
        life of three years. In connection with the software purchase, the Company
        also
        prepaid $1,712 for maintenance relating to these licenses, which maintenance
        expires on December 31, 2007. The prepaid maintenance will be expensed ratably
        over the maintenance term. The total license and maintenance fee of $5,000,
        was
        paid in full in January 2006.
 
 *Common
        Stock Repurchase Program*
 
 In
        February 2006, the Company’s Board of Directors authorized a new common stock
        repurchase program, pursuant to which the Company may from time to time
        repurchase (through open market repurchases at prevailing market prices),
        up to
        an aggregate of $25,000 of the Company’s outstanding common stock. As of March
        31, 2006, 36,500 shares were repurchased at an average price of
        $9.86.
  F-26-