##### 











SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

|           |  |                                                                                           
|---------- |  | ------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                           
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
	OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
	from                       to                                  

Commission File Number: 000-26529

Audible, Inc.

(Exact Name of Registrant as Specified in Its
Charter)


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

Registrants telephone number, including area code:

(973) 837-2700


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


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

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

Common Stock, par value $0.01

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

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

Documents incorporated by reference: Specified portions of the
Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the 2002
Annual Meeting are incorporated herein by reference into Part
III of this Report. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days
after the Registrants fiscal year ended December 31,
2001.

The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 20, 2002 was
approximately $27,856,030.

The number of shares outstanding of the Registrants Common
Stock, as of March 20, 2002 was 31,627,869 shares of Common
Stock.



---






---



##### 



AUDIBLE, INC.

FORM 10-K


TABLE OF CONTENTS

|              |  |                                                                                        |  |     
|------------- |  | -------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                        |  | PAGE
|             
|             
|             
|             
|PART I       
|             
|             
|             
|             
|Item 1.       |  | Business                                                                               |  | 3   
|             
|             
|             
|             
|              |  | Overview                                                                               |  | 3   
|             
|             
|             
|             
|              |  | Industry Background                                                                    |  | 3   
|             
|             
|             
|             
|              |  | Our Solution                                                                           |  | 4   
|             
|             
|             
|             
|              |  | Our Strategy                                                                           |  | 6   
|             
|             
|             
|             
|              |  | The Audible Service                                                                    |  | 7   
|             
|             
|             
|             
|              |  | Competition                                                                            |  | 9   
|             
|             
|             
|             
|              |  | Intellectual Property and Proprietary Rights                                           |  | 10  
|             
|             
|             
|             
|              |  | Employees                                                                              |  | 10  
|             
|             
|             
|             
|Item 2.       |  | Properties                                                                             |  | 10  
|             
|             
|             
|             
|Item 3.       |  | Legal Proceedings                                                                      |  | 11  
|             
|             
|             
|             
|Item 4.       |  | Submission of Matters to a Vote of Security
	Holders                                   |  | 11  
|             
|             
|             
|             
|PART II      
|             
|             
|             
|             
|Item 5.       |  | Market for the Companys Common Equity and
	Related Stockholder Matters                |  | 11  
|             
|             
|             
|             
|Item 6.       |  | Selected Financial Data                                                                |  | 14  
|             
|             
|             
|             
|Item 7.       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  | 15  
|             
|             
|             
|             
|Item 7A.      |  | Quantitative and Qualitative Disclosure about
	Market Risk                             |  | 31  
|             
|             
|             
|             
|Item 8.       |  | Financial Statements and Supplementary Data                                            |  | 31  
|             
|             
|             
|             
|Item 9.       |  | Changes in the Disagreements with Accountants on
	Accounting and Financial Disclosure  |  | 31  
|             
|             
|             
|             
|PART III     
|             
|             
|             
|             
|Item 10.      |  | Directors and Executive Officers of the Registrant                                     |  | 32  
|             
|             
|             
|             
|Item 11.      |  | Executive Compensation                                                                 |  | 32  
|             
|             
|             
|             
|Item 12.      |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  | 32  
|             
|             
|             
|             
|Item 13.      |  | Certain Relationships and Related Transactions                                         |  | 32  
|             
|             
|             
|             
|PART IV      
|             
|             
|             
|             
|Item 14.      |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  | 32  
|             
|             
|             
|             
|Exhibit Index |  | 32                                                                                    
|             
|             
|             
|             
|Signatures    |  | 35                                                                                    

1



---



##### 



FORWARD-LOOKING STATEMENTS

In addition to historical information, this Annual Report on
Form 10-K contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ
materially. Factors that might cause or contribute to such
differences include, but are not limited to, those discussed in
the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Readers should carefully review the risks described in other
documents the company files from time to time with the
Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q filed by the company in 2001. Readers are
cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date of this Annual
Report on Form 10-K. The company undertakes no obligation to
publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this
document.

2



---



##### 



PART I

Item 1. Business.

Overview

We are the leading provider of premium spoken audio content,
such as audio versions of books and newspapers and radio
programs, that is delivered over the Internet and can be
streamed and played back on personal computers and hand-held
electronic devices that have digital audio capabilities. The
Audible service allows consumers to purchase and download our
content from our Web site (www.audible.comTM), store
it in digital files and play it back on personal computers and
hand-held electronic devices. We offer customers the opportunity
to subscribe to AudibleListener, a monthly audio service. For a
fixed monthly fee, AudibleListener customers may download their
choice of programs from our Web site. More than 32,000 hours of
audio content, much of which is only available in digital audio
format at www.audible.com, is currently available on our Web
site. We also sell at our web site our own digital audio player
under the brand name of Otis, which is manufactured to our
specifications in Korea. Customers can also access content
products sold by Audible through www.amazon.com. Several
manufacturers, including Hewlett-Packard, Compaq Computer
Corporation, Sony Electronics, Handspring, Casio Inc., Franklin
Electronic Publishers, Digisette, LLC., and SONICblue
Incorporateds Rio Audio Group, have agreed to support and
promote the playback of our content on their hand-held
electronic devices by including our Audible software on their
devices. We have announced our plans to add a CD burning feature
to the Audible service, enabling our customers to listen on
their CD players. As of December 31, 2001, Audible had over
123,000 customers in over 100 countries.

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

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

Industry Background

Public demand for new sources of entertainment, information and
educational media continues to grow as amounts of content and
its sources proliferate. Veronis, Suhler & Associates
estimates that consumer spending on media and information will
rise at a compound rate of 5.6% per year reaching
$180 billion in 2005. Historically, Americans on average
spent more than 3,000 hours per year reading, watching or
listening to media content. We believe that many consumers seek
a better way to manage this content.

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

3



---



##### 



types of content, high prices and the limitations of cassette
tape players. For instance, the audiobook market does not
address timely print content such as newspapers, newsletters,
magazines and journals.

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

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

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

We have also announced our plans to enable purchasers of Audible
content to burn their audio to CD. IDC estimates that the number
of CD burners will increase from 120 million in 2001 to
546 million in 2005.

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

Our Solution

We have created the Audible service to give consumers the
ability to download spoken audio content of their choice from
the Internet and to listen to this audio when, where and how
they want. The Audible service addresses the market opportunity
created by consumer demand for audio content and the emergence
of the Internet and hand-held audio-enabled digital players. We
have created the first service for secure delivery of premium
digital spoken audio content over the Internet for playback on
personal computers and these devices. Our service allows
customers to program their listening time with personalized
selections from a wide collection of spoken audio content
available at our Web site audible.com, including entertainment,
news, education and business information. We believe that we
have assembled the largest and most diverse collection of
premium spoken audio content available for download on the
Internet for playback on personal computers, hand-held digital
audio players, or to burn to CD for playback on a CD player. We
have more than 32,000 hours of audio content currently available
on our Web site, including daily selected audio content from
publications such as The Wall Street Journal and The New York
Times, audio versions of books and periodicals such as The
Economist, Scientific America, Harvard Business Review, and
radio programs such as Car Talk, Fresh Air, Marketplace and All
Things Considered. We provide over 4,500 audiobooks from
publishers, including Bantam Doubleday Dell Audio Publishing and
Random House Audio Publishing, each a division of Random House,
Inc., Dove Audio, Harper Audio, Simon & Schuster Audio and
Time Warner AudioBooks, and written by authors such as Dave
Barry, John Grisham, Stephen King, Sidney Sheldon and Amy Tan.
Additionally, Audible is strategically aligned with Random
House, Inc., with the first-ever imprint to produce spoken word
content specifically suited for digital distribution, Random
House Audible. We believe that our extensive audio content
collection and our secure delivery system provide benefits to
our customers, content providers, manufacturers of AudibleReady
hand-held electronic devices and other companies which
distribute or promote our service.

4



---



##### 



Benefits to
Customers.

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

Selection.At our Web site, audible.com, customers can
browse and purchase from a large and diverse collection of
readily available premium spoken audio content, most of which is
currently available only through us in digital format for
Internet distribution either pursuant to exclusive arrangements
or because, to our knowledge, no one else currently has these
rights. Our collection currently includes over 4,500 digital
audiobooks in a wide variety of categories from more than 1,500
authors. We are the only source of timely digital audio editions
of leading newspapers and selected periodicals. We also offer
popular and special interest radio programming, including
interviews, commentaries and talk radio. Our collection also
contains selections that are difficult to find or may not
otherwise be readily or conveniently available to customers,
such as lectures and speeches. We have over 14,000 of these
other audio selections in addition to our audiobooks.

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

Listening Experience.Unlike radio, which offers 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 decide to
listen to what they want, when and where they want.
Additionally, customers can choose from five different fidelity
options for their listening. Our Service also allows customers
to skip between selections or individual articles or chapters
within selections. Customers can pause and resume listening
where they left off and can bookmark multiple
sections of content, rather than be constrained by the rewind
and fast forward functions of cassette tape players.

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

Value.We provide customers with what we believe is a
terrific value proposition in our AudibleListener program, where
for a fixed monthly fee, the customer can download programs of
their choice. Individual titles are typically priced at about
30% less than the same audiobook on cassette or CD, and if
purchased within the AudibeListener membership plan, discounts
compared to cassette or CD moves into the 75% to 80% range.

Benefits to Business
Affiliates.

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

Content creators.We provide a new source of revenue for
publishers of newspapers, magazines, journals, newsletters,
professional publications and business information and producers
of radio broadcasts by creating a new market for content that is
too timely for distribution on cassette tape or compact disc and
too specialized for widely-broadcast radio programs.
Additionally, our electronic delivery service offers publishers
of audiobooks a new distribution channel for their existing
audiobook content. In a strategic alliance with Random House,
Inc., Random House Audible has been established as a publishing
imprint of Random House, Inc.s Random House Audio
Publishing Group Division. All titles published by the imprint
will be distributed exclusively on the Internet by Audible.
Older publications, including archived or out-of-print content,
when converted to digital audio form, can also provide
additional revenue while incurring relatively low costs for
storing and delivering electronic inventory. Our solution has
the benefit of reducing the risk of

5



---



##### 





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

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

Companies which distribute our products or promote our
service.We have entered into marketing agreements with
Amazon.com, Microsoft, The New York Times Company and Dow Jones
(The Wall Street Journal) to promote our content to their
customers, either directly or indirectly. In return, we have
access to additional distribution outlets. We have agreed with
some of these companies to share a portion of revenue from sales
of our content to their customers.

Our Strategy

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

Increase brand
awareness.

We seek to make Audible a recognizable brand. We
continue to use the AudibleReady brand to signify that a player
is enabled to play back Audible content. We are continuing to
enhance brand awareness of the Audible service and increase
visitors to our Web site by expanding our marketing efforts
through online initiatives, such as affiliate programs,
sponsorships, direct e-mail solicitations and banner
advertisements. Our co-marketing agreements with Amazon.com and
AudibleReady player manufacturers are key elements of our plans
to make potential customers aware of, and to encourage them to
try our service. We continue to seek to enter into agreements
with content providers as well as owners of Internet portals,
destinations and commerce sites to promote co-branded services
to Internet users.

Expand content
collection.

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

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

We intend to continue to work with the manufacturers of
hand-held electronic devices to support and promote the playback
of Audible content on their players. We also seek to make
AudibleReady future

6



---



##### 





Continue to improve the
customer experience.

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

The Audible Service

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

Audible.com.

Our Web site, audible.com, delivers a large and diverse
selection of premium digital spoken audio content in a secure
format through the Internet. At audible.com, visitors can
browse, sample, purchase, subscribe to, schedule, stream and
download digital audio content. One hour of spoken audio in our
Format 1, requires about two megabytes of storage, takes
approximately 12-15 minutes to download to a personal computer
using a 28 kbps modem, approximately eight minutes using a 56
kbps modem or approximately ten seconds using a high speed
Internet connection, and less than one minute to transfer the
content from the personal computer to an AudibleReady player.
Customers are offered up to five different fidelity options,
allowing them to trade off between fidelity and speed of
connectivity to the Internet. Veronis Suhler projects that by
2005, 68.4 million U.S. households will be online and that
by 2006, 41% of online households will subscribe to a broadband
Internet connection.

Digital audio
content.

We currently offer more than 4,500 digital audiobooks and more
than 14,000 other audio selections comprising over 32,000 hours
of digital spoken audio content, segmented in four categories:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Audiobooks. We offer a wide selection of audiobooks from
	more than 1,500 authors. We offer both abridged (typically three
	to ten hours long) and unabridged (typically five to 20 hours
	long) versions of original works, read either by the authors or
	by professional narrators.                                                                                                                                                                            
|
| |  | Timely audio editions of print publications. Our service
	enables the timely distribution of audio editions of newspapers
	and periodicals previously available only in print. We offer a
	40-minute daily audio edition of The New York Times and selected
	audio content from The Wall Street Journal. We also offer audio
	editions of Forbes, Scientific American, Science News,
	Harvard Management Update, Harvard Health Letter, The
	Economist and others.
|
| |  | Radio broadcasts. We offer popular and special-interest
	radio programs shortly after they are originally broadcast so
	our customers have the flexibility to listen to these programs
	when and where they want. We offer audio versions of broadcasts
	such as Fresh Air, Marketplace, This American Life, The News
	from Lake Wobegon, Car Talk, and Science Friday.                                                                                           

7



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Lectures, speeches, performances and other audio. We
	offer a broad selection of lectures, speeches, dramatic and
	comedy performances, educational and self-improvement materials,
	religious and spiritual content, television audio tracks and
	other forms of spoken audio, many of which are difficult to find
	from any other source. We also offer specialty content created
	exclusively for audible.com., for example, our agreement with
	comedian and actor Robin Williams to create original comedy and
	other content programming for Internet distribution exclusively
	through audible.com.

We currently have licensed Internet distribution rights to audio
content from more than 160 publishers, producers of radio
content and other content creators. Our license agreements are
typically for terms of one to three years, and many provide us
with exclusive Internet distribution rights. Under most
licensing arrangements, we pay the content creator a portion of
the revenue we receive. In the majority of our current
arrangements, we also pay a guaranteed advance against the
content creators revenue share.

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

Audible software.

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

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

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

AudibleReady devices.

AudibleReady players are personal computers and other hand-held
electronic devices that have a speaker or an audio output jack
and can be enabled to play back our audio content. The
AudibleManager and AudiblePlayer software enable these devices
to receive and play back Audible content and are available for
download from audible.com. Several player manufacturers have
bundled the AudiblePlayer software in their devices. The audio
output jack of these players can work with headphones or a
cassette adaptor to enable the content to be played through a
car stereo system. Audible customers may also burn their audio
to a CD for listening through a CD player.

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

We have a co-marketing agreement with a CD burning software
company under which its CD burning software will be made capable
of burning content purchased from Audible onto CDs. Under this
agreement,

8



---



##### 





Other services.

We also provide audio production services to corporations to
enable them to distribute audio information in digital form
through a Web site or a wireless network.

Competition

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



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

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

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

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

Competition from Web sites that provide streaming audio content
is intense and is expected to increase significantly in the
future. Pressplay, MusicNet and RealNetworks offer a wide
selection of streaming and downloadable music content. These
companies and other portal companies including America Online
may compete directly with us by selling premium spoken audio
content for digital download.

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

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

9



---



##### 



Intellectual Property and Proprietary Rights

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

We hold six patents and have filed five patent applications for
some aspects of the Audible system. We do not know if the other
pending patents will ever be issued and, if issued, if they will
survive legal challenges. Legal challenges to our patents,
whether successful or not, may be very expensive to defend.

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

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

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

General

We were incorporated in 1995 in the State of Delaware and
commenced commercial operations in 1997. Our principal offices
are located at 65 Willowbrook Boulevard, Wayne, NJ 07470. Our
telephone number is (973) 837.2700.

Employees

As of December 31, 2001, we had a total of 64 full-time
employees  16 in production, 26 in sales &
marketing which includes 17 in customer support, 19 in
development, and 3 in general and administrative.

Item 2. Properties.

Our principal administrative, sales and marketing, research and
development and production facility is located at 65 Willowbrook
Boulevard, Wayne, New Jersey, 07470, where we lease
approximately 22,000 square feet. Our lease expires on
February 27, 2003.

10



---



##### 



Item 3. Legal Proceedings.

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

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

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

Item 4. Submission of matters to a vote of
Security Holders.

None.

PART II



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

Our common stock is traded on the Nasdaq National Market under
the symbol ADBL. Prior to July 16, 1999, there
was no established public trading market for any of our
securities.

11



---



##### 



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.

|     |                                        |      |   |       |  |  |   |       | 
|---- | -------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                                        | High |   | Low  
|     |                                        |      |   |      
|2000 |                                        |      |   |       |  |  |   |      
|    
|    
|    
|    
|     | First Quarter                          |      | $ | 16.50 |  |  | $ | 10.00 | 
|    
|    
|    
|    
|     | Second Quarter                         |      |   | 9.00  |  |  |   | 3.50  | 
|    
|    
|    
|    
|     | Third Quarter                          |      |   | 4.37  |  |  |   | 1.19  | 
|    
|    
|    
|    
|     | Fourth Quarter                         |      |   | 1.31  |  |  |   | 0.37  | 
|    
|2001 |                                        |      |   |       |  |  |   |      
|    
|    
|    
|    
|     | First Quarter                          |      | $ | 1.78  |  |  | $ | 0.41  | 
|    
|    
|    
|    
|     | Second Quarter                         |      |   | 1.40  |  |  |   | 0.62  | 
|    
|    
|    
|    
|     | Third Quarter                          |      |   | 0.68  |  |  |   | 0.34  | 
|    
|    
|    
|    
|     | Fourth Quarter                         |      |   | 0.80  |  |  |   | 0.36  | 
|    
|2002 |                                        |      |   |       |  |  |   |      
|    
|    
|    
|    
|     | First Quarter (through March 20, 2002) |      | $ | 1.48  |  |  | $ | 0.81  | 

On March 20, 2002, the last reported sale price of our
common stock was $0.90 per share. As of March 20, 2002, we
had approximately 180 stockholders.

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

On October 26, 2001, the Company received a Nasdaq Staff
Determination letter indicating that the Company had failed to
comply with the minimum Net Tangible Assets requirement for
continued listing. Accordingly, the Companys securities
were subject to de-listing from the Nasdaq National Market. The
Company had requested a reevaluation of the Staff Determination
by the National Listing Qualification Panel. On
November 20, 2001, the Company was notified by the National
Listing Qualifications Panel that Audibles compliance had
been re-evaluated and that Audible was in compliance with all
applicable requirements for continued listing. The Company was
further informed that effective November 1, 2002, the Company
will be required to demonstrate that it has $10 million in
stockholders equity, as defined by GAAP, in order to
remain listed.

Recent Sales of Unregistered Securities

From January 2001 through December 2001, we sold and issued the
following unregistered securities:

In January 2001, in connection with an amended Co-Branding,
Marketing and Distribution Agreement, the Company issued a
warrant to purchase 500,000 shares of common stock at a price of
$1.50 per share, which expires January 24, 2006.

In January 2001, in connection with an amended services
agreement, the Company cancelled a warrant to purchase 500,000
shares of common stock at a price of $8.00 per share. The
Company issued a warrant to purchase 400,000 shares of common
stock at a price of $0.91 per share, which expires
February 16, 2009.

In May 2001, in connection with a services agreement, the
Company issued a warrant to purchase 50,000 shares of common
stock at a price of $0.50 per share, which expires May 29,
2006.

In August 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
August 1, 2006.

In September 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
September 1, 2006.

12



---



##### 



In September 2001 in connection with a content provider
agreement, the Company issued a warrant to purchase 50,000
shares of common stock at a price of $0.43 per share, which
expires September 4, 2006.

In October 2001, in connection with a services agreement, the
Company issued a warrant to purchase 2,000 shares of common
stock at a price of $0.38 per share, which expires
October 1, 2006.

In October 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
October 1, 2006.

In November 2001, in connection with a services agreement, the
Company issued a warrant to purchase 40,000 shares of common
stock at a price of $0.50 per share, which expires
November 1, 2006.

In November 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
November 1, 2006.

In November 2001 in connection with a content provider
agreement, the Company issued a warrant to purchase 5,000 shares
of common stock at a price of $0.54 per share, which expires
November 30, 2006.

In December 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
December 1, 2006.

The above securities were offered and sold by us in reliance
upon exemptions from registration pursuant to Section 4(2)
of the Securities Act of 1933 as transactions not involving any
public offering or Rule 701 promulgated under the
Securities Act of 1933.

13



---



##### 





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

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

Selected Financial Data

|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |        |        |         |  
|----------------------------------------------- | --------------------------------------- | ------------------------------------- | --------------------------- | ----- | ----- | ------ | ------ | ----- | ----- | ------ | ------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                |                                         |                                      
|                                                |                                         | Year Ended December 31,              
|                                                |                                         |                                      
|                                                |                                         | 1997                                  |                             | 1998  |       | 1999   |        | 2000  |       | 2001  
|                                                |                                         |                                       |                             |       |       |        |        |       |       |       
|                                                |                                         |                                      
|                                                |                                         | (in thousands, except per share data)
|                                               
|                                               
|                                               
|                                               
|Statement of operations data:                   |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                               
|                                               
|                                               
|                                               
|Revenue, net:                                   |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Content and services                    |                                       | $                           | 3     |       |        | $      | 132   |       |        | $       | 478   |        |         | $       | 2,519  |        |         | $       | 7,462  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Hardware                                |                                       |                             | 57    |       |        |        | 244   |       |        |         | 314   |        |         |         | 1,273  |        |         |         | 1,293  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                   |                                       |                             |      |       |        |        |      |       |        |         | 951   |        |         |         | 757    |        |         |         | 316    |       
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                                | Total revenue, net                      |                                       |                             | 60    |       |        |        | 376   |       |        |         | 1,743 |        |         |         | 4,549  |        |         |         | 9,071  |       
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|Operating expenses:                             |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of content and services revenue    |                                       |                             | 78    |       |        |        | 372   |       |        |         | 812   |        |         |         | 3,668  |        |         |         | 4,902  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of hardware revenue                |                                       |                             | 252   |       |        |        | 556   |       |        |         | 308   |        |         |         | 2,572  |        |         |         | 2,858  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Production                              |                                       |                             | 1,982 |       |        |        | 1,639 |       |        |         | 3,397 |        |         |         | 6,458  |        |         |         | 5,636  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Development                             |                                       |                             | 2,672 |       |        |        | 1,642 |       |        |         | 2,680 |        |         |         | 4,444  |        |         |         | 3,322  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Write-down related to hardware business |                                       |                             |      |       |        |        | 952   |       |        |         |      |        |         |         |       |        |         |         |       |       
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing                     |                                       |                             | 1,228 |       |        |        | 1,453 |       |        |         | 6,109 |        |         |         | 16,052 |        |         |         | 15,187 |       
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative              |                                       |                             | 1,921 |       |        |        | 1,838 |       |        |         | 3,015 |        |         |         | 5,548  |        |         |         | 4,727  |       
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                                |                                         | Total operating expenses              |                             |       | 8,133 |        |        |       | 8,452 |        |         |       | 16,321 |         |         |        | 38,742 |         |         |        | 36,632 |        
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|                                                |                                         |                                       | Loss from operations        |       |       | (8,073 | )      |       |       | (8,076 | )       |       |        | (14,578 | )       |        |        | (34,193 | )       |        |        | (27,561 | )
|                                               
|                                               
|                                               
|                                               
|                                                |                                         |                                       | Other (income) expense, net |       |       | (44    | )      |       |       | 62     |         |       |        | (1,102  | )       |        |        | (1,602  | )       |        |        | (565    | )
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|Loss before state income tax benefit            |                                         |                                       | (8,029                      | )     |       |        | (8,138 | )     |       |        | (13,476 | )     |        |         | (32,591 | )      |        |         | (26,996 | )     
|                                               
|                                               
|                                               
|                                               
|State income tax benefit                        |                                         |                                       |                            |       |       |        |       |       |       |        |        |       |        |         | (316    | )      |        |         | (327    | )     
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|Net loss                                        |                                         | $                                     | (8,029                      | )     |       | $      | (8,138 | )     |       | $      | (13,476 | )     |        | $       | (32,275 | )      |        | $       | (26,669 | )     
|                                               
|                                               
|                                               
|                                               
|Accrued dividends on redeemable preferred stock |                                         |                                       |                            |       |       |        |       |       |       |        |        |       |        |         |        |        |        |         | 1,049   |       
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|Net loss applicable to common shareholders      |                                         | $                                     | (8,029                      | )     |       | $      | (8,138 | )     |       | $      | (13,476 | )     |        | $       | (32,275 | )      |        | $       | (27,718 | )     
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       
|Basic and diluted net loss per common share     |                                         | $                                     | (1.49                       | )     |       | $      | (1.15  | )     |       | $      | (0.85   | )     |        | $       | (1.21   | )      |        | $       | (1.03   | )     
|                                               
|                                               
|                                               
|                                               
|Weighted average common shares outstanding      |                                         |                                       | 5,379                       |       |       |        | 7,097  |       |       |        | 15,890  |       |        |         | 26,644  |        |        |         | 26,918  |       
|                                                |                                         |                                       |                             |       |       |        |        |       |       |        |         |       |        |         |         |        |        |         |         |       

|                                     |  |                    |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        |  
|------------------------------------ |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | -
|                                     |  |                   
|                                     |  | As of December 31,
|                                     |  |                   
|                                     |  | 1997               |         | 1998 |  | 1999 |         | 2000 |  | 2001
|                                     |  |                    |         |      |  |      |         |      |  |     
|Balance sheet data:                  |  |                    |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |        |  
|                                    
|                                    
|                                    
|                                    
|Cash and cash equivalents            |  | $                  | 646     |      |  | $    | 10,526  |      |  | $    | 12,030 |  |  | $ | 14,149 |  |  | $ | 7,628  |  
|                                    
|                                    
|                                    
|                                    
|Short-term investments               |  |                    |        |      |  |      |        |      |  |      | 24,404 |  |  |   | 1,957  |  |  |   |       |  
|                                    
|                                    
|                                    
|                                    
|Total assets                         |  |                    | 3,482   |      |  |      | 12,147  |      |  |      | 39,926 |  |  |   | 20,732 |  |  |   | 10,999 |  
|                                    
|                                    
|                                    
|                                    
|Noncurrent liabilities               |  |                    | 1,169   |      |  |      | 1,688   |      |  |      | 538    |  |  |   | 713    |  |  |   | 220    |  
|                                    
|                                    
|                                    
|                                    
|Redeemable preferred stock           |  |                    | 12,378  |      |  |      | 27,725  |      |  |      |       |  |  |   |       |  |  |   | 10,319 |  
|                                    
|                                    
|                                    
|                                    
|Total stockholders (deficit) equity |  |                    | (11,427 | )    |  |      | (19,529 | )    |  |      | 34,578 |  |  |   | 14,593 |  |  |   | (5,549 | )

14



---



##### 





|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
	Condition and Results of Operations.

The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
financial statements and related notes thereto, and other
financial information included elsewhere in this Annual Report
on Form 10-K.

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

Overview

We provide Internet-delivered premium spoken audio content for
streaming and playback on personal computers and hand-held
digital audio players. We have the largest and most diverse
collection of premium digital spoken audio content available for
purchase and download from the Internet, most of which is
currently available only through audible.com. We were
incorporated in 1995, commenced commercial operations in October
1997, and through March 31, 1999, we were in the
development stage for financial reporting purposes. Subsequent
to March 31, 1999, we substantially completed our
development efforts in establishing our business and accordingly
no longer consider ourselves a development stage company.

In order to test consumer behavior, demonstrate to content
providers the viability of digital distribution of audio content
and test our business model, we designed, created and sold
limited numbers of our own Internet-enabled mobile audio
playback device, the Audible MobilePlayer. Sales of the
MobilePlayer accounted for 65% of our revenue in 1998, and 18%
of our revenue in 1999. We discontinued selling the Audible
MobilePlayer in 1999. Hardware revenue in 2000 and 2001
represents revenue from the sale of third-party AudibleReady
digital audio players, primarily the Rio 500, manufactured by
SONICblue Incorporateds Rio Audio Group. Hardware revenue
accounted for 28% and 14% of our revenue in 2000 and 2001,
respectively. Digital audio players are sold from our Web site
at a deep discount from normal retail price, when a customer
enrolls in our AudibleListener program for a 12 month
period.

Revenue from the sale of audio content and services has
increased in each of the last four quarters. As of
December 31, 2001, more than 123,000 customers had
purchased content from our Website.

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

In November 1998, we entered into an agreement with Microsoft
Corporation (Microsoft), one of our stockholders, to
integrate some of our products, grant various rights and
licenses and provide for Microsoft to be paid future royalties
for content distributed as a result of the customized software
developed under the agreement. Microsoft has paid the Company
the minimum committed payments of $2,000,000 to integrate
products and acquire various products, rights and licenses.
Microsoft advanced Audible $1,500,000 in November 1998 in
consideration of Audible granting Microsoft the right to
distribute software enabling users of Microsoft platforms to
access and use Audible content. The Company allocated $50,000 of
this advance to certain business development work that was
recognized as a reduction of general and administrative expense
during 2001. The remaining $1,450,000 of this advance was
recognized as revenue on a straight-line basis which began in
the quarter ended June 30, 1999 through the initial term of
the agreement which ended in the second quarter of 2001. During
the years ended December 31, 1999, 2000 and 2001, $441,000,
$757,000 and $252,000 respectively, of this advance was
recognized as other revenue. Also under the agreement, during the

15



---



##### 





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

In January 2000, the Company entered into two agreements with
Amazon.com. The Company is the exclusive provider of digital
spoken audio to Amazon.com. as defined in the Co-Branding,
Marketing and Distribution Agreement, as amended. During the
three-year term of this agreement, in consideration for certain
services, Amazon is entitled to $22,500,000 plus a specified
percentage of revenue earned over a threshold amount in addition
to common stock warrants. Under the Securities Purchase
Agreement dated January 30, 2000, Amazon.com purchased
1,340,033 shares of common stock from the Company for
$20,000,000. The first $20,000,000 in payments due to Amazon.com
under the amended Co-Branding, Marketing and Distribution
Agreement, were offset against the $20,000,000 in consideration
due to Audible for the purchase of common stock and no cash was
exchanged. Of the remaining $2,500,000 due in cash to Amazon.com
under the agreement, $1,000,000 has been paid through
December 31, 2001 with the remaining $1,500,000 due in 2002.

In May 2000, the Company entered into a 50-month Co-Publishing,
Marketing, and Distribution Agreement with Random House to form
a strategic alliance to establish Random House Audible, a
publishing imprint, as defined in the agreement, to produce
spoken word content specifically suited for digital
distribution. All titles published by the imprint will be
distributed exclusively on the Internet by Audible. As part of
this alliance, Random House, through its Random House Ventures,
LLC subsidiary, purchased 169,780 shares of Audible common stock
from the Company for $1,000,000. Over the term of the agreement
Audible will be contributing towards funding the acquisition and
creation of digital audio titles through Random House Audible.
On March 26, 2002, the agreement was amended to waive the
cash payment due to Random House in 2002 of $1,250,000, thereby
reducing the total payments due under the agreement from
$4,000,000 to $2,750,000. In exchange for this waiver, under the
amendment the Company agreed to issue 1,250,000 shares of
Series B Convertible Preferred Stock. Through
December 31, 2001, $1,250,000 of the $2,750,000 obligation
had been paid, with the remaining amount of $1,500,000 due in
2003 and 2004.

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

In February 2002, Special Situations Funds purchased 4,069,768
shares of common stock for $3,500,000 at a per share price of
$0.86. Net proceeds received by the Company net of direct costs
was $3,159,000. In connection with this transaction, the Company
issued warrants to purchase an additional 1,220,930 shares of
common stock. The warrants are exercisable at a price of $1.15
anytime prior to the fifth anniversary of the

16



---



##### 





Results of Operations

The following table sets forth certain financial data as a
percentage of total revenue during 1999, 2000 and 2001.

|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |     |     |  
|----------------------------------------------- | ------------------------------------ | ---------------------------- | ---- | ---- | --- | ---- | ---- | --- | --- | - | ---- | --- | --- | -
|                                                |                                      |                             
|                                                |                                      | Year Ended December 31,     
|                                                |                                      |                             
|                                                |                                      | 1999                         |      | 2000 |     | 2001
|                                                |                                      |                              |      |      |     |     
|Revenue, net:                                   |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                               
|                                               
|                                               
|                                               
|                                                | Content and services                 |                              |      | 27   | %   |      |      | 55  | %   |   |      | 82  | %  
|                                               
|                                               
|                                               
|                                               
|                                                | Hardware                             |                              |      | 18   |     |      |      | 28  |     |   |      | 14  |    
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                |                              |      | 55   |     |      |      | 17  |     |   |      | 4   |    
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                                |                                      | Total revenue, net           |      |      | 100 | %    |      |     | 100 | % |      |     | 100 | %
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Operating expenses:                             |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of content and services revenue |                              |      | 47   |     |      |      | 81  |     |   |      | 54  |    
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of hardware revenue             |                              |      | 18   |     |      |      | 56  |     |   |      | 32  |    
|                                               
|                                               
|                                               
|                                               
|                                                | Production                           |                              |      | 195  |     |      |      | 142 |     |   |      | 62  |    
|                                               
|                                               
|                                               
|                                               
|                                                | Development                          |                              |      | 154  |     |      |      | 98  |     |   |      | 37  |    
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing                  |                              |      | 351  |     |      |      | 353 |     |   |      | 167 |    
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative           |                              |      | 173  |     |      |      | 122 |     |   |      | 52  |    
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                                |                                      | Total operating expenses     |      |      | 937 |      |      |     | 852 |   |      |     | 404 |  
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Loss from operations                            |                                      |                              | (837 | )    |     |      | (752 | )   |     |   | (304 | )  
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Other (income) expense:                         |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                               
|                                               
|                                               
|                                               
|                                                | Interest income                      |                              |      | (66  | )   |      |      | (36 | )   |   |      | (6  | )  
|                                               
|                                               
|                                               
|                                               
|                                                | Interest expense                     |                              |      | 3    |     |      |      | 1   |     |   |      |    |    
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|                                                |                                      | Total other (income) expense |      |      | (63 | )    |      |     | (35 | ) |      |     | (6  | )
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Loss before state income tax benefit            |                                      |                              | (775 | )    |     |      | (717 | )   |     |   | (298 | )  
|                                               
|                                               
|                                               
|                                               
|State income tax benefit                        |                                      |                              |     |      |     |      | 7    |     |     |   | 4    |    
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Net loss                                        |                                      |                              | (775 | )%   |     |      | (710 | )%  |     |   | (294 | )% 
|                                               
|                                               
|                                               
|                                               
|Accrued dividends on redeemable preferred stock |                                      |                              |     |      |     |      |     |     |     |   | (12  | )  
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    
|Net loss applicable to common shareholders      |                                      |                              | (775 | )%   |     |      | (710 | )%  |     |   | (306 | )% 
|                                                |                                      |                              |      |      |     |      |      |     |     |   |      |    

2001 Compared to 2000

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

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

Hardware. Hardware revenue for 2001 was $1,293,000, as
compared to $1,273,000 for 2000, an increase of $20,000, or 2%.
Hardware revenue increased as a result of selling over 23,000
AudibleReady digital audio

17



---



##### 





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

Operating expenses.

Cost of content and services revenue. Cost of content and
services revenue was $4,902,000, or 66% of content and services
revenue, for 2001, as compared to $3,668,000, or 146% of content
and services revenue, for 2000. This increase in cost was
primarily due to the royalties incurred on higher content and
services revenue, an increase of $320,000 related to the expense
associated with our obligations under our agreement with Random
House, Inc. to create the Random House Audible imprint as the
result of twelve months expense in 2001 versus eight months in
2000, and an increase of $268,000 in the amortization of
warrants issued to content providers. These increases were
offset in part by approximately $700,000 in lower amortization
of content agreement minimum guarantees as the result of most of
our content agreement minimum guarantees becoming fully
amortized in 2001. In addition, in 2001 we recorded a charge of
$669,000 to reflect the net realizable value of content
agreement guarantees, as compared to a similar charge of
$871,000 in 2000. In addition to lower amortization of content
agreement minimum guarantees, cost of content and services
revenue as a percent of content services revenue decreased to
66% in 2001 from 146% in 2000 as a result of reduced royalties
due on $1,285,000 in bulk content sales resulting from the
product mix sold.

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

Production expenses. Production expenses were $5,636,000
for 2001, as compared to $6,458,000 for 2000, a decrease of
$822,000, or 13%. This decrease was primarily due to a reduction
in personnel costs, decreased use of outside services and
consultants, and a decrease of $200,000 in charges associated
with the warrants issued in connection with the Microsoft
agreement which expired in April 2001.

Development. Development costs were $3,322,000 for 2001,
as compared to $4,445,000 for 2000, a decrease of $1,123,000, or
25%. This decrease was primarily due to a reduction in outside
consultants as well as reduced personnel costs as a result of
completing in early 2001 the upgrade of our Web site from
Broadvision version 2.5 to Broadvision
version 4.0.

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

General and administrative. General and administrative
expenses were $4,727,000 for 2001, as compared to $5,548,000 for
2000, a decrease of $821,000, or 15%. This decrease was
primarily due to a reduction in personnel costs and decreased
professional fees such as legal and recruiting expenses, offset
in

18



---



##### 





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

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

Accrued dividends on redeemable preferred stock. Accrued
dividends on redeemable preferred stock was $1,049,000 for 2001.
These dividends represent the 12% dividends payable to Microsoft
as a result of Microsofts purchase of 2,666,666 shares of
Audible Series A Redeemable Convertible Preferred Stock in
February 2001. During 2001 $318,902 in accrued dividends was
paid by the issuance of additional Series A Redeemable
Convertible Preferred Stock. It is the Companys intention
to pay the remaining balance due by issuing additional
Series A Redeemable Preferred Stock.

2000 Compared to 1999

Total revenue, net. Total revenue for 2000 was
$4,549,000, as compared to $1,743,000 for 1999, an increase of
$2,806,000, or 161%.

Content and services. Content and services revenue for
2000 was $2,519,000, as compared to $478,000 for 1999, an
increase of $2,041,000, or 427%. Approximately 53% of this
increase was the result of our customer base increasing from
13,000 customers to more than 51,000 customers at the end of
2000. Bulk content sales of $500,000 accounted for 25% of the
increase and growth in corporate services accounted for 22% of
the increase.

Hardware. Hardware revenue for 2000 was $1,273,000, as
compared to $314,000 for 1999, an increase of $959,000, or 305%.
Hardware revenue increased as a result of selling more
AudibleReady digital audio players, primarily the Rio 500,
manufactured by SONICblue Incorporateds Rio Audio Group.

Other. Other revenue for 2000 was $757,000, as compared
to $951,000 for 1999, a decrease of $194,000, or 20%. Other
revenue in 2000 consisted of revenue recognized in connection
with our agreement with Microsoft, granting Microsoft the right
to distribute software platforms enabling users to access and
use Audible content. The majority of the other revenue for 1999
was generated in connection with our agreement with Microsoft,
and consisted of $200,000 for services provided to create an
AudibleReady software player for Microsofts Windows CE
product; $250,000 for delivery of a license for certain
technology rights; and $441,000 relating to the recognition of
revenue from the advance for granting Microsoft the right to
distribute software platforms enabling users to access and use
Audible content. The remaining $60,000 in other revenue for 1999
related to services provided under an agreement with Compaq
Computer Corporation.

Operating expenses.

Cost of content and services revenue. Cost of content and
services revenue was $3,668,000, or 146% of content and services
revenue, for 2000, as compared to $812,000, or 170% of content
and services revenue, for 1999. This increase was primarily due
to the acquisition of additional content licenses which resulted
in additional amortization of new content agreement minimum
guarantees, an increase of $640,000 related to the obligations
under our agreement with Random House, Inc. to create the Random
House Audible imprint, and an increase of $352,000 related to
the amortization of warrants issued to Random House in 2000 in
connection with the agreement. In addition, we recorded an
adjustment of $871,000 in 2000, to reflect the net realizable
value of content agreement guarantees, as compared to a similar
adjustment of $146,000 in 1999.

19



---



##### 



Cost of hardware revenue. Cost of hardware revenue was
$2,572,000, or 202% of hardware revenue, for 2000, as compared
to $307,000, or 98% of hardware revenue, for 1999. This increase
in cost was primarily due to selling more digital audio players
in 2000 compared to 1999. The increase of cost of hardware
revenue as a percentage of hardware revenue in 2000 as compared
to 1999, reflects our selling digital audio players in 2000 at a
discount when the customer signs up for a one year commitment to
AudibleListener Membership.

Production expenses. Production expenses were $6,458,000
for 2000, as compared to $3,397,000 for 1999, an increase of
$3,061,000, or 90%. This increase was primarily due to increased
personnel, increased audio production, and increased expenses to
support and expand our infrastructure and systems. Web site and
related expenses increased as we continued to upgrade and expand
our capacity. Audio production and Web site-content increased as
we continued producing selections available on our Web site and
performed more daily original programming. Content acquisition
expenses increased as we expanded our content acquisition team.

Development. Development costs were $4,445,000 for 2000,
as compared to $2,680,000 for 1999, an increase of $1,765,000,
or 66%. This increase was primarily due to increased personnel
and outsourced costs in the development of the original and
subsequent versions of Audible Manager, AudibleReady formats,
and the upgrade of our Web site. During the year, we performed
work with many device Original Equipment Manufacturers
(OEM) to plan for compatibility of Audible software on
their platforms. In addition, during 2000, we spent significant
amounts related to the upgrade of our Web site from
Broadvision version 2.5 to
Broadvision version 4.0 providing our customers
new features and enhanced functionality.

Sales and marketing. Sales and marketing expenses were
$16,052,000 for 2000, as compared to $6,109,000 for 1999, an
increase of $9,943,000, or 163%. This increase was primarily due
to $9,167,000 in non cash expenses recognized in connection with
our Co-Marketing Agreement with Amazon.com and an increase in
personnel and higher advertising costs associated with increased
marketing efforts, partially offset by $612,000 in decreased
costs associated with the amortization of the fair value of
warrants issued in connection with a services agreement in 1999
accounted for under variable plan accounting.

General and administrative. General and administrative
expenses were $5,548,000 for 2000, as compared to $3,015,000 for
1999, an increase of $2,533,000, or 84%. This increase was
primarily due to increased personnel and higher legal,
accounting and recruiting fees during the period.

Other (income) expense, net. Interest income was
$1,624,000 for 2000, as compared to $1,150,000 for 1999, an
increase of $474,000. This increase was due to additional
interest income resulting from a higher average cash and cash
equivalent balance and short-term investments resulting from the
proceeds from our initial public offering which occurred in July
1999. Interest expense was $22,000 for 2000, as compared to
$48,000 for 1999, a decrease of $26,000. This decrease was
primarily due to the lower principal balance on our capital
equipment lease line.

State income tax benefit. As a result of selling certain
of our New Jersey state income tax loss benefits for cash the
Company realized $316,000 in state income tax benefit during the
year ended December 31, 2000. No similar sale occurred in
1999.

Critical Accounting Policies

Our critical accounting policies are as follows:



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

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

20



---



##### 



Content and Services:

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

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

In 2001 the majority of our bulk content revenue was the result
of barter transactions in which we exchanged bulk content for
advertising. Revenue from barter transactions is recognized
based on the fair value of the consideration surrendered or
received, whichever is more readily determinable. Advertising
received under barter arrangements is recognized in the period
the advertising is broadcasted.

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

Hardware:

Hardware revenue consists of sales of AudibleReady digital audio
players sold primarily at a discount when a customer signs up
for a one year commitment to our AudibleListener Membership. The
discounted selling price of the hardware device reflects the
subsidy that we incur to acquire a customer with a one year
commitment to AudibleListener. 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.

Other:

Other revenue has consisted primarily of revenue recognized in
connection with our agreement with Microsoft, granting Microsoft
the right to distribute software platforms enabling users to
access and use Audible content which ended in April 2001. We
recognized this revenue on a straight-line basis beginning in
the quarter ended September 30, 1999 through the term of
the agreement which ended in April 2001. Other revenue from a
license granted for certain technology rights to a device
manufacturer is recognized on a straight-line basis over the
term of the agreement.

Royalty Expense: Royalty expense is a component of
Cost of Content and Services Revenue, and includes amortization
of guaranteed royalty obligations to various content providers,
earned royalties on sales of content, and net realizable value
adjustments to royalty advances. Many of our early content
provider agreements contained guaranteed amounts due to the
provider. Anticipating that sales from these agreements would
not be sufficient to offset the amount of the guarantees, we
adopted a policy of amortizing royalty guarantees straight-line
over the term of the royalty agreement, or expensing the royalty
guarantees as earned, whichever was sooner. In addition, each
quarter we review and compare any remaining unamortized
guarantee balance with current and projected sales by provider
to determine if any additional net realizable value

21



---



##### 





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

Employee Stock-Based Compensation arrangements:
The Companys 1999 Stock Incentive Plan permits the
granting of stock options, stock appreciation rights, restricted
or unrestricted stock awards, performance rights and other stock
based awards to employees. For options granted to new Audible
employees as part of their compensation package, the exercise
price is determined by the closing price of Audibles stock
on the day immediately proceeding the employees start date. For
additional option grants made to existing employees, the
exercise price is determined by the closing price on the day
immediately proceeding the grant date. The majority of the
options granted vest over a fifty month period and expire ten
years from the date of the grant. The Company applies Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
Financial Accounting Standards Board (FASB) Interpretation
No. 44, Accounting for Certain Transactions involving
Stock Compensation  an Interpretation of APB Opinion
No. 25, in accounting for its stock-based
compensation, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. 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. If we
had adopted the fair value-based method of accounting for
stock-based compensation pursuant to SFAS No. 123,
compensation expense would increase.

Factors Affecting Operating Results

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



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

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

As of December 31, 2001, we had not entered into any
derivative financial instruments, other financial instruments or
derivative commodity investments that expose us to material
market risk. We currently do not and do not plan to engage in
derivative instruments or hedging activities.

22



---



##### 



We have incurred significant losses since inception, and as of
December 31, 2001, we had an accumulated deficit of
$93,195,000. We believe that our success will depend largely on
our ability to extend our leadership position as a provider of
premium digital spoken audio content over the Internet.
Accordingly, we plan to continue to invest in sales and
marketing, content acquisition and production over the next
several quarters.

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

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

Liquidity and Capital Resources

From inception through the date prior to our initial public
offering (IPO), we financed our operations through private sales
of our redeemable convertible preferred stock and warrants. Net
proceeds from the sales of redeemable convertible stock and
warrants prior to our IPO were $28,719,000 since inception.

In July 1999, we completed an initial public offering of
4,600,000 shares of common stock at $9.00 per share. Total
proceeds were $36,856,000, net of underwriting discounts and
commissions of $2,898,000 and offering costs of $1,641,000.
Concurrent with the offering, all shares of our redeemable
convertible preferred stock were converted into 13,400,985
shares of common stock. At December 31, 2001, our principal
source of liquidity was $7,628,000 in cash and cash equivalents.

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

In February 2002, Special Situations Funds purchased 4,069,768
shares of common stock for $3,500,000 at a per share price of
$0.86. Net proceeds received by the Company net of direct costs
were $3,159,000. In connection with this transaction, the
Company issued warrants to purchase an additional 1,220,930
shares of common stock. The warrants are exercisable at a price
of $1.15 per share anytime prior to the fifth anniversary

23



---



##### 





At December 31, 2001, our principal commitments consisted
of operating lease commitments, dividends payable to Microsoft
in connection with the sale of Series A Redeemable
Convertible Preferred Stock, contractual commitments with
content providers and commitments under our agreements with
Amazon.com and Random House.

The following table shows future payments due under our
commitments and obligations as of December 31, 2001.

|      |  |           |         |             |  |               |           |           |  |            |            |          |  |       |         |  |  |   |           |  |  |   |           |  |  |   |            | 
|----- |  | --------- | ------- | ----------- |  | ------------- | --------- | --------- |  | ---------- | ---------- | -------- |  | ----- | ------- |  |  | - | --------- |  |  | - | --------- |  |  | - | ---------- | 
|      |  |           |         | (1)         |  |               |           |           |  |            |            |          |  |      
|      |  |           |         | Dividends   |  | (2)           |           |           |  |            |            |          |  |      
|      |  |           |         | payable     |  | Redemption of |           |           |  |            |            |          |  |      
|      |  |           |         | Microsoft   |  | Microsoft     |           |           |  |            |            |          |  |      
|      |  |           |         | Series A    |  | Series A      |           |           |  |            |            | (3)      |  |      
|      |  |           |         | Redeemable  |  | Redeemable    |           | Payments  |  |            |            | Payments |  |      
|      |  |           |         | Convertible |  | Convertible   |           | due       |  | Payments   |            | due      |  |      
|      |  | Operating |         | Preferred   |  | Preferred     |           | Content   |  | due        |            | Random   |  |      
|Year  |  | Leases    |         | Stock       |  | Stock         |           | Providers |  | Amazon.com |            | House    |  | Total
|      |  |           |         |             |  |               |           |           |  |            |            |          |  |      
|2002  |  | $         | 420,888 |             |  | $             | 2,056,554 |           |  |            |           |          |  | $     | 896,950 |  |  | $ | 1,500,000 |  |  |   |          |  |  | $ | 4,874,392  | 
|     
|     
|     
|     
|2003  |  |           | 70,148  |             |  |               | 1,325,942 |           |  |            |           |          |  |       | 48,500  |  |  |   |          |  |  | $ | 1,000,000 |  |  |   | 2,444,590  | 
|     
|     
|     
|     
|2004  |  |           |        |             |  |               | 1,325,942 |           |  |            |           |          |  |       |        |  |  |   |          |  |  |   | 500,000   |  |  |   | 1,825,942  | 
|     
|     
|     
|     
|2005  |  |           |        |             |  |               | 1,325,942 |           |  |            |           |          |  |       |        |  |  |   |          |  |  |   |          |  |  |   | 1,325,942  | 
|     
|     
|     
|     
|2006  |  |           |        |             |  |               | 196,167   |           |  | $          | 10,318,902 |          |  |       |        |  |  |   |          |  |  |   |          |  |  |   | 10,515,069 | 
|      |  |           |         |             |  |               |           |           |  |            |            |          |  |       |         |  |  |   |           |  |  |   |           |  |  |   |            | 
|Total |  | $         | 491,036 |             |  | $             | 6,230,547 |           |  | $          | 10,318,902 |          |  | $     | 945,450 |  |  | $ | 1,500,000 |  |  | $ | 1,500,000 |  |  | $ | 20,985,935 | 
|      |  |           |         |             |  |               |           |           |  |            |            |          |  |       |         |  |  |   |           |  |  |   |           |  |  |   |            | 



---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1): | Dividends shown payable in 2002 include $730,612 due as of
	December 31, 2001, which the company intends to pay by
	issuance of additional Series A Redeemable Convertible
	Preferred Stock. The remaining 2002 balance of $1,325,942 as
	well as all future dividends payable can be paid by either the
	issuance of additional preferred shares or in cash at the option
	of the Company.                                                                 
|    
|(2): | If the Series A Redeemable Convertible Preferred Stock is
	not converted into common stock prior to the fifth anniversary
	of the original issue date, Audible is required to redeem all
	remaining outstanding shares at a per share price of $3.75 plus
	all accrued and unpaid dividends. If Audible elects to pay any
	future dividends by issuing additional preferred shares, the
	amount required for the redemption would increase
	proportionately.
|    
|(3): | Amounts shown payable to Random House reflect the March 26,
	2002 amendment to the Co-Publishing, Marketing and Distribution
	Agreement.                                                                                                                                                                                                                                                                                                                    

Net cash used in operating activities was $10,395,000 for 1999,
$18,605,000 for 2000 and $17,500,000 for 2001. Net cash used in
1999 was primarily attributable to our net loss and increases in
interest receivable on short-term investments and increases in
prepaid expenses, offset in part by services rendered for common
stock and warrants and increases in accounts payable and accrued
expenses. Net cash used in 2000 was primarily attributable to
our net loss and decrease in advances, offset in part by
depreciation and amortization, services rendered for common
stock and warrants, increases in accounts payable, accrued
expenses and compensation, and royalty obligations. Net cash
used in 2001 was primarily attributable to our net loss, an
increase in inventory and a decrease in royalty obligations,
offset in part by services rendered for common stock and
warrants, depreciation and amortization, and a decrease in
royalty advances.

Net cash used in investing activities was $25,959,000 for 1999.
Net cash provided by investing activities was $19,791,000 for
2000 and $965,000 for 2001. Net cash used in investing
activities in 1999 was related to purchases of property and
equipment of $1,505,000, $50,000 invested in a interest bearing
note issued to a stockholder as well as net purchases of
$24,404,000 in short-term investments. Net cash provided by
investing activities for 2000 was primarily related to
$22,446,000 in net redemptions of short-term investments and
$100,000 repayment of a note issued to a shareholder, offset in
part by $2,763,000 of purchases of property and

24



---



##### 





Net cash provided by financing activities was $37,858,000 for
1999, $933,000 for 2000 and $10,013,000 for 2001. Net cash
provided by financing activities resulted primarily from the
issuance of our redeemable convertible preferred stock during
1999 and 2001, from the proceeds of our initial public offering
during 1999, and during 2000 from the sale of common stock and
repayment of notes due from shareholders offset in part by
capital lease payments.

As of December 31, 2001, we had available net operating
loss carryforwards totaling approximately $86,772,000, which
expire beginning in 2010. The Tax Reform Act of 1986 imposes
limitations on our use of net operating loss carryforwards
because certain stock ownership changes have occurred.

Based on our currently proposed business plans and related
assumptions, we we believe that our cash and cash equivalents
balance, together with the February 2002 Special Situations Fund
investment of $3,159,000 net of direct costs, described above,
as well as the waiver of cash payments of $1,250,000 due to
Random House in 2002 in exchange for preferred stock, will
enable us to meet our anticipated cash requirements for
operations and capital expenditures through 2002. However, any
projection of future revenues is subject to a level of
uncertainty. If planned revenues are insufficient to satisfy our
liquidity requirements in 2002, we will need to raise additional
funds through public or private financing or other arrangements.
No assurance can be given that such additional financing, when
needed, will be available on terms favorable to us or to our
stockholders, if at all, and that such financing would not be
antidilutive to our stockholders.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations
(SFAS 141), and Statement No. 142, Goodwill and
Other Intangible Assets (SFAS 142). SFAS 141
requires that the purchase method of accounting be used for all
business combinations. SFAS 141 also specifies criteria
that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported separately
from goodwill. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually
in accordance with the provisions of SFAS 142.
SFAS 142 will also require that intangible assets with
definite useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS 144
Accounting for the Impairment or Disposal of Long-Lived
Assets.

The Company adopted the provisions of SFAS 141 effective
July 1, 2001. The adoption of SFAS 141 had no effect
on the Companys financial position or results of
operations. SFAS 142 is effective for the Company beginning
January 1, 2002, and is not expected to have an impact on
the Companys financial position or results of operations.

In August 2001, the Financial Accounting Standards Board issued
SFAS No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144), which
supercedes both SFAS No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, and reporting provisions of APB Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS 144 retains
the fundamental provisions in SFAS 121 for recognizing and
measuring impairment losses on long-lived assets held for use
and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with
SFAS 121. SFAS 144 retains the basic provisions of
Opinion 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a
component of entity (rather than a segment of a business).
Unlike SFAS 121, an impairment assessment under
SFAS 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS 142.

25



---



##### 



The Company is required to adopt SFAS 144 on
January 1, 2002. The Company does not expect the adoption
of SFAS No. 144 to have a material impact on the financial
statements because the impairment assessment under SFAS 144 is
largely unchanged from SFAS 121.

RISK FACTORS

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

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

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

Our limited revenue and history of losses makes it uncertain
when or if we will become profitable. Our failure to achieve
profitability within the time frame expected by investors may
adversely affect our business and the market price of our common
stock. We had total revenue of $1,743,000, $4,549,000 and
$9,071,000 for 1999, 2000 and 2001, respectively. This limited
revenue makes it difficult to predict our future quarterly
results and our revenue and operating results can vary
significantly quarter to quarter. Our limited revenue will make
relatively minor fluctuations in revenue much more significant
on a percentage basis. Our revenue is dependent on the
availability and sales of AudibleReady players by third-party
manufacturers. We had content and services revenue of $478,000,
$2,519,000 and $7,462,000 for 1999, 2000 and 2001, respectively.
Bulk content sales of $1,435,000 were recognized in 2001 and of
this amount $1,285,000 related to barter arrangements; there is
no assurance that we will be able to sell bulk content in the
future. We had operating expenses of $16,321,000, $38,742,000
and $36,633,000 for 1999, 2000 and 2001, respectively. Because
most of our expenses, such as employee compensation and rent,
are relatively fixed in the short term, we may be unable to
significantly adjust our spending to compensate for unexpected
revenue shortfalls. If current cash and cash equivalents and the
$3,159,000 received from Special Situations Fund in February
2002, net of direct costs are insufficient to satisfy our
liquidity requirements in 2002, we will need to raise additional
funds through public or private financing or other arrangements.
There can be no assurance that additional financing will be
available to the Company when needed, if at all. This would
likely affect the market price of our common stock in a manner
which may be unrelated to our long-term operating performance.
As of December 31, 2001, we have incurred net operating
losses of approximately $93,195,000 since inception, and we
expect to continue to incur significant losses for the
foreseeable future.

We must retain a significant portion of our AudibleListener
customers.

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

26



---



##### 



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

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

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

If we are unable to obtain licenses from the creators and
publishers of content to have that content available on our Web
site on terms acceptable to us or if a significant number of
content providers terminate their agreements with us, we would
have less content available for our customers, which would limit
our 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, conferences, lectures and other forms of
spoken audio content. Although many of our agreements with
content providers are for initial terms of one to three years,
our content providers may choose not to renew their agreements
with us or may terminate their agreements early if we do not
fulfill our contractual obligations. We cannot be certain that
our content providers will enter into new agreements with us on
the same or similar terms as those currently in effect or that
additional content providers will enter into agreements on terms
acceptable to us.

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

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

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

If we fail to promote and maintain our brand names, our
business, operating results and financial condition could be
materially adversely affected. We believe that building
awareness of the Audible, audible.com
and AudibleReady brand names is critical to
achieving widespread acceptance of our service by customers,
content providers, device manufacturers and marketing and
distribution companies with which we have business
relationships. To promote our brands, we will need to
substantially increase our marketing

27



---



##### 





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

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

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

We face competition in all aspects of our business and we cannot
assure you that we will be able to compete effectively. We
compete for consumers of audio content with other Internet-based
audio distributors and distributors of audio on cassette tape or
compact disk. 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 disk, such as Audio Book Club,
Borders, and Barnes & Noble, (2) Web sites that offer
streaming access to spoken audio content using tools such as the
RealPlayer or Windows Media Player, (3) other companies
offering services similar to ours, such as Media Bay and
(4) on-line and Internet portal companies such as America
Online, Inc., Yahoo! Inc., and Microsoft Network, with the
potential to offer audio content. Many of these companies have
financial, technological, promotional and other resources that
are much greater than those available to us and could use or
adapt their current technology, or could purchase technology, to
provide a service directly competitive with the Audible service.

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

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

28



---



##### 



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

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

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

If our computer systems are damaged or interrupted by a disaster
for an extended period of time, our business, results of
operations and financial condition would be materially adversely
affected. We do not have a 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.

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

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



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

The loss of key employees could jeopardize our growth
prospects.

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

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

The failure to hire new personnel could damage our ability to
grow and expand our business. Our future success depends on our
ability to attract, hire and retain highly skilled technical,
managerial, editorial, marketing and customer service personnel,
and competition for these individuals is intense. In particular,
we have experienced difficulty in hiring software and Web site
developers. Our failure to hire these technical employees could
delay improvements in, and enhancements to, the Audible service.

29



---



##### 



We may not be able to protect our intellectual property.

If we fail to protect our intellectual property, we may be
exposed to expensive litigation or risk jeopardizing our
competitive position. The steps we have taken may be inadequate
to protect our technology and other intellectual property. Our
competitors may learn or discover our trade secrets or may
independently develop technologies that are substantially
equivalent or superior to ours. We rely on a combination of
patents, licenses, confidentiality agreements and other
contracts to establish and protect our technology and other
intellectual property rights. We hold six patents and have filed
five other patent applications. 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.

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

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

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

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

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

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

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

30



---



##### 



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

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | prior to accepting an acquisition proposal or initiating a sale
	of substantially all of our assets, we must provide to Microsoft
	a notice specifying in general the proposed terms of such
	acquisition proposal or sale. Microsoft shall have ten days in
	which to present an offer to acquire us, during which period we
	must refrain from entering into definitive transaction
	documentation with respect to such acquisition proposal or sale.
	Nothing in the foregoing sentence shall obligate us to negotiate
	with Microsoft on an exclusive basis during such 10-day period.                                    
|
| |  | our board of directors, without stockholder approval, may issue
	preferred stock on terms that they determine. This preferred
	stock could be issued quickly with terms that delay or prevent
	the change in control of our company or make removal of
	management more difficult. Also, the issuance of preferred stock
	may cause the market price of our common stock to decrease;                                                                                                                                                                                                                                         
|
| |  | our board of directors is staggered so that only a
	portion of its members are elected each year;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | if, during the first year following the investment by Microsoft,
	our Board of Directors approves a merger or similar transaction
	which indicates a per share value of our common stock of less
	than $4.00, each share of preferred stock issued to Microsoft
	Corporation shall be convertible into shares of our common stock
	at a special rate of 1 to 1.5. This provision may have the
	effect of making it more difficult for us to complete a merger
	or similar transaction. The special conversion provisions will
	lapse in the event that we receive proceeds from additional
	financings of $10 million or more.
|
| |  | only our board of directors, our chairman of the board, our
	president or stockholders holding a majority of our stock can
	call special stockholder meetings; and                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | special procedures which must be followed in order for
	stockholders to present proposals at stockholder meetings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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

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

See Item 7 for discussion.

Item 8.     Financial
Statements and Supplementary Data.

The information required by Item 8 of Part II is
incorporated herein by reference to the financial statements
filed with this report; see Item 14 of Part IV.

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

None.

31



---



##### 



PART III

Item 10.     Directors and
Executive Officers of the Company.

The information required by Item 10 is hereby incorporated
by reference from the Proxy Statement for our 2002 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 2002 Annual
Meeting of Stockholders.

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

The information required by Item 12 is hereby incorporated
by reference from the Proxy Statement for our 2002 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 2002 Annual
Meeting of Stockholders.

PART IV

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

(a) Documents filed as part of the report:

|    |  |                                                                                                                                                                |  |        |     | 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | --- | 
|    |  |                                                                                                                                                                |  | Page  
|    |  |                                                                                                                                                                |  | Number
|    |  |                                                                                                                                                                |  |       
|(1) |  | Independent Auditors Report                                                                                                                                   |  |        | F-1 | 
|   
|   
|   
|   
|    |  | Balance Sheets at December 31, 2000 and 2001                                                                                                                   |  |        | F-2 | 
|   
|   
|   
|   
|    |  | Statements of Operations for the years ended
	December 31, 1999, 2000 and 2001                                                                                 |  |        | F-3 | 
|   
|   
|   
|   
|    |  | Statements of Stockholders Equity (Deficit)
	for the years ended December 31, 1999, 2000 and 2001                                                             |  |        | F-4 | 
|   
|   
|   
|   
|    |  | Statements of Cash Flows for the years ended
	December 31, 1999, 2000 and 2001                                                                                 |  |        | F-5 | 
|   
|   
|   
|   
|    |  | Notes to Financial Statements                                                                                                                                  |  |        | F-6 | 
|(2) |  | Financial Statement Schedules                                                                                                                                  |  |        |     | 
|    |  | All Financial Statement Schedules have been
	omitted because they are either in the accompanying footnotes to
	the financial statements or are not applicable. |  |        |     | 
|(3) |  | Exhibits                                                                                                                                                       |  |        |     | 

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

|        |          |             |  |                                                                                                                                                         
|------- | -------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 3.1*     |             |  | Amended and Restated Certificate of Incorporation
	of Audible                                                                                           
|        | 3.1.1*** |             |  | Certificate of Designation of Designations,
	Limitations, Restrictions And Relative Rights of the
	Series A Convertible Preferred Stock of Audible, Inc.
|        | 3.1.2    |             |  | Certificate of Amendment to the Amended and
	Restated Certificate of Incorporation of Audible                                                           
|        | 3.2*     |             |  | Amended and Restated Bylaws of Audible                                                                                                                  

32



---



##### 



|        |          |             |  |                                                                                                                                                                                                      
|------- | -------- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |            
|Number  |          | Description
|        |          |            
|        | 10.1*   |             |  | License Agreement dated November 4, 1998, by
	and between Microsoft Corporation and Audible                                                                                                          
|        | 10.2*   |             |  | Digital Rights Management Agreement dated
	November 4, 1998, between Microsoft Corporation and Audible                                                                                               
|        | 10.3*   |             |  | Development Agreement dated November 12,
	1998, by and between RealNetworks, Inc. and Audible                                                                                                        
|        | 10.4*    |             |  | RealMedia Architecture Partner Program Internet
	Agreement dated November 12, 1998, between RealNetworks,
	Inc. and Audible                                                                          
|        | 10.5*    |             |  | Master Lease Agreement dated November 19,
	1996, by and between Comdisco, Inc. as lessor, and Audible as
	lessee                                                                                     
|        | 10.5.1*  |             |  | Addendum to Master Lease Agreement dated
	November 20, 1996, by and between Comdisco, Inc., as
	lessor, and Audible, as lessee (relating to Exhibit 10.5)                                            
|        | 10.8*    |             |  | Loan and Security Agreement dated April 6,
	1998, by and between Silicon Valley Bank, as lender, and
	Audible, as borrower, for a revolving line of credit of up to
	$1,000,000                      
|        | 10.10*   |             |  | Security and Loan Agreement dated
	November 20, 1996, between Audible, as borrower, and
	Imperial Bank, as lender, for up to $500,000                                                                
|        | 10.14*   |             |  | Amended and Restated Registration Rights
	Agreement dated February 26, 1998, by and among Audible and
	certain stockholders named therein                                                            
|        | 10.14.1* |             |  | Amendment No. 1 to Amended and Restated
	Registration Rights Agreement dated December 18, 1998
	(relating to Exhibit 10.14)                                                                          
|        | 10.14.2* |             |  | Amendment No. 2 to Amended and Restated
	Registration Rights Agreement dated June 17, 1999 (relating
	to Exhibit 10.14)                                                                              
|        | 10.15*   |             |  | 1999 Stock Incentive Plan                                                                                                                                                                            
|        | 10.16*   |             |  | Form of Common Stock Warrants issued
	March 31, 1997 by Audible to various investors in
	connection with the Series C preferred stock financing                                                      
|        | 10.17*   |             |  | Form of Stock Restriction Agreement by and
	between Audible and the Named Executive Officers made in
	connection with various purchases and sales of shares of
	restricted common stock              
|        | 10.18*   |             |  | Form of Promissory Note made by the Named
	Executive Officers in favor of Audible in connection with
	various purchases and sales of shares of restricted common stock                               
|        | 10.19*   |             |  | Office Lease dated June 20, 1997, by and
	between Audible, as tenant, and Passaic Investment LLC,
	Sixty-Five Willowbrook Investment LLC and Wayne Investment LLC,
	as tenants-in-common, as landlord
|        | 10.20*   |             |  | Sublease Agreement dated July 19, 1996, by
	and between Audible, as sublessee, and Painewebber Incorporated,
	as sublessor                                                                           
|        | 10.21*  |             |  | Agreement dated April 3, 1999 by and between
	Audible and Diamond Multimedia Systems, Inc.                                                                                                           
|        | 10.22*   |             |  | Common Stock Purchase Warrant, issued
	April 22, 1999, to Microsoft Corporation                                                                                                                      
|        | 10.23*   |             |  | Employment Offer Letter from Audible to Guy Story
	dated September 10, 1996                                                                                                                          
|        | 10.24*   |             |  | Employment Offer Letter from Audible to Brian
	Fielding dated April 25, 1997                                                                                                                         
|        | 10.25*   |             |  | Employment Offer Letter from Audible to Travis
	Millman dated September 29, 1997                                                                                                                     
|        | 10.26*   |             |  | Employment Offer Letter from Audible to Andrew
	Kaplan dated May 25, 1999                                                                                                                            
|        | 10.27**  |             |  | Employment Offer Letter from Audible to Thomas G.
	Baxter dated February 3, 2000                                                                                                                     
|        | 10.28**  |             |  | Warrant Agreement to purchase 10,000 Shares of
	Common Stock at a price of $7.65 per share, dated
	October 8, 1999, issued by Audible to National Public
	Radio, Inc.                                
|        | 10.29*   |             |  | Common Stock Purchase Warrant, W-1, issued
	June 17, 1999, to Robin Williams                                                                                                                         
|        | 10.30*   |             |  | Common Stock Purchase Warrant, W-2, issued
	June 17, 1999, to Robin Williams                                                                                                                         

33



---



##### 



|        |           |             |  |                                                                                                                                                                                                                                                    
|------- | --------- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |            
|Number  |           | Description
|        |           |            
|        | 10.30.1## |             |  | Amendment No. 1 to Common Stock Purchase
	Warrant, W-2, issued January 25, 2001, to Robin Williams
	(relating to Exhibit 10.30)                                                                                                                    
|        | 10.31## |             |  | Securities Purchase Agreement dated
	January 30, 2000 by and between Audible and Amazon.com
	Commerce Services, Inc.                                                                                                                               
|        | 10.32## |             |  | Co-Branding, Marketing and Distribution Agreement
	dated January 30, 2000 by and between Audible and
	Amazon.com Commerce Services, Inc.                                                                                                           
|        | 10.33***  |             |  | Series A Convertible Preferred Stock
	Purchase Agreement by and between Audible, Inc. and Microsoft
	Corporation dated as of February 8, 2001.                                                                                                     
|        | 10.34   |             |  | Amendment No. 1 to Co-Branding, Marketing
	and Distribution Agreement dated as of January 24, 2001 by
	and between Amazon.com Commerce Services, Inc. and Audible
	(relating to Exhibit 10.32)                                                     
|        | 10.35     |             |  | Securities Purchase Agreement dated
	January 25, 2002 by and between Audible, Special Situations
	Fund III, L.P., Special Situations Cayman Fund, L.P., Special
	Situations Private Equity Fund, L.P. and Special Situations
	Technology Fund, L.P.
|        | 10.36     |             |  | Registration Rights Agreement dated
	January 25, 2002 by and between Audible, Special Situations
	Fund III, L.P., Special Situations Cayman Fund, L.P., Special
	Situations Private Equity Fund, L.P. and Special Situations
	Technology Fund, L.P.
|        | 10.37     |             |  | Form of Common Stock Purchase Warrant issued in
	connection with the sale of common stock to Special Situation
	Funds.                                                                                                                             
|        | 23.1      |             |  | Consent of KPMG LLP, Independent Accountants                                                                                                                                                                                                       



---



|    |                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Incorporated herein by reference to the Companys
	Registration Statement on Form S-1, No. 333-76985                                                                                                                                           
|   
|**  | Incorporated by reference from the Companys 10-K/ A for
	the period ended December 31, 1999                                                                                                                                                   
|   
|*** | Incorporated by reference from the Companys 10-K for the
	fiscal year ended December 31, 2000                                                                                                                                                 
|   
|#   | Incorporated by reference from the Companys Form 10-Q
	for the quarterly period ended September 30, 2000.                                                                                                                                     
|   
|##  | Incorporated by reference from the Companys Form 10-Q
	for the quarterly period ended June 30, 2001.                                                                                                                                          
|   
|### | Incorporated by reference from the Companys Form 10-Q
	for the quarterly period ended September 30, 2001.                                                                                                                                     
|   
|   | Portions of these Exhibits were omitted and have been filed
	separately with the Secretary of the Commission pursuant to the
	Companys Application requesting Confidential Treatment
	under Rule 406 of the Securities Act of 1933.           
|   
|  | Portions of these Exhibits were omitted and have been filed
	separately with the Secretary of the Commission pursuant to the
	Companys Application requesting Confidential Treatment
	under Rule 24b-2 of the Securities Exchange Act of 1934.

(b) Reports on Form 8-K

None

(c) Exhibits

The exhibits required by this Item are listed under
Item 14(a)(3).

(d) Financial Statement Schedules

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

34



---



##### 



SIGNATURES

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



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



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

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

Date: March 27, 2002

Pursuant to the requirements of the Securities Exchange Act of
1934 this report has been signed below by the following persons
in the capacities and on the date indicated. Each person whose
signature appears below in so signing also makes, constitutes,
and appoints Donald R. Katz and Andrew P. Kaplan, 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. KATZDonald R. Katz       |  | Chairman and Chief Executive Officer
	(Principal Executive Officer)                                                                            |  | March 27, 2002
|                                      
|/s/ ANDREW P. KAPLANAndrew P. Kaplan   |  | Chief Financial Officer, Vice President, Finance
	and Administration, Director (Principal Financial Officer and
	Principal Accounting Officer) |  | March 27, 2002
|                                      
|/s/ WINTHROP KNOWLTONWinthrop Knowlton |  | Director                                                                                                                                       |  | March 27, 2002
|                                      
|/s/ RICHARD SARNOFFRichard Sarnoff     |  | Director                                                                                                                                       |  | March 28, 2002
|                                      
|/s/ GARY L. GINSBERGGary L. Ginsberg   |  | Director                                                                                                                                       |  | March 31, 2002
|                                      
|Johannes Mohn                          |  | Director                                                                                                                                       |  |               
|                                      
|Richard Brass                          |  | Director                                                                                                                                       |  |               

35



---



##### 



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                    |  |      |     | 
|--------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                    |  | Page
|                                                                                                    |  |     
|Independent Auditors Report                                                                        |  |      | F-1 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Balance Sheets at December 31, 2000 and
	2001                                                       |  |      | F-2 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Statements of Operations for the years ended
	December 31, 1999, 2000 and 2001                      |  |      | F-3 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Statements of Stockholders Equity (Deficit)
	for the years ended December 31, 1999,
	2000 and 2001 |  |      | F-4 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Statements of Cash Flows for the years ended
	December 31, 1999, 2000 and 2001                      |  |      | F-5 | 
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Notes to Financial Statements                                                                       |  |      | F-6 | 

36



---



##### 



INDEPENDENT AUDITORS REPORT

Board of Directors and Stockholders 
 Audible, Inc.:

We have audited the accompanying balance sheets of Audible, Inc.
as of December 31, 2000 and 2001, and the related
statements of operations, stockholders equity (deficit),
and cash flows for each of the years in the three-year period
ended December 31, 2001. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Audible, Inc. as of December 31, 2000 and 2001, and the
results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States of America.



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

New York, New York



F-1



---



##### 



AUDIBLE, INC.

Balance Sheets

|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |             |            |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------- | ----------- | ---------- |  | --------- | ----------- | ---------- | -
|                                                 |                                                                                                                                                                                              |                                                      
|                                                 |                                                                                                                                                                                              | December 31,                                         
|                                                 |                                                                                                                                                                                              |                                                      
|                                                 |                                                                                                                                                                                              | 2000                                                  |           | 2001       
|                                                 |                                                                                                                                                                                              |                                                       |           |            
|                                                
|                                                
|                                                
|                                                
|ASSETS                                          
|                                                
|                                                
|                                                
|                                                
|Current assets:                                  |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash and cash equivalents                                                                                                                                                                    |                                                       | $         | 14,149,027  |            |  | $         | 7,627,802   |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Short-term investments                                                                                                                                                                       |                                                       |           | 1,957,733   |            |  |           |            |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Interest receivable on short-term investments                                                                                                                                                |                                                       |           | 95,336      |            |  |           |            |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts receivable, net of allowance for
	doubtful accounts of $6,983 and $12,400 at December 31,
	2000 and 2001, respectively                                                              |                                                       |           | 193,752     |            |  |           | 153,122     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Royalty advances                                                                                                                                                                             |                                                       |           | 847,396     |            |  |           | 56,682      |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Prepaid expenses                                                                                                                                                                             |                                                       |           | 464,133     |            |  |           | 661,192     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventory                                                                                                                                                                                    |                                                       |           | 118,170     |            |  |           | 449,220     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Note receivable due from stockholder, current                                                                                                                                                |                                                       |           | 50,000      |            |  |           | 10,000      |           
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                 |                                                                                                                                                                                              | Total current assets                                  |           |             | 17,875,547 |  |           |             | 8,958,018  |  
|                                                
|                                                
|                                                
|                                                
|Property and equipment, net                      |                                                                                                                                                                                              |                                                       | 2,818,792 |             |            |  | 1,990,670 |            
|                                                
|                                                
|                                                
|                                                
|Note receivable due from stockholder, noncurrent |                                                                                                                                                                                              |                                                       |          |             |            |  | 35,000    |            
|                                                
|                                                
|                                                
|                                                
|Other assets                                     |                                                                                                                                                                                              |                                                       | 37,510    |             |            |  | 15,805    |            
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                 |                                                                                                                                                                                              | Total assets                                          |           | $           | 20,731,849 |  |           | $           | 10,999,493 |  
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|LIABILITIES AND STOCKHOLDERS EQUITY
	(DEFICIT) 
|                                                
|                                                
|                                                
|                                                
|Current liabilities:                             |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Accounts payable                                                                                                                                                                             |                                                       | $         | 1,754,440   |            |  | $         | 1,519,586   |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued expenses                                                                                                                                                                             |                                                       |           | 1,336,825   |            |  |           | 1,336,120   |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Royalty obligations-current                                                                                                                                                                  |                                                       |           | 772,700     |            |  |           | 896,950     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued compensation                                                                                                                                                                         |                                                       |           | 1,061,054   |            |  |           | 1,009,168   |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Current maturities of obligations under capital
	leases                                                                                                                                      |                                                       |           | 47,187      |            |  |           |            |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Advances-current                                                                                                                                                                             |                                                       |           | 453,476     |            |  |           | 517,813     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Accrued dividends on redeemable convertible
	preferred stock                                                                                                                                 |                                                       |           |            |            |  |           | 730,612     |           
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                 |                                                                                                                                                                                              | Total current liabilities                             |           |             | 5,425,682  |  |           |             | 6,010,249  |  
|                                                
|                                                
|                                                
|                                                
|Deferred cash compensation                       |                                                                                                                                                                                              |                                                       | 211,065   |             |            |  | 93,550    |            
|                                                
|                                                
|                                                
|                                                
|Royalty obligations-noncurrent                   |                                                                                                                                                                                              |                                                       | 502,000   |             |            |  | 48,500    |            
|                                                
|                                                
|                                                
|                                                
|Advances-noncurrent                              |                                                                                                                                                                                              |                                                       |          |             |            |  | 77,780    |            
|                                                
|                                                
|                                                
|                                                
|Redeemable convertible preferred stock:          |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Series A, par value $0.01, Authorized none
	and 4,500,000 shares at December 31, 2000 and 2001,
	respectively; none and 2,751,707 shares issued at
	December 31, 2000 and 2001, respectively |                                                       |           |            |            |  |           | 10,318,902  |           
|                                                
|                                                
|                                                
|                                                
|Stockholders equity (deficit):                  |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Common stock, par value $.01. Authorized
	50,000,000 shares at December 31, 2000 and 2001; 27,546,989
	shares issued at December 31, 2000 and 2001                                           |                                                       |           | 275,470     |            |  |           | 275,470     |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Additional paid-in capital                                                                                                                                                                   |                                                       |           | 92,196,174  |            |  |           | 93,728,564  |           
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred compensation                                                                                                                                                                        |                                                       |           | (1,034,024  | )          |  |           | (467,600    | )         
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred services                                                                                                                                                                            |                                                       |           | (10,833,334 | )          |  |           | (5,416,667  | )         
|                                                
|                                                
|                                                
|                                                
|                                                 | Notes due from stockholders for common stock                                                                                                                                                 |                                                       |           | (391,703    | )          |  |           | (294,456    | )         
|                                                
|                                                
|                                                
|                                                
|                                                 | Treasury stock at cost: 536,505 and 676,725
	shares of common stock at December 31, 2000 and 2001,
	respectively                                                                             |                                                       |           | (143,061    | )          |  |           | (179,990    | )         
|                                                
|                                                
|                                                
|                                                
|                                                 | Accumulated deficit                                                                                                                                                                          |                                                       |           | (65,476,420 | )          |  |           | (93,194,809 | )         
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                 |                                                                                                                                                                                              | Total stockholders equity (deficit)                  |           |             | 14,593,102 |  |           |             | (5,549,488 | )
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|Commitments and contingencies                    |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                                                                                              | Total liabilities and stockholders equity
	(deficit) |           | $           | 20,731,849 |  |           | $           | 10,999,493 |  
|                                                 |                                                                                                                                                                                              |                                                       |           |             |            |  |           |            

See accompanying notes to financial statements.

F-2



---



##### 



AUDIBLE, INC.

STATEMENTS OF OPERATIONS

|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |            |            |             |  
|----------------------------------------------- | ------------------------------------ | ------------------------ | ---------------------------- | --------- | ---------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | ---------- | ----------- | -
|                                                |                                      |                         
|                                                |                                      | Year ended December 31, 
|                                                |                                      |                         
|                                                |                                      | 1999                     |                              | 2000      |            | 2001       
|                                                |                                      |                          |                              |           |            |            
|Revenue, net:                                   |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                               
|                                               
|                                               
|                                               
|                                                | Content and services                 |                          | $                            | 477,675   |            |             | $           | 2,519,345  |            |             | $           | 7,461,971  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Hardware                             |                          |                              | 313,627   |            |             |             | 1,273,117  |            |             |             | 1,293,533  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Other                                |                          |                              | 951,303   |            |             |             | 756,518    |            |             |             | 315,909    |           
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Total revenue, net           |           |            | 1,742,605   |             |            |            | 4,548,980   |             |            |            | 9,071,413   |  
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Operating expenses:                             |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of content and services revenue |                          |                              | 812,062   |            |             |             | 3,667,799  |            |             |             | 4,901,866  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Cost of hardware revenue             |                          |                              | 307,395   |            |             |             | 2,571,994  |            |             |             | 2,858,495  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Production                           |                          |                              | 3,397,297 |            |             |             | 6,457,638  |            |             |             | 5,635,977  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Development                          |                          |                              | 2,680,108 |            |             |             | 4,444,531  |            |             |             | 3,322,133  |           
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing                  |                          |                              | 6,108,988 |            |             |             | 16,052,207 |            |             |             | 15,187,584 |           
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative           |                          |                              | 3,015,227 |            |             |             | 5,548,085  |            |             |             | 4,726,694  |           
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                                |                                      | Total operating expenses |                              |           | 16,321,077 |             |             |            | 38,742,254 |             |             |            | 36,632,749 |            
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Loss from operations         |           |            | (14,578,472 | )           |            |            | (34,193,274 | )           |            |            | (27,561,336 | )
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Other (income) expense:                         |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                               
|                                               
|                                               
|                                               
|                                                |                                      | Interest income          |                              |           | (1,150,231 | )           |             |            | (1,623,640 | )           |             |            | (575,287   | )          
|                                               
|                                               
|                                               
|                                               
|                                                |                                      | Interest expense         |                              |           | 48,070     |             |             |            | 21,810     |             |             |            | 9,722      |            
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|                                                |                                      |                          | Total other (income) expense |           |            | (1,102,161  | )           |            |            | (1,601,830  | )           |            |            | (565,565    | )
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Loss before state income tax benefit            |                                      |                          | (13,476,311                  | )         |            |             | (32,591,444 | )          |            |             | (26,995,771 | )         
|                                               
|                                               
|                                               
|                                               
|State income tax benefit                        |                                      |                          |                             |           |            |             | 316,310     |            |            |             | 326,898     |           
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Net loss                                        |                                      | $                        | (13,476,311                  | )         |            | $           | (32,275,134 | )          |            | $           | (26,668,873 | )         
|                                               
|                                               
|                                               
|                                               
|Accrued dividends on redeemable preferred stock |                                      |                          |                             |           |            |             |            |            |            |             | (1,049,516  | )         
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Net loss applicable to common shareholders      |                                      | $                        | (13,476,311                  | )         |            | $           | (32,275,134 | )          |            | $           | (27,718,389 | )         
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Basic and diluted net loss per common share     |                                      | $                        | (0.85                        | )         |            | $           | (1.21       | )          |            | $           | (1.03       | )         
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           
|Weighted average common shares outstanding      |                                      |                          | 15,890,528                   |           |            |             | 26,643,589  |            |            |             | 26,917,513  |           
|                                                |                                      |                          |                              |           |            |             |             |            |            |             |             |           

See accompanying notes to financial statements.

F-3



---



##### 



AUDIBLE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                   |  |              |            |            |  |                 |         |              |  |          |            |   |  |   |            |   |  |   |             |  
|---------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | --------------- | ------- | ------------ |  | -------- | ---------- | - |  | - | ---------- | - |  | - | ----------- | -
|                                                                                   |  |              |            |            |  |                 |         |             
|                                                                                   |  | Common stock |            |            |  |                 |         |             
|                                                                                   |  |              |            | Additional |  | Deferred        |         | Deferred    
|                                                                                   |  | Shares       |            | Par Value  |  | paid-in capital |         | compensation |  | services
|                                                                                   |  |              |            |            |  |                 |         |              |  |         
|Balance at December 31, 1998                                                       |  |              | 7,394,355  |            |  | $               | 73,944  |              |  | $        | 1,162,420  |   |  | $ |           |   |  | $ |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued and reissued from treasury                                     |  |              | 207,914    |            |  |                 | 2,079   |              |  |          | 56,004     |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to common stock
	issued below fair market value      |  |              |           |            |  |                 |        |              |  |          | 907,214    |   |  |   | (907,214   | ) |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in initial public offering,
	net of issuance costs             |  |              | 4,600,000  |            |  |                 | 46,000  |              |  |          | 36,810,000 |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Conversion of redeemable convertible preferred
	stock upon initial public offering |  |              | 13,400,985 |            |  |                 | 134,010 |              |  |          | 28,585,116 |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |              |           |            |  |                 |        |              |  |          |           |   |  |   | 181,450    |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |              |           |            |  |                 |        |              |  |          | 1,349,726  |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cancellation of common stock issued for services
	rendered                         |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock warrants                                                  |  |              | 93,832     |            |  |                 | 938     |              |  |          | (938       | ) |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock options                                                   |  |              | 12,500     |            |  |                 | 125     |              |  |          | 99,875     |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                   |  |              |            |            |  |                 |         |              |  |          |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 1999                                                       |  |              | 25,709,586 |            |  |                 | 257,096 |              |  |          | 68,969,417 |   |  |   | (725,764   | ) |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to stock options
	issued below fair market value     |  |              |           |            |  |                 |        |              |  |          | 870,000    |   |  |   | (870,000   | ) |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in connection with Co-
	Marketing and Distribution agreement   |  |              | 1,340,033  |            |  |                 | 13,400  |              |  |          | 19,986,600 |   |  |   |           |   |  |   | (20,000,000 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in connection with Co-
	Publishing and Distribution agreement  |  |              | 169,780    |            |  |                 | 1,698   |              |  |          | 998,302    |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |              |           |            |  |                 |        |              |  |          |           |   |  |   | 561,740    |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred services                                                  |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   | 9,166,666   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |              |           |            |  |                 |        |              |  |          | 1,243,445  |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock warrants                                                  |  |              | 326,390    |            |  |                 | 3,264   |              |  |          | (3,264     | ) |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock options                                                   |  |              | 1,200      |            |  |                 | 12      |              |  |          | 9,588      |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Reversal of initial public offering issuance costs                                 |  |              |           |            |  |                 |        |              |  |          | 122,086    |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                   |  |              |            |            |  |                 |         |              |  |          |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2000                                                       |  |              | 27,546,989 |            |  |                 | 275,470 |              |  |          | 92,196,174 |   |  |   | (1,034,024 | ) |  |   | (10,833,334 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to stock options
	issued below fair market value     |  |              |           |            |  |                 |        |              |  |          | 25,000     |   |  |   | (25,000    | ) |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Reversal of deferred compensation related to
	employee terminations                |  |              |           |            |  |                 |        |              |  |          | (258,049   | ) |  |   | 258,049    |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |              |           |            |  |                 |        |              |  |          |           |   |  |   | 333,375    |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred services                                                  |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   | 5,416,667   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |              |           |            |  |                 |        |              |  |          | 1,765,439  |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued dividends on redeemable preferred stock                                    |  |              |           |            |  |                 |        |              |  |          |           |   |  |   |           |   |  |   |            |  
|                                                                                   |  |              |            |            |  |                 |         |              |  |          |            |   |  |   |            |   |  |   |             |  
|Balance at December 31, 2001                                                       |  |              | 27,546,989 |            |  | $               | 275,470 |              |  | $        | 93,728,564 |   |  | $ | (467,600   | ) |  | $ | (5,416,667  | )
|                                                                                   |  |              |            |            |  |                 |         |              |  |          |            |   |  |   |            |   |  |   |             |  

See accompanying notes to financial statements.

F-4



---



##### 



AUDIBLE, INC.

STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                   |  |                |            |                |  |             |          |               |  |                  |          |   |  |   |             |   |  |   |             |  
|---------------------------------------------------------------------------------- |  | -------------- | ---------- | -------------- |  | ----------- | -------- | ------------- |  | ---------------- | -------- | - |  | - | ----------- | - |  | - | ----------- | -
|                                                                                   |  |                |            |                |  |             |          |              
|                                                                                   |  |                |            | Treasury stock |  |             |          |              
|                                                                                   |  | Notes due from |            |                |  |             |          |              
|                                                                                   |  | stockholders   |            |                |  |             |          | Total        
|                                                                                   |  | for common     |            |                |  | Accumulated |          | stockholders
|                                                                                   |  | stock          |            | Shares         |  | Cost        |          | deficit       |  | equity (deficit)
|                                                                                   |  |                |            |                |  |             |          |               |  |                 
|Balance at December 31, 1998                                                       |  | $              | (1,040,158 | )              |  |             |         |               |  | $                |         |   |  | $ | (19,724,975 | ) |  | $ | (19,528,769 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |                | 143,882    |                |  |             | (550,186 | )             |  |                  | (143,882 | ) |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued and reissued from treasury                                     |  |                | (61,200    | )              |  |             | 21,586   |               |  |                  | 3,117    |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to common stock
	issued below fair market value      |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in initial public offering,
	net of issuance costs             |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 36,856,000  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Conversion of redeemable convertible preferred
	stock upon initial public offering |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 28,719,126  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 181,450     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 1,349,726   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cancellation of common stock issued for services
	rendered                         |  |                |           |                |  |             | (3,750   | )             |  |                  | (1,250   | ) |  |   |            |   |  |   | (1,250      | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock warrants                                                  |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock options                                                   |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 100,000     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |                | 378,451    |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 378,451     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |                |           |                |  |             |         |               |  |                  |         |   |  |   | (13,476,311 | ) |  |   | (13,476,311 | )
|                                                                                   |  |                |            |                |  |             |          |               |  |                  |          |   |  |   |             |   |  |   |             |  
|Balance at December 31, 1999                                                       |  |                | (579,025   | )              |  |             | (532,350 | )             |  |                  | (142,015 | ) |  |   | (33,201,286 | ) |  |   | 34,578,423  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |                | 1,046      |                |  |             | (4,155   | )             |  |                  | (1,046   | ) |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to stock options
	issued below fair market value     |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in connection with Co-
	Marketing and Distribution agreement   |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock issued in connection with Co-
	Publishing and Distribution agreement  |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 1,000,000   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 561,740     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred services                                                  |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 9,166,666   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 1,243,445   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock warrants                                                  |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Exercise of common stock options                                                   |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |             |   |  |   | 9,600       |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Reversal of initial public offering issuance costs                                 |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 122,086     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |                | 186,276    |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 186,276     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |                |           |                |  |             |         |               |  |                  |         |   |  |   | (32,275,134 | ) |  |   | (32,275,134 | )
|                                                                                   |  |                |            |                |  |             |          |               |  |                  |          |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2000                                                       |  |                | (391,703   | )              |  |             | (536,505 | )             |  |                  | (143,061 | ) |  |   | (65,476,420 | ) |  |   | 14,593,102  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock repurchases                                                           |  |                | 31,162     |                |  |             | (140,220 | )             |  |                  | (36,929  | ) |  |   |            |   |  |   | (5,767      | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deferred compensation related to stock options
	issued below fair market value     |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Reversal of deferred compensation related to
	employee terminations                |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   |            |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred compensation                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 333,375     |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of deferred services                                                  |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 5,416,667   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Amortization of warrants for services                                              |  |                |           |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 1,765,439   |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Payments received on notes due from stockholders                                   |  |                | 66,085     |                |  |             |         |               |  |                  |         |   |  |   |            |   |  |   | 66,085      |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Net loss                                                                           |  |                |           |                |  |             |         |               |  |                  |         |   |  |   | (26,668,873 | ) |  |   | (26,668,873 | )
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued dividends on redeemable preferred stock                                    |  |                |           |                |  |             |         |               |  |                  |         |   |  |   | (1,049,516  | ) |  |   | (1,049,516  | )
|                                                                                   |  |                |            |                |  |             |          |               |  |                  |          |   |  |   |             |   |  |   |             |  
|Balance at December 31, 2001                                                       |  | $              | (294,456   | )              |  |             | (676,725 | )             |  | $                | (179,990 | ) |  | $ | (93,194,809 | ) |  | $ | (5,549,488  | )
|                                                                                   |  |                |            |                |  |             |          |               |  |                  |          |   |  |   |             |   |  |   |             |  

See accompanying notes to financial statements.

F-5



---



##### 



AUDIBLE, INC.

STATEMENTS OF CASH FLOWS

|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |             |           |            |             |  
|----------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------------------- | ------------------------------------- | --------- | ----------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | --------- | ---------- | ----------- | -
|                                                                  |                                                                                                   |                                                           
|                                                                  |                                                                                                   | Year ended December 31,                                   
|                                                                  |                                                                                                   |                                                           
|                                                                  |                                                                                                   | 1999                                                       |                                                      | 2000                                  |           | 2001       
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |            
|Cash flows from operating activities:                             |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Net loss                                                                                          |                                                            | $                                                    | (13,476,311                           | )         |             | $           | (32,275,134 | )          |            | $           | (26,668,873 | )        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Adjustments to reconcile net loss to net cash
	used in operating activities:                      |                                                            |                                                      |                                       |           |             |             |             |            |            |             |             |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Depreciation and amortization                              |                                                      |                                       | 479,907   |             |             |             | 1,367,348  |            |             |             | 1,825,466 |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Gain on disposal of property and equipment                 |                                                      |                                       |          |             |             |             | (7,560     | )          |             |             |          |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Services rendered for common stock and warrants            |                                                      |                                       | 1,349,726 |             |             |             | 10,410,111 |            |             |             | 7,182,106 |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Noncash compensation charge                                |                                                      |                                       | 181,450   |             |             |             | 561,740    |            |             |             | 333,375   |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Cancellation of common stock issued for services
	rendered |                                                      |                                       | (1,250    | )           |             |             |           |            |             |             |          |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Deferred cash compensation                                 |                                                      |                                       | 10,444    |             |             |             | 33,303     |            |             |             | (117,515  | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Non cash barter revenue exchanged for prepaid
	advertising |                                                      |                                       |          |             |             |             |           |            |             |             | (213,788  | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Changes in assets and liabilities:                                |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Interest receivable on short-term investments              |                                                      |                                       | (445,662  | )           |             |             | 350,326    |            |             |             | 95,336    |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Accounts receivable, net                                   |                                                      |                                       | (42,374   | )           |             |             | (142,862   | )          |             |             | 40,630    |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Royalty advances                                           |                                                      |                                       | 123,060   |             |             |             | (195,054   | )          |             |             | 790,714   |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Prepaid expenses                                           |                                                      |                                       | (569,610  | )           |             |             | 208,393    |            |             |             | 16,727    |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Inventory                                                  |                                                      |                                       | 129,535   |             |             |             | (118,170   | )          |             |             | (331,050  | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Other assets                                               |                                                      |                                       | 9,173     |             |             |             | 59,470     |            |             |             | 21,705    |           
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Accounts payable                                           |                                                      |                                       | 1,030,521 |             |             |             | 240,948    |            |             |             | (234,854  | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Accrued expenses                                           |                                                      |                                       | 975,055   |             |             |             | 275,338    |            |             |             | (705      | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Royalty obligations                                        |                                                      |                                       | 17,000    |             |             |             | 710,700    |            |             |             | (329,250  | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Accrued compensation                                       |                                                      |                                       | 147,868   |             |             |             | 649,951    |            |             |             | (51,886   | )         
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  |                                                                                                   | Advances                                                   |                                                      |                                       | (313,061  | )           |             |             | (733,463   | )          |             |             | 142,117   |           
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                  |                                                                                                   |                                                            |                                                      | Net cash used in operating activities |           |             | (10,394,529 | )           |            |            | (18,604,615 | )           |           |            | (17,499,745 | )
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|Cash flows from investing activities:                             |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Purchases of property and equipment                                                               |                                                            |                                                      | (1,505,073                            | )         |             |             | (2,763,137  | )          |            |             | (997,344    | )        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from disposal of property and equipment                                                  |                                                            |                                                      |                                      |           |             |             | 7,560       |            |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Purchases of short-term investments                                                               |                                                            |                                                      | (61,268,261                           | )         |             |             | (25,462,949 | )          |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Redemptions of short-term investments                                                             |                                                            |                                                      | 36,864,257                            |           |             |             | 47,909,220  |            |            |             | 1,957,733   |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Notes receivable (issued to) repaid by
	stockholders                                              |                                                            |                                                      | (50,000                               | )         |             |             | 100,000     |            |            |             | 5,000       |          
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                  |                                                                                                   |                                                            | Net cash (used in) provided by investing
	activities |                                       |           | (25,959,077 | )           |             |            | 19,790,694 |             |             |           | 965,389    |            
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|Cash flows from financing activities:                             |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from issuance of Series A
	redeemable convertible preferred stock                        |                                                            |                                                      |                                      |           |             |             |            |            |            |             | 10,000,000  |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from issuance of Series D
	redeemable convertible preferred stock, net of issuance costs |                                                            |                                                      | 994,472                               |           |             |             |            |            |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from initial public offering, net of
	issuance costs                                     |                                                            |                                                      | 36,856,000                            |           |             |             |            |            |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from the sale of common stock                                                            |                                                            |                                                      |                                      |           |             |             | 1,000,000   |            |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Payments received on notes due from stockholders
	for common stock                                |                                                            |                                                      | 378,451                               |           |             |             | 186,276     |            |            |             | 66,085      |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Proceeds from exercise of common stock options                                                    |                                                            |                                                      | 100,000                               |           |             |             | 9,600       |            |            |             |            |          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Payment of principal on obligations under capital
	leases                                         |                                                            |                                                      | (471,224                              | )         |             |             | (263,320    | )          |            |             | (47,187     | )        
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|                                                                  | Cash payment for purchase of treasury stock                                                       |                                                            |                                                      |                                      |           |             |             |            |            |            |             | (5,767      | )        
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                  |                                                                                                   |                                                            | Net cash provided by financing activities            |                                       |           | 37,857,699  |             |             |            | 932,556    |             |             |           | 10,013,131 |            
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|                                                                  |                                                                                                   |                                                            | Increase (decrease) in cash and cash
	equivalents    |                                       |           | 1,504,093   |             |             |            | 2,118,635  |             |             |           | (6,521,225 | )          
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Cash and cash equivalents at beginning of year                    |                                                                                                   |                                                            | 10,526,299                                           |                                       |           |             | 12,030,392  |             |            |            | 14,149,027  |            
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|Cash and cash equivalents at end of year                          |                                                                                                   | $                                                          | 12,030,392                                           |                                       |           | $           | 14,149,027  |             |            | $          | 7,627,802   |            
|                                                                  |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            
|See note 18 for supplemental disclosure of cash
	flow information |                                                                                                   |                                                            |                                                      |                                       |           |             |             |             |            |            |             |            

See accompanying notes to financial statements.

F-6



---



##### 



AUDIBLE, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999, 2000 and 2001


(1) Description of Business and Business Conditions

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

The Company has experienced recurring net losses of $13,476,311,
$32,275,134 and $26,668,873 during the years ended
December 31, 1999, 2000, and 2001. As a result of these
losses, the Companys cash and cash equivalent balances
have declined to $7,627,802 in the aggregate as of
December 31, 2001. In response to these conditions,
management of the Company has established a business plan that,
together with the February 2002 Special Situations Fund
(SSF) investment of $3,159,000, net of direct costs (see
note 20), as well as the waiver of cash payments of $1,250,000
due Random House in 2002 in exchange for preferred stock (see
note 15), are designed to enable the Company to meet its
anticipated cash requirements until its operations become cash
flow positive, which is expected in early 2003. If, however, the
Company does not meet its plan and is required to seek
additional funds through public or private financing, or other
arrangements, no assurance can be given that such additional
financing, when needed, will be available on terms favorable to
the Company or to the stockholders, if at all.

(2) Initial Public Offering

On July 15, 1999, the Company completed an initial public
offering (IPO) of 4,600,000 shares of common stock at $9.00
per share. Total proceeds to the Company were approximately
$36.9 million, net of underwriting discounts and
commissions of approximately $2.9 million and offering
costs of approximately $1.6 million. Concurrent with the
IPO, all shares of the Companys redeemable convertible
preferred stock were converted into 13,400,985 shares of common
stock.

(3) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements retroactively reflect the
effect of a 3 for 2 common stock split in the form of a stock
dividend declared and paid by the Company effective May 26,
1999 to common stockholders of record at the close of business
on May 26, 1999. Accordingly, all common share and per
share data have been adjusted to reflect such split.

Risks and
Uncertainties

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

Reclassifications

Certain items in the 1999 and 2000 financial statements have
been reclassified to conform to the 2001 presentation.

F-7



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Revenue Recognition

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

Bulk content revenue is recognized after the agreement has been
finalized, the price is fixed, collectibility is assured and the
content is delivered via either CD-ROM or electronic transfer
and accepted without further obligation on the part of the
Company. In 2001, 90% of our bulk content revenue was the result
of barter transactions in which we exchanged bulk content for
advertising. Revenue from barter transactions is recognized
based on the fair value of the consideration surrendered or
received, whichever is more readily determinable.

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

The following table shows the breakdown of content and services
revenue for the years ended December 31, 1999, 2000 and
2001.

|                                                                   |  |                         |         |      |  |      |           |  |  |   |           | 
|------------------------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                                   |  |                        
|                                                                   |  | Year ended December 31,
|                                                                   |  |                        
|                                                                   |  | 1999                    |         | 2000 |  | 2001
|                                                                   |  |                         |         |      |  |     
|Consumer content                                                   |  | $                       | 364,138 |      |  | $    | 1,443,554 |  |  | $ | 5,143,002 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Bulk content, including barter transactions of
	$1,285,048 in 2001 |  |                         |        |      |  |      | 500,000   |  |  |   | 1,435,048 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Services                                                           |  |                         | 113,537 |      |  |      | 575,791   |  |  |   | 883,921   | 
|                                                                   |  |                         |         |      |  |      |           |  |  |   |           | 
|                                                                   |  | $                       | 477,675 |      |  | $    | 2,519,345 |  |  | $ | 7,461,971 | 
|                                                                   |  |                         |         |      |  |      |           |  |  |   |           | 

Hardware revenue consists of sales of AudibleReady digital audio
players sold primarily at a discount when the customer signs up
for a one year commitment to an AudibleListener Membership. The
discounted selling price of the hardware device reflects the
subsidy the Company incurs to acquire a customer with a one year
commitment to AudibleListener. 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.

Other revenue for the year ended December 31, 2001 relates
to fees billed and recognized for licensing under agreements
with Microsoft (see note 7) and royalties earned from a license
granted for certain technology rights to a device manufacturer.
Other revenue in 2000 consisted of revenue recognized in
connection with the agreement with Microsoft. Other revenue for
1999 consisted primarily of revenue recognized in connection
with our agreement with Microsoft as well as $60,000 in other
revenue recognized related to services provided under an
agreement with Compaq Computer Corporation.

Cash Equivalents

The Company considers short-term, highly liquid investments with
original maturities of three months or less at the time of
purchase to be cash equivalents. Cash equivalents at
December 31, 2000 and 2001 were $14,107,270 and $7,569,403,
respectively, and consisted primarily of investments in treasury
bill and

F-8



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

government agency notes with maturities of less than three
months as of December 31, 2000, and primarily money market
funds as of December 31, 2001.

Short-Term
Investments

The Companys short-term investments consisted of Treasury
Bills and other government-backed agency notes with a maturity
of between three months and one year. Since the Company holds
these notes until maturity, interest is recognized and accrued
pro rata over the term of the investment. Short-term investments
at December 31, 2000 and 2001 were $1,957,733 and zero,
respectively. Interest receivable on short-term investments was
$95,336 and zero at December 31, 2000 and 2001,
respectively.

Allowance for Doubtful
Accounts

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

The activity in the allowance for doubtful accounts during the
years ended December 31, 1999, 2000, and 2001 was as
follows:

|                             |  |   |         | 
|---------------------------- |  | - | ------- | 
|                            
|                            
|                            
|                            
|Balance at December 31, 1998 |  | $ | 21,043  | 
|                            
|                            
|                            
|                            
|Provisions                   |  |   | 1,288   | 
|                            
|                            
|                            
|                            
|Less: Write-offs             |  |   | 18,978  | 
|                             |  |   |         | 
|Balance at December 31, 1999 |  |   | 3,353   | 
|                            
|                            
|                            
|                            
|Provisions                   |  |   | 64,889  | 
|                            
|                            
|                            
|                            
|Less: Write-offs             |  |   | 61,259  | 
|                             |  |   |         | 
|Balance at December 31, 2000 |  |   | 6,983   | 
|                            
|                            
|                            
|                            
|Provisions                   |  |   | 168,240 | 
|                            
|                            
|                            
|                            
|Less: Write-offs             |  |   | 162,823 | 
|                             |  |   |         | 
|Balance at December 31, 2001 |  | $ | 12,400  | 
|                             |  |   |         | 

Royalties

Royalty advances and the corresponding royalty obligations
represent payments made and payments to be made to various
content providers pursuant to minimum guarantees under their
royalty agreements, net of royalties expensed. These agreements
give the Company the right to sell digital audio content over
the Internet. The royalty obligations recorded in the
accompanying balance sheets are classified between current and
noncurrent based on the payment terms specified in the
agreements. These guarantees are being amortized on a
straight-line basis over the term of the royalty agreements or
are expensed as royalties are earned by the content providers
under the agreements, whichever is sooner. In addition, the
Company periodically adjusts the balance of these advances to
reflect their estimated net realizable value. Royalty expense is
included in cost of content and services revenue in the
accompanying statements of operations.

Cost of Content and Services
Revenue

Cost of content and services revenue includes amortization of
guaranteed royalty obligations expensed straight-line over the
term of the royalty agreement, earned royalties on sales of
content as specified by the terms of the content agreements,
periodic net realizable value adjustments to royalty advances,
amortization of warrants issued to content providers in
connection with content agreements, and all other non-recoupable

F-9



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

content costs. Cost of content and services revenue for the
years ended December 31, 1999, 2000, and 2001 was as
follows:

|                                                 |  |                         |         |      |  |      |           |  |  |   |           | 
|------------------------------------------------ |  | ----------------------- | ------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                                 |  |                        
|                                                 |  | Year ended December 31,
|                                                 |  |                        
|                                                 |  | 1999                    |         | 2000 |  | 2001
|                                                 |  |                         |         |      |  |     
|Amortization of minimum guarantees               |  | $                       | 590,699 |      |  | $    | 984,378   |  |  | $ | 156,283   | 
|                                                
|                                                
|                                                
|                                                
|Earned royalties                                 |  |                         | 75,095  |      |  |      | 507,868   |  |  |   | 2,117,163 | 
|                                                
|                                                
|                                                
|                                                
|Net realizable value adjustment                  |  |                         | 146,268 |      |  |      | 870,963   |  |  |   | 668,567   | 
|                                                
|                                                
|                                                
|                                                
|Amortization of warrants issued to providers     |  |                         |        |      |  |      | 347,941   |  |  |   | 664,383   | 
|                                                
|                                                
|                                                
|                                                
|Random House Audible content costs (see note 15) |  |                         |        |      |  |      | 640,000   |  |  |   | 960,000   | 
|                                                
|                                                
|                                                
|                                                
|Other content costs                              |  |                         |        |      |  |      | 316,649   |  |  |   | 335,470   | 
|                                                 |  |                         |         |      |  |      |           |  |  |   |           | 
|                                                 |  | $                       | 812,062 |      |  | $    | 3,667,799 |  |  | $ | 4,901,866 | 
|                                                 |  |                         |         |      |  |      |           |  |  |   |           | 

Inventory

Inventory is stated at the lower of cost, principally using the
first-in, first-out method, or market (net realizable value). As
of December 31, 2000, inventory consisted of AudibleReady
digital audio players manufactured by third party manufacturers.
As of December 31, 2001, inventory consists of digital
audio players manufactured by third party manufacturers
including the Audible Otis, a digital audio player manufactured
specially for Audible. The Company had no inventory on hand as
of December 31, 1999.

Stock-Based
Compensation

The Companys 1999 Stock Incentive Plan permits the
granting of stock options, stock appreciation rights, restricted
or unrestricted stock awards, performance rights and other stock
based awards to employees. For options granted to new Audible
employees as part of their compensation package, the exercise
price is determined by the closing price of Audibles
common stock on the day immediately proceeding the employees
start date. For additional option grants made to existing
employees, the exercise price is determined by closing price of
the day immediately proceeding the grant date. The majority of
the options granted vest over a fifty month period and expire
ten years from the date of the grant. The Company applies
Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and
Financial Accounting Standards Board (FASB) Interpretation
No. 44, Accounting for Certain Transactions involving
Stock Compensation  an Interpretation of APB Opinion
No. 25, in accounting for its stock-based
compensation, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123 establishes a
fair value-based method of accounting for stock-based
compensation and requires proforma disclosure of net loss and
net loss per common share as if the fair value-based method of
accounting for stock-based compensation, as defined in SFAS
No. 123, had been applied. Compensation expense, if any, is
recognized on a straight-line basis over the vesting term.

Property and
Equipment

Property and equipment is stated at cost. Depreciation is
calculated using the straight-line method over the estimated
useful lives of the respective assets, which are three years for
computer server and Web site equipment, and two years for office
furniture and equipment, and studio equipment.

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

Maintenance and repairs are expensed as incurred.

F-10



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Stock and Equity Instruments
Issued for Goods and Services

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

Use of Estimates

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

Development

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

Production Expenses

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

Advertising Expenses

The Company expenses the costs of advertising and promoting its
products and services as incurred. These costs are included in
sales and marketing in the accompanying statements of operations
and totaled $2,226,476, $2,113,850 and $3,487,256 for the years
ended December 31, 1999, 2000, and 2001, respectively.
Included in the 2001 advertising expense is $1,071,260 resulting
from barter transactions.

Income Taxes

The Company accounts for income taxes using the asset and
liability method of SFAS No. 109, Accounting for
Income Taxes. Under the asset and liability method,
deferred tax assets and deferred tax liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in results of operations in the period in which
the tax change occurs.

F-11



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Impairment of Long-Lived
Assets

The Company accounts for long-lived assets in accordance with
the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.

Basic and Diluted Net Loss
Per Common Share

Basic and diluted net loss per common share is presented in
accordance with the provisions of SFAS No. 128,
Earnings Per Share. Basic net loss per common share
is computed by dividing net loss available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per common share
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance of
common stock. Diluted net loss per common share is equal to
basic net loss per common share, since all common stock
equivalents are antidilutive for all periods presented.

Basic and diluted net loss per common share for the years ended
December 31, 1999, 2000 and 2001 does not include the effects of
warrants to purchase 1,410,954, 1,878,654 and 2,455,654 shares
of common stock; options to purchase 1,448,600, 5,365,900 and
6,010,150 shares of common stock; and 0, 0 and 11,006,828 shares
of common stock on conversion of outstanding Series A
Redeemable Convertible Preferred Stock
(Series A), as the effect of their inclusion is
antidilutive during each period.

Fair Value of Financial
Instruments

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist of cash and
cash equivalents, short-term investments, accounts receivable,
accounts payable and accrued expenses. At December 31, 2000
and 2001, the fair values of these financial instruments
approximated their carrying value due to the short-term nature
of these instruments.

Comprehensive Loss

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

New Accounting
Standards

In July 2001, the FASB issued SFAS 141 and SFAS 142
Business Combinations and Goodwill and Other
Intangible Assets, respectively. SFAS 141 replaces
Accounting Principles Board Opinion No. 16 (APB 16)
Business Combinations, and requires the purchase
method of accounting prospectively. It also provides guidance on
the recognition of intangible assets apart from goodwill. SFAS
142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill
will be tested annually and whenever events or circumstances
occur indicating that goodwill might be impaired. SFAS 141 was
effective July 1, 2001, and had no impact on the
Companys financial position or results of operations. SFAS
142 is effective for the Company beginning January 1, 2002.
Upon adoption of SFAS 142, amortization of goodwill recorded for
business combinations consummated prior to July 1, 2001
will cease, and intangible assets acquired prior to July 1,
2001 that do not meet the criteria for recognition under SFAS
141 will be reclassified to goodwill. In connection with the
adoption of SFAS 142, companies will

F-12



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

be required to perform a transitional goodwill impairment
assessment. The Company believes that the adoption of SFAS
No. 142 beginning on January 1, 2002, will have no
effect on the Companys financial position, and results of
operations.

In October 2001, the FASB issued SFAS 144 Accounting for
the Impairment or Disposal of Long-Lived Assets. This
statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement
supercedes SFAS 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lives Assets to be Disposed
Of. The Company is required to adopt SFAS 144 on
January 1, 2002. The Company does not expect the adoption
of SFAS 144 to have a material impact on the Companys
financial statements because the impairment assessment under
SFAS 144 is largely unchanged from SFAS 121.

(4) Stockholders Equity (Deficit)

Common Stock

In April 1999, the Company increased the number of common stock
authorized from 16,000,000 to 50,000,000. At a special meeting
of stockholders of Audible Inc. held on March 12, 2002 (see
note 18) the Company increased the number of common stock
authorized from 50,000,000 to 75,000,000. At December 31,
2000 and 2001, the Company had 27,546,989, common stock shares
issued. At December 31, 2000 and 2001, the Company had
7,244,554 and 8,465,804, respectively, common shares reserved
for common stock warrants and options. Additionally, at
December 31, 2001, the Company had 11,006,828 shares of
common stock reserved for the conversion of outstanding
Series A Redeemable Convertible Preferred Stock.

Prior to the Companys initial public offering, shares of
common stock outstanding were purchased under the Companys
Stock Restriction Agreements, which contain certain restrictions
related to the sale and transfer of the shares and certain
vesting and buyback provisions. Under the Stock Restriction
Agreements, shares were purchased by employees and consultants
of the Company through the issuance of full recourse promissory
notes (see note 12). In general, shares sold to employees vest
over a 50-month period, with the Company maintaining an option
to repurchase unvested shares. Shares of common stock were also,
on occasion, issued in exchange for services.

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

|                                                 |  |           |           |                  |  |                                  |      | 
|------------------------------------------------ |  | --------- | --------- | ---------------- |  | -------------------------------- | ---- | 
|                                                 |  | Number of |           | Weighted average
|                                                 |  | Shares    |           | issue price     
|                                                 |  |           |           |                 
|Balance at December 31, 1998                     |  |           | 7,394,355 |                  |  |                                  |      | 
|                                                
|                                                
|                                                
|                                                
|Cancellation of common stock issued for services |  |           | (3,750    | )                |  | Fair value ofservices  ($1,250)
|                                                
|                                                
|                                                
|                                                
|Issued for notes                                 |  |           | 229,500   |                  |  |                                  | $.27 | 
|                                                
|                                                
|                                                
|                                                
|Repurchased                                      |  |           | (550,186  | )                |  |                                  | $.26 | 
|                                                 |  |           |           |                  |  |                                  |      | 
|Balance at December 31, 1999                     |  |           | 7,069,919 |                  |  |                                  |      | 
|                                                
|                                                
|                                                
|                                                
|Repurchased                                      |  |           | (4,155    | )                |  |                                  | $.25 | 
|                                                 |  |           |           |                  |  |                                  |      | 
|Balance at December 31, 2000                     |  |           | 7,065,764 |                  |  |                                  |      | 
|                                                
|                                                
|                                                
|                                                
|Repurchased                                      |  |           | (140,220  | )                |  |                                  | $.27 | 
|                                                 |  |           |           |                  |  |                                  |      | 
|Balance at December 31, 2001                     |  |           | 6,925,544 |                  |  |                                  |      | 
|                                                 |  |           |           |                  |  |                                  |      | 

F-13



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Employee Stock-based
Compensation

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

In February 2000, the Company offered 100,000 common shares to
its new Chief Executive Officer in connection with his offer of
employment at five dollars per share less than the fair value of
the stock. The Company recorded $500,000 as deferred
compensation in February 2000 and was recording the compensation
expense straight-line over the vesting term. The offer to
purchase these shares was rescinded in August 2000, and the CEO
did not purchase any of the offered shares. In August 2000, the
Company issued to its CEO 500,000 stock options at an exercise
price equal to the fair value of the common stock at the time of
issuance. The Company was recording the original compensation
expense over the vesting term of the new option grant, and was
accounting for 100,000 of the 500,000 newly issued options as
replacement options using variable accounting by adjusting the
compensation expense associated with these 100,000 options based
on the closing price of the Companys common stock in
accordance with FASB Interpretation No. 44 (FIN 44)
Accounting for Certain Transactions involving Stock
Compensation  an Interpretation of APB Opinion
No. 25. In July 2001, as a result of the CEO no
longer being employed by the Company, the Company is no longer
recording any further expense related to these options and has
reversed the remaining unexpensed deferred compensation related
to unvested options against additional paid-in-capital.

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

During the years ended December 31, 1999, 2000 and 2001,
$181,450, $561,740 and $333,375, respectively, of compensation
expense was recognized related to these transactions. During the
year ended December 31, 2001, $258,049 of deferred
compensation was reversed against paid-in-capital related to
unvested options due to employees leaving the Company.

Employee Stock Incentive
Plan

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

F-14



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

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

|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|-------------------------- |  | --------- | ---------- | -------------- |  | ---------------- | -------------- |  |  | - | ----- | 
|                           |  | Number of |            | Exercise Price |  | Weighted Average
|                           |  | Shares    |            | Per Share      |  | Exercise Price  
|                           |  |           |            |                |  |                 
|Balance, December 31, 1998 |  |           |           |                |  |                  |               |  |  |   |      | 
|                          
|                          
|                          
|                          
|Granted                    |  |           | 1,501,100  |                |  |                  | $2.00  $15.38 |  |  | $ | 9.65  | 
|                          
|                          
|                          
|                          
|Canceled                   |  |           | (40,000    | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                          
|                          
|                          
|                          
|Exercised                  |  |           | (12,500    | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 1999 |  |           | 1,448,600  |                |  |                  | $2.00  $15.38 |  |  | $ | 9.71  | 
|                          
|                          
|                          
|                          
|Granted                    |  |           | 4,575,500  |                |  |                  | $0.44  $40.00 |  |  | $ | 10.61 | 
|                          
|                          
|                          
|                          
|Canceled                   |  |           | (657,000   | )              |  |                  | $1.25  $40.00 |  |  | $ | 21.74 | 
|                          
|                          
|                          
|                          
|Exercised                  |  |           | (1,200     | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2000 |  |           | 5,365,900  |                |  |                  | $0.44  $15.88 |  |  | $ | 9.01  | 
|                          
|                          
|                          
|                          
|Granted                    |  |           | 4,157,000  |                |  |                  | $0.36  $ 1.78 |  |  | $ | 0.68  | 
|                          
|                          
|                          
|                          
|Canceled                   |  |           | (3,512,750 | )              |  |                  | $0.41  $15.88 |  |  | $ | 9.38  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2001 |  |           | 6,010,150  |                |  |                  | $0.36  $15.56 |  |  | $ | 3.04  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|Exercisable:               |  |           |            |                |  |                  |                |  |  |   |       | 
|                          
|                          
|                          
|                          
|December 31, 2001          |  |           | 915,660    |                |  |                  | $0.41  $ 1.00 |  |  | $ | 0.57  | 
|                           |  |           | 440,630    |                |  |                  | $1.02  $ 6.06 |  |  | $ | 3.93  | 
|                           |  |           | 644,180    |                |  |                  | $8.00  $15.56 |  |  | $ | 9.19  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 
|                           |  |           | 2,000,470  |                |  |                  | $0.41  $15.56 |  |  | $ | 4.08  | 
|                           |  |           |            |                |  |                  |                |  |  |   |       | 

A summary of the total stock options outstanding as of
December 31, 2001 is as follows:

|          |           |                |  |                  |                |                  |  |   |      |  |  |  |            | 
|--------- | --------- | -------------- |  | ---------------- | -------------- | ---------------- |  | - | ---- |  |  |  | ---------- | 
|          |           |                |  |                  |                | Weighted Average
|Number of |           | Exercise Price |  | Weighted Average |                | Remaining       
|Options   |           | Per Share      |  | Exercise Price   |                | Contractual Life
|          |           |                |  |                  |                |                 
|          | 3,360,000 |                |  |                  | $0.36  $ 1.00 |                  |  | $ | 0.56 |  |  |  | 9.51 years | 
|         
|         
|         
|         
|          | 1,371,250 |                |  |                  | $1.02  $ 6.06 |                  |  | $ | 3.19 |  |  |  | 8.78 years | 
|         
|         
|         
|         
|          | 1,278,900 |                |  |                  | $8.00  $15.56 |                  |  | $ | 9.37 |  |  |  | 7.84 years | 
|          |           |                |  |                  |                |                  |  |   |      |  |  |  |            | 
|          | 6,010,150 |                |  |                  | $0.36  $15.56 |                  |  | $ | 3.04 |  |  |  | 9.00 years | 
|          |           |                |  |                  |                |                  |  |   |      |  |  |  |            | 

The Company has computed the proforma disclosures required under
SFAS No. 123 for all stock options granted in 1999, 2000 and
2001 using the Black-Scholes option pricing model prescribed by
SFAS No. 123.

The assumptions used and the weighted-average information for
the years then ended are as follows:

|                                                                                  |  |              |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                  |  |             
|                                                                                  |  | December 31,
|                                                                                  |  |             
|                                                                                  |  | 1999         |         | 2000 |  | 2001
|                                                                                  |  |              |         |      |  |     
|Risk-free interest rate                                                           |  |              | 6.00    | %    |  |      | 6.00    | % |  |   | 5.00    | %
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Expected dividend yield                                                           |  |              |        |      |  |      |        |   |  |   |        |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Expected lives                                                                    |  |              | 7 years |      |  |      | 7 years |   |  |   | 7 years |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Expected volatility                                                               |  |              | 70      | %    |  |      | 126     | % |  |   | 163     | %
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Weighted-average grant date fair value of options
        granted during the year |  | $            | 7.81    |      |  | $    | 9.87    |   |  | $ | 0.68    |  

F-15



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

The effect of applying SFAS No. 123 would be as follows:

|                                       |             |      |   |             |   |      |   |             |   |  |   |             |  
|-------------------------------------- | ----------- | ---- | - | ----------- | - | ---- | - | ----------- | - |  | - | ----------- | -
|                                       |             | 1999 |   | 2000        |   | 2001
|                                       |             |      |   |             |   |     
|Net loss:                              |             |      |   |             |   |      |   |             |   |  |   |            
|                                      
|                                      
|                                      
|                                      
|                                       | As Reported |      | $ | (13,476,311 | ) |      | $ | (32,275,134 | ) |  | $ | (27,718,389 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Pro Forma   |      | $ | (14,412,428 | ) |      | $ | (43,329,652 | ) |  | $ | (33,548,999 | )
|                                      
|                                      
|                                      
|                                      
|Basic and diluted net loss per common: |             |      |   |             |   |      |   |             |   |  |   |            
|                                      
|                                      
|                                      
|                                      
|                                       | As Reported |      | $ | (0.85       | ) |      | $ | (1.21       | ) |  | $ | (1.03       | )
|                                      
|                                      
|                                      
|                                      
|                                       | Pro Forma   |      | $ | (0.91       | ) |      | $ | (1.63       | ) |  | $ | (1.25       | )

At December 31, 2001, approximately 3.0 million shares
of common stock were available for future grants under the Plan.

Warrants

In April 1999, in connection with an amendment to the agreement
with Microsoft (see note 8), the Company issued Microsoft a
warrant to purchase 100,000 shares of common stock at the IPO
price of $9.00 per share which expires November 18, 2003.

In June 1999, in connection with a services agreement (see note
8), the Company issued a warrant to purchase 150,000 shares of
common stock at $0.01 per share, which is fully vested, and a
warrant to purchase 500,000 shares of common stock at $8.00 per
share, which is subject to vesting over a three-year period. The
warrant to purchase 500,000 shares of common stock was cancelled
in January 2001 (see note 8). The agreement also allows for an
additional warrant to be granted for the purchase of 250,000
shares of common stock at $8.00 per share upon extension of the
agreement for an additional year, also subject to vesting. The
warrants expire on June 16, 2009.

In July 1999, in connection with a content provider agreement,
the Company issued a warrant to purchase 4,000 shares of common
stock at the IPO price of $9.00 per share, which expires
July 16, 2003.

In November 1999, in connection with a content provider
agreement, the Company issued a warrant to purchase 10,000
shares of common stock at 85% of the IPO price of $9.00 per
share, or $7.65 per share which expire May 20, 2003.

In May 2000, in connection with a agreement with Random House,
Inc. the Company issued 878,333 warrants with a price range of
$5.89 to $50.00 and a weighted average exercise price of $10.29,
which expire May 5, 2007.

In June 2000, in connection with a content provider agreement,
the Company issued a warrant to purchase 10,000 shares of common
stock at a price of $4.68 per share, which expires June 1,
2007.

In June 2000, in connection with a content provider agreement,
the Company issued a warrant to purchase 1,008 shares of common
stock at a price of $4.69 per share, which expires June 1,
2005.

In June 2000, in connection with a content provider agreement,
the Company issued a warrant to purchase 1,500 shares of common
stock at a price of $4.88 per share, which expires June 5,
2005.

In July 2000, in connection with a content provider agreement,
the Company issued a warrant to purchase 10,000 shares of common
stock at a price of $4.31 per share, which expires July 10,
2007.

In July 2000, in connection with a services agreement, the
Company issued a warrant to purchase 1,000 shares of common
stock at a price of $4.00 per share, which expires July 31,
2005.

In November 2000, in connection with a content provider
agreement, the Company issued a warrant to purchase 5,000 shares
of common stock at a price of $1.03 per share, which expires
November 13, 2007.

F-16



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

In January 2001, in connection with an amended Co-Branding,
Marketing and Distribution Agreement (see note 14), the Company
issued a warrant to purchase 500,000 shares of common stock at a
price of $1.50 per share, which expires January 24, 2006.

In January 2001, in connection with an amended services
agreement (see note 8), the Company issued a warrant to purchase
400,000 shares of common stock at a price of $0.91 per share,
which expires February 16, 2009.

In May 2001, in connection with a services agreement, the
Company issued a warrant to purchase 50,000 shares of common
stock at a price of $0.50 per share, which expires May 29,
2006.

In August 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
August 1, 2006.

In September 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
September 1, 2006.

In September 2001 in connection with a content provider
agreement, the Company issued a warrant to purchase 50,000
shares of common stock at a price of $0.43 per share, which
expires September 4, 2006.

In October 2001, in connection with a services agreement, the
Company issued a warrant to purchase 2,000 shares of common
stock at a price of $0.38 per share, which expires
October 1, 2006.

In October 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
October 1, 2006.

In November 2001, in connection with a services agreement, the
Company issued a warrant to purchase 40,000 shares of common
stock at a price of $0.50 per share, which expires
November 1, 2006.

In November 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
November 1, 2006.

In November 2001 in connection with a content provider
agreement, the Company issued a warrant to purchase 5,000 shares
of common stock at a price of $0.54 per share, which expires
November 30, 2006.

In December 2001, in connection with a services agreement, the
Company issued a warrant to purchase 6,000 shares of common
stock at a price of $0.46 per share, which expires
December 1, 2006.

All the warrants issued during 1999, 2000 and 2001 are still
outstanding, except for the 500,000 warrants that were cancelled
in January 2001, as noted above.

The relative fair values of warrants issued in exchange for
services were determined in accordance with EITF Issue
No. 96-18 using the Black-Scholes pricing model and are
being 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 date of grant.
Expected dividend yield of zero was used for all calculations.
For the years ended December 31, 1999,

F-17



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

2000 and 2001, $1,349,726, $1,243,445 and $1,765,439 was
recognized as expense related to warrants, as follows:

|                                     |  |      |           |      |  |      |           |  |  |   |           | 
|------------------------------------ |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                     |  | 1999 |           | 2000 |  | 2001
|                                     |  |      |           |      |  |     
|Cost of content and services revenue |  | $    |          |      |  | $    | 347,941   |  |  | $ | 664,383   | 
|                                    
|                                    
|                                    
|                                    
|Production expenses                  |  |      | 168,566   |      |  |      | 268,860   |  |  |   | 89,611    | 
|                                    
|                                    
|                                    
|                                    
|Sales and marketing expenses         |  |      | 1,181,160 |      |  |      | 568,570   |  |  |   | 989,861   | 
|                                    
|                                    
|                                    
|                                    
|General and administrative           |  |      |          |      |  |      | 58,074    |  |  |   | 21,584    | 
|                                     |  |      |           |      |  |      |           |  |  |   |           | 
|                                     |  | $    | 1,349,726 |      |  | $    | 1,243,445 |  |  | $ | 1,765,439 | 
|                                     |  |      |           |      |  |      |           |  |  |   |           | 

A summary of the warrant activity for the years ended
December 31, 1999, 2000, and 2001 is as follows (all
preferred stock warrants were converted into common stock
warrants on the IPO date and accordingly, are reflected below
retroactively showing the effect of the common stock split):

|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|-------------------------- |  | --------- | --------- | -------------- |  | ---------------- | -------------- |  |  | - | ----- | 
|                           |  | Number of |           | Exercise Price |  | Weighted Average
|                           |  | Warrants  |           | Per Share      |  | Exercise Price  
|                           |  |           |           |                |  |                 
|Balance, December 31, 1998 |  |           | 769,905   |                |  |                  | $1.79  $ 4.00 |  |  | $ | 3.78  | 
|                          
|                          
|                          
|                          
|Issued                     |  |           | 764,000   |                |  |                  | $0.01  $ 9.00 |  |  | $ | 6.56  | 
|                          
|                          
|                          
|                          
|Exercised                  |  |           | (122,951  | )              |  |                  | $1.79  $ 4.00 |  |  | $ | 3.63  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 1999 |  |           | 1,410,954 |                |  |                  | $0.01  $ 9.00 |  |  | $ | 5.30  | 
|                          
|                          
|                          
|                          
|Issued                     |  |           | 906,841   |                |  |                  | $1.03  $50.00 |  |  | $ | 10.08 | 
|                          
|                          
|                          
|                          
|Exercised                  |  |           | (439,141  | )              |  |                  | $1.79  $ 4.00 |  |  | $ | 2.96  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2000 |  |           | 1,878,654 |                |  |                  | $0.01  $50.00 |  |  | $ | 7.98  | 
|                          
|                          
|                          
|                          
|Issued                     |  |           | 1,077,000 |                |  |                  | $0.38  $ 1.50 |  |  | $ | 1.11  | 
|                          
|                          
|                          
|                          
|Cancelled                  |  |           | (500,000  | )              |  |                  | $8.00          |  |  | $ | 8.00  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|Balance, December 31, 2001 |  |           | 2,455,654 |                |  |                  | $0.01  $50.00 |  |  | $ | 4.96  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|Exercisable:               |  |           |           |                |  |                  |                |  |  |   |       | 
|                          
|                          
|                          
|                          
|December 31, 2001          |  |           | 150,000   |                |  |                  | $0.01          |  |  | $ | 0.01  | 
|                           |  |           | 395,000   |                |  |                  | $0.43  $ 1.03 |  |  | $ | 0.79  | 
|                           |  |           | 726,860   |                |  |                  | $4.00  $ 9.00 |  |  | $ | 5.78  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 
|                           |  |           | 1,271,860 |                |  |                  | $0.01  $ 9.00 |  |  | $ | 3.55  | 
|                           |  |           |           |                |  |                  |                |  |  |   |       | 

The warrants exercised in 1999 and 2000 were exercised through
cashless transactions in accordance with the warrant agreements.
Accordingly, the number of common stock shares issued as result
of these exercises was 93,832 and 326,390, respectively. No
warrants were exercised during 2001.

A summary of the total common stock warrants outstanding as of
December 31, 2001 is as follows:

|          |           |                |  |                  |                 |                  |  |      |       |  |  |  |            | 
|--------- | --------- | -------------- |  | ---------------- | --------------- | ---------------- |  | ---- | ----- |  |  |  | ---------- | 
|          |           |                |  |                  |                 | Weighted Average
|Number of |           | Exercise Price |  | Weighted Average |                 | Remaining       
|Warrants  |           | Per Share      |  | Exercise Price   |                 | Contractual Life
|          |           |                |  |                  |                 |                 
|          | 150,000   |                |  |                  | $ 0.01          |                  |  | $    | 0.01  |  |  |  | 7.46 years | 
|         
|         
|         
|         
|          | 1,082,000 |                |  |                  | $ 0.38  $ 1.50 |                  |  | $    | 1.11  |  |  |  | 5.23 years | 
|         
|         
|         
|         
|          | 995,321   |                |  |                  | $ 4.00  $ 9.00 |                  |  | $    | 5.91  |  |  |  | 5.08 years | 
|         
|         
|         
|         
|          | 228,333   |                |  |                  | $10.00  $50.00 |                  |  | $    | 22.34 |  |  |  | 5.27 years | 
|          |           |                |  |                  |                 |                  |  |      |       |  |  |  |            | 
|          | 2,455,654 |                |  |                  | $ 0.01  $50.   |                  |  | 00 $ | 4.96  |  |  |  | 5.31 years | 
|          |           |                |  |                  |                 |                  |  |      |       |  |  |  |            | 

F-18



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

(5) Redeemable Convertible Preferred Stock

Series A

In December 1995, the Company authorized 1,350,000 shares of
Series A convertible preferred stock, which was
subsequently decreased in March 1997 to 1,068,000. In 1995, the
Company issued 534,000 shares of Series A convertible
preferred stock at $.75 per share for net proceeds of $389,189.
Each holder of outstanding shares of Series A convertible
preferred stock had voting rights equal to the number of shares
of common stock into which the shares of Series A
convertible preferred stock were convertible, which was a 3 for
2 share basis.

Stockholders of the Series A convertible preferred stock
were entitled to receive dividends, when and if declared by the
Board of Directors, at an annual rate of $.075 per share. Such
dividends were not cumulative.

If a dividend or other distribution was declared on any shares
of Series B, Series C or Series D convertible
preferred stock, the Board of Directors had to simultaneously
declare a dividend or distribution on Series A convertible
preferred stock, based on the relative aggregated liquidation
value of the outstanding shares of Series A, Series B,
Series C and Series D convertible preferred stock, so
that the outstanding shares of Series A, Series B,
Series C and Series D convertible preferred stock
would participate equally with each other.

Series B

In July 1996, the Company authorized 2,000,000 shares of
Series B convertible preferred stock which was subsequently
increased to 2,200,000 in November 1996 and then subsequently
decreased to 2,100,000 shares in March 1997. During 1996, the
Company issued an aggregate of 2,050,000 shares of Series B
convertible preferred stock at $1.50 per share for aggregate net
proceeds of $3,040,581. Each holder of outstanding shares of
Series B convertible preferred stock had voting rights
equal to the number of shares of common stock into which the
shares of Series B convertible preferred stock were
convertible, which was a 3 for 2 share basis.

Stockholders of Series B convertible preferred stock were
entitled to receive dividends, when and if declared by the Board
of Directors, at an annual rate of $.15 per share. Such
dividends were not cumulative.

Series C

In March 1997, the Company authorized 2,300,000 shares of
Series C convertible preferred stock. In March 1997, the
Company issued 2,250,000 shares of Series C convertible
preferred stock at $4.00 per share for net proceeds of
$8,947,875. Each holder of outstanding shares of Series C
convertible preferred stock had voting rights equal to the
number of shares of common stock into which the Series C
convertible preferred stock were convertible, which was a 3 for
2 share basis.

Stockholders of Series C convertible preferred stock were
entitled to receive dividends, when and if declared by the Board
of Directors, at an annual rate of 10% of the initial
Series C convertible preferred stock value ($4.00 per
share). Such dividends were not cumulative.

Series D

In February 1998, the Company authorized 1,375,000 shares of
Series D convertible preferred stock, which was
subsequently increased to 4,375,000 in December 1998. During
1998, the Company issued an aggregate of 3,850,000 shares of
Series D convertible preferred stock at $4.00 per share for
aggregate net proceeds of $15,347,009. During 1999, the Company
issued 250,000 shares of Series D convertible preferred
stock at $4.00 per share, for net proceeds of $994,472. Each
holder of outstanding shares of Series D convertible
preferred stock had voting rights equal to the number of shares
of common stock into which the Series D convertible
preferred stock were convertible, which was a 3 for 2 share
basis.

F-19



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Stockholders of Series D convertible preferred stock were
entitled to receive dividends, when and if declared by the Board
of Directors, at an annual rate of 10% of the initial
Series D convertible preferred stock value ($4.00 per
share). Such dividends were not cumulative.

No dividends were declared on any series of the preferred stock.

Automatic Conversion

At the closing of the Companys IPO on July 15, 1999,
all shares of Series A convertible preferred stock,
Series B convertible preferred stock, Series C
convertible preferred stock, and Series D convertible
preferred stock were automatically converted into 13,400,985
shares of common stock.

Immediately following the closing of the Companys IPO, the
Companys board has the authority to designate and issue up
to 10,000,000 shares of new preferred stock, in one or more
series. The board can establish the preferences, rights and
privileges of each series, which may be superior to the rights
of the common stock. The board exercised this authority in
relation to the designation and issuance of the Series A
Redeemable Convertible Preferred Stock issued to Microsoft on
February 8, 2001.

Microsoft Investment

On February 8, 2001, Microsoft purchased 2,666,666 shares
of Audible Series A Redeemable Convertible Preferred stock
for $10,000,000 at a per share price of $3.75. Each share of
preferred stock may be converted into four shares of Common
Stock, (equivalent to a price of $.9375 per share, which was
greater than the common stock price at the date of grant),
subject to adjustment under certain conditions. The
Series A Redeemable Convertible Preferred stock is
convertible at the option of the holder at any time prior to the
fifth anniversary of the original issue date. Dividends are
payable semi-annually at a annual rate of 12% in either
additional preferred shares or in cash at the option of the
Company. On the fifth anniversary of the original issue date,
Audible is required to redeem all remaining outstanding shares
at a per share price of $3.75 plus all accrued and unpaid
dividends. In 2001 the Company issued 85,041 additional shares
of Series A Redeemable Convertible Preferred stock for
payment of dividends due on June 1, 2001. As of
December 31, 2001, $730,612 in accrued dividends remain
unpaid and are included in current liabilities on the
accompanying December 31, 2001 balance sheet. It is the
Companys intention to pay the remaining balance due
related to 2001 by issuing additional Series A Redeemable
Convertible Preferred Stock.

(6) Property and Equipment

Property and equipment at December 31, 2000 and 2001
consists of the following:

|                                               |                                                                  |              |           |      |  |   |           |  | 
|---------------------------------------------- | ---------------------------------------------------------------- | ------------ | --------- | ---- |  | - | --------- |  | 
|                                               |                                                                  |             
|                                               |                                                                  | December 31,
|                                               |                                                                  |             
|                                               |                                                                  | 2000         |           | 2001
|                                               |                                                                  |              |           |     
|Studio equipment                               |                                                                  | $            | 631,134   |      |  | $ | 755,004   | 
|                                              
|                                              
|                                              
|                                              
|Computer server and Web site equipment         |                                                                  |              | 2,761,900 |      |  |   | 3,566,629 | 
|                                              
|                                              
|                                              
|                                              
|Office furniture and equipment                 |                                                                  |              | 1,132,743 |      |  |   | 1,165,909 | 
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |                                                                  |              | 789,046   |      |  |   | 824,625   | 
|                                               |                                                                  |              |           |      |  |   |           | 
|                                               |                                                                  |              | 5,314,823 |      |  |   | 6,312,167 | 
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |                                                                  |              | 2,496,031 |      |  |   | 4,321,497 | 
|                                               |                                                                  |              |           |      |  |   |           | 
|                                               |                                                                  | $            | 2,818,792 |      |  | $ | 1,990,670 | 
|                                               |                                                                  |              |           |      |  |   |           | 
|                                               | Property and equipment includes equipment under
	capital leases. |              |           |      |  |   |           |  | 

F-20



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Depreciation and amortization expense on property and equipment,
including equipment under capital leases, totaled $479,907,
$1,367,348 and $1,825,466 in 1999, 2000 and 2001, respectively.

(7) Microsoft Corporation Agreement

In November 1998, the Company entered into a five-year agreement
with Microsoft. The agreement provides for services related to
integration of products, the granting of various rights and
licenses, and the provision for Microsoft to be paid future
royalties for content distributed as a result of the software
developed in the agreement. Under the terms of the agreement,
Microsoft has paid the Company the minimum committed payments of
$2.0 million to integrate certain products and acquire
various products, rights and licenses.

Microsoft advanced Audible $1,500,000 in November 1998 in
consideration of Audible granting Microsoft the right to
distribute software enabling users of Microsoft platforms to
access and use Audible content. The Company allocated $50,000 of
this advance to certain business development work that was
recognized as a reduction of general and administrative expense
in 2001. The remaining $1,450,000 of this advance was recognized
as revenue on a straight line basis beginning in the quarter
ended June 30, 1999 through the initial term of the
agreement which ended in April 2001. During the years ended
December 31, 1999, 2000 and 2001, $441,308, $756,518 and
$252,174, respectively, of this advance was recognized and is
recorded as other revenue on the accompanying statements of
operations.

Also under the agreement, during the year ended
December 31, 1999, Audible (i) performed technology
integration services for which the Company has recognized other
revenue of $200,000, (ii) delivered a license for certain
technology rights for which the Company has recognized other
revenue of $250,000, and (iii) delivered 300 Audible
MobilePlayers for which the Company recognized hardware revenue
of $50,000.

Audible will pay Microsoft a royalty on content licensed and
distributed by Audible to each end user that accesses its
content using the developed software. Royalties will be
recognized during the period that the related content revenue is
earned. Through December 31, 2001, Audible had not
recognized any royalties under this agreement.

In April 1999, in connection with an amendment to the agreement
with Microsoft, the Company issued to Microsoft a warrant which
expires November 18, 2003 to purchase 100,000 shares of common
stock at the IPO price of $9.00 per share. The fair value of
this warrant was determined in accordance with EITF Issue
No. 96-18 and was amortized as an expense on a
straight-line basis over the same period as the $1,450,000
advance described above. During the years ended
December 31, 1999, 2000 and 2001, respectively, $156,835,
$268,860 and $89,611, respectively, was recorded as a production
expense related to this agreement with the non-cash credit for
services to additional paid-in-capital in the statement of
stockholders equity (deficit).

(8) Services Agreement

In June 1999, in connection with a services agreement, the
Company issued a warrant to purchase 150,000 shares of common
stock at $0.01 per share, which is fully vested, and a warrant
to purchase 500,000 shares of common stock at $8.00 per share,
which is subject to vesting over a three-year period. The
agreement allows for an additional warrant to purchase 250,000
shares of common stock at $8.00 per share upon extension of the
agreement for an additional year, also subject to vesting. In
addition to the warrants, the agreement also allowed for the
purchase of 150,000 shares of common stock at the IPO price of
$9.00 per share on the IPO date. In January 2001, the services
agreement was amended whereby the warrant to purchase 500,000
shares of common stock was cancelled and a new warrant to
purchase 400,000 shares of common stock at $0.91 per share was
issued. The fair value of these warrants and purchase option was
determined in accordance with EITF Issue No. 96-18 and is
being amortized as an expense on a straight-line basis using
variable plan accounting over the initial term of the service
agreement of three years. During the

F-21



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

years ended December 31, 1999, 2000 and 2001, $1,181,160,
$568,570 and $813,530, respectively, was recorded as a marketing
expense related to this agreement with the non-cash credit for
services to additional paid-in capital in the 1999, 2000 and
2001 statement of stockholders equity.

(9) Income Taxes

There is no provision for income tax expense in 1999, 2000 or
2001 due to the Companys net losses in each of the years.
As a result of selling certain of its New Jersey state income
tax loss benefits for cash, the Company realized zero, $316,310
and $326,898, respectively, in state income tax benefit during
the years ended December 31, 1999, 2000 and 2001,
respectively.

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

|                                                    |                                             |                         |            |           |  |      |             |            |   |   |            |           |  
|--------------------------------------------------- | ------------------------------------------- | ----------------------- | ---------- | --------- |  | ---- | ----------- | ---------- | - | - | ---------- | --------- | -
|                                                    |                                             |                        
|                                                    |                                             | Year ended December 31,
|                                                    |                                             |                        
|                                                    |                                             | 1999                    |            | 2000      |  | 2001
|                                                    |                                             |                         |            |           |  |     
|Computed expected tax benefit                     |                                             | $                       | (4,581,946 | )         |  | $    | (11,081,091 | )          |   | $ | (9,178,562 | )        
|                                                   
|                                                   
|                                                   
|                                                   
|Decrease (increase) in tax benefit resulting
	from: |                                             |                         |            |           |  |      |             |            |   |   |            |          
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | State tax benefit, net of federal benefit   |                         |            |          |  |      |             | (208,765   | ) |   |            | (215,753  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Increase in the federal valuation allowance |                         |            | 4,578,000 |  |      |             | 10,963,000 |   |   |            | 9,064,000 |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other, net                                  |                         |            | 3,946     |  |      |             | 10,546     |   |   |            | 3,417     |  
|                                                    |                                             |                         |            |           |  |      |             |            |   |   |            |          
|                                                    |                                             | $                       |           |           |  | $    | (316,310    | )          |   | $ | (326,898   | )        
|                                                    |                                             |                         |            |           |  |      |             |            |   |   |            |          

The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
as of December 31, 2000 and 2001 are as follows:

|                     |                                                 |                            |                           |            |            |  |            |            |            |  |            | 
|-------------------- | ----------------------------------------------- | -------------------------- | ------------------------- | ---------- | ---------- |  | ---------- | ---------- | ---------- |  | ---------- | 
|                     |                                                 |                           
|                     |                                                 | December 31,              
|                     |                                                 |                           
|                     |                                                 | 2000                       |                           | 2001      
|                     |                                                 |                            |                           |           
|Deferred tax assets: |                                                 |                            |                           |            |            |  |            |           
|                    
|                    
|                    
|                    
|                     | Net operating loss carryforwards                |                            | $                         | 24,758,000 |            |  | $          | 36,494,000 |           
|                    
|                    
|                    
|                    
|                     | Capitalized start-up costs                      |                            |                           | 573,000    |            |  |            | 260,000    |           
|                    
|                    
|                    
|                    
|                     | Capitalized research and developmental costs    |                            |                           | 1,507,000  |            |  |            | 855,000    |           
|                    
|                    
|                    
|                    
|                     | Book depreciation in excess of tax depreciation |                            |                           | 538,000    |            |  |            | 875,000    |           
|                    
|                    
|                    
|                    
|                     | Deferred compensation and accrued vacation      |                            |                           | 247,000    |            |  |            | 156,000    |           
|                    
|                    
|                    
|                    
|                     | Advances                                        |                            |                           | 18,000     |            |  |            | 33,000     |           
|                    
|                    
|                    
|                    
|                     | Other, net                                      |                            |                           | 107,000    |            |  |            | 85,000     |           
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Total deferred tax assets  |                           |            | 27,748,000 |  |            |            | 38,758,000 | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 |                            | Less valuation allowance: |            |            |  |            |            |            |  |           
|                    
|                    
|                    
|                    
|                     |                                                 |                            |                           | Federal    |            |  | 22,230,000 |            |            |  | 31,294,000 | 
|                    
|                    
|                    
|                    
|                     |                                                 |                            |                           | State      |            |  | 5,518,000  |            |            |  | 7,464,000  | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Total valuation allowance: |                           |            | 27,748,000 |  |            |            | 38,758,000 | 
|                     |                                                 |                            |                           |            |            |  |            |           
|                     |                                                 | Net deferred taxes         |                           | $          |           |  |            | $          |           | 
|                     |                                                 |                            |                           |            |            |  |            |           

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

F-22



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

deferred tax assets and, accordingly, a full valuation allowance
has been recorded on the deferred tax assets as of
December 31, 2000 and 2001.

As of December 31, 2001, the Company has net operating loss
carryforwards for federal income tax purposes of approximately
$86,772,000 which begin to expire in 2010 if not used to offset
future taxable income. The Company has experienced certain
ownership changes which, under the provisions of Section 382 of
the Internal Revenue Code of 1986, as amended, may result in an
annual limitation on the Companys ability to utilize its
net operating losses in the future.

(10) Related-party Transactions

Note receivable due from stockholder of $50,000 at
December 31, 2000 reduced to $45,000 at December 31,
2001 (due to repayment) bears interest at 5.42% annually. On
April 11, 2001 the Company amended the payments terms of
the $50,000 note receivable from stockholder due on
March 27, 2001. The amendment requires semi-annual
principal payments of at least $5,000 beginning July 15,
2001 until the note and all accrued interest is repaid.

(11) Commitments and Contingencies

Lease Obligations

The Company entered into a capital lease line of credit with
Comdisco, Inc., whereby the Company had leased $1,240,585 of
equipment under this capital lease line as of December 31,
2000. This lease line is now closed and all lease obligations
have been paid as of December 31, 2001. The Company has
operating leases on its office space. Future minimum lease
obligations under these lease arrangements are as follows:

|                         |      |                                     |   |         |         | 
|------------------------ | ---- | ----------------------------------- | - | ------- | ------- | 
|                         |      | Operating                          
|                         |      | leases                             
|                         |      |                                    
|Year ending December 31: |      |                                     |   |        
|                        
|                        
|                        
|                        
|                         | 2002 |                                     | $ | 420,888 |        
|                        
|                        
|                        
|                        
|                         | 2003 |                                     |   | 70,148  |        
|                         |      |                                     |   |        
|                         |      | Total future minimum lease payments |   | $       | 491,036 | 
|                         |      |                                     |   |        

Rent expense of $206,128, $330,019 and $466,984 was recorded
under operating leases for the years ended December 31,
1999, 2000 and 2001, respectively.

License Agreements

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

F-23



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

Summary of Commitments and
Obligations

The following table shows future payments due under our
commitments and obligations as of December 31, 2001.

|      |  |           |         |                 |  |                 |           |           |  |            |            |          |  |       |         |  |  |   |           |  |  |   |           |  |  |   |            | 
|----- |  | --------- | ------- | --------------- |  | --------------- | --------- | --------- |  | ---------- | ---------- | -------- |  | ----- | ------- |  |  | - | --------- |  |  | - | --------- |  |  | - | ---------- | 
|      |  |           |         | (1)             |  |                 |           |           |  |            |            |          |  |      
|      |  |           |         | Dividends       |  | (2)             |           |           |  |            |            |          |  |      
|      |  |           |         | payable         |  | Redemption of   |           |           |  |            |            |          |  |      
|      |  |           |         | Microsoft       |  | Microsoft       |           |           |  |            |            | (3)      |  |      
|      |  |           |         | Series A        |  | Series A        |           | Payments  |  |            |            | Payments |  |      
|      |  |           |         | Redeemable      |  | Redeemable      |           | due       |  | Payments   |            | due      |  |      
|      |  | Operating |         | Convertible     |  | Convertible     |           | Content   |  | due        |            | Random   |  |      
|Year  |  | Leases    |         | Preferred Stock |  | Preferred Stock |           | Providers |  | Amazon.com |            | House    |  | Total
|      |  |           |         |                 |  |                 |           |           |  |            |            |          |  |      
|2002  |  | $         | 420,888 |                 |  | $               | 2,056,554 |           |  |            |           |          |  | $     | 896,950 |  |  | $ | 1,500,000 |  |  |   |          |  |  | $ | 4,874,392  | 
|     
|     
|     
|     
|2003  |  |           | 70,148  |                 |  |                 | 1,325,942 |           |  |            |           |          |  |       | 48,500  |  |  |   |          |  |  | $ | 1,000,000 |  |  |   | 2,444,590  | 
|     
|     
|     
|     
|2004  |  |           |        |                 |  |                 | 1,325,942 |           |  |            |           |          |  |       |        |  |  |   |          |  |  |   | 500,000   |  |  |   | 1,825,942  | 
|     
|     
|     
|     
|2005  |  |           |        |                 |  |                 | 1,325,942 |           |  |            |           |          |  |       |        |  |  |   |          |  |  |   |          |  |  |   | 1,325,942  | 
|     
|     
|     
|     
|2006  |  |           |        |                 |  |                 | 196,167   |           |  | $          | 10,318,902 |          |  |       |        |  |  |   |          |  |  |   |          |  |  |   | 10,515,069 | 
|     
|     
|     
|     
|Total |  | $         | 491,036 |                 |  | $               | 6,230,547 |           |  | $          | 10,318,902 |          |  | $     | 945,450 |  |  | $ | 1,500,000 |  |  | $ | 1,500,000 |  |  | $ | 20,985,935 | 



---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1): | Dividends shown payable in 2002 include $730,612 due as of
	December 31, 2001, which the company intends to pay by
	issuance of additional Series A Redeemable Convertible
	Preferred Stock. The remaining 2002 balance of $1,325,942 as
	well as all future dividends payable can be paid by either the
	issuance of additional preferred shares or in cash at the option
	of the Company.                                                                 
|    
|(2): | If the Series A Redeemable Convertible Preferred Stock is
	not converted into common stock prior to the fifth anniversary
	of the original issue date, Audible is required to redeem all
	remaining outstanding shares at a per share price of $3.75 plus
	all accrued and unpaid dividends. If Audible elects to pay any
	future dividends by issuing additional preferred shares, the
	amount required for the redemption would increase
	proportionately.
|    
|(3): | Amounts shown payable to Random House reflect the March 26,
	2002 amendment to the Co-Publishing, Marketing, and Distribution
	Agreement (see note 15).                                                                                                                                                                                                                                                                                                     

Contingencies

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

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

F-24



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

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

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

On October 26, 2001, the Company received a Nasdaq Staff
Determination letter indicating that the Company had failed to
comply with the minimum Net Tangible Assets requirement for
continued listing. Accordingly, the Companys securities
were subject to de-listing from the Nasdaq National Market. The
Company had requested a reevaluation of the Staff Determination
by the National Listing Qualification Panel. On
November 20, 2001, the Company was notified by the National
Listing Qualifications Panel that Audibles compliance had
been re-evaluated and that Audible was in compliance with all
applicable requirements for continued listing. The Company was
further informed that effective November 1, 2002, the Company
will be required to demonstrate that it has $10 million in
stockholders equity, as defined by GAAP, in order to remain
listed.

(12) Notes Due from Stockholders for Common Stock

Notes due from stockholders of $391,703 and $294,456 at
December 31, 2000 and 2001, respectively, were received by
the Company for payment for shares of common stock purchased by
employees and consultants under the Companys Stock
Restriction Agreements (see note 4). These notes have been
reflected as a reduction to stockholders equity. The notes
are full recourse promissory notes bearing interest at fixed
rates ranging from 7.0% to 8.5%. The notes began maturing in the
year 2000.

The Company has exercised its right to purchase shares of
unvested stock from employees who were terminated (under the
terms of the Companys Stock Restriction Agreements).
During 1999, 2000 and 2001, the Company repurchased 550,186,
4,155 and 140,220 shares, respectively. The Company paid for
these shares by reducing the indebtedness under the promissory
notes issued to the Company.

Certain Stock Restriction Agreements with employees contain a
provision whereby the employee is awarded a one-time bonus if
still employed by the Company on the due date of the promissory
note equal to the amount of the promissory note. Compensation
expense is recognized on a straight-line basis over the term of
the promissory note. Deferred cash compensation related to
bonuses in the accompanying balance sheets represents the
earned, unpaid portion of such bonuses.

(13) Employee Benefit Plan

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

F-25



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

(14) Amazon Agreement

In January 2000, the Company entered into two agreements with
Amazon.com. Under the Co-Branding, Marketing and Distribution
Agreement the Company will be the exclusive provider of digital
spoken audio (as defined) to Amazon.com. On January 24,
2001, the Company signed Amendment No.1 to its Co-Branding,
Marketing, and Distribution Agreement with Amazon.com. Under the
amendment, the annual fee for Year 3 of the agreement was
reduced from $10,000,000 to $1,500,000 and an additional fee of
$1,000,000 is payable in Year 2 of the agreement, making the
total amount to be paid by the Company under the agreement
$22,500,000. Also in connection with Amendment No.1, the Company
issued 500,000 common stock warrants to Amazon.com at an
exercise price of $1.50 per share, which are exercisable after
January 31, 2002. The fair value of these warrants was
determined in accordance with EITF Issue No. 96-18 and is
being amortized as an expense on a straight-line basis over the
remaining term of the agreement. During the year ended
December 31, 2001, $172,800 was recorded as a marketing
expense related to these warrants with the non-cash credit for
services to additional paid-in capital.

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

(15) Random House, Inc. Agreement

On May 5, 2000, Audible and Random House entered into a
50-month Co-Publishing, Marketing, and Distribution Agreement to
form a strategic alliance to establish Random House Audible, a
publishing imprint, as defined in the agreement, to produce
spoken word content specifically suited for digital
distribution. All titles published by the imprint will be
distributed exclusively on the Internet by Audible. As part of
this alliance, Random House, through its Random House Ventures,
LLC subsidiary, purchased 169,780 shares of Audible common stock
from the Company for $1,000,000. Over the term of the agreement
Audible will be contributing towards funding the acquisition and
creation of digital audio titles through Random House Audible.
On March 26, 2002, the agreement was amended to waive the
cash payment due to Random House in 2002 of $1,250,000, thereby
reducing the total payments due under the agreement from
$4,000,000 to $2,750,000. In exchange for this waiver, under the
amendment the Company agreed to issue 1,250,000 shares of
Series B Convertible Preferred Stock. At any time on or
after March 26, 2004, subject to certain conditions, all
outstanding shares of Series B Preferred Stock shall
automatically convert to shares of common stock at the then
effective conversion price. Through December 31, 2001,
$1,250,000 of the $2,750,000 obligation had been paid, with the
remaining amount of $1,500,000 due in 2003 and 2004.

During the years ended December 31, 2000 and 2001, $640,000
and $960,000, respectively was recorded as a cost of content and
services revenue related to this agreement. Under the agreement
Random House was

F-26



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

granted a warrant to purchase 878,333 shares of Audible common
stock at various exercise prices that vest over the term of the
agreement. The fair value of these warrants is being amortized
as an expense on a straight-line basis over the 50-month term of
the agreement, and most of the warrants are accounted for using
variable plan accounting and compensation costs vary each
accounting period until the measurement date. During the years
ended December 31, 2000 and 2001, $352,424 and $603,496,
respectively, was recorded as a cost of content and services
revenue related to these warrants with the non-cash credit for
services to additional paid-in capital. Additionally, the
agreement contains provisions for profit participation,
bounties, and the right to purchase additional warrants based on
future performance. Amounts paid to date related to profit
participation and bounties have not been material. Random House
Audible is an imprint of Random House, Inc.s Random House
Audio Publishing Group division.

(16) Streamlining Initiative

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

(17) Amendment to Certificate of Incorporation

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

(18) Supplemental Disclosure of Cash Flow Information

The following supplemental information relates to the Statements
of Cash Flows for the years ended December 31, 1999, 2000
and 2001:

No income tax payments have been made in 1999, 2000 or 2001.
Total cash paid for interest expense for the years ended
December 31, 1999, 2000 and 2001, was $48,070, $21,810 and
$9,722, respectively.

Non-cash operating activities which occurred in the years ended
December 31, 1999, 2000 and 2001 included: - Content
revenue exchanged for advertising (barter transactions); $0, $0,
and $1,285,048. Of the $1,285,048 in barter revenue in 2001,
$1,071,260 of barter advertising has been expensed in 2001, and
$213,788 is prepaid advertising as of December 31, 2001.

Non-cash investing and financing activities which occurred in
the years ended December 31, 1999, 2000 and 2001 included:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Common stock issued for notes receivable, net; $61,200, $0 and
	$0, respectively.                                                                         
|
| |  | Conversion of redeemable convertible preferred stock;
	$28,719,126, $0 and $0, respectively.                                                              
|
| |  | Reversal of initial public offering costs; $0, $122,086 and $0,
	respectively.                                                                            
|
| |  | Purchase of treasury stock at cost through reductions in notes
	receivable; $143,882 $1,046 and $31,162, respectively.                                    
|
| |  | Common stock issued for deferred services in connection with a
	Co-Branding, Marketing and Distribution agreement; $0,
	$20,000,0000 and $0, respectively.

F-27



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | Issuance of common stock upon the cashless exercise of common
	stock warrants; 93,832 shares, 326,390 shares and 0 shares,
	respectively.
|
| |  | Payment of dividends on redeemable convertible preferred stock
	in the form of preferred shares; $0, $0 and $318,902
	respectively.      

(19) Customer Concentration

Total revenues attributable to Microsoft represented 55%, 17%
and 3%, respectively, of total revenue for the years ended
December 31, 1999, 2000 and 2001, respectively. During the
year ended December 31, 2001, barter bulk content sales to
Real Networks, Inc. accounted for 11% of our total revenue in
2001. At December 31, 2000, two customers had accounts
receivable balances totaling 41% of the Companys total
account receivable balance. At December 31, 2001, one
customer had an accounts receivable balance totaling 26% of the
Companys total accounts receivable balance.

(20) Special Situation Funds Investment

On February 15, 2002, Special Situations Funds purchased
4,069,768 shares of common stock for $3,500,000 at a per share
price of $0.86. Net proceeds received by the Company was
$3,159,000 after deducting direct costs of $331,000 in finders
fees and $10,000 in legal fees. In connection with this
transaction, the Company issued warrants to purchase an
additional 1,220,930 shares of common stock. The warrants are
exercisable at a price of $1.15 per share anytime prior to the
fifth anniversary of the issue date. The Company may demand the
warrantholder exercise its rights in the event that closing bid
price of a share of the Companys common stock exceeds
$2.30 for twenty consecutive trading sessions. The Company is
required to register with the SEC by April 2, 2002, at
least 5,290,698 common shares (covering the number of shares of
common stock and warrants issued) pursuant to a registration
rights agreement.

(21) Quarterly Results (Unaudited)

The following tables contain selected unaudited quarterly
financial data for each quarter of 2000 and 2001. The Company
believes that the following information reflects all normal
recurring adjustments necessary for a fair presentation of the
information for the periods presented. The operating results for
any quarter are not necessarily indicative of results for any
future period.

|                                           |  |                              |            |             |  |             |            |             |  |   |            |   |  |   |            |  
|------------------------------------------ |  | ---------------------------- | ---------- | ----------- |  | ----------- | ---------- | ----------- |  | - | ---------- | - |  | - | ---------- | -
|                                           |  |                             
|                                           |  | Year Ended December 31, 2000
|                                           |  |                             
|                                           |  | 1st Quarter                  |            | 2nd Quarter |  | 3rd Quarter |            | 4th Quarter
|                                           |  |                              |            |             |  |             |            |            
|Revenue, net                               |  | $                            | 723,390    |             |  | $           | 840,977    |             |  | $ | 1,113,478  |   |  | $ | 1,871,135  |  
|                                          
|                                          
|                                          
|                                          
|Operating expenses                         |  |                              | 9,782,516  |             |  |             | 10,006,096 |             |  |   | 9,318,479  |   |  |   | 9,635,163  |  
|                                          
|                                          
|                                          
|                                          
|Loss before state income tax benefit       |  | $                            | (8,496,997 | )           |  | $           | (8,755,113 | )           |  | $ | (7,850,023 | ) |  | $ | (7,489,311 | )
|                                          
|                                          
|                                          
|                                          
|Net loss                                   |  | $                            | (8,496,997 | )           |  | $           | (8,755,113 | )           |  | $ | (7,850,023 | ) |  | $ | (7,173,001 | )
|                                          
|                                          
|                                          
|                                          
|Basic and diluted loss per common share    |  | $                            | (0.33      | )           |  | $           | (0.32      | )           |  | $ | (0.29      | ) |  | $ | (0.27      | )
|                                          
|                                          
|                                          
|                                          
|Weighted average common shares outstanding |  |                              | 25,597,835 |             |  |             | 26,940,204 |             |  |   | 27,014,489 |   |  |   | 27,013,239 |  

F-28



---



##### 



AUDIBLE, INC.


NOTES TO FINANCIAL STATEMENTS  (Continued)

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

F-29