UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form
10-K
 
 (Mark
      One)
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFx
              THE
      SECURITIES EXCHANGE ACT OF 1934For
      the Fiscal Year ended December 31, 2007ORo
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE
      SECURITIES EXCHANGE ACT OF 1934
 
 For
the transition period from _________ to __________
 
 Commission
File Number: 000-26529
 
 AUDIBLE,
INC.
 (Exact
name of Registrant as specified in its Charter)
 
 DELAWARE
                (State
      or other jurisdiction of
                incorporation
      or organization)
              
              22-3407945
                (I.R.S.
      Employer
                Identification
      Number)1
      WASHINGTON PARK
                NEWARK,
      NEW JERSEY
                (Address
      of principal executive offices)
              
              07102
                (Zip
      Code)
 
 (973)
820-0400
 (Registrant's
telephone number, including area code)
 
 Securities
Registered Pursuant to Section 12(b) of the Act:
 
 None
 
 Securities
Registered Pursuant to Section 12 (g) of the Act:
 
 None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yeso     Nox
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yeso     Nox
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes x   
Noo
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter)is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
accelerated filer [
]                                                                                                           Accelerated
filer [x]
 
 Non-accelerated
filer [ ] (Do not check if a smaller reporting
company)                                                                                                                                          Smaller
Reporting Company [ ]
 The
aggregate market value of voting stock held by non-affiliates of the registrant
was $119,751,015 based upon the closing price on The NASDAQ Stock Market LLC on
the last business day of the registrant's most recently completed second fiscal
quarter. (Based upon the closing price of $10.08 per share on June 29,
2007).
  As of
March 26, 2008 one share of common stock of the Registrant was
outstanding.
  
  
 AUDIBLE,
INC.
 FORM
10-K
 
 
 TABLE
OF CONTENTS
 
 PART I
              PAGEItem
      1.
              Business
              4Item
      1A.
              Risk Factors
              11Item
      1B.
              Unresolved Staff Comments
              16Item
      2.
              Properties
              16Item
      3.
              Legal Proceedings
              16Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              19PART IIItem
      5.
              Market for the Registrant's Common Equity, Related
      Stockholder Matters and Issuer Purchases of Equity
      Securities
              19Item
      6.
              Selected Financial Data
              20Item
      7.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              22Item
      7A.
              Quantitative and Qualitative Disclosures about Market
      Risk
              36Item
      8.
              Financial Statements and Supplementary
    Data
              36Item
      9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              37Item
      9A.
              Controls and Procedures
              37Item
      9B.
              Other Information
              40PART IIIItem
      10
              Directors, Executive Officers and Corporate
      Governance
              40Item
      11.
              Executive Compensation
              41Item
      12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              48Item
      13.
              Certain Relationships and Related Transactions, and Director
      Independence
              48Item
      14.
              Principal Accounting Fees and Services
              49PART IVItem
      15.
              Exhibits, Financial Statement Schedules
              50Exhibit Index
              51Signatures
              52
  
  PART I
 Item
1. Business.
 
 Overview
 
 We are a
leading provider of spoken audio entertainment, information, and educational
programming on the Internet. We specialize in the spoken word experience,
providing digital audio editions of books, newspapers and magazines, television
and radio programs, and original programming. Our service provides a way for
individuals to consume audio content at times when it is challenging to read,
such as when driving, exercising or performing consistent simple handwork and it
also provides listeners with the opportunity to simply enjoy what they want,
when they want.
 
 Consumers
shop, purchase and download audio content from our Web sites www.audible.com (United
States) andwww.audible.co.uk (United Kingdom), and from the Web sites of our related
parties www.audible.de (Germany)
andwww.audible.fr (France), directly to personal computers for listening in
a variety of ways. Most of our customers download audio to their PCs and Macs
and then transfer the audio to MP3 players, personal digital assistants (PDAs),
or to smart mobile devices (SMDs) for listening while not connected to a
computer. Others transfer, or “burn”, the content to audio CDs, while some
customers simply listen at their computers or through a digital home
entertainment network. Our customers can also have their audio content
wirelessly delivered to their SMDs every day, taking the computer out of the
equation. Links to our digital downloads are available on Amazon.com, and we are
the exclusive supplier of audio books at the Apple iTunes Store (“iTunes”)
through a contract that extends through September 30, 2010.
 
 In
addition to the desirability of our content, we offer customers value,
convenience and flexibility. Our customers have the option to buy our content
either individually on an a la carte basis, or to join any one of our
AudibleListener membership plans that offer significant savings from what
consumers typically will find at other traditional or online retail stores. We
currently offer AudibleListener membership plans for a monthly or annual fee
that provide customers download credits to acquire a fixed number of audio
downloads. Additionally the customers are provided a 30% discount on additional
content purchases, exposure to periodic sales, and member-only free content
offerings. Since November 2005 we have offered plans that provide for the
download credits to be rolled over month to month, should members elect to do
so.  Prior to November 2005, we only offered Legacy Audible
Memberships whose download credits could not be rolled over month to
month.
 
 We have
over 45,000 titles available for purchase at our U.S. and UK web sites.
Additionally, our related party web sites in Germany and France have nearly
45,000 programs available for purchase including certain titles from the U.S. or
UK sites that we have worldwide rights to distribute. Our selection of
audio in our stores ranges from more than 20,000 audio books and performances,
to audio editions of national periodicals such asTheNew York Times, The Wall Street
Journal, Forbes, The New Yorker andScientific American, to
radio and other short form programming such asThe Ricky Gervais Show, Car
Talk,The Bob Edwards
Show, Opie &
AnthonyandCharlie
Rose. Language instruction, personal development, stand-up comedy,
children's audio, study guides, historic speeches and readings, fiction,
business, mystery and romance are only some of the categories of listening
available to our customers.
  Another
important element of our success is our ability to build strong strategic
relationships with manufacturers of handheld devices that play digital or
compressed audio. With our AudibleReady initiative we have entered into multiple
technology and co-marketing relationships with companies that manufacture
digital audio-enabled devices. The AudibleReady brand exists as a standard for
digital downloads and playback that ensures interoperability between the Audible
service and digital audio-enabled devices.
 
 Consumers
are able to enjoy our digital content on more than 540 different mobile devices
made by more than 66 manufacturers. These devices include MP3 players, PDAs,
SMDs, or entertainment systems made by companies such as Apple, Creative Labs,
Dell, Garmin, Hewlett-Packard, Motorola, Oakley, Palm, Samsung, SanDisk, Sonos,
and Thomson. Our device manufacturing partners support us by including our
AudibleReady software on their devices. They may also include audio samples on
the device, insert marketing brochures in device boxes, provide
point-of-purchase sales support, after-market promotions, and web-based and
e-mail customer outreach. We also enter into agreements to reimburse customers a
portion of their purchase price for the devices if they enter into agreements to
subscribe to our services for a specified period. Our relationships enable us to
work with original equipment manufacturers of mobile audio devices, original
design manufacturers, and integrated circuit vendor partners to simplify and
rapidly adopt our technology for use in electronic devices with digital audio
capabilities.
 
  -4-
  Since
launching our service in 1997, over 1,633,000 customers from approximately
178 countries have purchased content from us, and hundreds of thousands more
have purchased our content at iTunes. We acquire new customers through a variety
of marketing and public relations methods, including e-mail, targeted Web
advertising, paid and natural search, word-of-mouth, marketing strategic
partnerships with device manufacturers and retailers, targeted radio
advertising, content-based public relations and other online and traditional
promotions. Beyond leveraging our first-to-market technology in the English
language, together with our joint venture partners, we launched the German
language version of the Audible service (www.audible.de) in
December 2004. We have a license and service agreement to support a French
language version of the Audible service (www.audible.fr),
which launched in the first quarter of 2005. In February 2005, we established
our wholly-owned subsidiary in the United Kingdom, known as Audible UK (www.audible.co.uk),
which began commercial operations in June 2005. During 2005, we established a
presence in Japan to support the procurement of Japanese audio content for
delivery at iTunes Japan.
 
 During
2005, we launched Audible Education, which we established to focus on the
educational market segment. Audible Education is a mobile learning service for
students, parents, educators and professionals with the mission of building
literacy, developing study skills, improving learner comprehension, and
expanding one’s knowledge through listening to downloadable digital content.
Through a strategic partnership with Pearson Education, Audible developed and
launched VangoNotes (www.vangonotes.com),
study guides tied chapter-by-chapter to top college textbooks, in the fall of
2006. Over 200 guides are now jointly marketed by us and Pearson directly to
students.
 
 We
provide new sources of revenue for publishers, writers and producers of books,
newspapers, magazines, newsletters, radio and television shows, professional
journals and business information. We not only add the utility of audio
entertainment, but of information, education and productivity to a broad array
of digital audio-enabled devices. We provide companies that distribute or
promote our service with a wide selection of digital audio content to offer to
their customers.
  Demand
for the Audible service is driven by the increasing usage of the
Internet, the growth of handheld electronic devices that have digital audio
capabilities, and the increasing number of hours commuters spend in traffic when
they cannot otherwise read. In contrast to traditional radio broadcasts or
satellite radio, the Audible service offers customers access to content of their
choice and the ability to listen to what they want, when and where they want -
whether commuting, exercising, working around the house, traveling, or simply
relaxing. Unlike traditional and online bookstores, which are subject to
physical inventory constraints and shipping delays, we provide a selection that
is readily available in a digital format that can be quickly delivered over the
Internet directly to our customers.
 
 Our
Solution
  We have
created the Audible service to give consumers the ability to download spoken
digital content of their choice and to listen to this content when and where
they want. The Audible service addresses the opportunity created by consumer
demand for audio content, the emergence of the commercial Internet and the
availability of a wide range of mobile, audio-enabled digital devices. We
created the first service and platform for secure, digital delivery of premium
spoken audio content over the Internet for playback on personal computers and
mobile devices. Our service allows customers to program their listening time
with personalized selections from a wide collection of spoken audio available at
our Web sites, including entertainment, news, education and business
information. We believe that we have assembled the largest and most diverse
collection of premium spoken audio available for download on the Internet for
playback on personal computers, handheld digital audio players, or to burn to CD
for playback on a CD player.
  We
believe that our extensive spoken audio collection and our secure delivery
system provide benefits to our customers, content providers, manufacturers of
AudibleReady handheld electronic devices and other partners that they would not
find anywhere else.
 
 Benefits
to Customers
  Unlike
the traditional methods in which customers select, organize and consume spoken
audio content, our customers can access spoken audio content of their choice and
listen when, where, and how they want - whether commuting, exercising, relaxing
or sitting at their personal computers. They can also do this at an unmatched
value.
 
  -5-
  Selection
  At our
Web sites, www.audible.com and
www.audible.co.uk,
and the Web sites of our related parties, www.audible.de and
www.audible.fr,
customers can browse and purchase from a large and diverse collection of readily
available premium spoken content. We have over 45,000 titles available for
purchase at our U.S. and UK web sites. Additionally, our related party web sites
in Germany and France have nearly 45,000 programs available for purchase
including certain titles from the U.S. or UK sites that we have worldwide rights
to distribute in a wide variety of categories.  These offerings
include timely digital spoken editions of leading newspapers and selected
periodicals and popular and special interest radio and other short form
programming, including interviews and commentaries. During 2006, we recorded an
unabridged audio version of the Iraq Commission’s report within 24 hours of its
publication. In 2007 we began to more aggressively record books that were
unavailable for listening on CD’s or tapes. We also recorded The Chopin Manuscript, an
original book written exclusively for distribution by Audible. Our collection
also contains selections that are difficult to find or may not otherwise be
readily or conveniently available to consumers elsewhere. Additionally, many of
these audiobooks and publications are available at iTunes online stores
in 22 different countries.
  Convenience
 
 Our Web
sites provide customers with one-stop shopping for their premium digital spoken
audio. Our customers can browse and sample spoken audio selections through our
easy-to-navigate Web sites. They can enroll in AudibleListener monthly or annual
membership plans, where depending on the plan, the customer may receive a
prescribed number of credits, entitling them to download content of their
choice. Our customers may choose automated delivery of timely audio content on a
subscription basis. Unlike traditional and online bookstores, which are subject
to physical inventory constraints and shipping delays, we are never “out of
stock” and we provide a service that is readily available in digital format and
can be quickly delivered over the Internet directly to our
customers.
  Listening
Experience
  Unlike
terrestrial and satellite radio, which offer limited programming and no ability
for the listener to control broadcast times, our service enables customers to
take greater control of their time and their listening experience. Customers
choose to listen to what they want, when and where they want. Additionally,
customers can choose from three different fidelity options for their listening.
Our service also allows customers to skip between selections or individual
articles or chapters within selections. Customers can pause and resume listening
where they left off and can “bookmark” multiple sections of content, rather than
be constrained by the rewind and fast forward functions of cassette tape
players.
  Mobility
  We offer
our customers a choice of listening options tailored to their lifestyle while
driving, exercising, relaxing or otherwise multitasking. Customers can listen to
their audio with an AudibleReady MP3 player or PDA, using a CD player, certain
SMDs, via an automobile jukebox or from their audio equipped desktop computer.
Customers who subscribe to a recurring title (newspaper, magazine, radio
program, etc.) can have it automatically delivered to their PC, Mac, or
wirelessly to their SMDs before they get up in the morning or leave the office
for the day.
  Value
  We
provide customers with what we believe is a strong value proposition in our
AudibleListener membership plans, where for a fixed monthly or annual fee, the
customer may download a prescribed number of audio titles of their choice.
Individual titles, at our list price, are typically priced 20% to 30% less than
the same audiobook in the cassette or CD format, and if purchased within an
AudibleListener membership plan, discounts on individual titles can be up to 70%
compared to the price of the audiobook in the cassette or CD
format.
 
 Benefits
to Business Affiliates
  We help
content creators, device manufacturers, online e-commerce companies, consumer
electronics retailers and other companies that distribute our products or
promote our service to their customers to create incremental sources of revenue
by aggregating premium audio content and providing a widely-accepted system for
digital spoken audio distribution.
 
  -6-
  Content
Creators
  We
provide a new source of revenue for publishers of newspapers, magazines,
journals, newsletters, professional publications and business information and
producers of radio or TV broadcasts by creating new demand for content that is
too timely for distribution on cassette tape or compact disc and generally too
specialized for widely-broadcast radio programs. Additionally, our electronic
delivery service offers publishers of audiobooks a new and profitable
distribution channel for their existing audiobook content.
 
 Older
publications, including archived or out-of-print content, when converted to
digital audio form, can also provide additional revenue while incurring
relatively low costs for storing and delivering electronic inventory. Our
solution has the benefit of reducing the risk of audio files being copied
without authorization by employing a system designed to limit playback of audio
files to specifically identified personal computers and digital audio
players.
  Device
Manufacturers
  Major
manufacturers of audio-enabled digital players, such as Apple, Creative Labs,
Dell, Garmin, Hewlett-Packard, Motorola, Oakley, Palm, Samsung, SanDisk, Sonos
and Thomson have agreed to support and promote the secure playback of our
content on their devices. In addition, during certain promotion periods, new
customers who agree to join an AudibleListener membership plan for a set period
of time have the option to receive Apple's iPod digital audio player. Our
service provides these manufacturers with an attractive application that takes
advantage of the audio capability of their digital audio devices, which may in
turn increase their sales. In most cases, these manufacturers receive a
percentage of the revenue generated over a specified period of time by each new
customer referred by them. Such costs are recorded in marketing
expenses.
  Companies
That Distribute Our Products or Promote Our Service
  We have
entered into marketing agreements with a number of strategic partners, including
but not limited to Amazon.com, Apple, AOL, Best Buy, Dow Jones (The Wall Street Journal), The
New York Times Company, Palm and SanDisk, to promote our content to their
customers, either directly or indirectly. We have agreed with these companies to
compensate them from sales of our content to their customers. In return, we have
access to additional distribution channels.
 
 The Audible
Service
  Our
integrated spoken audio delivery service includes five components: (1) our Web
sites, (2) our collection of digital audio content, (3) software for securing,
downloading, managing, transferring, burning and playing audio selections, (4) a
variety of AudibleReady players with proprietary technology and features that
manage the listening experience, and (5) other services.
 
 Web
sites
 
 There are
Audible-branded Web sites in the U.S., the United Kingdom, Germany and France.
Our U.S. Web site, www.audible.com,
offers a large and diverse selection of premium digital spoken content in a
secure format for download by customers. Visitors can browse, search for,
sample, purchase, subscribe to, schedule, stream and download digital audio
content. Customers can also contribute reviews and rate the content, which other
customers may use as part of their purchasing decision. One hour of spoken audio
in Audible's most popular format requires about eight megabytes of storage,
and downloads to a listener's computer in approximately ten seconds using a high
speed Internet connection. It then requires less than thirty seconds to transfer
the content from the computer to an AudibleReady player. Customers are offered
up to three different fidelity options, allowing them to trade off between
fidelity and speed of download from the Internet.
  -7-
  Digital
Audio Content
  We
currently offer digital spoken content, in four major categories:
 
 ·
              Audiobooks. We offer a
      wide selection of audiobooks, in both abridged (typically three to 10
      hours long) and unabridged (typically five to 20 hours long) versions,
      read by the authors or professional
narrators.
  ·
              Timely audio editions of print
      publications. Our service enables the timely distribution of audio
      editions of newspapers, magazines and newsletters previously available
      only in print. We offer a daily spoken digest edition ofThe New York Times and
      selected audio content fromThe Wall Street
      Journal. We also offer audio editions ofForbes, The New Yorker,
      Scientific American, Science News, Harvard Management Update,
      Harvard Health Letter, and
others.
 
 ·
              Other short form
      programming. We offer popular and special-interest public radio and
      TV programs shortly after they are originally broadcast so customers have
      the flexibility to listen to these programs when and where they want. We
      offer audio versions of broadcasts such asThis American Life,
      Marketplace, The News fromLakeWobegon, Car Talk, The Bob Edwards
      Show, Opie & Anthony,The Ricky Gervais
      ShowandCharlie
      Rose.
  ·
              Lectures, speeches,
      performances and other audio. We offer a broad selection of
      lectures, speeches, dramatic and comedic performances, educational and
      self-improvement materials, religious and spiritual content, and other
      forms of spoken content, many of which are difficult to find from any
      other source.
  We
currently have licensed Internet distribution rights to audio content from
almost 600 publishers, producers of radio and TV content and other content
creators. Our license agreements are typically for terms of one to five years,
and many provide us with exclusive Internet distribution rights. Under these
licensing arrangements, we pay the content creator a royalty from the sale of
that content creator’s contents, based on either a fixed royalty amount or a
percentage of net revenue. In some of our arrangements, we pay a guaranteed
advance against the content creator's royalty earned.
  In most
cases, we license existing audio recordings from publishers and content
creators. In other cases, such as withThe New York Times, The Wall Street
Journal, Pearson Higher Education andHarlequin, we record and
produce audio versions of the print publications. In all cases, we convert the
audio into a compressed, secure, digital format.
 
 Audible
Software
  Our
compilation of software consists of AudibleManager for downloading, managing,
scheduling and playing audio selections, Audible Download Manager for iPods and
Windows Media Player, AudibleAir for SMDs, and AudiblePlayer for Pocket PC PDAs
and devices running the Palm Operating System.
  AudibleManager
enables customers to download and listen to spoken content and transfer it to
AudibleReady players for mobile playback. AudibleManager implements Audible's
security system for ensuring that downloaded content is playable only by
authorized players and devices. AudibleManager can also be used to organize
individual selections, to specify listening preferences, to manage delivery
options for subscriptions, and to burn purchased audio to audio CDs. Selections
that exceed playback time limitations on a customer's handheld electronic device
can be listened to over successive sessions by reconnecting the player to the
customer's personal computer and initiating a synchronization command that
automatically replaces the sections that have been played with new
content.
 
 Audible
Download Manager allows a customer to download audio files directly from
Audible.com into iTunes and/or Windows Media Player without
using AudibleManager.  It also enables a customer to play Audible
content using Windows Media Player.
 
 AudibleAir
allows a customer to download spoken word files from their library to their SMD
wirelessly. It also enables listening to the spoken word file on their
SMD.
 
 AudiblePlayer
software enables users of handheld PDAs to control and customize their listening
experience, as does AudibleAir for SMDs. Unlike cassette tapes, AudibleReady
players allow fast navigation of the content through section markers and
bookmarks that can be set by the user. Users can skip between selections,
individual articles or chapters, effectively allowing them to control their
listening experience.
  -8-
  AudibleReady
Devices
 
 AudibleReady
devices are personal computers, mobile devices, SMDs or entertainment systems
that have speakers or audio output jacks and can play back content offered on
the Audible service. The AudibleManager, AudiblePlayer, and AudibleAir software
enable these devices to receive and play back Audible content and are available
for download for free from our Web site. Several device manufacturers have
bundled the AudibleManager and AudiblePlayer software with their devices. The
audio output jack of these players can work with headphones, an FM transmitter,
or a cassette adapter to enable the content to be played through a car stereo
system. Audible customers may also burn their audio to CDs for listening through
a CD player. The Apple iTunes jukebox software incorporates AudibleReady
features to enable owners of personal computers and Apple iPods to download and
listen to spoken audio from our Web site.
  A formal
set of specifications defines the technical requirements that must be met by
devices and by application software before they can be deemed AudibleReady.
These requirements define internal functions, user experience related features,
and aspects of the communication protocol between a device and the host software
used to update its digital content. These specifications are provided to our
partners when their devices and/or applications need upgrades meet the
requirements.
 We
have formed co-marketing relationships with a number of consumer electronics and
computer companies to promote AudibleReady electronic devices and our content to
consumers. The device manufacturers are generally required to promote the
Audible service through a variety of means, which may include (1) providing
audio samples, (2) displaying the AudibleReady logo on the outside of the player
packaging, (3) including our brochures inside the player packaging and (4)
referring to Audible and AudibleReady in their software, brochures and manuals.
In most cases, the device manufacturers receive a percentage of the revenue
related to the content purchased by owners of their AudibleReady devices. These
revenue sharing arrangements typically last one or more years from the date the
device owner becomes an Audible customer.
  Other
Services
  We also
provide the Audible service to over 20 public library and school library
systems.
  Competition
  The sale
and delivery of digital spoken content is competitive and rapidly
changing.
 
 Principal
competitive factors include:
 
 ·
              Price·
              Selection·
              Speed
      of delivery·
              Protection
      of intellectual property·
              Timeliness·
              Convenience·
              Functionality·
              Sound
      quality
 
 Although
we believe that we currently address these factors favorably in terms of
technology and service, we cannot be certain that we can maintain our
competitive position against current or new competitors, especially those new
competitors with longer operating histories, greater name recognition and
substantially greater financial, technical, marketing, management, service,
support and other resources.
  We
directly 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 RealPlayer or Windows Media Player, (3) Web sites that offer free
podcasts, and (4) other companies vying for consumers' time, such as satellite
radio, as well as digital music streaming, podcasting and download
services.
 
 Audiobooks
on cassette tape or compact disc have been available from a variety of sources
for a number of years. Traditional bookstores, such as Borders and Barnes &
Noble, and online bookstores, such as bn.com, offer a variety of audiobooks.
Various rental services offer low pricing for time-limited usage of physical
audiobooks on tape or CD, and libraries loan a limited selection of audiobooks.
One or more of these competitors may develop a competing electronic service for
delivering audio content. The online services soundsgood.com and e-Music.com
offer digital downloads of spoken audio. Soundsgood.com also supplies MSN Music
with spoken audio content.
  -9-
  Companies
and portal companies including AOL or Yahoo! may in the future compete directly
with us by selling premium spoken audio content for digital download.
Competition from Web sites that provide streaming audio content is intense and
is expected to increase significantly in the future. Online music services such
as eMusic, Napster, Sony Connect and Real Network's Rhapsody offer a wide
selection of streaming and downloadable music content. Other companies have
announced their intention to launch music services in the future.
  Content
providers and other media companies may choose to provide digital spoken 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.
  We also
expect competition to intensify and the number of competitors to increase
significantly in the future as technology advances, providing alternative
methods to deliver digital audio content through the Internet, satellite,
wireless data, digital radio or other means.
 
 Intellectual
Property and Proprietary Rights
 
 We rely
on a combination of patent, copyright and trademark laws, trade secrets and
confidentiality and other contractual provisions to establish and protect our
proprietary rights, each of which is important to our business. We continuously
assess whether to seek formal protection for particular innovation and
technologies. Our success depends in part on our ability to protect our
proprietary technologies.
 
 We hold
10 issued U.S. Letters patents and certain issued and pending corresponding
foreign counterparts and other pending U.S. patent applications. Our pending or
future patent applications may not be approved and the claims covered by our
applications may be limited in scope. If allowed, our patents may not be of
sufficient scope or strength, and others may independently develop similar
technologies or products. Further, patents held by third parties may prevent the
commercialization of products incorporating our technologies or third parties
may challenge or seek to narrow, invalidate or circumvent any of our pending or
future patents. We also believe that foreign patents, if obtained, and the
protection afforded by such foreign patents and foreign intellectual property
laws may be more limited than that provided under U.S. patent and intellectual
property laws.
 
 We also
rely on unpatented trade secrets and know-how and proprietary technological
innovation and expertise which are protected in part by confidentiality and
invention assignment agreements with our employees, advisors and consultants and
nondisclosure agreements with certain of our suppliers and distributors. These
agreements may be breached, we may not have adequate remedies for any breach or
our unpatented proprietary intellectual property may otherwise become known or
independently discovered by competitors. Further, the laws of certain foreign
countries may not protect our products or intellectual property rights to the
same extent as do the laws of the U.S.
 
 In
addition, we license certain technology from others, including elements of our
compression-decompression technology that we incorporate into the Audible
system. If these technologies become unavailable to us, it may become necessary
to license other technology, which may require us to redesign our system and
recode our content to a certain extent. In some instances, licenses may not be
available, either on commercially reasonable terms or at all. Whenever licenses
are granted, it cannot be determined with certainty that infringement or
invalidity claims arising from the incorporation of licensed technology and/or
resulting from these claims will not be asserted or prosecuted against
us.
 
 From time
to time, as is typical in the electronic content industry, we receive notice
from third parties alleging that our products or processes infringe the
third parties’ intellectual property rights. If we are unable to obtain a
necessary license, and one or more of our products or processes are determined
to infringe intellectual property rights of others, a court might enjoin us from
further manufacture and/or sale of the affected products. In that case, we would
need to re-engineer the affected products or processes in such a way as to avoid
the alleged infringement, which may or may not be possible. An adverse result in
litigation arising from such a claim could involve an injunction to prevent or
impede the effective delivery of our products to our customers, and/or the
assessment of a substantial monetary award for damages related to past
sales.  Any such litigation, regardless of outcome, could be expensive
and time-consuming, and adverse determinations in any such litigation could
seriously harm our business.  In addition, we may incur significant
legal costs to assert our intellectual property rights when we believe our
products or processes have been infringed by third parties.
 
 Although
we may be indemnified against claims that technology licensed by us infringes
the intellectual property rights of others, such indemnification is not always
available, and in some cases the scope of such indemnification is limited. Even
if we receive broad indemnification, third party indemnitors may not have the
financial resources to fully indemnify us in the event of infringement resulting
from our use of licensed technology, resulting in potentially substantial
exposure to us.
 
 -10-
  We
provide a limited indemnification for certain business partners against
intellectual property infringement claims related to our products and services.
In certain cases, there are limits on and exceptions to our potential liability
for indemnification relating to intellectual property infringement claims. To
date, we have not incurred any significant indemnification expenses relating to
intellectual property infringement claims. We cannot estimate the amount of
potential future payments, if any, that we might be required to make as a result
of these agreements, and accordingly, we have not accrued any amounts for our
indemnification obligations.
 
 We
believe that building awareness of the Audible®,
audible.com®, and
AudibleReady® and
AudibleListener ® brand
names is important to achieving widespread acceptance of our service by
customers, content providers, device manufacturers, and marketing and
distribution companies with which we have business relationships. To promote our
brands, we intend to continue to register, maintain, and enforce our
registrations and other rights in these marks in jurisdictions where we do
business and plan to expand. However, if we fail in our efforts to promote and
maintain our brand names, our business, operating results and financial
condition could be materially adversely affected.
 
 We also
license some of our intellectual property to others, including our
AudibleReadyâ
technology and various trademarks and copyrighted material. While we attempt to
ensure that the quality of our brand is maintained, others might take actions
that materially harm the value of either these proprietary rights or our
reputation.
  Employees
  As of
December 31, 2007, we had a total of 172 employees in the United States and
UnitedKingdom: 94
in operations, 34 in technology and development, 25 in marketing, and 19 in
general and administrative. None of our employees are members of a union and our
relationship with our employees is good.
 
 We are a
Delaware corporation that was incorporated in November 1995. Our principal
executive offices are located at a 49,600 square foot office and recording
studio facility at 1 Washington Park, Newark, New Jersey 07102. We
relocated to this space in February 2007 from a facility at 65 Willowbrook
Boulevard, Wayne, NJ 07470. Our telephone number is (973) 820-0400. Our
Internet address is www.audible.com. Our Web site is not part of this annual
report.
 
 We make
available free of charge, on or through the investor relations section of our
Web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to such reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission (“SEC”). These filings
also are available on the SEC's Web site at www.sec.gov.
 
 Recent
Developments
 
 On March
18, 2008, following the completion of a tender offer by AZBC Holdings, Inc.
(“Purchaser”), a wholly-owned subsidiary of Amazon.com, Inc. (“Amazon”),
Purchaser was merged into Audible, Inc. pursuant to an Agreement and Plan of
Merger, dated January 30, 2008.  We are now a wholly-owned subsidiary
of Amazon.
 
 Item 1A. RISK FACTORS
 
 Our
business is subject to a number of risks discussed below or appearing or
incorporated by reference in this annual report.
 
 We
have limited revenue, we have a history of losses, and we may not be profitable
in the future.
 
 We had
losses from operations of $3.5 million, $12.0 million and $3.7 million
respectively in 2005, 2006 and 2007. We can not assure you when we will become
profitable, or if we do so, whether we will maintain profitability.
 
 We are
highly dependent upon the sales of our audio content through the Apple iTunes
Store. During 2007, approximately 30% of our revenues were generated by selling
our audio content through the Apple iTunes Store. We cannot assure you
those customers visiting the iTunes Store will continue to purchase the audio
content that we provide.
  We
have previously identified material weaknesses in internal control over
financial reporting and future deficiencies may adversely affect our
operations.
 
 Section
404 of the Sarbanes-Oxley Act of 2002 requires us to report on management's
assessment of the effectiveness of our internal control over financial
reporting. Additionally, our independent registered public accounting firm is
also required to issue a report on the effective operation of our internal
control over financial reporting.
  -11-
  While we
have concluded that our internal control over financial reporting as of December
31, 2007 was effective, we cannot assure you that any of the measures we
implement to remedy future deficiencies will effectively mitigate or remediate
such deficiencies.  Additionally, ongoing compliance with Section 404
and the remediation of any future deficiencies, significant deficiencies or
material weaknesses that we or our independent registered public accounting firm
may identify will require us to incur significant cost and expend significant
time and management resources.
 
 If
too many AudibleListener members refrain from using their audio credits on
a timely basis, there will be a delay in recognizing the revenue until the
credits are either used or expire.
 
 The
AudibleListener plans implemented in late 2005 include the ability for
AudibleListener members to roll over a certain number of audio credits and
download audio later in their membership periods. To the extent AudibleListener
members roll over audio credits, the cash received from the sale of those audio
credits will be reflected as deferred revenue. As the rolled-over credits are
used to download audio or expire, the value of the credits will be recognized as
revenue. If a significant number of AudibleListeners delay in using their audio
credits, the recognition of revenue related to those audio credits will be
delayed and can adversely affect our operating results. Primarily related to the
ability of AudibleListener members to roll over their credits our deferred
revenue liability, current, increased from $13.8 million as of December 31, 2006
to $18.7 million as of December 31, 2007.
 
 If
our efforts to attract new AudibleListeners are not successful, our revenues
will be affected adversely.
 
 We must
continue to attract new AudibleListeners. In December 2005, we launched a
redesigned Web site and new AudibleListener membership plans aimed at making the
Audible service more flexible and convenient for our customers. We continue to
evaluate our membership plans and may make modifications in the future if we
believe that those modifications will be beneficial. If consumers do not
perceive our new AudibleListener plans to be of value, we may not be able to
retain our AudibleListener customers or attract additional AudibleListeners, and
as a result, our revenues will be affected adversely. The funds we spend on
marketing and promotional activities to acquire new members reflect assumptions
about how many members we can acquire and how long they will remain members. If
our actual experience falls short of our assumptions, our revenue and profit
will be materially affected.
 
 If
we experience excessive rates of churn, our revenues may decline.
 
 We must
minimize the rate of loss of existing AudibleListeners while adding new
AudibleListeners. Recently this rate has begun to increase. AudibleListeners
cancel their memberships for many reasons, including reasons related to changes
in the available time they have for listening to spoken audio, a perception that
they are not using their membership effectively, customer service issues that
are not satisfactorily resolved, or competitive service offerings in this or
other media, including the availability of free podcasts. We must continually
add new AudibleListener members, which come at a cost, to both replace members
who cancel and to grow our business beyond our current AudibleListener
membership base. If too many AudibleListener members cancel their memberships,
or if we are unable to attract new members in numbers sufficient to grow our
business, our operating results will be adversely affected. Further, if
excessive numbers of AudibleListener members cancel their memberships, we may be
required to incur significantly higher marketing expenditures than we currently
anticipate replacing those members.
  The demand
for our service is uncertain and consumers may not be willing to use the
Internet to purchase spoken audio content, which could cause our business to
grow more slowly.
 
 There can
be no assurance that our current business strategy will enable us to achieve
profitable operations. While the downloading of audio content from the Internet
as a method of distribution is gaining acceptance, growth and continued
acceptance is highly uncertain, particularly in Germany, France, and the UK. Our
success will depend in large part on more widespread consumer willingness to
purchase and download spoken audio content over the Internet. Purchasing this
content over the Internet involves changing purchasing habits, the willingness
of consumers to engage in downloads, and if consumers are not willing to
purchase and download this content over the Internet, our revenue will be
limited, and our business will be materially adversely affected. We believe that
acceptance of this method of distribution may be subject to network capacity
constraints, hardware limitations, company computer security policies, the
ability to change user habits, and the quality of the audio content delivered.
While we believe we have had some measure of success in gaining continued
acceptance of this method of distribution, including through our sales of
content at the Apple iTunes Store, there can be no assurance that this will
continue or that we will be able to gain continued acceptance in Germany,
France, or the UK. It is also possible that in certain circumstances we will be
unable to provide content requested by Apple, in which case Apple may elect to
attempt to source that content on its own.
  -12-
  Our
most significant expense, cost of content, can be significantly affected on
short notice by certain large publishers reducing our
profitability.
 
 While we
obtain content from over 600 different publishers, and the vast majority of our
financial arrangements are multi-year contracts, several large publishers
provide us rates for content that can change on a monthly
basis.  While we historically have had good relationships with our
publishers, there can be no assurance that this will continue in the future. A
sudden and dramatic increase could either cause an increase in expenses or
customer dissatisfaction if we chose to raise rates or make a certain
publishers books unavailable for purchase.
 
 We
may not be able to license or produce sufficiently compelling audio content to
attract and retain customers and grow our revenue.
 
 Our
future success depends upon our ability to accumulate and deliver premium spoken
audio content over the Internet. If we are unable to obtain licenses from the
creators and publishers of content, including foreign language 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.
Although we currently collaborate with the publishers of periodicals and other
branded print materials to convert their written material into original spoken
audio content, the majority of our content originates from producers of
audiobooks, radio broadcasts, and other forms of spoken audio content. We are
also seeking to increase the availability of foreign language content on www.audible.de and
www.audible.fr
as well as international content for these and www.audible.co.uk.
Although many of our agreements with content providers are for terms of one to
five years, our content providers may choose not to renew their agreements with
us or may terminate their agreements early if we do not fulfill our contractual
obligations. We cannot be certain that our content providers will enter into new
agreements with us on the same or similar terms as those currently in effect, or
that additional content providers will enter into agreements on terms acceptable
to us.
  If
manufacturers of electronic devices do not manufacture, make available or sell a
sufficient number of products suitable for our service, our revenue may not
grow.
 
 If
manufacturers of electronic devices do not manufacture, make available, or sell
a sufficient number of players promoted as AudibleReady, or if these players do
not achieve sufficient market acceptance, we will not be able to grow revenue,
and our business will be materially adversely affected. Manufacturers of
electronic devices have experienced delays in their delivery schedule of their
digital players due to parts shortages and other factors. Although the content
we sell can be played on personal computers, we believe that a key to our future
success is the ability to playback this content on handheld electronic devices
that have digital audio capabilities. We depend in large measure on
manufacturers, such as Apple, Creative Labs, Sandisk and Palm to develop and
sell their own products and promote them as AudibleReady.
  We
must establish, maintain and strengthen our brand names, trademarks and service
marks in order to acquire customers and generate revenue.
 
 If we
fail to promote and maintain our brand names, our business, operating results
and financial condition could be materially adversely affected. We believe that
building awareness of the “Audible,” “Audible.com” and “AudibleReady” brand
names is critical to achieving widespread acceptance of our service by
customers, content providers, device manufacturers and marketing and
distribution companies with which we have business relationships. To promote our
brands, we will need to increase our marketing expenditures and continue to
register, maintain and enforce our registrations and other rights in these marks
in the markets where we do business and plan to expand.
 
 Increasing
availability of digital audio technologies may increase competition and reduce
our revenue, market segment share and profitability.
 
 If we do
not continue to enhance our service and its capabilities and develop or adapt to
new technologies, we will not be able to compete with new and existing
distributors of spoken audio content. As a result, we may lose market segment
share and our business would be materially adversely affected. The market
segment for the Audible service is rapidly evolving and intensely competitive.
We expect competition to intensify as advances in and standardization of digital
audio distribution, download, security, management and playback technologies
reduce the cost of starting a digital audio delivery system or a service that
gathers audio content. This includes a trend toward the elimination or the
requirement that audiobooks be digitally encrypted which may increase the number
of retail competitors. To remain competitive, we must continue to license or
develop technology internally that will enhance the features of the Audible
service, our software that manages the downloading and playback of audio
content, our ability to compress audio files for downloading and storage, and
our security and playback technologies. Increased competition is likely to
result in price reductions, reduced revenues, higher customer cancellation
rates, higher content licensing costs, higher marketing costs and loss of market
segment share, any of which could materially adversely affect our financial
performance.
  -13-
  Our
industry is highly competitive and we cannot assure you that we will be able to
compete effectively.
 
 We face
competition in all aspects of our business and we cannot assure you that we will
be able to compete effectively. We compete for consumers of audio content with
other Internet-based audio distributors and distributors of audio on cassette
tape or compact disc. We compete with others for relationships with
manufacturers of electronic devices with audio playback capabilities. The
business of providing content over the Internet is experiencing rapid growth and
is characterized by rapid technological changes, changes in consumer habits and
preferences, and new and established companies entering the field. We compete
with (1) traditional and online retail stores, catalogs, clubs, and libraries
that sell, rent, or loan audiobooks on cassette tape or compact disc, such as
Audio Book Club, Borders, Barnes & Noble, and Amazon.com, (2) Web sites,
including iTunes, that offer podcasts and streaming access to spoken audio
content, (3) other companies offering services similar to ours, such as
soundsgood.com, e-Music.com, spokennetwork.com, Simply Audiobooks, and
LearningOutLoud, (4) online companies such as Google, AOL, Yahoo!, and Microsoft
Network, with the potential to offer spoken audio content. Many of these
companies have financial, technological, promotional, and other resources that
are much greater than those available to us and could use or adapt their current
technology, or could purchase technology, to provide a service directly
competitive with the Audible service.
  Capacity
constraints and failures, delays, or overloads could interrupt our service and
reduce the attractiveness of our service to existing or potential
customers.
 
 Any
capacity constraints or sustained failure or delay in using our Web site could
reduce the attractiveness of the Audible service to consumers, which would
materially adversely affect our financial performance. Our success depends on
our ability to electronically, efficiently and with few interruptions or delays
distribute spoken audio content through our Web site to a large number of
customers. Accordingly, the performance, reliability and availability of our Web
site, our transaction processing systems and our network infrastructure are
critical to our operating results. We have experienced periodic systems
interruptions including planned system maintenance, hardware and software
failures triggered by high traffic levels and network failure in the Internet
and our Internet service providers. We believe the complexities of our software
and hardware 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. Moreover, the success and the
availability of our services depends largely in part upon the continued growth
and maintenance of the Internet infrastructure, including but not limited to;
architecture, network, data capacity, protocols and security. Viruses spam and
other acts of intentional malevolence may affect not only the Internet’s speed,
reliability and availability but also its continued method of electronic
commerce, information and user engagement. If the Internet proves unstable and
cannot withstand the new threats and increased demands placed upon it, our
business, Web sites and revenues could be adversely affected.
 
 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 and insurance for errors or omissions, we
cannot assure you that the amount of coverage will be adequate to compensate us
for these losses. Security breaches might also discourage other content
providers from entering into agreements with us. We may be required to expend
substantial money and other resources to protect against the threat of security
breaches or to alleviate problems caused by these breaches.
 
 We
do not have a comprehensive disaster recovery plan and we have limited back-up
systems, and a disaster could severely damage our operations and could result in
loss of customers.
 
 If our
computer systems are damaged or interrupted by a disaster for an extended period
of time, our business, results of operations, and financial condition would be
materially adversely affected. We do not have a comprehensive disaster recovery
plan in effect and do not have fully redundant systems for the Audible service
at an alternate site. Our operations depend upon our ability to maintain and
protect our computer systems-all of which are located in our headquarters and at
a third party offsite hosting facility. Although we maintain insurance against
general business interruptions, we cannot assure you that the amount of coverage
will be adequate to compensate us for our losses.
 
  -14-
  Problems
associated with the Internet could discourage use of Internet-based services
like ours and adversely affect our business.
 
 If the
Internet 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 the continued increase in the number of consumers
who use of the Internet. There are critical issues concerning the commercial use
of the Internet which we expect to affect the development of the market for the
Audible service, including:
 
 ·
              Secure
      transmission of customer credit card numbers and other confidential
      information·
              Reliability
      and availability of Internet service providers·
              Cost
      of access to the Internet·
              Availability
      of sufficient network capacity·
              Ability
      to download audio content through computer security measures employed by
      businesses
 
 The
loss of key employees could jeopardize our growth prospects.
 
 We
currently have only two executive officers.  The loss of the services
of either of these executive officers or other key employees could materially
adversely affect our business. Our future success depends on the continued
service and performance of our senior management and other key personnel,
particularly Donald R. Katz, our Chairman and CEO. We have employment
agreements with both of our executive officers.
 
 Our
inability to hire new employees may hurt our growth prospects.
 
 The
failure to hire new personnel could damage our ability to grow and expand our
business. Our future success depends on our ability to attract, hire, and retain
highly skilled financial, technical, managerial, editorial, marketing, and
customer service personnel, and competition for these individuals is
intense.
  We
may not be able to protect our intellectual property, which could jeopardize our
competitive position.
 
 If we
fail to protect our intellectual property, we may be exposed to expensive
litigation or risk jeopardizing our competitive position. The steps we have
taken may be inadequate to protect our technology and other intellectual
property. Our competitors may learn or discover our trade secrets or may
independently develop technologies that are substantially equivalent or superior
to ours. We rely on a combination of patents, licenses, confidentiality
agreements, and other contracts to establish and protect our technology and
other intellectual property rights. We also rely on unpatented trade secrets and
know-how to maintain our competitive position. We may have to litigate to
enforce our intellectual property rights, to protect our trade secrets, or to
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and the diversion of our management
and technical resources.
  Other
companies may claim that we infringe their copyrights or patents, which could
subject us to substantial damages.
 
 If the
Audible service violates the proprietary rights of others, we may be required to
redesign our software, and 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. Furthermore,
technology development is inherently uncertain in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed with regard to similar
technologies. Any claim of infringement could cause us to incur substantial
costs defending against the claim, even if the claim is invalid, and could
distract our management from our business. A party making a claim could secure a
judgment that requires us to pay substantial damages. A judgment could also
include an injunction or other court order that could prevent us from offering
the Audible service. Any of these events could have a material adverse effect on
our business, operating results and financial condition.
  We
could be sued for content that we distribute over the Internet, which could
subject us to substantial damages.
 
 A lawsuit
based on the content we distribute could be expensive and damaging to our
business. Our service involves delivering spoken audio content to our customers.
As a distributor and publisher of content over the Internet, we may be liable
for copyright, trademark infringement, unlawful duplication, negligence,
defamation, indecency, and other claims based on the nature and content of the
materials that we publish or distribute to customers. Although we generally
require that our content providers indemnify us for liability based on their
content and we carry general liability and errors and omission insurance, the
indemnity and the insurance may not cover claims of these types or may not be
adequate to protect us from the full amount of the liability. If we are found
liable in excess of the amount of indemnity or of our insurance coverage, we
could be liable for substantial damages and our reputation and business may
suffer.
  -15-
  Future
government regulations may increase our cost of doing business on the Internet,
which could adversely affect our cost structure.
 
 Laws and
regulations applicable to the Internet, covering issues such as user privacy,
pricing and copyrights are becoming more prevalent. The adoption or modification
of laws or regulations relating to the Internet could force us to modify the
Audible service in ways that could adversely affect our business.
  We
may become subject to sales and other taxes for direct sales over the Internet,
which could affect our revenue growth.
 
 Increased
tax burden could make our service too expensive to be competitive and our
revenue may decline.
 
 We do not
currently collect sales or other similar consumer taxes for the sale of
downloadable content to residents of states other than New Jersey.  If we
establish physical presence in other states, our sales to residents of such
states may be subject to sales tax.  In addition, one or more states may
require that we collect sales taxes when engaging in online commerce with
consumers located in those states, even if we have no physical in-state
presence.  We determined in 2007 that certain foreign jurisdictions require
that companies located in the Unites States collect sales or similar taxes when
engaging in online commerce with residents of those jurisdictions. Other foreign
jurisdictions may enact similar requirements.
 
 If one or
more states or other foreign jurisdictions successfully assert that we should
collect sales or other taxes on the sale of our content to consumers located in
those states or foreign jurisdictions, which currently range from 5% to 25% of
the cost of our content, the resulting increased cost to consumers could
discourage them from purchasing our content.  This could have a
material adverse effect on our revenue.  In addition, continuous changes in
foreign tax regulations require us to ensure we are in compliance with these
obligations as they arise.  It is expensive to maintain the requisite
knowledge of taxing activities in the over 178 countries where we have
customers.  Failure to collect taxes from non-resident United States
consumers on a timely basis may necessitate that we pay these taxes from our
revenues without contribution from the consumers who made the taxable
purchase.
 
 A
variety of risks could adversely affect our international
activities.
 
 The
operation of our international activities will require significant management
attention as well as financial resources to operate in accordance with local
laws and customs. If international content publishers fail to provide us with
sufficient content, we may not be able to attract customers with the broad
selection of local content required to be successful. In addition, the concept
of digital spoken audio is not as well developed in Germany, France, and the UK
as it is in the United States. These factors may have a material adverse affect
on our financial performance.
 
 Item 1B. Unresolved Staff Comments
 
 None
 
 Item
2. Properties.
 
 In
September 2006, we entered into a lease agreement for office space in Newark,
NJ. We occupy two floors with an approximate space of 49,600 square feet. We
relocated our corporate headquarters to this space in February 2007. The
agreement expires in June 2014 and there is a one time only option to terminate
the lease agreement after June 2012 upon 12 months prior written notice to the
landlord. We believe our new facility provides us adequate space for the
foreseeable future. We had an operating lease for office space in Wayne, NJ that
was set to expire in December 2008. In September 2006, we notified the landlord
of our intentions to terminate the office lease and made a $0.1 million
cancellation payment, which are included in general and administrative expenses
in the accompanying 2006 consolidated Statement of Operations. Audible UK leases
furnished office space in London under a lease that expires in May 2008. We also lease office space in Tokyo, Japan where a
local representative assists us to secure local Japanese content. This lease
expires in June 2008.
 
 Item
3. Legal Proceedings.
 
 Various
legal actions, claims, assessments and other contingencies arising in the normal
course of business, in addition to the matters described below, are pending
against us. All of these matters are subject to many uncertainties, and it is
possible that some of these matters could be ultimately decided, resolved or
settled adversely. We record accruals for losses related to those matters which
we consider to be probable and that can be reasonably estimated. Although the
ultimate amount of liability at December 31, 2007 that may result from
those matters for which accruals have been recorded may differ, we believe that
any amounts exceeding the recorded accruals would not be material to the
consolidated financial position or results of operations.
 
 -16-
  New
Jersey Class Action
 
 Starting
on or about February 22, 2005, several class actions were filed against the
Company and two of the Company’s executives in the United States District Court
for the District of New Jersey. The plaintiffs purported to represent a class
consisting of all persons (other than the Company’s officers and directors and
their affiliates) who purchased the Company’s securities between November 2,
2004 and February 15, 2005 (the “Class Period”). The plaintiffs alleged that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated there under by failing to make
complete and accurate disclosures concerning the Company’s future plans and
prospects.  The individual defendants were also alleged to be liable under
Section 20(a) of the Exchange Act.  All of the defendants were alleged to
have sold stock at inflated prices during the Class Period.  In December
2005, the United States District Court for the District of New Jersey
consolidated the class action, appointed a group of lead plaintiffs and
appointed lead plaintiff’s counsel.  By prior agreement, the plaintiff’s
consolidated amended complaint was filed on February 14, 2006.  The
plaintiffs sought unspecified monetary damages and their reasonable costs and
expenses, including counsel fees and expert fees.  The defendants moved to
dismiss the pleading.  In March 2007, the Court granted the defendants’
motion to dismiss the plaintiffs’ consolidated amended complaint.  The
plaintiffs filed a motion for reconsideration.  In December 2007, the Court
denied the motion for reconsideration.  The time for an appeal has now
expired without any appeal being filed.
 
 In April
2005, a derivative action was filed in a New Jersey state court against the
Company, the two executives named as individual defendants in the class actions
described above, six of the Company’s outside directors, and three stockholders.
The derivative action was based on the same factual allegations as the class
actions described above and added allegations that the six outside directors
named as defendants and/or the stockholders who nominated them sold stock at
inflated prices at or about the time of the secondary offering of securities
that the Company made in November 2004. The plaintiff in this derivative action
purported to seek a recovery of the damages allegedly sustained by the Company
rather than by investors who allegedly purchased securities at inflated
prices.
 
 In May 2005, the Company learned of a second derivative action, which
was filed during April 2005 in the United States District Court for the District
of New Jersey against the Company, the two executives named as individual
defendants in the class actions described above, and all seven of the Company’s
outside directors.  The derivative action was based on the same allegations
as the class actions described above and added allegations that all of the
individual defendants were responsible for an alleged failure of internal
controls that resulted in the 45-day delay in the filing of the Company’s Form
10-K for 2004. The plaintiff in this derivative action purported to seek a
recovery of the damages allegedly sustained by the Company rather than by
investors who allegedly purchased securities at inflated
prices.
 
 The
plaintiffs in the derivative actions voluntarily agreed to stay the derivative
actions pending the outcome of the defendants’ motion to dismiss the securities
class actions described above, but the courts instead chose to dismiss the
actions without prejudice.  Now that the dismissal of the securities class
actions is final, the Company does not presently anticipate that these
derivative actions will be re-filed.
 
 IPO
Litigation
 
 In June
2001, the Company was named as a defendant in a securities class-action filed in
United States District Court for the Southern District of New York related to
its initial public offering (“IPO”) in July 1999.  The lawsuits also
named certain of the underwriters of the IPO, including Credit Suisse First
Boston Corporation, J.P. Morgan Chase & Co., Volpe Brown Whelan & Co.,
LLC, and Wit Capital Corporation, as well as officers and directors of the
Company Andrew J. Huffman, Donald R. Katz, Andrew Kaplan, Richard Brass, R.
Bradford Burnham, W. Bingham Gordon, Thomas P. Hirschfeld, Winthrop Knowlton,
and Timothy Mott, as defendants. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the Southern District of New York
(the “IPO Litigations”).  The complaints allege that the prospectus
and the registration statement for the IPO failed to disclose that the
underwriters allegedly solicited and received “excessive” commissions from
investors and that some investors in the IPO allegedly agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the
price of the Company’s stock.  An amended complaint was filed April
19, 2002.  The Company and the officers and directors identified above
were named in the suits pursuant to Section 11 of the Securities Act of 1933
(the “Securities Act”), Section 10(b) of the Exchange Act, and other related
provisions.  The complaints seek unspecified damages, attorney and
expert fees, and other unspecified litigation costs.
 
 On July
1, 2002, the underwriter defendants in the consolidated actions moved to dismiss
all of the IPO Litigations, including the action involving the Company. On July
15, 2002, the Company, along with other non-underwriter defendants in the
coordinated cases, also moved to dismiss the litigation. On February 19, 2003,
the Court ruled on the motions.  The Court granted the Company’s
motion to dismiss the claims against it under Rule 10b-5, due to the
insufficiency of the allegations against the Company.  The motions to
dismiss the claims under Section 11 of the Securities Act were denied as to
virtually all of the defendants in the consolidated cases, including the
Company.  In addition, the individual defendants in the IPO
Litigation, Donald R. Katz, Andrew P. Kaplan, Richard Brass, R. Bradford
Buroham, W. Bingham Gordon, Thomas P. Hirschfeld, Winthrop Knowlton, and Timothy
Mott signed a tolling agreement and were dismissed from the action without
prejudice on October 9, 2002.
 
 -17-
  In June
2004, the agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications.  On August 31, 2005 the court
issued a preliminary order further approving the modifications to the settlement
and certifying the settlement classes.  The court also appointed the
notice administrator for the settlement and ordered that notice of the
settlement be distributed to all settlement class members by January 15,
2006.  The settlement fairness hearing occurred on April 24, 2006, and
the court reserved decision at that time.
 
 While the
partial settlement was pending approval, the plaintiffs continued to litigate
their cases against the underwriter defendants.  The district court
directed that the litigation proceed within a number of “focus cases” rather
than in all of the 310 cases that have been consolidated.  The
Company’s case is not one of these focus cases.  On October 13, 2004,
the district court certified the focus cases as class actions.  The
underwriter defendants appealed that ruling, and on December 5, 2006, the United
States Court of Appeals for the Second Circuit reversed the district court’s
class certification decision.  On April 6, 2007, the Second Circuit
denied plaintiffs’ petition for rehearing.
 In
light of the Second Circuit’s opinion, we informed the district court that the
issuers’ settlement cannot be approved because the defined settlement class,
like the litigation class, cannot be certified. On June 25, 2007, the district
court entered an order terminating the settlement agreement.  We
cannot predict whether we will be able to renegotiate a settlement that complies
with the Second Circuit’s mandate. On August 14, 2007, the plaintiffs re-pled
their complaints against the focus cases and, on September 27, 2007, again filed
motions for class certification.  The focus case issuer and
underwriter defendants have moved for dismissal of these second amended
complaints.  The motions for class certification are being briefed.
Due to the inherent uncertainties of litigation, we cannot accurately predict
the ultimate outcome of the matter.
 
 Simmonds
Litigation
 
 On
October 9, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed
suit in the U.S. District Court for the Western District of Washington against
Credit Suisse Group and JP Morgan Chase & Co., the lead underwriters of
the Company’s initial public offering in July 1999, alleging violations of
Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p (b). 
The complaint alleges that the combined number of shares of the Company’s common
stock beneficially owned by the lead underwriters and certain unnamed officers,
directors, and principal shareholders exceeded ten percent of its outstanding
common stock from the date of the Company’s initial public offering on July 16,
1999, through at least July 15, 2000.  It further alleges that those
entities and individuals were thus subject to the reporting requirements of
Section 16(a) and the short-swing trading prohibition of Section 16(b), and
failed to comply with those provisions.  The complaint seeks to recover
from the lead underwriters any “short-swing profits” obtained by them in
violation of Section 16(b).  We were named as a nominal defendant in the
action, but have no liability for the asserted claims.  None of our
directors or officers are named as defendants in this action.  On February
25, 2008, Ms. Simmonds filed an Amended Complaint asserting substantially
similar claims as those set forth in the initial complaint.  We have waived
service and are in the process of considering what, if any, action to take in
response to this litigation.  We believe that the outcome of this
litigation will not have a material adverse impact on our consolidated financial
position and results of operations.
 
 Digital
Reg
 
 On
October 5, 2007, Digital Reg of Texas, LLC, a patent holding company, filed a
complaint in the U.S. District Court for the Eastern District of Texas, alleging
that the Company, among numerous other defendants, infringes a patent
purportedly relating to the Company’s Digital Rights Management
technology.  The Company intends to defend against the claim
vigorously, but at this time is unable to predict the outcome of the suit or
reasonably estimate any possible loss.
 
 Merger
Litigation
 
 On
February 20, 2008, two individuals who allege they are stockholders of Audible
commenced an action in the Superior Court of New Jersey, Equity Division, Essex
County against the Company, six of Audible’s seven directors, Amazon and an
affiliate of Amazon.  The case is captioned Leah Solomon, et al. v.
Donald R. Katz, et al.  The plaintiffs seek to represent a class
consisting of all of Audible’s stockholders other than the
defendants.  The plaintiffs allege that $11.50 per share was an
inadequate price for Audible and that Audible’s directors breached their
fiduciary duties by agreeing to sell Audible to Amazon at that price and by
pursuing a defective sales process.  The plaintiffs allege that the
Merger Agreement contained provisions which inappropriately limited the
possibility that another potential buyer would make a superior
bid.  The plaintiffs allege that Amazon and its affiliate aided and
abetted the breaches of fiduciary by Audible’s directors.  Finally,
the plaintiffs allege that the disclosures concerning the proposed transaction
that were made by Audible in the Schedule 14D-9 were incomplete or
inaccurate.  The plaintiffs sought to enjoin consummation of the
proposed transaction or if consummated, to rescind it or to obtain an award of
damages equivalent to rescission.  On February 29, 2008, the
defendants entered into a memorandum of understanding with the plaintiffs
pursuant to which Audible made the additional disclosures in their filings with
the SEC related to the acquisition and the parties will ask the court to approve
a settlement binding on the entire class pursuant to which the plaintiffs'
claims will be dismissed with prejudice, the defendants will receive a general
release, and the plaintiffs' counsel will be awarded attorneys'
fees.
 
 -18-
  Item
4. Submission of Matters to a Vote of Security Holders.
 
 None
 
 Part
II
  Item
5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
 
 Our
common stock was traded on the The NASDAQ Stock Market LLC under the symbol
"ADBL" from our public offering on July 16, 1999, through August 6, 2002, at
which time we moved to the NASDAQ Small Cap Market. On February 18, 2003, our
stock was delisted from the NASDAQ Small Cap Market and began trading on the
Over-the-Counter Market (OTCBB) under the symbol "ADBLD". On July 1, 2004, our
stock was relisted on the NASDAQ Small Cap Market under the symbol “ADBL”, and
on November 16, 2004, returned to trading on The NASDAQ Stock Market LLC. On
March 18, 2008, our common stock ceased to be traded on the NASDAQ Global Market
in connection with the closing of our merger with a wholly-owned subsidiary of
Amazon.com, Inc.  Prior to July 16, 1999, there was no established
public trading market for any of our securities.
 
 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 Stock Market
LLC.
  High
              
              
              Low2006First
      Quarter
              
              $
              13.08
              
              
              $
              9.23Second
      Quarter
              
              $
              11.76
              
              
              $
              8.52Third
      Quarter
              
              $
              9.18
              
              
              $
              6.93Fourth
      Quarter
              
              $
              8.49
              
              
              $
              7.102007First
      Quarter
              
              $
              11.24
              
              
              $
              7.04Second
      Quarter
              
              $
              10.81
              
              
              $
              9.01Third
      Quarter
              
              $
              13.18
              
              
              $
              8.84Fourth
      Quarter
              
              $
              14.16
              
              
              $
              8.842008First
      Quarter (through March 17, 2008)
              
              $
              11.60
              
              
              $
              8.15
  On March
17, 2008, the last day our stock was publicly traded on the NASDAQ Global
Market, the last reported sale price of our common stock was $11.50 per share.
As of March 26, 2008, we had one stockholder of record of our common stock,
Amazon.
  Securities
Authorized for Issuance under Equity Plans
 
 The
following table sets forth information regarding our equity compensation plans
as of December 31, 2007:
 
 Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights (1)
              
              Weighted-average
      exercise price of outstanding options, warrants and
      rights
              
              Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in first column)
      (1)Equity
      compensation plans approved by security holders
              
              
              2,363,266
              
              $
      9.34
              
              772,606Equity
      compensation plans not approved by security holders
              
              
              —
              
              —
              
              —Total
              
              
              2,363,266
              
              $9.34
              
              772,606
 
 (1)
Represents shares of common stock issuable in connection with such equity
compensation plans.
 
 Cash
Dividends
 
 We have
never paid or declared any cash dividends on our common stock.
 
 Recent
Sales of Unregistered Securities
 
 In
October 2007, a warrant for 28,000 shares of common stock was exercised for less
than $0.1 million in cash in accordance with the terms of the warrant agreement.
The transaction was exempt under Section 4(2) of the Securities
Act.
 -19-
 Performance
Graph
 
 The following graph
shows the comparison of cumulative total return on our common stock, based on
the market price of our common stock assuming reinvestment of dividends with a
comparable return of the JP Morgan H & Q Internet 100 Index. The RDG
Internet Composite Index and the Nasdaq Stock MarketIndex, for the period beginning December 31, 2002 through
December 31, 2007.
  
 
 Item 6. Selected Financial Data
  The
selected financial data set forth below should be read in conjunction with the
consolidated financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial information appearing elsewhere in this Form 10-K. The selected
financial data set forth below as of December 31, 2006 and 2007 and for the
years ended December 31, 2005, 2006 and 2007, are derived from, and are
qualified by reference to, our audited consolidated financial statements
included elsewhere in this Form 10-K. The selected financial data set forth
below as of December 31, 2003, 2004 and 2005, and for the years ended December
31, 2003 and 2004 are derived from our audited consolidated financial statements
not included in this Form 10-K.
  -20-
  
 Year
      Ended December 31,(dollars
      in thousands, except share and per share data)Consolidated statement of
      operations data:
              
              2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007Revenue,
      net:Content
      and services revenue:Consumer
      Content
              
              $
              18,594
              
              
              $
              33,838
              
              
              $
              62,185
              
              
              $
              80,217
              
              
              $
              108,158Point
      of sales rebates
              
              
              (105
              )
              
              
              (696
              )
              
              
              (1,006
              )
              
              
              (318
              )
              
              
              (37
              )Services
              
              
              105
              
              
              
              68
              
              
              
              131
              
              
              
              111
              
              
              
              109Total
      content and services revenue
              
              
              18,594
              
              
              
              33,210
              
              
              
              61,310
              
              
              
              80,010
              
              
              
              108,230Hardware
      revenue
              
              
              666
              
              
              
              695
              
              
              
              612
              
              
              
              431
              
              
              
              310Related
      party revenue
              
              
              --
              
              
              
              362
              
              
              
              1,146
              
              
              
              1,247
              
              
              
              648Other
      revenue
              
              
              65
              
              
              
              52
              
              
              
              169
              
              
              
              344
              
              
              
              780Total
      revenue, net
              
              
              19,325
              
              
              
              34,319
              
              
              
              63,237
              
              
              
              82,032
              
              
              
              109,968Operating
      expenses:Cost
      of content and services revenue:Royalties
      and other content charges
              
              
              5,319
              
              
              
              10,650
              
              
              
              22,613
              
              
              
              33,677
              
              
              
              47,947Discount
      certificate rebates
              
              
              --
              
              
              
              1,462
              
              
              
              1,556
              
              
              
              1,328
              
              
              
              588Total
      cost of content and services revenue
              
              
              5,319
              
              
              
              12,112
              
              
              
              24,169
              
              
              
              35,005
              
              
              
              48,535Cost
      of hardware revenue
              
              
              2,085
              
              
              
              2,188
              
              
              
              2,934
              
              
              
              1,953
              
              
              
              616Cost
      of related party revenue
              
              
              --
              
              
              
              126
              
              
              
              256
              
              
              
              637
              
              
              
              476Operations
              
              
              3,843
              
              
              
              5,146
              
              
              
              9,355
              
              
              
              12,168
              
              
              
              14,887Technology
      and development
              
              
              4,785
              
              
              
              5,030
              
              
              
              8,239
              
              
              
              16,984
              
              
              
              18,324Marketing
              
              
              4,495
              
              
              
              5,097
              
              
              
              13,387
              
              
              
              15,322
              
              
              
              16,945General
      and administrative
              
              
              2,633
              
              
              
              3,539
              
              
              
              8,366
              
              
              
              12,009
              
              
              
              13,903Total
      operating expenses
              
              
              23,160
              
              
              
              33,238
              
              
              
              66,706
              
              
              
              94,078
              
              
              
              113,686(Loss)
      income from operations
              
              
              (3,835
              )
              
              
              1,081
              
              
              
              (3,469
              )
              
              
              (12,046
              )
              
              
              (3,718
              )Loss
      on equity investment
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (364
              )
              
              
              (380
              )Other
      income, net
              
              
              25
              
              
              
              221
              
              
              
              2,077
              
              
              
              2,975
              
              
              
              3,535(Loss)
      income before income taxes
              
              
              (3,810
              )
              
              
              1,302
              
              
              
              (1,392
              )
              
              
              (9,435
              )
              
              
              (563
              )Income
      tax expense
              
              
              --
              
              
              
              (1
              )
              
              
              (1
              )
              
              
              (14
              )
              
              
              (160
              )State
      income tax benefit
              
              
              250
              
              
              
              724
              
              
              
              740
              
              
              
              769
              
              
              
              3,148Net
      (loss) income
              
              
              (3,560
              )
              
              
              2,025
              
              
              
              (653
              )
              
              
              (8,680
              )
              
              
              2,425Dividends
      on preferred stock
              
              
              (5,657
              )
              
              
              (614
              )
              
              
              --
              
              
              
              --
              
              
              
              --Preferred
      stock discount
              
              
              (1,444
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Charges
      related to conversion of convertible preferred stock
              
              
              --
              
              
              
              (9,873
              )
              
              
              --
              
              
              
              --
              
              
              
              --Total
      preferred stock expense
              
              
              (7,101
              )
              
              
              (10,487
              )
              
              
              --
              
              
              
              --
              
              
              
              --Net
      (loss) income applicable to common shareholders
              
              $
              (10,661
              )
              
              $
              (8,462
              )
              
              $
              (653
              )
              
              $
              (8,680
              )
              
              $
              2,425Basic
      net (loss) income applicable to common shareholders per common
      share
              
              $
              (1.01
              )
              
              $
              (0.40
              )
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              0.10Diluted
      net (loss) income applicable to common shareholders per common
      share
              
              $
              (1.01
              )
              
              $
              (0.40
              )
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              0.10Basic
      weighted average common shares outstanding
              
              
              10,506,704
              
              
              
              20,912,997
              (1)
              
              
              24,195,771
              
              
              
              24,371,844
              
              
              
              24,311,667Diluted weighted
      average common shares outstanding
              
              
              10,506,704
              
              
              
              20,912,997
              (1)
              
              
              24,195,771
              
              
              
              24,371,844
              
              
              
              24,801,490
 
 (1)
Reflects the sale of stock from a secondary public offering and the conversion
of preferred stock in 2004.
 
 -21-
 As
      of December 31,
                (dollars
      in thousands)2003
              
              
              2004
              
              
              2005
              
              
              2006
              
              
              2007Consolidated
      balance sheet data:Cash
      and cash equivalents
              
              $
              9,075
              
              
              $
              13,296
              
              
              $
              11,549
              
              
              $
              14,925
              
              
              $
              72,384Short-term
      investments
              
              $
              --
              
              
              $
              48,386
              
              
              $
              55,616
              
              
              $
              51,295
              
              
              $
              8,453Total
      assets
              
              $
              10,781
              
              
              $
              64,774
              
              
              $
              80,665
              
              
              $
              82,776
              
              
              $
              100,000Non
      current liabilities
              
              $
              59
              
              
              $
              38
              
              
              $
              287
              
              
              $
              865
              
              
              $
              2,280Total
      stockholders' equity
              
              $
              6,104
              
              
              $
              57,091
              (2)
              
              $
              58,395
              
              
              $
              50,466
              
              
              $
              57,696
 
 (2) Reflects the sale of stock from a secondary public offering and
the conversion of preferred stock in 2004.
 
 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 consolidated financial
statements and related notes thereto, and other financial information included
elsewhere in this report on Form 10-K.
  This
Annual Report on Form 10-K contains forward-looking statements and information
relating to our Company. We generally identify forward-looking statements using
words like “believe,” “intend,” “will,” “expect,” “may,” “should,” “plan,”
“project,” “contemplate,” “anticipate,” “seek” or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual results may differ significantly from the
results discussed in these forward-looking statements.
 
 Overview
 
 Our
Business
 
 Our goal
is to be the preeminent supplier of spoken-word digital audio on the
Internet. At our Web sites, our customers can select, purchase and download
spoken audio of their choice from over 45,000 titles available for purchase at
our U.S. and UK web sites. Additionally, our related party web sites in Germany
and France have nearly 45,000 programs available for purchase including certain
titles from the U.S. or UK sites that we have worldwide rights to distribute.
Our AudibleListener membership plans provide our customers a wide variety of
monthly and annual membership options, depending upon their listening
preferences. Customers can access our content at our Web sites, www.audible.com
(United States) and www.audible.co.uk
(United Kingdom), or at our related parties Web sites, www.audible.de
(Germany) and www.audible.fr
(France), or at Amazon.com and at the Apple iTunes store.
 
 Key
Business Metrics
 
 For 2007,
we generated total net revenue of $110.0 million and produced net income of $2.4
million. For 2006, we generated total revenue, net of $82.0 million and incurred
a net loss of $8.7 million.
 
 As of
December 31, 2007 we had total AudibleListeners of approximately 457,000 as
compared to approximately 381,000 as of December 31, 2006, an increase of
20%. During 2007, we acquired approximately 261,000 new AudibleListeners, a
decrease of 8% from approximately 285,000 newly acquired in 2006. However, 94%
of new AudibleListener members acquired in 2007 were Gold or Platinum recurring
revenue customers compared to 52% acquired in 2006. 6% of new AudibleListener
members in 2007 and 48% in 2006 were basic AudibleListener or “Value” Plan
members.
 
 As of
December 31, 2006 we had total AudibleListeners of approximately 381,000 as
compared to approximately 245,000 as of December 31, 2005, an increase of 55.5%.
During 2006, we acquired approximately 285,000 new AudibleListeners, an increase
of 25%, from approximately 228,000 acquired in 2005. Total AudibleListeners at
December 31, 2006 included 142,000 basic AudibleListener Plan
members
 
 During
2007, we chose to focus on Gold/Platinum members which have to pay a minimum of
$149.50 annually for our products and services, compared to just $9.95 annually
for the Value Plan. Since we ceased allowing new members early in 2007, we have
experienced a decline in the number of Value plan members. Value Plan members
totaled 133,000 as of December 31, 3007, a decrease from 142,000 as of December
31, 2006.
 
  -22-
  On a quarterly basis, we calculate
monthly churn as the number of member cancellations in the period divided by the
sum of AudibleListener members at the beginning of the period plus gross member
additions, divided by three months.
 
 The
following table sets forth the average monthly churn in AudibleListener Members
in 2006 and 2007:
 
 2006
              
              
              
              2007First
      Quarter
              
              
              4.8
              %
              
              
              3.0
              %Second
      Quarter
              
              
              3.5
              %
              
              
              3.0
              %Third
      Quarter
              
              
              3.0
              %
              
              
              3.3
              %Fourth
      Quarter
              
              
              2.6
              %
              
              
              3.5
              %
 
 Due in
part to the change in strategy our churn rate increased in 2007. Churn, a
measure of AudibleListener member cancellation, was 3.5% for the three months
ended December 31, 2007, an increase from 2.6% for the three months ended
December 31, 2006. The principal reason for the increase in churn during 2007
was a greater number of Value plan members who elected not renew their annual
subscription plan on their anniversary date or who we were unable to contact to
obtain permission for renewal.
 
 Results
of Operations
 
 The
following table sets forth certain financial data, as a percentage of total
revenue during 2005, 2006, and 2007.
  Year
      Ended December 31,2005
                  
                  
                  2006
                  
                  
                  2007Revenue,
      net:Consumer
      content
                  
                  
                  98.3
                  %
                  
                  
                  97.8
                  %
                  
                  
                  98.4
                  %Point
      of sale rebates
                  
                  
                  (1.6
                  )
      %
                  
                  
                  (0.4
                  )
      %
                  
                  
                  (0.1
                  )
      %Services
                  
                  
                  0.2
                  %
                  
                  
                  0.1
                  %
                  
                  
                  0.1
                  %Total
      content and services revenue
                  
                  
                  96.9
                  %
                  
                  
                  97.5
                  %
                  
                  
                  98.4
                  %Hardware
      revenue
                  
                  
                  1.0
                  %
                  
                  
                  0.5
                  %
                  
                  
                  0.3
                  %Related
      party revenue
                  
                  
                  1.8
                  %
                  
                  
                  1.5
                  %
                  
                  
                  0.6
                  %Other
      revenue
                  
                  
                  0.3
                  %
                  
                  
                  0.5
                  %
                  
                  
                  0.7
                  %Total
      revenue, net
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Operating
      expenses:Royalties
      and other content charges
                  
                  
                  35.8
                  %
                  
                  
                  41.1
                  %
                  
                  
                  43.6
                  %Discount
      certificate rebates
                  
                  
                  2.5
                  %
                  
                  
                  1.6
                  %
                  
                  
                  0.5
                  %Total
      cost of content and services revenue
                  
                  
                  38.3
                  %
                  
                  
                  42.7
                  %
                  
                  
                  44.1
                  %Cost
      of hardware revenue
                  
                  
                  4.6
                  %
                  
                  
                  2.4
                  %
                  
                  
                  0.6
                  %Cost
      of related party revenue
                  
                  
                  0.4
                  %
                  
                  
                  0.8
                  %
                  
                  
                  0.4
                  %Operations
                  
                  
                  14.8
                  %
                  
                  
                  14.8
                  %
                  
                  
                  13.5
                  %Technology
      and development
                  
                  
                  13.0
                  %
                  
                  
                  20.7
                  %
                  
                  
                  16.7
                  %Marketing
                  
                  
                  21.2
                  %
                  
                  
                  18.7
                  %
                  
                  
                  15.4
                  %General
      and administrative
                  
                  
                  13.2
                  %
                  
                  
                  14.6
                  %
                  
                  
                  12.7
                  %Total
      operating expenses
                  
                  
                  105.5
                  %
                  
                  
                  114.7
                  %
                  
                  
                  103.4
                  %Loss
      from operations
                  
                  
                  (5.5
                  )
      %
                  
                  
                  (14.7
                  )
      %
                  
                  
                  (3.4
                  )
      %Loss
      on equity investment
                  
                  
                  --
                  
                  
                  
                  (0.4
                  )
      %
                  
                  
                  (0.4
                  )
      %Other
      income, net
                  
                  
                  3.3
                  %
                  
                  
                  3.6
                  %
                  
                  
                  3.2
                  %Loss
      before income taxes
                  
                  
                  (2.2
                  )
      %
                  
                  
                  (11.5
                  )
      %
                  
                  
                  (0.6
                  )
      %Income
      tax expense
                  
                  
                  --
                  
                  
                  
                  --
                  
                  
                  
                  (0.2
                  )State
      income tax benefit
                  
                  
                  1.2
                  %
                  
                  
                  0.9
                  %
                  
                  
                  2.9
                  %Net
      (loss) income
                  
                  
                  (1.0
                  )
      %
                  
                  
                  (10.6
                  )
      %
                  
                  
                  2.1
                  %
  -23-
  Total
Content and Services Revenue
  The
following is our content and services revenue for the last three years (dollars
in thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              61,310
              
              
              $
              80,010
              
              
              $
              108,230
              
              
              $
              18,700
              
              
              $
              28,220
              
              
              
              30.5
              %
              
              
              35.3
              %
  Content and services revenue
consists of AudibleListener membership revenue, revenue from single (a la carte)
title sales, revenue from subscriptions, revenue from sales at the Apple iTunes
Store and library revenue. We deduct the cost of point of sale rebates from
content and services revenue. Content and services revenue grew due to an
increase in sales at Apple iTunes Store, as well as growth in our more
valuable AudibleListener memberships and a la carte sales. AudibleListener
membership growth was driven mainly through online marketing channels,
specifically promotions of the new membership programs introduced in December
2005.
 
 Year-end
AudibleListener membership grew from approximately 245,000 at December 31, 2005,
to 381,000 at December 31, 2006 and 457,000 at December 31, 2007. A higher
percentage of our members were more valuable Gold/Platinum members at December
31, 2007 which was responsible for growth in our Audible.com
revenue.
 
 Approximately
$9.5 million, $19.5 million, and $32.8 million of our content and services
revenue is derived from sales of Audible content at the Apple iTunes Store, in
2005, 2006, and 2007, respectively. Our customer count and AudibleListener
membership count excludes customers that purchase Audible content directly from
the Apple iTunes Store. As we continue to acquire new AudibleListener members
who may choose to rollover their audio credits, our ability to recognize revenue
will depend upon audio credit usage patterns of individual
members.  This will result in an increase in deferred revenue and may
result in a decrease or slower growth in our revenue as compared to prior
periods.
  Hardware
Revenue
  The
following is our hardware revenue for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              612
              
              
              $
              431
              
              
              $
              310
              
              
              $
              (181
              )
              
              $
              (121
              )
              
              
              (29.6
              )%
              
              
              (28.1
              )%
 
 Hardware revenue consists of
revenue derived primarily from the shipping and handling charge to customers on
devices that Audible provides for free to AudibleListeners who commit to an
AudibleListener membership. Under EITF No. 00-21,Revenue Arrangements with Multiple
Deliverables, with these multiple-element arrangements (membership plus
device), we recognize only shipping and handling fees as revenue for the
delivery of hardware because all other consideration paid by the customer is
contingent upon delivery of the content. Also included are separate sales of
digital audio players to consumers and libraries. Revenue is recognized
upon shipment, assuming all other criteria are met.
 
 Hardware
revenue decreased from 2005 to 2006 and from 2006 to 2007 primarily due to
a reduction in devices shipped during the periods and a de-emphasis of hardware
as a means of acquiring new members. We anticipate that hardware revenue will
continue to decline during 2008 for these same reasons.
 
  -24-
  Related
Party Revenue
  The
following is our related party revenue for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              1,146
              
              
              $
              1,247
              
              
              $
              648
              
              
              $
              101
              
              
              $
              (599
              )
              
              
              8.8
              %
              
              
              (48.0
              )%
 
 Related party revenue
consists of revenue recognized in connection with our agreements with France
Loisirs and Audible Germany, which were entered into in September 2004. The
agreement with France Loisirs called for an initial 24-month
term which was mutually extended through March 2010. Related party revenue for
2005, 2006 and 2007, included $0.5 million, $0.4 million and $0.1 million,
respectively, in fees earned from our agreement with France Loisirs. This
represents the straight-line recognition of $1.0 million in fees we are entitled
to receive pursuant to the arrangement, which was being recognized over the
initial 24-month term of the original agreement through September 14, 2006, as
well as $0.1 million, $0.2 million and $0.1 million, respectively, in billings
to France Loisirs for certain consulting services and reimbursement of related
incremental costs.
 
 Related party revenue for 2005, 2006
and 2007, also included $0.4 million, $0.4 million and $0.1 million,
respectively, in fees earned under our agreement with Audible Germany, as well
as $0.1 million, $0.4 million and $0.4 million, respectively, in billings to
Audible Germany for certain consulting services and reimbursement of related
incremental costs incurred by us in connection with our license and services
agreement. Revenues in
this category are unlikely to change significantly in 2008.
 
 Other
Revenue
  The
following is our other revenue for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              169
              
              
              $
              344
              
              
              $
              780
              
              
              $
              175
              
              
              $
              436
              
              
              
              103.6
              %
              
              
              126.7
              %
  Other revenue in 2005
and 2006 and 2007 primarily included $0.1 million, $0.3 million and $0.5
million, respectively of revenue earned under a product development agreement
with a publishing partner, which commenced in May 2005.  The fees are
being amortized on a straight-line basis as fees are billed over a 58 month
period beginning in the month we commenced production of audio (July 2005)
through the expiration of the agreement. Other revenue in the 2007 period also
included $0.3 million in revenue share earned in connection with our agreement
with Apple.
 
 As of
December 31, 2007 we billed the publisher $1.7 million, of which $1.6 million
had been received as of December 31, 2007, in connection with this agreement. As
of December 31, 2006, we billed the publisher $1.2 million, of which $0.9
million had been received as of December 31, 2006. As of December 31, 2005, we
billed the publisher $0.5 million, of which $0.5 million had been received as of
December 31, 2005.
 
  -25-
  Cost
of Content and Services Revenue
  The
following is our cost of content and services revenue for the last three years
(dollars in thousands):
 
 Cost of Content and
    Services:
              
              Year
      Ended December 31,
              
              As
      a Percentage of Total Content and Services Revenue2005
              
              2006
              
              2007
              
              2005
              
              2006
              
              2007Royalties
      and other content charges
              
              
              $
              22,613
              
              
              $
              33,677
              
              
              $
              47,947
              
              
              
              36.9
              %
              
              
              42.1
              %
              
              
              44.3
              %Discount
      certificate rebates
              
              
              
              1,556
              
              
              
              1,328
              
              
              
              588
              
              
              
              2.5
              %
              
              
              1.7
              %
              
              
              0.5
              %Total
      cost of content and services revenue
              
              
              $
              24,169
              
              
              $
              35,005
              
              
              $
              48,535
              
              
              
              39.4
              %
              
              
              43.8
              %
              
              
              44.8
              %
 
 Cost of content and services
revenue consists primarily of royalties incurred, discount certificate
rebates, and the amortization of publisher royalty advances. Discount
certificate rebates, introduced in 2004, are electronic discount certificates or
gift cards given to certain AudibleListeners who commit to joining an
AudibleListener plan for twelve months. AudibleListener customers use these when
purchasing an AudibleReady digital audio player from a third-party
retailer.
 
 Royalties
and other content charges as a percentage of total content and services revenue
increased in 2005, 2006 and 2007 to 36.9%, 42.1% and 44.3% respectively. This
increase was primarily due to the increasing percentage of revenue from sales at
the Apple iTunes Store, which yields a higher royalty cost as a percentage of
revenue, the impact of higher royalty rates from certain publishers, the impact
of our new Gold and Platinum membership plans, in which, royalties are incurred
on revenue that may be deferred if the straight-line revenue is less than the
proportional performance revenue, and the impact of the 30% a la carte discount
offered under our new basic membership plan.
 
 Royalties
and other content charges as a percentage of total content and services revenue
will continue to increase if sales at Apple iTunes represent a larger share of
future total revenue and/or content providers increase rates and we do not
change our billing fees.
 
 Cost
of Hardware Revenue
  The
following is our cost of hardware revenue for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of
                Hardware
      Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2005
              
              2006
              
              2007$
              2,934
              
              
              $
              1,953
              
              
              $
              616
              
              
              $
              (981
              )
              
              $
              (1,337
              )
              
              
              479.4
              %
              
              
              453.1
              %
              
              
              198.7
              %
 
 Cost of hardware revenue
consists of the cost of digital audio players that are given away or sold to
customers.
  In the
2005 period, we changed the model of the digital audio player we offered to new
AudibleListener members to an Apple iPod. The Apple iPod was more expensive than
the device we previously provided so the Company made a strategic change and
began to phase out using this method to acquire new members.
 
 The cost
of hardware revenue decreased in 2005 when compared to 2006 as well as from 2006
to 2007. The decrease in the 2007 period was primarily due to a reduction in the
number of digital audio players given away to customers.
 
  -26-
  Cost
of Related Party Revenue
  The
following is our cost of related party revenue for the last three years (dollars
in thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of
                Related
      Party Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2005
              
              2006
              
              2007$
              256
              
              
              $
              637
              
              
              $
              476
              
              
              $
              381
              
              
              $
              (161
              )
              
              
              22.3
              %
              
              
              51.1
              %
              
              
              73.5
              %
 
 Cost of Related Party Revenue
consists of costs we have incurred in connection with our agreements with France
Loisirs and Audible Germany, which were entered into in September
2004.
 
 Cost of
related party revenue for 2005, 2006 and 2007 included $0.1 million, $0.2
million and $0.1 million, respectively, for France Loisirs, and $0.1 million,
$0.4 million and $0.5 million, respectively, for Audible Germany. These costs
primarily consisted of payroll costs related to services performed for France
Loisirs and Audible Germany by certain employees of our technology, development,
and audio departments.
 
 Operations
  The
following is our operations expense for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of Total Content and Services Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2005
              
              2006
              
              2007$
              9,355
              
              
              $
              12,168
              
              
              $
              14,887
              
              
              $
              2,813
              
              
              $
              2,719
              
              
              
              15.3
              %
              
              
              15.2
              %
              
              
              13.8
              %
 
 Operations expense consists
of payroll and related expenses for content acquisition, education, editorial,
audio recording and conversion, programming, customer service and credit card
fees. Related expenses include outside consultants and professional fees, credit
card processing fees, and audio recording fees.
 
 Operations
expense increased in 2007 versus 2006 primarily due to $2.3 million in higher
personnel expenses, including incentive compensation, and $0.4 million in higher
credit card fees due to an increase in volume and dollar value
processed.
 
 Operations
expense increased in 2006 versus 2005 primarily due to $1.6 million in higher
personnel expenses, $0.5 million in higher outside service expenses, and $0.3
million in higher credit card fees.
 
 These
increases were primarily related to the increased scale of our business
resulting in a greater number of customers and transactions. Many of these
higher costs were directed at improving the quality of customer service as
well.
 
 Share-based
compensation expense related to the adoption of Statement of Financial
Accounting Standard No. 123R, Share-Based Payment (“SFAS
No. 123R”) on January 1, 2006, which is included in personnel expense, amounted
to $1.1 million in 2007, $1.1 million in 2006, and $0.2 million in
2005.
 
  -27-
  Technology
and Development
  The
following is our technology and development expense for the last three years
(dollars in thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of Total Content and Services Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2005
              
              2006
              
              2007$
              8,239
              
              
              $
              16,984
              
              
              $
              18,324
              
              
              $
              8,745
              
              
              $
              1,340
              
              
              
              13.4
              %
              
              
              21.2
              %
              
              
              16.9
              %
 
 Technology and development
expense consists of payroll and related expenses for information technology,
systems and telecommunications infrastructure, as well as technology licensing
fees.
 
 Technology
and development expense increased in 2007 versus 2006 primarily due to $1.3
million in higher personnel expenses, including incentive
compensation.
 
 The
increase in technology and development expense from 2005 to 2006 was primarily
due to increases of $3.6 million in depreciation expense, $2.5 million in
outside services expenses, $1.2 million in maintenance and repair
costs, $1.0 million in personnel expenses, $0.2 million in Web site hosting
fees, and a $0.1 million software impairment charge.
 
 Many of
these increased costs were related to enhancing the capacity and performance of
our Web site, and upgrades to our internal systems and
infrastructure.
 
 Share-based
compensation expense related to the adoption of SFAS No. 123R on January 1,
2006, which is included in personnel expense, amounted to $1.1 million in
2007, $1.0 million in 2006, and $0.1 million in 2005.
 
 Marketing
  The
following is our marketing expense for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of Total Content and Services Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2005
              
              2006
              
              2007$
              13,387
              
              
              $
              15,322
              
              
              $
              16,945
              
              
              $
              1,935
              
              
              $
              1,623
              
              
              
              21.8
              %
              
              
              19.2
              %
              
              
              15.7
              %
 
 Marketing expense consists of
payroll and related expenses for personnel in marketing and business
development, as well as advertising expenditures and other promotional
activities. Revenue sharing and bounty payments which we make to our partners,
and shipping and handling costs associated with selling digital devices are also
included in marketing expense.
 
 Marketing
expense increased in 2007 versus 2006 primarily due to $0.8 million in higher
personnel costs, including incentive compensation, $0.4 million in higher
outside services, and $0.4 million in higher advertising and promotional
expenses.
 
 Marketing
expense was higher in 2006 than 2005 primarily due to increases of $1.4 million
in personnel costs, $0.5 million in advertising and promotional expenses and
$0.2 million in outside services. This was partially offset by a decrease of
$0.3 million in hardware shipping costs. The increase in advertising and
promotional was directed toward marketing campaigns and new promotions to
increase members as we added approximately 285,000 AudibleListener plan
members.
 
 The
increased personnel costs were partially a result of the share-based
compensation expense related to the adoption of SFAS No. 123R on January 1,
2006, which amounted to $1.2 million in 2007, $1.1 million in 2006, and
$0.1 million in 2005.
 
  -28-
  General
and Administrative
  The
following is our general and administrative expense for the last three years
(dollars in thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              
              As
      a Percentage of Total Content and Services Revenue2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              
              2004
              
              2005
              
              2006$
              8,366
              
              
              $
              12,009
              
              
              $
              13,903
              
              
              $
              3,643
              
              
              $
              1,894
              
              
              
              13.6
              %
              
              
              15.0
              %
              
              
              12.8
              %
 
 General and administrative
expense consists primarily of payroll and related expenses for executive,
finance and administrative personnel. Also included are legal and audit fees,
public company expenses and other corporate expenses.
 
 General
and administrative expense increased in 2007 versus 2006 primarily due to $1.6
million in higher personnel expenses, including incentive compensation and $0.2
in higher depreciation expense related to our move to our new offices in
February 2007.
 
 The
increase in general and administrative expense in 2006 was primarily due to $3.2
million in personnel, $0.3 million in audit and related fees, which included
fees related to Sarbanes-Oxley compliance activities, $0.3 million in
depreciation primarily related to the accelerated depreciation of certain items
related to the corporate office relocation, $0.3 million in occupancy expenses
primarily related to an expense for amortizing rental expenses for the entire
contract over the “rent holiday” period of the new corporate office and $0.1
million in employee recruiting expenses. These increases were partially offset
by decreases in legal fees of $0.5 million, international operations expenses of
$0.2 million and other professional fees of $0.2 million.
 
 The
increased personnel expenses were partially a result of share-based compensation
expense related to the adoption of SFAS No. 123R on January 1, 2006 which
is included in personnel expense, amounted to $2.8 million in 2007,
$2.7 million in 2006, and $0.6 million in 2005.
 
 Loss
on Equity Investment
  The
following is our loss on equity investment for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              --
              
              
              $
              364
              
              
              $
              380
              
              
              $
              364
              
              
              $
              16
              
              
              
              --
              
              
              
              4.4
              %
  Loss on equity investment
consists of the equity method losses related to our investment in Audible
Germany.
 
 The $0.4
million loss on equity investment recording in 2007 includes $0.3 million loss
on a pro-rata basis Audible’s share of loss on its investment made in August
2007 in Audible Germany under the equity method, and $0.1 million when Audible
agreed to contribute as additional non-cash equity investment in Audible Germany
amounts owed to it by Audible Germany.
 
 The $0.4
million loss recorded in 2006 respectively, was recorded when Audible agreed to
contribute as additional equity investment in Audible Germany amounts owed to it
by Audible Germany. The investment was written down to zero as we recorded our
share of current losses up to the amount of our investment.
 
 For the
year ended December 31, 2005 there were no equity losses to record, as we had
not funded any losses or made any monetary contributions.
 
 We
currently have an investment balance of $0.7 million in our German joint
venture. We do not expect the German joint venture to generate income in
2008.
 
  -29-
  Other
Income, net
  The
following is our other income, net for the last three years (dollars in
thousands):
 
 Year
      Ended December 31,
              
              Dollar
      Change
              
              Percentage
      Change2005
              
              2006
              
              2007
              
              2006
      vs. 2005
              
              2007
      vs. 2006
              
              2006
      vs. 2005
              
              2007
      vs. 2006$
              2,077
              
              
              $
              2,975
              
              
              $
              3,535
              
              
              $
              898
              
              
              $
              560
              
              
              
              43.2
              %
              
              
              18.8
              %
 
 Other Income, net consists of
interest income and interest expense. The increase in other income, net during
2006 versus 2005, and 2007 versus 2006, was mainly due to an increase in
interest earned on the investment of funds in short-term investments, which
consisted of governmental agency notes and mortgage-backed securities. We began
to make these investments in November 2004, following the completion of a
secondary offering of our common stock.
 
 Critical
Accounting Policies
 
 The
Securities and Exchange Commission defines “critical accounting policies” as
those accounting policies that require application of management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Based on this definition, we have identified the
critical accounting policies and judgments addressed below. We have other
significant accounting policies, which involve the use of estimates, judgments,
and assumptions that are significant to understanding our results. For
additional information, see Note 2,Summary of Significant Accounting
Policies, of our consolidated financial statements. Although we believe
that our estimates, judgments and assumptions are reasonable, they are based
upon information presently available. Actual results may differ significantly
from these estimates under different assumptions, judgments or
conditions.
  Our
critical accounting policies are as follows:
  Revenue
Recognition
  We derive
our revenue from four main categories:
 ·
              Content
      and services revenue, which includes consumer content and corporate
      services;·
              Hardware
      revenue;·
              Related
      party revenue; and·
              Other
      revenue.
  Content and
Services
 
 Consumer
content revenue consists primarily of content sales made from our Web sites and
content sold through our agreement with the Apple iTunes Store. At our Web site,
customers purchase content either through an AudibleListener membership plan or
on an a la carte basis. When purchased on an a la carte basis, we recognize
revenue from the sale of individual content titles in the period when the
content is purchased and delivered. We generally recognize revenue from the sale
of content subscriptions pro rata over the term of the subscription
period.
 
 In July
2006, we entered into a global master agreement with Apple Computer, Inc. that
replaced the principal agreements we entered into with Apple during 2002 and
2003. We continue to recognize revenue from audio book sales made at the
Apple iTunes Store in the period when the content is purchased
and delivered. The new agreement provides that the revenue is
formula-driven, based upon the selling price on the iTunes Store and the content
cost. Under the old agreements, the revenue was a fixed price, based upon a
percentage of either the manufacturer’s suggested retail price or amount the
item was sold for on the Audible service. This change in payment structure
resulted in a change in the manner in which we calculate revenue under the new
agreement. The new revenue formula was implemented January 1, 2007.
  Our
“legacy” AudibleListener monthly membership plans generally provide customers
two audio credits for a fixed monthly fee. Customers may use these audio credits
to select content of their choice from our Web site. “Legacy” AudibleListener
audio credits provided under a monthly membership program have a life of 30
days, after which they expire. We recognize revenue from the sale of legacy
AudibleListener memberships ratably over the AudibleListener's monthly
membership period. This results in approximately 50% of the AudibleListener
membership fees received during each calendar month being deferred at month end
and recognized as content revenue in the following month.
   -30-
  In
December 2005, we introduced new AudibleListener monthly and annual membership
plans, designed to provide our customers more flexibility in using their audio
credits. Depending upon the AudibleListener membership plan, customers can
receive and “bank” or delay using up to a maximum number of audio credits,
depending on the membership plan. The banking feature results in audio credits
being used (delivered) over different periods for different customers. In
addition, some of the new AudibleListener plans include new membership benefits,
ranging from a complimentary daily newspaper to everyday discounts of 30% on a
la carte purchases. The daily newspaper and 30% discount benefits are “serial”
elements that are delivered continuously over the membership period, whereas the
content selections underlying the audio credits are discrete elements that are
delivered at different times based on individual customer behavior. As a result
of the characteristics of the new AudibleListener memberships, they are
considered revenue arrangements with multiple deliverables. Under Emerging
Issues Task Force, or EITF No. 00-21,Revenue Arrangements with Multiple
Deliverables, because the deliverables are not eligible for separation,
they are accounted for as a single unit of accounting. As a result, we recognize
revenue for these new AudibleListener plans using the lesser of straight-line or
proportional performance (based on content delivery) over the maximum membership
period. This may result in a decrease in revenue or slower revenue growth than
we experienced in prior periods because the customer has a longer period of time
to use their audio credits. For example, a customer may pre-pay an annual
membership for twelve audio credits and not use any credits for six months. Due
to the revenue recognition model described above, this revenue will be deferred
until the customer uses the audio credits.
 
 Upon
launch of the new AudibleListener plans in December 2005, the legacy
AudibleListener programs were no longer available to new customers. Customers
who have legacy memberships have the option of either converting to one of the
new AudibleListener membership plans or continuing their legacy
membership.
 
 Provision
for Refunds and Chargebacks
 
 In the
normal course of business, customers may contact us or contact their credit card
company to request an adjustment for a purchase the customer paid us for in the
past. Customers may contact us to request a refund for various reasons. We
record a provision for expected refunds and chargebacks relating to revenue that
was recognized in a previous period. The calculation of the provision for
estimated refunds and chargebacks is based on historical refund rates and sales
patterns. The provision is recorded as a reduction of revenue. A portion of the
resulting reserve is classified as a reduction of accounts receivable based on
an estimate of refunds and chargebacks that will be made related to sales that
were collected by the credit card processor but not remitted to us at
period-end. The remaining portion of the reserve is reflected as an accrued
liability at period-end. Actual results could differ from our
estimates.
 
 Customer
Concessions
 
 In the
normal course of business, customers may contact us to request a concession for
a purchase the customer paid us for in the past, with which they are
unsatisfied. Depending on the specific customer facts and circumstances, we
will provide the customer a replacement or complimentary credit or a coupon.
With our legacy AudibleListener plans, customers on occasion request that we
replace an audio credit that expired before the customer had an opportunity to
use it. Other customers may request an audio credit or coupon because they have
had a specific problem with content downloading or audio quality. We defer
revenue for expected replacement audio credits to legacy members based on
historical experience of the credits issued. We defer revenue for other audio
credits and coupons when they are delivered to the customers based on estimated
values. The concessions are recorded as a reduction of revenue and an increase
to deferred revenue. Actual customer credit and coupon issuance and usage
patterns could differ from our estimates.
 
 Services
Revenue
 
 Services
revenue primarily consists of corporate, library and school sales. Where
applicable, the Company recognizes service revenue as services are performed
after persuasive evidence of an agreement exists, the price is fixed, and
collection of cash is reasonably assured. Collectibility is based on past
transaction history and credit-worthiness of the customer.
 
 Hardware
Revenue
 
 Hardware
revenue consists of sales of AudibleReady digital audio players. Most of the our
AudibleReady digital audio devices are sold at a discount or given away when a
customer signs up for a three or six-month or one-year commitment to an
AudibleListener membership. For multiple-element arrangements in which a
customer signs up for a membership and receives an audio player for free,
revenue is first allocated to the two elements (device and membership) using the
relative fair value method under EITF No. 00-21. However, the delivered item
(hardware) is limited to the non-contingent consideration, which, for a free
device, consists of only shipping and handling fees. The free hardware device
reflects the subsidy incurred to acquire a customer with a commitment to
AudibleListener. For players sold separately, hardware revenue is recognized
upon shipment of the device, pursuant to a customer order and credit card
authorization and includes amounts received for shipping and
handling.
  -31-
  Related PartyRevenue
 
 Related
party revenue is revenue earned under agreements with Audible Germany (Note 8)
and France Loisirs (Note 9).
 
 Revenue
under the Audible Germany agreement includes $0.1 million earned per quarter
over the initial 30-month term of the agreement, which began on August 30, 2004.
All amounts related to the original 30-month agreement with Audible Germany had
been recognized as of March 31, 2007.
 
 Revenue
under the France Loisirs agreement includes a $1.0 million technology licensing
fee that was recognized on a straight-line basis over the initial 24-month term
of the agreement, which began on September 15, 2004. Of the $1.0 million, France
Loisirs has paid the full $1.0 million as of December 31, 2006 and all revenue
related to this agreement was recognized as of December 31, 2006.
 
 Revenue
earned under each of these agreements also includes consulting services
performed by certain of the Company's employees and reimbursement of certain
incremental costs incurred by the Company that are billed to Audible Germany and
France Loisirs in accordance with EITF Issue 01-14,Income Statement Characterization
of Reimbursement Received for Out-of-Pocket' Expenses
Incurred (“EITF No. 01-14”).
 
 Other
Revenue
 
 Other
revenue for the years ended December 31, 2005, 2006 and 2007 primarily includes
revenue earned from a product development and distribution agreement, which is
being recognized on a straight-line basis over a 58-month period.
 
 For the
year ended December 31, 2007 we also recognized revenue as part of a revenue
sharing deal with Apple.
 
 For the
year ended December 31, 2005 commissions earned for referring customers to a
retail partner to purchase a digital audio device, was recognized in the period
when the customer's purchase was completed.
 
 Royalty
Expense
  Royalty
expense is the largest component of cost of content and services revenue, and
includes amortization of guaranteed royalty obligations to various content
providers, royalties incurred on sales of content, and net realizable value
adjustments to royalty advances. Many of our early content provider agreements
contained a requirement to pay guaranteed amounts to the provider. Anticipating
that sales from these agreements would not be sufficient to recoup the amount of
the guarantees, we adopted a policy of amortizing royalty guarantees
straight-line over the term of the royalty agreement, or expensing the royalty
guarantees as incurred, whichever was sooner. In addition, each quarter we
review and compare any remaining unamortized guarantee balance with current and
projected sales by provider to determine if any additional net realizable value
adjustments are required. Royalty expense for sales of content is incurred
based upon either a percentage of revenue or a fixed price per title in
accordance with the terms of the applicable royalty agreement. The royalty cost
per title may differ depending upon whether the title is sold as part of an
AudibleListener membership or sold as an a la carte sale. Actual sales could
differ from our estimates of projected sales.
 
 Internal-Use
Software
 
 In
accordance with Statement of Position 98-1,Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, all costs
incurred for the development of internal use software that relate to the
planning and post-implementation phases of the development are expensed. Direct
costs incurred in the development phase are capitalized and recognized over the
software's estimated useful life, generally two years, commencing at the
time the software is ready for its intended use. Research and development costs
and other computer software maintenance costs related to software development
are expensed as incurred. We review the capitalized software costs for
impairment when events or circumstances indicate that the carrying amount of an
asset may not be recoverable. If the sum of the expected cash flows undiscounted
and without interest, is less than the carrying amount of the related asset, an
impairment loss is recognized as the amount by which the carrying amount of the
asset exceeds its fair value. Actual cash flows could differ from our
expectations.
 
  -32-
  Employee
Stock-Based Compensation Arrangements
 
 In
accordance with SFAS 123(R), we measure compensation cost for stock awards at
fair value and recognize compensation over the requisite service period for
awards expected to vest. Estimating the portion of stock awards that will
ultimately vest requires judgment, and to the extent actual results or updated
estimates differ from our current estimates, such amounts are recorded in the
period estimates are revised. We consider several factors when estimating
expected forfeitures, including types of awards, employee class, and historical
experience. We also consider several factors to estimate expected volatility and
expected life of the option. Actual results, and future estimates, may differ
substantially from our current estimates.
 
 Liquidity
and Capital Resources
 
 From
inception through the date prior to our initial public offering, we financed our
operations through private sales of our redeemable convertible preferred stock
and warrants. Net proceeds from the sales of redeemable convertible stock and
warrants prior to our initial public offering were $28.7 million. In July 1999,
we completed our initial public offering and received net proceeds of $36.9
million. From the time of our IPO, we have raised $15.9 million in net proceeds
through the private sale of shares of our convertible preferred stock (all of
which were subsequently converted to common stock), $4.2 million in net proceeds
through the private sales of our common stock, $3.7 million in net proceeds
through the exercise of common stock options, and $2.3 million in net proceeds
through the exercise of common stock warrants. In November 2004, we
completed a follow-on public offering of our common stock resulting in net
proceeds of approximately $46.5 million.
 
 As of
December 31, 2007, our cash and cash equivalents balance was $72.4 million. In
addition, as of December 31, 2007, we had $8.5 million in short-term
investments which we intend to hold until maturity.
 
 Cash
Requirements
 
 The
following table shows future cash payments due under our commitments and
obligations as of December 31, 2007:
  Year (In Thousands)
              
              Operating Leases (1)
              
              
              Service Agreements
              
              
              Royalty Obligations(2)
              
              
              Purchase Commitments
              
              
              Total2008
              
              $
              1,055
              
              
              $
              1,783
              
              
              $
              114
              
              
              $
              1,898
              
              
              $
              4,8502009
              
              
              1,068
              
              
              
              189
              
              
              
              --
              
              
              
              --
              
              
              
              1,2572010
              
              
              1,141
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,1412011
              
              
              1,215
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,2152012
              
              
              1,259
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,259Thereafter
              
              
              1,996
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,996Total
              
              $
              7,734
              
              
              $
              1,972
              
              
              $
              114
              
              
              $
              1,898
              
              
              $
              11,718
 
 (1) Of
the $7.73 million in total operating leases, $7.67 million is related to our new
office lease agreement signed in September 2006 that began in March 2007 and
expires in February 2014.
 
 (2) The
$0.1 million in total royalty obligations is recorded in accrued expenses in the
accompanying December 31, 2007 consolidated Balance Sheet.
 
 Lease
Obligations
  In
September 2006, we entered into a lease agreement for office space in Newark,
New Jersey. We occupy two floors with an approximate space of 49,600 square
feet. We relocated our corporate headquarter to this space in February 2007. The
agreement expires in June 2014 and there is a one time only option to terminate
the lease agreement after June 2012 upon 12 months prior written notice to the
landlord. We believe our new facility provides us adequate space for the
foreseeable future. We had an operating lease for office space in Wayne, NJ that
was set to expire in December 2008. During the third quarter of 2006, we
notified the landlord of our intentions to terminate the office lease and made a
$0.1 million cancellation payment during the quarter ended September 30, 2006,
which is included in general and administrative expenses in the accompanying
consolidated Statement of Operations. Audible UK leases furnished office space
in London under a lease that expires in May 2008. We also lease office
space in Tokyo, Japan where a local representative assists us to secure local
Japanese content. This lease expires in June 2008. Total future minimum lease
obligations as of December 31, 2007 under the lease arrangements are $7.7
million.
   -33-
  Rent
expense of $0.6 million, $1.0 million, and $1.2 million was recorded under
operating leases for the years ended December 31, 2005, 2006 and 2007,
respectively. Access to the space for the new corporate office was provided to
us at the time the lease was executed in September 2006, so we could design and
develop the office as needed in order to move in timely during the first quarter
of 2007. Based on our evaluation, we included this period in calculating the
straight-line rent expense and amortization of landlord allowances. Included in
rent expense for the year ended December 31, 2006 is $0.3 million for this “rent
holiday” period. Rent expense in the 2007 is net of a $0.1 million reduction due
to the amortization of $1.1 million reimbursement of leasehold improvement
expenses paid by the landlord under the terms of the lease.
 
 Service
Agreements
 
 We have
entered into operational and marketing agreements or purchase orders with
various vendors to provide certain contracted services. The majority of the
amounts committed are for hosting services related to our Web site. Most of our
service agreements are cancellable but require significant penalties for
cancellation.
  Royalty
Obligations
 
 Royalty
obligations represent payments to be made to various content providers pursuant
to minimum guarantees under their royalty agreements, net of royalties paid. The
royalty obligations recorded in the accompanying consolidated Balance Sheets are
classified between current and non-current based on the payment terms specified
in the agreements, and relate to audio content that has been delivered to us.
Royalty obligations pursuant to minimum guarantees for audio content to be
delivered in the future are reflected as a commitment in the table.
  Purchase
Commitments
 
 Purchase
commitments represent agreements we made for future purchases of goods and
services. The balance primarily consists of goods and services related to
customer rebates, technology and development services and marketing
services.
 
 Sources
and Uses of Cash (dollars in thousands)
 
 December
      31,2005
              
              
              2006
              
              
              2007Operating
      Activities
              
              $
              11,779
              
              
              $
              7,173
              
              
              $
              23,353Investing
      Activities
              
              
              (14,39292
              )
              
              
              173
              
              
              
              35,506Financing
      Activities
              
              
              864
              
              
              
              (3,968
              )
              
              
              (1,394
              )Exchange
      Rate
              
              
              2
              
              
              
              (2
              )
              
              
              (6
              )$
              (1,747
              )
              
              $
              3,376
              
              
              $
              57,459
 
 Operating
Activities
 
 Net cash
provided by operating activities of $23.4 million in 2007 resulted from our
net income of $2.4 million which included non-cash items, depreciation of $5.3
million and stock based compensation of $6.2 million. Additionally our balance
in deferred revenue increased by $4.8 million due to the payment by customers of
fees prior to the consumption of services and we had an increase of $5.4 million
in deferred compensation related to our incentive compensation. These items were
offset in part by a decrease of $1.5 million in accounts payable, a decrease of
$1.4 million in accrued expenses and $1.0 million decrease in accrued
royalties.
 
 Net cash
provided by operating activities in 2006 was attributable to our net loss of
$8.7 million significantly offset by two non-cash expenses; depreciation of $5.0
million and stock based compensation of $5.9 million. Additionally our balance
in deferred revenue increased by $7.2 million due to the payment by customers of
fees prior to the consumption of services. An increase in accounts receivable
due to higher revenues in the fourth quarter and declines in accounts payable of
$1.6 million and accrued expenses of $0.7 million were offset by an increase in
accrued royalties of $3.9 million.
 
 Net cash
provided by operating activities in 2005 was attributable to our net loss of
$0.7 million offset by two non-cash expenses; depreciation of $1.1 million and
stock based compensation of $1.0 million. Additionally cash was provided by a
$4.1 million increase in deferred revenue and $3.2 million in accrued royalties
stemming principally from greater sales activity in the fourth quarter.
Increases in accounts payable of $3.9 million and accrued expenses of $3.1
million contributed to the increase.
 
  -34-
  Investing
Activities
 
 Net cash
provided by investing activities was $35.5 million in 2007. This increase was
due primarily to $43.7 million in net proceeds from maturity of short-term
investments, offset in part by a net of $7.2 million in capital expenditures and
capitalized software development and a $1.0 million investment in Audible
Germany.
 
 Net cash
provided by investing activities was $0.2 million in 2006. This was the net of
$5.2 million in capital expenditures and capitalized software development offset
by $5.3 million net proceeds from maturity of short-term
investments.
 
 Net cash
used in investing activities in 2005 related to net purchases of short-term
investments of $6.0 million, purchases of property and equipment of $3.7
million, and expenditures on software development costs of $4.6
million.
  Financing
Activities
 
 Net cash
used in financing activities in 2007 resulted primarily from repurchase of $1.4
million in treasury stock at cost, $0.6 million in payment of taxes due to
vested restricted stock, offset in part by proceeds from exercise of $0.6
million of common stock options and common stock warrants.
 
 Net cash
used in financing activities in 2006 resulted primarily from repurchase of $5.4
million in treasury stock at cost, offset by proceeds from exercise of $1.4
million of common stock options and common stock warrants.
 
 Net cash
provided by financing activities in 2005 resulted primarily from $1.0 million in
proceeds from the exercise of common stock options and common stock warrants,
offset by principal payments made on capital lease obligations.
 
 As of
December 31, 2007, we had net operating loss carry-forwards for federal income
tax purposes of approximately $116.0 million, which begin to expire in 2010 if
not used to offset future taxable income. As of December 31, 2007, we had net
operating loss carry-forwards for New Jersey income tax purposes of
approximately $32.5 million which begin to expire in 2008 if not used to offset
future taxable future. As of December 31, 2007, the Company has foreign net
operating losses of $2.3 million which can be carried forward
indefinitely.
 
 As a
result of selling certain of our New Jersey state income tax loss benefits for
cash, we realized $0.7 million, $0.8 million and $3.1 million in state income
tax benefits during the years ended December 31, 2005, 2006 and 2007
respectively. We cannot assure you that this program will be available to us in
the future.
 
 New
Accounting Standards
 
 SFAS
No. 157
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements (“SFAS No. 157”) which establishes a framework for measuring
fair value and requires expanded disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value measurements. However, it
eliminates inconsistencies in the guidance provided in previous accounting
pronouncements. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged, provided that the reporting
entity has not yet issued financial statements for that fiscal year, including
financial statements for an interim period within that fiscal year. All
valuation adjustments will be recognized as cumulative-effect adjustments to the
opening balance of retained earnings for the fiscal year in which SFAS No. 157
is initially applied. We do not believe that SFAS No. 157 will have a material
effect on our consolidated financial statements. The FASB may delay a portion of
this standard.
 
 SFAS
No. 160
  In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements.SFAS No. 141 (R) requires an
acquirer to measure the identifiable assets acquired, the liabilities assumed
and any non controlling interest in the acquiree at their fair values on the
acquisition date, with goodwill being the excess value over the net identifiable
assets acquired. SFAS No. 160 clarifies that a non controlling interest in
a subsidiary should be reported as equity in the consolidated financial
statements. The calculation of earnings per share will continue to be based on
income amounts attributable to the parent. SFAS No. 141 (R) and SFAS
No. 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008. Early adoption is prohibited. We have
not yet determined the effect on our consolidated financial statements, if any,
upon adoption of SFAS No. 141 (R) or SFAS
No. 160.
 
 -35-
  SFAS
No. 159
 
 In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other items
at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. We do not believe the impact of SFAS No. 159 will have a
material effect on our consolidated financial statements.
 
 FIN
No. 48
 
 In July
2006, the FASB issued SFAS Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - an interpretation of SFAS Statement No. 109 (“FIN No. 48”). FIN
No. 48 applies to all “tax positions” accounted for under SFAS 109. FIN No. 48
refers to “tax positions” as positions taken in a previously filed tax return or
positions expected to be taken in a future tax return that are reflected in
measuring current or deferred income tax assets and liabilities reported in the
financial statements. FIN 48 further clarifies a tax position to include the
following:
 
 ·
              a
      decision not to file a tax return in a particular jurisdiction for which a
      return might be required,·
              an
      allocation or a shift of income between taxing
    jurisdictions,·
              the
      characterization of income or a decision to exclude reporting taxable
      income in a tax return, or·
              a
      decision to classify a transaction, entity, or other position in a tax
      return as tax exempt.
 
 FIN No.
48 clarifies that a tax benefit may be reflected in the financial statements
only if it is “more likely than not” that a company will be able to sustain the
tax return position, based on its technical merits. If a tax benefit meets this
criterion, it should be measured and recognized based on the largest amount of
benefit that is cumulatively greater than 50% likely to be realized. This is a
change from current practice, whereby companies may recognize a tax benefit only
if it is probable a tax position will be sustained.
 
 FIN No.
48 also requires that we make qualitative and quantitative disclosures,
including a discussion of reasonably possible changes that might occur in
unrecognized tax benefits over the next 12 months; a description of open tax
years by major jurisdictions; and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and ending balances of
the unrecognized tax benefits on an aggregated basis.
 
 This
statement became effective for us on January 1, 2007. Based on our analysis it
did not have a material effect on our consolidated financial
statements.
 
 In May
2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, Definition of Settlement in FASB
Interpretation No. 48, (“FIN 48-1”). This FSP was issued to amend FIN No.
48 to clarify that a tax position could be effectively settled upon examination
by a taxing authority. Assessing whether a tax position is effectively settled
is a matter of judgment because examinations occur in a variety of ways. In
determining whether a tax position is effectively settled, an enterprise should
make the assessment on a position-by-position basis, but an enterprise could
conclude that all positions in a particular tax year are effectively settled.
The application of the guidance in this FSP had no impact on our consolidated
financial statements.
 
 Off-Balance
Sheet Arrangements
 
 We do not
maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a
material current or future effect upon our financial condition or results of
operations.
 
 Item 7A. Quantitative and Qualitative
Disclosures about Market Risk.
  We are
exposed to fluctuations in foreign currency exchange rates as the financial
results of our foreign subsidiary are translated into U.S. dollars in
consolidation and we pay certain third-party suppliers in foreign currencies. We
do not use derivative instruments or hedging to manage our exposures and do not
hold any market risk sensitive instruments for trading purposes.
  Item 8. Financial Statements and Supplementary Data.
 
 The
information required by Item 8 of Part II is incorporated herein by reference to
the financial statements filed with this report; see Item 15 of Part
IV.
  -36-
  Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
 
 None.
 
 Item
9A. Controls and Procedures.
  a.)
Evaluation of Disclosure Controls and Procedures
  Under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as
of the end of the period covered by this report. Based on this evaluation, our
chief executive officer and our chief financial officer concluded that our
disclosure controls and procedures were effective as of the end of the period
covered by this Annual Report on Form 10-K,
  b.)
Management's Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in the Exchange Act
Rule 13a-15(f). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that:
 
 (i.)
              Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;
 
 (ii.)
              Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with U.S. generally
      accepted accounting principles, and that receipts and expenditures of the
      company are being made only in accordance with authorizations of
      management and directors of the company;
and
 
 (iii.)
              Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use, or disposition of the company's assets that
      could have a material effect on the financial
  statements.
 
 Our
management conducted an evaluation of the effectiveness of our internal control
over financial reporting as of December 31, 2007, using the criteria set forth
in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
 
 Based on
its evaluation under the criteria inInternal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), our management concluded that our internal control
..over financial reporting as of December 31, 2007 was effective based on those
criteria.
 
 A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As previously disclosed in our annual report on Form 10-K for the
year ended December 31, 2006, we identified the following material weaknesses in
our internal control over financial reporting: (i) ineffective execution of
non-routine contracts; (ii) inadequate information and communication; (iii)
ineffective review of account analyses; and (iv) inadequate identification and
analysis of non-income tax related matters.
 Throughout
2007, we made the remediation of the material weaknesses that have been
identified above a significant priority for us and we undertook the corrective
efforts to remediate the material weaknesses noted above. The remedial actions
associated with these material weaknesses included the following:
 
 Ineffective
Execution of Non-Routine Contracts.
 
 We have
improved our contract review procedures to provide a more detailed legal and
financial review of new contracts in order to identify potential financial
reporting risks and implementation issues.
 
  -37-
  Inadequate
Information and Communication
 
 We have
implemented change control procedures requiring review and signoff on
modifications to existing system-generated financial reports used in financial
reporting.
 
 We began
a process of reviewing, classifying and reconciling individual gift transactions
to properly categorize and support remaining gift deferral
balances.
 
 Ineffective
Review of Account Analyses
 
 We have
implemented additional reconciliation roll-forwards and review procedures to
provide greater accuracy over account analysis used as a basis to record journal
entries.
 
 We have
engaged more participation in the review of account activities by initiating
periodic circulation of interim financial information.
 
 Inadequate
Identification and Analysis of Non-Income Tax Related Matters
 
 We have
modified our web site to collect value added tax (“VAT”) from customers in
foreign jurisdictions.
 
 We have
implemented a periodic formal tax review process intended to identify and
address potential non-income tax related matters.
  During
the fourth quarter of 2007, we completed our testing and concluded that the
newly implemented controls discussed above were designed and operating
effectively as of December 31, 2007.
  McGladrey
& Pullen, LLP, our independent registered public accounting firm, has issued
an audit report on the effectiveness of our internal control over financial
reporting. This audit report is included in Item 9A.c.below.
 
 
  -38-
  c.)
Independent Registered Public Accounting Firm's Report on Internal Control over
Financial Reporting
 
 Report
of Independent Registered Public Accounting Firm
 
 
 To the
Board of Directors and Shareholders
 Audible
Inc.
 
 We have
audited Audible Inc. and subsidiary’s internal control over financial reporting
as of December 31, 2007, based on"criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO)."Audible Inc. and subsidiary management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on
the company's internal control over financial reporting based on our
audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, Audible Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on "criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO)”.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Audible and
subsidiary as of December 31, 2007, and the related consolidated statements of
operations, comprehensive income (loss), stockholders’ equity, and cash flows
for the year then ended and our report dated March 27, 2008, expressed an
unqualified opinion.
 
 /s/
McGladrey & Pullen, LLP
 New York,
New York
 March 27,
2008
  -39-
  d.) Changes
in Internal Control over Financial Reporting
 
 There
were no changes in internal control over financial reporting during the fourth
quarter of 2007 that have materially affected, or are reasonably likely to
materially affect our internal control over financial reporting.
 
 Item
9B. Other Information.
  None.
 
 PART
III
  Item 10. Directors, Executive Officers and Corporate Governance
of the Registrant.
 
 The
following information concerning our current directors and key executive
officers is as of March 26, 2008.
 
 Donald R. Katz, age 56, has
served as a director since co-founding the Company in November 1995 and was,
prior to the Effective Time, the Chairman of our Board of Directors since April
1999. Since July 2001, Mr. Katz has been serving as our Chief Executive Officer.
From October 1999 to February 2000 and from November 1995 to March 1998, Mr.
Katz served as our President and Chief Executive Officer. Prior to co-founding
the Company, Mr. Katz was an author, business journalist and media consultant
for over 20 years.
  William H. Mitchell, age 50,
has been our Chief Financial Officer since November 2006 and a director since
March 2008. Prior to joining the Company, Mr. Mitchell was the Chief Financial
Officer of Viewpoint Corporation, an internet marketing technology company. From
July 2002 to August 2003, Mr. Mitchell served as Chief Financial Officer of
MaxWorldwide, Inc., an Internet-based provider of marketing solutions for
advertisers and web publishers. From January 2001 to July 2002, Mr. Mitchell
served as Chief Financial Officer for Tally Systems, Inc., a software
development company.
 
 Anthony T. Nash, age 50, has
been our Vice President-Corporate Controller since August 2006 and a director
since March 2008.  Mr. Nash joined Audible in February 1997 and has
held various financial roles within the Company including, Director of Finance
and Senior Director of Finance.  Mr. Nash has over twenty-five years
of finance and accounting experience in various industries.
 
 Code
of Ethics and Business Conduct
 
 Prior to
the Effective Time, our Board of Directors had adopted a written code of ethics
and business conduct, a copy of which is available on the corporate governance
section of our web site, www.audible.com. We required all of our officers,
directors and employees to adhere to this code in addressing the legal and
ethical issues encountered in conducting their work. The code required that
employees avoid conflicts of interest, comply with all laws and other legal
requirements, conduct business in an honest and ethical manner and otherwise act
with integrity. Employees are required to report any conduct that they believe
in good faith to be an actual or apparent violation of the code. The
Sarbanes-Oxley Act of 2002 requires companies to have procedures to receive,
retain and treat complaints received regarding accounting, internal accounting
controls or auditing matters and to allow for the confidential and anonymous
submission by employees of concerns regarding questionable accounting or
auditing matters. We currently have such procedures in place.
 
 Upon the
Effective Time, Audible became a wholly-owned subsidiary of Amazon.com and
became subject to Amazon.com’s written code of business conduct and ethics, a
copy of which is available on the corporate governance section of Amazon.com’s
web site, www.amazon.com/ir.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Our
directors and executive officers must file reports with the Securities and
Exchange Commission indicating the number of shares of our common stock they
beneficially own and any changes in their beneficial ownership. Copies of these
reports must be provided to us. Based on our review of these reports and written
representations from the persons required to file them, we believe each of our
directors and executive officers filed all required reports during 2007 in a
timely fashion, with the following exceptions: Mr. Rogers failed to timely file
one Form 4 relating to two grants of restricted stock units. Mr. Katz failed to
timely file two Form 4s relating to one grant of restricted stock units, one
grant of options and the receipt of common stock upon the settlement of
restricted stock units. All such Form 4 filings subsequently were made.
 
  -40-
  Item
11. Executive Compensation.
 
 COMPENSATION
DISCUSSION AND ANALYSIS
 
 Overview
of Compensation Program
 
 Prior to
its dissolution upon the Effective Time, the Compensation Committee of our Board
of Directors was responsible for establishing, implementing, and overseeing all
aspects of our compensation philosophy. Its main objectives were to attract and
retain the most talented and dedicated executives possible, to establish
incentives to motivate these individuals to reach our corporate goals, and to
encourage the promotion of internal equity and external competitiveness by
ensuring that our compensation policies will enable us to retain our most
talented people.
 
 Compensation
Strategy
 
 To meet
these goals, we created a compensation package that was competitive and rewards
executive performance with a mix of compensation components. We used various
national and local compensation surveys to develop our compensation strategy and
plans, and referred to these surveys for executive compensation purposes. Our
compensation components included a base salary, equity-based incentives for all
employees and discretionary cash bonuses. We adjusted the mix of compensation
components from year to year based on overall performance and an executive’s
individual contributions.
 
 Elements
of Compensation
 
 Our
Compensation Committee evaluated individual executive performance with a goal of
setting compensation at levels commensurate with executives in other companies
of similar size and stage of development operating in the industry while taking
into account their relative performance and our own strategic goals. There were
five major elements that comprised the compensation program: (i) base salary;
(ii) annual incentive opportunities, including bonuses; (iii) long-term
incentives, such as equity awards; (iv) retirement benefits; and (v)
change-in-control and severance benefits.
 
 Base Salary.Executive base
salary was adjusted periodically based on financial results and performance on
developmental objectives that we believed were critical to its long-term
progress. These objectives included progress on our business plan objectives and
staff development.
 
 Bonus.Prior to 2007, we
annually determined whether to pay bonuses and approved executive bonuses based
upon the achievement of earnings and performance objectives that it believed
were critical to our long-term progress and success. Bonuses were payable to
officers, managers, and key employees based upon the recommendation of the Chief
Executive Officer. The Compensation Committee approved the bonuses for each of
the named executive officers.
 
 With
respect to Mr. Katz’s bonus, his prior employment agreement provided that he was
eligible to receive an annual bonus of up to 25,000 shares of common stock under
our 1999 Stock Incentive Plan. Mr. Katz’s prior employment agreement provided
that 50% of the annual bonus is granted at the discretion of the Compensation
Committee, and 50% is based on meeting mutually certain mutually agreed-upon
individual objectives and corporate performance levels relative to budgeted
revenue and earnings before interest, taxes, depreciation, and amortization are
met. On January 29, 2008, pursuant to the terms of his prior employment
agreement, Mr. Katz was awarded 25,000 shares of common stock in connection with
meeting 2007 performance targets, which became payable at the Effective Time.
Upon the Effective Time, Mr. Katz’s previous employment agreement was cancelled
and he entered into a new employment offer letter with Amazon to serve as
our President and Chief Executive Officer.
 
 With
respect to Mr. Mitchell’s bonus, his prior employment agreement provided for an
annual target payout of 50% of his base salary and with a minimum annual payout
during 2007 of $80,000. The actual bonus payout in excess of the minimum annual
amount was to be determined based upon meeting mutually agreed-upon individual
and corporate performance levels. On January 29, 2008, pursuant to the terms of
his prior employment agreement, Mr. Mitchell was awarded $55,000, in addition to
the $80,000 minimum annual payout, in connection with meeting 2007 performance
targets. The additional $55,000 bonus was paid on March 10, 2008. Upon the
Effective Time, Mr. Mitchell’s previous employment agreement was cancelled and
he entered into a new employment offer letter with Amazon to serve as our
Chief Financial Officer.
 
 Retirement.We maintained a
401(k) plan for our employees, including our named executive officers. In 2007,
we provided a matching contribution up to the first two percentage points of the
employee’s salary that they contribute to their 401(k) plan. Audible terminated
its 401(k) Plan March 10, 2008.
 
  -41-
  Incentive Program. We
believed that long-term performance was achieved through an ownership culture
that encouraged such performance by our executive officers through the use of
stock and stock-based awards. Our equity benefit plans were established to
provide certain of our employees, including our executive officers, with
incentives to help align those employees’ interests with the interests of our
stockholders. We granted equity awards primarily through the 1999 Stock
Incentive Plan, which was adopted by our Board of Directors and stockholders to
permit the grant of stock options, stock appreciation rights, restricted stock
and other stock-based awards to our officers, directors, employees and
consultants. The 1999 Stock Incentive Plan was cancelled upon the Effective
Time, and all outstanding equity awards issued pursuant to the 1999 Stock
Incentive Plan were assumed by Amazon.
 
 Awards,
historically in the form of stock options or restricted stock units, were
granted to new employees on their hiring date, based on the recommendation of
our officers and subject to the Compensation Committee’s approval. In addition,
the officers periodically recommended to the Compensation Committee, for its
approval, stock awards to employees based on merit. On January 2, 2007, Mr.
Rogers was granted 75,000 restricted stock units. On July 2, 2007, Mr. Fielding
was granted 3,160 restricted stock units, and on July 2, 2007, Mr. Story was
granted 3,014 restricted stock units. On January 2, 2008, Mr. Katz was granted
20,000 restricted stock units and options to purchase 60,000 shares of common
stock at an exercise price of $8.83 per share, and on January 29, 2008, Mr. Katz
was awarded 25,000 shares of common stock, all in accordance with the terms of
his then-effective employment agreement. Most stock options under the 1999 Stock
Incentive Plan fully vested in a period of up to 50 months and expired in ten
years. Most stock awards under the 1999 Stock Inventive Plan fully vested in a
period of 36 months and expired in ten years. The Compensation Committee
believed the 1999 Stock Incentive Plan was an important component of our
compensation program and was critical to our remaining competitive. It also
enabled us to attract, motivate, and retain high-caliber employees to the
ultimate benefit of stockholders.
 
 Severance and/or Change-of-Control
Benefits.The named executive officers, whom are designated below under
“—Summary Compensation Table,” were entitled to certain severance and/or
change-of-control benefits, the terms of which are described below under
“—Change of Control Arrangements.” The Compensation Committee believed these
severance and/or change-of-control benefits were an essential element of our
executive compensation package and assist us in recruiting and retaining
talented individuals.
 
 1999
Stock Incentive Plan
 
 Our 1999
Stock Incentive Plan was approved by our Board of Directors and stockholders in
1999 and subsequently amended to increase the number of shares available under
the plan in 2003 and 2005. The 1999 Stock Incentive Plan was cancelled upon the
Effective Time, and all outstanding equity awards issued pursuant to the 1999
Stock Incentive Plan were assumed by Amazon.
 
 401(k) Plan
  We had a
401(k) plan based on contributions from employees and discretionary company
contributions. Under the plan, employees were able to elect to reduce their
current compensation by up to the statutorily prescribed annual limit ($15,500
in calendar year 2007) and have the amount of the reduction contributed to the
plan. In addition, eligible employees were able to elect to contribute an
additional amount of their eligible compensation as a catch-up contribution to
the 401(k) plan ($5,000 in calendar year 2007), provided that such employees
were age 50 or older. We matched up to the first two percent of salary
contributions made from employees into the 401(k) plan. During 2007, we made
total contributions into the 401(k) plan of $166,000. As a tax-qualified plan,
we can generally deduct contributions to the 401(k) plan when made, and such
contributions are not taxable to participants until distributed from the plan.
Pursuant to the terms of the plan, participants were alble to direct the
trustees to invest their accounts in selected investment options. The Audible
401(k) Plan was terminated on March 10, 2008.
 
  -42-
  Summary
Compensation Table
 
 The
following summary compensation table sets forth the compensation paid by us
during 2007 to our chief executive officer, chief financial officer, and its
three most highly compensated executive officers at the end of the last
completed fiscal year, referred to collectively as the “named executive
officers.”
 
 Name
      and Principal Position
              
              Year
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Stock
                  Awards
                  ($)
      (1)(2)
              
              Option
                  Awards
                  ($)
      (1)(3)
              
              All
      Other
                  Compensation
                  ($)(4)
              
              Total
                  ($)Donald
      R. Katz
                Chairman
      and ChiefExecutive
      Officer
              
              2007
                2006
              
              292,808
                245,404
              
              222,000
                —
              
              395,335
                342,614
              
              596,332
                558,732
              
              —
                —
              
              1,506,475
                1,146,750William
      H. Mitchell
                Chief
      Financial Officer(5)
              
              2007
                2006
              
              263,607
                27,118
              
              135,000
                —
              
              206,500
                23,762
              
              —
                —
              
              38,306
                3,210
              
              643,413
                54,090Glenn
      M. Rogers
                Former
      Chief OperatingOfficer(6)
              
              2007
                2006
              
              248,336
                225,000
              
              125,000
                —
              
              437,337
                160,302
              
              174,137
                174,137
              
              —
                —
              
              984,810
                559,439Brian
      M. Fielding
                Executive
      Vice President,Content
      Business
                Development
      & BusinessAffairs(7)
              
              2007
                2006
              
              196,326
                199,604
              
              —
                —
              
              162,619
                169,449
              
              46,458
                67,763
              
              —
                —
              
              405,403
                436,866Guy
      A. Story, Jr.
                Chief
      Scientist(7)
              
              2007
                2006
              
              192,415
                190,996
              
              —
                —
              
              145,835
                162,723
              
              46,458
                67,763
              
              —
                —
              
              384,708
                421,482
 
 (1)  In
accordance with SFAS 123(R), we measure compensation cost for stock awards and
option awards at fair value and recognizes compensation over the requisite
service period for awards expected to vest. Estimating the portion of stock
awards and option awards that will ultimately vest requires judgment, and to the
extent actual results or updated estimates differ from the Company’s current
estimates, such amounts are recorded in the period estimates are revised. We
consider several factors when estimating expected forfeitures, including types
of awards, employee class, and historical experience. We also consider several
factors when estimating expected volatility and expected life of the
option.
 (2) Stock compensation for
stock awards represents the following grants:
 ·
              Grant
      made on June 10, 2005 to Mr. Katz for 75,000 restricted stock units.
      38,252 of these units vest on March 15, 2009. However, our Board of
      Directors may authorize accelerated vesting on an annual basis depending
      upon our financial performance. The remaining 36,748 units vest on June
      10, 2009.
 ·
              Grant
      made on June 13, 2005 to Mr. Rogers for 25,000 restricted stock units,
      which were to vest in full on June 13, 2008, and grant made on June 13,
      2006 to Mr. Rogers for 10,000 restricted stock units, 1,000 of which have
      vested. These units vest 10% on the first anniversary, 15% on the second
      anniversary, and 75% on the third anniversary.
 ·
              Grants
      made on July 1, 2005 to Mr. Fielding and Mr. Story for 10,000 restricted
      stock units each. These units vest in full on July 1, 2008.
 ·
              Grant
      made on April 5, 2006 to Mr. Fielding for 31,600 restricted stock units,
      3,160 of which have vested. These units vest 10% on the first anniversary
      of grant, 15% on the second anniversary and 75% on the third
      anniversary.
 ·
              Grant
      made on April 5, 2006 to Mr. Story for 29,000 restricted stock units,
      2,900 of which have vested. These units vest 10% on the first anniversary,
      15% on the second anniversary, and 75% on the third
      anniversary.
 ·
              Grant
      made on June 13, 2006 to Mr. Rogers for 10,000 restricted stock units,
      1,000 of which have vested.
 ·
              Grant
      made on November 20, 2006 to Mr. Mitchell for 75,000 shares of restricted
      stock, 25,000 of which have vested. The remaining shares vest 33.3% as of
      November 20, 2008 and 33.4% as of November 20, 2009.
 ·
              Grant
      made on January 2, 2007 to Mr. Katz for 20,000 restricted stock units,
      3,333 of which have vested. The units vest in six equal installments every
      six months from the date of grant.
 ·
              Grant
      made on July 2, 2007 to Mr. Fielding for 3,160 restricted stock units,
      none of which have vested. These units vest 10% on the first anniversary
      of grant, 15% on the second anniversary and 75% on the third anniversary.
 ·
              Grant
      made on July 2, 2007 to Mr. Story for 3,014 restricted stock units, none
      of which have vested. These units vest 10% on the first anniversary of
      grant, 15% on the second anniversary and 75% on the third anniversary.
 ·
              Grant
      made on July 2, 2007 to Mr. Rogers for 50,000 restricted stock units,
      16,500 of which vested as of December 31, 2007. These units were to vest
      33.3% on the first anniversary of grant, 33.3% on the second anniversary
      and 33.4% on the third anniversary.
 ·
              Grant
      made on July 2, 2007 to Mr. Rogers for 25,000 restricted stock units,
      which were to vest in full on June 1, 2008.
 ·
              Grant
      made on January 29, 2008 to Mr. Katz for 25,000 shares of common stock in
      connection with meeting 2007 performance targets, which shares were issued
      in connection with the successful closing of Amazon’s tender offer to
      purchase our outstanding shares of common stock.
 (3)  Stock
compensation for option awards represents the following grants:
 ·
              Stock
      option grants made on August 1, 2003 to Mr. Katz, Mr. Fielding and Mr.
      Story for 112,455, 43,605, 58,904, and 43,604 shares, respectively. These
      grants vest over a 48 month period.
 ·
              Stock
      option grants made on September 25, 2003 to Mr. Katz, Mr. Fielding and Mr.
      Story for 157,044, 60,894, 82,261, and 60,894 shares, respectively. These
      grants vest over a 48 month period.
 ·
              Stock
      option grant made on June 10, 2005 to Mr. Katz for 100,000 shares, which
      vests over a 45 month period.
 ·
              Stock
      option grant made on June 13, 2005 to Mr. Rogers for 50,000 shares, which
      vests over a 50 month period.
 ·
              Grant
      made on January 2, 2007 to Mr. Katz for options to purchase 60,000 shares
      at an exercise price of $7.93 per share. The options vest in six equal
      installments every six months from the date of
  grant.
 (4) Mr.
Mitchell is provided access to a company apartment at a cost of an average of
$3,210 per month for rent and parking.
 (5) On
January 29, 2008, pursuant to the terms of his employment agreement, Mr.
Mitchell was awarded a cash bonus of $55,000 in connection with meeting 2007
performance targets. The bonus is payable upon the filing of this annual report
on Form 10-K.
 (6) Mr.
Rogers resigned on January 4, 2008, and the units that were not vested as of
that date were forfeited without payment by us of any
consideration.
 (7)
Messrs. Fielding and Story received a cash bonus in connection with meeting 2007
performance targets. The bonus amounts paid on March 10, 2008 were $86,458 for
Mr. Fielding and $140,435 for Mr. Story.
 
 -43-
  Grants
of Plan-Based Awards
 
 We have
granted options and restricted stock to purchase common stock to our executive
officers, employees and other service providers. The following table provides
information concerning options and restricted stock granted during 2007, and
unexercised options held as of December 31, 2007, by each of the named executive
officers.
  Name
              
              Grant
      Date
              
              All
      OtherStock
                  Awards:Number
                  of
      Sharesof
      Stockor
                  Units(#)
              
              
              All
      OtherOption
                  Awards:Number
      of
                  SecuritiesUnderlying
                  Options(#)
              
              
              Exercise
      or Base
                  Price
      of Option
                  Awards
      ($/Sh) (1)
              
              
              Grant
      DateFair
      Value of
                  Stock
      andOption
                  Awards
      ($)(2)Donald
      R. Katz
              
              1/02/2007
              
              
              20,000
              
              
              
              60,000
              
              
              
              7.93
              
              
              $
              475,800Glenn
      M. Rogers
              
              1/02/2007
              
              
              75,000
              
              
              
              —
              
              
              
              —
              
              
              
              —Brian
      M. Fielding
              
              7/02/2007
              
              
              3,160
              
              
              
              —
              
              
              
              —
              
              
              
              —Guy
      A. Story, Jr.
              
              7/02/2007
              
              
              3,014
              
              
              
              —
              
              
              
              —
              
              
              
              —
 
 (1)
              The
      exercise price is determined by the closing price of our common stock on
      the trading day immediately preceding each grant date.
 
 (2)
              The
      value of stock and option awards granted to Mr. Katz has been estimated
      pursuant to SFAS 123(R). He will not realize the estimated value of these
      awards until these awards are vested or exercised, as the case may be.
  Outstanding
Equity Awards
 
 The
following table shows all outstanding equity awards held by the named executive
officers at the end of 2007.
 
 Option
      Awards
              
              
              
              Stock
      AwardsName
              
              Number
      ofSecuritiesUnderlyingUnexercisedOptions
      (#)Exercisable
              
              Number
      ofSecuritiesUnderlyingUnexercisedOptions
      (#)Unexercisable
              
              OptionExercise
                Price
      ($)(8)
              
              OptionExpiration
                Date(7)
              
              Number
      ofShares
      or
                Units
      ofStockThat
      HaveNotVested
              
              MarketValue
      of
                Shares
      orUnits
      of
                Stock
      ThatHave
      NotVested($)Donald
      R. Katz(1)
              
              83,333
                83,334
                133,332
                112,455
                157,044
                100,000
                60,000
              
              —
                —
                —
                —
                —
                75,500
                50,000
              
              4.69
                1.50
                2.97
                1.62
                3.42
                15.85
                7.93
              
              2/19/2011
                7/23/2011
                2/13/2012
                8/01/2013
                9/25/2013
                6/10/2015
                1/02/2017
              
              75,000
                —
                16,667
                —
                —
                —
                —
              
              594,750
                —
                132,169.31
                —
                —
                —
                —William
      H. Mitchell(3)
              
              —
              
              —
              
              —
              
              —
              
              50,000
              
              396,500.00Glenn
      M. Rogers(2)
              
              50,000
              
              20,000
              
              15.99
              
              6/13/2015
              
              25,000
                10,000
                25,000
                50,000
              
              198,250.00
                79,300.00
                198,250.00
                396,500.00Brian
      M. Fielding(4)
              
              12,499
                33,333
                30,424
              
              —
                —
                —
              
              31.32
                28.32
                3.42
              
              3/22/2010
                3/22/2010
                9/25/2013
              
              28,440
                3,160
                —
              
              225,529.20
                25,058.80
                —Guy
      A. Story, Jr.(5)
              
              16,666
                21,666
                66,666
                43,604
                60,894
              
              —
                —
                —
                —
                —
              
              31.32
                3.75
                2.97
                1.62
                3.42
              
              3/22/2010
                8/18/2010
                2/13/2012
                8/01/2013
                9/25/2013
              
              26,100
                3,014
                —
                —
                —
              
              206,973.00
                23,901.02
                —
                —
                —
  -44-
  (1) The
vesting dates for Mr. Katz stock options and restricted stock were as follows as
of the end of 2007:
 ·
              Option
      award granted on February 19, 2001—33.3% vest on the grant date, with the
      remaining balance vesting pro rata at 2% per
  month.
 ·
              Option
      award granted on July 23, 2001—options vest pro rata over a period of 18
      months.
 ·
              Option
      award granted on February 13, 2002—5% vest on January 15, 2003, with the
      remaining balance vesting on the last day of each of the following
      nineteen quarters, beginning with quarter ending March 31,
      2003.
 ·
              Option
      award granted on August 1, 2003 and September 25, 2003—vest pro rata over
      a 48 month period.
 ·
              Option
      award granted on June 10, 2005—options vest pro rata over a 45 month
      period.
 ·
              Option
      award granted on January 1, 2007—10,000 options vest in January 2008,
      10,000 options vest in July 2008, 20,000 options vest in 2009 and 10,000
      options vest in 2010.
 ·
              Restricted
      stock award granted on June 10, 2005—38,252 of these shares vest on March
      15, 2009. However, our Board of Directors may authorize accelerated
      vesting on an annual basis depending upon our financial performance. The
      remaining 36,748 shares vest on June 10,
2009.
 ·
              Restricted
      stock award granted on January 2, 2007—vests in equal amounts
      semi-annually over three years from grant
date.
 (2) Mr.
Rogers resigned on January 4, 2008 and the units that were not vested as of that
date or pursuant to his separation agreement with us were forfeited without
payment by us of any consideration. For a more detailed description of Mr.
Rogers’ separation agreement see “Employment Arrangements with Named Executive
Officers” below. The vesting dates for Mr. Rogers’ stock options and restricted
stock prior to the execution of the separation agreement were as
follows:
 ·
              Option
      award granted on June 13, 2005—vest pro rata over a 50 month
      period.
 ·
              Restricted
      stock award granted on June 13, 2005—vests in full on June 13,
      2008.
 ·
              Restricted
      stock award granted on June 13, 2006—vests 10% on the first anniversary of
      the grant date, 15% on the second anniversary of the grant date, and 75%
      on the third anniversary of the grant
date.
 ·
              Restricted
      stock award granted on January 2, 2007—vest in full on June
      2008.
 ·
              Restricted
      stock award granted on January 2, 2007—33.3% vest on January 2, 2008,
      33.3% vest on January 2, 2009 and 33.4% vest on January 2,
      2010.
 (3) Upon
the commencement of his employment on November 20, 2006, Mr. Mitchell was
granted 75,000 restricted stock under the 1999 Stock Incentive Plan. Mr.
Mitchell’s restricted stock which was scheduled to vest in accordance as
follows: 33.3% of the units/shares vest at the end of Year 1 of employment,
33.3% of the units/shares vest at the end of Year 2 of employment, and 33.4% of
the units/shares vest at the end of Year 3 of employment.
 (4) The
vesting dates for Mr. Fielding’s stock options and restricted stock were as
follows at the end of 2007:
 ·
              Option
      award granted on March 22, 2000—vests pro rata over a 50 month
      period.
 ·
              Option
      awards granted on August 1, 2003 and September 25, 2003—vests pro rata
      over a 48 month period.
 ·
              Restricted
      stock award granted on April 5, 2006—vests 10% on the first anniversary of
      the grant date, 15% on the second anniversary of the grant date, and 75%
      on the third anniversary of the grant
date.
 ·
              Restricted
      stock award granted on July 2, 2007—vests 10% on the first anniversary of
      the grant date, 15% on the second anniversary of the grant date and 75% on
      the third anniversary of the grant
date.
 (5) The
vesting dates for Mr. Story’s stock options and restricted stock were as follows
as of the end of 2007:
 ·
              Options
      award granted on March 22, 2000 and August 18, 2000—vests pro rata over a
      50 month period.
 ·
              Options
      award granted on February 13, 2002—5% vests on January 15, 2003, with the
      remaining balance vesting on the last day of each of the following three
      quarters beginning with quarter ending March 31,
  2003.
 ·
              Option
      award granted on August 1, 2003 and September 25, 2003—vests pro rata over
      a 48 month period.
 ·
              Restricted
      stock award granted on July 1, 2005—vests in full on July 1,
      2007.
 ·
              Restricted
      stock award granted on April 5, 2006—vests 10% on the first anniversary of
      the grant date, 15% on the second anniversary of the grant date, and 75%
      on the third anniversary of the grant
date.
 ·
              Restricted
      stock award granted on July 2, 2007—vests 10% on the first anniversary of
      the grant date, 15% on the second anniversary of the grant date, and 75%
      on the third anniversary of the grant
date.
 (6) All
stock options outstanding under our current plan expire in ten
years.
 (7) The exercise price is determined by
the closing price of our common stock on the trading day immediately preceding
each grant date.
 
 -45-
  Options
Exercised and Stock Vested
 
 The
following table shows all stock options exercised and value realized upon
exercise, and all stock awards vested and value realized upon vesting, by the
named executive officers during 2007.
  Option
      Awards
              
              
              Stock
      AwardsName
              
              Number
      of Shares
                  Acquired
      on Exercise(#)
              
              
              Value
      Realized on
                  Exercise
      ($)
              
              
              Number
      of SharesAcquired
      on Vesting(#)
              
              
              Value
      Realized on
                  Vesting($)Donald
      R. Katz
              
              
              —
              
              
              
              —
              
              
              
              3,333
              
              
              
              26,431William
      H. Mitchell
              
              
              —
              
              
              
              —
              
              
              
              25,000
              
              
              
              198,250Glenn
      M. Rogers
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Brian
      M. Fielding
              
              
              25,069
              
              
              
              237,358
              
              
              
              3,160
              
              
              
              25,059Guy
      A. Story, Jr.
              
              
              —
              
              
              
              —
              
              
              
              2,900
              
              
              
              22,997
  Employment
Arrangements with Named Executive Officers
 
 Donald R. Katz. Mr. Katz’s
employment offer letter, which became effective upon the closing of the Merger,
provides for an annual base salary of $300,000. Fifty percent of Mr. Katz’s
existing, unvested equity awards granted pursuant to our 1999 Stock Incentive
Plan were accelerated upon successful completion of Amazon’s offer to purchase
all the outstanding share of our common stock. The unvested portion of such
awards were assumed by Amazon in the Merger upon the same terms as currently
provided in Mr. Katz’s then-effective equity grant agreements. Any future equity
awards to Mr. Katz will be made under Amazon’s plans and policies. Mr. Katz was
also granted a restricted stock unit award with respect to 10,539 shares of
Amazon common stock at the Effective Time. Subject to Mr. Katz’s continued
employment, 5,930 shares will vest on the first anniversary of the Effective
Time and 4,609 shares will vest quarterly between the second and third
anniversary of the Effective Time.
 
 William H. Mitchell. Mr.
Mitchell’s employment offer letter, which became effective upon the closing of
the Merger, provides for an annual base salary of $270,000. Fifty percent of Mr.
Mitchell’s unvested equity awards granted pursuant to our 1999 Stock Incentive
Plan were accelerated upon successful completion of Amazon’s offer to purchase
all our outstanding shares of common stock. The unvested portion of such awards
were assumed by Amazon in the Merger upon the same terms as provided in Mr.
Mitchell’s then-effective equity grant agreements. Any future equity awards to
Mr. Mitchell will be made under Amazon’s plans and policies. Mr. Mitchell was
also granted a restricted stock unit award with respect to 7,248 shares of
Amazon common stock on the Effective Time. Subject to Mr. Mitchell’s continued
employment, 2,332 shares will vest on the first anniversary at the Effective
Time, 1,792 shares will vest quarterly during the second year of employment
following the Effective Time and 3,124 shares will vest quarterly during the
third year of employment following the Effective Time. Mr. Mitchell is also
being provided access to a company apartment following the Merger.
  Glenn M. Rogers. Mr. Rogers
resigned effective January 4, 2008. Pursuant to the separation agreement entered
into between us and Mr. Rogers in connection with his resignation, Mr. Rogers
agreed to not take any actions that are adverse or harmful to us or to initiate
any lawsuits against us or our affiliates. Mr. Rogers also agreed to cooperate
with us in connection with the transition of his duties and in connection with
the defense of claims against or the prosecution of claims by us. We paid Mr.
Rogers a bonus payment in the amount of $125,000 on March 10, 2008. Further, we
will pay Mr. Rogers an additional aggregate amount of $125,000 in severance to
be paid in thirteen equal amounts over a six-month period according to our
regular bi-weekly pay schedule, which was an agreed upon contractual payment
pursuant to Mr. Rogers’ employment agreement with us.
 
 As of
January 4, 2008, we also amended grant agreements with Mr. Rogers pursuant to
his separation agreement with respect to 72,024 shares of outstanding, unvested
restricted stock units granted under our 1999 Stock Incentive Plan. Pursuant to
the amended grant agreements, such restricted stock units became fully vested as
of January 4, 2008 and were settled upon the closing of the Offer.
 
 All of
the above payments are conditioned upon Mr. Rogers’ continued cooperation and
compliance with the terms of the separation agreement and the terms of Mr.
Rogers’ non-disclosure, developments and non-compete agreement entered into with
us.
  Brian M. Fielding.Mr.
Fielding’s employment offer letter, which became effective upon the closing of
the Merger, provides for an annual base salary of $207,200. Fifty percent of Mr.
Fielding’s unvested equity awards granted pursuant to our 1999 Stock Incentive
Plan were accelerated upon successful completion of Amazon’s offer to purchase
all our outstanding shares of common stock. The unvested portion of such awards
were assumed by Amazon in the Merger upon the same terms as provided in Mr.
Fielding’s then-effective equity grant agreements. Any future equity awards to
Mr. Fielding will be made under Amazon’s plans and policies. Mr. Fielding
was also granted a restricted stock unit award with respect to 2,924 shares of
Amazon common stock at the Effective Time. Subject to Mr. Fielding’s continued
employment, 54% of the shares will vest on the first anniversary of the
Effective Time, 3% of the shares will vest on the second anniversary of the
Effective Time and 44% of the shares will vest on the third anniversary of the
Effective Time.
  Guy A. Story, Jr.Mr. Story’s
employment offer letter, which became effective upon the closing of the Merger,
provides for an annual base salary of $210,000. Fifty percent of Mr. Story’s
unvested equity awards granted pursuant to our 1999 Stock Incentive Plan were
accelerated upon successful completion of Amazon’s offer to purchase all
our outstanding shares of common stock. The unvested portion of such awards were
assumed by Amazon in the Merger upon the same terms as provided in Mr. Story’s
then-effective equity grant agreements. Any future equity awards to Mr. Story
will be made under Amazon’s plans and policies. Mr. Story was also granted
a restricted stock unit award with respect to 3,106 shares of Amazon common
stock at the Effective Time. Subject to Mr. Story’s continued employment, 54% of
the shares will vest on the first anniversary of the Effective Time, 2% of the
shares will vest on the second anniversary of the Effective Time and 44% of the
shares will vest on the third anniversary of the Effective Time.
  Following
the Merger, each of our employees was required to enter into an agreement with
Amazon containing confidentiality and invention assignment provisions. Each of
these employees will also be required to agree to non-competition and
non-solicitation provisions that will be effect during his or her employment and
for 18 months and one year thereafter, respectively.
  -46-
  Change
of Control and Severance Arrangements
 
 Glenn M. Rogers. Mr. Rogers
resigned effective January 4, 2008. Pursuant to the separation agreement entered
into between us and Mr. Rogers in connection with his resignation, we amended
grant agreements with Mr. Rogers with respect to 72,024 shares of outstanding,
unvested restricted stock units granted under our 1999 Stock Incentive Plan, as
amended. Pursuant to the amended grant agreements, such restricted stock units
became fully vested as of January 4, 2008 and were settled upon the closing of
the Offer.
 
 Compensation
of Directors
 
 On
October 9, 2006, William H. Washecka was granted options to purchase 50,000
shares of common stock at an exercise price of $7.29 per share, with 12,500
shares vesting on April 9, 2007, and the remaining shares vesting 3% per month
for the succeeding 25 months. Prior to the Effective Time, our non-employee
directors were paid $10,000 annually, in quarterly increments of $2,500,
beginning October 1, 2007, for their service on our Board of Directors and newly
appointed non-employee directors of our Board of Directors were granted options
to purchase 50,000 shares of common stock upon appointment.
 
 In
addition, Gary L. Ginsberg was granted options to purchase 25,000 shares of our
Common Stock at an exercise price of $10.83 per share, and James P. Bankoff was
granted options to purchase 50,000 shares of our common stock at an exercise
price of $10.83 per share. Each option was granted on August 7, 2007 with a
vesting schedule of 25% vesting on February 8, 2008, and the remaining shares
vesting 3% on the last day of each succeeding month until fully vested.
 
 Prior to
the Effective Time, The Chairman of the Audit Committee received an annual
retainer of $35,000, and each of the other members of the Audit Committee
received an annual retainer of $15,000 per year. All retainer amounts were paid
quarterly.
 
 2007
DIRECTOR COMPENSATION
 
 Name
              
              Fees
      Earnedor
      Paid inCash
      ($)
              
              
              Option
                  Awards($)
              
              
              Total
                  ($)James
      P. Bankoff
              
              
              2,500
              
              
              
              49,420
              
              
              
              51,920Gary
      L. Ginsberg
              
              
              28,500
              
              
              
              24,710
              
              
              
              53,210Johannes
      Mohn
              
              
              2,500
              
              
              
              —
              
              
              
              2,500Richard
      Sarnoff
              
              
              17,500
              
              
              
              —
              
              
              
              17,500William
      H. Washecka
              
              
              53,500
              
              
              
              95,951
              
              
              
              149,451Oren
      Zeev
              
              
              13,500
              
              
              
              —
              
              
              
              13,500
 
 REPORT
ON EXECUTIVE COMPENSATION
 
 For the
Year Ended December 31, 2007
 
 The Board
of Directors has reviewed the Compensation Discussion and Analysis and discussed
that analysis with management. Based on its review and discussion with
management, our Board of Directors recommended that the Compensation Discussion
and Analysis be included in our annual report on Form 10-K. This report is
provided by the following directors, who comprise our Board of
Directors:
 
 Donald
      R. Katz
                William
      H. Mitchell
                Anthony
      T. NashMarch
      27, 2008
 
 
  -47-
  Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
 The following table shows the number of shares of our
common stock beneficially owned as of March 26, 2008, by:
 
 ·
              each
      person known to beneficially own more than 5% of our common
      stock;
 ·
              each
      member of our Board of Directors;
 ·
              each
      of the named executive officers;
and
 ·
              all
      of the directors and executive officers as a
  group.
 
 Unless
otherwise indicated, (1) the persons named in the table have sole voting and
investment power with respect to all shares of our common stock shown as
beneficially owned by them, subject to community property laws where applicable,
and (2) the address for the persons named in the table is c/o Audible, Inc., 1
Washington Park—16th Floor, Newark, New Jersey 07102.
 
 Name
      of Beneficial Owner
              
              Number
      of
                  SharesBeneficially
                  Owned
              
              
              Percent
      ofShares
                  Outstanding (1)Amazon.com,
      Inc.
                1200
      12th Avenue South
                Suite
      1200
                Seattle,
      Washington 98144-2734
              
              
              1
              
              
              
              100
              %Donald
      R. Katz
              
              
              0
              
              
              
              *William
      H. Mitchell
              
              
              0
              
              
              
              *Brian
      M. Fielding
              
              
              0
              
              
              
              *Guy
      A. Story, Jr.
              
              
              0
              
              
              
              *Anthony
      T. Nash
              
              
              0
              
              
              
              *All
      Named Executive Officers and Directors as a Group (5
    persons)
              
              
              0
              
              
              
              *
 
 *
              Represents
      less than 1.0% beneficial ownership.(1)
              As
      of March 26, 2008, we had outstanding 1 share of our common stock. In
      compliance with the SEC rules, for purposes of calculating the percentage
      of our common stock outstanding, any securities not outstanding which are
      subject to options, warrants, restricted stock units or conversion
      privileges, are deemed outstanding for the purposes of computing the
      percentage of the outstanding securities owned by such person, but are not
      deemed to be outstanding for the purpose of computing the percentage owned
      by any other person. Share ownership in each case includes shares issuable
      upon exercise of outstanding options, warrants and restricted stock units
      that are exercisable within 60 days of March 26,
    2008.
  Item
13. Certain Relationships and Related Transactions, and Director
Independence.
 
 Certain
Relationships and Related Transactions
 
 Random
House, Inc. is a major audio book publisher which licenses audio content to us
for resale to its customers. Payments to Random House under these license
agreements exceeded 5% of our revenue in 2007. Prior to the Effecive Time,
entities affiliated with Bertelsmann AG, including Random House, Inc. and Random
House Ventures LLC, together owned less than 2% of our outstanding common
stock. Johannes Mohn, one of our former directors, is an executive at
Bertelsmann AG. Richard Sarnoff, one of our former directors, is an executive at
Random House.
 
 On August
30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
(the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
an affiliate of Bertelsmann AG.
 
 -48-
  Audible
Germany has the exclusive rights to operate a German language Audible Web site.
Under the original Joint Venture, Random House and Holtzbrinck each contributed
a nominal amount in exchange for each receiving a 24.5% interest in Audible
Germany. We were required to contribute a nominal amount in exchange for a 51%
interest in Audible Germany. After the initial formation, Random House and
Holtzbrinck were to provide additional equity financing of $1.5 million each in
certain installments, subject to Audible Germany meeting certain milestones. The
full amount has been funded by Random House and Holtzbrinck. In the event of
liquidation of Audible Germany, this additional financing by Random House and
Holtzbrinck accrues interest at 8% per annum and is senior to our capital
investment. In July 2006, a new investor, Luebbe, contributed €0.3 million for a
5% interest in Audible Germany. This contribution reduced our interest to 48%
and Random House’s and Holzbrinck’s ownership percentage to 23.5% each. We may,
but are not obligated to, contribute additional capital to the entity. Any
profits distributed by Audible Germany are to be distributed in accordance with
the ownership interests.
  In
October 2006, the original Joint Venture agreement was amended to provide
additional financing commitments for the investors. Accordingly, additional
contributions were made by us and Holtzbrinck in October 2006 and December 2006.
During the fourth quarter of 2006, we contributed €0.3 million, or $0.4 million,
which includes the amount that was due to us from Audible Germany for services
performed during the twelve month period ended December 31, 2006, and
Holtzbrinck contributed €0.7 million. In addition, we contributed a nominal
amount and Holtzbrinck contributed a nominal amount as statutory capital
contributions during the fourth quarter of 2006. These contributions further
changed the ownership percentages to 44.9% for us, 30.9% for Holtzbrinck, 19.5%
for Random House, and 4.7% for Luebbe.
 
 In July
2007, a second amendment was signed and executed to the original Joint Venture
agreement, which stipulated the additional financing commitments for us,
Holtzbrinck, Random House, and a new investor, CSW. CSW, incorporated in
Germany, is an entity owned 100% by the managing director of Audible Germany.
Additional contributions were made by these investors as follows: Audible, Inc.,
€0.7 million, Holtzbrinck, €0.5 million, Random House, €0.3 million, and CSW,
€0.2 million. In addition, each investor contributed statutory capital
contributions of less than €0.1 million. These contributions further changed
each investor’s ownership percentage to 45.4% for the Company, 29.7% for
Holtzbrinck, 19.5% for Random House, 3.4% for Luebbe, and 2.0% for
CSW.
 
 On
September 15, 2004, us, France Loisirs S.A.S. (“France Loisirs”) and Audio
Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio Direct”),
entered into a 24-month Master Alliance Agreement (the “Agreement”), the term of
which has been extended to March 31, 2010. France Loisirs is a wholly owned
subsidiary of Bertelsmann AG. During this time, terms and conditions of the
Agreement remain in effect. No additional fees will be paid to us other than
billings for consulting and incremental costs and royalty payments to us
discussed below.
 
 Under the
Agreement, in the quarter ended March 31, 2005, France Loisirs launched a French
language spoken word audio service through Audio Direct. The terms provide for
us to provide intellectual property and substantially all of the technological
infrastructure for the operation of the service. In return, France Loisirs was
required to pay us $1.0 million, payable as follows: $0.3 million in September
2004, $0.3 million in October 2004, $0.3 million in January 2005 and $0.1
million evenly over the following 12 months. As of December 31, 2006, we had
received the full amount. Commencing the first fiscal year after the business
achieves positive net income, we will receive a royalty of 5% of the business's
annual net paid revenue. Net paid revenue refers to net revenues for digital
spoken word content after the deduction of taxes but excluding certain hardware
revenue. The 5% royalty will apply until the business net paid revenue exceeds
€20.0 million. Once net paid revenue exceeds €20.0 million, we will receive a
flat fee of €1.0 million annually. If net paid revenue exceeds €33.3 million, we
will receive a royalty payment of €1.0 million, plus 3% of net paid revenue in
excess of €33.3 million. An additional royalty is payable equal to one-half of
the distributable pre-tax profits of the business.
 
 Director
Independence
 
 Following
the Effective Time, none of our Board of Directors are independent as defined
under the Nasdaq Marketplace Rules.
  Item 14. Principal Accounting Fees and Services.
 
 Audit Fees. The aggregate fees
billed by McGladrey & Pullen, LLP for professional services rendered for the
audit of our financial statements for the fiscal year ended December 31, 2007,
for the audit of internal control over financial reporting, reviews of our
interim financial statements included in our Forms l0-Q for the fiscal year,
issuance of consents and accounting research and consultation was $0.9
million.
  -49-
  The
aggregate fees billed by KPMG, LLP for professional services rendered for the
audit of our financial statements for the fiscal year ended December 31, 2006,
the 2006 audit of internal control over financial reporting including our
assessment of the effectiveness of internal control over financial reporting,
reviews of our interim financial statements included in our Forms l0-Q, issuance
of consents and accounting research and consultation in 2006 were $1.5
million, In 2007, KPMG, LLP billed us $0.3 million related to reviews of our
interim financial statements for the first and second quarters and issuance
of  consents, accounting research and consultation.
 
 Audit Related Fees. There were
no aggregate fees billed by McGladrey & Pullen, LLP for audit-related
services during the fiscal year ended December 31, 2007.
 
 There
were no fees billed by KPMG LLP for audit-related services during the fiscal
years ended December 31, 2007 and 2006.
 
 Tax Fees. There were no fees
billed by McGladrey & Pullen, LLP or KPMG LLP for professional services
rendered for tax compliance, tax advice or tax planning for the fiscal years
ended December 31, 2007 and 2006.
 
 All Other Fees. There were no
other fees billed or other services rendered by McGladrey & Pullen, LLP or
KPMG LLP during the fiscal years ended December 31, 2007 and 2006.
 
 Prior to
its dissolution in connection with the Merger, the Audit Committee adopted a
formal policy concerning the pre-approval of audit and non-audit services to be
provided by the independent registered public accounting firm to the Company.
The policy required that all services to be performed by the Company’s
independent registered public accounting firm, including audit services,
audit-related services and permitted non-audit services, be pre-approved by the
Audit Committee. The policy permitted the Audit Committee to delegate
pre-approval authority to one or more members, provided that any pre-approval
decisions are reported to the Audit Committee at its next meeting. Specific
services being provided by the independent registered public accounting firm
were regularly reviewed in accordance with the pre-approval policy. At
subsequent Audit Committee meetings, the Audit Committee received updates on
services being provided by the independent registered public accounting firm,
and management could present additional services for approval. For 2007 and
2006, all audit and permissible non-audit services provided by McGladrey &
Pullen, LLP and KPMG LLP were approved in advance by the Audit
Committee.
 
 PART IV
 
 Item
15. Exhibits, Financial Statement Schedules.
  (a)
      Documents filed as part of the report:
              
              Page(1)
              Consolidated
      Financial StatementsReport of Independent Registered Public Accounting
      Firm
              
              F-1Report of Independent Registered Public Accounting
      Firm
              
              F-2Consolidated Balance Sheets at December 31, 2006 and
      2007
              
              F-3Consolidated Statements of Operations for the years
      ended December 31, 2005, 2006 and 2007
              
              F-4Consolidated Statements of Comprehensive (Loss) Income
      for the years ended December 31, 2005, 2006 and 2007
              
              F-5Consolidated Statements of Stockholders' Equity for the
      years ended December 31, 2005, 2006 and 2007
              
              F-6Consolidated Statements of Cash Flows for the years ended
      December 31, 2005, 2006 and 2007
              
              F-8Notes to Consolidated Financial
      Statements
              
              F-9(2)
              Consolidated
      Financial Statement SchedulesAll
      consolidated financial statement schedules have been omitted
      because the applicable information has been included in the
      accompanying footnotes to the consolidated financial
      statements.(3)
              ExhibitsThe
      following exhibits are filed or incorporated by reference, as stated
      below:
  -50-
  Exhibit
      Number
              
              Description
      of Exhibit Index2.1
              
              Agreement
      and Plan of Merger, dated as of January 30, 2008 (1)3.1
              
              Amended
      and Restated Certificate of Incorporation of Audible, Inc.
    (3)3.2
                10.15
              
              Amended
      and Restated Bylaws.  (5)
                1999
      Stock Incentive Plan.  (2)10.41
              
              Form
      of common stock warrant issued by Audible Inc. to investor parties in
      connection with the Series A Settlement Agreement dated February 6,
      2004.  (4)10.43*
              
              License
      and Services Agreement by and between Audible Inc., and Audible GmbH dated
      August 30, 2004.  (6)10.44*
              
              Master
      Alliance Agreement by and between Audible Inc., France Loisirs S.A.S. and
      Audio Direct S.A.S. dated September 15,
    2004.  (6)10.45
              
              Articles
      of Association of Audible GmbH.  (6)10.47*
              
              Digital
      Download Agreement with Apple Computer, Inc. dated July 27,
      2006.  (7)10.48
              
              Office
      lease dated September 27, 2006, between Audible, Inc., as tenant, &
      Washington Park Fidelco, LLC, as landlord(7)10.49
              
              First
      Amendment to the License and Services Agreement by and between Audible
      Inc., and Audible GmbH dated October 5, 2006 (related to Exhibit 10.43)
      .  (7)10.50
              
              First
      Amendment to the Master Alliance Agreement by and between Audible Inc.,
      France Loisirs S.A.S. and Audio Direct S.A.S. dated September 15, 2006
      (related to Exhibit 10.44).   (7)10.51
              
              Letter
      of Employment by and between the Company and William H. Mitchell, dated
      November 20, 2006.  (8)10.52
              
              Letter
      of Employment by and between the Company and Donald R. Katz, dated January
      2, 2007.   (9)10.54
              
              Second
      amendment to the Master Alliance Agreement by and between, Audible, Inc.,
      France Loisirs S.A.S and Audio Direct S.A.S. dated November 30, 2006
      (related to Exhibit 10.44). (10)10.55
              
              Third
      amendment to the Master Alliance Agreement by and between Audible, Inc.,
      France Loisirs S.A.S. and Audio Direct S.A.S. dated March 31, 2007.
      (11)14.1
              
              Audible
      Code of Ethics and Business Conduct.  (12)21.1
              
              List
      of subsidiaries.  (12)23.1
              
              Consent of  McGladrey
      & Pullen, LLP, independent Registered Public Accounting
      Firm23.2
              
              Consent of KPMG LLP, former
      Independent Registered Public Accounting Firm24.1
              
              Power
      of attorney (included on signature page).31.1
              
              Annual Certifications of the Chief
      Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
              
              Annual Certifications of the Chief
      Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1
              
              Annual Certifications of the Chief
      Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
      of2002.32.2
              
              Annual Certifications of the Chief
      Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.(1)
              
              Incorporated
      by reference from the Company’s Form 8-K dated February 5,
      2008.(2)
              
              Incorporated
      herein by reference to the Company's Registration Statement on Form S-1,
      No. 333-76985.(3)
              
              Incorporated
      by reference from the Company's 8-K dated March
    19, 2008.(4)
              
              Incorporated
      by reference from the Company's 10-K for the fiscal year ended December
      31, 2003.(5)
              
              Incorporated
      by reference from the Company’s 8-K dated November 6,
  2007.(6)
              
              Incorporated
      by reference from the Company's Form 10-Q for the quarterly period ended
      September 30, 2004.(7)
              
              Incorporated
      by reference from the Company’s Form 10-Q for the quarterly period ending
      September 30, 2006.(8)
              
              Incorporated
      by reference from the Company's 8-K dated November 21,
    2006.(9)
              
              Incorporated
      by reference from the Company's 8-K dated January 8,
  2007.(10)
              
              Incorporated
      by reference from the Company’s 10-K for the fiscal year ended December
      31, 2006.(11)
              
              Incorporated
      by reference from the Company’s Form 10-Q for the quarterly period ended
      March 31, 2007.(12)
              
              Incorporated
      by reference from the Company’s 10-K for the fiscal year ended December
      31, 2005.
 
 *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.
  -51-
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
 
 AUDIBLE,
      INC.By:
              /s/ Donald
      R. KatzDonald
      R. KatzChief
      Executive OfficerDate: 
      March 27,  2008
 
 POWER
OF ATTORNEY
 
 Each
person whose signature appears below in so signing also makes, constitutes, and
appoints Donald R. Katz and William H. Mitchell, 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.
  Pursuant
to the requirements of the Securities Exchange Act of 1934 this report has been
signed below by the following persons on behalf of the registrant, in the
capacities and on the dates indicated.
 
 Name
              
              Title
              
              Date/s/
      Donald R. Katz
              
              
              
              March
      27, 2008Donald
      R. Katz
              
              Chief
      Executive Officer(principal
      executive officer)/s/
      William H. Mitchell
              
              
              
              March
      27, 2008William
      H. Mitchell
              
              Chief
      Financial Officer(principal
      financial and accounting officer)/s/
      Anthony T. Nash
              
              
              
              March
      27, 2008Anthony
      T. Nash
              
              Vice
      President-Corporate Controller
  -52-
  Report of Independent Registered Public Accounting
Firm
 
 To the
Board of Directors and Shareholders
 Audible,
Inc.
 
 We have
audited the consolidated balance sheet of Audible, Inc and subsidiary as of
December 31, 2007, and the related consolidated statements of operations,
comprehensive income (loss), stockholders’ equity, and cash flows for the year
ended December 31, 2007. Our audit also included the financial statement
schedules of Audible, Inc. listed in Item 15(a). These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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 audit provides a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Audible, Inc. and subsidiary
as of December 31, 2007 and the results of their operations and their cash flows
for the year ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
 
 As
discussed in Note 2 to the consolidated financial statements, effective
January 1, 2007, the Company adopted FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an Interpretation of FASB
No. 109”.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Audible Inc. and subsidiary's internal control
over financial reporting as of December 31, 2007, based on"criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) and our report dated March 27,
2008, expressed an unqualified opinion on the effectiveness of Audible
Inc.’s internal control over financial reporting.
 
 /s/
McGladrey & Pullen, LLP
 New York,
New York
 March 27,
2008
 
 
 F-1
  Report of Independent Registered Public Accounting
Firm
   The Board
of Directors and Stockholders
  Audible,
Inc.:
   We have
audited the accompanying consolidated balance sheet of Audible, Inc. and
subsidiary as of December 31, 2006, and the related consolidated statements of
operations, comprehensive loss, stockholders’ equity, and cash flows for each of
the years in the two-year period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
   We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
   In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Audible, Inc. and subsidiary
as of December 31, 2006, and the results of their operations and their cash
flows for each of the years in the two-year period ended December 31, 2006, in
conformity with U.S. generally accepted accounting principles.
   As
discussed in Note 5 to the consolidated financial statements, the Company
changed its method of accounting for share-based compensation effective January
1, 2006. Also, as discussed in Note 17, the Company changed its method for
quantifying misstatements effective January 1, 2006.
   /s/ KPMG
LLP
  Short
Hills, New Jersey
  April 2,
2007
   
 F-2
  AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED
BALANCE SHEETS
 (dollars
in thousands, except share and per share data)
 
 December
      31,2006
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              14,925
              
              
              $
              72,384Short-term
      investments
              
              
              51,295
              
              
              
              8,453Interest
      receivable on short-term investments
              
              
              626
              
              
              
              332Accounts
      receivable, net of provision for refunds and chargebacks of $40 and $46 at
      December 31, 2006 and 2007, respectively
              
              
              4,181
              
              
              
              5,007Accounts
      receivable - related parties
              
              
              100
              
              
              
              443Royalty
      advances
              
              
              710
              
              
              
              310Prepaid
      expenses and other current assets
              
              
              1,797
              
              
              
              740Inventory
              
              
              212
              
              
              
              69Total
      current assets
              
              
              73,846
              
              
              
              87,738Property
      and equipment, net
              
              
              8,149
              
              
              
              9,910Investment
      in related party, net
              
              
              --
              
              
              
              657Other
      assets
              
              
              781
              
              
              
              1,695Total
      assets
              
              $
              82,776
              
              
              $
              100,000LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              3,121
              
              
              $
              1,796Accrued
      expenses
              
              
              4,678
              
              
              
              3,804Accrued
      royalties
              
              
              9,028
              
              
              
              9,532Accrued
      compensation
              
              
              778
              
              
              
              6,241Deferred
      revenue
              
              
              13,840
              
              
              
              18,651Total
      current liabilities
              
              
              31,445
              
              
              
              40,024Deferred
      revenue, noncurrent
              
              
              513
              
              
              
              546Other
      liabilities, noncurrent
              
              
              262
              
              
              
              1,734Royalty
      obligations, noncurrent
              
              
              90
              
              
              
              -Commitments
      and contingenciesStockholders'
      equity:Common
      stock, par value $0.01. Authorized 40,000,000 shares at December 31, 2006
      and 2007; 24,119,768 and 24,306,766 shares issued and outstanding at
      December 31, 2006 and 2007, respectively
              
              
              241
              
              
              
              243Additional
      paid-in capital
              
              
              190,799
              
              
              
              195,617Accumulated
      other comprehensive loss
              
              
              (36
              )
              
              
              (51
              )Accumulated
      deficit
              
              
              (140,538
              )
              
              
              (138,113
              )Total
      stockholders' equity
              
              
              50,466
              
              
              
              57,696Total
      liabilities and stockholders' equity
              
              $
              82,776
              
              
              $
              100,000
 
 See
accompanying notes to consolidated financial statements.
  F-3
  AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS
OF OPERATIONS
 (dollars
in thousands, except share and per share data)
 
 Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Revenue,
      net:Content
      and services revenue:Consumer
      content
              
              $
              62,185
              
              
              $
              80,217
              
              
              $
              108,158Point
      of sale rebates
              
              
              (1,006
              )
              
              
              (318
              )
              
              
              (37
              )Services
              
              
              131
              
              
              
              111
              
              
              
              109Total
      content and services revenue
              
              
              61,310
              
              
              
              80,010
              
              
              
              108,230Hardware
      revenue
              
              
              612
              
              
              
              431
              
              
              
              310Related
      party revenue
              
              
              1,146
              
              
              
              1,247
              
              
              
              648Other
      revenue
              
              
              169
              
              
              
              344
              
              
              
              780Total
      revenue, net
              
              
              63,237
              
              
              
              82,032
              
              
              
              109,968Operating
      expenses:Cost
      of content and services revenue:Royalties
      and other content charges
              
              
              22,613
              
              
              
              33,677
              
              
              
              47,947Discount
      certificate rebates
              
              
              1,556
              
              
              
              1,328
              
              
              
              588Total
      cost of content and services revenue
              
              
              24,169
              
              
              
              35,005
              
              
              
              48,535Cost
      of hardware revenue
              
              
              2,934
              
              
              
              1,953
              
              
              
              616Cost
      of related party revenue
              
              
              256
              
              
              
              637
              
              
              
              476Operations
              
              
              9,355
              
              
              
              12,168
              
              
              
              14,887Technology
      and development
              
              
              8,239
              
              
              
              16,984
              
              
              
              18,324Marketing
              
              
              13,387
              
              
              
              15,322
              
              
              
              16,945General
      and administrative
              
              
              8,366
              
              
              
              12,009
              
              
              
              13,903Total
      operating expenses
              
              
              66,706
              
              
              
              94,078
              
              
              
              113,686Loss
      from operations
              
              
              (3,469
              )
              
              
              (12,046
              )
              
              
              (3,718
              )Loss
      on equity investment
              
              
              --
              
              
              
              (364
              )
              
              
              (380
              )Other
      income (expense):Interest
      income
              
              
              2,078
              
              
              
              2,975
              
              
              
              3,536Interest
      expense
              
              
              (1
              )
              
              
              --
              
              
              
              (1
              )Other
      income, net
              
              
              2,077
              
              
              
              2,975
              
              
              
              3,535Loss
      before income tax expense
              
              
              (1,392
              )
              
              
              (9,435
              )
              
              
              (563
              )Income
      tax expense
              
              
              (1
              )
              
              
              (14
              )
              
              
              (160
              )State
      income tax benefit
              
              
              740
              
              
              
              769
              
              
              
              3,148Net
      (loss) income
              
              
              (653
              )
              
              
              (8,680
              )
              
              
              2,425Net
      (loss) income
              
              $
              (653
              )
              
              $
              (8,680
              )
              
              $
              2,425Basic
      net (loss) income per share
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              0.10Basic
      weighted average shares outstanding
              
              
              24,195,771
              
              
              
              24,371,844
              
              
              
              24,311,667Diluted
      net  (loss) income per share
              
              $
              (0.03
              )
              
              $
              (0.36
              )
              
              $
              0.10Diluted
      weighted average shares outstanding
              
              
              24,195,771
              
              
              
              24,371,844
              
              
              
              24,801,490
 
 See
accompanying notes to consolidated financial statements.
  F-4
  AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (dollars
in thousands)
  Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Net (loss)
      income
              
              $
              (653
              )
              
              $
              (8,680
              )
              
              $
              2,425Other
      comprehensive income (loss):Foreign
      currency translation adjustment
              
              
              15
              
              
              
              (51
              )
              
              
              (15
              )Comprehensive
      (loss) income
              
              $
              (638
              )
              
              $
              (8,731
              )
              
              $
              2,410
 
 See
accompanying notes to consolidated financial statements.
 
  F-5
  AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 (dollars
and shares in thousands)
  Common
      Stock
              
              
              Treasury
      Stock
              
              
              AdditionalShares
              
              
              Par
      Value
              
              
              Shares
              
              
              Cost
              
              
              Paid-in
      capitalBalance
      at December 31, 2004
              
              
              24,170
              
              
              $
              242
              
              
              
              (230
              )
              
              $
              (185
              )
              
              $
              187,249Cashless
      exercise of common stock warrants
              
              
              24
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Exercise
      of common stock options
              
              
              246
              
              
              
              2
              
              
              
              --
              
              
              
              --
              
              
              
              689Exercise
      of common stock warrants
              
              
              117
              
              
              
              1
              
              
              
              --
              
              
              
              --
              
              
              
              293Reversal
      of deferred compensation related to forfeiture of stock
      options
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (9
              )Amortization
      of deferred compensation
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Issuance
      of restricted stock units, net of cancellations
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              4,238Issuance
      of stock options below fair market value
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              270Retirement
      of treasury stock
              
              
              (230
              )
              
              
              (2
              )
              
              
              230
              
              
              
              185
              
              
              
              (183
              )Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Net
      loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Balance
      at December 31, 2005
              
              
              24,327
              
              
              $
              243
              
              
              
              --
              
              
              $
              --
              
              
              $
              192,547Exercise
      of common stock warrants
              
              
              167
              
              
              
              2
              
              
              
              --
              
              
              
              --
              
              
              
              748Exercise
      of common stock options
              
              
              250
              
              
              
              2
              
              
              
              --
              
              
              
              --
              
              
              
              631Shares
      issued upon vesting of restricted stock
              
              
              12
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Elimination
      of deferred compensation upon SFAS 123R adoption
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (3,696
              )Share-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,914Repurchase
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              (636
              )
              
              
              (5,351
              )
              
              
              --Retirement
      of treasury stock
              
              
              (636
              )
              
              
              (6
              )
              
              
              636
              
              
              
              5,351
              
              
              
              (5,345
              )Cumulative
      effect adjustments under SAB108
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Net
      loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Balance
      at December 31, 2006
              
              
              24,120
              
              
              $
              241
              
              
              
              --
              
              
              $
              --
              
              
              $
              190,799Exercise
      of common stock warrants
              
              
              28
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              76Exercise
      of common stock options
              
              
              181
              
              
              
              2
              
              
              
              --
              
              
              
              --
              
              
              
              514Shares
      issued upon vesting of restricted stock
              
              
              122
              
              
              
              1
              
              
              
              --
              
              
              
              --
              
              
              
              (1
              )Share-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              6,194Repurchase
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              (144
              )
              
              
              (1,414
              )
              
              
              --Retirement
      of treasury stock
              
              
              (144
              )
              
              
              (1
              )
              
              
              144
              
              
              
              1,414
              
              
              
              (1,413
              )Shares
      withheld for payment of taxes due on restricted stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (572
              )Income
      tax benefit from stock options exercised
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              20Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Net
      loss
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Balance
      at December 31, 2007
              
              
              24,307
              
              
              $
              243
              
              
              
              --
              
              
              $
              --
              
              
              $
              195,617
 
 See
accompanying notes to consolidated financial statements.
  F-6
  AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
 (dollars
and shares in thousands)
  Accumulated
      deficit
              
              
              Deferred
      compensation
              
              
              Accumulated
                comprehensive
                income
      (loss)
              
              
              Total
      stockholders' equityBalance
      at December 31, 2004
              
              $
              (130,061
              )
              
              $
              (154
              )
              
              $
              --
              
              
              $
              57,091Cashless
      exercise of common stock warrants
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Exercise
      of common stock options
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              691Exercise
      of common stock warrants
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              294Reversal
      of deferred compensation related to forfeiture of stock
      options
              
              
              --
              
              
              
              9
              
              
              
              --
              
              
              
              --Amortization
      of deferred compensation
              
              
              --
              
              
              
              981
              
              
              
              --
              
              
              
              981Issuance
      of restricted stock, net of cancellations
              
              
              --
              
              
              
              (4,262
              )
              
              
              --
              
              
              
              (24
              )Issuance
      of stock options below fair market value
              
              
              --
              
              
              
              (270
              )
              
              
              --
              
              
              
              --Retirement
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              15
              
              
              
              15Net
      loss
              
              
              (653
              )
              
              
              --
              
              
              
              --
              
              
              
              (653
              )3)Balance
      at December 31, 2005
              
              $
              (130,714
              )
              
              $
              (3,696
              )
              
              $
              15
              
              
              $
              58,395Exercise
      of common stock warrants
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              750Exercise
      of common stock options
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              633Shares
      issued upon vesting of restricted stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Elimination
      of deferred compensation upon SFAS 123R adoption
              
              
              --
              
              
              
              3,696
              
              
              
              --
              
              
              
              --Share-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              5,914Repurchase
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (5,351
              )Retirement
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Cumulative
      effect adjustments under SAB108
              
              
              (1,144
              )
              
              
              --
              
              
              
              --
              
              
              
              (1,144
              )Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              (51
              )
              
              
              (51
              )Net
      loss
              
              
              (8,680
              )
              
              
              --
              
              
              
              --
              
              
              
              (8,680
              )Balance
      at December 31, 2006
              
              $
              (140,538
              )
              
              $
              --
              
              
              $
              (36
              )
              
              $
              50,466Exercise
      of common stock warrants
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              76Exercise
      of common stock options
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              516Shares
      issued upon vesting of restricted stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Share-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              6,194Repurchase
      of treasury stock
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,414
              )Retirement
      of treasury stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --Shares
      withheld for payment of taxes due on restricted stock
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (572
              )Income
      tax benefit from stock options exercised
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              20Foreign
      currency translation adjustment
              
              
              --
              
              
              
              --
              
              
              
              (15
              )
              
              
              (15
              )Net
      income
              
              
              2,425
              
              
              
              --
              
              
              
              --
              
              
              
              2,425Balance
      at December 31, 2007
              
              $
              (138,113
              )
              
              
              --
              
              
              
              (51
              )
              
              $
              57,696
  See
accompanying notes to consolidated financial statements.
 
  F-7
 
 AUDIBLE,
INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (dollars
in thousands)
 
 Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Cash
      flows from operating activities:Net
      income (loss)
              
              $
              (653
              )
              
              $
              (8,680
              )
              
              $
              2,425Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              1,106
              
              
              
              5,018
              
              
              
              5,318Impairment
      of long-lived asset
              
              
              --
              
              
              
              144
              
              
              
              160Loss
      on equity investment in related party
              
              
              --
              
              
              
              364
              
              
              
              380Noncash
      stock-based compensation charge
              
              
              957
              
              
              
              5,914
              
              
              
              6,194Amortization
      of audio production costs
              
              
              2
              
              
              
              153
              
              
              
              553Income
      tax benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              20Accretion
      of discounts on investments
              
              
              (1,184
              )
              
              
              (1,004
              )
              
              
              (881
              )Changes
      in assets and liabilities:Interest
      receivable on short-term investments
              
              
              (352
              )
              
              
              (198
              )
              
              
              294Accounts
      receivable, net
              
              
              (1,550
              )
              
              
              (1,833
              )
              
              
              (823
              )Accounts
      receivable from related party
              
              
              (506
              )
              
              
              130
              
              
              
              (403
              )Royalty
      advances
              
              
              (330
              )
              
              
              (239
              )
              
              
              400Prepaid
      expenses and other current assets
              
              
              (233
              )
              
              
              (896
              )
              
              
              1,059Inventory
              
              
              (104
              )
              
              
              293
              
              
              
              144Other
      assets
              
              
              (95
              )
              
              
              (817
              )
              
              
              (1,467
              )Accounts
      payable
              
              
              3,903
              
              
              
              (1,640
              )
              
              
              (1,326
              )Accrued
      expenses
              
              
              3,062
              
              
              
              (724
              )
              
              
              (967
              )Accrued
      royalties
              
              
              3,222
              
              
              
              3,902
              
              
              
              499Accrued
      compensation
              
              
              420
              
              
              
              (101
              )
              
              
              5,460Other
      liabilities, non current
              
              
              --
              
              
              
              262
              
              
              
              1,471Deferred
      revenue
              
              
              4,114
              
              
              
              7,125
              
              
              
              4,843Net
      cash provided by operating activities
              
              
              11,779
              
              
              
              7,173
              
              
              
              23,353Cash
      flows from investing activities:Purchases
      of property and equipment
              
              
              (3,706
              )
              
              
              (4,280
              )
              
              
              (6,051
              )Capitalized
      internally developed software costs
              
              
              (4,640
              )
              
              
              (872
              )
              
              
              (1,188
              )Investment
      in related party
              
              
              --
              
              
              
              --
              
              
              
              (978
              )Purchases
      of short-term investments
              
              
              (79,546
              )
              
              
              (85,465
              )
              
              
              (44,313
              )Proceeds
      from maturity of short-term investments
              
              
              73,500
              
              
              
              90,790
              
              
              
              88,036Net
      cash (used in) provided by  investing activities
              
              
              (14,392
              )
              
              
              173
              
              
              
              35,506Cash
      flows from financing activities:Proceeds
      from exercise of common stock options
              
              
              691
              
              
              
              633
              
              
              
              516Proceeds
      from exercise of common stock warrants
              
              
              294
              
              
              
              750
              
              
              
              76Repurchase
      of treasury stock at cost
              
              
              --
              
              
              
              (5,351
              )
              
              
              (1,414
              )Payment
      of taxes due on vested restricted stock
              
              
              --
              
              
              
              --
              
              
              
              (572
              )Payment
      of principal on obligations under capital leases
              
              
              (121
              )
              
              
              --
              
              
              
              --Net
      cash provided by (used in) financing activities
              
              
              864
              
              
              
              (3,968
              )
              
              
              (1,394
              )Effect
      of exchange rate changes on cash and cash equivalents
              
              
              2
              
              
              
              (2
              )
              
              
              (6
              )(Decrease)
      increase in cash and cash equivalents
              
              
              (1,747
              )
              
              
              3,376
              
              
              
              57,459Cash
      and cash equivalents at beginning of year
              
              
              13,296
              
              
              
              11,549
              
              
              
              14,925Cash
      and cash equivalents at end of year
              
              $
              11,549
              
              
              $
              14,925
              
              
              $
              72,384
 
 See Note
15 for supplemental disclosure of cash flow information.
 
 See
accompanying notes to consolidated financial statements.
  F-8
  (1) Description of Business and Business
Conditions
  The
Business
  Audible,
Inc. and its subsidiary (together the “Company”), incorporated on November 3,
1995. The Company was formed to create the Audible service, the Internet's
leading provider of digital spoken entertainment information and educational
programming for playback on personal computers and mobile devices. The Company
commenced commercial operations in October 1997.
 
 Business
Conditions
  The
Company recorded net income of $2.4 million for the year ended December 31,
2007. The Company experienced net losses applicable to common shareholders of
$0.7 million and $8.7 million during the years ended December 31, 2005, and
2006, respectively, and had an accumulated deficit of $138.1 million as of
December 31, 2007. As of December 31, 2007, the Company's cash and cash
equivalents balance was $72.4 million, and its short-term investments balance
was $8.5 million.
 
 On March
18, 2008, following the completion of a tender offer by AZBC Holdings, Inc.
(“Purchaser”), a wholly-owned subsidiary of Amazon.com, Inc. (“Amazon”),
Purchaser was merged into Audible, Inc. pursuant to an Agreement and Plan of
Merger, dated January 30, 2008. Audible is now a wholly-owned subsidiary of
Amazon.
  (2) Summary
of Significant Accounting Policies
 
 Basis
of Presentation
 
 Commencing
in the quarter ending March 31, 2005, the Company began international operations
in the United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a
wholly-owned subsidiary of Audible, Inc. and therefore its results of operations
are consolidated as of the end of each reporting period. The accompanying
consolidated financial statements as of and for the years ended December 31,
2005, 2006 and 2007 include the accounts of Audible, Inc. and Audible UK since
its inception. All inter-company transactions and balances have been
eliminated.
 
 Cash
and Cash Equivalents
  The
Company considers short-term, highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of money market funds and notes due from
governmental agencies. Cash consists of funds held in the Company's checking
account.
 
 Short-Term
Investments
 
 Investments
purchased with a maturity of more than three months, and less than twelve
months, are classified as short-term investments. The Company's short-term
investments, as of December 31, 2006 and 2007 of $51.3 million and $8.5 million,
respectively, consisted of governmental agency notes and mortgage-backed
securities that are to be held to maturity because the Company has the positive
intent and ability to hold these securities to maturity. Held to maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Dividend and interest income are
recognized when earned. Premiums and discounts are amortized or accreted over
the life of the related held-to-maturity security as an adjustment to yield
using the effective interest method. A decline in the market value of
held-to-maturity security below that which is deemed to be other-than-temporary
results in a reduction in carrying amount to fair value. The impairment is
charged to operations and a new cost basis for the security is established. To
determine whether an impairment is other-than-temporary, the Company considers
whether it has the ability and intends to hold the investment until a market
price recovery and considers whether evidence indicating the cost of the
investment is recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in the value subsequent to year
end, and forecasted performance of the investee.
 
 The
amortized cost, gross unrealized holding gains and the fair value of
held-to-maturity debt securities at December 31, 2006 and 2007 were
$51.3 million, less than $0.1 million, and $51.3 million and $8.5 million,
respectively.
 
 All of
the debt securities classified as held-to-maturity
mature before December 31, 2008.
 
  F-9
  Provision
for Refunds and Chargebacks
 
 The
provision for refunds and chargebacks is recorded as a reduction of revenue and
is estimated based on a percentage of revenue, taking into account historical
experience. A portion of the provision is recorded as a reduction of accounts
receivable based on an estimate of refunds that will be made related to sales
that were unpaid at period-end. The remaining portion of the provision is
reflected as an accrued liability at period-end. Actual refunds and chargebacks
could differ from the Company's estimate.
 
 The
amount of the provision that was recorded as a reduction of accounts receivable
as of December 31, 2006 and 2007 was less than $0.1 million each
year.
 
 The
activity in the provision account during the years ended December 31, 2005,
2006, and 2007 was as follows (in thousands):
 
 Balance
      at December 31, 2004
              
              $
              183Provision
      for refunds and chargebacks
              
              
              1,917Refunds
      and chargebacks provided
              
              
              (1,782
              )Balance
      at December 31, 2005
              
              $
              318Provision
      for refunds and chargebacks
              
              
              2,436Refunds
      and chargebacks provided
              
              
              (2,625
              )Balance
      at December 31, 2006
              
              $
              129Provision
      for refunds and chargebacks
              
              
              1,645Refunds
      and chargebacks provided
              
              
              (1,643
              )Balance
      at December 31, 2007
              
              $
              131
 
 Inventory
  Inventory
is stated at the lower of cost or market using the first-in, first-out method.
As of December 31, 2006 and 2007, inventory consists of digital audio players
manufactured by third party manufacturers.
 
 Audio
Production Costs
 
 Beginning
in 2006, the Company began recording original content not previously available
in audio. The Company capitalizes audio production costs incurred in connection
with the creation of the master copy of an audio title, which includes talent,
editorial and other costs. These costs are stated at the lower of cost, less
accumulated amortization, or fair value. These production costs are amortized
beginning in the month the title is released, on a straight-line basis over a
two year period, which is the estimated substantial economic life of the title,
and are recognized as cost of content revenue in the consolidated Statement of
Operations. The remaining unamortized balance is periodically reviewed, and
adjusted if necessary, to reflect the fair value.
 
 The
capitalized audio production costs and accumulated amortization as of December
31, 2006 and 2007, was as follows (in thousands):
 
 December
      31,2006
              
              2007Capitalized
      audio production costs
              
              $
              697
              
              
              $
              2,042Less:
      accumulated amortization
              
              
              (155
              )
              
              
              (708
              )Net
      capitalized audio production costs
              
              $
              542
              
              
              
              1,334
 
 These
costs are included in Other assets on the accompanying consolidated Balance
Sheets.
 
 Property
and Equipment
 
 Property
and equipment, which includes computer server and Web site equipment, office
furniture and equipment, leasehold improvements, internally developed software,
studio equipment, and software licenses, are stated at cost. Property and
equipment under capital leases are stated at the present value of minimum lease
payments. Depreciation is calculated using the straight-line method over the
estimated useful lives of the respective assets, and for leasehold improvements,
over the shorter of the estimated useful life of the asset or the lease
term.
 
  F-10
  For
assets placed in service prior to January 1, 2007, the Company estimated the
useful lives to be three years for computer server and Web site equipment, and
software licenses, and two years for office furniture and equipment, internally
developed software, and studio equipment. As of January 1, 2007, the Company
reassessed the useful lives of its new asset purchases. For assets placed in
service after January 1, 2007, the Company estimates the useful lives to be
three years for office computers, five years for computer servers, web site
equipment, studio equipment, office appliances and telephone equipment and seven
years for office furniture. Office appliances, telephone equipment, office
furniture and office computers are grouped together in office furniture and
equipment in Note 3. There has been no change to the estimated useful lives for
software licenses and internally developed software. Property and equipment held
under capital leases are amortized on a straight-line basis over the estimated
useful life of the asset. The amortization is included within depreciation
expense in the Consolidated Statement of Cash Flows.
 
 In June
2006, in anticipation of the Company’s move to its new facility, the Company
reassessed the estimated useful lives of its existing office furniture, and
equipment and leasehold improvements located at the old corporate office. The
existing office furniture and equipment was depreciated using the straight line
method over a two year period and leasehold improvements were amortized on a
straight-line basis over the lease term or the estimated useful lives of the
asset, whichever was shorter. In June 2006, the Company changed the remaining
estimated useful life of these assets to seven months and in December 2006,
extended the previous estimate by an additional two months to coincide with the
termination of the Company’s office lease. The change in estimate resulted in a
higher depreciation expense of $0.1 million for the year ended December 31,
2006.
 
 Work in
process consists of expenditures for the development of various computer
software projects incurred subsequent to the completion of the preliminary
project stage. In accordance with SOP 98-1,Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, the Company has
capitalized external direct costs of material and services developed or obtained
for these projects and payroll and payroll related expenses for employees
directly associated with these projects. Amortization for each software
project begins when the computer software is ready for its intended
use.
 
 Construction
in progress represents leasehold improvement costs related to the development
and construction of the new office space. Amortization for office leasehold
improvements will begin once the project is complete and will be amortized on a
straight-line basis over the lease term or the estimated useful life of the
asset, whichever is shorter. Maintenance and repairs are expensed as
incurred.
 
 Tenant
Leasehold Improvement Allowance
 
 In
accordance with the terms of the corporate office lease for its facility in
Newark, New Jersey, the landlord is subject to pay a tenant leasehold
improvement allowance to the Company for leasehold improvement work performed at
the facility, up to a maximum amount per square foot. In June 2007, the Company
billed the landlord $1.3 million for this tenant allowance, of which $1.1
million had been paid as of December 31, 2007.
 
 In
accordance with FASB Technical Bulletin, or FTB, No. 88-1, Issues Relating to Accounting for
Leases, the tenant allowance is an incentive that is considered a
reduction of rental expense, which is amortized on a straight-line basis over
the remaining term of the lease on the accompanying Consolidated Balance Sheets
as of December 31, 2007 and December 31, 2006. Straight-line rent expense in
excess of rent payments due is recorded as deferred rent. The current portion of
the tenant allowance is recorded as deferred rent within accrued expenses. The
non-current portion is recorded as deferred rent, non-current within other
current liabilities.
  Impairment
of Long-Lived Assets
  The
Company reviews its long-lived assets for impairment when events or
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the related asset, an impairment
loss is recognized as the amount by which the carrying amount of the asset
exceeds its fair value, generally based on discounted cash flow.
 
 During
the year ended December 31, 2007 the Company recorded impairment charges of $0.2
million included in technology and development expense on the accompanying
Consolidated Statement of Operations, related to a previously purchased software
license.
 
 During
the year ended December 31, 2006, the Company recorded a $0.1 million impairment
charge, included in technology and development, on the accompanying Consolidated
Statement of Operations, related to expenditures previously capitalized for the
development of internally developed software.
 
  F-11
  Royalty
Advances and Royalty Obligations
  Royalty
advances represent payments made and payments to be made to various content
providers pursuant to minimum guarantees under their royalty agreements, net of
royalties expensed. The corresponding royalty obligations represent payments to
be made to the content providers pursuant to minimum guarantees under their
royalty agreements. These agreements give the Company the right to sell digital
audio content over the Internet. The royalty obligations recorded in the
accompanying consolidated Balance Sheets are classified between current
(included in accrued expenses) and non-current based on the payment terms
specified in the agreements. The Company periodically adjusts the balance of
these advances to reflect their estimated net realizable value based on the
difference, if any, between the carrying amount of the asset and the discounted
future revenue stream. Royalty expense is included in cost of content and
services revenue in the accompanying consolidated Statements of
Operations.
 
 Fair
Value of Financial Instruments
  Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
accounts receivable, accounts receivable from related parties, accounts payable
and accrued expenses. At December 31, 2006 and 2007, the fair values of
these financial instruments approximated their carrying values due to the
short-term nature of these instruments.
 
 Foreign
Currency Translation
 
 In
accordance with the provision of Statement of Financial Accounting Standard No.
52, Foreign Currency
Translation (“SFAS No. 52”),Audible UK, whose
functional currency is the British Pound, translates its balance sheet into U.S.
dollars at the prevailing rate at the balance sheet date and translates its
revenues, costs and expenses at the average rates prevailing during each
reporting period. Net gains or losses resulting from the translation of Audible
UK's financial statements are accumulated and charged directly to Accumulated
Other Comprehensive Income (Loss), a component of stockholders'
equity.
 
 Prior to
2007, Audible Inc. made periodic cash funding to Audible UK to assist with the
cash flow needs of the start-up subsidiary. In addition to the cash, Audible,
Inc. has paid certain amounts on behalf of the subsidiary, such as a security
deposit on office space and payroll of U.S. employees working on the UK
business. All of these inter-company transactions were made with the intention
of treating them as a long-term investment. In accordance with the provisions of
SFAS No. 52, the foreign currency gain/loss at each reporting period resulting
from the long-term inter-company account is recorded to accumulated other
comprehensive loss, a component of stockholders’ equity. Other inter-company
transactions between Audible, Inc. and Audible UK that are not considered
long-term in nature, and other transactions denominated in a foreign currency,
give rise to foreign exchange gains or losses, which are reported in other
income (expense) on the condensed consolidated Statement of Operations, in
accordance with SFAS No. 52.
 
 Reclassifications
 
 Certain
prior year and prior quarter amounts have been reclassified to conform to the
current year presentation.
 
 Investments
Accounted For Under the Equity Method of Accounting
 
 Prior to
the additional contribution made to Audible Germany (see Note 8) by a new
investor in July 2006, the Company’s ownership percentage of Audible Germany was
greater than 50%. Subsequent to the additional investments made by minority
shareholders during 2006, the Company’s ownership percentage was reduced to
44.9%. In July 2007, the Company made an additional cash investment of $1.0
million that increased its ownership to 45.4%.
 
 Under
Emerging Issues Task Force, or EITF, Issue No. 96-16, Investor’s Accounting for an
Investee when the Investor has a Majority of the Voting Interest but the
Minority Shareholder of Shareholders Have Certain Approval or Veto
Rights, the Company had determined that the minority shareholders
together have significant participatory rights, allowing them to participate in
significant decisions of Audible Germany and to block significant decisions
proposed by Audible. As a result of the significant participatory rights held by
the minority shareholders, the Company did not have unilateral control over
Audible Germany and therefore the Company did not consolidate the results of
Audible Germany but rather accounted for its investment in Audible Germany under
the equity method of accounting.
 
 Under the
equity method of accounting, the Company records its pro-rata share of the
profits, if any, and its pro-rata of the equity losses but only until such time
that the Company records losses equal to the initial investment of the Company
plus any profits previously recorded. The initial investment was reduced to zero
during 2004. In the Consolidated Statement of Operations for the years ended
December 31, 2005, 2006 and 2007, the Company recognized its pro-rata loss of
none, $0.4 million and $0.4 million respectively relating to Audible
Germany.
 
 F-12
  Revenue
Recognition
 
 Content and
Services
 
 Consumer
content revenue consists primarily of content sales made from the Company's Web
sites and content sold through the Apple iTunes Store, under its agreement with
Apple Computer, Inc. (“Apple”). At the Company's Web site, customers purchase
content either through an AudibleListener membership plan or on an a la carte
basis. When purchased on an a la carte basis, the Company recognizes revenue
from the sale of individual content titles in the period when the content is
purchased and delivered. The Company generally recognizes revenue from the sale
of content subscriptions pro rata over the term of the subscription
period.
 
 In July
2006, the Company entered into a global master agreement with Apple that
replaced prior agreements entered into with Apple. The Company continues to
recognize revenue from sales made at the Apple iTunes Store in the period
when the content is purchased and delivered. However, in accordance with
the terms of the new agreement, the amount of revenue the Company
recognizes on each sale is now formula-driven, derived from the
Apple iTunes selling price and the content cost of each audio book.
The new revenue formula was implemented January 1, 2007.
 
 The
(“Legacy”) AudibleListener monthly membership plans generally provide customers
two audio credits for a fixed monthly fee. Customers may use these audio credits
to download audio of their choice from the Web site. Legacy AudibleListener
audio credits provided under a monthly membership plan have a life of 30 days,
after which they expire. The Company recognizes revenue from the sale of legacy
AudibleListener memberships ratably over the AudibleListener's monthly
membership period, which is 30 days. This results in approximately 50% of the
AudibleListener membership fees received during each calendar month being
deferred at month end and recognized as content revenue in the following
month.
 
 In
December 2005, the Company introduced new AudibleListener monthly and annual
membership plans, designed to provide customers more flexibility in using their
audio credits. Depending upon the AudibleListener membership plan, customers
receive and can “bank” or delay using a maximum number of audio credits,
depending on the membership plan. The banking feature results in audio credits
being used (delivered) over different periods for different customers. This may
result in slower revenue growth or less revenue than the Company experienced in
prior periods because the customer has a longer period of time to use their
audio credits.
 
 In
addition, some of the new AudibleListener plans include new membership benefits,
ranging from a complimentary daily newspaper to everyday discounts of 30% on a
la carte purchases. The daily newspaper and 30% discount benefits are “serial”
elements that are delivered continuously over the membership period, whereas the
content selections underlying the audio credits are discrete elements that are
delivered at different times based on individual customer behavior. As a result
of the characteristics of the new AudibleListener memberships, they are
considered revenue arrangements with multiple deliverables; however under EITF
00-21,Revenue Arrangements
with Multiple Deliverables, because the deliverables are not eligible for
separation, they are accounted for as a single unit of accounting. As a result,
revenue is recognized for these new AudibleListener membership plans using the
lesser of straight-line or proportional performance (based on content delivery)
over the maximum membership period.
 
 The
following table displays the activity related to the new annual membership plans
introduced in December 2005, which is included within deferred revenue on the
accompanying consolidated Balance Sheets as of December 31, 2006 and 2007 (in
thousands):
 
 2006
              
              
              2007Beginning
      Deferred Revenue
              
              $
              2,083
              
              
              $
              8,222Total
      cash received
              
              
              12,361
              
              
              
              10,903Revenue
      recognized, net
              
              
              (5,720
              )
              
              
              (10,192
              )Refunds
      issued
              
              
              (502
              )
              
              
              (670
              )Ending
      Deferred revenue
              
              $
              8,222
              
              
              $
              8,263
 
 Upon
launch of the new AudibleListener plans in December 2005, the legacy
AudibleListener plans were no longer available to new customers. Customers who
have legacy memberships have the option of either converting to one of the new
AudibleListener membership plans or continuing their legacy membership. Revenue
is recognized from the sale of UltimateListener, the legacy prepaid discounted
content package, in which the customer receives twelve audio credits, and gift
programs, when the content is downloaded, over the membership period or
subscription period, as applicable.
 
  F-13
  Point of Sale Rebates and
Discount Certificate Rebates
 
 Part of
the Company's marketing strategy to obtain new AudibleListener members includes
retail promotions in which the Company pays retailers to offer discounts to
consumers on their purchase of AudibleReady devices if they become
AudibleListener members for twelve months. The Company also has retail
promotions in which it purchases electronic discount certificates or gift cards
from retailers and gives them away to the Company's customers when they sign up
to be AudibleListener members for twelve months. Point of sale rebates, which
are discounts given by a third party retailer to a customer on the purchase of a
digital audio player at the point of sale of the Audible membership, are
recorded as a reduction of revenue in the period the discount is given in
accordance with EITF No. 01-9,Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products) (“EITF No. 01-9”). The cost of
discount certificate rebates and gift cards that are given to a customer by the
Company at the time the customer purchases the Audible membership are recorded
as a cost of content and services revenue in accordance with EITF No.
01-9.
 
 Services
Revenue
  Services
revenue primarily consists of corporate, library and school sales. Where
applicable, the Company recognizes service revenue as services are performed
after persuasive evidence of an agreement exists, the price is fixed, and
collection of cash is reasonably assured. Collectibility is based on past
transaction history and credit-worthiness of the customer.
 
 Hardware
Revenue
 
 Hardware
revenue consists of sales of AudibleReady digital audio players. Most of the
Company's AudibleReady digital audio devices are sold at a discount or given
away when a customer signs up for a three or six-month or one-year commitment to
an AudibleListener membership. For multiple-element arrangements in which a
customer signs up for a membership and receives an audio player for free,
revenue is first allocated to the two elements (device and membership) using the
relative fair value method under EITF No. 00-21. However, the delivered item
(hardware) is limited to the non-contingent consideration, which, for a free
device, consists of only shipping and handling fees. The free hardware device
reflects the subsidy incurred to acquire a customer with a commitment to
AudibleListener. For players sold separately, hardware revenue is recognized
upon shipment of the device, pursuant to a customer order and credit card
authorization and includes amounts received for shipping and
handling.
 
 Related Party
Revenue
 
 In the
Consolidated Statement of Operations for the years ended December 31, 2005, 2006
and 2007, respectively, the Company recognized related party revenue of $1.1
million, $1.2 million and $0.6 million, respectively. In addition, the Company
recognized losses of none, $0.4 million and $0.4 million respectively relating
to Audible Germany.
 
 Related
party revenue includes revenue earned under agreements with Audible Germany (See
Note 8) and France Loisirs (see Note 9).
 
 Revenue
under the Audible Germany agreement includes $0.1 million earned per quarter
over the initial 30-month term of the agreement, which began on August 30, 2004.
All amounts related to the original 30-month agreement with Audible Germany had
been recognized as of March 31, 2007.
 
 Revenue
under the France Loisirs agreement includes a $1.0 million technology licensing
fee that was recognized on a straight-line basis over the initial 24-month term
of the agreement, which began on September 15, 2004. Of the $1.0 million, France
Loisirs has paid the full $1.0 million as of December 31, 2006 and all revenue
related to this agreement was recognized as of December 31, 2006.
 
 Revenue
earned under each of these agreements also includes consulting services
performed by certain of the Company's employees and reimbursement of certain
incremental costs incurred by the Company that are billed to Audible Germany and
France Loisirs in accordance with EITF Issue 01-14,Income Statement Characterization
of Reimbursement Received for Out-of-Pocket' Expenses
Incurred (“EITF No. 01-14”).
 
 Related
party revenues from Germany for the years ended December 31, 2005, 2006 and
2007 totaled $0.5 million, $0.8 million and $0.5 million,
respectively.
 
 Related
party revenues from France for the years ended December 31, 2005, 2006 and
2007 totaled $0.6 million, $0.6 million and $0.1 million,
respectively.
 
  F-14
  Other
Revenue
 
 Other
revenue in 2005, 2006 and 2007 primarily included $0.1 million, $0.3 million and
$0.5 million, respectively, of revenue earned from a new product development and
distribution agreement, which is being recognized on a straight-line basis over
a 58-month period beginning in July 2005.
 
 For the
year ended December 31, 2007 the Company also recognized $0.3 million as part of
a revenue sharing element of our Master Agreement with Apple. The remaining
balance of Other Revenue in 2005 consisted of commissions earned for referring
customers to a retail partner to purchase a digital audio device, which is
recognized in the period when the customer's purchase is
completed.
 
 Customer
Concessions
 
 The
Company defers revenue for expected replacement audio credits to legacy members
based on a historical experience of the credits issued. The Company defers
revenue for other audio credits and coupons when they are delivered to the
customers based on estimated values. Actual customer credit and coupon issuance
and usage patterns could differ from the Company's estimates. The concessions
are recorded as a reduction of revenue and an increase to deferred
revenue.
 
 Cost of
content and services revenue for the years ended December 31, 2005, 2006, and
2007 was as follows (in thousands):
 
 Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Royalties
      incurred on content sales
              
              $
              22,399
              
              
              $
              33,256
              
              
              $
              47,118Amortization
      of audio production costs
              
              
              28
              
              
              
              156
              
              
              
              553Other
      non-recoupable content costs
              
              
              186
              
              
              
              265
              
              
              
              276Royalties
      and other content charges
              
              $
              22,613
              
              
              $
              33,677
              
              
              $
              47,947Discount
      certificate rebates
              
              
              1,556
              
              
              
              1,328
              
              
              
              588Total cost of content and
      services revenue
              
              $
              24,169
              
              
              $
              35,005
              
              
              $
              48,535
 
 Cost of
content and services revenue includes royalties incurred on sales of content as
specified by the terms of the content agreements, discount certificate rebates,
amortization of audio production costs incurred in connection with creation of
certain audio products, and other non-recoupable content costs. Royalty expense
for sales of content is incurred based on either a percentage of revenue or a
fixed price per title as per the royalty agreement. The royalty cost per title
may differ depending upon whether the title is sold as part of the
AudibleListener membership or sold as an a la carte sale.
 
 Shipping and Handling
Costs
  Shipping
and handling costs for hardware promotions consist of costs and fees associated
with warehousing, fulfillment, and shipment of digital audio devices to
customers. For the years ended December 31, 2005, 2006, and 2007 costs
totaled $0.5 million; $0.2 million and $0.1 million, respectively and
are recorded as a component of marketing expense in the consolidated
Statements of Operations.
 
 Advertising
Expenses
  The
Company expenses the costs of advertising and promoting its products and
services as incurred. These costs primarily include web and channel advertising
as well as print, radio, telemarketing, direct mail and trade shows. For the
years ended December 31, 2005, 2006, and 2007 these costs totaled $5.0 million,
$5.8 million and $6.7 million, respectively and are included in marketing
expense in the accompanying Statements of Operations.
 
 Legal
Fees
 
 The
Company expenses legal fees, including expenses expected to be incurred in
connection with loss contingencies, as incurred.
 
 Use of
Estimates
  The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the period. Significant items subject to
estimates include the recoverability of the carrying amount of property and
equipment (including internally-developed software), the provision for refunds,
chargebacks, customer concessions, and recoverability of royalty advances, lease
period when right of cancellation exists, valuation of deferred tax assets,
certain accruals and fair value of share-based compensation. Actual results
could differ from those estimates.
  F-15
  Income
Taxes
  The
Company accounts for income taxes using the asset and liability method of SFAS
No. 109,Accounting for Income
Taxes. Under the asset and liability method, deferred tax assets and
deferred tax liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operations in the period in which the tax
change occurs. Deferred tax assets are reduced, if necessary, by a valuation
allowance for any tax benefits, which are more than likely never going to be
realized.
 
 Accounting for Uncertainty
in Income Taxes
 
 On
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN No. 48”), an interpretation of SFAS No. 109. FIN No. 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. The interpretation requires that the Company recognize
the tax benefit of a tax position in the financial statements if it is more
likely than not that the tax position will be sustained on audit, based upon
technical merits of the position. FIN No. 48 also provides guidance on
de-recognition of tax accruals, classification of current and deferred tax
accounts, accruals for interest and penalties, and accounting in interim and
year end periods, including disclosures.
 
 The
Company files federal and state of New Jersey corporate income tax returns. The
Company also files a corporate income tax return in the United Kingdom. All tax
years since inception are open to tax examination by the taxing authorities for
possible adjustments to the net operating losses but not for assessment. The
statute of limitations for assessment of tax is generally three years from the
last date prescribed by law for the filing of the return for federal, as well as
for the State of New Jersey, and six years for the United Kingdom. Additionally,
the Company files a consumption return in Japan related to its Japanese
activity. The years currently open for federal income tax assessment includes
calendar years 2004 through 2007, calendar years 2004 through 2007 for New
Jersey income tax assessment purposes, and calendar years 2006 through 2007 for
the United Kingdom. The Company is not currently under examination by any of the
above jurisdictions for any of the open years as above.
 
 The
implementation of FIN No. 48 has not resulted in any adjustment to the Company’s
beginning tax position or tax position for the years ended December 31, 2005,
2006 and 2007.
 
 Equity Instruments Issued
for Goods and Services
  The
Company has in the past issued warrants to purchase shares of common stock to
non-employees as part of their compensation for providing goods and services.
The Company accounts for these warrants in accordance with the EITF Issue No.
96-18,Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. The exercise price of the
warrants is determined by the closing price of Audible's common stock on the day
of the agreement. Fair value of the warrant issued is estimated using the
Black-Scholes model with the best available assumptions concerning risk-free
interest rate, expected term of the warrant, dividend yield and expected
volatility. The fair value of the warrant is expensed on a straight-line basis
over the term of the agreement and is recorded within the operating expense line
item that best represents the nature of the goods and services provided.
Depending on the terms of the warrant, the Company applies variable plan or
fixed plan accounting in accordance with EITF No. 96-18.
  Basic and Diluted Net Loss
Applicable to Common Shareholders Per Common Share
 
 Basic net
loss applicable to common shareholders per common share is computed by dividing
net loss applicable to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted net loss applicable to common
shareholders per common share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common stock and resulted in the issuance of common stock.
Potential common shares consist primarily of incremental shares issuable upon
the assumed exercise of stock options and warrants and the vesting of restricted
stock using the treasury stock method.
 
 For 2005,
2006, all potential common shares have been excluded from the diluted
calculation because the Company had a net loss applicable to common
shareholders, and their inclusion would have been anti-dilutive. For 2007 the
Company produced net income and calculated additional net incremental
shares.
 
  F-16
  The
following table summarizes the share calculations for 2005, 2006 and
2007.
  Year
      ended December 31,2005
              
              2006
              
              2007Stock
      options
              
              
              2,629,809
              
              2,237,731
              
              
              1,978,933Warrants
              
              
              883,389
              
              713,858
              
              
              384,333Restricted
      stock
              
              
              261,557
              
              991,085
              
              
              1,034,723Total
      shares  (See Note 5)
              
              
              3,774,755
              
              3,942,674
              
              
              3,397,989
 
 Share-Based
Compensation
 
 In
accordance with SFAS 123(R), the Company measures compensation cost for stock
awards at fair value and recognizes compensation over the requisite service
period for awards expected to vest. Estimating the portion of stock awards that
will ultimately vest requires judgment, and to the extent actual results or
updated estimates differ from the Company’s current estimates, such amounts are
recorded in the period estimates are revised. The Company considers several
factors when estimating expected forfeitures, including types of awards,
employee class, and historical experience. The Company also considers several
factors when estimating expected volatility and expected life of the
option.
  (3)  Property
and Equipment
  Property
and equipment at December 31, 2006 and 2007 consists of the following (in
thousands):
  December
      31,2006
              
              
              2007Computer
      server and Web site equipment
              
              $
              7,687
              
              
              $
              8,259Software
      licenses
              
              
              4,235
              
              
              
              4,017Internally
      developed software
              
              
              2,779
              
              
              
              3,642Office
      furniture and equipment
              
              
              1,720
              
              
              
              2,445Leasehold
      improvements
              
              
              1,011
              
              
              
              4,239Studio
      equipment
              
              
              667
              
              
              
              880Work
      in process - internally developed software
              
              
              326
              
              
              
              549Construction
      in progress
              
              
              443
              
              
              
              0Total
      property and equipment
              
              
              18,868
              
              
              
              24,031Less:
      accumulated depreciation and amortization
              
              
              (10,719
              )
              
              
              (14,121
              )Total
      property and equipment, net
              
              $
              8,149
              
              
              $
              9,910
 
 Depreciation
and amortization expense on property and equipment totaled $1.1 million, $5.0
million, and $5.3 million in 2005, 2006, and 2007, respectively. Included in the
2005, 2006 and 2007 amounts is amortization of internally developed software of
$0.1 million, $1.2 million and $1.5 million, respectively. Included in the 2006
amount is accelerated depreciation on office furniture and leasehold
improvements due to the corporate office relocation.
 
 In the
years ended December 31, 2006 and 2007, the Company recognized a $0.1 million
and $0.2 million of impairment charges respectively, recorded in technology and
development in the accompanying consolidated Statement of Operations. During
2006 the impairment related to expenditures previously capitalized for a
computer software project. These costs were in included in work in process and
internally developed software. During 2007 the impairment related to previously
purchased software. Upon review of the financial forecast for these items
management concluded that an impairment charge should be recognized for the full
amount of the costs in accordance with the provisions of FASB Statement No. 144,
Accounting for the Impairment
or Disposal of Long-Lived Asset.
 
 The gross
amount of property and equipment and related accumulated amortization recorded
under capital leases were as follows (in thousands):
  December
      31,2006
              
              2007Computer
      server and Web site equipment
              
              $
              743
              
              
              $
              743Less:
      accumulated amortization
              
              
              (685
              )
              
              
              (743
              )Total
      computer server and Web site equipment, net
              
              $
              58
              
              
              
              0
 
  F-17
  (4) Accrued
Expenses
  The
components of the accrued expenses balance as of December 31, 2006 and 2007 are
follows (in thousands):
 
 December
      31,2006
              
              
              2007Professional
      fees
              
              $
              958
              
              
              $
              1,154Accrued
      expense - related parties
              
              
              242
              
              
              
              869Revenue
      sharing and bounty payments
              
              
              630
              
              
              
              461Royalty
      obligations
              
              
              410
              
              
              
              112Marketing
              
              
              241
              
              
              
              208Software
      license fees
              
              
              0
              
              
              
              185Retail
      rebates and discounts
              
              
              400
              
              
              
              8Value
      added tax
              
              
              708
              
              
              
              210Other
      accrued expenses
              
              
              1,089
              
              
              
              597Total
      accrued expenses
              
              $
              4,678
              
              
              $
              3,804
 
 (5) Stockholders'
Equity
  Common
Stock
  The
Company had 24,119,768 and 24,306,766 shares of common stock issued and
outstanding as of December 31, 2006 and 2007 respectively. At December 31, 2006
and December 31, 2007, the Company had 3,942,674 and 3,397,989, respectively,
common shares reserved for issuance under common stock warrants, options and
restricted stock.
 
 Share-based
Compensation
  The
Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
options, stock appreciation rights, restricted or unrestricted stock awards,
performance rights and other stock-based awards to employees. Prior to April
2006 the Company primarily awarded stock options to employees as their
stock-based compensation. Subsequent to April 2006 the Company primarily awards
restricted stock units as employee stock-based compensation. Beginning in the
second quarter of 2007, for option awards granted to Audible employees as part
of their compensation package, the exercise price for options and the fair value
for restricted stock is determined by the opening price of Audible's common
stock on the grant date, which for new employees is the employee's start date.
Prior to the second quarter of 2007, the exercise price for stock options for
options and the fair value for restricted stock was determined by the closing
price of Audible’s common stock on either the day immediately preceding a new
employee’s start date or the date immediately preceding the grant date for
existing employees. This change in policy had no impact on any previously
granted options. The majority of options granted vest over a fifty-month period
and expire ten years from the date of the grant. The majority of restricted
share awards vest over a thirty-six month period. All share-based compensation
is granted through share-based employee compensation plans maintained by
Audible.
 
 The total
aggregate number of common shares available for issuance under the Plan is
5,700,000 shares, of which approximately 2,300,000 shares authorized remain
available for issuance of new awards. Outstanding common stock options to
purchase shares as of December 31, 2006 and 2007, were 2,237,731 and 1,978,933,
respectively. As of December 31, 2006 and 2007, 979,985 and 1,034,723,
respectively, of non-vested restricted share awards had been granted, net of
cancellations, forfeitures and net of shares vested.
  Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised),“Share-Based Payment” (“SFAS
123R") utilizing the modified prospective approach. Prior to the adoption of
SFAS 123R, stock option grants were accounted for in accordance with the
intrinsic value method prescribed in Accounting Principles Board Opinion No.
25,"Accounting for Stock
Issued to Employees" ("APB 25") and accordingly, no compensation expense
was recognized for these awards except for awards that had intrinsic value on
the grant date. Restricted stock was also accounted for under APB 25 and
compensation expense was recognized for restricted stock awards based on
intrinsic value (which was equal to fair value).
 
 Under the
modified prospective approach, SFAS 123R applies to all new awards and to
previously issued awards that were unvested on January 1, 2006, and awards that
are modified, repurchased or cancelled after January 1, 2006. Compensation
expense recognized for the year ended December 31, 2006 includes compensation
cost for all share-based payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of SFAS 123, and compensation expense for all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123R. Prior periods were not restated to reflect the impact of adopting the
new standard.
 
  F-18
  The
Company recorded compensation expense of $5.9 million and $6.2 million for the
years ended December 31, 2006 and 2007, respectively, recorded within the
Consolidated Statement of Operations in operations, technology and development,
marketing and general and administrative as follows (in thousands):
 
 For
      the year ended December 31,2006
              
              
              2007Operations
              
              $
              1,111
              
              
              $
              1,095Technology
      and Development
              
              
              993
              
              
              
              1,098Marketing
              
              
              1,123
              
              
              
              1,224General
      and administrative
              
              
              2,687
              
              
              
              2,777Total
      Compensation Expense
              
              $
              5,914
              
              
              $
              6,194
 
 At
December 31, 2006, the Company had $11.5 million of unrecognized compensation
expense related to share-based payments which is expected to be recognized over
a weighted-average period of 2.21 years. No compensation cost, as defined under
SFAS 123R, was capitalized in any asset as of December 31, 2006.
 
 At
December 31, 2007, the Company had $8.7 million of unrecognized compensation
expense related to share-based payments which are expected to be recognized over
a weighted-average period of 2.86 years. No compensation cost, as defined under
SFAS 123R, was capitalized in any asset as of December 31, 2007.
 
 The
unearned share-based compensation related to stock options and restricted stock
awards are being amortized to compensation expense over the requisite service
period. The Plan does not make a separate reference to provisions regarding
participant retirement and the vesting terms in stock options and restricted
stock awards relating to participants eligible for retirement; therefore, in
accordance with the provisions of SFAS 123R, compensation expense, for stock
options and restricted stock awards to participants that are retirement eligible
on the grant date, is recognized over the requisite service period, rather than
immediately at the grant date.
 
 The
Company receives a tax deduction for certain stock option exercises, generally
for the intrinsic value of the award on the exercise date and a tax deduction
for increases in the value of restricted stock upon vesting. Prior to the
adoption of SFAS 123R, all tax benefits resulting from the exercise of stock
options and restricted stock were reported as operating cash flows in the
consolidated Statements of Cash Flows. SFAS 123R requires the cash flows
resulting from tax benefits in excess of the compensation costs recognized for
these options (excess tax benefits) to be classified as financing cash flows.
Further, under SFAS 123R, excess tax benefits are recognized as a credit to
additional paid-in capital only in the period in which the deduction reduces
income taxes payable. Since the Company currently has significant net operating
loss ("NOL") carryforwards that are fully reserved through the valuation
allowance, any excess tax benefits related to the exercise of stock options will
not be recorded until after the Company utilizes its NOL carryforwards to
reduce current income taxes payable.
 
 During
the year ended December 31, 2007, less than $0.1 million was recognized as
excess tax benefit resulting from share-based compensation.
 
 During
the years ended December 31, 2005 and 2006, respectively, there was no tax
benefit recognized from share-based compensation.
 
 The
Company's net cash proceeds from the exercise of stock options were $0.7
million, $0.6 million and $0.5 million as of December 31, 2005, 2006 and 2007,
respectively.
 
 All stock
incentives (options and restricted stock units) issued to employees and
non-employee directors are awarded according to the applicable plan terms. The
source of shares for exercised stock options and delivery of vested restricted
stock are newly issued shares.
 
 As a
result of adopting SFAS 123R on January 1, 2006, the Company's net income for
the year ended December 31, 2007 is $2.6 million lower than if it had continued
to account for share-based compensation under APB 25. Basic and diluted net
income per share for the year ended December 31, 2007 was $0.11 cents lower
than if the Company had continued to account for share-based compensation
under APB 25.
 
 As a
result of adopting SFAS 123R on January 1, 2006, the Company's net loss for the
year ended December 31, 2006 is $2.8 million higher than if it had continued to
account for share-based compensation under APB 25. Basic and diluted net loss
per share for the year ended December 31, 2006 was $0.12 cents higher
than if the Company had continued to account for share-based compensation
under APB 25.
   F-19
  On
November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP
123R-3”),“Transition Election
Related to Accounting For the Tax Effects of Share-Based Payment Awards”,
that provides an elective alternative transition method of calculating the pool
of excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS 123R (the “APIC Pool”) to the method
otherwise required by paragraph 81 of SFAS 123R. The Company evaluated the
alternative methods and has decided to elect the alternative transition method
provided by FSP 123R-3. The election had no impact on the Company’s consolidated
financial statements.
 
 The
following table illustrates the effect on the Company's net loss and net loss
per share had the Company accounted for share-based compensation in accordance
with SFAS 123 for the year ended December 31, 2005 (in thousands, except per
share data):
 
 2005Net
      loss, as reported
              
              $
              (653
              )Add:
      Total share-based employee compensation expense included in reported net
      income
              
              
              957Deduct:
      Total share-based employee compensation expense determined under the fair
      value method for all awards
              
              
              (3,498
              )Pro
      forma net loss
              
              $
              (3,194
              )Basic
      and diluted net loss per share:As
      reported
              
              $
              (0.03
              )Pro
      Forma
              
              $
              (0.13
              )
 
 The
Company has on occasion issued options to employees to purchase shares of common
stock at a price less than the fair value of the stock at the time of issuance.
Prior to the adoption of SFAS 123R, the difference between the fair value on
grant date and the exercise price of options issued, as well as the value of
restricted stock on the grant date, was accounted for under APB 25 and was
recorded as deferred compensation, a component of stockholders' equity, and was
amortized as compensation expense on a straight-line basis over the vesting term
of the option or restricted stock, as applicable. In connection with the
adoption of SFAS 123R, the unamortized deferred compensation balance of $3.7
million at December 31, 2005 relating to previous grants of options that had
intrinsic value at the time of issuance and restricted stock was eliminated
against additional paid-in capital on January 1, 2006.
 
 Stock
Options
  The
Company has used the Black-Scholes option pricing model in calculating the fair
value of options granted. The assumptions used and the weighted-average
information for the years ended December 31, 2005, 2006 and 2007 are as
follows:
  Year
      Ended December 31,2005
              
              2006
              
              2007Risk-free
      interest rate
              
              
              4.3
              %
              
              
              4.6
              %
              
              
              4.5
              %Expected
      life
              
              5 years
              
              
              4.6
      years
              
              
              4.6yearsExpected
      volatility
              
              
              114.0
              %
              
              
              68.7
              %
              
              
              68.7
              %
 
 The
assumptions above are based on multiple factors, including historical exercise
patterns of employees in relatively homogeneous groups with respect to exercise
and post-vesting employment termination behaviors, expected future exercising
patterns for these same homogeneous groups and both the implied and historical
volatility of the Company's stock price. The expected life of the option
represents the period of time that the option granted is expected to be
outstanding. Expected volatility is calculated based on the historical and
implied volatility of the Company's stock price. Historical volatility is
calculated over the most recent period that is commensurate with the expected
life. The risk free interest rate is based on the U.S. Treasury yield curve
commensurate with the expected term in effect at the time of grant.
 
  F-20
  A summary
of the stock option activity under the Plan is as follows:
  Number of
                Shares
              
              
              Exercise Price
                Per
      Share
              
              
              Weighted
                Average
                Exercise
      Price Per ShareBalance,
      December 31, 2004
              
              
              2,600,331
              
              
              $
              0.69-$38.25
              
              
              $
              6.80Granted
              
              
              389,900
              
              
              $
              10.73-$26.58
              
              
              $
              15.63Expired/Canceled
              
              
              (114,352
              )
              
              $
              0.99-$31.32
              
              
              $
              14.80Exercised
              
              
              (246,070
              )
              
              $
              0.69-$13.69
              
              
              $
              2.81Balance,
      December 31, 2005
              
              
              2,629,809
              
              
              $
              0.69-$38.25
              
              
              $
              8.13Granted
              
              
              63,100
              
              
              $
              7.29-$12.84
              
              
              $
              8.03Canceled
              
              
              (61,470
              )
              
              $
              0.69-$38.25
              
              
              $
              14.34Forfeited
              
              
              (144,067
              )
              
              $
              0.69-$38.25
              
              
              $
              10.70Exercised
              
              
              (249,641
              )
              
              $
              0.69-$5.72
              
              
              $
              2.53Balance,
      December 31, 2006
              
              
              2,237,731
              
              
              $
              1.05-$31.32
              
              
              $
              8.42Granted
              
              
              145,000
              
              
              $
              7.32-$10.83
              
              
              $
              9.39Canceled
              
              
              (13,724
              )
              
              $
              1.62-$22.96
              
              
              $
              14.56Forfeited
              
              
              (209,106
              )
              
              $
              9.76-$28.32
              
              
              $
              8.42Exercised
              
              
              (180,968
              )
              
              $
              1.05-$11.20
              
              
              $
              2.85Balance,
      December 31, 2007
              
              
              1,978,933
              
              
              $
              1.47-$31.32
              
              
              $
              7.61
 
 A summary
of the total stock options outstanding as of December 31, 2007 is as
follows:
  Number
      of Options
              
              
              Exercise
      Price
                Per
      Share
              
              Weighted
      Average
                Exercise
      Price Per Share
              
              Weighted
      Average
                Remaining
                Contractual
      Life677,194
              
              
              $
              1.47
      to $2.97
              
              $2.15
              
              4.44
      years443,760
              
              
              $
              3.00
      to $3.42
              
              $3.40
              
              5.58
      years413,598
              
              
              $
              3.48
      to $11.46
              
              $8.22
              
              6.79
      years444,381
              
              
              $
              11.76
      to 31.32
              
              $19.56
              
              5.53
      years1,978,933
              
              
              $
              1.47
      to $31.32
              
              $7.61
              
              5.43
      years
 
 (in
      thousands except share and per share data)
              
              Number
      of Shares
              
              
              Weighted-Average
      Exercise Price Per Share
              
              
              Aggregate
      Intrinsic Value
              
              Weighted-Average
      Remaining Contractual LifeOptions
      exercisable at December 31, 2007
              
              
              1,683,383
              
              
              $
              6.79
              
              
              $
              7,603
              
              4.18
      YearsVested
      and expected to vest at December 31, 2007
              
              
              1,962,123
              
              
              $
              7.74
              
              
              $
              7,706
              
              6.56
      Years
 
 The
following table summarizes stock option activity for the years ended December
31, 2005, 2006 and 2007:
 
 (in
      thousands except per share data)
              
              Year
      Ended
                December
      31,Options:
              
              2005
              
              
              2006
              
              
              2007Weighted-average
      grant date fair value of options granted during the period
              
              $
              13.52
              
              
              $
              4.69
              
              
              $
              5.49Total
      intrinsic value of options exercised during the period
              
              $
              3,346
              
              
              $
              1,656
              
              
              $
              1,100
 
 Restricted
Stock
 
 During
the years ended December 31, 2005, 2006 and 2007, the Company granted awards to
receive 279,750, 872,800 and 298,119, respectively, restricted stock units to
employees under the Plan. The restricted stock units either cliff-vest or vest
periodically between three months and forty-eight months after the grant
date.
 
 F-21
  During
the years ended December 31, 2005, 2006, and 2007 a total of 18,193, 130,960 and
78,043 restricted stock units were forfeited, respectively, due to employee
terminations.
 
 Beginning
in the second quarter of 2007, for restricted stock awards granted to Audible
employees as part of their compensation package, the fair value is determined by
the opening price of Audible's common stock on the grant date, which for new
employees is the employee's start date. Prior to the second quarter of 2007, the
fair value for restricted stock awards was determined by the closing price of
Audible’s common stock on either the day immediately preceding a new employee’s
start date or the date immediately preceding the grant date for existing
employees. This change in policy had no impact on any previously granted
restricted stock awards. Under the terms of the restricted stock awards, unless
different provisions are noted on the restricted stock award, the Company is
required to issue to the recipient the number of whole shares of common stock
that equals the number of vested whole restricted stock shares following the
date on which the restricted stock share becomes vested.
 
 The
following table summarizes non-vested restricted stock activity through December
31, 2007:
 
 Weighted-Average
      Grant-DateNonvested
      Restricted Stock
              
              Units
              
              
              Fair
      ValueNonvested
      at December 31, 2004
              
              
              --
              
              
              
              --Granted
              
              
              279,750
              
              
              $
              16.14Forfeited
              
              
              (18,193
              )
              
              $
              15.33Vested
              
              
              (3,474
              )
              
              $
              14.13Nonvested
      at December 31, 2005
              
              
              258,083
              
              
              $
              16.39Granted
              
              
              872,800
              
              
              $
              9.87Forfeited
              
              
              (130,960
              )
              
              $
              11.12Vested
              
              
              (19,938
              )
              
              $
              14.85Nonvested
      at December 31, 2006
              
              
              979,985
              
              
              $
              11.27Granted
              
              
              298,119
              
              
              $
              9.67Forfeited
              
              
              (78,043
              )
              
              $
              10.33Vested
              
              
              (165,338
              )
              
              $
              10.32Nonvested
      at December 31, 2007
              
              
              1,034,723
              
              
              $
              10.72
 
 The
following table summarizes restricted stock for the years ended December 31,
2005, 2006 and 2007:
 
 (in
      thousands except share and per share data)
              
              Year
      Ended
                December
      31,Restricted
      Stock:
              
              2005
              
              
              2006
              
              
              2007Weighted-average
      grant date fair value of shares granted during the year
              
              $
              16.14
              
              
              $
              9.87
              
              
              $
              9.67Total
      fair value of shares that vested during the year
              
              $
              49
              
              
              $
              296
              
              
              $
              1,821
  Total
common stock available for future stock option and restricted stock grants are
approximately 2.3 million shares.
 
 Warrants
  The
Company has issued in the past common stock warrants to third parties in
exchange for services. The fair values of warrants issued in exchange for
services are determined by the Black-Scholes model in accordance with EITF Issue
No. 96-18 and are recognized as an expense under fixed plan or variable
accounting depending on the terms of the agreements over the periods in which
services are being performed. The assumptions used in the Black-Scholes pricing
model to calculate fair values, including risk-free interest rate and
volatility, were determined using available information on the measurement date.
Expected dividend yield of zero was used for all calculations. For the years
ended December 31, 2005, 2006 and 2007, no expense was recognized as all
warrants were fully vested as of December 31, 2004.
 
  F-22
  A summary
of the warrant activity for the years ended December 31, 2005, 2006 and 2007 is
as follows:
  Number of Warrants
              
              
              Exercise Price Per
    Share
              
              
              Weighted Average Exercise Price Per
      ShareBalance,
      December 31, 2004
              
              
              1,035,329
              
              
              $
              0.03-$150.00
              
              
              $
              16.96Exercised
              
              
              (147,771
              )
              
              $
              1.29-$12.00
              
              
              $
              2.83Issued
              
              
              --
              
              
              
              --
              
              
              
              --Expired
              
              
              (4,169
              )
              
              $
              14.07-$22.95
              
              
              $
              21.24Balance,
      December 31, 2005
              
              
              883,389
              
              
              $
              0.03-$150.00
              
              
              $
              19.22Exercised
              
              
              (167,199
              )
              
              $
              2.73-$4.50
              
              
              $
              4.49Issued
              
              
              --
              
              
              
              --
              
              
              
              --Expired
              
              
              (2,332
              )
              
              $
              1.14-$1.62
              
              
              $
              1.48Balance,
      December 31, 2006
              
              
              713,858
              
              
              $
              0.03-$150.00
              
              
              $
              22.73Exercised
              
              
              (28,000
              )
              
              $
              2.73
              
              
              $
              2.73Issued
              
              
              --
              
              
              
              --
              
              
              
              --Expired
              
              
              (301,525
              )
              
              $
              2.55-$150.00
              
              
              $
              30.28Balance,
      December 31, 2007
              
              
              384,333
              
              
              $
              0.03-$21.00
              
              
              $
              18.26
 
 During
2005, 31,105 warrants were exercised through cashless transactions in accordance
with the original terms of the warrant agreements. Accordingly, the number of
shares of common stock issued as a result of these cashless exercises was 23,733
shares. During 2006, 533 warrants were exercised through a cashless transaction
in accordance with the original terms of the warrant agreement. Accordingly, the
number of common shares issued as a result of this cashless exercise was 346.
During 2007, a warrant for 28,000 shares was exercised for cash in accordance
with the original terms of the warrant agreement.
 
 A summary
of the total common stock warrants outstanding and exercisable as of December
31, 2007 is as follows:
  Number
      of Warrants
              
              Exercise
      Price Per Share
              
              Weighted
      Average Exercise Price Per Share
              
              Weighted
      Average Remaining Contractual Life50,000
              
              $
              0.03
              
              $0.03
              
              1.46
      years1,000
              
              $
              17.00
              
              $17.00
              
              1.80
      years333,333
              
              $
              21.00
              
              $21.00
              
              3.10
      years384,333
              
              $
              0.03-$21.00
              
              $18.26
              
              2.89
      years
 
 Common
Stock Repurchase Program and Treasury Stock
 
 In
February 2006, the Company's Board of Directors authorized a common stock
repurchase program, pursuant to which the Company may from time to time
repurchase (through open market repurchases at prevailing market prices), up to
an aggregate of $25.0 million of the Company's outstanding common
stock.
 
 During
the year ended December 31, 2006, 635,700 shares were repurchased at an average
price of $8.42. The Company legally retired the treasury stock during
2006.
 
 During
the year ended December 31, 2007 144,000 shares were repurchased at an average
price of $9.82. The Company legally retired the treasury stock during
2007.
 
 As of
December 31, 2007, the Company held no shares of common stock as treasury
stock.
 
 Comprehensive
loss
 
 The
following table sets forth comprehensive loss for the periods indicated (in
thousands):
 
 Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Net income
      (loss)
              
              $
              (653
              )
              
              $
              (8,680
              )
              
              $
              2,425Other
      comprehensive income (loss):Foreign
      currency translation adjustment
              
              
              15
              
              
              
              (51
              )
              
              
              (15
              )Comprehensive
      income (loss)
              
              $
              (638
              )
              
              $
              (8,731
              )
              
              $
              2,410
  F-23
  (6) Income
Taxes
 
 There is
no federal provision for income tax expense in 2005, 2006 and a $0.1 million
federal tax provision in 2007. As a result of selling certain of its New Jersey
state income tax loss benefits for cash, the Company realized $0.7 million, $0.8
million and $3.1 million in state income tax benefits during the years
ended December 31, 2005, 2006 and 2007, respectively.
 
 The
components of loss before income taxes are as follows (in
thousands):
 
 December
      31,2005
              
              2006
              
              2007Domestic
              
              $
              113
              
              
              $
              (8,411
              )
              
              $
              (791
              )Foreign
              
              
              (1,505
              )
              
              
              (1,024
              )
              
              
              228Total
              
              $
              (1,392
              )
              
              $
              (9,435
              )
              
              $
              (563
              )
 
 The
difference between the actual income tax benefit and that computed by applying
the U.S. federal income tax rate of 34% to pretax (loss) income is summarized
below (in thousands):
 
 Year
      Ended December 31,2005
              
              
              2006
              
              
              2007Computed
      “expected” tax (benefit) expense
              
              $
              (473
              )
              
              $
              (3,208
              )
              
              $
              (191
              )(Increase)
      decrease in tax (benefit) expense resulting from:State
      tax benefit, net of federal benefit
              
              
              (488
              )
              
              
              (507
              )
              
              
              (2,077
              )Increase/(decrease)
      in the federal valuation allowance
              
              
              (301
              )
              
              
              1,932
              
              
              
              (1,342
              )Foreign
      losses
              
              
              512
              
              
              
              472
              
              
              
              52Permanent
      differences
              
              
              11
              
              
              
              542
              
              
              
              411Foreign
      taxes and credits
              
              
              --
              
              
              
              14
              
              
              
              159Total
              
              $
              (739
              )
              
              $
              (755
              )
              
              $
              (2,988
              )
 
 The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities as of December 31, 2006 and 2007 are as
follows (in thousands):
 
 December
      31,2006
              
              
              2007Deferred
      tax assets:Net
      operating loss carryforwards
              
              $
              46,070
              
              
              $
              40,656Book
      depreciation in excess of tax depreciation
              
              
              810
              
              
              
              1,008Investments
              
              
              --
              
              
              
              166Deferred
      compensation and accrued vacation
              
              
              98
              
              
              
              53Deferred
      revenue
              
              
              679
              
              
              
              754Deferred
      rent
              
              
              105
              
              
              
              337Allowance
      for sales refunds and chargebacks
              
              
              30
              
              
              
              52Stock
      based compensation
              
              
              2,056
              
              
              
              3,210Accrued
      expense
              
              
              --
              
              
              
              139Patents
      and trademarks
              
              
              68
              
              
              
              63Other,
      net
              
              
              35
              
              
              
              9Total
      deferred tax assets
              
              
              49,951
              
              
              
              46,447Deferred
      tax liability:Prepaid
      expense
              
              
              (240
              )
              
              
              (137
              )Net
      deferred tax assets
              
              
              49,711
              
              
              
              46,310Less valuation
      allowance
              
              
              49,711
              
              
              
              46,310Net
      deferred taxes
              
              $
              --
              
              
              $
              --
 
  F-24
  In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
 
 Based on
the Company’s historical net losses, management believes it is more likely that
not that the Company will not realize the benefits of these deferred tax assets
and, accordingly, a full valuation allowance, which decreased by $2.1 million,
increased by $1.9 million, and decreased by $3.4 million in 2005, 2006 and 2007
respectively, has been recorded on the deferred tax assets as of December 31,
2005, 2006 and 2007.
 
 A
deduction in the amount of $2.4 million in 2006 attributable to stock options
and warrants is not being reflected in the net operating loss carry-forwards for
the deferred tax assets until such time that the deduction reduces tax payable
In 2007 the deduction was used to offset federal income tax..
 
 As of
December 31, 2007, the Company had net operating loss carry-forwards for federal
income tax purposes of approximately $116.0 million, which begin to expire in
2010 if not used to offset future taxable income. As of December 31, 2007, the
Company has net operating loss carry-forwards for New Jersey income tax purposes
of approximately $32.5 million which begin to expire in 2008 if not used to
offset future taxable future. As of December 31, 2007, the Company has foreign
net operative losses of $2.3 million which can be carried forward
indefinitely.
 
 The
Company has experienced certain ownership changes, which under the provisions of
Section 382 of the Internal Revenue Code 1986, as amended; result in an annual
and aggregate limitation on the Company’s ability to utilize its net operating
losses in the future. The Company has conducted a study to determine the extent
of the limitations.
 
 Based on
the study, the Company has had four separate changes in control. However, in
each case, the annual and aggregate limitations will not hamper the Company’s
ability to utilize its net operating losses in the future.
 
 (7) AudibleUK
 
 In
February 2005, the Company established Audible UK. Audible, Inc. purchased one
share of Audible UK stock on February 7, 2005, which at that date became a
wholly-owned subsidiary of Audible Inc. Audible UK began commercial operations
in June 2005.
 
 (8) Audible
Germany Agreement
  On August
30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
(the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own less than
2% of Audible's common stock, as of December 31, 2007.
  Audible
Germany has the exclusive rights to operate a German language Audible Web site.
Under the original Joint Venture agreement, Random House and Holtzbrinck each
contributed a nominal amount in exchange for each receiving a 24.5% interest in
Audible Germany. The Company was required to contribute a nominal amount in
exchange for a 51% interest in Audible Germany. After the initial formation,
Random House and Holtzbrinck were to provide additional equity financing of
approximately $1.5 million each in certain installments, subject to Audible
Germany meeting certain milestones. The full amount has been funded by Random
House and Holtzbrinck. In the event of liquidation of Audible Germany, this
additional financing by Random House and Holtzbrinck accrues interest at 8% per
annum and is senior to Audible's capital investment. In July 2006, a new
investor, Lubbe, contributed €0.3 million for a 5% interest in Audible Germany.
This contribution reduced the Company’s interest to 48% and Random House’s and
Holzbrinck’s ownership percentage to 23.5% each.  In connection with
the admission of Lubbe to the joint venture, the original Joint Venture was
amended effective July 3, 2006.
 
 In
October 2006, the Joint Venture agreement was further amended to provide for
additional financing commitments by for the investors. Accordingly, additional
contributions were made by the Company and Holtzbrinck in October 2006 and
December 2006. During the fourth quarter of 2006, the Company contributed €0.3
million, or $0.4 million, which includes the amount that was due to the Company
from Audible Germany for services performed during the twelve month period ended
December 31, 2006, and Holtzbrinck contributed €0.7 million. In addition, the
Company contributed a nominal amount and Holtzbrinck contributed a nominal
amount as statutory capital contributions during the fourth quarter of 2006.
These contributions further changed the ownership percentages to 44.9% for the
Company, 30.9% for Holtzbrinck, 19.5% for Random House, and 4.7% for
Luebbe.
 
 During
the first quarter of 2007, the Company contributed an additional amount of $0.1
million for the amount that was due to the Company from Audible Germany for
services performed during this period. This contribution further changed the
ownership percentage to 45.3% for the Company, 30.7% for Holtzbrinck, 19.4% for
Random House, and 4.6% for Lubbe.
  F-25
  In July
2007, a second amendment was signed and executed to the Joint Venture
agreement, which stipulated the additional financing commitments for the
Company, Holtzbrinck, Random House, and a new investor, CSW. CSW, incorporated
in Germany, is an entity owned 100% by the managing director of Audible Germany.
Additional contributions were made by these investors as follows: Audible, Inc.,
€0.7 million, Holtzbrinck, €0.5 million, Random House, €0.3 million, and CSW,
€0.2 million. In addition, each investor contributed statutory capital
contributions of less than €0.1 million. These contributions further changed
each investor’s ownership percentage to 45.4% for the Company, 29.7% for
Holtzbrinck, 19.5% for Random House, 3.4% for Lubbe, and 2.0% for CSW. The
Company may, but is not obligated to, contribute additional capital to the
entity. Any profits distributed by Audible Germany are to be distributed in
accordance with the ownership interests.
 
 At the
time the Joint Venture was entered into, the Company had determined that Audible
Germany was not a variable interest entity as defined in FASB Interpretation No.
46R,Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51 (“FIN 46R”) because,
as a development stage enterprise, Audible Germany had sufficient equity to
permit it to finance the activities in which it was currently engaged in without
additional subordinated financial support. In addition, the other criteria
within FIN 46R that would characterize Audible Germany as a variable interest
entity were not met. Rather, Audible Germany was considered to be a voting
interest entity. Upon occurrence of the additional financing in July 2006, the
Company performed an analysis to determine whether or not Audible Germany is a
variable interest entity, as defined in FIN 46R. Audible Germany is 100% equity
funded and no debt exists or is planned. Therefore, equity is deemed to be
sufficient under the definition of FIN 46R paragraph 5a. In addition, under
paragraph 9 of FIN 46R, on a qualitative basis, Audible Germany has demonstrated
that it can finance its activities without additional subordinated financial
support, even though the equity may be less than 10% of the entity’s total
assets. An entity that is able to support its operations with existing equity
has demonstrated the sufficiency of its equity. Therefore, the Company has
concluded that Audible Germany continues to be a voting interest
entity.
  Prior to
the additional contribution made in July 2006, the Company’s ownership
percentage was greater than 50%. Under EITF 96-16,Investor's Accounting for an
Investee When the Investor has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain Approval or Veto
Rights, the Company had determined that the minority shareholders,
together, have significant participatory rights, allowing them to participate in
significant decisions of Audible Germany and to block significant decisions
proposed by Audible. As a result of the significant participatory rights held by
the minority shareholders, the Company did not have unilateral control over
Audible Germany. Therefore, Audible did not consolidate the results of Audible
Germany but rather accounted for its investment in Audible Germany under the
equity method of accounting. Under the equity method of accounting, the Company
records its shares of the profits, if any, and its share of the equity losses
but only until such time that the Company records losses equal to the initial
investment of the Company plus any profits previously recorded. The initial
investment was reduced to zero during 2004. Subsequent to the additional
fundings made in July 2006, October 2006, December 2006, March 2007 and July
2007, the Company’s ownership percentage was reduced to 45.4% and therefore the
equity method of accounting for the investment in Audible Germany continues to
apply regardless of the significant participatory rights of the other
investors.
 
 In
connection with the Joint Venture, on August 30, 2004, the Company entered into
a license and services agreement with Audible Germany (the “License”). Under the
License, Audible Germany launched a German language spoken word audio service.
The terms provide for the Company to provide intellectual property and
substantially all of the technological infrastructure for the operation of the
service. In return, Audible Germany is required to pay Audible $0.9 million
evenly over a period of 30 months, beginning in September 2004. Every 60 days
during this agreement, the parties meet to review and accept the services. The
monthly payments were subject to refund if Audible Germany does not accept the
services, subject to reasonable cure. Under the License, Audible recognizes $0.1
million of revenue per quarter once Audible Germany has agreed that the services
delivered were satisfactory and collection of the amount is reasonably assured.
Also under the License, Audible Germany will pay the Company royalties ranging
from 0.5% to 3% of revenue up to an annual royalty cap of the U.S. dollar
equivalent of €1.5 million, subject to Audible Germany achieving certain
operating margins. No royalties have been received by the Company under the
License as of December 31, 2007.
 
 During
the years ended December 31, 2005, 2006 and 2007, the Company recognized $0.4
million, $0.3 million and $0.1 million, respectively, in related party revenue
under the license agreement as the related services were delivered and accepted.
In addition, the Company recognizes revenue for certain consulting services and
related incremental reimbursable costs incurred in connection with the License
in accordance with EITF 01-14. These amounts are included in related party
revenue on the condensed consolidated Statements of Operations. During the years
ended December 31, 2005, 2006, and 2007, $0.1 million, $0.4 million and $0.4
million was recognized, respectively. Revenues under the License have been fully
recognized.
 
 As of
December 31, 2007, the Company recorded a $0.4 million loss on equity investment
which included $0.3 million loss on a pro-rata basis Audible’s share of loss on
its investment made in August 2007 in Audible Germany under the equity method,
and $0.1 million when Audible agreed to contribute as additional non-cash equity
investment in Audible Germany amounts owed to it by Audible Germany, on the
accompanying 2007 consolidated Statements of Operations.
 
  F-26
  As of
December 31, 2006 the $0.4 million in accounts receivable related to revenues
recognized for the year ended December 31, 2006 were not collected in cash, but
rather were contributed as the Company’s equity investment in Audible Germany.
During the year ended December 31, 2006, the Company recorded its share of the
equity loss up to the amount of its investment of $0.4 million, in the
accompanying 2006 consolidated Statements of Operations.
 
 The
Company accrues for amounts to be paid to Audible Germany related to net profit
earned by Audible, Inc. at the Apple Germany iTunes Store. These amounts are
included in accrued expenses in the consolidated Balance Sheets as of December
31, 2006 and 2007, and marketing expense in the consolidated Statements of
Operations.
 
 As of
December 31, 2007, the Company had an account receivable balance of $0.4
million, and an accrued expense balance of $0.7 million related to Audible
Germany.
 
 (9) France
Loisirs Agreement
  On
September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”),
the term of which has been extended to March 31, 2010. France Loisirs is a
wholly owned subsidiary of Bertelsmann AG. During this time, terms and
conditions of the Agreement remain in effect. No additional fees will be paid to
the Company other than billings for consulting and incremental costs and royalty
payments to the Company discussed below.
 
 Under the
Agreement, in the quarter ended March 31, 2005, France Loisirs launched a French
language spoken word audio service through Audio Direct. The terms state that
Audible will provide intellectual property and substantially the entire
technological infrastructure for the operation of the service. In return, France
Loisirs is required to pay Audible $1.0 million, payable as follows: $0.3
million in September 2004, $0.3 million in October 2004, $0.3 million in January
2005 and $0.1 million evenly over the following 12 months. As of December 31,
2006, the Company had received the full amount.
 
 Commencing
the first fiscal year after the business achieves positive net income, the
Company will receive a royalty of 5% of the business's annual net paid revenue.
Net paid revenue refers to net revenues for digital spoken word content after
the deduction of taxes but excluding certain hardware revenue. The 5% royalty
will apply until the business net paid revenue exceeds €20.0 million. Once net
paid revenue exceeds €20.0 million, the Company will receive a flat fee of €1.0
million. If net paid revenue exceeds €33.3 million, the Company will receive a
royalty payment of €1.0 million, plus 3% of net paid revenue in excess of €33.3
million. An additional royalty is payable equal to one-half of the distributable
pre-tax profits of the business. No royalties have been received by the Company
under the License as of December 31, 2007.
 
 FIN 46R
addresses the consolidation by business enterprises of variable interest
entities (VIEs) and requires that if an enterprise is the primary beneficiary of
a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be consolidated in the
financial statements of the enterprise.
 
 Audio
Direct is considered a VIE because its equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support. Audible and France Loisirs form a related party group, as defined in
FIN 46R, as a result of the Bertelsmann affiliation and the number of seats that
Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the entity
within the related party group that is most closely associated with the variable
interest entity is the primary beneficiary.
 
 Based
upon analysis, the Company determined that France Loisirs is more closely
associated with Audio Direct, primarily because France Loisirs is required to
fund the operations of Audio Direct, including the $1.0 million payment made to
Audible. France Loisirs is therefore considered to be the primary beneficiary of
Audio Direct. As a result, the Company does not consolidate the results of Audio
Direct but rather accounts for its variable interest in Audio Direct under the
cost method of accounting.
  Because
the Company has not made and is not required to provide any funding to France
Loisirs or Audio Direct, it has no exposure to loss under the
Agreement.
 
 The $1.0
million in fees are non-refundable and not subject to any acceptance provisions.
Since fair values do not exist for the different services (elements) that
Audible is providing, the services are considered a single unit of accounting
under EITF 00-21 and accordingly, the $1.0 million in fees is recognized as
related party revenue on a straight-line basis over the 24-month term, provided
collectibility is reasonably assured. As of December 31, 2006, the full amount
was collected and recognized as revenue.
 
 The
Company recognized $0.5 million and $0.4 million of revenue during December 31,
2005 and 2006, respectively. In addition, the Company recognizes related party
revenue for billings for certain consulting services and related incremental
reimbursable costs incurred in connection with the Agreement in accordance with
EITF 01-14.
 
 F-27
  During
the years ended December 31, 2005, 2006 and 2007, the Company recognized $0.1
million, $0.2 million and $0.1 million, respectively. These amounts are included
in related party revenue on the consolidated Statements of
Operations.
 
 The
Company accrues for amounts to be paid to France Loisirs related to net
profit earned by Audible, Inc. at the Apple France iTunes Store. These
amounts are included in accrued expenses in the consolidated Balance Sheets as
of December 31, 2006 and 2007, and marketing expense in the consolidated
Statements of Operations.
 
 As of
December 31, 2007, the Company had an account receivable balance of $0.1 million
and an accrued expense balance of $0.1 million related to France
Loisirs.
 
 (10)
Apple Agreement
 
 In July
2006, the Company entered into a global master agreement with Apple Computer,
Inc. that replaced the principal agreements entered into with Apple during 2002
and 2003. Pursuant to the new agreement, the Company continues to be the
exclusive source of audiobooks, book-related content, and other spoken-word
material to Apple’s iTunes Stores worldwide and will continue to provide the
iTunes Store with comedy, lectures, speeches, periodicals, educational programs,
Audible originals, spiritual programming, paid podcasts, and other spoken-word
programs. All Audible content will continue to receive branding within the audio
stream and visually in the iTunes Store. All Apple iPods and iTunes applications
will continue to be AudibleReady and will work with the Audible service. Under
the new agreement, the Company has agreed to certain exclusivity obligations
that restrict the Company to varying degrees from integrating Audible content
into other internet-based services. The new agreement also provides that the
Company’s revenue is formula-driven, based upon the selling price on the iTunes
Store and the content cost. Under the old agreements, the Company’s revenue was
a fixed price, based upon a percentage of either the manufacturer’s suggested
retail price or amount the item was sold for on the Audible service. This change
in payment structure resulted in a change in the manner in which the Company
calculates revenue under the new agreement. The new agreement also changes the
terms of the revenue share payments due to Apple. Under the terms of the
previous agreements, the Company paid Apple a revenue share based on number of
customers who used the iTunes software to download digital audio. In the new
agreement, the revenue share paid to Apple is a percentage of sales made by
customers who are referred directly by Apple to the Company’s Web site. The new
revenue formula was implemented January 1, 2007. The term of the new agreement
expires on September 30, 2010.
 
 (11) Product Development, Licensing,
Marketing and Distribution Agreement
 
 On May
16, 2005, the Company entered into a five-year agreement with a new
content provider to develop, license, market and distribute audio
content. The Company is paid an exclusivity fee, a product development fee
and production fees for audio content produced under the
agreement. In addition, the Company makes royalty and revenue sharing
payments to the content provider based on sales of the products
produced.
 
 As of the
years ended December 31, 2005, 2006 and 2007, the Company billed the
publisher $0.5 million, $1.2 million, and $1.7 million, respectively. The fees
associated with this agreement are being amortized over a 58-month period
beginning in the month the Company commenced production of audio in July 2005
through the expiration of the agreement.
 
 During
the years ended December 31, 2005, 2006, and 2007, the Company recorded $0.1
million, $0.3 million and $0.5 million, respectively, as other revenue in
connection with this agreement.
 
 As of
December 31, 2005, 2006 and 2007, the Company recorded $0.3 million, $0.3
million and $0.4 million as deferred revenue current respectively, and $0.1
million $0.5 million and $0.5 million as deferred non-current,
respectively, on the accompanying consolidated Balance Sheets, relating to this
agreement, representing cash received in advance of being recognized as
revenue.
 
 (12) Employee
Benefit Plan
  The
Company has a 401(K) plan based on contributions from employees and
discretionary Company contributions. Beginning January 1, 2005, the Company
adopted a policy to match up to the first two-percent of salary contributions
made from employees into the 401(K) plan. During the years ended December 31,
2005, 2006 and 2007, the Company made contributions of $0.1 million, $0.2
million and $0.2 million, respectively.
   F-28
  (13) Commitments
and Contingencies
  Lease
Obligations
  In
September 2006, the Company entered into a lease agreement for office space in
Newark, NJ. The Company occupies two floors with an approximate space of 49,600
square feet, which is used as its corporate headquarters. The term of the
agreement is through June 2014 and there is a one time only option to terminate
the lease agreement after June 2012 upon 12 months prior written notice to the
landlord. The Company has no current plans to terminate the lease agreement
early.
 
 Audible
UK leases office space, which includes office amenities, under a lease that
expires in May 2008. The Company also leases office space in Tokyo, Japan where
a local representative assists the Company in securing local Japanese content.
This lease expires in June 2008. Total future minimum lease obligations at
December 31, 2007 under these three lease arrangements are $7.7
million.
 
 Rent
expense of $1.2 million was recorded for the year ended December 31, 2007.
Access to the space for the new corporate office was provided to the Company at
the time the lease was executed in September 2006, so it could design and
develop the office as needed in order to move in timely. Based on the Company’s
evaluation, this period was included in calculating the straight-line rent
expense. Included in rent expense for the year ended December 31, 2006 is $0.3
million for this “rent holiday” period.
 
 Service
Agreements
 
 The
Company has entered into operational and marketing agreements or purchase orders
with various vendors to provide certain contracted services. The majority of the
amounts committed are for hosting services related to the Company’s Web site.
Most of these service agreements are cancellable but require significant
penalties for cancellation.
 
 Royalty
Obligations
 
 Royalty
obligations represent payments to be made to various content providers pursuant
to minimum guarantees under their royalty agreements, net of royalties paid. The
royalty obligations recorded in the accompanying consolidated Balance Sheets are
classified between current and non-current based on the payment terms specified
in the agreements, and relate to audio content that has been delivered to
Audible. Royalty obligations pursuant to minimum guarantees for audio content to
be delivered in the future are reflected as a commitment in the
table.
  Purchase
Commitments
 
 Purchase
commitments represent agreements the Company has made for future purchases of
goods and services. The balance primarily consists of amounts committed for
customer rebates, technology and development services and marketing
services.
 
 Summary
of Cash Commitments and Obligations
  The
following table shows the Company’s commitments and obligations of future cash
payments as of December 31, 2007:
  (in thousands)
                Year
              
              Operating Leases(1)
              
              
              Service Agreements
              
              
              Royalty Obligations(2)
              
              
              Purchase Commitments
              
              
              TotalCash
      Due2008
              
              $
              1,055
              
              
              $
              1,783
              
              
              $
              114
              
              
              $
              1,898
              
              
              $
              4,8502009
              
              
              1,068
              
              
              
              189
              
              
              
              --
              
              
              
              --
              
              
              
              1,2572010
              
              
              1,141
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,1412011
              
              
              1,215
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,2152012
              
              
              1,259
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,259Thereafter
              
              
              1,996
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,996Total
              
              $
              7,734
              
              
              $
              1,972
              
              
              $
              114
              
              
              $
              1,898
              
              
              $
              11,718
 
 (1) Of
the $7.7 million in total operating leases, $7.6 million is related to the
Company’s office lease agreement entered into in September 2006.
 
 (2) Of
the $0.1 million in total royalty obligations, less than $0.1 million is
recorded in accrued expenses and less than $0.1 million is recorded as royalty
obligations, non-current in the accompanying December 31, 2007 consolidated
Balance Sheet. The remaining less than $0.1 million is related to content that
has not yet been delivered as of December 31, 2007.
 
  F-29
  Contingencies
 
 Various
legal actions, claims, assessments and other contingencies arising in the normal
course of business, in addition to the matters described below, are pending
against the Company. All of these matters are subject to many uncertainties, and
it is possible that some of these matters could be ultimately decided, resolved
or settled adversely. The Company has recorded accruals for losses related to
those matters which it considers to be probable and that can be reasonably
estimated. Although the ultimate amount of liability at December 31, 2007 that
may result from those matters for which accruals have been recorded may differ,
the Company believes that any amounts exceeding the recorded accruals would not
be material to the consolidated financial position or results of
operations.
 
 New
Jersey Class Action
 
 Starting
on or about February 22, 2005, several class actions were filed against the
Company and two of the Company’s executives in the United States District Court
for the District of New Jersey. The plaintiffs purported to represent a class
consisting of all persons (other than the Company’s officers and directors and
their affiliates) who purchased the Company’s securities between November 2,
2004 and February 15, 2005 (the “Class Period”). The plaintiffs alleged that the
defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated there under by failing to make
complete and accurate disclosures concerning the Company’s future plans and
prospects. The individual defendants were also alleged to be liable under
Section 20(a) of the Exchange Act. All of the defendants were alleged to have
sold stock at inflated prices during the Class Period. In December 2005, the
United States District Court for the District of New Jersey consolidated the
class action, appointed a group of lead plaintiffs and appointed lead
plaintiff’s counsel. By prior agreement, the plaintiff’s consolidated
amended complaint was filed on February 14, 2006. The plaintiffs sought
unspecified monetary damages and their reasonable costs and expenses, including
counsel fees and expert fees. The defendants moved to dismiss the pleading. In
March 2007, the Court granted the defendants’ motion to dismiss the plaintiffs’
consolidated amended complaint. The plaintiffs filed a motion for
reconsideration. In December 2007, the Court denied the motion for
reconsideration. The time for an appeal has now expired without any appeal being
filed.
 
 In April
2005, a derivative action was filed in a New Jersey state court against the
Company, the two executives named as individual defendants in the class actions
described above, six of the Company’s outside directors, and three stockholders.
The derivative action was based on the same factual allegations as the class
actions described above and added allegations that the six outside directors
named as defendants and/or the stockholders who nominated them sold stock at
inflated prices at or about the time of the secondary offering of securities
that the Company made in November 2004. The plaintiff in this derivative action
purported to seek a recovery of the damages allegedly sustained by the Company
rather than by investors who allegedly purchased securities at inflated
prices.
 
 In May
2005, the Company learned of a second derivative action, which was filed during
April 2005 in the United States District Court for the District of New Jersey
against the Company, the two executives named as individual defendants in the
class actions described above, and all seven of the Company’s outside directors.
 The derivative action was based on the same allegations as the class
actions described above and added allegations that all of the individual
defendants were responsible for an alleged failure of internal controls that
resulted in the 45-day delay in the filing of the Company’s Form 10-K for 2004.
The plaintiff in this derivative action purported to seek a recovery of the
damages allegedly sustained by the Company rather than by investors who
allegedly purchased securities at inflated prices.
 
 The
plaintiffs in the derivative actions voluntarily agreed to stay the derivative
actions pending the outcome of the defendants’ motion to dismiss the securities
class actions described above, but the courts instead chose to dismiss the
actions without prejudice.  Now that the dismissal of the securities class
actions is final, the Company does not presently anticipate these derivative
actions will be re-filed.
 
 IPO
Litigation
 
 In June
2001, the Company was named as a defendant in a securities class-action filed in
United States District Court for the Southern District of New York related to
its initial public offering (“IPO”) in July 1999.  The lawsuits also
named certain of the underwriters of the IPO, including Credit Suisse First
Boston Corporation, J.P. Morgan Chase & Co., Volpe Brown Whelan & Co.,
LLC, and Wit Capital Corporation, as well as officers and directors of the
Company Andrew J. Huffman, Donald R. Katz, Andrew Kaplan, Richard Brass, R.
Bradford Burnham, W. Bingham Gordon, Thomas P. Hirschfeld, Winthrop Knowlton,
and Timothy Mott, as defendants. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the Southern District of New York
(the “IPO Litigations”).  The complaints allege that the prospectus
and the registration statement for the IPO failed to disclose that the
underwriters allegedly solicited and received “excessive” commissions from
investors and that some investors in the IPO allegedly agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the
price of the Company’s stock.  An amended complaint was filed April
19, 2002.  The Company and the officers and directors identified above
were named in the suits pursuant to Section 11 of the Securities Act of 1933
(the “Securities Act”), Section 10(b) of the Exchange Act, and other related
provisions.  The complaints seek unspecified damages, attorney and
expert fees, and other unspecified litigation costs.
 
  F-30
  On July
1, 2002, the underwriter defendants in the consolidated actions moved to dismiss
all of the IPO Litigations, including the action involving the Company. On July
15, 2002, the Company, along with other non-underwriter defendants in the
coordinated cases, also moved to dismiss the litigation. On February 19, 2003,
the Court ruled on the motions.  The Court granted the Company’s
motion to dismiss the claims against it under Rule 10b-5, due to the
insufficiency of the allegations against the Company.  The motions to
dismiss the claims under Section 11 of the Securities Act were denied as to
virtually all of the defendants in the consolidated cases, including the
Company.  In addition, the individual defendants in the IPO
Litigation, Donald R. Katz, Andrew P. Kaplan, Richard Brass, R. Bradford
Buroham, W. Bingham Gordon, Thomas P. Hirschfeld, Winthrop Knowlton, and Timothy
Mott signed a tolling agreement and were dismissed from the action without
prejudice on October 9, 2002.
 
 In June
2004, the agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on February 15,
2005, subject to certain modifications.  On August 31, 2005 the court
issued a preliminary order further approving the modifications to the settlement
and certifying the settlement classes.  The court also appointed the
notice administrator for the settlement and ordered that notice of the
settlement be distributed to all settlement class members by January 15,
2006.  The settlement fairness hearing occurred on April 24, 2006, and
the court reserved decision at that time.
 
 While the
partial settlement was pending approval, the plaintiffs continued to litigate
their cases against the underwriter defendants.  The district court
directed that the litigation proceed within a number of “focus cases” rather
than in all of the 310 cases that have been consolidated.  The
Company’s case is not one of these focus cases.  On October 13, 2004,
the district court certified the focus cases as class actions.  The
underwriter defendants appealed that ruling, and on December 5, 2006, the United
States Court of Appeals for the Second Circuit reversed the district court’s
class certification decision.  On April 6, 2007, the Second Circuit
denied plaintiffs’ petition for rehearing.
 
 In light
of the Second Circuit’s opinion, we informed the district court that the
issuers’ settlement cannot be approved because the defined settlement class,
like the litigation class, cannot be certified. On June 25, 2007, the district
court entered an order terminating the settlement agreement.  We
cannot predict whether we will be able to renegotiate a settlement that complies
with the Second Circuit’s mandate. On August 14, 2007, the plaintiffs re-pled
their complaints against the focus cases and, on September 27, 2007, again filed
motions for class certification.  The focus case issuer and
underwriter defendants have moved for dismissal of these second amended
complaints.  The motions for class certification are being briefed.
Due to the inherent uncertainties of litigation, the Company cannot accurately
predict the ultimate outcome of the matter.
 
 Simmonds
Litigation
 
 On
October 9, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed
suit in the U.S. District Court for the Western District of Washington against
Credit Suisse Group and JP Morgan Chase & Co., the lead
underwriters of the Company’s initial public offering in July 1999, alleging
violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. §
78p (b).  The complaint alleges that the combined number of shares of the
Company’s common stock beneficially owned by the lead underwriters and certain
unnamed officers, directors, and principal shareholders exceeded ten percent of
its outstanding common stock from the date of the Company’s initial public
offering on July 16, 1999, through at least July 15, 2000.  It further
alleges that those entities and individuals were thus subject to the reporting
requirements of Section 16(a) and the short-swing trading prohibition of Section
16(b), and failed to comply with those provisions.  The complaint seeks to
recover from the lead underwriters any “short-swing profits” obtained by them in
violation of Section 16(b).  The Company was named as a nominal defendant
in the action, but has no liability for the asserted claims.  No directors
or officers of the Company are named as defendants in this action.  On
February 25, 2008, Ms. Simmonds filed an Amended Complaint asserting
substantially similar claims as those set forth in the initial complaint. 
The Company has waived service and is in the process of considering what, if
any, action to take in response to this litigation.  They Company
believes that the outcome of this litigation will not have a material adverse
impact on our consolidated financial position and results of
operations.
 
 Digital
Reg
 
 On
October 5, 2007, Digital Reg of Texas, LLC, a patent holding company, filed a
complaint in the U.S. District Court for the Eastern District of Texas, alleging
that the Company, among numerous other defendants, infringes a patent
purportedly relating to the Company’s Digital Rights Management
technology.  The Company intends to defend against the claim
vigorously, but at this time is unable to predict the outcome of the suit or
reasonably estimate any possible loss.
 
  F-31
  Merger
Litigation
 
 On
February 20, 2008, two individuals who allege they are stockholders of Audible
commenced an action in the Superior Court of New Jersey, Equity Division, Essex
County against the Company, six of Audible’s seven directors, Amazon and an
affiliate of Amazon.  The case is captioned Leah Solomon, et al. v.
Donald R. Katz, et al.  The plaintiffs seek to represent a class
consisting of all of Audible’s stockholders other than the
defendants.  The plaintiffs allege that $11.50 per share was an
inadequate price for Audible and that Audible’s directors breached their
fiduciary duties by agreeing to sell Audible to Amazon at that price and by
pursuing a defective sales process.  The plaintiffs allege that the
Merger Agreement contained provisions which inappropriately limited the
possibility that another potential buyer would make a superior
bid.  The plaintiffs allege that Amazon and its affiliate aided and
abetted the breaches of fiduciary by Audible’s directors.  Finally,
the plaintiffs allege that the disclosures concerning the proposed transaction
that were made by Audible in the Schedule 14D-9 were incomplete or
inaccurate.  The plaintiffs sought to enjoin consummation of the
proposed transaction or if consummated, to rescind it or to obtain an award of
damages equivalent to rescission.  On February 29, 2008, the
defendants entered into a memorandum of understanding with the plaintiffs
pursuant to which Audible made the additional disclosures in their filings with
the SEC related to the acquisition and the parties will ask the court to approve
a settlement binding on the entire class pursuant to which the plaintiffs'
claims will be dismissed with prejudice, the defendants will receive a general
release, and the plaintiffs' counsel will be awarded attorneys'
fees.
 
 (14) Customer
Concentration
  Apple
Computer accounted for 15.0%, 23.8% and 29.9% of total revenue for the
years ended December 31, 2005, 2006 and 2007.
 
 Apple
Computer accounted for 64.1% and 71.8% of the Company's accounts receivable as
of December 31, 2006 and 2007.
 
 (15) Supplemental
Disclosure of Cash Flow Information
  The
following supplemental information relates to Statements of Cash Flows for the
years ended December 31, 2005, 2006 and 2007:
 
 Non-Cash
Financing and Investing Activities
 
 No
capital leases were entered into during the 2005, 2006 or 2007
years.
 
 During
2005, 31,105 warrants were exercised through cashless transactions in accordance
with the original terms of the warrant agreements. Accordingly, the number of
shares of common stock issued as a result of these cashless exercises was 23,733
shares.
 
 During
2006, 533 warrants were exercised through a cashless transaction in accordance
with the original terms of the warrant agreement.  Accordingly, the
number of common shares issued as a result of this cashless exercise was
346.
 
 During
2007, there were no warrants were exercised through a cashless
transactions.
 
 Cash
Paid for Interest
  Interest
paid was less than $0.1 million during the year ended December 31, 2005,
respectively. No interest was paid in cash for the years ended December 2006 or
2007.
 
 Taxes
Paid
 
 Amounts
paid for income taxes were nominal during the years ended December 31, 2005 and
2006. In 2007 the Company paid $0.1 million in federal income tax.
 
  F-32
  (16) Financial
Information by Geographic Area
 
 Revenues
and long-lived assets for the Company's U.S. and UK operations are as follows
(in thousands):
  United
      States
              
              United
      Kingdom
              
              ConsolidatedDecember 31, 2005Revenues
              
              $
              62,783
              
              
              $
              454
              
              
              $
              63,237Long-lived
      assets
              
              
              8,239
              
              
              
              34
              
              
              
              8,273December 31, 2006Revenues
              
              $
              78,764
              
              
              $
              3,268
              
              
              $
              82,032Long-lived
      assets
              
              
              8,887
              
              
              
              43
              
              
              
              8,930December 31, 2007Revenues
              
              $
              104,198
              
              
              $
              5,770
              
              
              $
              109,968Long-lived
      assets
              
              
              11,566
              
              
              
              39
              
              
              
              11,605
 
 (17) Adoption
of SAB 108
 
 Staff
Accounting Bulletin 108 (“SAB 108”) was issued by the Securities and Exchange
Commission in September 2006. This bulletin addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires registrants
to quantify misstatements using both the balance-sheet and income-statement
approaches (“dual” method) and to evaluate whether each approach results in
quantifying an error that is material in light of relevant quantitative and
qualitative factors. Historically, the Company used the income-statement
(“rollover”) approach to quantify misstatements. Upon adoption, SAB 108 permits
the Company to adjust for the cumulative effect of errors that were previously
considered immaterial under the rollover method that are now considered material
under the dual method.  Effective January 1, 2006, the Company changed
its method of quantifying misstatements to the dual method in accordance with
SAB 108 and adjusted its opening accumulated deficit for the items described
below. These errors were considered immaterial to the Company’s historical
consolidated financial statements using the rollover method.
 
 Legacy
Membership Revenue
 
 As of the
December 31, 2005 the Company documented a prior period misstatement related to
the over recognition of Legacy revenue beginning in August 2000 through
September 2003. Prior to October 2003, the Company had been recognizing revenue
for the full amount of cash receipts on the first day of a 30-day Legacy
membership instead of ratably recognizing the revenue over the 30-day period.
The revenue recognition policy was changed during the quarter ended December 31,
2003 to properly recognize revenue from the sale of monthly Legacy memberships
ratably over the monthly membership period. This resulted in approximately 50%
of the membership fees received during each calendar month being deferred at
month-end and recognized as content revenue in the following month. However,
when the Company changed this policy, it was only applied prospectively, and as
a result, an error of $0.7 million remained for the overstatement of the revenue
from August 2000 through September 30, 2003. The $0.7 million, therefore, has
been recorded as a cumulative effect adjustment to beginning of the year
accumulated deficit as of January 1, 2006.
 
 Value
Added Tax
 
 In early
2007, the Company discovered that it was required to assess a sales tax for
sales made in European Union countries effective as of July 2003. Sales to
individuals outside of the U.S. in countries subject to this tax have comprised
approximately 3% of total revenue over the past three years. Accordingly, the
Company is required to record a liability for estimated past liabilities. The
amount due for past liabilities for the period from July 2003 to December 2005
was $0.5 million which was not recorded by the Company as of December 31, 2005.
The $0.5 million, therefore, has been recorded as a cumulative effect adjustment
to beginning of the year accumulated deficit as of January 1, 2006.
 
  F-33
  (18) Quarterly
Results (UNAUDITED)
 
 The
following tables contain select unaudited quarterly consolidated financial data
for each quarter of 2006 and 2007. The consolidated operating results for any
quarter are not necessarily indicative of results for any future
period.
 
 (dollars
      in thousands, except share and per share data)
              
              YEAR
      ENDED DECEMBER 31, 20061st
      Quarter
              
              
              2nd
      Quarter
              
              
              3rd
      Quarter
              
              
              4th
      QuarterRevenue,
      net
              
              $
              19,715
              
              
              $
              19,141
              
              
              $
              20,026
              
              
              $
              23,150Cost
      of content and services revenue
              
              
              8,281
              
              
              
              8,025
              
              
              
              8,547
              
              
              
              10,152Cost
      of hardware revenue
              
              
              675
              
              
              
              206
              
              
              
              826
              
              
              
              246Cost
      of related party revenue
              
              
              158
              
              
              
              171
              
              
              
              169
              
              
              
              139Gross
      Margin
              
              
              10,601
              
              
              
              10,739
              
              
              
              10,484
              
              
              
              12,613Operations
              
              
              3,102
              
              
              
              2,854
              
              
              
              2,987
              
              
              
              3,225Technology
      and development
              
              
              3,694
              
              
              
              4,362
              
              
              
              4,625
              
              
              
              4,303Marketing
              
              
              4,301
              
              
              
              3,573
              
              
              
              3,340
              
              
              
              4,108General
      and administrative
              
              
              3,201
              
              
              
              2,663
              
              
              
              2,743
              
              
              
              3,402Total
      operating expenses
              
              
              23,412
              
              
              
              21,854
              
              
              
              23,237
              
              
              
              25,575(Loss)
      before income taxes
              
              
              (3,037
              )
              
              
              (2,179
              )
              
              
              (2,522
              )
              
              
              (1,697
              )Net
      loss
              
              $
              (3,040
              )
              
              $
              (2,182
              )
              
              $
              (2,525
              )
              
              $
              (933
              )Basic
      net loss per share
              
              
              (0.12
              )
              
              
              (0.09
              )
              
              
              (0.10
              )
              
              
              (0.04
              )Diluted
      net loss per share
              
              
              (0.12
              )
              
              
              (0.09
              )
              
              
              (0.10
              )
              
              
              (0.04
              )Basic
      weighted average shares outstanding
              
              
              24,481,751
              
              
              
              24,501,629
              
              
              
              24,348,938
              
              
              
              24,158,857Diluted
      weighted average shares outstanding
              
              
              24,481,751
              
              
              
              24,501,629
              
              
              
              24,348,938
              
              
              
              24,158,857
 
 (dollars
      in thousands, except share and per share data)
              
              YEAR
      ENDED DECEMBER 31, 20071st
      Quarter
              
              
              2nd
      Quarter
              
              
              3rd
      Quarter
              
              
              4th
      QuarterRevenue,
      net
              
              $
              25,264
              
              
              $
              25,947
              
              
              $
              27,618
              
              
              $
              31,139Cost
      of content and services revenue
              
              
              11,516
              
              
              
              11,283
              
              
              
              12,063
              
              
              
              13,673Cost
      of hardware revenue
              
              
              179
              
              
              
              121
              
              
              
              95
              
              
              
              221Cost
      of related party revenue
              
              
              129
              
              
              
              108
              
              
              
              133
              
              
              
              106Gross
      Margin
              
              
              13,440
              
              
              
              14,435
              
              
              
              15,327
              
              
              
              17,139Operations
              
              
              3,826
              
              
              
              3,406
              
              
              
              3,761
              
              
              
              3,894Technology
      and development
              
              
              4,571
              
              
              
              4,569
              
              
              
              4,680
              
              
              
              4,504Marketing
              
              
              3,904
              
              
              
              4,049
              
              
              
              4,300
              
              
              
              4,692General
      and administrative
              
              
              3,104
              
              
              
              3,359
              
              
              
              3,609
              
              
              
              3,831Total
      operating expenses
              
              
              27,229
              
              
              
              26,895
              
              
              
              28,641
              
              
              
              30,921Loss
      (income) before income taxes
              
              
              (1,186
              )
              
              
              (94
              )
              
              
              (140
              )
              
              
              857Net
      (loss) income
              
              $
              (1,210
              )
              
              $
              (125
              )
              
              $
              (192
              )
              
              $
              3,952Basic
      net (loss) income per share
              
              
              (0.05
              )
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              0.16Diluted
      net (loss) income per common share
              
              
              (0.05
              )
              
              
              (0.01
              )
              
              
              (0.01
              )
              
              
              0.16Basic
      weighted average shares outstanding
              
              
              24,205,043
              
              
              
              24,279,102
              
              
              
              24,349,644
              
              
              
              24,406,910Diluted
      weighted average shares outstanding
              
              
              24,205,043
              
              
              
              24,279,102
              
              
              
              24,349,644
              
              
              
              25,033,566
  (20) Subsequent
Events
 
 On March
18, 2008, following the completion of a tener offer by AZBC Holding, Inc.
(“Purchaser”), a wholly-owned subsidiary of Amazon.com, Inc. (“Amazon”),
Purchaser was merged into Audible, Inc. pursuant to an Agreement and Plan of
Merger, dated January 30, 2008. Audible is now a wholly-owned subsidiary of
Amazon.
  F-34