**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-K**





**(Mark
                One)**
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF****x**
            **THE
                SECURITIES EXCHANGE ACT OF 1934****For
                the Fiscal Year ended December 31, 2006****OR**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE
                SECURITIES EXCHANGE ACT OF 1934**





**For
      the transition period from _________ to __________**





**Commission
      File Number: 000-26529**





**AUDIBLE,
      INC.**


(Exact
      name of Registrant as specified in its Charter)





**DELAWARE**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **22-3407945**
              (I.R.S.
                Employer
              Identification
                Number)**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:





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





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





Common
      Stock, par value $0.01




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


**Yes** **o** **No** **x**


Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


**Yes** **o** **No** **x**





Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the Registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.


**Yes** **x** **No** **o**





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


Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated filer [ ]   Accelerated filer
      [x]  Non-accelerated filer [ ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


**Yes**  **o** **No** **x**





The
      aggregate market value of voting stock held by non-affiliates of the registrant
      was $115,238,511 based upon the closing price on the 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 $9.09 per share on June 30,
      2006).




As
      of
      March 29, 2007, 24,242,400 shares of common stock of the Registrant were
      outstanding.





Documents
      Incorporated by Reference


Portions
      of the definitive Proxy Statement to be delivered to shareholders in connection
      with the Annual Meeting of shareholders to be held June 20,
      2007.







**AUDIBLE,
      INC.**


**FORM
      10-K**





**TABLE
      OF CONTENTS**


PART
                I
            PAGEItem
                1.
            Business
            3Item
                1A.
            Risk
                Factors
            12Item
                1B.
            Unresolved
                Staff Comments
            18Item
                2.
            Properties
            18Item
                3.
            Legal
                Proceedings
            18Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            20PART
                IIItem
                5.
            Market
                for the Registrant's Common Equity, Related Stockholder Matters and
                Issuer
                Purchases of Equity Securities
            20Item
                6.
            Selected
                Financial Data
            21Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            23Item
                7A.
            Quantitative
                and Qualitative Disclosures about Market Risk
            37Item
                8.
            Financial
                Statements and Supplementary Data
            37Item
                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
            41Item
                11.
            Executive
                Compensation
            41Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            41Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            41Item
                14.
            Principal
                Accounting Fees and Services
            41PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            41Exhibit
                Index
            42Signatures
            43







-2-
 Table
          of Contents


**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) and www.audible.co.uk (United
      Kingdom), and from the Web sites of our related parties www.audible.de (Germany) and www.audible.fr (France), directly to personal computers for listening in a variety of ways.
      Most of our customers download audio to their PCs and Macs and then transfer
      the
      audio to MP3 players, personal digital assistants (PDAs), or to smart mobile
      devices (SMDs) for listening 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. Our digital downloads are available
      on
      Amazon.com, and we are the exclusive supplier of audiobooks 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 a la carte, or to join any one of our AudibleListener membership plans
      that offer significant savings from what consumers typically will find at other
      traditional or online retail stores. AudibleListener membership plans provide
      customers with access to a 30% discount on any individual content purchase,
      exposure to periodic sales, and member-only free content offerings all for
      the
      low price of $9.95 per year. Customers can also join the AudibleListener Gold
      or
      Platinum membership plans for a fixed monthly or annual fee that provides them
      with a predetermined number of credits to be used for downloading audio content.
      Some of these credits may be rolled over month to month, should members elect
      to
      do so. In addition to our AudibleListener membership plans, our customers may
      also subscribe to any one of nearly 50 daily, weekly or monthly subscription
      products.





On
      our
      Web sites, customers can select from more than 127,000 hours of audio content,
      comprising of 37,000 different programs. Our selection of audio in our
      stores ranges from over 14,800 audiobooks and performances, to audio editions
      of
      national periodicals such as *The
      New York Times, The Wall Street Journal, Forbes, The New Yorker* and *Scientific American* ,
      to
      radio and TV programming such as *The
      Ricky Gervais Show, Car Talk* , *The
      Bob Edwards Show* , *Opie
      & Anthony* and *Charlie 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 throughout the emerging market for handheld devices that play
      digital or compressed audio. Our AudibleReady ® initiative was designed to exploit this market by entering into multiple
      technology and 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 570 different mobile devices
      made by more than 60 manufacturers. These devices include MP3 players, PDAs,
      SMDs, or entertainment systems made by companies such as Apple, Creative Labs,
      Dell, Hewlett-Packard, Motorola, Oakley, Palm, Philips, Samsung, SanDisk, Sonos,
      and Thomson. Our device manufacturing partners support us by including our
      AudibleReady software on their devices. They may also include audio samples
      on
      the device, insert marketing brochures in device boxes, provide
      point-of-purchase sales support, after-market promotions, and web-based and
      e-mail customer outreach. Frequently, 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.




-3-
 Table
              of Contents


Since
      launching our service in 1997, over 1,166,000 customers from approximately
      174 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 also entered into a license and service agreement to
      support a French language version of the Audible service ( www.audible.fr ),
      which
      launched in the first quarter of 2005. In February 2005, we established our
      wholly-owned subsidiary in the United Kingdom, known as Audible UK ( www.audible.co.uk ),
      which
      began commercial operations in June 2005. 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. 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 70 guides are now marketed by Pearson and us directly to students, and
      more
      guides are being developed in 2007.





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.





The
      market for the Audible service is driven by the increasing usage of
      the Internet, the growth of handheld electronic devices that have digital audio
      capabilities, and the increasing number of hours commuters spend in traffic
      when
      they cannot otherwise read. In contrast to traditional radio broadcasts or
      satellite radio, the Audible service offers customers access to content of
      their
      choice and the ability to listen to what they want, when and where they want
      -
      whether commuting, exercising, working around the house, traveling, or simply
      relaxing. Unlike traditional and online bookstores, which are subject to
      physical inventory constraints and shipping delays, we provide a selection
      that
      is readily available in a digital format that can be quickly delivered over
      the
      Internet directly to our customers.





**Industry
      Background**




Demand
      for new sources of entertainment, information and educational programming
      continues to grow as the quantity and variety of content and its sources
      proliferate. Veronis Suhler Stevenson, a leading media entertainment firm,
      estimates that total communications spending in the U.S. was nearly $900 million
      in 2005, and forecasts the market to increase to more than $1.2 trillion by
      the
      end of 2010. Although digital media continues to be a growth driver of this
      industry at the margin, we see the “marketplace for words” making
      up approximately 20% of the U.S. communications market when considering
      books, newspapers, magazines, radio and certain sectors of the TV
      industry.





A
      significant catalyst to the digital media industry has been the proliferation
      of
      mobile digital players, ranging from iPods to PocketPCs and Palms to SMDs.
      Apple
      alone sold nearly 39 million iPods worldwide in 2006, reflecting annual growth
      of nearly 22%. On the horizon are SMDs, where global shipments continue to
      grow
      in the high double digits. We currently expect that by the end of 2009, SMDs
      will have become the device of choice for our customers in receiving and
      consuming our content.




Driving
      these trends is the increasing consumer need for content on the go, whether
      entertainment, information or education. In today's world, demand for increased
      productivity and efficiency and long hours of commuting continue to take away
      from leisure time and preferred media consumption, whether in the form of books,
      magazines, newspapers, radio shows or TV programming. According to the 2000
      United States Census, 97 million people drive to and from work alone, an
      increase of 15% from 1989. In 2005, the U.S. Census Bureau reported that
      Americans spent more than 100 hours per year commuting to work, with the average
      daily commute lasting about 24.3 minutes. As individuals look to use their
      commuting time more efficiently and manage an increasing amount of available
      content, digital audio content has emerged as a personalized “pay-to-listen”
alternative to radio, because radio does not allow listeners to control when
      they listen to a particular program.





-4-
 Table
            of Contents


The
      Internet has emerged as a powerful global communications and entertainment
      medium, giving millions of people the ability to access large amounts of
      valuable information and media in a timely fashion. As of October 2006,
      Nielsen//NetRatings estimated that there were 209 million Internet users in
      the
      U.S., representing 70% of the population of the country. The Pew
      Internet & American Life Project estimated that by the end of June 2005, 53% of all Internet users in the U.S.
      were connected via broadband, which allows for more convenient and faster
      downloading of digital media.




Currently,
      we are focused on three device categories for the AudibleReady initiative.
      The
      two primary categories are commonly referred to as MP3 players and PDAs. The
      emerging device category is smart mobile devices, commonly known as
“smartphones” or SMDs, because they combine the function of PDAs such as
      on-board memory, and the ability to play digital audio with cellular phone
      services.





The
        Consumer Electronics Association projects that MP3 players will account for
        90%
        of the $6 billion in revenues for the portable entertainment market. 34 million
        MP3 players shipped in 2006 and an additional 41 million are expected to
        ship in
        2007. While IDC reported cell phone makers shipped more than 1 billion handsets
        for the first time in 2006, driven by a strong holiday season in which shipments
        rose nearly 20% to a record 295 million devices.
  According
      to Jupiter Research, a leading business intelligence provider, as the MP3 market
      moves beyond early adopters who purchase multiple devices and upgrade regularly,
      the user base will steadily increase from 37 million in 2006 to over 100 million
      in 2011. At the same time, we estimate that global SMDs grew by more than 70%
      in
      2005 and we anticipated similar, if not stronger, growth in 2006. As global
      consumer demand for SMDs continues, we continue to expect that by the end of
      2009, SMDs will become the device of choice for our customers in receiving
      and
      consuming our content.




Over
      the
      past ten years the Internet has been increasingly accepted as a media
      distribution channel for consumers and businesses. This, coupled with the
      dramatic growth of broadband connectivity and the widespread adoption of
      audio-enabled mobile devices, has provided an opportunity to deliver audio
      digital content to consumers. This opportunity is not, however, without its
      challenges. These challenges include refining a system for selling media over
      the Internet, and compensating publishers and other content creators for quality
      entertainment and information, while preventing unauthorized duplication and
      distribution. These challenges present an opportunity for a content creator,
      aggregator and distributor to establish a secure technology system and an
      attractive consumer service focused on the delivery of premium audio
      content.





**Our
      Solution**




We
      have
      created the Audible service to give consumers the ability to download spoken
      digital content of their choice and to listen to this content when and where
      they want. The Audible service addresses the market opportunity created by
      consumer demand for audio content, the emergence of the commercial Internet
      and
      the availability of a wide range of mobile, audio-enabled digital devices.
      We
      created the first service and platform for secure, digital delivery of premium
      spoken audio content over the Internet for playback on personal computers and
      mobile devices. Our service allows customers to program their listening time
      with personalized selections from a wide collection of spoken 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-
 Table
            of Contents


***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, most of which is only available through us
      for
      Internet distribution pursuant to exclusive arrangements. Our collection
      currently consists of more than 37,000 programs, over 14,800 of which are
      digital audiobooks in a wide variety of categories. This represents an increase
      of over 9,000 programs and 2,500 audiobooks in the past year. These offerings
      include timely digital spoken editions of leading newspapers and selected
      periodicals and popular and special interest radio and TV 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. 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 over 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 four different fidelity options for their listening.
      Our service also allows customers to skip between selections or individual
      articles or chapters within selections. Customers can pause and resume listening
      where they left off and can “bookmark” multiple sections of content, rather than
      be constrained by the rewind and fast forward functions of cassette tape
      players.




***Mobility***




We
      offer
      our customers a choice of listening options tailored to their lifestyle while
      driving, exercising, relaxing or otherwise multitasking. Customers can listen
      to
      their audio with an AudibleReady MP3 player or PDA, using a CD player, certain
      SMDs, via an automobile jukebox or from their audio equipped desktop computer.
      Customers who subscribe to a recurring title (newspaper, magazine, radio
      program, etc.) can have it automatically delivered to their PC, Mac, or
      wirelessly to their SMDs before they get up in the morning or leave the office
      for the day.




***Value***




We
      provide customers with what we believe is a strong value proposition in our
      AudibleListener membership plans, where for a fixed monthly or annual fee,
      the
      customer may download a prescribed number of audio titles of their choice.
      Individual titles, at our list price, are typically priced 20% to 30% less
      than
      the same 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-
 Table
            of Contents


***Content
      Creators***




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





Older
      publications, including archived or out-of-print content, when converted to
      digital audio form, can also provide additional revenue while incurring
      relatively low costs for storing and delivering electronic inventory. Our
      solution has the benefit of reducing the risk of audio files being copied
      without authorization by employing a system designed to limit playback of audio
      files to specifically identified personal computers and digital audio
      players.




***Device
      Manufacturers***




Major
      manufacturers of audio-enabled digital players, such as Apple, Creative Labs,
      Dell, Hewlett-Packard, Motorola, Palm, Samsung, SanDisk, Thomson, and Toshiba
      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.





**Audible's
      Strategy**




Our
      objective is to enhance our position as the leading provider of premium spoken
      content on the Internet. Key elements of our strategy to achieve this goal
      include:




***Increase
      Brand Awareness***





We
      seek
      to make “Audible” a more recognizable brand. We are working to enhance Audible's
      brand awareness and affinity and, in turn, increase visitors to and purchases
      on
      our Web sites by focusing our marketing efforts on online initiatives, as well
      as co-marketing agreements. Online initiatives include a wide range of
      promotional vehicles that we use to communicate with existing and prospective
      customers. Our co-marketing agreements and business relationships with our
      content partners, cable television operators, CD burning software providers,
      retail partners, iTunes, Amazon.com and AudibleReady player manufacturers are
      key elements of our plans to make potential customers aware of, and to encourage
      them to use our service. We continue to seek to enter into agreements with
      content providers as well as owners of Internet portals and e-commerce sites
      to
      promote the Audible service to Internet users.




***Expand
      Content Collection***




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




-7-
 Table
            of Contents


***Enable
      Additional Electronic Devices, Wireless Phones and Systems to be
      AudibleReady***




We
      intend
      to continue to work with the manufacturers of MP3 players, handheld electronic
      devices and SMDs to support and promote the playback of our content on their
      players. We are expanding the AudibleReady system within a variety of mobile
      players, such as SMDs, automobile-based media jukeboxes, personal computers
      and
      in-home digital entertainment systems. We continue to offer a packaged software
      library to partners who wish to add Audible support to their desktop end-user
      audio management applications.




***Continue
      To Improve the Customer Experience***




In
      2005,
      we launched a redesigned Web site and new AudibleListener membership plans
      aimed
      at making the Audible service more flexible and increasingly easy for customers
      to use and personalize. We intend to continue to take advantage of the
      efficiency of our online distribution system to offer various pricing,
      membership, and subscription models designed to maximize customer satisfaction
      and to generate recurring revenue. We continue to enhance our Web sites to
      make
      it easier for customers to find specific selections and to actively suggest
      selections that might be of interest to them based on their prior purchasing
      patterns. Also in 2005, we enhanced our AudibleManager software to make it
      simpler for customers to manage their personal audio content selections and
      automate downloads and transfers of content to mobile players. We also provide
      customer service via telephone and e-mail. During 2006, we added a
      recommendation engine that provides Audible customers with suggestion for
      content that may interest them based on past purchases or queries of our
      database.





***Continue
      International Expansion***





In
      December 2004, together with our joint venture partners, we launched Audible
      Germany, a German language version of the Audible service. We have also entered
      into a license and service agreement to support a French language version of
      the
      Audible service, which launched in the first quarter of 2005. In February 2005
      we established Audible UK, a wholly-owned subsidiary in the United Kingdom
      ( www.audible.co.uk ),
      which
      began commercial operations in June 2005. We also began selling local content
      in
      Japan in 2005 through iTunes. Including these countries, iTunes was selling
      Audible content in 21 countries in addition to the U.S. in December 2006.
      Prospectively, we will continue to leverage our resources to build the existing
      international Web sites, obtain international content and work toward expanding
      into additional countries.


**The
      Audible Service**




Our
      integrated spoken audio delivery service includes five components: (1) our
      Web
      sites, (2) our collection of digital audio content, (3) software for securing,
      downloading, managing, transferring, burning and playing audio selections,
      (4) a
      variety of AudibleReady players which include proprietary technology and
      features that manage the listening experience, and (5) other
      services.





***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 at www.audible.com,
      which other customers may use as part of their purchasing decision. One hour
      of
      spoken audio in Audible's most popular format, requires about eight
      megabytes of storage, and downloads to a listener's computer in approximately
      ten seconds using a high speed Internet connection. It then requires less than
      thirty seconds to transfer the content from the computer to an AudibleReady
      player. Customers are offered up to four different fidelity options, allowing
      them to trade off between fidelity and speed of download from the
      Internet.




-8-
 Table
            of Contents


***Digital
      Audio Content***




We
      currently offer digital spoken content, in four major categories:





**·**
            *Audiobooks.*We
                offer a wide selection of audiobooks, in both abridged (typically
                three to
                10 hours long) and unabridged (typically five to 20 hours long) versions,
                read by the authors or by professional
                narrators.




**·**
            *Timely
                audio editions of print publications.*Our service enables the timely distribution of audio editions of
                newspapers, magazines and newsletters previously available only in
                print.
                We offer a daily spoken digest edition of*The New York Times*and selected audio content from*The Wall Street Journal.*We
                also offer audio editions of*Forbes, The New Yorker, Scientific American, Science
                News,**Harvard
                Management Update, Harvard Health Letter,*and others.





**·**
            *Radio
                and TV broadcasts.*We
                offer popular and special-interest public radio and TV programs shortly
                after they are originally broadcast so customers have the flexibility
                to
                listen to these programs when and where they want. We offer audio
                versions
                of broadcasts such as*This American Life, Fresh Air, Marketplace, The News from Lake Wobegon,
                Car Talk, The Bob Edwards Show, Opie & Anthony, The Ricky Gervais Show
                and Charlie Rose.*




**·**
            *Lectures,
                speeches, performances and other audio.*We
                offer a broad selection of lectures, speeches, dramatic and comedic
                performances, educational and self-improvement materials, religious
                and
                spiritual content, and other forms of spoken content, many of which
                are
                difficult to find from any other source.




We
      currently have licensed Internet distribution rights to audio content from
      almost 400 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 with *The
      New York Times, The Wall Street Journal, Pearson Higher
      Education* and *Harlequin,* we
      record and produce audio versions of the print publications. In all cases,
      we
      convert the audio into a compressed, secure, digital format.





***Audible
      Software***




Our
      compilation of software consists of AudibleManager for downloading, managing,
      scheduling and playing audio selections, AudiblePlayer for Pocket PC PDAs and
      for devices running the Palm Operating System, and AudibleAir for
      SMDs.




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




AudiblePlayer
      software enables users of handheld PDAs to control and customize their listening
      experience, as does AudibleAir for SMDs. Unlike cassette tapes, AudibleReady
      players allow fast navigation of the content through section markers and
      bookmarks that can be set by the user. Users can skip between selections,
      individual articles or chapters, effectively allowing them to control their
      listening experience.




-9-
 Table
            of Contents


***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 additional work is required to have their devices and/or
      applications 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
      market for the sale and delivery of digital spoken content is competitive and
      rapidly changing. Principal competitive factors in the spoken audio content
      market 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 its
      competitive position against current or new competitors, especially those new
      competitors with longer operating histories, greater name recognition and
      substantially greater financial, technical, marketing, management, service,
      support and other resources.




We
      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 Amazon.com and bn.com, offer a variety
      of
      audiobooks. The Audiobook Club offers discounted audiobooks by mail order.
      Various rental services offer low pricing for time-limited usage of physical
      audiobooks on tape or CD, and libraries loan a limited selection of audiobooks.
      The online service soundsgood.com offers digital downloads of spoken audio
      and
      supplies MSN Music with spoken audio content. One or more of these competitors
      may develop a competing electronic service for delivering audio
      content.




-10-
 Table
            of Contents


Companies
      and portal companies including AOL, Amazon.com 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 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.






-11-
 Table
            of Contents




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 ® brand
      names is important to achieving widespread acceptance of our service by
      customers, content providers, device manufacturers, and marketing and
      distribution companies with which we have business relationships. To promote
      our
      brands, we intend to continue to register, maintain, and enforce our
      registrations and other rights in these marks in the markets where we do
      business and plan to expand. However, if we fail in our efforts to promote
      and
      maintain our brand names, our business, operating results and financial
      condition could be materially adversely affected.





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




**Employees**




As
      of
      December 31, 2006, we had a total of 152 employees in the United States and
      United Kingdom: 85 in operations, 27 in technology and development, 25 in
      marketing, and 15 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, NJ 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.





**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.**





Although
      we had income from operations of $1.1 million in 2004, we had losses from
      operations of $3.5 million and $12.0 million in 2005 and 2006. We can not assure
      you when we will become profitable again, 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 2006, approximately 24% of our revenues were generated by selling
      our audio content through the Apple iTunes Store. We cannot assure you that
      customers visiting the iTunes Store will continue to purchase the audio content
      that we provide.




**We
      have identified material weaknesses in internal control over financial reporting
      which may adversely affect our operations.**




Section
      404 of the Sarbanes-Oxley Act of 2002 requires us to report on management's
      assessment of the effectiveness of our internal control over financial
      reporting. Additionally, our independent registered public accounting firm
      is
      also required to issue a report on management's assessment of, and the effective
      operation of, our internal control over financial reporting.





During
      our 2006 compliance efforts, we identified material weaknesses
      involving ineffective execution of non-routine contracts, inadequate
      financial information and communication, ineffective review of account
      analyses, and inadequate identification and analysis of international non-income
      tax related matters. See Item 9A of our Annual Report for 2006 for additional
      details regarding these material weaknesses. As a result, our independent
      registered public accounting firm issued an adverse opinion on the effectiveness
      of internal control over financial reporting.





Although
      we are in the process of implementing new controls to remediate these material
      weaknesses, we cannot assure you that any of the measures we implement will
      effectively mitigate or remediate such material weaknesses.






-12-
 Table
            of Contents




Ongoing
      compliance with Section 404 and remediation of any additional deficiencies,
      significant deficiencies or other material weaknesses that we or our independent
      registered public accounting firm may identify, will require us to incur
      significant costs and expend significant time and management resources. We
      cannot assure you that any of the measures we implement to remedy potential
      future deficiencies will effectively mitigate or remediate such deficiencies.
      In
      addition, we cannot assure you that we will be able to complete the work
      necessary for our management to issue its annual management report for 2007
      or
      in future years. We also can give no assurance that our independent registered
      public accounting firm will agree with our management's assessment in future
      years.





**If
      too many AudibleListener members refrain from using their audio credits on
      a timely basis, there will be a delay in recognizing the revenue until the
      credits are either used or expire.**





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.





**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. 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 both
      to
      replace members who cancel and to grow our business beyond our current
      AudibleListener membership base. If too many AudibleListener members cancel
      their memberships, or if we are unable to attract new members in numbers
      sufficient to grow our business, our operating results will be adversely
      affected. Further, if excessive numbers of AudibleListener members cancel their
      memberships, we may be required to incur significantly higher marketing
      expenditures than we currently anticipate to replace these members. While our
      monthly churn rate significantly decreased during 2006, we cannot assure you
      that we will be able to sustain these lower rates.




**The
      market 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 market
      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 market
      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 market 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.








-13-
 Table
            of Contents


**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 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 share
      and
      our business would be materially adversely affected. The market for the Audible
      service is rapidly evolving and intensely competitive. We expect competition
      to
      intensify as advances in and standardization of digital audio distribution,
      download, security, management and playback technologies reduce the cost of
      starting a digital audio delivery system or a service that gathers audio
      content. To remain competitive, we must continue to license or develop
      technology internally that will enhance the features of the Audible service,
      our
      software that manages the downloading and playback of audio content, our ability
      to compress audio files for downloading and storage, and our security and
      playback technologies. Increased competition is likely to result in price
      reductions, reduced revenues, higher customer cancellation rates, higher content
      licensing costs, higher marketing costs and loss of market share, any of which
      could materially adversely affect our financial performance.




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





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, spokennetwork.com, Simply Audiobooks, and LearningOutLoud (4)
      online companies such as Google, America Online, 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.






-14-
 Table
            of Contents




**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 Audible’s 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 connate 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.





**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







-15-
 Table
            of Contents


**The
      loss of key employees could jeopardize our growth
      prospects.**





The
      loss
      of the services of any of our executive officers or other key employees could
      materially adversely affect our business. Our future success depends on the
      continued service and performance of our senior management and other key
      personnel, particularly Donald R. Katz, our Chairman and CEO. We have employment
      agreements with all of our executive officers. We maintain a $2.5 million
      key-man life insurance policy on Mr. Katz.




**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.




**Our
      new facility in Newark may not lead to an increase in operational efficiencies
      or employee performance.**





We
      have
      recently relocated our headquarters approximately 17 miles to a new facility
      in
      downtown Newark, New Jersey. The facility provides us more space, better
      studios, better access to telecommunications and mass transportation facilities
      and is closer to New York City. Nevertheless, the relocation of a facility
      may
      lead to employee turnover, disruption of certain supplier relationships and
      a
      slowdown in responsiveness to customer contacts. This may lead to a reduction
      in
      service levels which could adversely affect our financial
      performance.





**Our
      common stock has been relatively thinly traded and we cannot predict the extent
      to which a trading market will develop, which may adversely affect our share
      price.**





Our
      common stock currently trades on the The NASDAQ Stock Market LLC. Our common
      stock is thinly traded compared to larger more widely known companies. In
      addition, there is a significant short interest in our common stock. Thinly
      traded or common stock with a significant short interest can be more volatile
      than common stock trading in an active public market. We cannot predict the
      extent to which an active public market for the common stock will develop or
      be
      sustained in the future.





**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.






-16-
 Table
            of Contents




**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 facilities 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 do not currently collect any sales or similar taxes in
      connection with purchases made by non-U.S. residents on www.audible.com ,
      although VAT is collected at our U.K. website, as well as on audible.fr and
      audible.de.  We determined in 2007 that certain foreign jurisdictions
      require that companies located in the U.S. 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 locates
      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 170 countries where we have
      customers.  Failure to collect taxes from non-resident U.S. 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.





**Our
      charter and bylaws could discourage an acquisition of our company that would
      benefit our stockholders.**





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




**·**
            Our
                Board of Directors, without stockholder approval, may issue preferred
                stock on terms that they determine. This preferred stock could be
                issued
                quickly with terms that delay or prevent the change in control of
                our
                company or make removal of management more difficult. Also, the issuance
                of preferred stock may cause the market price of our common stock
                to
                decrease.




**·**
            Our
                Board of Directors is “staggered” so that only a portion of its members
                are elected each year.




**·**
            Only
                our Board of Directors, our Chairman of the Board, our President
                or
                stockholders holding a majority of our stock can call special stockholder
                meetings.




**·**
            Special
                procedures must be followed in order for stockholders to present
                proposals
                at stockholder meetings.








-17-
 Table
            of Contents


**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 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 as of September 30, 2006, which is 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 assist 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 have recorded accruals for losses related to those matters
      which we consider to be probable and that can be reasonably estimated. Although
      the ultimate amount of liability at December 31, 2006 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.





In
      June
      2001, we and certain of our officers were named as defendants in a securities
      class action filed in United States District Court for the Southern District
      of
      New York related to our initial public offering in July 1999. The lawsuits
      also
      named certain of the underwriters of the IPO as well as certain of our officers
      and directors and former directors as defendants. Approximately 300 other
      issuers and their underwriters have had similar suits filed against them, all
      of
      which are included in a single coordinated proceeding in the Southern District
      of New York (the “IPO Litigations”). An amended complaint was filed on April 19,
      2002. The complaints allege that the prospectus and the registration statement
      for our IPO failed to disclose that the underwriters allegedly solicited and
      received “excessive” commissions from investors and that some investors in our
      IPO allegedly agreed with the underwriters to buy additional shares in the
      aftermarket in order to inflate the price of our stock. We and certain of our
      officers, directors, and former directors were named in the suits pursuant
      to
      Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act
      of
      1934, and other related provisions. The complaints seek unspecified damages,
      attorneys' and expert fees, and other unspecified litigation costs.




On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        2002
        we, along with other non-underwriter defendants in the coordinated cases,
        also
        moved to dismiss the IPO Litigations. On February 19, 2003, the court ruled
        on
        the motions. The court granted our motion to dismiss the claims against us
        under
        Rule 10b-5, due to the insufficiency of the allegations against us. The motions
        to dismiss the claims under Section 11 of the Securities Act were denied
        as to
        virtually all of the defendants in the consolidated cases, including ours.
        Our
        individual officers, directors and former director defendants in the IPO
        Litigation signed a tolling agreement and were dismissed from the action
        without
        prejudice on October 9, 2002.


In
      June
      2003, a proposed settlement of this litigation was reached among the plaintiffs,
      the issuer defendants in the consolidated actions, the issuer officers and
      directors named as defendants, and the issuers' insurance companies. The
      settlement would provide, among other things, a release for us and for the
      individual defendants for the conduct alleged to be wrongful in the amended
      complaint. We would agree to undertake other responsibilities under the partial
      settlement, including agreeing to assign away, not assert, or release certain
      potential claims that we may have against the underwriters. Any direct financial
      impact of the proposed settlement is expected to be borne by our insurance
      carriers.








-18-
 Table
            of Contents


In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. The plaintiffs have continued to litigate 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. Our 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 the ruling, and on December 5, 2006, the Court of Appeals
      for the Second Circuit reversed the district court’s class certification
      decision. On January 5, 2007, the plaintiffs filed a petition for rehearing
      with
      the court of appeals. Because our settlement with the plaintiffs involves the
      certification of the case as a class action as part of the approval process,
      the
      impact of the court of appeals’ ruling on our settlement is unclear at this
      time.





If
      the
      court determines that the settlement is fair to the class members, the
      settlement will be approved. There can be no assurance that this proposed
      settlement would be approved and implemented in its current form, or at
      all.




Due
      to
      the inherent uncertainties of litigation and because the settlement approval
      process is not complete, we cannot accurately predict the ultimate outcome
      of
      the matter.





Starting
      on or about February 22, 2005, several class actions were filed against us
      and
      two of our executives in the United States District Court for the District
      of
      New Jersey.  The plaintiffs purport to represent a class consisting of all
      persons (other than our officers and directors and their affiliates) who
      purchased our securities between November 2, 2004 and February 15, 2005 (the
      "Class Period").  The plaintiffs allege that the defendants violated
      Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there under
      by failing to make complete and accurate disclosures concerning our future
      plans
      and prospects.  The individual defendants are also alleged to be liable
      under Section 20(a) of the Exchange Act.  All of the defendants are alleged
      to have sold stock at inflated prices during the Class Period. In 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
      seek unspecified monetary damages and their reasonable costs and expenses,
      including counsel fees and expert fees. The defendants have moved to dismiss
      the
      pleading. The motion has been fully briefed, but the Court has not yet ruled.





In
      April
      2005, a derivative action was filed in the state court of New Jersey against
      us,
      the two executives named as individual defendants in the class actions described
      above, six of our outside directors, and three of our stockholders.  The
      derivative action made 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 we
      made
      in November 2004. The plaintiff in this derivative action purported to seek
      a
      recovery of the damages allegedly sustained by us rather than by investors
      who
      allegedly purchased securities at inflated prices.





In
      May
      2005, we learned of a second derivative action which was filed during April
      2005
      in the United States District Court for the District of New Jersey against
      us,
      the two executives named as individual defendants in the class actions described
      above, and all seven of our outside directors. The derivative action makes
      the
      same allegations as the class actions described above and adds allegations
      that
      all of the individual defendants are responsible for an alleged failure of
      internal controls that resulted in the 45-day delay in the filing of our Form
      10-K for 2004. The plaintiff in this derivative action purports to seek a
      recovery of the damages allegedly sustained by us rather than by investors
      who
      allegedly purchased securities at inflated prices.





The
      plaintiffs in the derivative actions voluntarily agreed to stay those actions
      pending the outcome of our motion to dismiss the class actions described above.
      More recently, the state derivative action was dismissed without prejudice
      because the Court preferred that course of action to staying the action. The
      state derivative action could be re-commenced if the securities class action
      survives the defendant's motion to dismiss.





We
      believe that all of the claims described above are without merit and we intend
      to defend the actions vigorously. Due to the inherent uncertainties of
      litigation and because these actions are at a preliminary stage, we cannot
      accurately predict the ultimate outcome of these matters.


In
      May
      2005, Digeo, Inc. commenced an action against us for patent infringement in
      Federal District Court in the State of Washington. All Digeo claims were
      dismissed with prejudice on December 1, 2006.  We have filed an appeal in
      the Court of Appeals for the Federal Circuit to recover our attorney
      fees.






-19-
 Table
            of Contents




**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 The NASDAQ Stock Market LLC.
      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 The NASDAQ Stock
      Market LLC.





High
            
            Low**2005**First
                Quarter
            
            $
            28.90
            
            $
            12.37Second
                Quarter
            
            $
            18.64
            
            $
            12.36Third
                Quarter
            
            $
            19.63
            
            $
            10.22Fourth
                Quarter
            
            $
            14.29
            
            $
            10.12**2006**First
                Quarter
            
            $
            13.08
            
            $
            9.23Second
                Quarter
            
            $
            11.76
            
            $
            8.52Third
                Quarter
            
            $
            9.18
            
            $
            6.93Fourth
                Quarter
            
            $
            8.49
            
            $
            7.10**2007**First
                Quarter (through March 30, 2007)
            
            $
            11.24
            
            $
            7.04




On
      March
      29, 2007, the last reported sale price of our common stock was $10.31 per share.
      As of March 29, 2007, we had approximately 170 stockholders of record of our
      common stock, although there are a significantly larger number of beneficial
      owners of our common stock.




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




**Recent
      Sales of Unregistered Securities**





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. Also during
      2006, 166,666 warrants were exercised for cash in accordance with the original
      terms of the warrant agreement. The transactions were exempt under Section
      4(2)
      of the Securities Act.





**Securities
      Authorized for Issuance under Equity Compensation Plans**





The
      information set forth under the caption “Executive Compensation” in our
      definitive Proxy Statement to be used in connection with our 2007 Annual Meeting
      of Stockholders to be held on June 20, 2007, which will be filed within 120
      days
      of our fiscal year ended December 31, 2006, is incorporated herein by
      reference.








-20-
 Table
            of Contents


**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 Market Index,
      for the period beginning December 31, 2001 through December 31,
      2006.*










**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, 2005 and 2006 and for the
      years ended December 31, 2004, 2005 and 2006, 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, 2002, 2003 and 2004, and for the years ended December
      31, 2002 and 2003 are derived from our audited consolidated financial statements
      not included in this Form 10-K. All share data shown reflects the one for three
      reverse stock split that occurred on June 17, 2004.


-21-
 Table
              of Contents


Certain
      operating expenses within the following selected financial data for 2002, 2003,
      and 2004 have been reclassified to conform to the presentation for later
      periods. These reclassifications had no effect on consolidated net income or
      net
      loss.





**Year
                Ended December 31,****(dollars
                in thousands, except share and per share data)****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Consolidated
                statement of operations data:**Revenue,
                net:Content
                and services revenue:Consumer
                Content
            
            $
            10,940
            
            $
            18,594
            
            $
            33,838
            
            $
            62,185
            
            $
            80,217Point
                of sales rebates
            
            
            --
            
            
            (105
            )
            
            (696
            )
            
            (1,006
            )
            
            (318
            )Services
            
            
            348
            
            
            105
            
            
            68
            
            
            131
            
            
            111Total
                content and services revenue
            
            
            11,288
            
            
            18,594
            
            
            33,210
            
            
            61,310
            
            
            80,010Hardware
                revenue
            
            
            932
            
            
            666
            
            
            695
            
            
            612
            
            
            431Related
                party revenue
            
            
            --
            
            
            --
            
            
            362
            
            
            1,146
            
            
            1,247Other
                revenue
            
            
            150
            
            
            65
            
            
            52
            
            
            169
            
            
            344Total
                revenue, net
            
            
            12,370
            
            
            19,325
            
            
            34,319
            
            
            63,237
            
            
            82,032Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            4,904
            
            
            5,319
            
            
            10,650
            
            
            22,613
            
            
            33,677Discount
                certificate rebates
            
            
            --
            
            
            --
            
            
            1,462
            
            
            1,556
            
            
            1,328Total
                cost of content and services revenue
            
            
            4,904
            
            
            5,319
            
            
            12,112
            
            
            24,169
            
            
            35,005Cost
                of hardware revenue
            
            
            2,717
            
            
            2,085
            
            
            2,188
            
            
            2,934
            
            
            1,953Cost
                of related party revenue
            
            
            --
            
            
            --
            
            
            126
            
            
            256
            
            
            637Operations
            
            
            3,743
            
            
            3,843
            
            
            5,146
            
            
            9,355
            
            
            12,168Technology
                and development
            
            
            4,998
            
            
            4,785
            
            
            5,030
            
            
            8,239
            
            
            16,984Marketing
            
            
            11,108
            
            
            4,495
            
            
            5,097
            
            
            13,387
            
            
            15,322General
                and administrative
            
            
            2,485
            
            
            2,633
            
            
            3,539
            
            
            8,366
            
            
            12,009Total
                operating expenses
            
            
            29,955
            
            
            23,160
            
            
            33,238
            
            
            66,706
            
            
            94,078(Loss)
                income from operations
            
            
            (17,585
            )
            
            (3,835
            )
            
            1,081
            
            
            (3,469
            )
            
            (12,046
            )Loss
                on equity investment
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (364
            )Other
                income, net
            
            
            85
            
            
            25
            
            
            221
            
            
            2,077
            
            
            2,975(Loss)
                income before income taxes
            
            
            (17,500
            )
            
            (3,810
            )
            
            1,302
            
            
            (1,392
            )
            
            (9,435
            )Income
                tax expense
            
            
            --
            
            
            --
            
            
            (1
            )
            
            (1
            )
            
            (14
            )State
                income tax benefit
            
            
            314
            
            
            250
            
            
            724
            
            
            740
            
            
            769Net
                (loss) income
            
            
            (17,186
            )
            
            (3,560
            )
            
            2,025
            
            
            (653
            )
            
            (8,680
            )Dividends
                on  preferred stock
            
            
            (1,366
            )
            
            (5,657
            )
            
            (614
            )
            
            --
            
            
            --Preferred
                stock discount
            
            
            --
            
            
            (1,444
            )
            
            --
            
            
            --
            
            
            --Charges
                related to conversion of convertible preferred stock
            
            
            --
            
            
            --
            
            
            (9,873
            )
            
            --
            
            
            --Total
                preferred stock expense
            
            
            (1,366
            )
            
            (7,101
            )
            
            (10,487
            )
            
            --
            
            
            --Net
                loss applicable to common shareholders
            
            $
            (18,552
            )
            $
            (10,661
            )
            $
            (8,462
            )
            $
            (653
            )
            $
            (8,680
            )Basic
                and diluted net loss applicable to common shareholders per common
                share
            
            $
            (1.82
            )
            $
            (1.01
            )
            $
            (0.40
            )
            $
            (0.03
            )
            $
            (0.36
            )Basic
                and diluted weighted average common shares outstanding
            
            
            10,169,406
            
            
            10,506,704
            
            
            20,912,997
            (1)
            
            24,195,771
            
            
            24,371,844




(1)
        Reflects the sale of stock from a secondary public offering and the
      conversion of preferred stock in 2004.






-22-
 Table
            of Contents






**As
                of December 31,**
              **(dollars
                in thousands)****2002**
            
            **2003**
            
            **2004**
            
            **2005**
            
            **2006****Consolidated
                balance sheet data:**Cash
                and cash equivalents
            
            $
            2,822
            
            $
            9,075
            
            $
            13,296
            
            $
            11,549
            
            
            14,925Short-term
                investments
            
            $
            --
            
            $
            --
            
            $
            48,386
            
            $
            55,616
            
            
            51,295Total
                assets
            
            $
            4,608
            
            $
            10,781
            
            $
            64,774
            
            $
            80,665
            
            
            82,776Noncurrent
                liabilities
            
            $
            135
            
            $
            59
            
            $
            38
            
            $
            287
            
            
            865Redeemable
                convertible preferred stock
            
            $
            12,290
            
            $
            --
            
            $
            --
            
            $
            --
            
            
            --Total
                stockholders' equity (deficit)
            
            $
            (13,326
            )
            $
            6,104
            
            $
            57,091
            (2)
            $
            58,395
            
            
            50,466





(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**


(dollars
      in thousands, except share and per share data)




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




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




**Overview**





**Our
      Business**





Our
      goal
      is to be the preeminent supplier of spoken-word digital audio on the Internet.
      At our Web sites, our customers can select, purchase and download spoken audio
      of their choice from more than 127,000 hours and 37,000 different programs
      amongst a wide range of categories. Our AudibleListener membership plans provide
      our customers a wide variety of monthly and annual membership options, depending
      upon their listening preferences. Customers can access our content at our Web
      sites, www.audible.com (United
      States) and www.audible.co.uk (United
      Kingdom), or at our related parties Web sites, www.audible.de (Germany) and www.audible.fr (France), or at Amazon.com and at the Apple iTunes store.





**Key
      Business Metrics**





For
      2006,
      we generated total revenue, net of $82.0 million and incurred a net loss of
      $8.7
      million. During 2006, we acquired approximately 285,000 new AudibleListeners,
      an
      increase of 25%, from approximately 228,000 acquired in 2005. This increase
      in
      new AudibleListeners acquired resulted in total AudibleListeners of
      approximately 383,000 as of December 31, 2006, compared to approximately 245,000
      as of December 31, 2005, an increase of 56%. Total AudibleListeners at December
      31, 2006 included 142,000 basic AudibleListener Plan members. Unlike most of
      our
      other members who, on average, purchase at least one book per month, these
      members pay a $9.95 annual fee to be eligible for member discounts on books
      purchased during their membership period on our Web site. This plan, which
      was
      launched in December 2005, was started with the objective of expanding the
      appeal of membership in an AudibleListener plan to more customers.





Churn,
      a
      measure of AudibleListener member cancellation, decreased in 2006 from 2005,
      due
      primarily to the introduction of the new basic AudibleListener membership.
      The
      lower priced basic AudibleListener plan provides customers access to a discount
      on content prices for a year in exchange for $9.95. At December 31, 2006, the
      142,000 net basic AudibleListener plan customers had significantly contributed
      to our reduction in churn. Additionally, based on our experience in 2005 we
      had
      reduced our reliance on “free service” marketing campaigns which contributed to
      higher churn levels in 2005. 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.






-23-
 Table
            of Contents


The
      following table sets forth the average monthly churn in AudibleListener Members
      in 2005 and 2006:




**2005**
              
              **2006**First
                  Quarter
              
              
              4.0
              %
              
              4.6
              %Second
                  Quarter
              
              
              4.7
              %
              
              3.4
              %Third
                  Quarter
              
              
              5.1
              %
              
              3.1
              %Fourth
                  Quarter
              
              
              4.8
              %
              
              2.5
              %
  During
      2005, we launched four important initiatives that we continued to focus on
      during 2006:




·
            Audible
                UK,·
            AudibleAir,·
            AudibleEducation,
                and·
            New
                AudibleListener membership plans.





In
      February 2005, we established Audible UK, a UK focused spoken audio Web site
      service mirroring our U.S. service. Audible UK began commercial operations
      in
      June 2005.





During
      2006, our operations in Audible UK significantly accelerated due to our
      increased marketing initiatives and customer acquisition programs. We generated
      $3.3 million in revenue in the UK during 2006, an increase from $0.5 million
      in
      2005. We believe that revenue from Audible UK will continue to grow provided
      we
      are able to obtain additional content that is appealing to more
      customers.





AudibleAir
      is an innovative new service that allows the automated wireless download of
      secure digital audio files to certain smart digital phones. Customers can now
      bypass connecting to the desktop and program their Audible content to be
      delivered wirelessly anytime and anywhere. Customers can refresh their content
      automatically as AudibleAir recognizes how much of a downloaded audio program
      they have heard. The application retains the portion they haven't listened
      to,
      while refreshing the device with new audio content. Any content in the Audible
      My Library can be accessed by our customers and downloaded at any time. During
      2006, we expanded the number of devices that can connect to Audible Air. We
      believe we will be able to increase revenues from AudibleAir if we can increase
      awareness of the capabilities of Audible Air and have our software installed
      in
      more devices.





AudibleEducation
      is a section of our Web site that provides a selection of education content
      designed for students of all ages. We intend to capitalize on the significant
      demand for strategic partnerships with entities positioned within the numerous
      multi-billion dollar markets in corporate learning, higher education,
      professional certification, test preparation, continuing education and
      direct-to-consumer education. During 2005 and 2006, we secured important
      agreements to produce educational material that provides us additional
      educational material to distribute. We believe we can increase our revenue
      in
      2007 if we are able to further increase the amount of content we have available
      for distribution and increase the number of customers who purchase this content.





Our
      new
      AudibleListener membership plans, launched in December 2005, provide an array
      of
      new member benefits, ranging from greater flexibility in using AudibleListener
      membership credits, to everyday 30% discounts on a la carte purchases, and
      a
      daily audio edition of *The
      New York Times* or *The
      Wall Street Journal* subscription. The flexibility in the requirement to use credits led to an
      increase of $7.4 million in deferred revenue during 2006. Revenues in 2007
      are
      expected to increase if we are able to increase the rate of consumption of
      our
      customers and reduce the outstanding balance in deferred revenues.





For
      2007,
      our major goals include increasing the number of new AudibleListeners we acquire
      and focusing on adding more customers that purchase at least one book per month.
      Additionally, we plan to improve customer service by increasing the speed of
      our
      website and enhancing our customer service operations. Finally, we anticipate
      increasing our revenues from our international operations, educational
      initiatives, specifically the new content agreements signed in 2005 and 2006,
      and securing more devices that pre-install Audible Air.





Subsequent
      to our earnings announcement on February 27, 2007, we revised our
      previously reported results of operations for the three months and year
      ended December 31, 2006. The revisions resulted from changes in estimates
      and reclassifications and audit adjustments that took place during the
      completion of our 2006 financial reporting process.  As a result, the
      following changes occurred from our February 27, 2007 earnings announcement
      to the results in this Form 10-K, respectively: for the three months ended
      December 31, 2006, total revenue net, decreased from $23.3 million to $23.2
      million; operating expenses increased from $25.5 million to $25.6
      million; net loss increased from $0.7 million to $0.9 million; our net loss
      per share increased from ($0.03) to ($0.04); for the year ended December 31,
      2006 total revenue net, decreased from $82.2 million to $82.0 million; operating
      expenses increased from $94.0 million to $94.1 million; net loss increased
      from $8.4 million to $8.7 million; and our net loss per share increased from
      ($0.35) to ($0.36) per share.





-24-
 Table
            of Contents


**Results
      of Operations**





The
      following table sets forth certain financial data, as a percentage of total
      revenue during 2004, 2005, and 2006.


**Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Revenue,
                  net:Content
                  and services revenue:Consumer
                  content
              
              
              98.6
              %
              
              98.3
              %
              
              97.8
              %Point
                  of sale rebates
              
              
              (2.0
              )%
              
              (1.6
              )%
              
              (0.4
              )%Services
              
              
              0.2
              %
              
              0.2
              %
              
              0.1
              %Total
                  content and services revenue
              
              
              96.8
              %
              
              96.9
              %
              
              97.5
              %Hardware
                  revenue
              
              
              2.0
              %
              
              1.0
              %
              
              0.5
              %Related
                  party revenue
              
              
              1.0
              %
              
              1.8
              %
              
              1.5
              %Other
                  revenue
              
              
              0.2
              %
              
              0.3
              %
              
              0.5
              %Total
                  revenue, net
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              31.0
              %
              
              35.8
              %
              
              41.1
              %Discount
                  certificate rebates
              
              
              4.3
              %
              
              2.5
              %
              
              1.6
              %Total
                  cost of content and services revenue
              
              
              35.3
              %
              
              38.3
              %
              
              42.7
              %Cost
                  of hardware revenue
              
              
              6.4
              %
              
              4.6
              %
              
              2.4
              %Cost
                  of related party revenue
              
              
              0.4
              %
              
              0.4
              %
              
              0.8
              %Operations
              
              
              15.0
              %
              
              14.8
              %
              
              14.8
              %Technology
                  and development
              
              
              14.7
              %
              
              13.0
              %
              
              20.7
              %Marketing
              
              
              14.9
              %
              
              21.2
              %
              
              18.7
              %General
                  and administrative
              
              
              10.3
              %
              
              13.2
              %
              
              14.6
              %Total
                  operating expenses
              
              
              97.0
              %
              
              105.5
              %
              
              114.7
              %Income
                  (loss) from operations
              
              
              3.0
              %
              
              (5.5
              )%
              
              (14.7
              )%Loss
                  on equity investment
              
              
              --
              
              
              --
              
              
              (0.4
              )%Other
                  income, net
              
              
              0.6
              %
              
              3.3
              %
              
              3.6
              %Income
                  (loss) before income taxes
              
              
              3.6
              %
              
              (2.2
              )%
              
              (11.5
              )%Income
                  tax expense
              
              
              --
              
              
              --
              
              
              --State
                  income tax benefit
              
              
              2.1
              %
              
              1.2
              %
              
              0.9
              %Net
                  income (loss)
              
              
              5.7
              %
              
              (1.0
              )%
              
              (10.6
              )%Dividends
                  on preferred stock
              
              
              (1.8
              )%
              
              --
              
              
              --Charges
                  related to conversion of convertible preferred stock
              
              
              (28.8
              )%
              
              --
              
              
              --Total
                  preferred stock expense
              
              
              (30.6
              )%
              
              --
              
              
              --Net
                  loss applicable to common shareholders
              
              
              (24.9
              )%
              
              (1.0
              )%
              
              (10.6
              )%








-25-
 Table
            of Contents




***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
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            33,210
            
            $
            61,310
            
            $
            80,010
            
            $
            28,100
            
            $
            18,700
            
            
            84.6%
            
            
            30.5%




*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 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
      159,000 at December 31, 2004, to 245,000 at December 31, 2005 and 383,000 at
      December 31, 2006. Approximately $3.7 million, $9.5 million, and $19.5 million
      of our content and services revenue is derived from sales of Audible content
      at
      the Apple iTunes Store, in 2004, 2005, and 2006, 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. We believe continuing consumer adoption of digital downloading,
      increased consumer awareness of the Audible service, customer satisfaction
      and
      improved marketing will continue to drive AudibleListener membership growth
      and
      growth in sales at the Apple iTunes Store.




***Hardware
      Revenue***




The
      following is our hardware revenue for the last three years (dollars in
      thousands):





**Year
                Ended December 31,**
            
            **Dollar
                Change**
            
            **Percentage
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            695
            
            $
            612
            
            $
            431
            
            $
            (83)
            
            $
            (181)
            
            
            (11.9)%
            
            
            (29.6)%





*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 2004 to 2005 and 2005 to 2006 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 2007 for these same
      reasons.




***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
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            362
            
            $
            1,146
            
            $
            1,247
            
            $
            784
            
            $
            101
            
            
            216.6%
            
            
            8.8%





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




Related
      party revenue for 2004, 2005 and 2006, included $0.1 million, $0.5 million
      and
      $0.4 million, respectively, in fees earned from our agreement with France
      Loisirs, representing 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, $0.1 million and $0.2 million, respectively,
      in
      billings to France Loisirs for certain consulting services and reimbursement
      of
      related incremental costs. Related party revenue for 2004, 2005 and 2006, also
      included $0.1 million, $0.4 million and $0.4 million, respectively, in fees
      earned under our agreement with Audible Germany, as well as $0.1 million, $0.1
      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.




-26-
 Table
            of Contents




***Other
      Revenue***




The
      following is our other revenue for the last three years (dollars in
      thousands):





**Year
                Ended December 31,**
            
            **Dollar
                Change**
            
            **Percentage
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            52
            
            $
            169
            
            $
            344
            
            $
            117
            
            $
            175
            
            
            225.0%
            
            
            103.6%




*Other
      revenue* in 2005
      and 2006 primarily included $0.1 million and $0.3 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. 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, in connection
      with
      this agreement. 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. Other revenue
      in 2005 also included commissions earned by us for referring customers to a
      retail partner to purchase a digital audio device. We recognize the commissions
      in the period when the purchase is completed and the amounts are known and
      determinable.




*Other
      revenue* in 2004
      consisted primarily of straight-line amortization of revenue earned from a
      technology licensing fee arrangement which ended June 30, 2004.





***Cost
      of Content and Services Revenue***




The
      following is our cost of content and services revenue for the last three years
      (dollars in thousands):





**Cost
                of Content and Services:**
            
            **Year
                Ended December 31,**
            
            **As
                a Percentage of Total Content and**
              **Services
                Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2004**
            
            **2005**
            
            **2006**Royalties
                and other content charges
            
            $
            10,650
            
            $
            22,613
            
            $
            33,677
            
            
            32.1
            %
            
            36.9
            %
            
            42.1
            %Discount
                certificate rebates
            
            
            1,462
            
            
            1,556
            
            
            1,328
            
            
            4.4
            %
            
            2.5
            %
            
            1.7
            %Total
                cost of content and services revenue
            
            $
            12,112
            
            $
            24,169
            
            $
            35,005
            
            
            36.5
            %
            
            39.4
            %
            
            43.8
            %





*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 2004, 2005 and 2006 to 32.1%, 36.9% and 42.1% 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.





-27-
 Table
            of Contents


***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 Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            2,188
            
            $
            2,934
            
            $
            1,953
            
            $
            746
            
            $
            (981)
            
            314.8
            %
            
            479.4
            %
            
            453.1
            %





*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. As a result, cost of hardware revenue
      increased in 2005 when compared to 2004. The decrease in the 2006 period was
      primarily due to a reduction in the number of digital audio players given away
      to customers.





***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 Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            126
            
            $
            256
            
            $
            637
            
            $
            130
            
            $
            381
            
            34.8
            %
            
            22.3
            %
            
            51.1
            %





*Cost
      of Related Party Revenue*





*Cost
      of related party revenue* consists
      of costs we have incurred in connection with our agreements with France Loisirs
      and Audible Germany, which were entered into in September 2004.





Cost
      of
      related party revenue for 2004, 2005 and 2006 included $0.1 million, $0.1
      million and $0.2 million, respectively, for France Loisirs, and $0.1 million,
      $0.1 million and $0.4 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
                Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            5,146
            
            $
            9,355
            
            $
            12,168
            
            $
            4,209
            
            $
            2,813
            
            15.5
            %
            
            15.3
            %
            
            15.2
            %





*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 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 2006 compared to similar expenses of $0.2 million in 2005.





Operations
      expense increased in 2005 versus 2004 primarily due to $1.9 million in higher
      personnel expenses, $1.0 million in higher outside service expenses, and $0.8
      million in higher credit card fees. These increases were primarily related
      to
      the increased scale of our business. Many of these higher costs were directed
      at
      improving the quality of customer service as well as the launch of Audible
      UK.




-28-
 Table
            of Contents




***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
                Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            5,030
            
            $
            8,239
            
            $
            16,984
            
            $
            3,209
            
            $
            8,745
            
            15.1
            %
            
            13.4
            %
            
            21.2
            %




*Technology
      and development* expense
      consists of payroll and related expenses for information technology, systems
      and
      telecommunications infrastructure, as well as technology licensing
      fees.





The
      increase in technology and development expense from 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 $1.0 million in 2006 compared to similar expenses of $0.1
      million in 2005.





The
      increase in technology and development expense from 2004 to 2005 was primarily
      due to increases of $0.9 million in personnel expenses, $0.9 million in outside
      services expenses, and $0.9 million in maintenance and repair costs, as well
      as
      an increase in supplies purchased. Many of these increased costs were related
      to
      the development of our new AudibleListener plans, enhancing the performance
      of
      our Web site, and the launch of Audible UK.





***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
                Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            5,097
            
            $
            13,387
            
            $
            15,322
            
            $
            8,290
            
            $
            1,935
            
            15.3
            %
            
            21.8
            %
            
            19.2
            %





*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 marketing
      partners, and shipping and handling costs associated with selling digital
      devices are also included in marketing expense.





Marketing
      expense was higher in 2006 than 2005 primarily due to increases of $1.4 million
      in personnel expenses, $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
      increased advertising and promotional expenses were directed toward marketing
      campaigns and new promotions for our membership plans. During 2006 we added
      approximately 285,000 AudibleListener plan members. As we continue to build
      the
      AudibleListener membership base, we expect our marketing expenses to continue
      to
      grow. The
      increased personnel expenses were partially a result of the share-based
      compensation expense related to the adoption of SFAS No. 123R on January 1,
      2006, which is included in personnel expense, and amounted to $1.1 million
      in
      2006 compared to similar expenses of $0.1 million in 2005.





Marketing
      expense was higher in 2005 than 2004 primarily due to increases of $3.4 million
      in advertising and promotional expenses, $3.2 million in revenue sharing and
      bounty payments, and $1.1 million in personnel. These increases were offset
      by a
      decrease of $0.3 million relating to the amortization of warrants issued in
      prior periods. Most of these higher expenses were directed towards obtaining
      new
      AudibleListeners, the launch of Audible UK and the rollout of our new
      AudibleListener plans. New AudibleListeners obtained in 2005 were approximately
      237,000 compared to 117,000 in 2004.






-29-
 Table
            of Contents




***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
                Revenue****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2004**
            
            **2005**
            
            **2006**$
            3,539
            
            $
            8,366
            
            $
            12,009
            
            $
            4,827
            
            $
            3,643
            
            10.7
            %
            
            13.6
            %
            
            15.0
            %





*General
      and administrative* expense
      consists primarily of payroll and related expenses for executive, finance and
      administrative personnel. Also included are legal fees, audit fees, public
      company expenses and other general corporate expenses.





The
      increase in general and administrative expense in 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 and amounted to
      $2.7
      million in 2006 compared to similar expenses of $0.6 million in
      2005.




The
      increase in general and administrative expense in 2005 was primarily due to
      $1.5
      million in increased legal and other professional fees, $1.2 million in
      increased personnel expenses, $1.2 million in increased audit and related fees,
      which included fees related to Sarbanes-Oxley compliance activities, and $0.3
      million in increases related to expenses in international
      operations.





***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
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            --
            
            $
            --
            
            $
            364
            
            $
            --
            
            $
            364
            
            
            --
            
            
            --




*Loss
      on equity investment* consists
      of the equity method losses related to our investment in Audible Germany. The
      $0.4 million loss recorded in 2006, 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 years ended
      December 31, 2005 and 2004, there were no equity losses to record, as Audible
      had not funded any losses and had not made any monetary
      contributions.





***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
                Change****2004**
            
            **2005**
            
            **2006**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**
            
            **2005
                vs. 2004**
            
            **2006
                vs. 2005**$
            221
            
            $
            2,077
            
            $
            2,975
            
            $
            1,856
            
            $
            898
            
            
            839.8%
            
            
            43.2%





*Other
      Income, net* consists
      of interest income and interest expense. The increase in other income, net
      during 2006 versus 2005 and 2005 versus 2004, 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.








-30-
 Table
            of Contents


**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 a la carte 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 will be 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.




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.






-31-
 Table
            of Contents




*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.





***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-
 Table
            of Contents


***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 when estimating 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 to us of approximately $46.5 million.





As
      of
      December 31, 2006, our cash and cash equivalents balance was $14.9 million.
      In
      addition, as of December 31, 2006, we had $51.3 million in short-term
      investments which we intend to hold until maturity. Based on our
      currently proposed business plans and related assumptions, we believe that
      our
      cash and cash equivalents balance and short-term investment balance as of
      December 31, 2006 will enable us to meet our anticipated cash requirements
      for
      operations and capital expenditures for the foreseeable future. Beyond that,
      we
      may need additional cash to fund our business and finance our continued growth.
      No assurance can be given that such additional financing, if needed, will be
      available on terms favorable to us or our stockholders, if at all.


***Cash
        Requirements***
 
 The
        following table shows future cash payments due under our commitments and
        obligations as of December 31, 2006 (in thousands):
  **Year**
              
              **Operating
                  Leases**
                **(1)**
              
              **Service
                  Agreements**
              
              **Royalty
                  Obligations**
                **(2)**
              
              **Purchase
                  Commitments**
              
              **Total**2007
              
              $
              719
              
              $
              1,724
              
              $
              503
              
              $
              775
              
              $
              3,7212008
              
              
              1,009
              
              
              1,034
              
              
              92
              
              
              --
              
              
              2,1352009
              
              
              1,066
              
              
              45
              
              
              --
              
              
              --
              
              
              1,1112010
              
              
              1,141
              
              
              --
              
              
              --
              
              
              --
              
              
              1,1412011
              
              
              1,215
              
              
              --
              
              
              --
              
              
              --
              
              
              1,215Thereafter
              
              
              3,255
              
              
              --
              
              
              --
              
              
              --
              
              
              4,470Total
              
              $
              8,405
              
              $
              2,803
              
              $
              595
              
              $
              775
              
              $
              12,578
 
 (1)
        Of
        the $8.4 million in total operating leases, $8.1 million is related to our
        new
        office lease agreement signed in September 2006.
 
 (2)
        Of
        the $0.6 million in total royalty obligations, $0.4 million is recorded in
        accrued expenses and $0.1 million is recorded as royalty obligations,
        non-current in the accompanying December 31, 2006 consolidated Balance Sheet.
        The remaining $0.1 million is related to content that has not yet been delivered
        as of December 31, 2006.




-33-
 Table
            of Contents




***Lease
      Obligations***




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 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 assist us to secure local
      Japanese content. This lease expires in June 2008.Total future minimum lease
      obligations as of December 31, 2006 under the lease arrangements are $8.4
      million.




Rent
      expense of $0.4 million, $0.6 million, and $1.0 million was recorded under
      operating leases for the years ended December 31, 2004, 2005 and 2006,
      respectively. There are no future minimum lease payments due under capital
      leases as of December 31, 2006, which were paid in full during the first quarter
      of 2005. 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.





***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
      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 we have 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,****2004**
            
            **2005**
            
            **2006**Operating
                Activities
            
            $
            5,188
            
            $
            11,779
            
            $
            7,173Investing
                Activities
            
            
            (48,702
            )
            
            (14,392
            )
            
            173Financing
                Activities
            
            
            47,735
            
            
            864
            
            
            (3,968
            )Exchange
                Rate
            
            
            --
            
            
            2
            
            
            (2
            )$
            4,221
            
            $
            (1,747
            )
            $
            3,376





***Operating
      Activities.*** 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. Net
      cash provided by operating activities in 2004 was primarily attributable to
      our
      net income, an increase in deferred revenue, accrued expenses, services rendered
      for common stock and warrants, depreciation and amortization, and accounts
      payable, offset in part by an increase in accounts receivable and
      inventory.




-34-
 Table
            of Contents




***Investing
      Activities.*** 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 a $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.
      Net cash used in 2004 was attributable to the purchase of short-term investments
      of $48.3 million, using the proceeds of our November 2004 public offering,
      as
      well as purchases of property and equipment of $0.4 million.




***Financing
      Activities.*** 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. Net cash provided by
      financing activities in 2004 resulted primarily from the follow-on November
      2004
      public offering and from the exercise of employee stock options, offset in
      part
      by principal payments on capital lease obligations.




As
      of
      December 31, 2006, the Company had net operating loss carry-forwards for federal
      income tax purposes of approximately $123.1 million, which begin to expire
      in
      2010 if not used to offset future taxable income. As of December 31, 2006,
      the
      Company has net operating loss carry-forwards for New Jersey income tax purposes
      of approximately $75.0 million which begin to expire in 2008 if not used to
      offset future taxable future. As of December 31, 2006, the Company has foreign
      net operating losses of $2.5 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 three 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.





As
      a
      result of selling certain of our New Jersey state income tax loss benefits
      for
      cash, we realized $0.7 million, $0.7 million and $0.8 million in state income
      tax benefits during the years ended December 31, 2004, 2005 and 2006
      respectively. We cannot assure you that this program will be available to us
      in
      the future.





**New
      Accounting Standards**





*SFAS
      No. 123R*





Effective
      January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
      No. 123R, *Share-Based
      Payment* ,
      using
      the Modified Prospective Approach. See Note 6 to our consolidated financial
      statements for further detail regarding the adoption of this
      standard.





*SFAS
      No. 155*





In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
      155, *Accounting
      for Certain Hybrid Financial Instruments—an Amendment of FASB Statements No. 133
      and 140.* SFAS No.
      155 allows financial instruments that contain an embedded derivative and that
      otherwise would require bifurcation to be accounted for as a whole on a fair
      value basis, at the holders’ election. SFAS No. 155 also clarifies and amends
      certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is
      effective for all financial instruments acquired or issued in fiscal years
      beginning after September 15, 2006. We do not expect that the adoption of SFAS
      No. 155 will have a material impact on our consolidated financial
      statements.





*SFAS
      No. 156*





In
      March
      2006, the FASB issued SFAS No. 156, *Accounting
      for Servicing of Financial Assets—an Amendment of FASB Statement No.
      140.* SFAS No.
      156 provides guidance on the accounting for servicing assets and liabilities
      when an entity undertakes an obligation to service a financial asset by entering
      into a servicing contract. This statement is effective for all transactions
      in
      fiscal years beginning after September 15, 2006. We do not expect that the
      adoption of SFAS No. 156 will have a material impact on our consolidated
      financial statements.


-35-
 Table
              of Contents
  *SFAS
      No. 157*




In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* (SFAS
        157). SFAS 157 establishes a framework for measuring fair value and requires
        expanded disclosures regarding fair value measurements. SFAS 157 does not
        require any new fair value measurements. However, it eliminates inconsistencies
        in the guidance provided in previous accounting pronouncements.


SFAS
      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 157 is initially applied. We do
      not
      believe the impact that SFAS 157 will have a material effect on our consolidated
      financial statements.





*EITF
      No. 06-3*





In
      March
      2006, the EITF reached a tentative consensus on Issue No. 06-3, *How
      Sales Taxes Collected from Customers and Remitted to Governmental Authorities
      Should Be Presented in the Income Statement (That Is, Gross Versus Net
      Presentation)* (“EITF
      06-3”). EITF 06-3 addresses income statement classification and disclosure
      requirements of externally-imposed taxes on revenue-producing transactions.
      EITF
      06-3 is effective for periods beginning after December 15, 2006. We do not
      expect the implementation of EITF 06-3 to have a material impact 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
      48”). FIN 48 applies to all “tax positions” accounted for under SFAS 109. FIN 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
      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
      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 and, based on our analysis,
      we do not believe FIN 48 will have a material effect on our consolidated
      financial statements.





*SAB
      108*





In
      September 2006, the SEC published Staff Accounting Bulletin Topic 1N, *Financial
      Statements — Considering the Effects of Prior Year Misstatements When
      Quantifying Misstatements in Current Year Financial Statements* (“SAB
      108”). SAB 108 addresses how a company should quantify the effect of an error on
      the financial statements. The SEC staff concludes in SAB 108 that a dual
      approach should be used to compute the amount of a misstatement. Specifically,
      the amount should be computed using both the “rollover” (current year income
      statement perspective) and “iron curtain” (year-end balance sheet perspective)
      methods. SAB 108 does not address how to evaluate materiality, that is, how
      to
      assess the quantitative and qualitative effects of a misstatement on the
      financial statements. The SEC staff’s views on evaluating the materiality of an
      error are covered in SAB Topic 1M, *Financial
      Statements — Materiality* (“SAB
      99”). Companies that will need to change their method for computing the amount
      of an error must adopt the dual approach for fiscal years ending after November
      15, 2006, which is effective for our year ended December 31, 2006. A change
      in
      the method of quantifying errors represents a change in accounting policy.
      Accordingly, if the use of the dual approach results in a larger, material
      misstatement, we would have to adjust our financial statements. Under FAS 154,
      changes in accounting policy generally are accounted for using retrospective
      application; however, SAB 108 permits public companies to report the cumulative
      effect of the new policy as an adjustment to opening retained earnings. We
      recorded two adjustments for a total of $1.2 million to opening accumulated
      deficit. See Note 18 to our consolidated financial statements for further
      explanation on these adjustments.








-36-
 Table
            of Contents


**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.





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





None.





**Item
      9A. Controls and Procedures.**




**a.)
      Evaluation of Disclosure Controls and Procedures**




Under
      the
      supervision and with the participation of our management, including our chief
      executive officer and chief financial officer, we conducted an evaluation of
      the
      effectiveness of our disclosure controls and procedures, as such term is defined
      under Rule 13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as
      of the end of the period covered by this report. Based on this evaluation,
      our
      chief executive officer and our chief financial officer concluded that our
      disclosure controls and procedures were not effective as of the end of the
      period covered by this Annual Report on Form 10-K because of the material
      weaknesses in internal control over financial reporting discussed
      below.





**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, 2006, 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.




-37-
 Table
            of Contents




A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. As a result of our assessment, we identified the following
      material weaknesses in internal control over financial reporting as of December
      31, 2006:




**Ineffective
      Execution of Non-Routine Contracts**





We
      had
      inadequate policies and procedures to ensure that financial reporting risks
      associated with significant non-routine contracts were addressed at a sufficient
      level of detail so that financial and operating implications could be identified
      and appropriate actions could be taken to comply with the contracts on a timely
      basis. This deficiency resulted in our inability to determine revenue in
      accordance with the terms of a significant revenue contract. As a result of
      this
      deficiency, there was more than a remote likelihood that a material misstatement
      of our annual or interim consolidated financial statements would not be
      prevented or detected.





**Inadequate
      Financial Information and Communication**





We
      did
      not have effective policies and procedures in place for finance personnel to
      adequately develop, validate and formally accept certain system-generated
      reports used in financial reporting. Such system-generated reports did not
      properly reflect certain customer concessions that were provided by customer
      service and other customer activities. As a result of this deficiency, there
      were errors in consumer content revenue and deferred revenue in our 2006
      consolidated financial statements and more than a remote likelihood that a
      material misstatement of our annual or interim consolidated financial statements
      would not be prevented or detected. The errors were corrected prior to the
      issuance of our consolidated financial statements.





**Ineffective
      Review of Account Analyses**





We
      did
      not have policies and procedures to ensure adequate review of all significant
      account analyses and spreadsheets used to record journal entries. As a result
      of
      this deficiency, there were errors in operating expenses, accrued expenses
      and
      additional paid-in capital in our 2006 consolidated financial statements, on
      an
      interim and annual basis. The errors were corrected prior to the issuance of
      our
      interim and annual consolidated financial statements. Also, as a result of
      this
      deficiency, there was more than a remote likelihood that a material misstatement
      of our annual or interim consolidated financial statements would not be
      prevented or detected.





**Inadequate
      Identification and Analysis of International Non-Income Tax Related
      Matters**





We
      did
      not have adequate policies and procedures to identify and analyze the financial
      reporting implications associated with international non-income tax related
      matters. This deficiency resulted in our inability to properly account for
      value-added tax liabilities in foreign jurisdictions. As a result of this
      deficiency, there were errors in content revenue, current liabilities and
      accumulated deficit, which resulted in a material misstatement in our 2006
      consolidated financial statements and more than a remote likelihood that a
      material misstatement of our annual or interim consolidated financial statements
      would not be prevented or detected. The errors were corrected prior to the
      issuance of our consolidated financial statements.





Based
      on
      its evaluation under the criteria in *Internal Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
      management concluded that the Company did not maintain effective internal
      control over financial reporting as of December 31, 2006.





KPMG
      LLP,
      our independent registered public accounting firm, has issued an audit report
      on
      our assessment of internal control over financial reporting. This audit report
      is included in Item 9A.c.below.




-38-
 Table
            of Contents




**c.)
      Independent Registered Public Accounting Firm's Report on Internal Control
      Over
      Financial Reporting**





**Report
      of Independent Registered Public Accounting Firm**





Board
      of
      Directors and Stockholders


Audible,
      Inc.:





We
      have
      audited management's assessment, included in the accompanying *Management’s
      Report on Internal Control Over Financial Reporting* (Item
      9A.b.), that Audible, Inc. (the Company) did not maintain effective internal
      control over financial reporting as of December 31, 2006, because of the effect
      of the material weaknesses identified in management's assessment, based on
      criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      The Company's management is responsible for maintaining effective internal
      control over financial reporting and for its assessment of the effectiveness
      of
      internal control over financial reporting. Our responsibility is to express
      an
      opinion on management's assessment and an opinion on the effectiveness of the
      Company's internal control over financial reporting based on our
      audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management's assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company's internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company's
      assets that could have a material effect on the financial
      statements.





Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected. The following material weaknesses have been identified and included
      in management's assessment as of December 31, 2006:





**Ineffective
      Execution of Non-Routine Contracts**





The
      Company had inadequate policies and procedures to ensure that financial
      reporting risks associated with significant non-routine contracts were addressed
      at a sufficient level of detail so that financial and operating implications
      could be identified and appropriate actions could be taken to comply with the
      contracts on a timely basis. This deficiency resulted in the Company’s inability
      to determine revenue in accordance with the terms of a significant revenue
      contract. As a result of this deficiency, there was more than a remote
      likelihood that a material misstatement of the Company’s annual or interim
      consolidated financial statements would not be prevented or
      detected.





**Inadequate
      Financial Information and Communication**





The
      Company did not have effective policies and procedures in place for finance
      personnel to adequately develop, validate and formally accept certain
      system-generated reports used in financial reporting. Such system-generated
      reports did not properly reflect certain customer concessions that were provided
      by customer service and other customer activities. As a result of this
      deficiency, there were errors in consumer content revenue and deferred revenue
      in the Company’s 2006 consolidated financial statements and more than a remote
      likelihood that a material misstatement of the Company’s annual or interim
      consolidated financial statements would not be prevented or detected.





**Ineffective
      Review of Account Analyses**





The
      Company did not have policies and procedures to ensure adequate review of all
      significant account analyses and spreadsheets used to record journal entries.
      As
      a result of this deficiency, there were errors in operating expenses, accrued
      expenses and additional paid-in capital in the Company’s 2006 consolidated
      financial statements, on an interim and annual basis. Also as a result of this
      deficiency, there was more than a remote likelihood that a material misstatement
      of the Company’s annual or interim consolidated financial statements would not
      be prevented or detected.





**Inadequate
      Identification and Analysis of International Non-Income Tax Related
      Matters**





The
      Company did not have adequate policies and procedures to identify and analyze
      the financial reporting implications associated with international
      non-income tax related matters. This deficiency resulted in the Company’s
      inability to properly account for value-added tax liabilities in foreign
      jurisdictions. As a result of this deficiency, there were errors in content
      revenue, current liabilities and accumulated deficit, which resulted in a
      material misstatement in the Company’s 2006 consolidated financial statements
      and more than a remote likelihood that a material misstatement of the Company’s
      annual or interim consolidated financial statements would not be prevented
      or
      detected.






-39-
 Table
            of Contents




We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Audible,
      Inc. and subsidiary as of December 31, 2005 and 2006, and the related
      consolidated statements of operations, comprehensive income (loss),
      stockholders’ equity, and cash flows for each of the years in the three-year
      period ended December 31, 2006. The aforementioned material weaknesses were
      considered in determining the nature, timing, and extent of audit tests applied
      in our audit of the 2006 consolidated financial statements, and this report
      does
      not affect our report dated April 2, 2007, which expressed an unqualified
      opinion on those consolidated financial statements.





In
      our
      opinion, management's assessment that the Company did not maintain effective
      internal control over financial reporting as of December 31, 2006, is fairly
      stated, in all material respects, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Also, in our opinion, because of the effect of the material weaknesses described
      above on the achievement of the objectives of the control criteria, the Company
      has not maintained effective internal control over financial reporting as of
      December 31, 2006, based on criteria established in *Internal
      Control - Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO).





/s/
      KPMG
      LLP





Short
      Hills, New Jersey


April
      2,
      2007





**d.) Changes
      in Internal Control Over Financial Reporting**





There
      were no changes in internal control over financial reporting during the fourth
      quarter of 2006 that have materially affected, or are reasonably likely to
      materially affect our internal control over financial reporting, except that
      we
      hired a new Chief Financial Officer and business analyst in our Finance
      Department.





**Item
      9B. Other Information.**




None.




-40-
 Table
            of Contents




**PART
      III**




**Item
      10. Directors, Executive Officers and Corporate Governance
      of the Registrant.**





The
      information required by Item 10 is hereby incorporated by reference from the
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**Item
      11. Executive Compensation.**





The
      information required by Item 11 is hereby incorporated by reference from the
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**Item
      12.Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters.**





The
      information required by Item 12 is hereby incorporated by reference from the
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**Item
      13. Certain Relationships and Related Transactions, and
      Director Independence.**





The
      information required by Item 13 is hereby incorporated by reference from the
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**Item
      14. Principal Accounting Fees and
      Services.**





The
      information required by Item 14 is hereby incorporated by reference from the
      Proxy Statement for our 2007 Annual Meeting of Stockholders.





**PART
      IV**


**Item
      15. Exhibits, Financial Statement
      Schedules.**




(a)
                Documents filed as part of the report:
            
            Page
                Number(1)
            Consolidated
                Financial StatementsReport
                of Independent Registered Public Accounting Firm
            
            F-1Consolidated
                Balance Sheets at December 31, 2005 and 2006
            
            F-2Consolidated
                Statements of Operations for the years ended December 31, 2004, 2005
                and
                2006
            
            F-3Consolidated
                Statements of Comprehensive Income (Loss) for the years ended December
                31,
                2004, 2005 and 2006
            
            F-4Consolidated
                Statements of Stockholders' Equity for the years ended December 31,
                2004,
                2005 and 2006
            
            F-5Consolidated
                Statements of Cash Flows for the years ended December 31, 2004, 2005
                and
                2006
            
            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:






-41-
 Table
            of Contents





Exhibit
                Number
            
            Description3.1*
            
            Amended
                and Restated Certificate of Incorporation of Audible,
                Inc.3.1.2***
            
            Certificate
                of Amendment to the Amended and Restated Certificate of Incorporation
                of
                Audible3.2*
            
            Amended
                and Restated Bylaws of Audible, Inc.3.3!
            
            Certificate
                of Retirement dated March 12, 200410.15*
            
            1999
                Stock Incentive Plan10.41!
            
            Form
                of common stock warrant issued by Audible Inc. to investor parties
                in
                connection with the Series A Settlement Agreement dated February
                6,
                200410.43++@
            
            License
                and Services Agreement by and between Audible Inc., and Audible GmbH
                dated
                August 30, 200410.44++@
            
            Master
                Alliance Agreement by and between Audible Inc., France Loisirs S.A.S.
                and
                Audio Direct S.A.S. dated September 15, 200410.45@
            
            Articles
                of Association of Audible GmbH10.47$$
            
            Digital
                Download Agreement with Apple Computer, Inc. dated July 27,
                200610.48$$
            
            Office
                lease dated September 27, 2006, by and between Audible, Inc., as
                tenant,
                and Washington Park Fidelco, LLC, as landlord10.49$$
            
            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)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)10.51##
            
            Letter
                of Employment by and between the Company and William H. Mitchell,
                dated
                November 20, 2006.10.52!!
            
            Letter
                of Employment by and between the Company and Donald R. Katz, dated
                January
                2, 2007.10.53!!
            
            Letter
                of Employment by and between the Company and Glenn M. Rogers, dated
                January 2, 2007.10.54
            
            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)14.1&
            
            Audible
                Code of Ethics and Business Conduct21.1&
            
            List
                of subsidiary23.1
            
            Consent
                of KPMG LLP, Independent Registered Public Accounting
                Firm24.1
            
            Power
                of attorney (included on signature page)31.1
            
            Annual
                Certifications of the Chief Executive Officer pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 200231.2
            
            Annual
                Certifications of the Chief Financial Officer pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 200232.1
            
            Annual
                Certifications of the Chief Executive Officer pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 200232.2
            
            Annual
                Certifications of the Chief Financial Officer pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002*
            
            Incorporated
                herein by reference to the Company's Registration Statement on Form
                S-1,
                No. 333-76985***
            
            Incorporated
                by reference from the Company's 10-K for the fiscal year ended December
                31, 2001##
            
            Incorporated
                by reference from the Company's 8-K dated November 21,
                2006.!
            
            Incorporated
                by reference from the Company's 10-K for the fiscal year ended December
                31, 2003@
            
            Incorporated
                by reference from the Company's Form 10-Q for the quarterly period
                ended
                September 30, 2004!!
            
            Incorporated
                by reference from the Company's 8-K dated January
                8,2007.$$
            
            Incorporated
                by reference from the Company’s Form 10-Q for the quarterly period ending
                September 30, 2006^
            
            Executive
                Compensation Plans and Arrangements&
            
            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.











-42-
 Table
            of Contents


**SIGNATURES**





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


***AUDIBLE,
                INC.***By:
            /s/ Donald
                R. KatzDonald
                R. KatzChairman
                and Chief Executive OfficerDate: 
                April 2, 2007




Pursuant
      to the requirements of the Securities Exchange Act of 1934 this report has
      been
      signed below by the following persons on behalf of the registrant, in the
      capacities and on the dates indicated. Each person whose signature appears
      below
      in so signing also makes, constitutes, and appoints Donald R. Katz and Glenn
      Rogers, and each of them, his or her true and lawful attorney-in-fact, with
      full
      power of substitution, for him in any and all capacities, to execute and cause
      to be filed with the SEC any and all amendments to this report, with exhibits
      thereto and other documents in connections therewith, and hereby ratifies and
      confirms all that said attorney-in-fact or his substitute or substitutes may
      do
      or cause to be done by virtue hereof.




Name
            
            Title
            
            Date/s/
                Donald R. Katz
            
            
            
            April
                2, 2007Donald
                R. Katz
            
            Chairman
                and Chief Executive Officer(principal
                executive officer)/s/
                William H. Mitchell
            
            
            
            April
                2, 2007William
                H. Mitchell
            
            Chief
                Financial Officer(principal
                financial and accounting officer)/s/
                Richard Sarnoff
            
            
            
            March
                29, 2007Richard
                Sarnoff
            
            Director/s/ Gary
                L. Ginsberg
            
            
            
            March
                29, 2007Gary
                L. Ginsberg
            
            Director/s/
                Johannes Mohn
            
            
            
            March
                29, 2007Johannes
                Mohn
            
            Director/s/
                Alan Patricof
            
            
            
            March
                29, 2007Alan
                Patricof
            
            Director/s/
                Oren Zeev
            
            
            
            March
                29, 2007Oren
                Zeev
            
            Director/s/
                William Washecka
            
            
            
            March
                29, 2007William
                Washecka
            
            Director








-43-
 Table
            of Contents





**Report
      of Independent Registered Public Accounting
      Firm**








The
      Board
      of Directors and Stockholders


Audible,
      Inc.:





We
      have
      audited the accompanying consolidated balance sheets of Audible, Inc. and
      subsidiary as of December 31, 2005 and 2006, and the related consolidated
      statements of operations, comprehensive income (loss), stockholders' equity,
      and
      cash flows for each of the years in the three-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, 2005 and 2006, and the results of their operations and their
      cash flows for each of the years in the three-year period ended December 31,
      2006, in conformity with U.S. generally accepted accounting
      principles.





As
      discussed in Note 6 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 18, the Company changed its method of
      quantifying misstatements effective January 1, 2006.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Audible, Inc.'s internal
      control over financial reporting as of December 31, 2006, 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 April 2, 2007 expressed an unqualified opinion on
      management's assessment of, and an adverse opinion on the effective operation
      of, internal control over financial reporting.








/s/
      KPMG
      LLP








Short
      Hills, New Jersey


April
      2,
      2007


F-1
 
 Table
        of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**


**(dollars
      in thousands, except share and per share data)**





**December
                31,****2005**
            
            **2006****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            11,549
            
            $
            14,925Short-term
                investments
            
            
            55,616
            
            
            51,295Interest
                receivable on short-term investments
            
            
            428
            
            
            626Accounts
                receivable, net of provision for refunds and chargebacks of $31 and
                $40 at
                December 31, 2005 and 2006, respectively
            
            
            2,337
            
            
            4,181Accounts
                receivable - related parties
            
            
            594
            
            
            100Royalty
                advances
            
            
            471
            
            
            710Prepaid
                expenses and other current assets
            
            
            899
            
            
            1,797Inventory
            
            
            498
            
            
            212Total
                current assets
            
            
            72,392
            
            
            73,846Property
                and equipment, net
            
            
            8,159
            
            
            8,149Other
                assets
            
            
            114
            
            
            781Total
                assets
            
            $
            80,665
            
            $
            82,776**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            4,750
            
            $
            3,121Accrued
                expenses
            
            
            4,802
            
            
            4,678Accrued
                royalties
            
            
            5,104
            
            
            9,028Accrued
                compensation
            
            
            868
            
            
            778Deferred
                revenue
            
            
            6,459
            
            
            13,840Total
                current liabilities
            
            
            21,983
            
            
            31,445Deferred
                revenue, noncurrent
            
            
            99
            
            
            513Other
                liabilities, noncurrent
            
            
            --
            
            
            262Royalty
                obligations, noncurrent
            
            
            188
            
            
            90Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $0.01. Authorized 40,000,000 shares at December
                31, 2005
                and 2006; 24,326,503 and 24,119,768 shares issued and outstanding
                at
                December 31, 2005 and 2006, respectively
            
            
            243
            
            
            241Additional
                paid-in capital
            
            
            192,547
            
            
            190,799Deferred
                compensation
            
            
            (3,696
            )
            
            --Accumulated
                other comprehensive income (loss)
            
            
            15
            
            
            (36
            )Accumulated
                deficit
            
            
            (130,714
            )
            
            (140,538
            )Total
                stockholders' equity
            
            
            58,395
            
            
            50,466Total
                liabilities and stockholders' equity
            
            $
            80,665
            
            $
            82,776






See
      accompanying notes to consolidated financial statements.





F-2
 Table
            of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED STATEMENTS
      OF OPERATIONS**


**(dollars
      in thousands, except share and per share data)**





**Year
                Ended December 31,****2004**
            
            **2005**
            
            **2006**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            $
            33,838
            
            $
            62,185
            
            $
            80,217Point
                of sale rebates
            
            
            (696
            )
            
            (1,006
            )
            
            (318
            )Services
            
            
            68
            
            
            131
            
            
            111Total
                content and services revenue
            
            
            33,210
            
            
            61,310
            
            
            80,010Hardware
                revenue
            
            
            695
            
            
            612
            
            
            431Related
                party revenue
            
            
            362
            
            
            1,146
            
            
            1,247Other
                revenue
            
            
            52
            
            
            169
            
            
            344Total
                revenue, net
            
            
            34,319
            
            
            63,237
            
            
            82,032Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            10,650
            
            
            22,613
            
            
            33,677Discount
                certificate rebates
            
            
            1,462
            
            
            1,556
            
            
            1,328Total
                cost of content and services revenue
            
            
            12,112
            
            
            24,169
            
            
            35,005Cost
                of hardware revenue
            
            
            2,188
            
            
            2,934
            
            
            1,953Cost
                of related party revenue
            
            
            126
            
            
            256
            
            
            637Operations
            
            
            5,146
            
            
            9,355
            
            
            12,168Technology
                and development
            
            
            5,030
            
            
            8,239
            
            
            16,984Marketing
            
            
            5,097
            
            
            13,387
            
            
            15,322General
                and administrative
            
            
            3,539
            
            
            8,366
            
            
            12,009Total
                operating expenses
            
            
            33,238
            
            
            66,706
            
            
            94,078Income
                (loss) from operations
            
            
            1,081
            
            
            (3,469
            )
            
            (12,046
            )Loss
                on equity investment
            
            
            --
            
            
            --
            
            
            (364
            )Other
                income (expense):Interest
                income
            
            
            253
            
            
            2,078
            
            
            2,975Interest
                expense
            
            
            (32
            )
            
            (1
            )
            
            --Other
                income, net
            
            
            221
            
            
            2,077
            
            
            2,975Income
                (loss) before income taxes
            
            
            1,302
            
            
            (1,392
            )
            
            (9,435
            )Income
                tax expense
            
            
            (1
            )
            
            (1
            )
            
            (14
            )State
                income tax benefit
            
            
            724
            
            
            740
            
            
            769Net
                income (loss)
            
            
            2,025
            
            
            (653
            )
            
            (8,680
            )Dividends
                on preferred stock
            
            
            (614
            )
            
            --
            
            
            --Charges
                related to conversion of convertible preferred stock
            
            
            (9,873
            )
            
            --
            
            
            --Total
                preferred stock expense
            
            
            (10,487
            )
            
            --
            
            
            --Net
                loss applicable to common shareholders
            
            $
            (8,462
            )
            $
            (653
            )
            $
            (8,680
            )Basic
                and diluted net loss applicable to common shareholders per common
                share
            
            $
            (0.40
            )
            $
            (0.03
            )
            $
            (0.36
            )Basic
                and diluted weighted average common shares outstanding
            
            
            20,912,997
            
            
            24,195,771
            
            
            24,371,844




See
      accompanying notes to consolidated financial statements.


F-3
 Table
        of Contents


**AUDIBLE,
          INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 **(dollars
          in thousands)**
  **Year
                    Ended****D****ecember
                    31,****2004**
                
                **2005**
                
                **2006**Net income
                    (loss)
                
                $
                2,025
                
                $
                (653
                )
                $
                (8,680
                )Other
                    comprehensive income (loss):Foreign
                    currency translation adjustment
                
                
                --
                
                
                15
                
                
                (51
                )Comprehensive
                    income (loss)
                
                $
                2,025
                
                $
                (638
                )
                $
                (8,731
                )
 
 See
          accompanying notes to consolidated financial statements.


F-4
 
 Table
        of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(dollars
      and shares in thousands)**




**Common
                Stock****Series
                A**
              **Preferred**
              **Stock**
            
            **Series
                B**
              **Preferred**
              **Stock**
            
            **Shares**
            
            **Par
                Value****Balance
                at December 31, 2003**
            
            $
            13,027
            
            $
            1,138
            
            
            15,015
            
            $
            150Conversion
                of Series A Preferred Stock
            
            
            (13,027
            )
            
            --
            
            
            4,669
            
            
            46Conversion
                of Series B Preferred Stock
            
            
            --
            
            
            (1,138
            )
            
            417
            
            
            4Preferred
                dividends and conversion inducement
            
            
            --
            
            
            --
            
            
            1,167
            
            
            12Sale
                of common stock
            
            
            --
            
            
            --
            
            
            2,022
            
            
            20Cashless
                exercise of common stock warrants
            
            
            --
            
            
            --
            
            
            40
            
            
            1Exercise
                of common stock options
            
            
            --
            
            
            --
            
            
            802
            
            
            8Exercise
                of common stock warrants
            
            
            --
            
            
            --
            
            
            38
            
            
            1Amortization
                of deferred compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --Amortization
                of warrants for services
            
            
            --
            
            
            --
            
            
            --
            
            
            --Payments
                received on notes due from stockholders
            
            
            --
            
            
            --
            
            
            --
            
            
            --Reversal
                of unused accrued expense related to Series C financing
            
            
            --
            
            
            --
            
            
            --
            
            
            --Preferred
                stock expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --Income
                tax benefit due to exercise of stock options
            
            
            --
            
            
            --
            
            
            --
            
            
            --Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Balance
                at December 31, 2004**
            
            
            --
            
            
            --
            
            
            24,170
            
            $
            242Cashless
                exercise of common stock warrants
            
            
            --
            
            
            --
            
            
            24
            
            
            --Exercise
                of common stock options
            
            
            --
            
            
            --
            
            
            246
            
            
            2Exercise
                of common stock warrants
            
            
            --
            
            
            --
            
            
            117
            
            
            1Reversal
                of deferred compensation related to forfeiture of stock
                options
            
            
            --
            
            
            --
            
            
            --
            
            
            --Amortization
                of deferred compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --Issuance
                of restricted stock units, net of cancellations
            
            
            --
            
            
            --
            
            
            --
            
            
            --Issuance
                of stock options below fair market value
            
            
            --
            
            
            --
            
            
            --
            
            
            --Retirement
                of treasury stock
            
            
            --
            
            
            --
            
            
            (230
            )
            
            (2
            )Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            --Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Balance
                at December 31, 2005**
            
            $
            --
            
            $
            --
            
            
            24,327
            
            $
            243Exercise
                of common stock warrants
            
            
            --
            
            
            --
            
            
            167
            
            
            2Exercise
                of common stock options
            
            
            --
            
            
            --
            
            
            250
            
            
            2Shares
                issued upon vesting of restricted stock
            
            
            --
            
            
            --
            
            
            12
            
            
            --Elimination
                of deferred compensation upon SFAS 123R adoption
            
            
            --
            
            
            --
            
            
            --
            
            
            --Share-based
                compensation expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --Repurchase
                of treasury stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --Retirement
                of treasury stock
            
            
            --
            
            
            --
            
            
            (636
            )
            
            (6
            )Cumulative
                effect adjustments under SAB108
            
            
            --
            
            
            --
            
            
            --
            
            
            --Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            --Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --**Balance
                at December 31, 2006**
            
            $
            --
            
            $
            --
            
            
            24,120
            
            $
            241





See
        accompanying notes to consolidated financial statements.




F-5
 Table
          of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(dollars
      and shares in thousands)**





**Additional
                paid-in capital**
            
            **Deferred
                compensation**
            
            
            **Accumulated
                other**
              **comprehensive**
              **income
                (loss)****Balance
                at December 31, 2003**
            
            $
            110,507
            
            $
            (239
            )
            
            $
            --Conversion
                of Series A Preferred Stock
            
            
            12,981
            
            
            --
            
            
            
            --Conversion
                of Series B Preferred Stock
            
            
            1,134
            
            
            --
            
            
            
            --Preferred
                dividends and conversion inducement
            
            
            13,838
            
            
            --
            
            
            
            --Sale
                of common stock
            
            
            46,437
            
            
            --
            
            
            
            --Cashless
                exercise of common stock warrants
            
            
            (1
            )
            
            --
            
            
            
            --Exercise
                of common stock options
            
            
            1,777
            
            
            --
            
            
            
            --Exercise
                of common stock warrants
            
            
            56
            
            
            --
            
            
            
            --Amortization
                of deferred compensation
            
            
            --
            
            
            85
            
            
            
            --Amortization
                of warrants for services
            
            
            511
            
            
            --
            
            
            
            --Payments
                received on notes due from stockholders
            
            
            --
            
            
            --
            
            
            
            --Reversal
                of unused accrued expense related to Series C financing
            
            
            8
            
            
            --
            
            
            
            --Preferred
                stock expense
            
            
            --
            
            
            --
            
            
            
            --Income
                tax benefit due to exercise of stock options
            
            
            1
            
            
            --
            
            
            
            --Net
                income
            
            
            --
            
            
            --
            
            
            
            --**Balance
                at December 31, 2004**
            
            $
            187,249
            
            $
            (154
            )
            
            $
            --Cashless
                exercise of common stock warrants
            
            
            --
            
            
            --
            
            
            
            --Exercise
                of common stock options
            
            
            689
            
            
            --
            
            
            
            --Exercise
                of common stock warrants
            
            
            293
            
            
            --
            
            
            
            --Reversal
                of deferred compensation related to forfeiture of stock
                options
            
            
            (9
            )
            
            9
            
            
            
            --Amortization
                of deferred compensation
            
            
            --
            
            
            981
            
            
            
            --Issuance
                of restricted stock, net of cancellations
            
            
            4,238
            
            
            (4,262
            )
            
            
            --Issuance
                of stock options below fair market value
            
            
            270
            
            
            (270
            )
            
            
            --Retirement
                of treasury stock
            
            
            (183
            )
            
            --
            
            
            
            --Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            
            15Net
                loss
            
            
            --
            
            
            --
            
            
            
            --**Balance
                at December 31, 2005**
            
            $
            192,547
            
            $
            (3,696
            )
            
            $
            15Exercise
                of common stock warrants
            
            
            748
            
            
            --
            
            
            
            --Exercise
                of common stock options
            
            
            631
            
            
            --
            
            
            
            --Shares
                issued upon vesting of restricted stock
            
            
            --
            
            
            --
            
            
            
            --Elimination
                of deferred compensation upon SFAS 123R adoption
            
            
            (3,696
            )
            
            3,696
            
            
            
            --Share-based
                compensation expense
            
            
            5,914
            
            
            --
            
            
            
            --Repurchase
                of treasury stock
            
            
            --
            
            
            --
            
            
            
            --Retirement
                of treasury stock
            
            
            (5,345
            )
            
            --
            
            
            
            --Cumulative
                effect adjustments under SAB108
            
            
            --
            
            
            --
            
            
            
            --Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            
            (51
            )Net
                loss
            
            
            --
            
            
            --
            
            
            
            --**Balance
                at December 31, 2006**
            
            $
            190,799
            
            $
            --
            
            
            $
            (36
            )




See
      accompanying notes to consolidated financial statements.





F-6
 
 Table
        of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' EQUITY**


**(dollars
      and shares in thousands)**





**Treasury
                Stock****Notes
                due from stockholders for common stock**
            
            **Shares**
            
            **Cost**
            
            **Accumulated
                deficit**
            
            **Total
                stockholders' equity****Balance
                at December 31, 2003**
            
            $
            (59
            )
            
            (230
            )
            $
            (185
            )
            $
            (118,235
            )
            $
            6,104Conversion
                of Series A Preferred Stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Conversion
                of Series B Preferred Stock
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Preferred
                dividends and conversion inducement
            
            
            --
            
            
            --
            
            
            --
            
            
            (3,363
            )
            
            10,487Sale
                of common stock
            
            
            --
            
            
            --
            
            
            --
            
            
            
            
            
            46,457Cashless
                exercise of common stock warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercise
                of common stock options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,785Exercise
                of common stock warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            57Amortization
                of deferred compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            85Amortization
                of warrants for services
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            511Payments
                received on notes due from stockholders
            
            
            59
            
            
            --
            
            
            --
            
            
            --
            
            
            59Reversal
                of unused accrued expense related to Series C financing
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            8Preferred
                stock expense
            
            
            --
            
            
            --
            
            
            --
            
            
            (10,488
            )
            
            (10,488
            )Income
                tax benefit due to exercise of stock options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            2,025
            
            
            2,025**Balance
                at December 31, 2004**
            
            $
            --
            
            
            (230
            )
            $
            (185
            )
            $
            (130,061
            )
            $
            57,091Cashless
                exercise of common stock warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercise
                of common stock options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            691Exercise
                of common stock warrants
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            294Reversal
                of deferred compensation related to forfeiture of stock
                options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Amortization
                of deferred compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            981Issuance
                of restricted stock, net of cancellations
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (24
            )Issuance
                of stock options below fair market value
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Retirement
                of treasury stock
            
            
            --
            
            
            230
            
            
            185
            
            
            --
            
            
            --Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            15Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (653
            )
            
            (653
            )**Balance
                at December 31, 2005**
            
            $
            --
            
            
            --
            
            $
            --
            
            $
            (130,714
            )
            $
            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
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Share-based
                compensation expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            5,914Repurchase
                of treasury stock
            
            
            --
            
            
            (636
            )
            
            (5,351
            )
            
            --
            
            
            (5,351
            )Retirement
                of treasury stock
            
            
            --
            
            
            636
            
            
            5,351
            
            
            --
            
            
            --Cumulative
                effect adjustments under SAB108
            
            
            --
            
            
            --
            
            
            --
            
            
            (1,144
            )
            
            (1,144
            )Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (51
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (8,680
            )
            
            (8,680
            )**Balance
                at December 31, 2006**
            
            $
            --
            
            
            --
            
            $
            --
            
            $
            (140,538
            )
            $
            50,466











F-7
 
 Table
        of Contents





**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(dollars
      in thousands)**





**Year
                Ended December 31,****2004**
            
            **2005**
            
            **2006****Cash
                flows from operating
                activities:**Net
                income (loss)
            
            $
            2,025
            
            $
            (653
            )
            $
            (8,680
            )Adjustments
                to reconcile net income (loss) to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            499
            
            
            1,106
            
            
            5,018Impairment
                of long-lived asset
            
            
            --
            
            
            --
            
            
            144Services
                received for common stock and warrants
            
            
            511
            
            
            --
            
            
            --Noncash
                stock-based compensation charge
            
            
            85
            
            
            957
            
            
            5,914Deferred
                cash compensation
            
            
            (59
            )
            
            --
            
            
            --Income
                tax benefit from exercise of stock options
            
            
            1
            
            
            --
            
            
            --Amortization
                of discounts on investments
            
            
            (86
            )
            
            (1,184
            )
            
            (1,004
            )Changes
                in assets and liabilities:Interest
                receivable on short-term investments
            
            
            (76
            )
            
            (352
            )
            
            (198
            )Accounts
                receivable, net
            
            
            (541
            )
            
            (1,550
            )
            
            (1,833
            )Accounts
                receivable from related party
            
            
            (88
            )
            
            (506
            )
            
            494Royalty
                advances
            
            
            (68
            )
            
            (330
            )
            
            (239
            )Prepaid
                expenses and other current assets
            
            
            (69
            )
            
            (233
            )
            
            (896
            )Inventory
            
            
            (294
            )
            
            (104
            )
            
            293Other
                assets
            
            
            398
            
            
            (93
            )
            
            (664
            )Accounts
                payable
            
            
            324
            
            
            3,903
            
            
            (1,640
            )Accrued
                expenses
            
            
            711
            
            
            3,062
            
            
            (724
            )Other
                liabilities, non current
            
            
            --
            
            
            --
            
            
            262Accrued
                royalties
            
            
            257
            
            
            3,222
            
            
            3,902Accrued
                compensation
            
            
            87
            
            
            420
            
            
            (101
            )Deferred
                revenue
            
            
            1,571
            
            
            4,114
            
            
            7,125**Net
                cash provided by operating activities**
            
            
            5,188
            
            
            11,779
            
            
            7,173**Cash
                flows from investing activities:**Purchases
                of property and equipment
            
            
            (402
            )
            
            (3,706
            )
            
            (4,280
            )Capitalized
                internally developed software costs
            
            
            --
            
            
            (4,640
            )
            
            (872
            )Purchases
                of short-term investments
            
            
            (48,300
            )
            
            (79,546
            )
            
            (85,465
            )Proceeds
                from maturity of short-term investments
            
            
            --
            
            
            73,500
            
            
            90,790**Net
                cash (used in) provided by investing activities**
            
            
            (48,702
            )
            
            (14,392
            )
            
            173**Cash
                flows from financing activities:**Proceeds
                from the sale of common stock, net
            
            
            46,457
            
            
            --
            
            
            --Payments
                received on notes due from stockholders for common stock
            
            
            59
            
            
            --
            
            
            --Proceeds
                from exercise of common stock options
            
            
            1,785
            
            
            691
            
            
            633Proceeds
                from exercise of common stock warrants
            
            
            57
            
            
            294
            
            
            750Repurchase
                of treasury stock at cost
            
            
            --
            
            
            --
            
            
            (5,351
            )Payment
                of principal on obligations under capital leases
            
            
            (623
            )
            
            (121
            )
            
            --**Net
                cash provided by (used in) financing activities**
            
            
            47,735
            
            
            864
            
            
            (3,968
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            --
            
            
            2
            
            
            (2
            )Increase
                (decrease) in cash and cash equivalents
            
            
            4,221
            
            
            (1,747
            )
            
            3,376Cash
                and cash equivalents at beginning of year
            
            
            9,075
            
            
            13,296
            
            
            11,549**Cash
                and cash equivalents at end of year**
            
            $
            13,296
            
            $
            11,549
            
            $
            14,925


See
        Note
        16 for supplemental disclosure of cash flow information.





See
      accompanying notes to consolidated financial statements.





F-8
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS
 Table
              of Contents


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




*The
      Business*




Audible,
      Inc. and subsidiary (the “Company”), incorporated on November 3, 1995, was
      formed to create the Audible service, the Internet's leading provider of digital
      spoken entertainment information and educational programming for playback on
      personal computers and mobile devices. The Company commenced commercial
      operations in October 1997.





*Business
      Conditions*




The
      Company has experienced net losses applicable to common shareholders of $8.5
      million, $0.7 million and $8.7 million during the years ended December 31,
      2004,
      2005, and 2006, respectively, and has an accumulated deficit of $140.5 million
      as of December 31, 2006. The Company raised $46.5 million, net of direct costs,
      from the sale of common stock in a follow-on offering of its common stock in
      November 2004. As of December 31, 2006, the Company's cash and cash equivalents
      balance was $14.9 million, and its short-term investments balance was $51.3
      million.





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




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





*Basis
      of Presentation*





Commencing
      in the 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 and 2006 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, 2005 and 2006 of $55.6 million and $51.3
      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 (losses) and the fair value
      of
      held-to-maturity debt securities at December 31, 2005 and 2006 were $55.6
      million, ($0.1) million and $55.6 million, and $51.3 million, less than $0.1
      million and $51.3 million, respectively.





All
      of
      the debt securities classified as held-to-maturity
      mature before December 31, 2007.








F-9
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




*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, 2005 and 2006 was less than $0.1 million, respectively.
        Refer
        to the table in Note 4 for the amount of the provision reflected in the accrued
        liabilities.
 
 The
        activity in the provision account during the years ended December 31, 2004,
        2005, and 2006 was as follows (in thousands):
  Balance
                  at December 31, 2003
              
              $
              14Provision
                  for refunds and chargebacks
              
              
              1,037Refunds
                  and chargebacks provided
              
              
              (868
              )Balance
                  at December 31, 2004
              
              $
              183Provision
                  for refunds and chargebacks
              
              
              1,917Refunds
                  and chargebacks provided
              
              
              (1,782
              )Balance
                  at December 31, 2005
              
              $
              318Provision
                  for refunds and chargebacks
              
              
              2,436Refunds
                  and chargebacks provided
              
              
              (2,625
              )Balance
                  at December 31, 2006
              
              $
              129
 
 *Inventory*


Inventory
      is stated at the lower of cost or market using the first-in, first-out method.
      As of December 31, 2005 and 2006, inventory consists of digital audio players
      manufactured by third party manufacturers.





*Audio
      Production Costs*





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 included in Other Assets on the consolidated
      Balance Sheets presented. 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 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 net realizable value.





*Property
      and Equipment*




Property
      and equipment, which includes computer server and Web site equipment, office
      furniture and equipment, leasehold improvements, internally developed software,
      studio equipment, and software licenses, are stated at cost. Property and
      equipment under capital leases are stated at the present value of minimum lease
      payments. Depreciation is calculated using the straight-line method over the
      estimated useful lives of the respective assets, which is three years for
      computer server, Web site equipment, and software licenses, and two years for
      internally developed software and studio equipment. Property and equipment
      held
      under capital leases are amortized on a straight-line basis over the estimated
      useful life of the asset. In
      June
      2006, the Company reassessed the estimated useful lives of office furniture
      and
      equipment and leasehold improvements. Prior to June 2006, 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 life of the asset, whichever was shorter.
      In
      June 2006, the Company changed the estimated remaining 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. The
      amortization is included within depreciation expense in the consolidated
      Statement of Cash Flows.





Work
      in
      process consists of expenditures for the development of various computer
      software projects incurred subsequent to the completion of the preliminary
      project stage. Construction in progress represents leasehold improvement costs
      related to the development and construction of the new office space. 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. Amortization for the office space 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.






F-10
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




*Impairment
      of Long-Lived Assets*




The
      Company reviews its long-lived assets for impairment when events or
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected cash flows, undiscounted and without
      interest, is less than the carrying amount of the related asset, an impairment
      loss is recognized as the amount by which the carrying amount of the asset
      exceeds its fair value, generally based on a discounted cash flow analysis.
      During the year ended December 31, 2006, the Company recorded a $0.1 million
      impairment charge, included in technology and development expense on the
      accompanying consolidated Statement of Operations, related to expenditures
      previously capitalized for the development of a computer software
      project.





*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, 2005 and 2006, the fair values of
      these financial instruments approximated their carrying values due to the
      short-term nature of these instruments.





*Foreign
      Currency Translation*





In
      accordance with the provision of Statement of Financial Accounting Standard
      No.
      52, *Foreign Currency Translation* , ** SFAS
      52,
      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.




Since
      the
      inception of Audible UK’s operations, Audible Inc. has made periodic cash
      fundings to Audible UK to assist with the cash flow needs of the start-up
      subsidiary. Audible, Inc. expects these periodic fundings to continue into
      the
      foreseeable future. In addition to cash fundings, Audible, Inc. has paid certain
      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 fundings
      were made with the intention of treating them as a long-term investment. In
      accordance with the provisions of SFAS 52, the foreign currency gain/loss at
      each reporting period resulting from the inter-company account is recorded
      to Accumulated Other Comprehensive Income (Loss).





*Reclassifications*





Certain
      prior year and prior quarter amounts have been reclassified to conform to the
      current year presentation.





F-11
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


*Investments
      Accounted For Under the Equity Method of Accounting*





Prior
      to
      the additional contribution made to Audible Germany by a new investor in July
      2006, the Company’s ownership percentage of Audible Germany was greater than
      50%. 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.
      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 51%
      of
      the profits (the Company’s pro-rata ownership), if any, and 51% of the equity
      losses but only until such time that the Company records losses equal to the
      initial investment of the Company plus any profits previously recorded. The
      initial investment was reduced to zero during 2004. Subsequent to the additional
      fundings made during 2006, the Company’s ownership percentage was reduced to
      44.9% and therefore the equity method of accounting for the investment in
      Audible Germany is appropriate regardless of the significant participatory
      rights of the other investors.




*Revenue
      Recognition*




Content
      and Services





Consumer
      content revenue consists primarily of content sales made from the Company's
      Web
      sites and content sold through its agreement with the Apple iTunes Store. At
      the
      Company's Web site, customers purchase content either through an AudibleListener
      membership plan or on an a la carte basis. When purchased on an a la carte
      basis, the Company recognizes revenue from the sale of individual content titles
      in the period when the content is purchased and delivered. The Company generally
      recognizes revenue from the sale of a la carte content subscriptions pro rata
      over the term of the subscription period.





In
      July
      2006, the Company entered into a global master agreement with Apple Computer,
      Inc. that replaced the principal agreements the Company entered into with Apple
      during 2002 and 2003. The Company continues to recognize revenue from audio
      book 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 audio
      book sale is now formula-driven, derived from the Apple iTunes selling
      price and the content cost of each audio book. The new revenue formula will
      be 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.





F-12
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


The
        following table displays the activity related to the new annual membership
        plans
        introduced in December 2005, which is included within deferred revenue on
        the
        accompanying consolidated Balance Sheet at December 31, 2005 and 2006 (in
        thousands):
 
 **2005**
              
              **2006**Beginning
                  Deferred Revenue
              
              $
              --
              
              $
              2,083Total
                  cash received
              
              
              2,135
              
              
              12,361Revenue
                  recognized, net
              
              
              (52
              )
              
              (5,720
              )Refunds
                  issued
              
              
              --
              
              
              (502
              )Deferred
                  revenue
              
              $
              2,083
              
              $
              8,222
 
 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.


Point
      of Sale Rebates and Discount Certificate Rebates





Part
      of
      the Company's marketing strategy to obtain new AudibleListeners includes retail
      promotions in which the Company pays retailers to offer discounts to consumers
      on their purchase of AudibleReady devices if they become AudibleListeners for
      twelve months. The Company also has retail promotions in which it purchases
      electronic discount certificates or gift cards from retailers and gives them
      away to the Company's customers when they sign up to be AudibleListeners for
      twelve months. Point of sale rebates, which are discounts given by a third
      party
      retailer to a customer on the purchase of a digital audio player at the point
      of
      sale of the Audible membership, are recorded as a reduction of revenue in the
      period the discount is given in accordance with EITF 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including a
      Reseller of the Vendor's Products)* ,
      or EITF
      01-9. The cost of discount certificate rebates and gift cards that are given
      to
      a customer by Audible at the time the customer purchases the Audible membership
      are recorded as a cost of content and services revenue in accordance with EITF
      01-9.





Services
      Revenue




Corporate
      services revenue primarily consists of library sales. Where applicable, the
      Company recognizes corporate service revenue as services are performed after
      persuasive evidence of an agreement exists, the price is fixed, and
      collectibility is reasonably assured. Collectibility is based on past
      transaction history and credit-worthiness of the customer.





Hardware
      Revenue





Hardware
      revenue consists of sales of AudibleReady digital audio players. Most of the
      Company's AudibleReady digital audio devices are sold at a discount or given
      away when a customer signs up for a three or six-month or one-year commitment
      to
      an AudibleListener membership. For multiple-element arrangements in which a
      customer signs up for a membership and receives an audio player for free,
      revenue is first allocated to the two elements (device and membership) using
      the
      relative fair value method under EITF Issue No. 00-21. However, the delivered
      item (hardware) is limited to the non-contingent consideration, which, for
      a
      free device, consists of only shipping and handling fees. The free hardware
      device reflects the subsidy incurred to acquire a customer with a commitment
      to
      AudibleListener. For players sold separately, hardware revenue is recognized
      upon shipment of the device, pursuant to a customer order and credit card
      authorization and includes amounts received for shipping and
      handling.





Related
      Party Revenue





Related
      party revenue consists of revenue earned under agreements with Audible Germany
      (see Note 9) and France Loisirs (see Note 10). 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. The Company recognizes
      $0.1 million per quarter only after Audible Germany has agreed that the services
      delivered were satisfactory and collection of the amount is reasonably assured.
      Revenue under the France Loisirs agreement includes a $1.0 million technology
      licensing fee that is being recognized on a straight-line basis over the initial
      24-month term of the agreement, which began on September 15, 2004. Of the $1.0
      million, France Loisirs has paid the full $1.0 million as of December 31, 2006,
      resulting in deferred revenue of $0.2 million and none as of December 31, 2005
      and 2006, respectively. 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* .








F-13
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


Other
      Revenue





Other
      revenue in 2005 and 2006 primarily included $0.1 million and $0.3 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. The remaining balance of Other Revenue in 2005 consisted of commissions
      earned for referring customers to a retail partner to purchase a digital audio
      device, which is recognized in the period when the customer's purchase is
      completed. Other revenue in 2004 primarily consisted of straight-line
      amortization of revenue earned from technology licensing fee arrangements,
      which
      ended on June 30, 2004.





Customer
      Concessions





The
      Company defers revenue for expected replacement audio credits 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*




Cost
      of
      content and services revenue includes royalties incurred on sales of content
      as
      specified by the terms of the content agreements, amortization of warrants
      issued to content providers in connection with content agreements (2004 only),
      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.





Cost
      of
      content and services revenue for the years ended December 31, 2004, 2005, and
      2006 was as follows (in thousands):


**Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Royalties
                  incurred on content sales
              
              $
              10,393
              
              $
              22,399
              
              $
              33,256Amortization
                  of warrants issued to providers
              
              
              181
              
              
              --
              
              
              --Amortization
                  of audio production costs
              
              
              --
              
              
              28
              
              
              156Other
                  non-recoupable content costs
              
              
              76
              
              
              186
              
              
              265Royalties
                  and other content charges
              
              $
              10,650
              
              $
              22,613
              
              $
              33,677Discount
                  certificate rebates
              
              
              1,462
              
              
              1,556
              
              
              1,328Total
                  cost of content and services revenue
              
              $
              12,112
              
              $
              24,169
              
              $
              35,005




*Shipping
      and Handling Costs*




Shipping
      and handling costs, which consist of costs and fees associated with warehousing,
      fulfillment, and shipment of digital audio devices to customers, are recorded
      as
      a component of marketing expense in the consolidated Statements of Operations.
      These costs totaled $0.5 million, $0.5 million and $0.2 million for the years
      ended December 31, 2004, 2005, and 2006, respectively.





*Advertising
      Expenses*




The
      Company expenses the costs of advertising and promoting its products and
      services as incurred. These costs are included in marketing expense in the
      accompanying Statements of Operations and totaled $1.6 million, $5.0 million
      and
      $5.8 million for the years ended December 31, 2004, 2005, and 2006
      respectively.





*Legal
      Fees*





The
      Company expenses legal fees, including those expenses expected to be incurred
      in
      connection with loss contingencies, as incurred.





*Use
      of Estimates*




The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements, and reported
      amounts of revenues and expenses during the period. Significant items subject
      to
      estimates include the recoverability of the carrying amount of property and
      equipment (including internally-developed software), the provision for refunds
      and chargebacks, customer concessions, recoverability of royalty advances,
      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-14
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


*Income
      Taxes*




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





*Equity
      Instruments Issued for Goods and Services*




The
      Company 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
      2004,
      2005, and 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. The following
      table summarizes the potential common shares excluded from the diluted
      calculation:


**Year
                  ended December 31,****2004**
              
              **2005**
              
              **2006**Stock
                  Options
              
              
              2,600,331
              
              
              2,629,809
              
              
              2,237,731Warrants
              
              
              1,035,329
              
              
              883,389
              
              
              713,858Restricted
                  Stock
              
              
              --
              
              
              261,557
              
              
              991,085




*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.





F-15
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**(3)    Property
      and Equipment**




Property
      and equipment at December 31, 2005 and 2006 consists of the following (in
      thousands):





**December
                31,****2005**
            
            **2006**Computer
                server and Web site equipment
            
            $
            6,599
            
            $
            7,687Software
                licenses
            
            
            745
            
            
            4,235Internally
                developed software
            
            
            1,357
            
            
            2,779Office
                furniture and equipment
            
            
            1,558
            
            
            1,720Leasehold
                improvements
            
            
            975
            
            
            1,011Studio
                equipment
            
            
            652
            
            
            667Work
                in process - internally developed software
            
            
            3,283
            
            
            326Construction
                in progress
            
            
            --
            
            
            443Total
                property and equipment
            
            
            15,169
            
            
            18,868Less:
                accumulated depreciation and amortization
            
            
            (7,010
            )
            
            (10,719
            )Total
                property and equipment, net
            
            $
            8,159
            
            $
            8,149






Depreciation
      and amortization expense on property and equipment totaled $0.5 million, $1.1
      million, and $5.0 million and in 2004, 2005, and 2006, respectively. Included
      in
      the 2005 and 2006 amounts is amortization of internally developed software
      of
      $0.1 million and $1.2 million, respectively. Included in the 2006 amount is
      accelerated depreciation on office furniture and leasehold improvements due
      to
      the corporate office relocation.





In
      the
      quarter ended September 30, 2006, the Company recognized a $0.1 million
      impairment charge, included in technology and development in the accompanying
      consolidated Statement of Operations, relating to expenditures previously
      capitalized for a computer software project. These costs were in included in
      work in process and internally developed software. Upon review of the financial
      forecast for this project during the quarter ended September 30, 2006,
      management concluded that an impairment charge should be recognized for the
      full
      amount of the project 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,****2005**
              
              **2006**Computer
                  server and Web site equipment
              
              $
              743
              
              $
              743Less:
                  accumulated amortization
              
              
              (437
              )
              
              (685
              )Total
                  computer server and Web site equipment, net
              
              $
              306
              
              $
              58




**(4)  
      Accrued Expenses**




The
      components of the accrued expenses balance as of December 31, 2005 and 2006
      are
      follows (in thousands):


**December
                  31,****2005**
              
              **2006**Professional
                  fees
              
              $
              1,084
              
              $
              958Revenue
                  sharing and bounty payments
              
              
              774
              
              
              630Retail
                  rebates and discounts
              
              
              578
              
              
              400Royalty
                  obligations
              
              
              293
              
              
              410Accrued
                  expense - related parties
              
              
              333
              
              
              242Marketing
              
              
              468
              
              
              241Refunds
                  and chargebacks
              
              
              287
              
              
              89Value
                  added tax
              
              
              2
              
              
              708Other
                  accrued expenses
              
              
              983
              
              
              1,000Total
                  accrued expenses
              
              $
              4,802
              
              $
              4,678


F-16
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**(5)   Reverse
      Stock Split**




On
      June 3, 2004, the Board approved a reverse stock split in the ratio of one
      for
      three shares effective June 17, 2004. On the effective date, each holder of
      record was deemed to hold one share of common stock for every three shares
      of
      common stock held immediately prior to the effective date. The 64,480,245 common
      shares then issued and outstanding were converted into 21,493,415 shares of
      common stock. Following the effective date of the reverse stock split, the
      par
      value of the common stock remained at $.01 per share.




All
      share
      numbers and amounts have been retroactively restated for all periods presented
      to reflect the one for three reverse stock split.




**(6)    Stockholders'
      Equity**




*Common
      Stock*




On
      February 6, 2004, in connection with the conversion of the outstanding Series
      A
      Preferred Stock (“Series A”), the Company issued 5,836,013 shares of common
      stock to Apax Partners (“Apax”). The Series A conversion was the result of a
      negotiated agreement under which, in addition to the 4,669,347 shares of common
      stock issuable upon conversion of the outstanding Series A shares in accordance
      with the terms of conversion, the Company issued to Apax 1,166,666 common shares
      of common stock and warrants to purchase 333,333 shares of common stock. Of
      the
      additional 1,166,666 shares issued, 389,863 shares were issued in payment of
      cumulative accrued dividends at the date of conversion, and 776,803 shares
      together with the warrants to purchase 333,333 shares were issued as an
      inducement to Apax to convert its Series A shares. The warrants are exercisable
      at $21.00 per share and expire on February 5, 2011. The fair value of the
      776,803 shares of common stock and the warrants to purchase 333,333 of $9.9
      million was recorded as a charge to the net loss applicable to common
      shareholders in the consolidated Statement of Operations for the year ended
      December 31, 2004.




On
      February 6, 2004, the Company issued 416,666 shares of common stock to Random
      House upon conversion of their outstanding Series B Preferred Stock (“Series B”)
      in accordance with the original terms of conversion.





On
      November 17, 2004, the Company issued 2,022,500 shares of common stock in
      connection with a secondary public offering at a price of $24.50 per share.
      Net
      proceeds received by the Company were $46.5 million net of direct
      costs.





At
      December 31, 2005 and 2006, the Company had 24,326,503 and 24,119,768,
      respectively, common stock shares issued and outstanding. At December 31, 2005
      and 2006, the Company had 3,774,755 and 3,942,674, respectively, common shares
      reserved for 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. For options
      granted to new Audible employees as part of their compensation package, the
      exercise price is determined by the closing price of Audible's common stock
      on
      the day immediately preceding each employee's start date. For the majority
      of
      additional option grants made to existing employees, the exercise price is
      determined based on the closing price of the day immediately preceding the
      grant
      date. The majority of the options granted vest over a fifty-month period and
      expire ten years from the date of the grant. All share-based compensation is
      granted through the Plan.





The
      number of authorized common shares available for issuance under the Plan is
      5,700,000 shares. As of December 31, 2005 and 2006, options to purchase
      2,629,809 and 2,237,731, respectively, shares of common stock were outstanding.
      As of December 31, 2005 and 2006, 258,083 and 979,985, respectively, of
      non-vested restricted share awards had been granted, net of cancellations,
      forfeitures and net of shares vested.







F-17
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


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. Total compensation expense for share-based payment arrangements
      recognized during the years ended December 31, 2004, 2005 and 2006 was $0.7
      million, $1.0 million and $5.9 million respectively. 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.





The
      unearned share-based compensation related to stock options and restricted stock
      awards is 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 years ended December 31, 2004
      and 2006, less than $0.1 million was recognized as excess tax benefit resulting
      from share-based compensation. During the years ended December 31, 2005, there
      was no excess tax benefit recognized resulting from share-based compensation.
      The Company's net cash proceeds from the exercise of stock options were $1.8
      million, $0.7 million and $0.6 million as of December 31, 2004, 2005 and 2006,
      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 loss from
      operations, loss before income taxes, and 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 common
      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.




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.






F-18
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


The
      following table illustrates the effect on the Company's net loss and net loss
      per common share had the Company accounted for share-based compensation in
      accordance with SFAS 123 for the years ended December 31, 2004 and 2005 (in
      thousands, except per share data):


**2004**
              
              **2005**Net
                  loss, as reported
              
              $
              (8,462
              )
              $
              (653
              )Add:
                  Total share-based employee compensation expense included in reported
                  net
                  income
              
              
              85
              
              
              957Deduct:
                  Total share-based employee compensation expense determined under
                  the fair
                  value method for all awards
              
              
              (2,670
              )
              
              (3,498
              )Pro
                  forma net loss
              
              $
              (11,047
              )
              $
              (3,194
              )Basic
                  net loss per common share:As
                  reported
              
              $
              (0.40
              )
              $
              (0.03
              )Pro
                  Forma
              
              $
              (0.53
              )
              $
              (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, 2004, 2005 and 2006 are as
      follows:


**Year
                  Ended December 31,****2004**
              
              **2005**
              
              **2006**Risk-free
                  interest rate
              
              
              3.66
              %
              
              4.31
              %
              
              4.57
              %Expected
                  dividend yield
              
              
              --
              
              
              --
              
              
              --Expected
                  life
              
              
              5
                  years
              
              
              5
                  years
              
              
              4.58
                  yearsExpected
                  volatility
              
              
              122
              %
              
              114
              %
              
              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-19
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


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


**Number of**
                **Shares**
              
              **Exercise Price**
                **Per
                  Share**
              
              **Weighted**
                **Average**
                **Exercise
                  Price Per Share****Balance,
                  December 31, 2003**
              
              
              
              
              
              3,147,363
              
              
              
              
              $
              0.66-$38.25
              
              
              
              
              $
              5.34Granted
              
              
              
              
              
              277,691
              
              
              
              
              $
              9.30-$29.70
              
              
              
              
              $
              12.63Expired/Canceled
              
              
              
              
              
              (23,217
              )
              
              
              
              $
              0.66-$12.60
              
              
              
              
              $
              3.92Exercised
              
              
              
              
              
              (801,506
              )
              
              
              
              $
              0.66-$16.50
              
              
              
              
              $
              2.23**Balance,
                  December 31, 2004**
              
              
              
              
              
              2,600,331
              
              
              
              
              $
              0.69-$38.25
              
              
              
              
              $
              6.80Granted
              
              
              
              
              
              389,900
              
              
              
              
              $
              10.73-$26.58
              
              
              
              
              $
              15.63Expired/Canceled
              
              
              
              
              
              (114,352
              )
              
              
              
              $
              0.99-$31.32
              
              
              
              
              $
              14.80Exercised
              
              
              
              
              
              (246,070
              )
              
              
              
              $
              0.69-$13.69
              
              
              
              
              $
              2.81**Balance,
                  December 31, 2005**
              
              
              
              
              
              2,629,809
              
              
              
              
              $
              0.69-$38.25
              
              
              
              
              $
              8.13Granted
              
              
              
              
              
              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
              
              
              
              
              $
              2.53**Balance,
                  December 31, 2006**
              
              
              
              
              
              2,237,731
              
              
              
              
              $
              1.05-$31.32
              
              
              
              
              $
              8.42




A
      summary
      of the total stock options outstanding as of December 31, 2006 is as
      follows:




**Number
                  of Options**
              
              **Exercise
                  Price**
                **Per
                  Share**
              
              **Weighted
                  Average**
                **Exercise
                  Price Per Share**
              
              **Weighted
                  Average**
                **Remaining**
                **Contractual
                  Life**746,119
              
              $
              1.05-$2.97
              
              $
              2.12
              
              
              
              
              
              5.50
                  years586,559
              
              $
              3.00-$3.99
              
              $
              3.42
              
              
              
              
              
              5.43
                  years163,548
              
              $
              4.69-$10.85
              
              $
              6.55
              
              
              
              
              
              6.57
                  years395,494
              
              $
              11.20-15.99
              
              $
              13.54
              
              
              
              
              
              7.87
                  years346,011
              
              $
              16.50-31.32
              
              $
              25.50
              
              
              
              
              
              2.66
                  years2,237,731
              
              $
              1.05-$31.32
              
              $
              8.42
              
              
              
              
              
              5.54
                  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 Life**Options
                  exercisable at December 31, 2006
              
              
              1,825,292
              
              $
              8.08
              
              $
              6,454
              
              
              5.01
                  YearsVested
                  and expected to vest at December 31, 2006
              
              
              2,172,657
              
              $
              8.95
              
              $
              7,131
              
              
              5.93
                  Years




The
      following table summarizes stock option activity for the years ended December
      31, 2004, 2005 and 2006


(in
      thousands except share and per share data):


**Years
                  Ended**
                **December
                  31,**Options:
              
              **2004**
              
              **2005**
              
              **2006**Weighted-average
                  grant date fair value of options granted during the period
              
              $
              10.61
              
              $
              13.52
              
              $
              8.03Total
                  intrinsic value of options exercised during the period
              
              $
              15,033
              
              $
              3,346
              
              $
              1,656






F-20
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




*Restricted
      Stock*





During
      the years ended December 31, 2005 and 2006, the Company granted awards to
      receive 279,750 and 872,800, 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.
      During the years ended December 31, 2005 and 2006, 18,193 and 130,960 restricted
      stock units were forfeited due to employee terminations. The fair value of
      restricted stock units on the grant date is determined by the closing price
      of
      Audible's stock on the day immediately preceding the grant date. Actual shares
      under these awards are not issued until vesting is complete. Under the terms
      of
      the restricted stock awards, unless different provisions are noted on the
      restricted stock award, the Company is required to issue to the recipient the
      number of whole shares of common stock that equals the number of vested whole
      restricted stock shares following the date on which the restricted stock share
      becomes vested.





The
      following table summarizes nonvested restricted stock activity through December
      31, 2006:


**Weighted-Average
                  Grant-Date****Nonvested
                  Restricted Stock**
              
              **Units**
              
              **Fair
                  Value****Nonvested
                  at December 31, 2004**
              
              
              --
              
              
              --Granted
              
              
              279,750
              
              $
              16.14Forfeited
              
              
              (18,193
              )
              $
              15.33Vested
              
              
              (3,474
              )
              $
              14.13**Nonvested
                  at December 31, 2005**
              
              
              258,083
              
              $
              16.39Granted
              
              
              872,800
              
              $
              9.87Forfeited
              
              
              (130,960
              )
              $
              11.12Vested
              
              
              (19,938
              )
              $
              14.85**Nonvested
                  at December 31, 2006**
              
              
              979,985
              
              $
              11.27




Of
      the
      total number of units vested noted in the table above, 11,100 restricted stock
      units were not delivered to employees as of December 31, 2006, due to an
      election made by the employees to delay receipt.





The
      following table summarizes restricted stock for the years ended December 31,
      2004, 2005 and 2006 (in thousands except per share data):


**Year
                  Ended**
                **December
                  31,**Restricted
                  Stock:
              
              **2004**
              
              **2005**
              
              **2006**Weighted-average
                  grant date fair value of shares granted during the year
              
              $
              --
              
              $
              16.14
              
              $
              9.87Total
                  fair value of shares that vested during the year
              
              $
              --
              
              $
              49
              
              $
              296




Total
      common stock available for future stock option and restricted stock grants
      is
      approximately 915,000 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, 2004, 2005 and 2006, $0.5 million, $0 and $0, respectively,
      was recognized as expense related to warrants, as follows (in
      thousands):


**December
                  31,****2004**
              
              **2005**
              
              **2006**Cost
                  of content and services revenue
              
              $
              181
              
              $
              --
              
              $
              --Cost
                  of hardware revenue
              
              
              17
              
              
              --
              
              
              --Marketing
                  expenses
              
              
              313
              
              
              --
              
              
              --$
              511
              
              $
              --
              
              $
              --


No
      expense was recognized in 2005 or 2006 as all warrants were fully vested as
      of
      December 31, 2004.






F-21
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




A
      summary
      of the warrant activity for the years ended December 31, 2004, 2005 and 2006
      is
      as follows:





**Number of
                Warrants**
            
            **Exercise Price
                Per Share**
            
            **Weighted Average
                Exercise Price Per Share****Balance,
                December 31, 2003**
            
            
            715,438
            
            $
            0.03-$150.00
            
            $
            14.55Exercised
            
            
            (81,108
            )
            $
            0.60-$2.73
            
            $
            1.77Issued
            
            
            400,999
            
            $
            1.50-$21.00
            
            $
            17.98**Balance,
                December 31, 2004**
            
            
            1,035,329
            
            $
            0.03-$150.00
            
            $
            16.96Exercised
            
            
            (147,771
            )
            $
            1.29-$12.00
            
            $
            2.83Issued
            
            
            --
            
            
            --
            
            
            --Expired
            
            
            (4,169
            )
            $
            14.07-$22.95
            
            $
            21.24**Balance,
                December 31, 2005**
            
            
            883,389
            
            $
            0.03-$150.00
            
            $
            19.22Exercised
            
            
            (167,199
            )
            $
            2.73-$4.50
            
            $
            4.49Issued
            
            
            --
            
            
            --
            
            
            --Expired
            
            
            (2,332
            )
            $
            1.14-$1.62
            
            $
            1.48**Balance,
                December 31, 2006**
            
            
            713,858
            
            $
            0.03-$150.00
            
            $
            22.73




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
      2005,
      31,105 warrants were exercised through cashless transactions in accordance
      with
      the original terms of the warrant agreements. Accordingly, the number of shares
      of common stock issued as a result of these cashless exercises was 23,733
      shares. In 2004, 43,443 were exercised through cashless transactions in
      accordance with the original terms of the warrant agreements. Accordingly,
      the
      number of common stock shares issued as result of these cashless exercises
      was
      39,888.





A
      summary
      of the total common stock warrants outstanding and exercisable as of December
      31, 2006 is as follows:


**Number
                  of Warrants**
              
              **Exercise
                  Price Per Share**
              
              **Weighted
                  Average Exercise Price Per Share**
              
              **Weighted
                  Average Remaining Contractual Life**80,082
              
              $
              0.03-$3.09
              
              $
              1.05
              
              
              2.30
                  years207,666
              
              $
              12.94-$17.67
              
              $
              17.53
              
              
              0.36
                  years333,333
              
              $
              21.00
              
              $
              21.00
              
              
              4.10
                  years50,001
              
              $
              24.00-$36.00
              
              $
              30.00
              
              
              0.34
                  years42,776
              
              $
              60.00-$150.00
              
              $
              93.51
              
              
              0.34
                  years713,858
              
              $
              0.03-$150.00
              
              $
              22.73
              
              
              2.32
                  years




**Convertible
      Preferred Stock**




**Series
      A**




In
      February 2001, Microsoft purchased 2,666,666 shares of Series A Preferred stock
      (“Series A”) for $10.0 million at a per share price of $3.75. Each share of
      Series A was originally convertible into one and one-third shares of common
      stock, (equivalent to a price of $2.8125 per share), subject to adjustment
      under
      certain conditions. As a result of the investment in the Company made by Special
      Situations Funds in the first quarter of 2002, the conversion rate was adjusted
      as per the Series A Certificate of Designation to 1.3441 shares of Common Stock
      for each share of Series A stock. The stock was convertible at the option of
      the
      holder at any time. Dividends were payable semi-annually at an annual rate
      of
      12% in either additional preferred shares or in cash at the option of the
      Company. On the fifth anniversary of the original issue date, the Company was
      required to redeem all remaining outstanding shares at a per share price of
      $3.75 plus all accrued and unpaid dividends. As of August 2003, the Company
      had
      issued to Microsoft an aggregate of 807,301 additional shares of Series A in
      respect of the dividends payable through June 1, 2003.





In
      August
      2003, Apax Partners purchased from Microsoft the 3,473,967 then-outstanding
      shares of Audible Series A Preferred Stock and agreed to certain amendments
      to
      the security. As amended, the Series A was no longer mandatory redeemable,
      therefore the Series A was reclassified into permanent equity, was convertible
      at any time by the holders into shares of common stock, and dividends would
      accrue and compound semi-annually for a period of four years at the rate of
      12%
      per annum. In the event of the conversion of the Series A, all accrued but
      unpaid preferred dividends would have converted into shares of common stock.
      In
      liquidation, the Series A ranked pari passu with the Company's Series B
      Preferred Stock.




On
      February 6, 2004, Apax Partners converted all of its Series A and accrued
      dividends into 4,669,347 shares of common stock. The Series A conversion was
      the
      result of a negotiated agreement with the Company, where the Company issued
      1,166,666 shares and 333,333 warrants to purchase common stock to Apax Partners.
      Of the common shares issued, 389,863 were issued as dividends due at the date
      of
      conversion, and 776,803 shares and 333,333 warrants were issued as an inducement
      to Apax Partners to immediately convert its Series A shares. The 333,333
      outstanding warrants are exercisable at $21.00 and expire on February 5, 2011.
      The fair value of the 776,803 shares of common stock and the 333,333 warrants
      of
      approximately $9.9 million was determined in accordance with EITF Issue No.
      96-18, and this expense is included in the charges related to conversion of
      convertible preferred stock in the accompanying 2004 consolidated Statement
      of
      Operations.




F-22
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




**Series
      B**




In
      March
      2002, the Company issued 1,250,000 shares of Series B Preferred Stock (“Series
      B”) in connection with an amendment to its contract with Random House, an
      affiliate of Bertelsmann AG. At any time on or after March 26, 2004, subject
      to
      certain conditions, all outstanding shares of Series B stock were to
      automatically convert to shares of common stock at the then effective conversion
      price. On February 6, 2004, Random House converted the Series B into 416,666
      shares of common stock in accordance with the original terms of
      conversion.




**Common
      Stock Repurchase Program and Treasury Stock**





In
      February 2006, the Company's Board of Directors authorized a new common stock
      repurchase program, pursuant to which the Company may from time to time
      repurchase (through open market repurchases at prevailing market prices), up
      to
      an aggregate of $25.0 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.





At
      the
      February 8, 2005 Board of Directors meeting, the Board resolved that all 229,741
      shares of common stock held as treasury shares by the Company at that time
      were
      to be retired, and the Company subsequently legally retired the treasury stock.
      As of December 31, 2006, the Company held no shares of common stock as treasury
      stock.




**(7)    Income
      Taxes**





There
      is
      no federal provision for income tax expense in 2004, 2005 or 2006. As a result
      of selling certain of its New Jersey state income tax loss benefits for cash,
      the Company realized $0.7 million, $0.7 million and $0.8 million in state
      income tax benefits during the years ended December 31, 2004, 2005 and 2006,
      respectively.





The
      components of (loss) income before income taxes are as follows (in
      thousands):





**December
                31,****2004**
            
            **2005**
            
            **2006**Domestic
            
            $
            1,302
            
            $
            113
            
            $
            (8,411
            )Foreign
            
            
            --
            
            
            (1,505
            )
            
            (1,024
            )Total
            
            $
            1,302
            
            $
            (1,392
            )
            $
            (9,435
            )




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,****2004**
              
              **2005**
              
              **2006**Computed
                  “expected” tax (benefit) expense
              
              $
              443
              
              $
              (473
              )
              $
              (3,208
              )(Increase)
                  decrease in tax (benefit) expense resulting from:State
                  tax benefit, net of federal benefit
              
              
              (477
              )
              
              (488
              )
              
              (507
              )Increase/(decrease)
                  in the federal valuation allowance
              
              
              (692
              )
              
              (301
              )
              
              1,932Foreign
                  losses
              
              
              --
              
              
              512
              
              
              472Permanent
                  differences
              
              
              3
              
              
              11
              
              
              542Foreign
                  taxes
              
              
              --
              
              
              --
              
              
              14$
              (723
              )
              $
              (739
              )
              $
              (755
              )








F-23
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and liabilities as of December 31, 2005 and 2006 are as
      follows (in thousands):


**December
                  31,****2005**
              
              **2006**Deferred
                  tax assets:Net
                  operating loss carryforwards
              
              $
              46,323
              
              $
              46,070Book
                  depreciation in excess of tax depreciation
              
              
              762
              
              
              810Deferred
                  compensation and accrued vacation
              
              
              140
              
              
              98Deferred
                  revenue
              
              
              23
              
              
              679Deferred
                  rent
              
              
              --
              
              
              105Allowance
                  for sales refunds and chargebacks
              
              
              115
              
              
              30Stock
                  based compensation
              
              
              383
              
              
              2,056Accrued
                  expense
              
              
              100
              
              
              --Patents
                  and trademarks
              
              
              119
              
              
              68Other,
                  net
              
              
              71
              
              
              35Total
                  deferred tax assets
              
              
              48,036
              
              
              49,951Deferred
                  tax liability:Prepaid
                  expense
              
              
              (234
              )
              
              (240
              )Net
                  deferred tax assets
              
              
              47,802
              
              
              49,711Less valuation
                  allowance
              
              
              47,802
              
              
              49,711Net
                  deferred taxes
              
              $
              --
              
              $
              --




In
      assessing the realizability of deferred tax assets, the Company considers
      whether it is more likely than not that some portion or all of the deferred
      tax
      assets will not be realized. The ultimate realization of deferred tax assets
      is
      dependent upon the generation of future taxable income during the periods in
      which those temporary differences become deductible. Based on the Company’s
      historical net losses, management believes it is more likely that not that
      the
      Company will not realize the benefits of these deferred tax assets and,
      accordingly, a full valuation allowance, which increased by $2.4 million,
      decreased by $2.1 million, and increased by $1.9 million in 2004, 2005 and
      2006
      respectively, has been recorded on the deferred tax assets as of December 31,
      2005 and 2006.





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.





As
      of
      December 31, 2006, the Company had net operating loss carry-forwards for federal
      income tax purposes of approximately $123.1 million, which begin to expire
      in
      2010 if not used to offset future taxable income. As of December 31, 2006,
      the
      Company has net operating loss carry-forwards for New Jersey income tax purposes
      of approximately $78.0 million which begin to expire in 2008 if not used to
      offset future taxable future. As of December 31, 2006, the Company has foreign
      net operative losses of $2.5 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 three 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.





**(8)**  **Audible
      UK**





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.





F-24
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents




**(9)    
      Audible Germany Agreement**




On
      August
      30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
      Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
      (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
      an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
      approximately 5.7% of Audible's common stock, inclusive of certain common stock
      warrants held by the entities.




Audible
      Germany has the exclusive rights to operate a German language Audible 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. 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. 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. In
      July 2006, a new investor, Luebbe, 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
      October 2006, the original Joint Venture agreement was amended to provide
      additional financing commitments 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.





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 and December 2006, the Company’s ownership percentage was
      reduced to 44.9% 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.







F-25
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


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 are 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.





During
      the years ended December 31, 2004, 2005 and 2006, the Company recognized $0.1
      million, $0.4 million and $0.4 million, respectively, in related party revenue
      under the license agreement as the related services were delivered and accepted.
      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.





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, 2004, 2005, and 2006, $0.1 million, $0.1 million and $0.4
      million was recognized, respectively. 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, 2005 and 2006, and marketing
      expense in the consolidated Statements of Operations.





**(10)    
      France Loisirs Agreement**




On
      September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
      Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
      Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
      France Loisirs is a wholly owned subsidiary of Bertelsmann AG. The Agreement
      expired in September 2006. On September 15, 2006, the parties agreed to extend
      the period of the original Agreement to December 31, 2006, and effective
      November 30, 2006, the parties agreed to a second extension of the original
      agreement from November 30, 2006 to March 31, 2007. During this time, terms
      and
      conditions of the original Agreement remain in effect and if the parties do
      not
      agree to further extend the original Agreement by March 31, 2007, the agreement
      will expire on April 30, 2007 and no further renewals will be possible.





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
      Audible to provide intellectual property and substantially all of the
      technological infrastructure for the operation of the service. In return, France
      Loisirs is required to pay Audible $1.0 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 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.




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.







F-26
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


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
      has been collected.





The
      Company recognized $0.1 million, $0.5 million, and $0.4 million of revenue
      during December 31, 2004, 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. These amounts are included
      in related party revenue on the consolidated Statements of Operations.
      During the years ended December 31, 2004, 2005 and 2006, the Company recognized
      $0.1 million, $0.1 million and $0.2 million, respectively. 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
      2005, and marketing expense in the consolidated Statements of Operations. As
      of
      December 31, 2006, the Company had an accounts receivable balance of less than
      $0.1 million related to France Loisirs.





**(11)
      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 will be implemented January 1, 2007. The term of the new
      agreement expires on September 30, 2010.





**(12)**  **Product
      Development, Licensing, Marketing and Distribution
      Agreement**





On
      May
      16, 2005, the Company entered into a five-year agreement with a
      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 publisher based on sales of the products produced. As of
      December 31, 2005 and 2006, the Company billed the publisher $0.5 million and
      $1.2 million, of which $0.5 million and $0.9 million was received as of December
      31, 2005 and 2006, respectively, in connection with this agreement. The
      fees associated with this agreement are being amortized over a 58-month period
      beginning in the month the Company commenced production of audio (July 2005)
      through the expiration of the agreement. During the years ended December 31,
      2005 and 2006, the Company recorded $0.1 million and $0.3 million, respectively,
      as other revenue in connection with this agreement. As of December 31, 2005
      and
      2006, the Company recorded $0.3 million and $0.3 million as deferred revenue
      current and $0.1 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.








F-27
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**(13)    Employee
      Benefit Plan**




The
      Company has a 401(K) plan based on contributions from employees and
      discretionary Company contributions. As of December 31, 2004, the Company had
      not contributed to the 401(K) plan to date. Beginning January 1, 2005, the
      Company adopted a policy to match up to the first two-percent of salary
      contributions made from employees into the 401(K) plan. During the years ended
      December 31, 2005 and 2006, the Company made contributions of $0.1 million
      and
      $0.2 million, respectively.




**(14)    Commitments
      and Contingencies**




*Lease
      Obligations*




In
      September 2006, the Company entered into a lease agreement for office space
      in
      Newark, NJ. The Company will be occupying two floors with an approximate space
      of 49,600 square feet, which will be 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. In February 2005, Audible UK signed a one year lease
      for
      office space, which includes office amenities. This lease was subsequently
      amended in the quarter ended June 30, 2005 for additional space and was renewed
      in May 2006 for an additional two years. 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 as of December 31, 2006 under these lease arrangements are $8.4
      million. The Company had an operating lease on its office space in Wayne, New
      Jersey that was set to expire in December 2008. During the quarter ended
      September 30, 2006, the Company notified the landlord of its intention to
      terminate the office lease in Wayne, NJ as of February 28, 2007, and made a
      $0.1
      million cancellation payment, which is included in general and administrative
      expenses in the accompanying 2006 consolidated Statement of
      Operations.




Rent
      expense of $0.4 million, $0.6 million and $1.0 million was recorded under
      operating leases for the years ended December 31, 2004, 2005, and 2006,
      respectively. There are no future minimum lease payments due under capital
      leases as of December 31, 2006, which were paid in full during the quarter
      ended
      March 31, 2005. 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 during the
      quarter ended March 31, 2007. Based on the Company’s evaluation, this period was
      included 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.





*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.








F-28
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**Summary
      of Cash Commitments and Obligations**




The
      following table shows future cash payments due under the Company’s commitments
      and obligations as of December 31, 2006 (in thousands):


**Year**
              
              **Operating
                  Leases**
                **(1)**
              
              **Service
                  Agreements**
              
              **Royalty
                  Obligations**
                **(2)**
              
              **Purchase
                  Commitments**
              
              **Total**2007
              
              $
              719
              
              $
              1,724
              
              $
              503
              
              
              
              
              $
              775
              
              $
              3,7212008
              
              
              1,009
              
              
              1,034
              
              
              92
              
              
              
              
              
              --
              
              
              2,1352009
              
              
              1,066
              
              
              45
              
              
              --
              
              
              
              
              
              --
              
              
              1,1112010
              
              
              1,141
              
              
              --
              
              
              --
              
              
              
              
              
              --
              
              
              1,1412011
              
              
              1,215
              
              
              --
              
              
              --
              
              
              
              
              
              --
              
              
              1,215Thereafter
              
              
              3,255
              
              
              --
              
              
              --
              
              
              
              
              
              --
              
              
              3,255Total
              
              $
              8,405
              
              $
              2,803
              
              $
              595
              
              
              
              
              $
              775
              
              $
              12,578




(1)
      Of
      the $8.4 million in total operating leases, $8.1 million is related to the
      Company’s office lease agreement entered into in September 2006.





(2)
      Of
      the $0.6 million in total royalty obligations, $0.4 million is recorded in
      accrued expenses and $0.1 million is recorded as royalty obligations,
      non-current in the accompanying December 31, 2006 consolidated Balance Sheet.
      The remaining $0.1 million is related to content that has not yet been delivered
      as of December 31, 2006.





**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, 2006 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.





In
      June
      2001, the Company and certain of its officers were named as defendants in a
      securities class action filed in United States District Court for the Southern
      District of New York related to the Company’s initial public offering in July
      1999. The lawsuits also named certain of the underwriters of the IPO as well
      as
      certain of its officers and directors and former directors as defendants.
      Approximately 300 other issuers and their underwriters have had similar suits
      filed against them, all of which are included in a single coordinated proceeding
      in the Southern District of New York (the “IPO Litigations”). An amended
      complaint was filed on April 19, 2002. The complaints allege that the prospectus
      and the registration statement for the Company’s IPO failed to disclose that the
      underwriters allegedly solicited and received “excessive” commissions from
      investors and that some investors in their IPO allegedly agreed with the
      underwriters to buy additional shares in the aftermarket in order to inflate
      the
      price of our stock. The Company and certain of our officers, directors, and
      former directors were named in the suits pursuant to Section 11 of the
      Securities Act of 1933, Section 10(b) of the Exchange Act of 1934, and other
      related provisions. The complaints seek unspecified damages, attorneys' and
      expert fees, and other unspecified litigation costs.




On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        2002
        the Company, along with other non-underwriter defendants in the coordinated
        cases, also moved to dismiss the IPO Litigations. On February 19, 2003, the
        court ruled on the motions. The court granted their motion to dismiss the
        claims
        against us under Rule 10b-5, due to the insufficiency of the allegations
        against
        us. The motions to dismiss the claims under Section 11 of the Securities
        Act
        were denied as to virtually all of the defendants in the consolidated cases,
        including the Company’s. The Company’s individual officers, directors and former
        director defendants in the IPO Litigation signed a tolling agreement and
        were
        dismissed from the action without prejudice on October 9, 2002.


In
      June
      2003, a proposed settlement of this litigation was reached among the plaintiffs,
      the issuer defendants in the consolidated actions, the issuer officers and
      directors named as defendants, and the issuers' insurance companies. The
      settlement would provide, among other things, a release for the Company and
      for
      the individual defendants for the conduct alleged to be wrongful in the amended
      complaint. The Company would agree to undertake other responsibilities under
      the
      partial settlement, including agreeing to assign away, not assert, or release
      certain potential claims that they may have against the underwriters. Any direct
      financial impact of the proposed settlement is expected to be borne by the
      Company’s insurance carriers.








F-29
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. The plaintiffs have continued to litigate 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 the ruling, and on December 5, 2006, the Court
      of Appeals for the Second Circuit reversed the district court’s class
      certification decision. On January 5, 2007, the plaintiffs filed a petition
      for
      rehearing with the court of appeals. Because the Company’s settlement with the
      plaintiffs involves the certification of the case as a class action as part
      of
      the approval process, the impact of the court of appeals’ ruling on the
      Company’s settlement is unclear at this time.





If
      the
      court determines that the settlement is fair to the class members, the
      settlement will be approved. There can be no assurance that this proposed
      settlement would be approved and implemented in its current form, or at
      all.




Due
      to
      the inherent uncertainties of litigation and because the settlement approval
      process is not complete, the Company cannot accurately predict the ultimate
      outcome of the matter.





Starting
      on or about February 22, 2005, several class actions were filed against the
      Company and two of our executives in the United States District Court for the
      District of New Jersey.  The plaintiffs purport to represent a class
      consisting of all persons (other than 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 allege
      that the defendants violated Section 10(b) of the Securities Exchange Act of
      1934 and Rule 10b-5 there under by failing to make complete and accurate
      disclosures concerning the Company’s future plans and prospects.  The
      individual defendants are also alleged to be liable under Section 20(a) of
      the
      Exchange Act.  All of the defendants are alleged to have sold stock at
      inflated prices during the Class Period. In 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 seek unspecified monetary damages
      and
      their reasonable costs and expenses, including counsel fees and expert fees.
      The
      defendants have moved to dismiss the pleading. The motion has been fully
      briefed, but the Court has not yet ruled.





In
      April
      2005, a derivative action was filed in the state court of New Jersey against
      the
      Company’s, the two executives named as individual defendants in the class
      actions described above, six of the Company’s outside directors, and three of
      their stockholders.  The derivative action made 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 we 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 them, the two executives named as individual defendants in the class
      actions described above, and all seven of the Company’s outside directors. The
      derivative action makes the same allegations as the class actions described
      above and adds allegations that all of the individual defendants are responsible
      for an alleged failure of internal controls that resulted in the 45-day delay
      in
      the filing of the Company’s Form 10-K for 2004. The plaintiff in this derivative
      action purports to seek a recovery of the damages allegedly sustained by the
      Company rather than by investors who allegedly purchased securities at inflated
      prices.





The
      plaintiffs in the derivative actions voluntarily agreed to stay those actions
      pending the outcome of the Company’s motion to dismiss the class actions
      described above. More recently, the state derivative action was dismissed
      without prejudice because the Court preferred that course of action to staying
      the action. The state derivative action could be re-commenced if the securities
      class action survives the defendant's motion to dismiss.





The
      Company believes that all of the claims described above are without merit and
      they intend to defend the actions vigorously. Due to the inherent uncertainties
      of litigation and because these actions are at a preliminary stage, the Company
      cannot accurately predict the ultimate outcome of these matters.





In
      May
      2005, Digeo, Inc. commenced an action against the Company for patent
      infringement in Federal District Court in the State of Washington. All Digeo
      claims were dismissed with prejudice on December 1, 2006.  The Company has
      filed an appeal in the Court of Appeals for the Federal Circuit to recover
      its
      attorney fees.







F-30
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**(15)    Customer
      Concentration**




During
      the years ended December 31, 2004, 2005 and 2006, Apple Computer accounted
      for
      10.7%, 15.0% and 23.8% of total revenue, respectively.




As
      of
      December 31, 2005 and 2006, Apple Computer accounted for 62.1% and 64.1%,
      respectively, of the Company's accounts receivable.





**(16)    Supplemental
      Disclosure of Cash Flow Information**




The
      following supplemental information relates to the Statements of Cash Flows
      for
      the years ended December 31, 2004, 2005 and 2006:




**Non-Cash
      Financing and Investing Activities**




Capital
      lease obligations of $0.7 million were incurred during the year ended December
      31, 2004, when the Company entered into leases for new property and equipment.
      No capital leases were entered into during the 2005 or 2006 years.




In
      February 2004, Apax Partners converted all of its Series A Preferred Stock
      and
      accrued dividends, valued at $13.0 million, into 4,669,347 shares of common
      stock. The conversion was the result of a negotiated agreement with Apax
      Partners and the Company, where the Company issued 1,166,666 shares and 333,333
      warrants to purchase common stock. Of the common shares issued, 389,863 shares
      were issued as dividends due at the date of conversion, and 776,803 shares
      and
      333,333 warrants were issued as an inducement to convert the Series A
      shares. The total dividends and inducement was valued at $13.9
      million.





In
      February 2004, Random House converted the 1,250,000 shares of Series B Preferred
      Stock, originally issued in March 2002, valued at $1.1 million, into 416,666
      shares of common stock in accordance with the original terms of the
      conversion.





In
      2004,
      43,443 warrants were exercised through cashless transactions in accordance
      with
      the original terms of the warrant agreements. Accordingly, the number of common
      stock shares issued as a result of these cashless exercises was 39,888.





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.





**Cash
      Paid for Interest**




Interest
      paid was less than $0.1 million during the years ended December 31, 2004 and
      2005, respectively. No interest was paid during the 2006 year.




**Taxes
      Paid**





Amounts
      paid for income taxes were nominal during 2004, 2005 and 2006,
      respectively.








F-31
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents


**(17)  
        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**
              
              **Consolidated****December
                  31, 2004**Revenues
              
              $
              34,319
              
              $
              --
              
              $
              34,319Long-lived
                  assets
              
              
              940
              
              
              --
              
              
              940**December
                  31, 2005**Revenues
              
              $
              62,783
              
              $
              454
              
              $
              63,237Long-lived
                  assets
              
              
              8,239
              
              
              34
              
              
              8,273**December
                  31, 2006**
              
              ****Revenues
              
              $
              78,764
              
              $
              3,268
              
              $
              82,032Long-lived
                  assets
              
              
              8,887
              
              
              43
              
              
              8,930




**(18)  
        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-32
 AUDIBLE,
            INC. AND SUBSIDIARY
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS Table
              of Contents





**(19)  
       Quarterly Results (UNAUDITED)**




The
      following tables contain select unaudited quarterly consolidated financial
      data
      for each quarter of 2005 and 2006. The consolidated operating results for any
      quarter are not necessarily indicative of results for any future
      period.




**YEAR
                  ENDED DECEMBER 31, 2005****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue,
                  net
              
              $
              12,905
              
              
              15,297
              
              $
              16,771
              
              $
              18,264Cost
                  of content and services revenue
              
              
              4,754
              
              
              5,776
              
              
              6,316
              
              
              7,323Cost
                  of hardware revenue
              
              
              294
              
              
              301
              
              
              846
              
              
              1,493Cost
                  of related party revenue
              
              
              29
              
              
              44
              
              
              48
              
              
              135Gross
                  Margin
              
              
              7,828
              
              
              9,176
              
              
              9,561
              
              
              9,313Operations
              
              
              1,848
              
              
              2,275
              
              
              2,461
              
              
              2,771Technology
                  and development
              
              
              1,625
              
              
              1,843
              
              
              2,343
              
              
              2,428Marketing
              
              
              2,260
              
              
              2,935
              
              
              3,173
              
              
              5,019General
                  and administrative
              
              
              1,536
              
              
              1,689
              
              
              2,376
              
              
              2,765Total
                  operating expenses
              
              
              12,346
              
              
              14,863
              
              
              17,563
              
              
              21,934Income
                  before income taxes
              
              
              972
              
              
              890
              
              
              (238
              )
              
              (3,016
              )Net
                  income (loss)
              
              
              891
              
              
              823
              
              
              (187
              )
              
              (2,180
              )Net
                  income(loss) applicable to common shareholders
              
              $
              891
              
              $
              823
              
              $
              (187
              )
              $
              (2,180
              )Basic
                  net income (loss) applicable to common shareholders per common
                  share
              
              
              0.04
              
              $
              0.03
              
              $
              (0.01
              )
              $
              (0.09
              )Diluted
                  net income (loss) applicable to common shareholders per common
                  share
              
              
              0.03
              
              $
              0.03
              
              $
              (0.01
              )
              $
              (0.09
              )Basic
                  weighted average common shares outstanding
              
              
              24,008,188
              
              
              24,169,396
              
              
              24,291,008
              
              
              24,310,129Diluted
                  weighted average common shares outstanding
              
              
              26,117,932
              
              
              25,987,000
              
              
              24,291,008
              
              
              24,310,129




**YEAR
                  ENDED DECEMBER 31, 2006****1st
                  Quarter**
              
              **2nd
                  Quarter**
              
              **3rd
                  Quarter**
              
              **4th
                  Quarter**Revenue,
                  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
              
              
              25,575Loss
                  before income taxes
              
              
              (3,037
              )
              
              (2,179
              )
              
              (2,522
              )
              
              (1,697
              )Net
                  loss
              
              
              (3,040
              )
              
              (2,182
              )
              
              (2,525
              )
              
              (933
              )Net
                  loss applicable to common shareholders
              
              
              (3,040
              )
              
              (2,182
              )
              
              (2,525
              )
              
              (933
              )Basic
                  net loss applicable to common shareholders per common
                  share
              
              
              (0.12
              )
              
              (0.09
              )
              
              (0.10
              )
              
              (0.04
              )Diluted
                  net loss applicable to common shareholders per common
                  share
              
              
              (0.12
              )
              
              (0.09
              )
              
              (0.10
              )
              
              (0.04
              )Basic
                  and diluted weighted average common shares outstanding
              
              
              24,481,751
              
              
              24,501,629
              
              
              24,348,938
              
              
              24,158,857




**(20) Subsequent
      Events**





In
      January 2007, the Company entered
      into amended and restated employment agreements with the Chief Executive Officer
      (“CEO”) and the Chief Operating Officer (“COO”). The CEO employment agreement
      provides for a bonus in the form of a stock award of 25,000 shares each year
      under the Company’s Stock Incentive Plan, as well as, additional grants of
      20,000 restricted stock units and an option to purchase 60,000 shares of common
      stock under the Plan on the first business day of each of 2007, 2008 and 2009.
      The COO employment agreement provides an award of 50,000 restricted stock units
      and an award of 25,000 restricted stock units.







F-33