Annual Report

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

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. ¨

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates of the registrant, based upon the closing price of our common stock on June 30, 2005 as reported on the NASDAQ National Market, was approximately $443.0 million.

As of February 15, 2006, there were approximately 27,778,000 shares of the registrant’s Common Stock outstanding.

Portions of the Registrant’s definitive Proxy Statement for the 2006 annual meeting of stockholders are incorporated by reference in Part II and Part III of this Form 10-K. The definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which the report relates.

This annual report on Form 10-K contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will,” or the negative of such terms, or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks outlined under Item 1A “Risk Factors” and elsewhere in this report, that may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Particular attention should also be paid to the cautionary language in those sections of this annual report captioned: Item 1: Business; Item 3: Legal Proceedings; Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Item 7A: Quantitative and Qualitative Disclosures About Market Risk. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.

The following discussion about our business includes forward-looking statements. Actual results could differ from those projected in the forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” above.

We are a multi-national company offering a range of products and services for the retailers’ storefront consisting of self-service coin counting; electronic payment (“e-payment”) services such as stored value cards, payroll cards, prepaid MasterCard^® cards and prepaid wireless products; and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. We call our focus on the retailers’ storefront the 4^th Wall™ solution. Providing a combination of 4^th Wall products and services which are convenient, reliable, safe and fun greatly expands our opportunity to cross-sell these products and services. We also offer a range of point-of-sale terminals, stand-alone e-payment kiosks and e-payment enabled coin-counting machines in drugstores, universities, shopping malls, supermarkets and convenience stores in the United States and the United Kingdom. Due to our recent strategic investments with Video Vending New York, Inc. (d.b.a. “DVDXpress”) and Redbox Automated Retail, LLC (“Redbox”), we are now able to offer self-service DVD kiosks where consumers can rent or purchase movies.

Our 2004 acquisition of ACMI Holdings, Inc. and its subsidiaries (collectively referred to as “ACMI”), our 2005 acquisition of The Amusement Factory L.L.C. (“Amusement Factory”), our strategic investments with DVDXpress and Redbox, as well as the continued growth of our e-payment services has significantly broadened our base of existing and potential retail partners and the depth and reach of our sales and field service forces, providing greater opportunity to cross-sell our coin, entertainment and e-payment services. We now have more than 1,350 field service employees throughout the United States and internationally, who have broadened our geographic reach to develop and maintain strong relationships with new and existing retail partners. With the combination of coin, entertainment and e-payment services, we are positioned as a single-source supplier for retailers to capitalize on the 4^th Wall, an area between the cash registers and front door of retail locations that in the past, has generally not been managed to optimize revenue per square foot.

inception, our coin-counting machines have counted and processed more than 260 billion coins worth more than $13.0 billion in more than 370 million self-service coin-counting transactions. We now own and operate more than 12,800 coin-counting machines in the United States, Canada and the United Kingdom and more than 320,000 entertainment services machines in the United States and Mexico. We also utilize more than 19,300 point-of-sale terminals and own and operate approximately 360 stand-alone e-payment kiosks for e-payment services in the United States and the United Kingdom. In addition, approximately 5,800 of our 12,800 coin-counting machines are e-payment enabled.

We are headquartered in Bellevue, Washington, where we maintain most of our sales, marketing, research and development, quality control, customer service operations and administration. In addition, our main entertainment services office is located in Louisville, Colorado. As of December 31, 2005, we had approximately 2,000 employees. We believe our employee relations are good. We were incorporated in Delaware on October 12, 1993.

We are the leader in the self-service coin-counting services market. We own and operate the only multi-national fully automated network of self-service coin-counting machines across the United States, in Canada, Puerto Rico and in the United Kingdom. We estimate that at any one time, there is approximately $10.5 billion worth of coin sitting idle in households in the United States. In 2005, consumers processed more than $2.3 billion worth of coin through our coin-counting machines.

We own and service all of our coin-counting machines, providing a “turn-key, headache-free” service to retailers. Our machines are easy to use, highly accurate, durable, easy to service and capable of processing up to 600 coins per minute. Consumers feed loose change into the machines, which count the change and then dispense vouchers or, in some cases, issue e-payment products, at the consumer’s election. Each voucher lists the dollar value of coins counted, less our transaction fee, which is typically 8.9% of the value of each coin to cash transaction. Our patented, proprietary technology helps us to maintain high up-time, remotely monitor performance and minimize the potential for losses associated with voucher fraud.

Since we pay a percentage of our transaction fees to our retail partners, our coin services benefit our retail partners by providing an additional source of revenue. In addition, third party studies show that our coin services increase foot traffic in our retail partners’ stores and that approximately 45% of our customers spend all or a part of the proceeds of their vouchers in the store. Our leading coin services retail partners include The Kroger Co. and Albertson’s, Inc. supermarket chains.

We estimate that the market for our entertainment services is approximately $1.1 billion in the United States. We are the leading owner and operator of skill-crane and bulk vending machines in the United States.

Our entertainment services machines consist primarily of skill-crane machines, bulk vending and kiddie rides, which are installed in more than 33,000 retail locations, totaling more than 320,000 pieces of equipment. The majority of our entertainment services revenue is derived from skill-crane machines that dispense plush toys, novelties and other items. For each play, customers maneuver the skill-crane into position and attempt to retrieve the desired item in the machine’s enclosed display area before play is ended. We utilize displays of quality merchandise, new product introductions and other merchandising techniques to attract new and repeat customers. Our leading entertainment services partners include Wal-Mart, Inc. and Kmart, a subsidiary of Sears Holdings Corporation.

Since we pay our retail partners a portion of the fee per play, our entertainment services machines, like our coin-counting machines, provide an additional revenue stream for our retail partners. In addition, our

entertainment services machines add an element of entertainment for consumers. As with our coin services business, we own and service all of our entertainment services machines, providing a convenient and trouble free service to retailers.

We estimate that the e-payment services market is approximately $5.0 billion in the United States. We offer e-payment services, including loading prepaid wireless accounts, loading and reloading stored value cards, reloading prepaid MasterCard^® cards and prepaid phone cards and providing payroll card services. We believe these and other e-payment services represent a significant growth opportunity for us. We offer various e-payment services through point-of-sale terminals, stand-alone e-payment kiosks and e-payment-enabled coin-counting machines in supermarkets, drugstores, universities, shopping malls and convenience stores. These services provide an easy way for consumers to perform a variety of useful transactions without having to obtain a bank account or credit card. Our key e-payment services partners include Albertson’s, Inc. supermarket chain and Walgreens Co. and CVS Corporation drug stores.

We generate revenue for ourselves and pay our retail partners a fee through our commissions earned on the sales of e-payment services. We have relationships with national wireless carriers, such as Sprint, Verizon, T-Mobile, Virgin Mobile and Cingular Wireless.

Market leadership. We are the market leader in the self-service coin-counting services market and in the skill-crane and bulk vending markets. We own and operate the only multi-national fully automated network of self-service coin-counting machines in the United States, Canada and the United Kingdom. To date, we have installed more than 12,800 of our coin-counting machines in those countries, which account for approximately 80% of the installed base in those markets. Currently, we estimate that 75% of the US population lives within five miles of one of our coin-counting machines. We estimate that there is $10.5 billion worth of coin sitting idle in US households alone. Our coin-counting machines provide consumers with a convenient and reliable means of converting loose coins into cash. In addition, we are the leading owner and operator of skill-crane and bulk vending machines in the United States, with more than 320,000 pieces of equipment installed in more than 33,000 retail locations.

Profitable, turn-key solutions for our retail partners. We own, operate and maintain all of our machines and provide our retail partners with low-maintenance, turn-key solutions and revenue-generating services. In addition, our array of services allows retailers to work with a single-source provider for key front-of-store needs. Our studies show that our coin-counting machines increase foot traffic to host stores, and that approximately 45% of customers spend all or a part of the proceeds of their vouchers in the retail partner’s store. Retail partners also receive a portion of our revenues from our coin, entertainment and e-payment services transaction fees. We believe that these sources of revenue are very attractive to retailers. For example, our self-service coin-counting machines and skill-crane machines generate five to eight times the supermarket average for profitability per square foot, among the most profitable per square foot in a supermarket, compared to the supermarket average reported in an independent survey.

Differentiating, patented coin services technology. We believe that our proprietary technology sets us apart from our competitors. We have over 60 United States and international patents covering various aspects of our coin services business, including our networked coin-counting machines, coin-cleaning technology and voucher security features. Our coin-counting machines have a multi-step coin-cleaning process to remove debris, which helps prevent our equipment from becoming jammed. Our network allows our field service team to remotely monitor each individual coin-counting machine, thereby allowing us to optimize pickup of coins for

maximum efficiency and perform maintenance on a cost-effective basis. These proprietary features allowed us to achieve availability rates on our coin-counting machines of approximately 95% in 2005, which underscores our reputation for providing reliable service. Our vouchers are encrypted using our proprietary technology to minimize the potential for losses associated with voucher fraud. We believe that the combination of our proprietary technology and reliable machine performance results in a preference for our services compared to our competitors.

Barriers to entry. We believe that our proprietary network of coin-counting machines combined with our wide geographic reach and existing relationships with our coin and entertainment services retail partners, would require a substantial investment of time and resources for other companies to enter the market and compete effectively against us in the self-service coin-counting and entertainment services markets. In the last 12 years, we have invested more than $340 million in capital equipment and research and development to build our coin-counting network, and believe that this investment represents a significant competitive barrier to entry. The scale and size of our entertainment services operations allows us to achieve better economies of scale and provide higher quality merchandise in our machines, which we believe increases usage, resulting in higher revenues for us and our retail partners. We believe that any potential competitors in the skill-crane and bulk vending markets would need to invest significant capital and secure relationships with large scale retailers in order to challenge our leadership in those markets. In addition, we believe that our existing relationships with retail partners and a broad range of product offerings in our e-payment business gives us a competitive edge in the e-payment services space.

Consistent and diversified revenue streams and stable operating cash flow. Our revenues and operating cash flows have increased each year for the last seven years. Our diversified revenue streams are mainly driven by the service fees we charge our customers and the size and number of customer transactions. For example, in our coin services business, the average transaction value over the last five years has remained stable at approximately $36, while the annual number of transactions has grown from 35 million in 2000 to 62 million in 2005. A large proportion of our costs are variable, which allows us to maintain stable operating cash flows while responding to changes in the business.

Leadership of the 4^th Wall space. There is an area between the cash registers and the front door of retail locations that we call the 4^th Wall space, where many convenient and profitable consumer services are located. We are a leader in providing consumer products and services in this space and our leadership in this area positions us to continue to drive growth through the front of the store as well as differentiates us from other suppliers. Our 4^th Wall strategy has been the focus of our business development and acquisition strategy over the past two years and will continue to drive our growth as we move forward.

Product and service expansion. In less than two years, we have transitioned from a one-product company offering coin-counting services to a business with a variety of products and services for the 4^th Wall. We now offer self-service coin counting, e-payment services and entertainment services. In addition, through our strategic investments in DVDXpress and Redbox, we now offer DVD rentals through self-service kiosks. Additionally, our Coin to Card™ program, where customers receive gift cards instead of cash vouchers from our coin machines, is an example of how we are beginning to leverage our coin-counting network driving incremental transactions. We expect to continue to add products and services to our existing kiosk businesses through our acquisitions, strategic alliances and product line extensions, as well as explore other services designed to drive traffic to the front end of retail locations, the 4^th Wall.

Place more units. We expect continued growth through new distribution; both new channels and cross-selling activity among the products and services we offer. At December 31, 2005, we had more than 65,000 retail

locations representing a variety of channels including supermarkets, mass merchants, drug stores, convenience stores, truck stops, and restaurants. A new channel that we expect to grow in the coming year is banks and credit unions. This is a natural extension for our coin-counting business and is a prime channel for consumers to adopt our service. With our vast distribution network, we also continue to focus on cross-selling opportunities. We believe that combining our coin, e-payment and entertainment sales teams and our 4^th Wall product portfolio positions us to see continued results from our cross-selling efforts.

Stronger customer relationships. We continue strengthening existing and building new relationships with retail customers through our 4th Wall category management program. We believe our unique program and category management expertise clearly sets us apart from other suppliers at the front end of the store. Our 4^th Wall strategy gives us the ability to work closely with our customer base to consolidate and introduce new services, while increasing store profits for the retailer. We believe the 4^th Wall of retail locations has long been under-utilized and believe our 4^th Wall strategy is a competitive advantage that will drive our growth in the retail environment for years to come.

International growth. During 2005, we expanded in Puerto Rico with our coin-counting business and in Mexico with our entertainment services. We continue to grow in these regions as well as in the United Kingdom, one of our more established international markets. In 2006, we expect to continue exploring opportunities in countries where we currently have distribution, as well as other countries where we see opportunities for growth, including Asia Pacific and Europe.

Grow through acquisitions. We continue to explore opportunities to acquire companies and assets in order to strengthen our position in existing markets and to add complementary products and services to offer to both our retail partners and consumers. We believe that future acquisitions may enable us to further leverage our field service team and existing retail relationships thereby improving margins and expanding the geographic reach of our products and services.

The segment and geographic information required herein is contained in Note 16 to our Consolidated Financial Statements “Business Segment Information” in Part IV, Item 15(A) of this Annual Report on Form 10-K.

We file annual, quarterly and current reports (including amendments), as well as registration and proxy statements and other information, with the SEC. These documents are available free of charge on our website at www.coinstar.com under: About Us—Investor Relations—SEC Filings. In addition, copies of these reports and other information may be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. You can get further information about the SEC’s Public Reference Room by calling 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, registration statements and other information regarding registrants like us that file electronically with the SEC.

Factors That May Affect Our Business, Future Operating Results and Financial Condition

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only risks facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed, the trading price of our common stock could decline and you could lose all or part of your investment.

Certain statements in the risks described below are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results performance, or achievements. Forward-looking statements can be identified by the use of terminology such as “believe,” “anticipate,” “expect,” “estimate,” “future,” “may,” “will,” “seek,” “should,” “project,” “potential,” “continue,” “plans,” “intends,” “likely,” or other similar words or phrases. Except for historical matters, the matters discussed in this Annual Report on Form 10-K and other statements or filings made by Coinstar from time-to-time may be forward-looking statements. We caution you that forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. We are including this Cautionary Statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any such forward-looking statements.

The termination, non-renewal or renegotiation on materially adverse terms of our contracts with any one or more of our significant retail partners could seriously harm our business, financial condition and results of operations.

We derive substantially all of our revenue from two sources: coin-counting machines installed in high traffic supermarkets and entertainment services machines installed in supermarkets, mass merchandisers, restaurants, bowling centers, truckstops, warehouse clubs and similar locations. The success of our business depends in large part on our ability to maintain contractual relationships with our existing retail partners in locations where we can operate profitably. If we are unable to maintain or renew such contracts with our existing retail partners, our business, financial condition and results of operations could be significantly impaired. For example, our coin and entertainment services agreements with Wal-Mart, Inc. and the Kroger Company account for approximately 25.3% and 10.5% of our consolidated revenue, respectively. If we are unable to provide existing retail partners like Wal-Mart and Kroger with direct and indirect benefits that are superior to or competitive with other systems (including coin-counting systems which the retail partners could operate themselves or through a third party) or alternative potential uses of the floor space that our machines occupy, we may encounter difficulties maintaining existing retailer relationships.

We typically operate pursuant to separate agreements with each of our retail partners. Our typical contract is for a set term, which typically ranges from one to three years and automatically renews until we or our partner gives notice of termination before a certain time prior to the end of the initial term or renewal period. Certain contract provisions with some of our retail partners vary, including product offerings, the service fee we pay each retail partner, frequency of service, and the ability to cancel the contract upon notice after a certain period of time. Our entertainment services relationship with Wal-Mart, Inc. is governed by a contract that Wal-Mart, Inc. may terminate at any time. Cancellation of this contract would seriously harm our business and reputation.

We may be unable to continue to pay our retail partners a service fee that allows us to operate our coin-counting and entertainment services machines at historical levels of profitability.

We have faced and continue to face ongoing pricing pressure from our current retail partners to increase the service fee we pay to them on coin and entertainment services or to make other financial concessions to win or retain business. If we are unable to respond effectively to ongoing pricing pressures, we may fail to retain certain of our retail partners. These fee arrangements are based on our evaluation of certain unique factors with the retailer, such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, or other criteria. Together with other factors, these arrangements could significantly increase our expenses relative to coin services in future periods.

We may be unable to attract new retail partners and penetrate new markets and distribution channels.

In order to continue our coin-counting and entertainment services machine installation growth, we will need to attract new retail partners and develop operational or unit production cost efficiencies that make it feasible for us to penetrate lower density markets and/or new distribution channels. We may be unable to attract new retail partners or drive down costs relating to the manufacture, installation or servicing of coin-counting or

entertainment services machines to levels that would enable us to operate profitably in lower density markets. If we are unable to do so, our future operating results could be adversely affected.

We may be unable to identify and define product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner.

To be competitive, we need to develop new services that are accepted by the market and establish third-party relationships necessary to develop and commercialize such services. For example, toy and other products dispensed in our entertainment services machines must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. If we misjudge the market for our toy products, we may be faced with significant excess inventories for some products and missed opportunities for other products. In addition, because we place orders for toy products well in advance of purchases by consumers, we could experience excess inventory if our consumers purchase fewer products than anticipated. In order to develop and commercialize new non-entertainment vending products or services, we will need to enhance the capabilities of our coin-counting and entertainment services machines and our network and establish market acceptance of such products or services. We cannot assure you that new or additional products or services that we may attempt to commercialize will be successful.

We may be unable to achieve the strategic and financial objectives for our entry into the entertainment services business, and our failure to do so could materially and adversely affect our business, operating results and financial condition.

We first entered the entertainment services business as a result of our acquisition of ACMI on July 7, 2004. Since that time, we have further expanded this line of business through acquisitions, such as Amusement Factory. Our entertainment services business now represents our largest source of revenue. There are a number of financial and operational risks associated with our entry into this line of business.

For these and other reasons, we may be unable to achieve the strategic and financial objectives for our entry into the entertainment services business. Our failure to do so could materially and adversely affect our businesses, operating results and financial condition.

On July 7, 2004, we entered into a senior secured credit facility. The credit agreement provides for advances totaling up to $310.0 million, consisting of a $60.0 million revolving credit facility and a $250.0 million term loan facility. Since the debt inception, we have repaid $44.2 million of the debt outstanding. The credit facility bears interest at variable rates pegged to prevailing interest rates. As a result, our operating results are exposed to risks of fluctuations in interest rates. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. The credit facility matures on July 7, 2011.

This debt financing may limit our ability to effect future financings or may negatively impact our business, financial condition, results of operations and growth. Substantial financial leverage poses the risk that we may not be able to generate sufficient cash flow to service the indebtedness, or to adequately fund our operations. Moreover, the credit agreement governing our indebtedness contains financial and other covenants that could impair our flexibility to pursue growth opportunities. The credit agreement contains negative covenants and restrictions relating to such things as certain common stock repurchases, liens, investments, capital expenditures, indebtedness, cash payments of dividends, and fundamental changes or dispositions of our assets. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a maximum consolidated leverage ratio and a minimum interest coverage ratio, all as defined in the credit agreement. If the covenants are not met, our lenders would be entitled, under certain circumstances, to declare our indebtedness immediately due and payable.

Competitive pressures could seriously harm our business, financial condition and results of operations.

Our coin-counting business faces competition from supermarket retailers, banks and other companies that purchase and operate coin-counting equipment from companies such as ScanCoin AB, Cummins-Allison Corporation and others. Our current retail partners may choose to replace our coin-counting machines with competitor machines and operate such machines themselves or through a third party. In addition, retailers, some of which have significantly more resources than us, may decide to enter the self-service coin-counting business. Some banks and other competitors already provide coin-counting free of charge or for an amount that yields very low margins or that may not generate a profit at all. An expansion of the coin-counting services provided by any of these competitors could materially and adversely affect our business and results of operations.

Our entertainment services business faces competition from a number of regional and local operators of entertainment services equipment. Many of these competitors are engaged in expansion programs, and we have experienced and we expect to continue to experience intense competition for new locations and acquisition candidates. Our entertainment services equipment also competes with other vending machines, coin-operated entertainment devices, and seasonal and bulk merchandise for sites within retail locations. We cannot assure you that we will be able to maintain current sites in the retail locations or that we will be able to obtain sites in the future on attractive terms or at all. It is possible that a well-financed vending machine manufacturer or other vending machine operator with existing relationships with retail accounts could compete with us in certain markets or capture additional market share at our expense.

Defects, failures or security breaches in our coin-counting machines’ operating system could harm our business.

The operation of our coin-counting machines depends on sophisticated software, computing systems and communication services that may contain undetected errors or may be subject to failures. These errors may arise particularly when new services or service enhancements are added. We have in the past experienced limited delays and disruptions resulting from upgrading or improving our operating systems. Future upgrades or improvements that may be necessary to expand and maintain our business could result in delays or disruptions that could have the effect of seriously harming our operations. We also rely on a long distance telecommunication network that is not owned by us and is subject to service disruptions. Further, while we have

taken significant steps to protect the security of our network, security breaches may result from intentional acts of third parties or from computer viruses. Any service disruptions, whether due to errors or delays in our software or computing systems, interruptions or breaches in the communications network, or security breaches of the system, could seriously harm our business, financial condition and results of operations.

Lack of consumer confidence, whether real or perceived, in our coin-counting machines could harm our business.

The accuracy of the coin-counting functionality of our machines is important to consumers and our retail partners. The failure to maintain consumer confidence in our technology and systems could harm our business. Our inability to collect the data from our coin-counting machines could lead to a delay in processing coins and crediting the accounts of our retail partners for vouchers that have already been redeemed. Any loss or delay in collecting coin data could seriously harm our operations.

We may be unable to adequately protect or enforce our patents and other proprietary rights.

Our success depends, in part, on our ability to protect our intellectual property and maintain the proprietary nature of our technology through a combination of patents, licenses and other intellectual property arrangements, without infringing the proprietary rights of third parties. We have over 60 United States and international patents relevant to aspects of self-service coin-counting, including: machine networking, fraud avoidance and voucher authentication, among others. We also have additional patent applications pending in the United States and several foreign jurisdictions directed to this technology.

Our patents may not be held valid if challenged, pending patent applications may not be issued, and other parties may claim rights in or ownership of our patents and other proprietary rights. Since many patent applications in the United States are not publicly disclosed until the patent is issued, others may have filed applications, which, if issued as patents, could cover our products or technology. Patents issued to us may be circumvented or fail to provide adequate protection of our technologies. Our competitors might independently develop or patent technologies that are substantially equivalent or superior to our technologies.

We also rely on trademarks, copyrights, trade secrets and other proprietary intellectual property to develop and maintain our competitive position. Although we protect our intellectual property in part by confidentiality agreements with our employees, consultants, vendors and corporate partners, these parties may breach these agreements. We may have inadequate remedies for any such breach and our trade secrets may otherwise become known or be discovered independently by our competitors. The failure to protect our intellectual property rights effectively or to avoid infringing the intellectual property rights of others could seriously harm our business, financial condition and results of operations.

Certain parties may assert claims of patent infringement or misappropriation against us based on current or pending United States and/or foreign patents, copyrights or trade secrets, or contracts. If such claims were successful, our business could be harmed. Defending our company and our retail partners against these types of claims, regardless of their merits, could require us to incur substantial costs and divert the attention of key personnel. Parties making these types of claims may be able to obtain injunctive or other equitable relief, which could effectively block our ability to provide our coin-counting service and operate our coin-counting equipment in the United States and abroad. Such types of claims could also result in an award of substantial damages. If third parties have or obtain proprietary rights that our products infringe, we may be unable to obtain necessary licenses from others at a reasonable cost or at all. For example, we have from time to time engaged in discussions with a former supplier, ScanCoin AB, in an effort to clarify certain contract rights and obligations as well as ownership of certain of our intellectual property. In addition, if we instigate litigation to enforce our patents or protect our other proprietary rights, or to determine the validity and scope of other parties’ proprietary rights, such litigation could cause us to spend significant financial and management resources.

Acquisitions involve risks that could harm our business and impair our ability to realize potential benefits from such acquisitions.

As part of our business strategy, we have in the past sought and may in the future seek to acquire or invest in businesses, products or technologies that we feel could complement or expand our business. We may be unable to adequately address the financial, legal and operational risks raised by acquisitions, which could harm our business and prevent us from realizing the projected benefits of the acquisitions. Further, the evaluation and negotiation of potential acquisitions, as well as the integration of an acquired business, will divert management time and other resources. In addition, we cannot assure you that any particular transaction, even if successfully completed, will ultimately benefit our business. Certain financial and operational risks related to acquisitions that may have a material impact on our business are:

Our future operating results will depend significantly on our ability to continue to drive new and repeat consumer utilization of our coin-counting services and entertainment services equipment, our ability to develop and commercialize new products and services and the costs incurred to do so, and our ability to successfully integrate new lines of business into our operations. Our operating results have a history of fluctuating. Our future operating results also may fluctuate based upon several factors, including:

In addition, we have historically experienced seasonality in our coin services business, with highest revenues experienced in the third calendar quarter, followed by the fourth calendar quarter, and relatively lower revenues in the first half of the year. Our entertainment business has also experienced seasonality, with peak revenues in the fourth quarter and periods surrounding the Easter holiday season. While our entertainment services business may offset the historical seasonality of the coin-counting business to some degree, we expect our results of operations will continue to fluctuate both as a result of seasonal fluctuations and our revenue mix between relatively higher margin coin and e-payment services and relatively lower margin entertainment services.

Higher petroleum prices may adversely affect our operating results and reduce our profitability.

We source a substantial amount of goods, particularly plush toys and other products dispensed from our entertainment services machines, internationally resulting in significant transportation-related costs. Petroleum-based resins are used in the manufacture of these products. In addition, we operate a large number of vehicles used by our field service personnel for the purpose of servicing and maintaining our coin-counting and entertainment services machines. Significant increases in petroleum prices during 2005 have negatively impacted our results of operations. The cost of petroleum may continue to increase as a result of natural disasters, political and geopolitical issues and otherwise. Further increases could harm our financial condition and increases and decreases in fuel costs may have a significant affect on our operating margins.

We depend upon third-party manufacturers, suppliers and service providers.

We currently conduct limited manufacturing operations and depend, and will continue to depend, on outside parties to manufacture key components of our coin-counting and entertainment services machines. We intend to continue to expand our installed base for coin-counting machines in North America and in the United Kingdom and for entertainment services machines in the United States and Mexico. Such expansion may be limited by the manufacturing capacity of our third-party manufacturers and suppliers. Third-party manufacturers may not be able to meet our manufacturing needs in a satisfactory and timely manner. If there is an unanticipated increase in demand for coin-counting machine or entertainment services equipment installations, we may be unable to meet such demand due to manufacturing constraints.

We obtain some key hardware components used in the coin-counting machines and entertainment services equipment from a limited number of suppliers. We may be unable to continue to obtain an adequate supply of these components in a timely manner or, if necessary, from alternative sources. If we are unable to obtain sufficient quantities of components or to locate alternative sources of supply on a timely basis, we may experience delays in installing or maintaining coin-counting machines or entertainment services equipment, either of which could seriously harm our business, financial condition and results of operations.

We rely on third-party service providers for substantial support and service efforts that we currently do not provide directly. In particular, we contract with third-party providers to arrange for pick-up, processing and deposit of coins as well as limited servicing of our machines. We generally contract with a single transportation

provider and coin processor to service a particular region and either party generally can terminate the contracts with advance notice ranging from 30 to 90 days. We do not currently have, nor do we expect to have in the foreseeable future, the internal capability to provide back-up coin processing service in the event of a sudden disruption in service from a commercial coin processor. Any failure by us to maintain our existing coin processing relationships or to establish new relationships on a timely basis or on acceptable terms could harm our business, financial condition and results of operations.

There are risks associated with conducting our businesses and sourcing goods internationally.

We currently have coin operations in Canada and the United Kingdom. We also now have entertainment services equipment operating in Mexico. We expect to continue increasing our deployment of both coin-counting machines and entertainment services equipment internationally. Exposure to exchange rate fluctuations, restrictions on the repatriation of funds, adverse changes in tax, tariff and trade regulations, difficulties with foreign distributors and difficulties in managing an organization outside the United States are risks that could seriously harm the development of our business and ability to operate our machines profitably.

In addition, substantially all of the plush toys and other products dispensed from our entertainment services machines are produced by foreign manufacturers, including a majority purchased directly from manufacturers in China. We purchase our other vending products from vendors who obtain a significant percentage of such products from foreign manufacturers. As a result, we are subject to changes in governmental policies, the imposition of tariffs, import and export controls, transportation delays and interruptions, political and economic disruptions and labor strikes that could disrupt the supply and timely delivery of products from such manufacturers. A reduction or interruption in supplies or a significant increase in the price of one or more supplies necessary for our toy manufacture, such as petroleum, could have a material adverse effect on our business. We also could be affected by labor strikes in the sea shipping, trucking and railroad industries. Such disruptions could interrupt supplies or increase our transportation costs and thereby reduce profit margins in a particular period.

Our business, operating results and financial condition can be adversely affected by severe weather, natural disasters and other events beyond our control, such fires, power failures, telecommunications loss and terrorist attacks.

Our operational and financial performance is a direct reflection of customer use of and our ability to operate and service our coin-counting and entertainment services machines installed in retail and similar locations. Severe weather, natural disasters and other events beyond our control can, for extended periods of time, significantly reduce customer use of our machines as well as interrupt our own ability to manufacture, operate and service our machines. In some cases, severe weather, natural disasters and other events beyond our control may result in the total loss of our machines, which losses may not be fully covered by our insurance. For example, the hurricanes occurring in the gulf coast region of the United States in 2005 caused damage or operational interruptions to some of the retail and other locations where our machines are installed.

We are subject to federal, state, local and foreign laws and government regulation specific to our business.

Our current businesses are subject to federal, state, local and foreign laws and government regulation, including government regulation relating to coins, toy safety, child protection, vehicle safety, access to machines in public places, charitable fundraising, the transfer of money or things of value, weights and measures, gaming, sweepstakes, contests and consumer protection. The application of existing laws and regulations, changes in or enactment of new laws and regulations that apply or may in the future apply to our current or future products or services, changes in governmental authorities’ interpretation of the application of various government regulations to our business, or the failure or inability to gain and retain required permits and approvals could materially and adversely affect our business in the future. In addition, certain jurisdictions may also require us to hold certain licenses, permits and approvals in connection with the operation of our coin-counting and entertainment services

machines. For example, in Washington state, skill-crane machines are subject to the licensing requirements of the Washington State Gambling Commission. There can be no assurance that we will be granted all necessary permits or approvals in the future or that current permits and approvals will be renewed. Given the unique nature of our business and new products and services we may develop in the future, the application of various laws and regulations to our business is or in the future may be uncertain.

Recall of any of the products dispensed by our entertainment services machines or by the entertainment services industry generally could adversely affect our entertainment services business.

Our entertainment services machines, and the entertainment services industry generally, are subject to regulation by the Consumer Product Safety Commission and similar state and international regulatory authorities. The toys and other products dispensed from our entertainment services machines could be subject to involuntary recalls and other actions by such authorities. Concerns about product safety may lead us to voluntarily recall or discontinue offering selected products. Defects in any of our products distributed through our entertainment services machines could result in the rejection of our entertainment services products by consumers, damage to our reputation, lost sales, potential inventory valuation write-downs, excess inventory, diverted development resources and increased customer service and support costs, any of which could harm our business. Any such errors, defects or recalls may not be covered by insurance or cause our insurance costs to increase in future periods.

We may be subject to product liability claims if people or property are harmed by our products and services.

Some of the products we sell, especially through our entertainment services machines, may expose us to product liability claims arising from personal injury, death or property damage. Any such product liability claim may result in adverse publicity regarding us, our entertainment service machines and the products we sell. Even if we successfully defend ourselves against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses and our management could be required to spend valuable time in defending against these claims. Our vendors may not indemnify us against product liability. There is a risk that such claims or liabilities may exceed, or fall outside the scope of, our insurance coverage and we cannot be certain that insurance will continue to be available to us on economically reasonable terms, or at all. Any imposition of product liability could harm our business, financial condition and operating results.

Our stock price has fluctuated substantially since our initial public offering in July 1997. For example, during the last twelve months, the sale price of our common stock has ranged from $16.95 to $27.10 per share. The market price of our stock could decline from current levels or continue to fluctuate. The market price of our stock may be significantly affected by the following factors:

In addition, the securities markets have experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also seriously harm the market price of our common stock.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or prevent fraud.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent or detect fraud. Any inability to provide reliable financial reports or prevent or detect fraud could harm our business. We continue to evaluate our internal control procedures to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires management and our auditors to evaluate and assess the effectiveness of our internal controls. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we could be subject to regulatory scrutiny, civil or criminal penalties or shareholder litigation. In addition, failure to maintain adequate internal controls could result in financial statements that do not accurately reflect our financial condition.

Our anti-takeover mechanisms may affect the price of our common stock and make it harder for a third party to acquire us without the consent of our board of directors.

We have implemented anti-takeover provisions that may discourage takeover attempts and depress the market price of our stock. Provisions in our certificate of incorporation, bylaws and rights plan could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Delaware law also imposes some restrictions on mergers and other business combinations between us and any acquirer of 15% or more of our outstanding common stock. Furthermore, Washington law may impose additional restrictions on mergers and other business combinations between us and any acquirer of 10% or more of our outstanding common stock. These provisions may make it harder for a third party to acquire us without the consent of our board of directors, even if the offer from a third party may be considered beneficial by some stockholders.

Our corporate administrative, marketing and product development facility is located in a 46,070 square foot facility in Bellevue, Washington, under a lease that expires December 1, 2009.

Our entertainment services office is located in a 31,000 square foot facility in Louisville, Colorado, which is utilized for administrative, warehouse, pre-pack and field office functions. The lease for this facility expires on February 28, 2013.

We are subject to various legal proceedings and claims arising in the ordinary course of business. Our management does not expect that the results in any of these legal proceedings would have a material adverse effect on our financial position, results of operations or cash flows.

No matters were submitted to a vote of security holders during the fourth quarter of 2005.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the NASDAQ National Market under the symbol “CSTR.” The following table sets forth the high and low bid prices per share as reported by the NASDAQ National Market for our common stock for each quarter during the last two fiscal years. The quotations represent inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.

The last reported sale price of our common stock on the NASDAQ National Market on February 15, 2006 was $24.61 per share.

As of February 15, 2006, there were 141 holders of record of our common stock. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

We have never paid any cash dividends on our capital stock. We currently intend to retain all future earnings to fund development and growth of our business or retire debt obligations. In addition, we are restricted from paying dividends under our current credit facility and do not anticipate paying any dividends in the foreseeable future.

We did not sell any unregistered securities during our fiscal year ended December 31, 2005.

The information concerning securities authorized for issuance under our equity compensation plans is incorporated herein by reference to our 2006 Proxy Statement which we intend to file with the Securities and Exchange Commission not later than 120 days after the close of the fiscal year ended December 31, 2005.

The following selected financial data is qualified by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of Coinstar, Inc. and related Notes thereto included elsewhere in this Annual Report on Form 10-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis should be read in conjunction with the Financial Statements and related Notes thereto included elsewhere in this Annual Report on Form 10-K. Except for the consolidated historical information, the following discussion contains forward-looking statements. Actual results could differ from those projected in the forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” at the beginning of this annual report.

We are a multi-national company offering a range of 4^th Wall solutions for retailers’ storefront consisting of self-service coin counting; e-payment services such as stored value cards, payroll cards, prepaid MasterCard^® cards and prepaid wireless products; and entertainment services such as skill-crane machines, bulk vending machines and kiddie rides. These products and services are convenient, reliable, safe and fun. Providing a combination of 4^th Wall products and services greatly expands our opportunity to cross-sell these products and services. We also offer a range of point-of-sale terminals, stand-alone e-payment kiosks and e-payment enabled coin-counting machines in drugstores, universities, shopping malls, supermarkets and convenience stores in the United States and the United Kingdom. Due to our recent strategic investments in DVDXpress and Redbox, we are now able to offer self-service DVD kiosks where consumers can rent or purchase movies.

We launched our business in North America with the installation of the first Coinstar^® coin-counting machine in the early 1990s, and in 2001 we began offering our coin services in the United Kingdom. Since inception, our coin-counting machines have counted and processed more than 260 billion coins worth more than $13.0 billion in more than 370 million self-service coin-counting transactions. We now own and operate more than 12,800 coin-counting machines in the United States, Canada and the United Kingdom and more than 320,000 entertainment services machines in the United States and Mexico. We also utilize more than 19,300 point-of-sale terminals and own and operate approximately 360 stand-alone e-payment kiosks for e-payment services in the United States and the United Kingdom. In addition, approximately 5,800 of our 12,800 coin-counting machines are e-payment enabled.

Our strategy, embodied in our 4^th Wall concept, is based on cross-selling our full range of products and services to retailers in each of our historically separate products and services. In addition, we believe that we will increase operating efficiencies by combining and concentrating our products and services in our retail partners’ storefront. While the entertainment services market is relatively mature and has experienced slow growth, we believe that we have significant opportunities in combining it with self-service coin counting and e-payment services.

We expect to continue devoting significant resources to building our sales organization in connection with our 4^th Wall cross-selling strategy, adding administrative personnel to support our growing organization and developing the information technology systems and technology infrastructure necessary to support our products and services. We expect to continue evaluating new marketing and promotional programs to increase consumer utilization of our services as well as further expand our product research and development efforts.

We own and service all of our coin-counting machines. Consumers feed loose change into the machines, which count the change and then dispense vouchers or, in some cases, issue e-payment products, at the

consumer’s election. Each voucher lists the dollar value of coins counted, less our transaction fee, which is typically 8.9% of the value of each coin to cash transaction.

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to coin-in-machine and accrued expenses, property and equipment, stock-based compensation, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Cash and cash equivalents, cash in machine or in transit, and cash being processed: We consider all highly liquid securities purchased with a maturity at purchase of three months or less to be cash equivalents.

Cash in machine or in transit represents coin residing in our coin-counting or entertainment services machines, cash being processed by carriers, or cash deposits in transit. Cash being processed represents cash which we are obligated to use to settle our accrued liabilities payable to retailers. We have the contractual right and obligation to pick up and process all coins in our machines, although in certain circumstances, we may not be able to immediately access the coins until they have been deposited into one of our regional bank accounts.

We have estimated the value of our entertainment services coin-in-machine which was approximately $5.0 million and $4.4 million at December 31, 2005 and 2004, respectively. Coin-in-machine represents the cash deposited into our entertainment services machines at period end which has not yet been collected. Based on our estimate of coin-in-machine, we have recognized the related revenue, the corresponding reduction to inventory and increase to accrued liabilities which represents the direct operating expenses associated with the coin-in-machine estimate.

Inventory: Inventory, which consists primarily of plush toys and other products dispensed from our entertainment services machines, is stated at the lower of cost or market. The cost of inventory includes mainly the cost of materials, and to a lesser extent, labor, overhead and freight. Cost is determined using the average cost method. Inventory, which is considered finished goods, consists of purchased items ready for resale or use in vending operations.

Property and equipment: Property and equipment are depreciated in accordance with the methods disclosed in Note 2 to our Consolidated Financial Statements. We are depreciating the cost of our coin-counting and entertainment services machines over periods that range from 3 to 10 years and have determined that these lives are appropriate based on our analysis which included a review of historical data and trends, as well as other relevant factors. We will continue to evaluate the useful life of our coin-counting and entertainment services machines, as well as our other property and equipment as necessary, and will determine the need to make changes when and if appropriate. Any changes to the estimated lives of our machines may cause actual results to differ based on different assumptions or conditions.

Purchase price allocations: In connection with our acquisitions of our entertainment and e-payment subsidiaries, we have allocated the respective purchase prices plus transaction costs to the estimated fair values of assets acquired and liabilities assumed. These purchase price allocation estimates were based on our estimates of fair values and estimates from third-party consultants. Adjustments to our purchase price allocation estimates are made based on our final analysis of the fair value during the allocation period, which is within one year of the purchase date.

Goodwill and intangible assets: Goodwill represents the excess of cost over the estimated fair value of net assets acquired, which is not being amortized. We test goodwill for impairment at the reporting unit level on an annual or more frequent basis as determined necessary. SFAS No. 142 requires a two-step goodwill impairment test whereby the first step, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second test is not performed. The second step of the impairment test is performed when required and compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess. Based on the annual goodwill test for impairment we performed for the years ended December 31, 2005 and 2004, we determined there is no impairment of our goodwill.

Our intangible assets are comprised primarily of retailer relationships acquired in connection with our acquisition of ACMI in 2004, Amusement Factory in 2005 and other smaller acquisitions during 2004 and 2005.

A third-party consultant used expectations of future cash flows to estimate the fair value of the acquired retailer relationships. We amortize our intangible assets over their expected useful lives, which range from 3 to 10 years.

Fees paid to retailers: Fees paid to retailers relate to the amount we pay our retail partners for the benefit of placing our machines in their stores and their agreement to provide certain services on our behalf to our customers. The fee is calculated as a percentage of each coin-counting transaction or as a percentage of our entertainment revenue and is recorded in our consolidated income statement under the caption “direct operating expenses.” The fee arrangements are based on our evaluation of certain factors with the retailers such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, co-op marketing incentive or other criteria. We recognize this expense at the time we recognize the associated revenue from each of our customer transactions. This expense is recorded on a straight-line basis as a percentage of revenue based on estimated annual volumes. In certain instances, we prepay amounts to our retailers, which are expensed over the contract term. The expense is included in depreciation and other in the accompanying consolidated statements of operations and cash flows.

Stock-based compensation: We have several stock-based compensation programs which are described more fully in the Notes to our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. We account for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. If we had determined compensation cost for our stock-based compensation consistent with the method prescribed in SFAS No. 123, Accounting for Stock-Based Compensation, our net income would have decreased by $4.6 million in 2005, $4.8 million in 2004 and $5.0 million in 2003. We have adopted SFAS 123(R) as of January 1, 2006.

Recent accounting pronouncements: In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS 123(R)”). SFAS 123(R) addresses the accounting for stock options and other stock-based compensation. SFAS 123(R) eliminates the option of accounting for employee stock options using the intrinsic value provisions of APB Opinion No. 25 and related interpretations, and requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. In April 2005, the SEC delayed the effective date of SFAS 123(R) until January 1, 2006 for calendar year companies. Accordingly, beginning January 1, 2006, we will expense the fair value of all stock-based compensation over the vesting period of the related equity instrument. In addition, SFAS 123(R) will require the Company to reflect the tax savings resulting from tax deductions in excess of expense reflected in its financial statements as a financing cash flow, which will impact the Company’s future reported cash flows from operating activities. Our employee stock-based compensation plans include stock options and restricted stock awards. Stock-based compensation expense amounts recognized going forward will be based on the unvested options and awards granted prior to January 1, 2006, and impacted by future grants and modifications. The impact of adoption of SFAS 123(R) on our results of operations may vary greatly depending on the number of stock options and restricted stock awards granted and the future price of our common stock. However, management currently anticipates that, based on a range of estimated prices of our common stock and current expectations of the number of shares that may be awarded, stock-based compensation expense during the year ending December 31, 2006 will be similar to our current and prior period proforma disclosures.

Certain reclassifications have been made to the prior year balances to conform with the current year presentation.

The following table shows revenue and expenses as a percent of revenue for the last three years:

Revenues increased year over year to $459.7 million in 2005 from $307.1 million in 2004 and $176.1 million in 2003. Our revenue grew as a result of two primary factors, the acquisition of entertainment and e-payment subsidiaries during 2004 and 2005 and an increase in coin-counting activity due to a greater number of installed machines, and increased trial and repeat usage.

We acquired ACMI in July 2004. Due to the timing of this acquisition, approximately $100 million of the year over year revenue growth is directly attributed to our acquisition of this business. Our year over year revenues from our entertainment subsidiaries was $239.1 million during 2005 and $111.1 million during 2004, the first year we had entertainment revenue. Adjusting for the timing of our acquisitions, entertainment revenues were relatively flat from 2004 to 2005. We believe this is due to the maturity of this industry as well as lack of increased foot traffic at our retail partners’ locations.

Revenue for our coin and e-payment services increased year over year to $220.6 million during 2005, a 12.6% increase from $196.0 million in 2004. Revenues in 2004 increased 11.3% from revenues of $176.1 million in 2003. The total dollar value of coins processed through our network increased to approximately $2.3 billion during 2005 from $2.2 billion in 2004 and $2.0 billion in 2003. Additionally, the total coin-counting machine installed base at December 31, 2005, 2004 and 2003 was approximately 12,800, 12,100 and 10,700 respectively. The increase in the number of machines coupled with the timing of those installations, as well as the increased usage of our existing machines, accounted for the majority of this increase in revenue. We expect to continue installing additional coin and e-payment machines and therefore, expect this trend to continue in the foreseeable future.

Direct operating expenses for our 4^th Wall product and service offerings consist of expenses associated with our coin-counting, entertainment services and e-payment services operations and support, as follows:

For coin services and e-payment services, these expenses consist primarily of the cost of (1) the percentage of transaction fees we pay to our retail partners, (2) coin pick-up, transportation and processing expenses

and (3) field operations support and related expenses. Variations in the percentage of transaction fees we pay to our retail partners may result in increased expenses. Such variations are based on our evaluation of certain factors with the retailer, such as total revenue, e-payment capabilities, long-term non-cancelable contracts, installation of our machines in high traffic and/or urban or rural locations, new product commitments, or other criteria.

For entertainment services, these expenses consist primarily of (1) the fees we pay our retail partners as commissions and for the placement of machines, (2) the cost of plush toys and other products dispensed from the skill-crane and bulk-vending machines and (3) field operations support and related expenses.

Direct operating expenses increased to $309.2 million during the year ended December 31, 2005 from $186.9 million during 2004 and $78.6 million during 2003. Direct operating expenses increased primarily due to expenses incurred to support our increased year over year revenues and the acquisitions of our entertainment businesses. The addition of our entertainment companies to our 4^th Wall products and services offerings has added inventory and related freight cost to our direct operating expenses, which we do not incur operating our coin-counting services. Direct operating expenses as a percentage of revenue increased year over year to 67.2% during 2005, from 60.9% during 2004 and 44.6% during 2003, mainly from the addition of our entertainment subsidiaries which represented about 52% of our total revenue during 2005. This increase is mainly due to our entertainment business which has higher ongoing direct operating costs as a percentage of revenue than our coin business. We are in the process of integrating our various business operations and expect to realize some operating expense efficiencies as a percentage of revenue during 2006.

Our marketing expenses consist primarily of marketing, advertising and public relations efforts in existing market regions and startup marketing expenses incurred to launch our services in new regional markets.

Marketing expenses decreased to $10.7 million during the year ended December 31, 2005 from $12.9 million during 2004 and $13.2 million during 2003. We have been directing most of our advertising dollars toward regional broadcasting and promotions as we introduce e-payment features on our coin-counting machines and other e-payment product channels like our gift card mall offerings. Our regional introduction of e-payment products enables us to use cost effective regional marketing strategies rather than more expensive national marketing campaigns. This directed marketing and advertising approach continues driving increased trial and repeat usage of both our coin services offering and e-payment products. Since our revenues have significantly increased primarily due to our acquisition of ACMI in 2004, and our marketing expenditures have decreased, marketing as a percentage of revenue decreased to 2.3% from 4.2% during 2004 and 7.5% during 2003.

Our research and development expenses consist primarily of development costs of our coin-counting machine software, network applications, machine improvements and new product development.

Research and development expenses have remained relatively consistent. Our research and development expenses were $5.7 million during the year ended December 31, 2005, $5.5 million during 2004 and $5.8 million during 2003. Research and development expenses represent expenditures to support development and design of complementary new product ideas and continue our ongoing efforts to enhance our existing products and services, primarily our coin-counting system. It is our intent to continue to invest in research and development in the coming years. Over the last two years we have also acquired some technology related to our entertainment business. We have capitalized these costs as intangible assets. Since revenues have increased significantly and our research and development expenditures remained relatively consistent, research and development as a percentage of revenue has been decreasing to 1.2% during 2005 from 1.8% during 2004 and 3.3% during 2003.

Our general and administrative expenses consist primarily of administrative support for field operations, customer service, systems and engineering support, computer network operations, finance, human resources, occupancy expenses, legal expenses and insurance.

General and administrative expenses increased to $36.6 million during the year ended December 31, 2005, from $27.5 million during 2004 and $19.3 million during 2003. We attribute the year over year increases to our acquisition of entertainment subsidiary companies over the last two years and the related costs of providing administrative support to our subsidiary businesses. Our increased general and administrative expenditures represent the incremental cost of supporting subsidiary companies with regional offices throughout the United States. These costs include, among others, the expenditures incurred for consulting fees relating to Sarbanes-Oxley and our internal compliance costs, including documentation and testing. Our Sarbanes-Oxley 404 internal control compliance costs totaled approximately $2.0 million in 2005 and $1.5 million in 2004. In 2003 we incurred an insignificant amount of compliance expenses, mainly internal costs to plan and document our internal control compliance strategy. General and administrative expense as a percentage of revenue has decreased to 8.0% during 2005 from 8.9% during 2004 and 11.0% during 2003. This is due to efficiency realized from integrating some of our administrative processes and support across our subsidiary companies. For the forseeable future, we will continue to strive for additional synergies as a result of efficiencies gained from our integrations.

Our depreciation and other expenses consist primarily of depreciation charges on our installed coin-counting and entertainment services machines and depreciation on computer equipment and leased automobiles.

Depreciation and other expense increased to $45.3 million during the year ended December 31, 2005, from $35.3 million during 2004 and $27.0 during 2003. Depreciation expense increased each year primarily due to our increased installed entertainment machine counts from the acquisitions of our subsidiary companies. Depreciation and other expense as a percentage of revenue decreased to 9.9% during 2005 from 11.5% during 2004 and 15.3% during 2003.

Our amortization expense consists of amortization of intangible assets including retailer relationships that were valued in connection with our acquisitions.

Amortization of intangible assets increased to $4.6 million during the year ended December 31, 2005, from $2.0 million during 2004 and $0.1 million during 2003. Amortization expense of intangible assets increased due to our acquisitions of subsidiary companies in 2005 and 2004. Our intangible assets are mainly composed of the value assigned to acquired retailer relationships and to a lesser extent acquired internally developed software from acquisitions of our subsidiary companies. Amortization expense as a percentage of revenue increased to 1.0% during 2005 from 0.7% during 2004 and 0.1% during 2003.

Interest income and other, net, increased to $1.8 million during the year ended December 31, 2005, from $0.5 million during 2004 and $0.3 million during 2003. The increase in interest and other income is mainly due to an increase of interest earned on investments due to increased interest rates throughout the year and higher average investment balances, as well as net income from equity investments.

Interest expense increased to $12.9 million during the year ended December 31, 2005 from $6.3 million during 2004 and $1.2 million during 2003. The increase is due to the full year recognition of interest expense

during 2005 on our outstanding debt. During July of 2004 we entered into a $310.0 million credit facility in order to finance our acquisition of ACMI. As of December 31, 2005, $205.8 million is outstanding on our term loan.

The effective income tax rate was 39.0% in 2005 compared with 33.3% in 2004 and 37.2% in 2003. The lower effective tax rate in 2004 was primarily due to change in the valuation allowance for our deferred tax asset and the recognition of net deferred tax assets at an adjusted rate. The effective income tax rates for 2005 vary from the federal statutory tax rate of 35% primarily due to state income taxes. The effective income tax rates for 2004 and 2003 vary from the federal statutory tax rate of 35% primarily due to change in valuation allowance for deferred tax asset and recognition of net deferred tax assets at an adjusted rate and state income taxes.

Our business involves collecting and processing large volumes of cash, most of it in the form of coins. We present three categories of cash on our balance sheet: cash and cash equivalents, cash in machine or in transit, and cash being processed.

As of December 31, 2005, we had cash and cash equivalents, cash in machine or in transit, and cash being processed totaling $175.3 million, which consisted of cash and cash equivalents immediately available to fund our operations of $45.4 million, cash in machine or in transit of $60.1 million and cash being processed of $69.8 million. Cash in machine or in transit represents coin residing in our coin-counting or entertainment services machines or being processed by carriers which is not immediately available to us until it has been collected and deposited. Cash being processed represents coin residing in our coin-counting or entertainment services machines or being processed by carriers which we are mainly obligated to use to settle our accrued liabilities payable to our retailer partners. Working capital was $101.7 million at December 31, 2005, compared with $105.5 million at December 31, 2004. The decrease in net working capital was primarily the result of cash paid for acquisitions and investments during 2005 offset, to a lesser degree, by cash generated by our operations

Net cash provided by operating activities was $103.1 million for the year ended December 31, 2005, compared to net cash provided by operating activities of $60.6 million for the year ended December 31, 2004. Cash provided by operating activities increased as a result of an increase in net income of $1.9 million; an increase in cash provided by our operating assets and liabilities of $21.5 million, mainly due to the timing of payments to our retail customers and an increase in cash provided from a net increase of non-cash transactions on our consolidated income statement of $18.1 million, mostly from increases in depreciation expense and amortization of intangible assets acquired from acquisitions of subsidiaries.

Net cash used by investing activities for the year ended December 31, 2005 was $84.6 million compared to $278.9 million in the prior year period. During 2005 net cash used by investing activities consisted of net equity investments of $20.3 million, acquisitions of subsidiaries of $20.8 million and net capital expenditures of $43.5 million. Comparatively, during 2004 net cash used by investing activities consisted primarily of our acquisition of ACMI for $227.8 million, acquisitions of other subsidiaries of $8.6 million and net capital expenditures of $42.6 million, mainly to purchase coin-counting and entertainment service machines.

Net cash provided by financing activities for the year ended December 31, 2005 was $1.8 million compared to $274.3 million in the prior year period. During 2005 net cash provided by financing activities represented cash received from the proceeds of employee stock option exercises net of cash used to make principal payments on debt. During 2004 we refinanced an existing credit facility by retiring $7.8 million of outstanding debt with funds provided by drawing $250.0 million from a new credit facility. We used most of the remaining borrowings to purchase ACMI. Additionally, during December 2004 we received proceeds of $81.6 million offset by $0.5 million of financing fees from a secondary offering of our common stock and used some of the proceeds to retire $41.0 million of our long-term debt and we received $7.3 million from the proceeds of employee stock option exercises.

On December 1, 2005, we invested $20.0 million to obtain a 47.3% interest in Redbox. We are accounting for our ownership under the equity method in our consolidated financial statements. Our 47.3% interest in this investment includes a conditional consideration agreement to contribute an additional $12.0 million if Redbox achieves certain targets within a one year period.

On August 5, 2005, we entered into a credit agreement to provide DVDXpress with a $4.5 million credit facility. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of DVDXpress’ assets as well as a pledge of their capital stock. Interest on the unpaid balance of the loan will bear interest at an annual rate equal to LIBOR plus three percent. As of December 31, 2005, DVDXpress has drawn down $3.5 million on this credit facility. Additionally, on December 7, 2005 we signed an asset purchase option agreement that allows Coinstar to purchase substantially all of DVDXpress’ business assets and liabilities in exchange for any outstanding debt and accrued interest on the credit facility plus $10,000 and contingent consideration of up to $3.5 million based on achievement of specific conditions. Effective December 7, 2005, we have consolidated the fair value of DVDXpress’ financial results into our consolidated financial statements in accordance with FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46R”).

On July 7, 2004, we entered into a senior secured credit facility to finance our acquisition of ACMI. This facility provided for advances totaling up to $310.0 million, consisting of a $60.0 million revolving credit facility and a $250.0 million term loan facility. Fees for this facility of approximately $5.7 million are being amortized over the life of the revolving line of credit and the term loan which are 5 years and 7 years, respectively. Loans under this facility are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. The credit facility matures on July 7, 2011. As of December 31, 2005, our original term loan balance of $250.0 million had been reduced to $205.8 million.

Advances under this credit facility may be made as either base rate loans (the higher of the Prime Rate or Federal Funds Effective Rate) or LIBOR rate loans at our election. Applicable interest rates are based upon either the LIBOR or base rate plus an applicable margin dependent upon a consolidated leverage ratio of outstanding indebtedness to EBITDA (to be calculated in accordance with the terms specified in the credit agreement). Our consolidated leverage ratios are based upon either LIBOR plus 200 basis points or the base rate plus 100 basis points. At December 31, 2005, our interest rate on this facility was 6.1%. On January 7, 2006, due to increases in the LIBOR rate, our interest rate was adjusted to 6.55%.

The credit facility contains standard negative covenants and restrictions on actions by us including, without limitation, restrictions on indebtedness, liens, fundamental changes or dispositions of our assets, payments of dividends or common stock repurchases, capital expenditures, foreign investments, acquisitions, sale and leaseback transactions and swap agreements, among other restrictions. In addition, the credit agreement requires that we meet certain financial covenants, ratios and tests, including maintaining a maximum consolidated leverage ratio and a minimum interest coverage ratio, as defined in the agreement. As of December 31, 2005, we were in compliance with all covenants.

Quarterly principal payments on the term loan of $0.5 million terminate on March 31, 2011. The remaining principal balance of $194.8 million will be due July 7, 2011, the maturity date of the facility. Commitment fees on the unused portion of the facility, currently 50 basis points, may vary and are based on our consolidated leverage ratio.

rate hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on LIBOR in excess of the ceiling. Conversely, we will be required to pay the financial institution that originated the instrument if LIBOR is less than the respective floor rates. We have recognized the fair value of the interest rate cap and floor as an asset of $0.2 million and $0.1 million at December 31, 2005 and 2004, respectively.

As of December 31, 2005, we had nine irrevocable standby letters of credit that totaled $16.4 million. These standby letters of credit, which expire at various times through December 31, 2006 are used to collateralize certain obligations to third parties. As of December 31, 2005, no amounts were outstanding under these standby letters of credit.

Under the terms of our credit agreement entered into on July 7, 2004, we are permitted and our Board of Directors has authorized us to repurchase up to $3.0 million of our common stock plus proceeds from the issuance of new shares of capital stock under our employee equity compensation plans. As of December 31, 2005, the cumulative proceeds received from option exercises or other equity purchases under our equity compensation plans subsequent to July 7, 2004, totaled approximately $10.6 million bringing the total authorized for purchase under our credit agreement to $13.6 million.

As of December 31, 2005 and 2004, our net deferred income tax assets totaled $22.7 million and $34.7 million, respectively. In the years ended December 31, 2005 and 2004, we recorded $14.2 million and $10.2 million in income tax expense, respectively, which, as a result of our U.S. NOL carryforwards, will not result in cash payments for U.S. federal income taxes other than federal alternative minimum taxes.

As of December 31, 2005, off-balance sheet arrangements are comprised of our conditional consideration agreement related to our equity investment disclosed in Note 2 to our Consolidated Financial Statements, obligations under our interest rate hedge disclosed in Note 6 to our Consolidated Financial Statements, and our operating leases and letters of credit disclosed in Note 8 to our Consolidated Financial Statements. We have no other off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition or consolidated financial statements.

The tables below summarize our contractual obligations and other commercial commitments as of December 31, 2005:

We believe our existing cash, cash equivalents and amounts available to us under our credit facility will be sufficient to fund our cash requirements and capital expenditure needs for at least the next 12 months. After that time, the extent of additional financing needed, if any, will depend on the success of our business. If we significantly increase installations beyond planned levels, or if coin-counting machine volumes generated or entertainment services machine plays are lower than historical levels, our cash needs may increase. Furthermore, our future capital requirements will depend on a number of factors, including cash required by future acquisitions, our consumer usage, the timing and number of machine installations, the number of available installable machines held, the type and scope of service enhancements and the cost of developing potential new product and service offerings and enhancements.

The following table sets forth selected unaudited quarterly financial information for the last eight quarters. This information has been prepared on the same basis as our audited consolidated financial statements and includes, in the opinion of management, all normal and recurring adjustments that management considers necessary for a fair presentation of the quarterly results for the periods. The operating results for any quarter are not necessarily indicative of the results for future periods. Certain reclassifications have been made to the prior year balances to conform with the current year presentation.

We have historically experienced seasonality in our coin services business, with highest revenues experienced in the third calendar quarter, followed by the fourth calendar quarter, and relatively lower revenues in the first half of the year. ACMI has also experienced seasonality, with peak revenues in the fourth quarter and periods surrounding the Easter holiday season. While our acquisition of ACMI and Amusement Factory may impact the historical seasonality of the coin-counting business to some degree, we expect our results of operations will continue to fluctuate both as a result of seasonal fluctuations and our revenue mix between relatively higher margin coin and e-payment services and relatively lower margin entertainment services.

The following discussion about our market risk involves forward-looking statements. Actual results could differ from those projected in our forward-looking statements. Please refer to “Special Note Regarding Forward-Looking Statements” at the beginning of this annual report.

We are subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of our credit agreement with JPMorgan Chase Bank and investment activities that generally bear interest at variable rates. Because our investments have maturities of three months or less, and our credit facility interest rates are based upon either the LIBOR or base rate plus an applicable margin, we believe that the risk of material loss is low and that the carrying amount of these balances approximates fair value. For our debt obligation which

has a variable interest rate, the rate presented reflects the current rate in effect at the end of 2005. The rate is based on LIBOR plus a margin of 2.0%.

The table below presents principal amounts, at book value, by year of maturity and related weighted average interest rates.

We have variable-rate debt that, at December 31, 2005, had an outstanding balance of $205.8 million. Under the terms of our credit agreement, we have entered into a zero net cost interest rate hedge on $125.0 million of this outstanding debt balance which will decrease our sensitivity to changes in the LIBOR rate. Based on our outstanding debt obligations and our interest rate hedge as of December 31, 2005, an increase of 1.0% in interest rates over the next year would increase our annualized interest expense and related cash payments by approximately $0.9 million; a decrease of 1.0% in interest rates over the next year would decrease our annualized interest expense and related cash payments by approximately $2.1 million. Such potential increases or decreases are based on certain simplified assumptions, including minimum quarterly principal repayments made on variable-rate debt for all maturities and an immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent changes for the remainder of the periods.

On July 7, 2004, we entered into a senior secured credit facility to finance our acquisition of ACMI. As of December 31, 2005, our credit agreement provides for advances totaling up to $265.8 million, consisting of a $60.0 million revolving credit facility and a $205.8 million term loan facility. Included in the terms of this agreement was a requirement to enter into an interest rate protection agreement for a minimum notional amount of $125.0 million by October 6, 2004. Loans made pursuant to the credit agreement are secured by a first security interest in substantially all of our assets and the assets of our subsidiaries, as well as a pledge of our subsidiaries’ capital stock. The credit facility matures on July 7, 2011.

On September 23, 2004, we purchased an interest rate cap and sold an interest rate floor at zero net cost, which protects us against certain interest rate fluctuations of the LIBOR rate on $125.0 million of our variable rate debt under our credit facility. The effective date of the interest rate cap and floor was October 7, 2004 and expires in three years on October 9, 2007. The interest rate cap and floor consists of a LIBOR ceiling of 5.18% and a LIBOR floor that will step up in each of the three years beginning October 7, 2004, 2005 and 2006. The LIBOR floor rates are 1.85%, 2.25% and 2.75% for each of the respective three-year periods. Under this hedge, we will continue to pay interest at prevailing rates plus any spread, as defined by our credit facility, but will be reimbursed for any amounts paid on LIBOR in excess of the ceiling. Conversely, we will be required to pay the financial institution that originated the instrument if LIBOR is less than the respective floor rates.

See Item 15 for an index to the financial statements and supplementary data required by this item.

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

The Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2005.

Management of Coinstar, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). 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 internal control over financial reporting as of December 31, 2005 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control-Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2005.

We made certain acquisitions, including The Amusement Factory L.L.C. (Amusement Factory), during 2005, and our management excluded it from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005, the internal control over financial reporting associated with all businesses acquired in 2005, which had total assets of $78.0 million, including $44.9 million related to Amusement Factory, and total revenues of $18.7 million, including $9.0 million related to Amusement Factory, included in our consolidated financial statements as of and for the year ended December 31, 2005. Our management’s assessment of internal control over financial reporting also excluded an evaluation of the internal control over financial reporting of these acquisitions, including Amusement Factory.

Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which appears on page 36.

The attestation report of KPMG, LLP, the Company’s independent registered public accounting firm, on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and the effectiveness of the Company’s internal control over financial reporting is set forth on page 36 and is incorporated herein by reference.

There was no change in the Company’s internal control over financial reporting during the Company’s fourth fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The information required by this item is incorporated herein by reference to the Proxy Statement.

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

The information required by this item is incorporated herein by reference to the Proxy Statement.

The financial statements required by this item are submitted in a separate section beginning on page 36 of this Annual Report on Form 10-K.

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.


Coinstar, Inc.

By:		/s/ BRIAN V. TURNER
		Brian V. Turner Chief Financial Officer Date: February 24, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

We have audited management’s assessment, included in the accompanying management’s report on internal control over financial reporting appearing under Item 9A that Coinstar, Inc. and subsidiaries (the “Company”), maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The Company made certain acquisitions, including The Amusement Factory L.L.C. (Amusement Factory), during 2005, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, the internal control over financial reporting associated with all businesses acquired in 2005, which had total assets of $78.0 million, including $44.9 million related to Amusement Factory, and total revenues of $18.7 million, including $9.0 million related to Amusement Factory, included in the consolidated financial statements of the Company as of and for the year ended December 31, 2005. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of these acquisitions, including Amusement Factory.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report, dated February 24, 2006, expressed an unqualified opinion on those consolidated financial statements.

We have audited the accompanying consolidated balance sheets of Coinstar, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coinstar, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Coinstar, Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 24, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.


Delaware		94-3156448
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1800 114th Avenue SE, Bellevue, Washington		98004
(Address of principal executive offices)		(Zip Code)


PART I
Item 1.	Business	Page 1
Item 1A.	Risk Factors	Page 5
Item 2.	Properties	Page 14
Item 3.	Legal Proceedings	Page 14
Item 4.	Submission of Matters to a Vote of Security Holders	Page 14

PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	Page 15
Item 6.	Selected Consolidated Financial Data	Page 15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 17
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	Page 28
Item 8.	Financial Statements and Supplementary Data	Page 29
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	Page 29
Item 9A.	Controls and Procedures	Page 30
Item 9B.	Other Information	Page 30

PART III
Item 10.	Directors and Executive Officers of the Registrant	Page 31
Item 11.	Executive Compensation	Page 31
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	Page 31
Item 13.	Certain Relationships and Related Transactions	Page 31
Item 14.	Principal Accountant Fees and Services	Page 31

PART IV
Item 15.	Exhibits and Financial Statement Schedules	Page 32

SIGNATURES		Page 35


	High		Low
Fiscal 2004:
First Quarter	$	19.98	$	14.87
Second Quarter		22.06		15.60
Third Quarter		23.30		17.50
Fourth Quarter		27.85		22.75

Fiscal 2005:
First Quarter	$	27.10	$	19.70
Second Quarter		22.79		16.95
Third Quarter		23.33		18.06
Fourth Quarter		26.30		17.88


	Year Ended December 31,
	2005			2004			2003			2002			2001
	(in thousands, except per share data)
Consolidated Statements of Operations:
REVENUE	$	459,739		$	307,100		$	176,136		$	155,675		$	129,352
EXPENSES:
Direct operating		309,162			186,926			78,586			69,451			59,326
Marketing		10,748			12,925			13,215			10,689			11,039
Research and development		5,716			5,465			5,772			4,997			4,162
General and administrative		36,625			27,475			19,344			19,061			19,140
Depreciation and other		45,347			35,302			27,006			25,810			26,349
Amortization of intangible assets		4,556			2,014			138			—			—

Income from operations		47,585			36,993			32,075			25,667			9,336
OTHER INCOME (EXPENSE):
Interest income and other, net		1,830			521			263			309			707
Interest expense		(12,916	)		(6,271	)		(1,210	)		(3,710	)		(8,302	)
Early retirement of debt		—			(706	)		—			(6,308	)		—

Income from continuing operations before income taxes		36,499			30,537			31,128			15,958			1,741
Income taxes		(14,227	)		(10,169	)		(11,573	)		42,555			—

Income from continuing operations		22,272			20,368			19,555			58,513			1,741
DISCONTINUED OPERATIONS:
Loss from discontinued operations		—			—			—			—			(9,127	)

NET INCOME (LOSS)	$	22,272		$	20,368		$	19,555		$	58,513		$	(7,386	)

NET INCOME (LOSS) PER SHARE:
Basic:(1)
Continuing operations	$	0.86		$	0.94		$	0.91		$	2.68		$	0.08
Discontinued operations		—			—			—			—			(0.43	)

Net income (loss) per share	$	0.86		$	0.94		$	0.91		$	2.68		$	(0.35	)

Diluted:(1)
Continuing operations	$	0.86		$	0.93		$	0.90		$	2.58		$	0.08
Discontinued operations		—			—			—			—			(0.42	)

Net income (loss) per share	$	0.86		$	0.93		$	0.90		$	2.58		$	(0.34	)

Consolidated Balance Sheet Data:
Cash and cash equivalents(2)	$	45,365		$	61,878		$	7,125		$	21,684		$	31,953
Cash in machines or in transit(3)		60,070			35,751			31,757			19,876			8,475
Cash being processed(4)		69,832			59,158			60,782			61,283			65,507
Total assets		643,401			547,134			204,074			216,636			171,187
Total debt, capital lease obligations and other, including current portion		210,478			211,410			17,461			36,746			62,643
Common stock		328,951			282,046			191,370			187,473			171,059
Total stockholders’ equity		294,047			226,146			114,190			105,251			37,227


	Payments Due by Period
Contractual Obligations As of December 31, 2005	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(in thousands)
Long-term debt	$	205,764	$	2,089	$	4,178	$	4,178	$	195,319
Capital lease obligations(1)		5,135		2,133		2,604		398		—
Operating leases(2)		20,033		8,191		8,677		2,261		904
Purchase obligations(3)		8,562		8,562		—		—		—

Total contractual cash obligations	$	239,494	$	20,975	$	15,459	$	6,837	$	196,223


	Year Ended December 31,
	2005 (1)		2004 (1)		2003
Revenue	100.0	%	100.0	%	100.0	%
Expenses:
Direct operating	67.2		60.9		44.6
Marketing	2.3		4.2		7.5
Research and development	1.2		1.8		3.3
General and administrative	8.0		8.9		11.0
Depreciation and other	9.9		11.5		15.3
Amortization of intangible assets	1.0		0.7		0.1

Income from operations	10.4	%	12.0	%	18.2	%


	Amount of Commitment Expiration Per Period
Other Commercial Commitments As of December 31, 2005	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
	(in thousands)
Letters of credit	$	16,436	$	16,436	$	—	$	—	$	—

Total commercial commitments	$	16,436	$	16,436	$	—	$	—	$	—


	Three Month Periods Ended
	Dec. 31, 2005			Sept. 30, 2005			June 30, 2005			March 31, 2005			Dec. 31, 2004			Sept. 30, 2004			June 30, 2004			March 31, 2004
	(in thousands, except per share data)
	(unaudited)
Consolidated Statements of Operations:
Revenue	$	125,607		$	118,707		$	109,840		$	105,585		$	109,793		$	106,430		$	47,825		$	43,052
Expenses:
Direct operating		83,871			78,022			74,389			72,880			73,678			69,937			23,093			20,218
Marketing		5,031			2,785			1,975			957			4,567			3,642			3,666			1,050
Research and development		1,446			1,445			1,516			1,309			1,058			1,410			1,556			1,441
General and administrative		9,800			9,546			8,687			8,592			9,423			8,098			4,890			5,064
Depreciation and other		11,887			11,696			10,958			10,806			10,116			9,821			7,450			7,915
Amortization of intangible assets		1,281			1,140			1,104			1,031			993			884			84			53

Income from operations		12,291			14,073			11,211			10,010			9,958			12,638			7,086			7,311
Interest income and other, net		338			472			532			488			201			190			61			69
Interest expense and early retirement of debt		(3,613	)		(3,353	)		(3,100	)		(2,850	)		(3,812	)		(2,793	)		(126	)		(246	)

Income before income taxes		9,016			11,192			8,643			7,648			6,347			10,035			7,021			7,134
Income taxes		(3,497	)		(4,372	)		(3,378	)		(2,980	)		(1,796	)		(3,386	)		(2,470	)		(2,517	)

Net income	$	5,519		$	6,820		$	5,265		$	4,668		$	4,551		$	6,649		$	4,551		$	4,617

Net income per share:
Basic	$	0.20		$	0.27		$	0.21		$	0.18		$	0.20		$	0.31		$	0.21		$	0.22
Diluted	$	0.20		$	0.27		$	0.21		$	0.18		$	0.20		$	0.30		$	0.21		$	0.21


Liabilities	Expected Maturity Date												December 31, 2005
(in thousands)	2006		2007		2008		2009		2010		Thereafter		Total		Fair Value		Average interest rate
Long-term debt:
Variable rate	$	2,089	$	2,089	$	2,089	$	2,089	$	2,089	$	195,319	$	205,764	$	205,764	6.81	%


		Page
(a)(1)	Index to Financial Statements
	Reports of Independent Registered Public Accounting Firm – KPMG LLP	36
	Consolidated Balance Sheets	38
	Consolidated Statements of Operations	39
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income	40
	Consolidated Statements of Cash Flows	41
	Notes to Consolidated Financial Statements	42
(a)(2)	Index to Financial Statement Schedules
	All schedules have been omitted because they are not applicable or not required, or the required information is included in the financial statements or notes thereto.
(a)(3)	Exhibit Index:


Exhibit Number		Description of Document
2.1(1)		Agreement and Plan of Merger, dated May 23, 2004, by and among the Registrant, Sesame Mergeco, Inc., ACMI Holdings, Inc., American Coin Merchandising, Inc. and Wellspring Capital Management LLC, as Stockholder Representative.

2.2(2)		LLC Interest Purchase Agreement dated November 17, 2005 by and among Redbox Automated Retail, LLC, McDonald’s Ventures, LLC and Coinstar, Inc.

2.3(3)		Asset Purchase Agreement by and among The Amusement Factory, L.L.C., Levine Investments Limited Partnership, American Coin Merchandising, Inc., Adventure Vending Inc. and Coinstar, Inc.

3.1(4)		Amended and Restated Certificate of Incorporation.

3.2(4)		Amended and Restated Bylaws.

4.1(4)		Reference is made to Exhibits 3.1 through 3.2.

4.2(4)		Specimen Stock Certificate.

4.3(4)		Second Amended and Restated Investor Rights Agreement, dated August 27, 1996, between the Registrant and certain investors, as amended October 22, 1996.

4.4(5)		Rights Agreement dated as of November 12, 1998 between Registrant and American Securities Transfer and Trust, Inc.

4.5(5)		Certificate of Designation of Series A Preferred Stock. Reference is made to Exhibit A of Exhibit 4.4.

4.6(5)		Form of Rights Certificate. Reference is made to Exhibit B of Exhibit 4.4.

10.1(4)*		1997 Employee Stock Purchase Plan.

10.2(6)*		Amended and Restated 1997 Non-Employee Directors’ Stock Option Plan.

10.3(7)*		Outside Directors’ Deferred Compensation Plan.

10.4(8)*		1997 Amended and Restated Equity Incentive Plan.

10.5(9)*		2000 Amended and Restated Equity Incentive Plan.

10.6(7)*		Registrant’s Executive Deferred Compensation Plan.

10.7(10)*		2005 Incentive Compensation Plan.


Exhibit Number		Description of Document

10.8(11)*		Form of 1997 Amended and Restated Equity Incentive Plan Stock Option Grant Notice for option grants made prior to December 12, 2005.

10.9*		Form of 1997 Amended and Restated Equity Incentive Plan Stock Option Grant Notice for option grants made after December 12, 2005 to the CEO or CFO.

10.10*		Form of 1997 Amended and Restated Equity Incentive Plan Stock Option Grant Notice for option grants made after December 12, 2005 to plan participants other than the CEO or CFO.

10.11(11)*		Form of 2000 Amended and Restated Equity Incentive Plan Stock Option Grant Notice.

10.12(4)*		Form of Indemnity Agreement between the Registrant and its Executive Officers and Directors.

10.13(12)*		Form of Release Agreement.

10.14(13)*		Summary of 2006 Base Salaries for 2005 Named Executive Officers.

10.15(14)*		Form of Restricted Stock Award under the 1997 Amended and Restated Equity Incentive Plan for awards made prior to December 12, 2005.

10.16*		Form of Restricted Stock Award under the 1997 Amended and Restated Equity Incentive Plan for awards made after December 12, 2005 to the CEO or CFO.

10.17*		Form of Restricted Stock Award under the 1997 Amended and Restated Equity Incentive Plan for awards made after December 12, 2005 to plan participants other than the CEO or CFO.

10.18(15)*		Summary of Director Fees.

10.19(1)		Credit Agreement, dated July 7, 2004, among the Registrant, as Borrower, Bank of America, N.A., Keybank National Association and Wells Fargo Bank, National Association, as Documentation Agents, Lehman Commercial Paper, Inc., as Syndication Agent, and JPMorgan Chase Bank, as Administrative Agent.

10.20(16)		First Amendment, dated December 21, 2005, to the Credit Agreement, dated July 7, 2004, among the Registrant, as Borrower, Bank of America, N.A., Keybank National Association and Wells Fargo Bank, National Association, as Documentation Agents, Lehman Commercial Paper, Inc., as Syndication Agent, and JPMorgan Chase Bank, as Administrative Agent.

10.21(17)		Lease Agreement, dated January 1, 2004, by and between Registrant and EOP Operating Limited Partnership.

10.22(18)		Industrial Building Lease, dated October 24, 2002, by and between FCF Properties, LLC and American Coin Merchandising, Inc., a wholly-owned subsidiary of the Registrant, as amended June 6, 2003.

10.23(19)*		Employment Agreement between Brian V. Turner and the Registrant dated August 5, 2005.

10.24(19)*		Change of Control Agreement between Brian V. Turner and the Registrant dated August 5, 2005.

10.25(17)*		Employment Agreement between David W. Cole and the Registrant dated January 1, 2004.

10.26(20)*		Employment Agreement between Randall J. Fagundo and American Coin Merchandising, Inc., a wholly-owned subsidiary of the Registrant dated July 7, 2004.

10.27(11)*		First Amendment to Employment Agreement between Randall J. Fagundo and American Coin Merchandising, Inc., a wholly-owned subsidiary of the Registrant dated May 2, 2005.

10.28(21)*		Coinstar, Inc. Stock Option Agreement, Grant to Chief Executive Officer dated October 8, 2001.

10.29(22)		Voting Agreement between Levine Investments Limited Partnership and the Registrant dated November 1, 2005.


Exhibit Number		Description of Document

21.1		Subsidiaries.

23.1		Consent of Independent Registered Public Accounting Firm - KPMG LLP.

31.1		Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signature	Title	Date

/S/ DAVID W. COLE David W. Cole	Chief Executive Officer and Director	February 24, 2006

/S/ BRIAN V. TURNER Brian V. Turner	Chief Financial Officer	February 24, 2006

/S/ RICHARD C. DECK Richard C. Deck	Chief Accounting Officer	February 24, 2006

/S/ KEITH D. GRINSTEIN Keith D. Grinstein	Chairman of the Board	February 24, 2006

/S/ DEBORAH L. BEVIER Deborah L. Bevier	Director	February 24, 2006

/S/ DAVID M. ESKENAZY David M. Eskenazy	Director	February 24, 2006

/S/ ROBERT D. SZNEWAJS Robert D. Sznewajs	Director	February 24, 2006

/S/ RONALD B. WOODARD Ronald B. Woodard	Director	February 24, 2006


	December 31,
	2005			2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	45,365		$	61,878
Cash in machine or in transit		60,070			35,751
Cash being processed		69,832			59,158
Trade accounts receivable, net of allowance for doubtful accounts of $469 and $481 in 2005 and 2004, respectively		9,046			5,283
Inventory		31,234			25,877
Deferred income taxes		17,330			18,833
Prepaid expenses and other current assets		11,575			11,626

Total current assets		244,452			218,406
PROPERTY AND EQUIPMENT, NET		148,494			131,267
DEFERRED INCOME TAXES		5,385			15,880
OTHER ASSETS		5,154			6,200
EQUITY INVESTMENTS		19,966			—
INTANGIBLE ASSETS, NET		40,139			35,033
GOODWILL		179,811			140,348

TOTAL ASSETS	$	643,401		$	547,134

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	34,760		$	23,661
Accrued liabilities payable to retailers		77,175			63,504
Other accrued liabilities		26,941			22,413
Current portion of long-term debt and capital lease obligations		3,850			3,350

Total current liabilities		142,726			112,928
LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OTHER		206,628			208,060

Total liabilities		349,354			320,988

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value—Authorized, 5,000,000 shares; no shares issued and outstanding in 2005 or 2004		—			—
Common stock, $0.001 par value—Authorized, 45,000,000 shares; 29,008,842 and 26,460,701 shares issued and 27,775,628 and 25,227,487 shares outstanding at December 31, 2005 and 2004, respectively		328,951			282,046
Accumulated deficit		(13,158	)		(35,430	)
Treasury stock		(22,783	)		(22,783	)
Accumulated other comprehensive income		1,037			2,313

Total stockholders’ equity		294,047			226,146

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	643,401		$	547,134


	Common Stock					Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income		Total			Comprehensive Income
	Shares		Amount			Accumulated Deficit			Treasury Stock			Accumulated Other Comprehensive Income		Total			Comprehensive Income
BALANCE, December 31, 2002	21,832,344		$	187,473		$	(75,353	)	$	(7,496	)	$	627	$	105,251

Proceeds from issuance of shares under employee stock purchase plan	70,728			960											960
Proceeds from exercise of stock options, net	256,304			2,696											2,696
Stock-based compensation expense	2,649			43											43
Non-cash stock-based compensation				(65	)										(65	)
Tax benefit on options and employee stock purchase plan				263											263
Repurchase of common stock	(933,714	)								(15,287	)				(15,287	)
Comprehensive income:
Net income							19,555								19,555		$	19,555
Other comprehensive income:
Short-term investments net of tax expense of $6													10		10			10
Foreign currency translation adjustments net of tax expense of $722													676		676			676
Interest rate swap on long-term debt net of tax benefit of $36													88		88			88

Total comprehensive income:																	$	20,329

BALANCE, December 31, 2003	21,228,311			191,370			(55,798	)		(22,783	)		1,401		114,190

Proceeds from common stock offering, net of offering costs of $5,112	3,450,000			81,138											81,138
Proceeds from issuance of shares under employee stock purchase plan	66,126			770											770
Proceeds from exercise of stock options, net	475,784			6,539											6,539
Stock-based compensation expense	3,699			38											38
Tax benefit on options and employee stock purchase plan