**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**







**(Mark
                One)**x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the quarterly period ended September 30, 2007
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from _______ to _______**Commission
                File Number: 000-26529








**AUDIBLE,
      INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **22-3407945**
              (I.R.S.
                employer
              identification
                number)**1
                WASHINGTON PARK**
              **NEWARK,
                NEW JERSEY**
              (Address
                of principal executive offices)
            
            **07102**
              (Zip
                Code)








**(973)
      820-0400**


(Registrant's
      telephone number, including area code)





**None**


(Former
      name, former address and former fiscal year, if changed since last
      report)





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


**Large Accelerated Filer** x**Accelerated
      Filer************Non-accelerated filer**





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


**Yes************No**x




As
      of
      November 6, 2007, 24,409,674 shares of the registrant's common stock were
      outstanding.














**AUDIBLE, INC.
      AND SUBSIDIARY**


**TABLE
      OF CONTENTS**





**PART
                I**
            **FINANCIAL
                INFORMATION**
            **PAGE**Item
                1.
            Financial
                Statements:Condensed
                Consolidated Balance Sheets as of September 30,
                2007 (unaudited) and December 31, 2006
            3Condensed
                Consolidated Statements of Operations for the
                three and nine month periods ended September 30, 2007 and 2006
                (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the
                nine month periods ended September 30, 2007 and 2006
                (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            6Item
                2.
            Management's
                Discussion and Analysis of Financial
                Condition and Results of Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risks
            39Item
                4.
            Controls
                and Procedures
            39**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            40Item
                1A.
            Risk
                Factors
            42Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            42Item
                3.
            Defaults
                Upon Senior Security
            42Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            42Item
                5.
            Other
                Information
            42Item
                6.
            Exhibits
            42Signatures
            
            43





-2-
 
 Table
        of Conents





**PART I
      - FINANCIAL INFORMATION**


**ITEM
      1. Financial Statements**


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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





**September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****ASSETS**
            
            **(unaudited)**
            
            
            **(audited)**Current
                assets:Cash
                and cash equivalents
            
            $
            42,846
            
            
            $
            14,925Short-term
                investments
            
            
            27,954
            
            
            
            51,295Interest
                receivable on short-term investments
            
            
            422
            
            
            
            626Accounts
                receivable, net of provision for refunds and chargebacks of $40
                at
              September
                30, 2007 and December 31, 2006
            
            
            3,626
            
            
            
            4,181Accounts
                receivable, related parties
            
            
            263
            
            
            
            100Royalty
                advances, net
            
            
            426
            
            
            
            710Prepaid
                expenses and other current assets
            
            
            1,497
            
            
            
            1,797Inventory
            
            
            79
            
            
            
            212Total
                current assets
            
            
            77,113
            
            
            
            73,846Property
                and equipment, net
            
            
            10,755
            
            
            
            8,149Investment
                in related party, net (see Note 6)
            
            
            961
            
            
            
            -Other
                assets
            
            
            1,629
            
            
            
            781Total
                assets
            
            $
            90,458
            
            
            $
            82,776**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,057
            
            
            $
            3,121Accrued
                expenses and other current liabilities
            
            
            4,243
            
            
            
            4,678Accrued
                royalties
            
            
            7,606
            
            
            
            9,028Accrued
                compensation
            
            
            3,995
            
            
            
            778Deferred
                revenue
            
            
            16,508
            
            
            
            13,840Total
                current liabilities
            
            
            34,409
            
            
            
            31,445Deferred
                revenue, noncurrent
            
            
            616
            
            
            
            513Royalty
                obligations, noncurrent
            
            
            75
            
            
            
            90Deferred
                rent, noncurrent
            
            
            1,842
            
            
            
            262Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $.01. Authorized 40,000,000 shares at September
                30, 2007
                and December 31, 2006; 24,382,269 and 24,119,768 shares issued and
                outstanding at September 30, 2007 and December 31, 2006,
                respectively
            
            
            244
            
            
            
            241Additional
                paid-in capital
            
            
            195,394
            
            
            
            190,799Accumulated
                other comprehensive loss
            
            
            (57
            )
            
            
            (36
            )Accumulated
                deficit
            
            
            (142,065
            )
            
            
            (140,538
            )Total
                stockholders' equity
            
            
            53,516
            
            
            
            50,466Total
                liabilities and stockholders' equity
            
            $
            90,458
            
            
            $
            82,776





See
      accompanying notes to condensed consolidated financial statements.








-3-
 
 Table of Conents





**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF
      OPERATIONS**


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


**(Unaudited)**




**Three
                months**
              **ended
                September 30,**
            
            
            **Nine
                months**
              **ended
                September 30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue,
                net:Consumer
                content
            
            $
            26,973
            
            
            $
            19,565
            
            
            $
            77,679
            
            
            $
            57,681Point
                of sale rebates
            
            
            (4
            )
            
            
            -
            
            
            
            (33
            )
            
            
            (293
            )Services
            
            
            28
            
            
            
            26
            
            
            
            90
            
            
            
            85Total
                content and services revenue
            
            
            26,997
            
            
            
            19,591
            
            
            
            77,736
            
            
            
            57,473Hardware
                revenue
            
            
            28
            
            
            
            73
            
            
            
            192
            
            
            
            283Related
                party revenue
            
            
            431
            
            
            
            222
            
            
            
            542
            
            
            
            852Other
                revenue
            
            
            162
            
            
            
            140
            
            
            
            359
            
            
            
            274Total
                revenue, net
            
            
            27,618
            
            
            
            20,026
            
            
            
            78,829
            
            
            
            58,882Operating
                expenses:Royalties
                and other content charges
            
            
            11,989
            
            
            
            8,240
            
            
            
            34,455
            
            
            
            23,943Discount
                certificate rebates
            
            
            74
            
            
            
            307
            
            
            
            407
            
            
            
            910Total
                cost of content and services revenue
            
            
            12,063
            
            
            
            8,547
            
            
            
            34,862
            
            
            
            24,853Cost
                of hardware revenue
            
            
            95
            
            
            
            826
            
            
            
            395
            
            
            
            1,707Cost
                of related party revenue
            
            
            133
            
            
            
            169
            
            
            
            370
            
            
            
            498Operations
            
            
            3,761
            
            
            
            2,987
            
            
            
            10,993
            
            
            
            8,943Technology
                and development
            
            
            4,680
            
            
            
            4,625
            
            
            
            13,820
            
            
            
            12,681Marketing
            
            
            4,300
            
            
            
            3,340
            
            
            
            12,253
            
            
            
            11,214General
                and administrative
            
            
            3,609
            
            
            
            2,743
            
            
            
            10,072
            
            
            
            8,607Total
                operating expenses
            
            
            28,641
            
            
            
            23,237
            
            
            
            82,765
            
            
            
            68,503Loss
                from operations
            
            
            (1,023
            )
            
            
            (3,211
            )
            
            
            (3,936
            )
            
            
            (9,621
            )Loss
                on equity investment
            
            
            (17
            )
            
            
            (90
            )
            
            
            (77
            )
            
            
            (270
            )Other
                income (expense):Interest
                income
            
            
            904
            
            
            
            779
            
            
            
            2,606
            
            
            
            2,153Other
                expense
            
            
            (4
            )
            
            
            --
            
            
            
            (13
            )
            
            
            --Other
                income, net
            
            
            900
            
            
            
            779
            
            
            
            2,593
            
            
            
            2,153Loss
                before income taxes
            
            
            (140
            )
            
            
            (2,522
            )
            
            
            (1,420
            )
            
            
            (7,738
            )Income
                tax expense
            
            
            (52
            )
            
            
            (3
            )
            
            
            (107
            )
            
            
            (9
            )Net
                loss
            
            $
            (192
            )
            
            $
            (2,525
            )
            
            $
            (1,527
            )
            
            $
            (7,747
            )Basic
                and diluted net loss per common share
            
            $
            (0.01
            )
            
            $
            (0.10
            )
            
            $
            (0.06
            )
            
            $
            (0.32
            )Basic
                and diluted weighted average common shares outstanding
            
            
            24,349,644
            
            
            
            24,348,938
            
            
            
            24,278,459
            
            
            
            24,443,620





See
      accompanying notes to condensed consolidated financial statements.





-4-
 
 Table of Conents





**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS**


**(in
      thousands)**




**Nine
                  months ended****(Unaudited)**
              
              **September
                  30,****2007**
              
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (1,527
              )
              
              $
              (7,747
              )Adjustments
                  to reconcile net loss to net cash provided by operating
                  activities:Loss
                  on equity investment in related party
              
              
              77
              
              
              
              270Depreciation
                  and amortization
              
              
              3,964
              
              
              
              3,710Amortization
                  of audio production costs
              
              
              367
              
              
              
              79Non-cash
                  share-based compensation charge
              
              
              4,577
              
              
              
              4,162Accretion
                  of discounts on short-term investments
              
              
              (718)
              
              
              
              (724)Impairment
                  of long lived asset
              
              
              160
              
              
              
              144Changes
                  in assets and liabilities:Interest
                  receivable short-term investments
              
              
              204
              
              
              
              (77
              )Accounts
                  receivable, net
              
              
              560
              
              
              
              (496
              )Accounts
                  receivable, related parties
              
              
              (223
              )
              
              
              (203
              )Royalty
                  advances
              
              
              286
              
              
              
              (48
              )Prepaid
                  expenses and other current assets
              
              
              301
              
              
              
              (1,098
              )Inventory
                  on hand
              
              
              134
              
              
              
              345Other
                  assets
              
              
              (1,213
              )
              
              
              (767
              )Accounts
                  payable
              
              
              (1,069
              )
              
              
              (2,402
              )Accrued
                  expenses and other current liabilities
              
              
              (1,143
              )
              
              
              (595
              )Accrued
                  royalties
              
              
              (1,436
              )
              
              
              773Accrued
                  compensation
              
              
              3,211
              
              
              
              194Deferred
                  revenue
              
              
              2,763
              
              
              
              4,872Deferred
                  rent, noncurrent
              
              
              1,580
              
              
              
              --Net
                  cash provided by operating activities
              
              
              10,855
              
              
              
              392Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (5,394
              )
              
              
              (4,049
              )Capitalized
                  internally developed software costs
              
              
              (653
              )
              
              
              (445
              )Investment
                  in related party
              
              
              (978
              )
              
              
              --Purchases
                  of short-term investments
              
              
              (44,316
              )
              
              
              (60,098
              )Proceeds
                  from maturity of short-term investments
              
              
              68,375
              
              
              
              69,065Net
                  cash provided by investing activities
              
              
              17,034
              
              
              
              4,473Cash
                  flows from financing activities:Proceeds
                  from exercise of common stock options
              
              
              469
              
              
              
              385Proceeds
                  from exercise of common stock warrants
              
              
              --
              
              
              
              750Purchase
                  of treasury stock at cost
              
              
              --
              
              
              
              (3,988
              )Payment
                  of taxes due on vested restricted stock
              
              
              (448
              )
              
              
              --Net
                  cash provided by (used in) financing activities
              
              
              21
              
              
              
              (2,853
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              11
              
              
              
              (5
              )Increase
                  in cash and cash equivalents
              
              
              27,921
              
              
              
              2,007Cash
                  and cash equivalents at beginning of period
              
              
              14,925
              
              
              
              11,549Cash
                  and cash equivalents at end of period
              
              $
              42,846
              
              
              $
              13,556Supplemental
                  schedule of non-cash operating and investing activitiesAccrued
                  purchases of property and equipment
              
              $
              683
              
              
              $
              --




See
      accompanying notes to condensed consolidated financial statements.





-5-
 
 Table of Conents





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





*The
      Business*





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





For
      the
      three and nine month periods ended September 30, 2007, the Company reported
      a
      net loss of $0.2 million and $1.5 million, respectively, and had an accumulated
      deficit of $142.1 million as of September 30, 2007. The Company's cash and
      cash
      equivalents balance as of September 30, 2007 was $42.8 million. In addition,
      the
      Company had short-term investments of $28.0 million.





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





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





*Basis
      of Presentation*





Commencing
      in the first quarter of 2005, the Company began its international operations
      in
      the United Kingdom, as Audible Limited (“Audible UK”). Audible UK is a
      wholly-owned subsidiary of Audible, Inc. and therefore its results of operations
      are consolidated as of the end of each reporting period. All inter-company
      transactions and balances have been eliminated.





The
      accompanying condensed consolidated financial statements as of September 30,
      2007 and for the three and nine month periods ended September 30, 2007 and
      2006,
      are unaudited, and in the opinion of management, include all adjustments
      necessary to present fairly the results for the periods presented in accordance
      with U.S. generally accepted accounting principles. Operating results for the
      three and nine month periods ended September 30, 2007 are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2007. The consolidated balance sheet at December 31, 2006 was derived from
      the
      audited financial statements at that date and does not include all of the
      information and notes required by accounting principles generally accepted
      in
      the United States of America for complete financial statements. These condensed
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto for the year ended December
      31, 2006, from the Company's Annual Report on Form 10-K.





*Cash
      and Cash Equivalents*





The
      Company considers short-term, highly liquid investments with original maturities
      of three months or less at the time of purchase to be cash equivalents. Cash
      equivalents consist primarily of money market funds and notes due from
      governmental agencies. Cash consists of funds held in the Company's checking
      account.





*Short-Term
      Investments*





Investments
      purchased with a maturity of more than three months, and less than twelve
      months, are classified as short-term investments. The Company's short-term
      investments, as of September 30, 2007 and December 31, 2006, of $28.0 million
      and $51.3 million, respectively, consisted of governmental agency notes that
      are
      to be held to maturity because the Company has the positive intent and ability
      to hold these securities to maturity.





Held
      to
      maturity securities are stated at amortized cost, adjusted for amortization
      of
      premiums and accretion of discounts to maturity. Dividend and interest income
      are recognized when earned. Premiums and discounts are amortized or accreted
      over the life of the related held-to-maturity security as an adjustment to
      yield
      using the effective interest method. A decline in the market value of a
      held-to-maturity security below the amortized cost basis that is deemed to
      be
      other-than-temporary results in a reduction in carrying amount to fair value.
      The impairment is charged to operations and a new cost basis for the security
      is
      established. To determine whether impairment is other-than-temporary, the
      Company considers whether it has the ability and intends to hold the investment
      until a market price recovery and considers whether evidence indicating the
      cost
      of the investment is recoverable outweighs evidence to the contrary. Evidence
      considered in this assessment includes the reasons for
      the
      impairment, the severity and duration of the impairment, changes in the value
      subsequent to period end, and forecasted performance of the
      investee.





-6-
 
 Table of Conents




The
      amortized cost, gross unrealized holding losses and the fair value of
      held-to-maturity debt securities at September 30, 2007 was $28.0 million, less
      than $0.2 million, and $28.2 million, respectively.





All
      of
      the debt securities classified as held-to-maturity
      mature before September 30, 2008.





*Provision
      for Refunds and Chargebacks*





The
      provision for refunds and chargebacks is recorded as a reduction of revenue
      and
      is estimated based on a percentage of revenue, taking into account historical
      experience. A portion of the provision is recorded as a reduction of accounts
      receivable based on an estimate of refunds that will be made related to sales
      that were unpaid at period-end. The remaining portion of the provision is
      reflected as an accrued liability at period-end. Actual refunds and chargebacks
      could differ from the Company’s estimate.





*Inventory*




Inventory
      is stated at the lower of cost or market using the first-in, first-out method.
      Inventory consists of digital audio players manufactured by third
      parties.





*Audio
      Production Costs*





The
      Company capitalizes audio production costs incurred in connection with the
      creation of the master copy of an audio title, which includes talent, editorial
      and other costs. These costs are stated at the lower of cost, less accumulated
      amortization, or fair value. These production costs are amortized beginning
      in
      the month the title is released, on a straight-line basis over a two year
      period, which is the estimated substantial economic life of the title, and
      are
      recognized as cost of content revenue in the condensed consolidated Statement
      of
      Operations. The remaining unamortized balance is periodically reviewed, and
      adjusted if necessary, to reflect the fair value.





*Property
      and Equipment*




Property
      and equipment, which includes computer server and Web site equipment, office
      furniture and equipment, leasehold improvements, internally developed software,
      studio equipment, software licenses, work in progress and construction in
      progress, are stated at cost. Property and equipment under capital leases are
      stated at the present value of minimum lease payments. Depreciation is
      calculated using the straight-line method over the estimated useful lives of
      the
      respective assets and for leasehold improvements, over the shorter of the
      estimated useful life of the asset or the lease term.





For
      assets placed in service prior to January 1, 2007, the Company estimated the
      useful lives to be three years for computer server and Web site equipment,
      and
      software licenses, and two years for office furniture and equipment, internally
      developed software, and studio equipment. As of January 1, 2007, the Company
      reassessed the useful lives of its new asset purchases. For assets placed in
      service after January 1, 2007, the Company estimates the useful lives to be
      three years for office computers, five years for computer servers, web site
      equipment, studio equipment, office appliances and telephone equipment and
      seven
      years for office furniture. Office appliances, telephone equipment, office
      furniture and office computers are grouped together in office furniture and
      equipment in Note 3. There has been no change to the estimated useful lives
      for
      software licenses and internally developed software. Property and equipment
      held
      under capital leases are amortized on a straight-line basis over the estimated
      useful life of the asset.





In
      June
      2006, in anticipation of the Company’s move to its new facility, the Company
      reassessed the estimated useful lives of its existing office furniture and
      equipment and leasehold improvements located at the old corporate office. The
      existing office furniture and equipment was depreciated using the straight
      line
      method over a two year period and leasehold improvements were amortized on
      a
      straight-line basis over the lease term or the estimated useful lives of the
      asset, whichever was shorter. In June 2006, the Company changed the remaining
      estimated useful life of these assets to seven months and in December 2006,
      extended the previous estimate by an additional two months to coincide with
      the
      termination of the Company’s office lease. The amortization is included within
      depreciation expense in the condensed consolidated Statements of Cash
      Flows.





-7-
 
 Table of Conents





Work
      in
      process consists of expenditures for the development of various computer
      software projects incurred subsequent to the completion of the preliminary
      project stage. In accordance with Statement of Position, or SOP, No. 98-1,*Accounting for Costs of Computer Software Developed or Obtained for Internal
      Use*(“SOP No. 98-1”), the Company has capitalized external direct costs of
      material and services developed or obtained for these projects and certain
      payroll and payroll related expenses for employees directly associated with
      these projects. Amortization for each software project begins when the computer
      software is ready for its intended use. Construction in progress primarily
      represents leasehold improvement costs related to the development and
      construction of the new corporate office space. Amortization for the office
      space leasehold improvements begins when the project is complete.





Maintenance
      and repairs are expensed as incurred.





*Impairment
      of Long-Lived Assets*





The
      Company reviews its long-lived assets for impairment when events or
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected cash flows, undiscounted and without
      interest, is less than the carrying amount of the related asset, an impairment
      loss is recognized as the amount by which the carrying amount of the asset
      exceeds its fair value, generally based on discounted cash flow.  In
      the nine month period ended September 30, 2007, the Company recorded a $0.2
      million impairment charge, included in technology and development, on the
      accompanying condensed consolidated Statement of Operations, related to
      internally developed software. In the three and nine month periods ended
      September 30, 2006, the Company recorded a $0.1 million impairment charge,
      included in technology and development, on the accompanying condensed
      consolidated Statement of Operations, related to a previously purchased software
      license, which the Company determined would not be used.





*Royalty
      Advances and Royalty Obligations*





Royalty
      advances represent payments made and payments to be made to various content
      providers pursuant to minimum guarantees under their royalty agreements, net
      of
      royalties expensed. The corresponding royalty obligations represent payments
      to
      be made to the content providers for audio content delivered pursuant to minimum
      guarantees under their royalty agreements. These agreements give the Company
      the
      right to sell digital audio content over the Internet. The royalty obligations
      recorded in the accompanying condensed consolidated Balance Sheets are
      classified between current (included in accrued expenses) and non-current based
      on the payment terms specified in the agreements. The Company periodically
      adjusts the balance of these advances to reflect their estimated net realizable
      value based on the difference, if any, between the carrying amount of the asset
      and the discounted future revenue stream. Royalty expense is included in cost
      of
      content and services revenue in the accompanying condensed consolidated
      Statements of Operations.





*Tenant
      Leasehold Improvement Allowance*





In
      accordance with the terms of the corporate office lease for its facility in
      Newark, NJ, the landlord is subject to pay a tenant leasehold improvement
      allowance to the Company for leasehold improvement work performed at the
      facility, up to a maximum amount per square foot. In June 2007, the Company
      billed the landlord $1.3 million for this tenant allowance, of which $1.1
      million had been paid as of September 30, 2007. In accordance with FASB
      Technical Bulletin, or FTB, No. 88-1, *Issues Relating to Accounting for
      Leases*, this tenant allowance, recorded as deferred rent within accrued
      expenses and other current liabilities and deferred rent, non-current on the
      accompanying condensed consolidated Balance Sheet as of September 30, 2007,
      is
      an incentive that is considered a reduction of rental expense, which is
      amortized on a straight-line basis over the remaining term of the lease.
      Straight-line rent expense in excess of rent payments due is recorded as
      deferred rent within accrued expenses and other current liabilities and deferred
      rent, non-current on the accompanying condensed consolidated Balance Sheet
      as
      of  September 30, 2007 and December 31, 2006.





*Fair
      Value of Financial Instruments*





Financial
      instruments that potentially subject the Company to significant concentrations
      of credit risk consist of cash and cash equivalents, short-term investments,
      accounts receivable, accounts receivable from related parties, accounts payable
      and accrued expenses. At September 30, 2007 and December 31, 2006, the fair
      values of these financial instruments approximated their carrying values due
      to
      the short-term nature of these instruments.








-8-
 
 Table of Conents





*Foreign
      Currency Translation*





In
      accordance with the provision of Statement of Financial Accounting Standard,
      or
      SFAS, No. 52,*Foreign Currency Translation* (“SFAS No.
      52”),**Audible UK, whose functional currency is the British Pound,
      translates its balance sheet into U.S. dollars at the prevailing rate at the
      balance sheet date and translates its revenues, costs and expenses at the
      average rates prevailing during each reporting period. Net gains or losses
      resulting from the translation of Audible UK's financial statements are
      accumulated and charged directly to accumulated other comprehensive loss, a
      component of stockholders' equity.





Prior
      to
      2007, Audible Inc. made cash fundings to Audible UK to assist with its cash
      flow
      needs. All of these fundings were made with the intention of treating them
      as a
      long-term investment. In accordance with the provisions of SFAS No. 52, the
      foreign currency gain/loss at each reporting period resulting from the long-term
      inter-company account is recorded to accumulated other comprehensive loss,
      a component of stockholders’ equity. Other inter-company transactions between
      Audible, Inc. and Audible UK that are not considered long-term in nature, and
      other transactions denominated in a foreign currency, give rise to foreign
      exchange gains or losses, which are reported in other income (expense) on the
      condensed consolidated Statement of Operations, in accordance with SFAS No.
      52.





*Reclassifications*





Certain
      prior period amounts have been reclassified to conform to current period
      presentation. These reclassifications had no effect on stockholders equity,
      net
      loss or loss per share for any period.





*Investments
      Accounted For Under the Equity Method of Accounting*





Prior
      to
      the additional contribution made to Audible Germany (see Note 6) by a new
      investor in July 2006, the Company’s ownership percentage of Audible Germany was
      greater than 50%. Under Emerging Issues Task Force, or EITF, Issue No. 96-16,
      *Investor’s Accounting for an Investee when the Investor has a Majority of
      the Voting Interest but the Minority Shareholder of Shareholders Have Certain
      Approval or Veto Rights* (“EITF No. 96-16”), the Company had determined that
      the minority shareholders, together have significant participatory rights,
      allowing them to participate in significant decisions of Audible Germany and
      to
      block significant decisions proposed by Audible. As a result of the significant
      participatory rights held by the minority shareholders, the Company did not
      have
      unilateral control over Audible Germany. Therefore, the Company did not
      consolidate the results of Audible Germany but rather accounted for its
      investment in Audible Germany under the equity method of accounting. Under
      the
      equity method of accounting, the Company records its pro-rata share of the
      profits, if any, and its pro-rata of the equity losses but only until such
      time
      that the Company records losses equal to the initial investment of the Company
      plus any profits previously recorded. The initial investment was reduced to
      zero
      during 2004. Subsequent to the additional fundings made during 2006, the
      Company’s ownership was reduced to 44.9%. In July 2007, the Company made an
      additional cash investment of $1.0 million that increased its ownership to
      45.4%. For the three and nine month periods ended September 30, 2007
      respectively, the Company recognized its pro-rata loss of less than $0.1 million
      under the equity method. During the three month periods ended September 30,
      2007
      and September 30, 2006, the Company recognized $0.4 million and $0.2 million,
      respectively, in related party revenue. For the nine month periods ended
      September 30, 2007 and September 30, 2006, the Company recognized $0.5 million
      and $0.9 million, respectively, in related party revenue.





*Revenue
      Recognition*





Content
      and Services





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





In
      July
      2006, the Company entered into a global master agreement with Apple that
      replaced prior agreements entered into with Apple. The Company continues to
      recognize revenue from sales made at the Apple iTunes Store in the period
      when the content is purchased and delivered. However, in accordance with
      the terms of the new agreement, the amount of revenue the Company
      recognizes on each sale is now formula-driven, derived from the
      Apple iTunes selling price and the content cost of each audio
      book.





-9-
 
 Table of Conents





The
      “legacy” AudibleListener monthly membership plans generally provide customers
      two audio credits for a fixed monthly fee. Customers may use these audio credits
      to download audio of their choice from the Web site. “Legacy” AudibleListener
      audio credits provided under a monthly membership plan have a life of 30 days,
      after which they expire. The Company recognizes revenue from the sale of legacy
      AudibleListener memberships ratably over the AudibleListener members’ monthly
      membership period, which is 30 days. This results in approximately 50% of the
      AudibleListener membership fees received during each calendar month being
      deferred at month end and recognized as content revenue in the following
      month.





In
      December 2005, the Company introduced new AudibleListener monthly and annual
      membership plans, designed to provide customers more flexibility in using their
      audio credits. Depending upon the AudibleListener membership plan, customers
      receive and can “bank” or delay using a maximum number of audio credits,
      depending on the membership plan. The banking feature results in audio credits
      being used (delivered) over different periods for different customers. This
      may
      result in slower revenue growth or less revenue than the Company experienced
      in
      prior periods because the customer has a longer period of time to use his/her
      audio credits. In addition, some of the new AudibleListener plans include new
      membership benefits, ranging from a complimentary audio newspaper delivered
      each
      weekday to everyday discounts of 30% on a la carte purchases. The audio
      newspaper and 30% discount benefits are “serial” elements that are delivered
      continuously over the membership period, whereas the content selections
      underlying the audio credits are discrete elements that are delivered at
      different times based on individual customer behavior. As a result of the
      characteristics of the new AudibleListener memberships, they are considered
      revenue arrangements with multiple deliverables; however under EITF No.
      00-21,*Revenue Arrangements with Multiple Deliverables* (“EITF No.
      00-21”)*,* because the deliverables are not eligible for separation, they
      are accounted for as a single unit of accounting. As a result, revenue is
      recognized for these new AudibleListener membership plans using the lesser
      of
      straight-line or proportional performance (based on content delivery) over
      the
      maximum membership period.





Upon
      launch of the new AudibleListener plans in December 2005, the legacy
      AudibleListener plans were no longer available to new customers, except for
      UK
      customers who purchase their memberships from the UK Web site. Customers who
      have legacy memberships have the option of either converting to one of the
      new
      AudibleListener membership plans or continuing their legacy membership. Revenue
      is recognized from the sale of UltimateListener, the legacy prepaid discounted
      content package, in which the customer receives twelve audio credits, and gift
      programs, when the content is downloaded, over the membership period or
      subscription period, as applicable.





Point
      of Sale Rebates and Discount Certificate Rebates





Part
      of
      the Company's marketing strategy to obtain new AudibleListener members includes
      retail promotions in which the Company pays retailers to offer discounts to
      consumers on their purchase of AudibleReady devices if they become
      AudibleListener members for twelve months. The Company also has retail
      promotions in which it purchases electronic discount certificates or gift cards
      from retailers and gives them away to the Company's customers when they sign
      up
      to be AudibleListener members for twelve months. Point of sale rebates, which
      are discounts given by a third party retailer to a customer on the purchase
      of a
      digital audio player at the point of sale of the Audible membership, are
      recorded as a reduction of revenue in the period the discount is given in
      accordance with EITF No. 01-9,*Accounting for Consideration Given by a
      Vendor to a Customer (Including a Reseller of the Vendor's Products)* (“EITF
      No. 01-9”). The cost of discount certificate rebates and gift cards that are
      given to a customer by the Company at the time the customer purchases the
      Audible membership are recorded as a cost of content and services revenue in
      accordance with EITF No. 01-9.





Services
      Revenue





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





Hardware
      Revenue





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





-10-
 
 Table of Conents





Related
      Party Revenue





Related
      party revenue consists of revenue earned under agreements with Audible Germany
      (see Note 6) and France Loisirs (see Note 7). Revenue under the Audible Germany
      agreement includes $0.1 million earned per quarter over the initial 30-month
      term of the agreement All amounts related to the original 30-month agreement
      with Audible Germany had been recognized as of March 31, 2007. Revenue under
      the
      France Loisirs agreement included a $1.0 million technology licensing fee that
      was recognized on a straight-line basis over the initial 24-month term of the
      agreement, which began on September 15, 2004. France Loisirs had paid the full
      amount as of December 31, 2006 and all revenue related to this agreement had
      been recognized as of December 31, 2006. Revenue earned under each of these
      agreements also includes consulting services performed by certain of the
      Company's employees and reimbursement of certain incremental costs incurred
      by
      the Company that are billed to Audible Germany and France Loisirs in accordance
      with EITF Issue 01-14,*Income Statement Characterization of Reimbursement
      Received for Out-of-Pocket' Expenses Incurred* (“EITF No.
      01-14”).





Other
      Revenue





Other
      revenue of $0.2 and $0.1 million for the three month periods ended September
      30,
      2007 and 2006, respectively and $0.4 and $0.3 for the nine month periods ended
      September 30, 2007 and 2006, respectively primarily included revenue for fees
      earned for production of audio content under a product development and
      distribution agreement that began in July 2005, which is being recognized on
      a
      straight-line basis over a 58-month period until the expiration of the agreement
      in May 2010.





Customer
      Concessions





The
      Company defers revenue for expected replacement audio credits to legacy members
      based on historical experience of the credits issued. The Company defers revenue
      for other audio credits and coupons when they are delivered to the customers
      based on estimated values. Actual customer credit and coupon issuance and usage
      patterns could differ from the Company's estimates. The concessions are recorded
      as a reduction of revenue and an increase to deferred revenue.





*Cost
      of Content and Services Revenue*





Cost
      of
      content and services revenue includes royalties incurred on sales of content
      as
      specified by the terms of the content agreements, discount certificate rebates,
      amortization of audio production costs incurred in connection with creation
      of
      certain audio products, and other non-recoupable content costs. Royalty expense
      for sales of content is incurred based on either a percentage of revenue or
      a
      fixed price per title as per the royalty agreement. The royalty cost per title
      may differ depending upon whether the title is sold as part of the
      AudibleListener membership or sold as an a la carte sale.





*Shipping
      and Handling Costs*





Shipping
      and handling costs, which consist of costs and fees associated with warehousing,
      fulfillment, and shipment of digital audio devices to customers, are recorded
      as
      a component of marketing expense in the condensed consolidated Statements of
      Operations. These costs totaled less than $0.1 million for the three and nine
      month periods ended September 30, 2007 and 2006, respectively.





*Advertising
      Expenses*





The
      Company expenses the costs of advertising and promoting its products and
      services as incurred. These costs are included in marketing expense in the
      accompanying condensed consolidated Statements of Operations and totaled $1.5
      million and $1.1 million for the three month periods ended September 30, 2007
      and 2006, respectively, and $4.2 million and $5.2 million for the nine months
      ended September 30, 2007 and 2006, respectively.








-11-
 
 Table of Conents





*Legal
      Fees*





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





*Use
      of Estimates*





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements, and reported
      amounts of revenues and expenses during the period. Significant items subject
      to
      estimates include the recoverability of the carrying amount of property and
      equipment (including internally developed software), the provision for refunds
      and chargebacks, customer concessions, recoverability of royalty advances,
      recoverability of audio production costs, lease period when right of
      cancellation exists, valuation of deferred tax assets, certain accruals and
      fair
      value of share-based compensation. Actual results could differ from
      estimates.





*Income
      Taxes*





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





*Accounting
      for Uncertainty in Income Taxes*





On
      January 1, 2007, the Company adopted the provisions of Financial Accounting
      Standards Board (“FASB”) Interpretation No. 48, *Accounting for Uncertainty
      in Income Taxes* (“FIN No. 48”), an interpretation of SFAS No. 109. FIN No.
      48 prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. The interpretation requires that the
      Company recognize the tax benefit of a tax position in the financial statements
      if it is more likely than not that the tax position will be sustained on audit,
      based upon technical merits of the position. FIN No. 48 also provides guidance
      on de-recognition of tax accruals, classification of current and deferred tax
      accounts, accruals for interest and penalties, and accounting in interim and
      year end periods, including disclosures.





The
      Company files federal and State of New Jersey corporate income tax returns.
      The
      Company also files a corporate income tax return in the United Kingdom. All
      tax
      years since inception are open to tax examination by the taxing authorities
      for
      possible adjustments to the net operating losses but not for assessment. The
      statute of limitations for assessment of tax is generally three years from
      the
      last date prescribed by law for the filing of the return for federal, as well
      as
      for the State of New Jersey, and six years for the United Kingdom. The years
      currently open for federal income tax assessment includes calendar years 2003
      through 2006, calendar years 2003 through 2006 for New Jersey income tax
      assessment purposes, and calendar years 2005 through 2006 for the United
      Kingdom. The Company is not currently under examination by any of the above
      jurisdictions for any of the open years as above.





The
      implementation of FIN No. 48 has not resulted in any adjustment to the Company’s
      beginning tax position or tax position for the three or nine month periods
      ended
      September 30, 2007.





*Basic
      and Diluted Net Loss per Share*





Basic
      net
      loss per share is computed by dividing net loss by the weighted average number
      of common shares outstanding for the period. Diluted net loss per share reflects
      the potential dilution that could occur if securities or other contracts to
      issue common stock were exercised or converted into common stock and resulted
      in
      the issuance of common stock. Potential common shares consist primarily of
      incremental shares issuable upon the assumed exercise of stock options, warrants
      and the vesting of restricted stock units using the treasury stock
      method.





-12-
 
 Table of Conents





For
      the
      three and nine month periods ended September 30, 2007 and 2006, diluted net
      loss
      per share is equal to basic net loss per share and diluted common shares
      outstanding is equal to basic common shares outstanding, since all potential
      common stock was anti-dilutive.





For
      the
      three and nine month periods ended September 30, 2007 and 2006, all potential
      common shares have been excluded from the diluted calculation since the Company
      was in a net loss position, and their inclusion would have been
      anti-dilutive.




The
      following table summarizes the potential common shares excluded from the diluted
      calculation:




**For
                  the three and nine month periods ended September
                  30,****2007**
              
              
              **2006**Stock
                  options
              
              
              2,052,913
              
              
              
              2,307,598Warrants
              
              
              413,999
              
              
              
              716,723Restricted
                  Stock
              
              
              1,042,897
              
              
              
              869,360Total
              
              
              3,509,809
              
              
              
              3,893,681




*Share-Based
      Compensation*





In
      accordance with SFAS No. 123 (Revised), *Share-Based Payment* (“SFAS No.
      123R”), the Company measures compensation cost for stock awards at fair value
      and recognizes compensation over the requisite service period for awards
      expected to vest. Estimating the portion of stock awards that will ultimately
      vest requires judgment, and to the extent actual results or updated estimates
      differ from the Company’s current estimates, such amounts are recorded in the
      period estimates are revised. The Company considers several factors when
      estimating expected forfeitures, including types of awards, employee class,
      and
      historical experience. The Company also considers several factors when
      estimating expected volatility and expected life of the option. The expense
      is
      recorded on the income statement based on the department the employee is
      in.





**(3)** **Property
      and Equipment**





Property
      and equipment at September 30, 2007 and December 31, 2006 consisted of the
      following (in thousands):





**September
                30,**
              **2007**
            
            
            **December
                31, 2006**Computer
                server and Web site equipment
            
            $
            8,028
            
            
            $
            7,687Software
                licenses
            
            
            3,915
            
            
            
            4,235Internally
                developed software
            
            
            3,377
            
            
            
            2,779Leasehold
                improvements
            
            
            3,435
            
            
            
            1,011Office
                furniture and equipment
            
            
            2,339
            
            
            
            1,720Studio
                equipment
            
            
            857
            
            
            
            667Work
                in process
            
            
            381
            
            
            
            326Construction
                in progress
            
            
            1,204
            
            
            
            443Total
                property and equipment
            
            
            23,536
            
            
            
            18,868Less:
                accumulated depreciation and amortization
            
            
            (12,781
            )
            
            
            (10,719
            )Total
                property and equipment, net
            
            $
            10,755
            
            
            $
            8,149





Depreciation
      and amortization expense on property and equipment totaled $1.3 million during
      the three months ended September 30, 2007 and 2006. Depreciation and
      amortization expense on property and equipment totaled $4.0 million and $3.7
      million during the nine months ended September 30, 2007 and 2006,
      respectively.





For
      the
      nine months ended September 30, 2007, the Company reduced both fixed assets
      and
      accumulated depreciation when it retired $1.7 million in fully depreciated
      assets related to the office move.





The
      gross
      amount of property and equipment and related accumulated amortization recorded
      under capital leases were as follows (in thousands):





**September
                30,**
              **2007**
            
            
            **December
                31, 2006**Computer
                server and Web site equipment
            
            $
            743
            
            
            $
            743Less:
                accumulated amortization
            
            
            (743
            )
            
            
            (685
            )Total
                computer server and Web site equipment, net
            
            $
            --
            
            
            $
            58




-13-
 Table
          of Conents




**(4)** **Accrued
      Expenses and Other Current Liabilities**





The
      components of the accrued expenses and other current liabilities balance were
      as
      follows (in thousands):





**September
                30,**
              **2007**
            
            
            **December
                31, 2006**Professional
                fees
            
            $
            1,024
            
            
            $
            958Construction
                in progress
            
            
            683
            
            
            
            --Revenue
                sharing and bounty payments
            
            
            499
            
            
            
            630Liabilities
                - related parties
            
            
            420
            
            
            
            400Software
                license fees
            
            
            303
            
            
            
            215Value
                added tax
            
            
            221
            
            
            
            708Royalty
                obligations
            
            
            194
            
            
            
            242Consulting
            
            
            165
            
            
            
            232Retail
                rebates and discounts
            
            
            118
            
            
            
            410Marketing
            
            
            103
            
            
            
            241Other
                accrued expenses and other current liabilities
            
            
            513
            
            
            
            642Total
                accrued expenses
            
            $
            4,243
            
            
            $
            4,678





**(5)** **Stockholders'
      Equity**





The
      following is a summary of the consolidated Stockholders' Equity activity for
      the
      nine months ended September 30, 2007 (in thousands except share
      data):




**Common
                Stock****Shares**
            
            
            **Par
                value**
            
            
            **Additional
                paid-in capital**
            
            
            **Accumulated
                other comprehensive loss**
            
            
            **Accumulated
                deficit**
            
            
            **Total
                stockholders' equity**Balance
                at December 31, 2006
            
            
            24,119,768
            
            
            $
            241
            
            
            $
            190,799
            
            
            $
            (36
            )
            
            $
            (140,538
            )
            
            $
            50,466Issuance
                of restricted stock
            
            
            97,315
            
            
            
            1
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            --Exercise
                of common stock options
            
            
            165,186
            
            
            
            2
            
            
            
            467
            
            
            
            --
            
            
            
            --
            
            
            
            469Share-based
                compensation expense
            
            
            --
            
            
            
            --
            
            
            
            4,577
            
            
            
            --
            
            
            
            --
            
            
            
            4,577Payment
                of taxes due on vested restricted stock
            
            
            --
            
            
            
            --
            
            
            
            (448
            )
            
            
            --
            
            
            
            --
            
            
            
            (448
            )Foreign
                currency translation adjustment
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (21
            )
            
            
            --
            
            
            
            (21
            )Net
                loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            
            
            
            
            (1,527
            )
            
            
            (1,527
            )Balance
                at September 30, 2007
            
            
            24,382,269
            
            
            $
            244
            
            
            $
            195,394
            
            
            $
            (57
            )
            
            
            (142,065
            )
            
            $
            53,516





*Common
      Stock*





As
      of
      September 30, 2007 and December 31, 2006, the Company had outstanding 24,382,269
      and 24,119,768, respectively, shares of common stock. As of September 30, 2007
      and December 31, 2006, the Company had 3,509,809 and 3,942,674, respectively,
      shares of common stock reserved for common stock warrants, options and
      restricted stock.








-14-
 
 Table of Conents




*Share-Based
      Compensation*





The
      Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
      options, stock appreciation rights, restricted or unrestricted stock awards,
      performance rights and other stock-based awards to employees. Beginning in
      the
      second quarter of 2007, for option awards granted to Audible employees as part
      of their compensation package, the exercise price is determined by the opening
      price of Audible's common stock on the grant date, which for new employees
      is
      the employee's start date. Prior to the second quarter of 2007, the exercise
      price for stock options was determined by the closing price of Audible’s common
      stock on either the day immediately preceding a new employee’s start date or the
      date immediately preceding the grant date for existing employees. This change
      in
      policy had no impact on any previously granted options. The majority of options
      granted vest over a fifty-month period and expire ten years from the date of
      the
      grant. All share-based compensation is granted through share-based employee
      compensation plans maintained by Audible. The total aggregate number of common
      shares under the Plan is 5,700,000 shares, of which approximately 742,000 shares
      authorized remain available for issuance of new awards.





Effective
      January 1, 2006, the Company adopted SFAS No. 123R utilizing the modified
      prospective approach. Total compensation expense for share-based payment
      arrangements recognized for the three month periods ended September 30, 2007
      and
      2006 respectively was $1.5 million. The Company recorded compensation expense
      of
      $4.6 million and $4.2 million for the nine month periods ended September 30,
      2007 and 2006, respectively.




(in
                thousands)
            
            **Three
                months ended September 30,**
            
            
            **Nine
                months ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Operations
            
            $
            243
            
            
            $
            324
            
            
            $
            808
            
            
            $
            767Technology
                and Development
            
            
            240
            
            
            
            281
            
            
            
            804
            
            
            
            699Marketing
            
            
            292
            
            
            
            271
            
            
            
            898
            
            
            
            796General
                and administrative
            
            
            694
            
            
            
            629
            
            
            
            2,067
            
            
            
            1,900Total
                Compensation Expense
            
            $
            1,469
            
            
            $
            1,505
            
            
            $
            4,577
            
            
            $
            4,162





*Stock
      Options*





The
      Company uses the Black-Scholes option pricing model to estimate the fair value
      of stock options with the following weighted-average assumptions for the
      indicated periods:





**Three
                months ended**
            
            
            **Nine
                months ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Dividend
                yield
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Expected
                volatility
            
            
            77.33
            %
            
            
            76.56
            %
            
            
            77.33
            %
            
            
            76.56
            %Risk-free
                interest rate
            
            
            4.38
            %
            
            
            4.50
            %
            
            
            4.38
            %
            
            
            4.50
            %Expected
                life of option (years)
            
            
            4.58
            
            
            
            4.63
            
            
            
            4.58
            
            
            
            4.63





The
      assumptions above are based on multiple factors, including historical exercise
      patterns of employees in relatively homogeneous groups with respect to exercise
      and post-vesting employment termination behaviors, expected future exercising
      patterns for these same homogeneous groups and both the implied and historical
      volatility of the Company’s stock price. The expected life of the option
      represents the period of time that the option granted is expected to be
      outstanding. Expected volatility is calculated based on the historical and
      implied volatility of the Company’s stock price. The risk free interest rate is
      based on the U.S. Treasury yield curve commensurate with the expected term
      in
      effect at the time of grant. For the three and nine month periods ended
      September 30, 2007 and 2006, the Company did not grant a significant number
      of
      stock option awards, and therefore there was no re-measurement done for the
      assumptions used.







-15-
 
 Table of Conents





During
        the three months ended September 30, 2007, the Company granted options to
        purchase 75,000 shares of common stock under the Plan. During the three months
        ended September 30, 2006, the Company did not grant any awards under the
        Plan.
        During the nine months ended September 30, 2007 and 2006, the Company granted
        options to purchase 145,000 and 13,100 shares of common stock, respectively,
        under the Plan. During the three months ended September 30, 2007 and 2006,
        respectively, options to purchase 11,327 and 27,986 shares of common stock
        were
        forfeited due to employee terminations.  During the nine months ended
        September 30, 2007 and 2006, respectively, 153,142 and 187,781 shares of
        common
        stock were forfeited due to employee terminations.





*Restricted
      Stock*





During
      the three month periods ended September 30, 2007 and 2006, the Company granted
      awards to receive 114,976 and 71,900 restricted stock units, respectively,
      to
      employees under the Plan. During the nine month periods ended September 30,
      2007
      and 2006, the Company granted awards to receive 257,176 and 733,300 restricted
      stock units, respectively, to employees under the Plan. The restricted shares
      either cliff-vest or vest periodically between three months and forty-eight
      months after the grant date. During the three month periods ended September
      30,
      2007 and 2006, respectively, 27,179 and 74,500, restricted stock units were
      forfeited due to employee terminations. During the nine month periods ended
      September 30, 2007 and 2006, respectively, 64,534 and 115,300, restricted stock
      units were forfeited due to employee terminations. Actual shares under these
      awards are not issued until vesting is complete. Under the terms of the
      restricted stock awards, unless different provisions are noted on the restricted
      stock award, the Company is required to issue to the recipient the number of
      whole shares of common stock that equals the number of vested whole restricted
      stock shares following the date on which the restricted stock share becomes
      vested.





In
      accordance with the terms of the restricted stock unit award agreement, the
      Company has the right to deduct from any compensation due the employee, the
      amount of any federal, state or local taxes required by law to be withheld
      as a
      result of vesting of the restricted stock units; provided, however, that the
      value of the shares of common stock withheld may not exceed the statutory
      minimum withholding amount required by law.  In lieu of such deduction, the
      Company may require the employee to make a cash payment to the Company equal
      to
      the amount required to be withheld.  During the three months ended
      September 30, 2007, 19,713 shares were withheld from employees for the payment
      for taxes due, at the employee’s election. No shares were withheld in the three
      and nine month periods ended September 30, 2006.





*Common
      Stock Repurchase Program and Treasury Stock*





In
      February 2006, the Company's Board of Directors authorized a common stock
      repurchase program, pursuant to which the Company may from time to time
      repurchase (through open market repurchases at prevailing market prices), up
      to
      an aggregate of $25.0 million of the Company's outstanding common stock. During
      the three and nine month periods ended September 30, 2007, no shares were
      repurchased. During the nine months ended September 30, 2006, 462,300 shares
      were repurchased, at an average price of $8.63. The Company subsequently legally
      retired the treasury stock. As of September 30, 2007 and December 31, 2006,
      the
      Company held no shares of common stock as treasury stock.





*Comprehensive
      loss*





The
      following table sets forth comprehensive loss for the periods indicated (in
      thousands):





**Three
                months ended September 30,**
            
            
            **Nine
                months ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                loss
            
            $
            (192
            )
            
            $
            (2,525
            )
            
            $
            (1,527
            )
            
            $
            (7,747)
            )Other
                comprehensive loss:Foreign
                currency translation adjustment
            
            
            (8
            )
            
            
            (7
            )
            
            
            (21
            )
            
            
            (38
            )Comprehensive
                loss
            
            $
            (200
            )
            
            $
            (2,532
            )
            
            $
            (1548
            )
            
            $
            (7,785
            )








-16-
 Table
          of Conents




(**6)
      Investment in related Company (Audible Germany Agreement)**





On
      August
      30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
      Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
      (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
      an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
      approximately 4.5% of Audible's common stock at September 30, 2007.





Audible
      Germany has the exclusive rights to operate a German language Audible Web site.
      Under the original Joint Venture, Random House and Holtzbrinck each contributed
      a nominal amount in exchange for each receiving a 24.5% interest in Audible
      Germany. The Company was required to contribute a nominal amount in exchange
      for
      a 51% interest in Audible Germany. After the initial formation, Random House
      and
      Holtzbrinck were to provide additional equity financing of $1.5 million each
      in
      certain installments, subject to Audible Germany meeting certain milestones.
      The
      full amount has been funded by Random House and Holtzbrinck. In the event of
      liquidation of Audible Germany, this additional financing by Random House and
      Holtzbrinck accrues interest at 8% per annum and is senior to Audible's capital
      investment. In July 2006, a new investor, Luebbe, contributed €0.3 million for a
      5% interest in Audible Germany. This contribution reduced the Company’s interest
      to 48% and Random House’s and Holzbrinck’s ownership percentage to 23.5% each.
      The Company may, but is not obligated to, contribute additional capital to
      the
      entity. Any profits distributed by Audible Germany are to be distributed in
      accordance with the ownership interests.





In
      October 2006, the original Joint Venture agreement was amended to provide
      additional financing commitments for the investors. Accordingly, additional
      contributions were made by the Company and Holtzbrinck in October 2006 and
      December 2006. During the fourth quarter of 2006, the Company contributed €0.3
      million, or $0.4 million, which includes the amount that was due to the Company
      from Audible Germany for services performed during the twelve month period
      ended
      December 31, 2006, and Holtzbrinck contributed €0.7 million. In addition, the
      Company contributed a nominal amount and Holtzbrinck contributed a nominal
      amount as statutory capital contributions during the fourth quarter of 2006.
      These contributions further changed the ownership percentages to 44.9% for
      the
      Company, 30.9% for Holtzbrinck, 19.5% for Random House, and 4.7% for
      Luebbe.





During
      the first quarter of 2007, the Company contributed an additional amount of
      $0.1
      million for the amount that was due to the Company from Audible Germany for
      services performed during this period. This contribution further changed the
      ownership percentage to 45.3% for the Company, 30.7% for Holtzbrinck, 19.4%
      for
      Random House, and 4.6% for Luebbe.





In
      July
      2007, a second amendment was signed and executed to the original Joint
      Venture agreement, which stipulated the additional financing commitments for
      the
      Company, Holtzbrinck, Random House, and a new investor, CSW. CSW, incorporated
      in Germany, is an entity owned 100% by the managing director of Audible Germany.
      Additional contributions were made by these investors as follows: Audible,
      Inc.,
€0.7 million, Holtzbrinck, €0.5 million, Random House, €0.3 million, and CSW,
€0.2 million. In addition, each investor contributed statutory capital
      contributions of less than €0.1 million.  These contributions further
      changed each investor’s ownership percentage to 45.4% for the Company, 29.7% for
      Holtzbrinck, 19.5% for Random House, 3.4% for Luebbe, and 2.0% for
      CSW.





At
      the
      time the Joint Venture was entered into, the Company had determined that Audible
      Germany was not a variable interest entity as defined in FASB Interpretation
      No.
      46R,*Consolidation of Variable Interest Entities, an interpretation of ARB
      No. 51* (“FIN No. 46R”) because, as a development stage enterprise, Audible
      Germany had sufficient equity to permit it to finance the activities in which
      it
      was currently engaged in without additional subordinated financial support.
      In
      addition, the other criteria within FIN No. 46R that would characterize Audible
      Germany as a variable interest entity were not met. Rather, Audible Germany
      was
      considered to be a voting interest entity. Upon occurrence of the additional
      financing in July 2006, the Company performed an analysis to determine whether
      or not Audible Germany is a variable interest entity, as defined in FIN No.
      46R.
      Audible Germany is 100% equity funded and no debt exists or is planned.
      Therefore, equity is deemed to be sufficient under the definition of FIN No.
      46R
      paragraph 5a. In addition, under paragraph 9 of FIN No. 46R, on a qualitative
      basis, Audible Germany has demonstrated that it can finance its activities
      without additional subordinated financial support, even though the equity may
      be
      less than 10% of the entity’s total assets. An entity that is able to support
      its operations with existing equity has demonstrated the sufficiency of its
      equity. Therefore, the Company has concluded that Audible Germany continues
      to
      be a voting interest entity.





Prior
      to
      the additional contribution made in July 2006, the Company’s ownership
      percentage was greater than 50%. Under EITF No. 96-16,**the Company
      had determined that the minority shareholders, together, have significant
      participatory rights, allowing them to participate in significant decisions
      of
      Audible Germany and to block significant decisions proposed by Audible. As
      a
      result of the significant participatory rights held by the minority
      shareholders, the Company did not have unilateral control over Audible Germany.
      Therefore, Audible did not consolidate the results of Audible Germany but rather
      accounted for its investment in Audible Germany under the equity method of
      accounting. Under the equity method of accounting, the Company records its
      shares of the profits, if any, and its share of the equity losses but only
      until
      such time that the Company records losses equal to the initial investment of
      the
      Company plus any profits previously recorded. The initial investment was reduced
      to zero during 2004. Subsequent to the additional fundings made in July 2006,
      October 2006, December 2006, March 2007 and July 2007, the Company’s ownership
      percentage was changed to 45.4% and therefore the equity method of accounting
      for the investment in Audible Germany continues to apply regardless of the
      significant participatory rights of the other investors.





-17-
 Table
            of Conents





In
      connection with the Joint Venture, on August 30, 2004, the Company entered
      into
      a license and services agreement with Audible Germany (the “License”). Under the
      License, Audible Germany launched a German language spoken word audio service.
      The terms provide for the Company to provide intellectual property and
      substantially all of the technological infrastructure for the operation of
      the
      service. In return, Audible Germany was required to pay Audible $0.9 million
      over a 30-month period, beginning in September 2004. Every 60 days during this
      agreement, the parties met to review and accept the services. The monthly
      payments were subject to refund if Audible Germany did not accept the services,
      subject to reasonable cure. Under the License, Audible recognized $0.1 million
      of revenue per quarter once Audible Germany agreed that the services delivered
      were satisfactory and collection of the amount was reasonably assured. Also
      under the License, Audible Germany will pay the Company royalties ranging from
      0.5% to 3% of revenue up to an annual royalty cap of the U.S. dollar equivalent
      of €1.5 million, subject to Audible Germany achieving certain operating margins.
      No royalties have been received by the Company under the License.





During
      the three and nine month periods ended September 30, 2007, the Company
      recognized $0.1 million in related party revenue under the License. During
      the
      three and nine month periods ended September 30, 2006, the Company recognized
      $0.2 million, respectively, in related party revenue. The full amount of
      revenues recognized during the nine months ended September 30, 2007 were not
      collected in cash, but rather were contributed as the Company’s equity
      investment in Audible Germany. As of September 30, 2007, the Company recorded
      its share of the equity loss up to the amount of its investment of less than
      $0.1 million, on the accompanying consolidated Statements of Operations.
      Revenues under the License have been fully recognized.





In
      addition, the Company recognizes billings for certain consulting services and
      related incremental reimbursable costs incurred in connection with the License
      in accordance with EITF 01-14. These amounts are included in related party
      revenue on the condensed consolidated Statements of Operations. During the
      three
      and nine month periods ended September 30, 2007, $0.1 million and $0.4 million,
      respectively, was recognized for these costs. During the three and nine month
      periods ended September 30, 2006, none and $0.2 million, respectively, was
      recognized for these costs. The Company accrues for amounts to be paid to
      Audible Germany related to net profit earned by Audible, Inc. at the Apple
      Germany iTunes music store. These amounts are included in accrued expenses
      and
      other current liabilities in the condensed consolidated Balance Sheets as of
      September 30, 2007 and December 31, 2006, and marketing expense in the condensed
      consolidated Statement of Operations. As of September 30, 2007, the Company
      had
      an account receivable balance of $0.2 million related to Audible Germany,
      primarily related to accrued royalties and accrued revenue share expenses the
      Company pays on Audible Germany’s behalf.





**(7)
      France Loisirs Agreement**





On
      September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
      Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
      Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”),
      the term of which has been extended to March 31, 2010. France Loisirs is a
      wholly owned subsidiary of Bertelsmann AG. During this time, terms and
      conditions of the Agreement remain in effect. No additional fees will be paid
      to
      the Company other than billings for consulting and incremental costs and royalty
      payments to the Company discussed below.





Under
      the
      Agreement, in the quarter ended March 31, 2005, France Loisirs launched a French
      language spoken word audio service through Audio Direct. The terms provide
      for
      Audible to provide intellectual property and substantially all of the
      technological infrastructure for the operation of the service. In return, France
      Loisirs was required to pay Audible $1.0 million, payable as follows: $0.3
      million in September 2004, $0.3 million in October 2004, $0.3 million in January
      2005 and $0.1 million evenly over the following 12 months. As of December 31,
      2006, the Company had received the full amount. Commencing the first fiscal
      year
      after the business achieves positive net income, the Company will receive a
      royalty of 5% of the business's annual net paid revenue. Net paid revenue refers
      to net revenues for digital spoken word content after the deduction of taxes
      but
      excluding certain hardware revenue. The 5% royalty will apply until the business
      net paid revenue exceeds €20.0 million. Once net paid revenue exceeds €20.0
      million, the Company will receive a flat fee of €1.0 million annually. If net
      paid revenue exceeds €33.3 million, the Company will receive a royalty payment
      of €1.0 million, plus 3% of net paid revenue in excess of €33.3 million. An
      additional royalty is payable equal to one-half of the distributable pre-tax
      profits of the business.





-18-
 Table
          of Conents




FIN
      No.
      46R addresses the consolidation by business enterprises of VIE and requires
      that
      if an enterprise is the primary beneficiary of a variable interest entity,
      the
      assets, liabilities, and results of the activities of the variable interest
      entity should be consolidated in the financial statements of the enterprise.




Audio
      Direct is considered a VIE because its equity is not sufficient to permit the
      entity to finance its activities without additional subordinated financial
      support. Audible and France Loisirs form a related party group, as defined
      in
      FIN No. 46R, as a result of the Bertelsmann affiliation and the number of seats
      that Bertelsmann holds on the Audible Board of Directors. Under FIN No. 46R,
      the
      entity within the related party group that is most closely associated with
      the
      variable interest entity is the primary beneficiary.





Based
      upon analysis, the Company determined that France Loisirs is more closely
      associated with Audio Direct, primarily because France Loisirs is required
      to
      fund the operations of Audio Direct, including the $1.0 million payment made
      to
      Audible. France Loisirs is therefore considered to be the primary beneficiary
      of
      Audio Direct. As a result, the Company does not consolidate the results of
      Audio
      Direct but rather accounts for its variable interest in Audio Direct under
      the
      cost method of accounting.





Because
      the Company has not made and is not required to provide any funding to France
      Loisirs or Audio Direct, it has no exposure to loss under the
      Agreement.





The
      $1.0
      million in fees were non-refundable and not subject to any acceptance
      provisions. Since fair values did not exist for the different services
      (elements) that Audible provided, the services were considered a single unit
      of
      accounting under EITF No. 00-21 and accordingly, the $1.0 million in fees were
      recognized as related party revenue on a straight-line basis over the 24-month
      term, provided collectibility is reasonably assured. As of December 31, 2006,
      the full amount had been collected and recognized as revenue.





The
      Company recognized no revenue for the three and nine month periods ended
      September 30, 2007 related to the Agreement. The Company recognized $0.1 million
      and $0.3 million of revenue during the three and nine month periods ended
      September 30, 2006, respectively. In addition, the Company recognizes related
      party revenue for billings for certain consulting services and related
      incremental reimbursable costs incurred in connection with the Agreement in
      accordance with EITF No. 01-14. These amounts are included in related party
      revenue on the consolidated Statements of Operations. During the three and
      nine
      month periods ended September 30, 2007, the Company recognized less than $0.1
      million and $0.1 million, respectively. During the three and nine month periods
      ended September 30, 2006, less than $0.1 million and $0.1 million, respectively,
      was recognized.  The Company accrues for amounts to be paid to France
      Loisirs related to net profit earned by Audible, Inc. at the Apple
      France iTunes Store. These amounts are included in accrued expenses and other
      current liabilities in the consolidated Balance Sheets as of September 30,
      2007
      and December 31, 2006, and marketing expense in the condensed consolidated
      Statements of Operations. As of September 30, 2007, the Company had an accounts
      receivable balance of $0.1 million related to France Loisirs.





**(8)
      Apple Agreement**





In
      July
      2006, the Company entered into a global master agreement with Apple that
      replaced prior agreements entered into with Apple. Pursuant to the agreement,
      the Company continues to be the exclusive source of audiobooks, book-related
      content, and other spoken-word material to Apple’s iTunes Stores worldwide and
      will continue to provide the iTunes Store with comedy, lectures, speeches,
      periodicals, educational programs, Audible originals, spiritual programming,
      paid podcasts, and other spoken-word programs. All Audible content will continue
      to receive branding within the audio stream and visually in the iTunes Store.
      All Apple iPods and iTunes applications will continue to be AudibleReady(R)
      and
      will work with the Audible service. Under the agreement, the Company has agreed
      to certain exclusivity obligations that restrict the Company to varying degrees
      from integrating Audible content into other internet-based services. The
      agreement also provides that the Company’s revenue is formula-driven, based upon
      the selling price on the iTunes Store and the content cost. Under the prior
      agreements, the Company’s revenue was a fixed price, based upon a percentage of
      either the manufacturer’s suggested retail price or amount the item was sold for
      on the Audible service. This change in payment structure resulted in a change
      in
      the manner in which the Company calculates revenue under the current agreement.
      The current agreement also changed the terms of the revenue share payments
      due
      to Apple. Under the terms of the previous agreements, the Company paid Apple
      a
      revenue share based on number of customers who used the iTunes software to
      download digital audio. In the current agreement, the revenue share due to
      Apple
      is a percentage of sales made by customers who are referred directly by Apple
      to
      the Company’s Web site. The term of the new agreement expires on September 30,
      2010.


-19-
 Table
            of Conents
 
 **(9)
        Product Development, Licensing, Marketing and Distribution
        Agreement**


On
      May
      16, 2005, the Company entered into a five-year agreement with a new
      content provider to develop, license, market and distribute audio
      content. The Company is paid an exclusivity fee, a product development fee
      and production fees for audio content produced under the
      agreement. In addition, the Company will make royalty and revenue
      sharing payments to the content provider based on sales of the products
      produced. As of September 30, 2007, the Company billed the current provider
      $1.7
      million in connection with this agreement. The fees associated with this
      agreement are being amortized over a 58-month period beginning in the month
      the
      Company commenced production of audio through the expiration of the agreement.
      During the three and nine month periods ended September 30, 2007, $0.1 million
      and $0.4 million, respectively, were recorded as other revenue in connection
      with this agreement. During the three and nine month periods ended September
      30,
      2006, $0.1 million and $0.3 million, respectively, was recorded as other revenue
      for both periods in connection with this agreement. As of September 30, 2007,
      the Company recorded $0.3 million and $0.6 million as deferred revenue
      current and non-current, respectively, on the accompanying condensed
      consolidated Balance Sheet, relating to this agreement, representing cash
      received in advance of being recognized as revenue. As of December 31, 2006,
      the
      Company recorded $0.3 million and $0.5 million as deferred revenue
      current and non-current, respectively, on the accompanying consolidated Balance
      Sheet, relating to this agreement.





**(10)
      Commitments and Contingencies**





*Lease
      Obligations*





In
      September 2006, the Company entered into a lease agreement for office space
      in
      Newark, NJ. The Company occupies two floors with an approximate space of 49,600
      square feet, which is used as its corporate headquarters. The term of the
      agreement is through June 2014 and there is a one time only option to terminate
      the lease agreement after June 2012 upon 12 months prior written notice to
      the
      landlord. The Company has no current plans to terminate the lease agreement
      early. Audible UK leases office space, which includes office amenities, under
      a
      lease that expires in May 2008. The Company also leases office space in Tokyo,
      Japan where a local representative assists the Company in securing local
      Japanese content. This lease expires in June 2008. Total future minimum lease
      obligations as of September 30, 2007 under these lease arrangements are $8.1
      million.





Rent
      expense of $0.3 million was recorded under operating leases for the three months
      ended September 30, 2007 and 2006, respectively, and $0.9 million and $0.6
      million for the nine months ended September 30, 2007 and 2006, respectively.
      Access to the space for the new corporate office was provided to the Company
      at
      the time the lease was executed in September 2006, so it could design and
      develop the office as needed in order to move in timely. Based on the Company’s
      evaluation, this period was included in calculating the straight-line rent
      expense.





*Service
      Agreements*





The
      Company has entered into operational and marketing agreements or purchase orders
      with various vendors to provide certain contracted services. The majority of
      the
      amounts committed are for hosting services related to the Company’s Web site.
      Most of these service agreements are cancellable but require significant
      penalties for cancellation.





*Royalty
      Obligations*





Royalty
      obligations represent payments to be made to various content providers pursuant
      to minimum guarantees under their royalty agreements, net of royalties paid.
      The
      royalty obligations recorded in the accompanying consolidated Balance Sheets
      are
      classified between current and non-current based on the payment terms specified
      in the agreements, and relate to audio content that has been delivered to
      Audible. Royalty obligations pursuant to minimum guarantees for audio content
      to
      be delivered in the future are reflected as a commitment in the
      table.





*Purchase
      Commitments*





Purchase
      commitments represent agreements the Company has made for future purchases
      of
      goods and services. The balance primarily consists of amounts committed for
      marketing services.







-20-
 Table
            of Conents





**Summary
      of Cash Commitments and Obligations**




The
      following table shows future cash payments due under the Company's commitments
      and obligations as of September 30, 2007 (in thousands):





**Year**
            
            **Lease
                Obligations**
              **(1)**
            
            
            **Royalty
                Obligations**
              **(2)**
            
            
            **Service
                Agreements**
            
            
            **Purchase
                Commitments**
            
            
            **Total**2007
            
            $
            265
            
            
            $
            254
            
            
            $
            658
            
            
            $
            308
            
            
            $
            1,4852008
            
            
            1,046
            
            
            
            77
            
            
            
            1,359
            
            
            
            --
            
            
            
            2,4822009
            
            
            1,066
            
            
            
            --
            
            
            
            31
            
            
            
            --
            
            
            
            1,0972010
            
            
            1,141
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,1412011
            
            
            1,215
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,2152012
                & Thereafter
            
            
            3,255
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3,255Total
            
            $
            7,988
            
            
            $
            331
            
            
            $
            2,048
            
            
            $
            308
            
            
            $
            10,675





(1)
      Of
      the $8.0 million in total operating leases, $7.9 million relates to the new
      office lease agreement  entered into in September 2006, of which $0.8
      million is recorded as deferred rent, noncurrent in the accompanying condensed
      consolidated Balance Sheet as of September 30, 2007.





(2)
      Of
      the $0.3 million in total royalty obligations, $0.2 million is recorded in
      accrued expenses and $0.1 million is recorded as royalty obligations,
      non-current, in the accompanying condensed consolidated Balance Sheet as of
      September 30, 2007. The remaining obligation relates to content that had not
      yet
      been delivered as of September 30, 2007.





**Contingencies**





Various
      legal actions, claims, assessments and other contingencies arising in the normal
      course of business, in addition to the matters described below, are pending
      against the Company. All of these matters are subject to many uncertainties,
      and
      it is possible that some of these matters could be ultimately decided, resolved
      or settled adversely. The Company has recorded accruals for losses related
      to
      those matters which it considers to be probable and that can be reasonably
      estimated. Although the ultimate amount of liability at September 30, 2007
      that
      may result from those matters for which accruals have been recorded may differ,
      the Company believes that any amounts exceeding the recorded accruals would
      not
      be material to the consolidated financial position or results of
      operations.





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





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





-21-
 Table
          of Conents




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





In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. The plaintiffs have continued to litigate against the underwriter
      defendants. The district court directed that the litigation proceed within
      a
      number of “focus cases” rather than in all of the 310 cases that have been
      consolidated. The Company’s case is not one of these focus cases. On October 13,
      2004, the district court certified the focus cases as class actions. The
      underwriter defendants appealed the ruling, and on December 5, 2006, the Court
      of Appeals for the Second Circuit reversed the district court’s class
      certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’
petition for a rehearing. In light of the Second Circuit opinion, the district
      court has been informed that the settlement cannot be approved because the
      defined settlement class, like the litigation class, cannot be certified. On
      June 25, 2007, the district court entered into an order terminating the
      settlement agreement. There can be no assurance that a settlement that complies
      with the Second Circuit’s mandate can be renegotiated.





On
      August
      14, 2007, the plaintiffs filed their second consolidated amended class action
      complaints against the focus cases and on September 27, 2007, filed motions
      for
      class certification again.  The focus case issuer and underwriter
      defendants intend to move for dismissal of these second amended
      complaints.





Due
      to
      the inherent uncertainties of litigation, the Company cannot accurately predict
      the ultimate outcome of the matter.





Starting
      on or about February 22, 2005, several class actions were filed against the
      Company and two of the Company’s executives in the United States District Court
      for the District of New Jersey. The plaintiffs purport to represent a class
      consisting of all persons (other than the Company’s officers and directors and
      their affiliates) who purchased the Company’s securities between November 2,
      2004 and February 15, 2005 (the "Class Period"). The plaintiffs allege that
      the
      defendants violated Section 10(b) of the Securities Exchange Act of 1934 and
      Rule 10b-5 there under by failing to make complete and accurate disclosures
      concerning the Company’s future plans and prospects. The individual defendants
      are also alleged to be liable under Section 20(a) of the Exchange Act. All
      of
      the defendants are alleged to have sold stock at inflated prices during the
      Class Period. In December 2005, the United States District Court for the
      District of New Jersey consolidated the class action, appointed a group of
      lead
      plaintiffs and appointed lead plaintiff's counsel. By prior agreement, the
      plaintiff's consolidated amended complaint was filed on February 14, 2006.
      The
      plaintiffs seek unspecified monetary damages and their reasonable costs and
      expenses, including counsel fees and expert fees. The defendants moved to
      dismiss the pleading. In March 2007, the Court granted the defendants’ motion to
      dismiss the plaintiffs’ consolidated amended complaint but granted the
      plaintiffs leave to amend. The plaintiffs have filed a motion for
      reconsideration, which the defendants have opposed. The Court has yet to rule
      on
      the motion.





In
      April
      2005, a derivative action was filed in the state court of New Jersey against
      the
      Company, the two executives named as individual defendants in the class actions
      described above, six of the Company’s outside directors, and three stockholders.
      The derivative action made the same factual allegations as the class actions
      described above and added allegations that the six outside directors named
      as
      defendants and/or the stockholders who nominated them sold stock at inflated
      prices at or about the time of the secondary offering of securities that the
      Company made in November 2004. The plaintiff in this derivative action purported
      to seek a recovery of the damages allegedly sustained by the Company rather
      than
      by investors who allegedly purchased securities at inflated prices.





-22-
 Table
          of Conents




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





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





The
      Company believes that all of the claims relating to the 2005 class action
      described above are without merit and intends to defend the actions vigorously.
      Due to the inherent uncertainties of litigation and because these actions are
      at
      a preliminary stage, the Company cannot accurately predict the ultimate outcome
      of these matters.





On
      October 5, 2007, Digital Reg of Texas, LLC, a patent holding company, filed
      a
      complaint in the U.S. District Court for the Eastern District of Texas alleging
      that the Company, among numerous other defendants, infringes a patent
      purportedly relating to the Company’s Digital Rights Management technology. The
      Company intends to defend against the claim vigorously, but at this time is
      unable to predict the outcome of the suit or reasonably estimate any possible
      loss.





On
      October 9, 2007, Vanessa Simmonds, a purported stockholder of the
      Company, filed suit in the U.S. District Court for the Western District of
      Washington against Credit Suisse Group and JP Morgan & Co., the lead
      underwriters of the Company’s initial public offering in July
      1999, alleging violations of Section 16(b) of the Securities Exchange
      Act of 1934, 15 U.S.C. Sec. 78p(b).  The complaint seeks to recover from
      the lead underwriters any “short-swing profits” obtained by them in
      violation of Section 16(b). The Company was named as a nominal defendant in
      the action, but have no liability for the asserted claims. The Company is
      considering what, if any, action to take in response to this litigation.
 The Company does not anticipate that the ultimate outcome of this
      litigation will have a material adverse impact on our financial
      position.





**(11)
      Supplemental Disclosure of Cash Flow Information**





**Cash
      Paid for Interest and Taxes**





No
      interest was paid during the nine month periods ended September 30, 2007 and
      2006.





No
      income
      taxes were paid in the nine month periods ended September 30, 2007 and
      2006.





The
      Company recorded an accrual for property and equipment (CIP) of $0.7 million
      for
      the nine month period ended September 30, 2007.





**(12)
      Customer Concentration**





For
      the
      three month periods ended September 30, 2007 and 2006, Apple accounted for
      28.8%
      and 21.5% of total revenue, respectively.





For
      the
      nine month periods ended September 30, 2007 and 2006, Apple accounted for 29.6%
      and 22.0% of total revenue, respectively.





As
      of
      September 30, 2007 and December 31, 2006, Apple accounted for 68.5% and 64.1%,
      respectively, of the Company's accounts receivable.





**(13)
      Financial Information by Geographic Area**





Revenue
      and long-lived assets for the Company's United States and United Kingdom
      operations are as follows (in thousands):




**Revenue**
            
            **United
                States**
            
            
            **United
                Kingdom**
            
            
            **Consolidated**Three
                months ended September 30, 2007
            
            $
            26,101
            
            
            $
            1,517
            
            
            $
            27,618Three
                months ended September 30, 2006
            
            
            19,109
            
            
            
            917
            
            
            
            20,026Nine
                months ended September 30, 2007
            
            
            74,654
            
            
            
            4,175
            
            
            
            78,829Nine
                months ended September 30, 2006
            
            
            56,705
            
            
            
            2,177
            
            
            
            58,882**September
                30, 2007**Long-lived
                assets
            
            
            13,307
            
            
            
            38
            
            
            
            13,345**September
                30, 2006**Long-lived
                assets
            
            
            9,556
            
            
            
            46
            
            
            
            9,602




-23-
 Table
          of Conents




**ITEM
      2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations**


(dollars
      in thousands except per share data)





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our audited consolidated financial
      statements and notes thereto appearing in our 2006 Annual Report on Form 10-K.
      This discussion and analysis contains forward-looking statements that involve
      risks and uncertainties. Our actual results may differ materially from those
      anticipated in these forward-looking statements as a result of a number of
      factors.*





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




**Overview**




**Our
      Business**





Our
      goal
      is to be the preeminent supplier of spoken-word digital audio on the Internet.
      At our Web sites, our customers can select, purchase and download spoken audio
      of their choice from more than 144,000 hours from more than 470 content partners
      that include leading audiobook publishers, broadcasters, entertainers, magazine
      and newspaper publishers, and business information providers. Our
      AudibleListener membership plans provide our customers a wide variety of monthly
      and annual membership options, depending upon their listening preferences.
      Our
      largest plans, the Gold and Platinum plans, provide one or two listening
      products per month in exchange for monthly subscription payments of $14.95
      or
      $22.95 per month. Customers can access our content at our Web sites,
www.audible.com (United States) and www.audible.co.uk (United
      Kingdom), at our related parties Web sites, www.audible.de (Germany) and
www.audible.fr (France), and at Amazon.com and at the Apple iTunes
      store.





**Key
      Business Metrics**





During
      the nine months ended September 30, 2007, we generated net revenue of $78.8
      million and incurred a net loss of $1.5 million. During this period, we acquired
      approximately 190,000 new AudibleListener members, a decrease of 11.2%, from
      approximately 214,000 acquired in the same period in 2006. However 97% of new
      AudibleListener members acquired in the 2007 period were Gold or Platinum
      recurring revenue customers versus 50% of new AudibleListener members acquired
      in the 2006 period signing up for Gold or Platinum services. Total
      AudibleListener members increased to approximately 446,000 as of September
      30,
      2007, compared to approximately 344,000 as of September 30, 2006, an increase
      of
      29.7%. 63,000 new AudibleListener members were acquired during the three months
      ended September 30, 2007, of which 98% were Gold or Platinum recurring monthly
      revenue customers versus 51% for the three months ended September 30,
      2006.





-24-
 Table
            of Conents




Subsequent
              to our announcement on November 1, 2007 of our financial results for
              the three
              months ended September 30, 2007, we identified a group of customers
              whose
              AudibleListener memberships had not been properly cancelled in our records.
              We were not recognizing any membership revenue from these customers
              after
              their membership renewal date, but their inclusion in our records
              resulted in our overstating the number of AudibleListener members at
              the end of
              each period. In addition, as a result of the inclusion of these customers,
              we
              understated our average monthly churn in AudibleListener members, which
              is
              defined as member cancellations in the period divided by the sum of
              members at
              the beginning of the period plus gross member adds, divided by three
              months.
 
 The
              revised increase in churn reflects the increase in cancellations at
              the time
              of renewal by customers, the majority of whom were annual Basic
              AudibleListener plan members. Basic AudibleListener plan members are
              charged
              $9.95 annually in return for a 30% discount on products purchased at
              our web
              site.
 
 The
              continued inclusion of these customers in our AudibleListener membership
              records
              does not have a material impact on the financial information we previously
              reported. We estimate that these customers would have increased our
              revenues by approximately $0.5 million over a twelve month period had
              they
              instead renewed their memberships.
 
 The
              following tables set forth for the periods indicated the revised and
              previously
              reported figures for total AudibleListener members, Basic AudibleListener
              members and average monthly churn in AudibleListener
              members:
  **Total
            AudibleListener Members at End of Period (in
            thousands):**
 **3/31/06**
              
              
              **6/30/06**
              
              
              **9/30/06**
              
              
              **12/31/06**
              
              
              **3/31/07**
              
              
              **6/30/07**
              
              
              **9/30/07**Revised
              
              
              277
              
              
              
              307
              
              
              
              344
              
              
              
              383
              
              
              
              414
              
              
              
              428
              
              
              
              446As
                  reported
              
              
              279
              
              
              
              309
              
              
              
              345
              
              
              
              383
              
              
              
              415
              
              
              
              431
              
              
              
              455
  **Basic
        AudibleListener Members at End of Period (in thousands):**
 **3/31/06**
              
              
              **6/30/06**
              
              
              **9/30/06**
              
              
              **12/31/06**
              
              
              **3/31/07**
              
              
              **6/30/07**
              
              
              **9/30/07**Revised
              
              
              47
              
              
              
              80
              
              
              
              113
              
              
              
              142
              
              
              
              150
              
              
              
              147
              
              
              
              143As
                  reported
              
              
              47
              
              
              
              80
              
              
              
              113
              
              
              
              142
              
              
              
              150
              
              
              
              150
              
              
              
              152
  **Average
        Monthly Churn in AudibleListener Members During Period
        Ended:**
 **3/31/06**
              
              
              **6/30/06**
              
              
              **9/30/06**
              
              
              **12/31/06**
              
              
              **3/31/07**
              
              
              **6/30/07**
              
              
              **9/30/07**Revised
              
              
              4.8
              %
              
              
              3.5
              %
              
              
              3.0
              %
              
              
              2.6
              %
              
              
              3.0
              %
              
              
              3.0
              %
              
              
              3.3
              %As
                  reported
              
              
              4.6
              %
              
              
              3.4
              %
              
              
              3.1
              %
              
              
              2.5
              %
              
              
              3.0
              %
              
              
              2.8
              %
              
              
              2.7
              %
 
 During
      2007, our operations in Audible UK significantly accelerated due to our
      increased marketing initiatives and customer acquisition programs. We generated
      $4.2 million in net revenue in the UK during the nine months ended September
      30,
      2007, compared to $2.2 million for the nine months ended September 30, 2006.
      We
      believe that revenue from Audible UK will continue to grow provided we are
      able
      to obtain additional content that is appealing to more customers.





Our
      new
      AudibleListener membership plans, launched in December 2005, provide an array
      of
      new member benefits, ranging from greater flexibility in using AudibleListener
      membership credits, to everyday 30% discounts on a la carte purchases, and
      a
      weekday audio edition of *The New York Times* or *The Wall Street
      Journal* subscription. The increase in the number of AudibleListener members
      and the flexibility in the requirement to use credits led to an increase of
      $2.8
      million in deferred revenue from December 31, 2006.





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





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





**Critical
      Accounting Policies**





The
      Securities and Exchange Commission defines “critical accounting policies” as
      those accounting policies that require application of management's most
      difficult, subjective and complex judgments, often as a result of the need
      to
      make estimates about the effect of matters that are inherently uncertain and
      may
      change in subsequent periods. Based on this definition, we have identified
      the
      critical accounting policies and judgments addressed below. We have other
      significant accounting policies, which involve the use of estimates, judgments,
      and assumptions that are significant to understanding our results. For
      additional information, see Note 2,*Summary of Significant Accounting
      Policies,* of our condensed consolidated financial statements. Although we
      believe that our estimates, judgments and assumptions are reasonable, they
      are
      based upon information presently available. Actual results may differ
      significantly from these estimates under different assumptions, judgments or
      conditions.





Our
      critical accounting policies are as follows:





***Revenue
      Recognition***





We
      derive
      our revenue from four main categories:





Content
                and services revenue, which includes consumer content and corporate
                services;Hardware
                revenue;Related
                party revenue; andOther
                revenue.






-25-
 Table
          of Conents




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





In
      July
      2006, we entered into a new global master agreement with Apple.
      We recognize revenue from sales made at the Apple iTunes Store in the
      period when the content is purchased and delivered. In accordance with the
      terms of the agreement, the amount of revenue we recognize on
      each sale is now formula-driven, based upon the Apple iTunes selling
      price and the content cost of each audio book. As a result, Apple revenue
      for each quarterly period will reflect an estimate for the last month of the
      quarter, based on actual number of titles sold and the prior month or current
      unit sales price as applicable, at the Apple iTunes Store.





Our
      “legacy” AudibleListener monthly membership plans generally provide customers
      two audio credits for a fixed monthly fee. Customers may use these audio credits
      to select content of their choice from our Web site. “Legacy” AudibleListener
      audio credits provided under a monthly membership program have a life of 30
      days, after which they expire. We recognize revenue from the sale of legacy
      AudibleListener memberships ratably over the AudibleListener members’ monthly
      membership period. This leads to approximately 50% of the AudibleListener
      membership fees received during each calendar month being deferred at month
      end
      and recognized as content revenue in the following month.





In
      December 2005, we introduced new AudibleListener membership plans, designed
      to
      provide our customers more flexibility in using their audio credits. Depending
      upon the AudibleListener membership plan, customers can receive and “bank” or
      delay using up to a maximum number of audio credits, depending on the membership
      plan. The banking feature results in audio credits being used (delivered) over
      different periods for different customers. In addition, some of the new
      AudibleListener plans include new membership benefits, ranging from a
      complimentary audio newspaper delivered each weekday to everyday discounts
      of
      30% on a la carte purchases. The audio newspaper and 30% discount benefits
      are
“serial” elements that are delivered continuously over the membership period,
      whereas the content selections underlying the audio credits are discrete
      elements that are delivered at different times based on individual customer
      behavior. As a result of the characteristics of the new AudibleListener
      memberships, they are considered revenue arrangements with multiple
      deliverables, however under EITF No. 00-21,*Revenue Arrangements with
      Multiple Deliverables*, because the deliverables are not eligible for
      separation, they are accounted for as a single unit of accounting. As a result,
      we recognize revenue for these new AudibleListener plans using the lesser of
      straight-line or proportional performance (based on content delivery) over
      the
      maximum membership period. This may result in a decrease in revenue or slower
      revenue growth than we experienced in prior periods because the customer has
      a
      longer period of time to use his/her audio credits. For example, a customer
      may
      pre-pay an annual membership for twelve audio credits and not use any credits
      for six months. Due to the revenue recognition model described above, this
      revenue will be deferred until the customer uses the audio credits.





Upon
      launch of the new AudibleListener plans in December 2005, the legacy
      AudibleListener programs were no longer available to new customers except for
      UK
      customers who purchase their memberships from the UK Web site. Customers who
      have legacy memberships have the option of either converting to one of the
      new
      AudibleListener membership plans or continuing their legacy
      membership.





*Provision
      for Refunds and Chargebacks*





In
      the
      normal course of business, customers may contact us or contact their credit
      card
      company to request an adjustment for a purchase the customer paid us for in
      the
      past. Customers may contact us to request a refund for various reasons. We
      record a provision for expected refunds and chargebacks relating to revenue
      that
      was recognized in a previous period. The calculation of the provision for
      estimated refunds and chargebacks is based on historical refund rates and sales
      patterns. The provision is recorded as a reduction of revenue. A portion of
      the
      resulting reserve is classified as a reduction of accounts receivable based
      on
      an estimate of refunds and chargebacks that will be made related to sales that
      were collected by the credit card processor but not remitted to us at
      period-end. The remaining portion of the reserve is reflected as an accrued
      liability at period-end. Actual results could differ from our
      estimates.







-26-
 Table
            of Conents




Customer Concessions




In
      the
      normal course of business, customers may contact us to request a concession
      for
      a purchase the customer paid us for in the past, with which they are
      unsatisfied. Depending on the specific customer facts and circumstances, we
      will provide the customer a replacement or complimentary credit or a coupon.
      With our legacy AudibleListener plans, customers on occasion request that we
      replace an audio credit that expired before the customer had an opportunity
      to
      use it. Other customers may request an audio credit or coupon because they
      have
      had a specific problem with content downloading or audio quality. We defer
      revenue for expected replacement audio credits based on historical experience
      of
      the credits issued. We defer revenue for other audio credits and coupons when
      they are delivered to the customers based on estimated values. The concessions
      are recorded as a reduction of revenue and an increase to deferred revenue.
      Actual customer credit and coupon issuance and usage patterns could differ
      from
      our estimates.





***Royalty
      Expense***





Royalty
      expense is the largest component of cost of content and services revenue, and
      includes amortization of guaranteed royalty obligations to various content
      providers, royalties incurred on sales of content, amortization of audio
      production costs incurred in connection with the creation of certain audio
      products, and net realizable value adjustments to royalty advances. Many of
      our
      early content provider agreements contained a requirement to pay guaranteed
      amounts to the provider. Anticipating that sales from these agreements would
      not
      be sufficient to recoup the amount of the guarantees, we adopted a policy of
      amortizing royalty guarantees straight-line over the term of the royalty
      agreement, or expensing the royalty guarantees as incurred, whichever was
      sooner. In addition, each quarter we review and compare any remaining
      unamortized guarantee balance with current and projected sales by provider
      to
      determine if any additional net realizable value adjustments are required.
      Royalty expense for sales of content is incurred based upon either a
      percentage of revenue or a fixed price per title in accordance with the terms
      of
      the applicable royalty agreement. The royalty cost per title may differ
      depending upon whether the title is sold as part of an AudibleListener
      membership or sold as an a la carte sale. Actual sales could differ from our
      estimates of projected sales.





***Internal-Use
      Software***





In
      accordance with SOP No. 98-1,*Accounting for the Costs of Computer Software
      Developed or Obtained for Internal Use*, all costs incurred for the
      development of internal use software that relate to the planning and
      post-implementation phases of the development are expensed. Direct costs
      incurred in the development phase are capitalized and recognized over the
      software's estimated useful life, generally two years, commencing at the
      time the software is ready for its intended use. Research and development costs
      and other computer software maintenance costs related to software development
      are expensed as incurred. We review the capitalized software costs for
      impairment when events or circumstances indicate that the carrying amount of
      an
      asset may not be recoverable. If the sum of the expected cash flows,
      undiscounted and without interest, is less than the carrying amount of the
      related asset, an impairment loss is recognized as the amount by which the
      carrying amount of the asset exceeds its fair value. Actual cash flows could
      differ from our expectations.





***Employee
      Stock-Based Compensation Arrangements***





In
      accordance with SFAS No. 123(R), *Share-based payment*, we measure
      compensation cost for stock awards at fair value and recognize compensation
      over
      the requisite service period for awards expected to vest. Estimating the portion
      of stock awards that will ultimately vest requires judgment, and to the extent
      actual results or updated estimates differ from our current estimates, such
      amounts are recorded in the period estimates are revised. We consider several
      factors when estimating expected forfeitures, including types of awards,
      employee class, and historical experience. We also consider several factors
      when
      estimating expected volatility and expected life of the option. Actual results,
      and future estimates, may differ substantially from our current
      estimates.





-27-
 Table
            of Conents





**Results
      of Operations**





The
      following table sets forth certain financial data for the periods indicated
      as a
      percentage of total revenue for the three and nine month periods ended September
      30, 2007 and 2006:





**Three
                months ended September 30,**
            
            
            **Nine
                months ended**
              **September
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            
            97.7
            %
            
            
            98.5
            %
            
            
            98.5
            %
            
            
            98.1
            %Point
                of sale rebates
            
            
            --
            
            
            
            (0.7
            )
            
            
            --
            
            
            
            (0.8
            )Services
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.2Total
                content and services revenue
            
            
            97.8
            
            
            
            97.9
            
            
            
            98.6
            
            
            
            97.5Hardware
                revenue
            
            
            0.1
            
            
            
            0.4
            
            
            
            0.2
            
            
            
            0.6Related
                party revenue
            
            
            1.5
            
            
            
            1.4
            
            
            
            0.7
            
            
            
            1.6Other
                revenue
            
            
            0.6
            
            
            
            0.3
            
            
            
            0.5
            
            
            
            0.3Total
                revenue, net
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            43.4
            
            
            
            40.3
            
            
            
            43.7
            
            
            
            40.4Discount
                certificate rebates
            
            
            0.3
            
            
            
            1.6
            
            
            
            0.5
            
            
            
            1.6Total
                cost of content and services revenue
            
            
            43.7
            
            
            
            41.9
            
            
            
            44.2
            
            
            
            42.0Cost
                of hardware revenue
            
            
            0.3
            
            
            
            1.1
            
            
            
            0.5
            
            
            
            2.3Cost
                of related party revenue
            
            
            0.5
            
            
            
            0.9
            
            
            
            0.5
            
            
            
            0.8Operations
            
            
            13.6
            
            
            
            14.9
            
            
            
            14.0
            
            
            
            15.3Technology
                and development
            
            
            16.9
            
            
            
            22.8
            
            
            
            17.5
            
            
            
            20.7Marketing
            
            
            15.6
            
            
            
            18.7
            
            
            
            15.5
            
            
            
            20.3General
                and administrative
            
            
            13.1
            
            
            
            13.9
            
            
            
            12.8
            
            
            
            15.1Total
                operating expenses
            
            
            103.7
            
            
            
            114.2
            
            
            
            105.0
            
            
            
            116.5Loss
                from operations
            
            
            (3.7
            )
            
            
            (14.2
            )
            
            
            (5.0
            )
            
            
            (16.5
            )Loss
                on equity investment
            
            
            (0.1
            )
            
            
            (0.9
            )
            
            
            (0.1
            )
            
            
            (0.5
            )Other
                income, net
            
            
            3.3
            
            
            
            3.7
            
            
            
            3.3
            
            
            
            3.6Loss
                before income taxes
            
            
            (0.5
            )
            
            
            (11.4
            )
            
            
            (1.8
            )
            
            
            (13.4
            )Income
                tax expense
            
            
            (0.2
            )
            
            
            (0.0
            )
            
            
            (0.1
            )
            
            
            (0.0
            )Net
                loss
            
            
            (0.7
            )
                %
            
            
            (11.4
            )%
            
            
            (1.9
            )
                %
            
            
            (13.4
            )%














-28-
 Table
            of Conents





***Three
      months ended September 30, 2007 compared to three months ended September 30,
      2006 (unaudited):***




**Three
                months ended**
              **September
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Content
                and services revenue (in thousands):**$
            26,997
            
            
            $
            19,591
            
            
            $
            7,406
            
            
            
            37.8
            %





*Content
      and services revenue* consists of AudibleListener membership revenue,
      revenue from single (a la carte) title sales, revenue from subscriptions,
      revenue from sales at the Apple iTunes Store and other services revenue. We
      deduct the cost of point of sale rebates from content and services
      revenue.





Content
      and services revenue grew during the three months ended September 30, 2007
      compared to the three months ended September 30, 2006 due primarily to growth
      in
      our AudibleListener memberships, as well as growth in sales at the Apple iTunes
      Store, and a la carte sales. AudibleListener membership growth was driven mainly
      through online marketing channels, specifically promotions of the new membership
      programs introduced in December 2005. We recognized $7.9 million and $4.7
      million in revenue from sales of Audible content at the Apple iTunes Store
      during the three months ended September 30, 2007 and 2006, respectively. Revenue
      we receive from Apple is net of Apple’s negotiated share of transaction
      proceeds. Audible is obligated to pay content service fees for Apple
      sales.





Our
      total
      AudibleListener membership count grew 29.7% from approximately 344,000 at
      September 30, 2006, to approximately 446,000 at September 30, 2007. As we
      continue to acquire new AudibleListener members who may choose to roll over
      their audio credits, our ability to recognize revenue will depend upon audio
      credit usage patterns of individual members. This will result in an increase
      in
      deferred revenue and may result in a decrease or slower growth in our revenue
      as
      compared to prior periods. Our customer count and AudibleListener membership
      count excludes customers that purchase Audible content directly from the Apple
      iTunes Store. We believe continuing consumer adoption of digital downloading,
      increased consumer awareness of the Audible service, customer satisfaction
      and
      improved marketing will continue to drive AudibleListener membership growth
      and
      growth in sales at the Apple iTunes Store.





**Three
                months ended**
              **September
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Hardware
                revenue (in thousands):**$
            28
            
            
            
            73
            
            
            $
            (45
            )
            
            
            (61.6)
            %





*Hardware
      revenue* consists of revenue derived primarily from the shipping and
      handling charge to customers on devices that Audible provides for free to
      AudibleListener members who commit to an AudibleListener membership. Under
      EITF
      No. 00-21, with these multiple-element arrangements (membership plus device),
      we recognize only shipping and handling fees as revenue for the delivery of
      hardware because all other consideration paid by the customer is contingent
      upon
      delivery of the content. Also included are separate sales of digital audio
      players to consumers and libraries. Revenue is recognized upon shipment,
      assuming all other criteria are met. The decrease in revenue for the three
      months ended September 30, 2007 as compared to the three months ended September
      30, 2006 is due primarily to less units sold in the current period.




**Three
                months ended**
              **September
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Related
                party revenue (in thousands):**$
            431
            
            
            $
            222
            
            
            $
            209
            
            
            
            94.1
            %








-29-
 Table
            of Conents


*Related
        party revenue* consists of revenue recognized in connection with our
        agreements with France Loisirs and Audible Germany.
 
 Related
        party revenue during the three months ended September 30, 2007 consisted
        of
        billings to Audible GmbH and France Loisirs for certain consulting services
        and
        reimbursement of related incremental costs.  For the three months
        ended September 30, 2007 and 2006, $0.4 million and zero, respectively, was
        recognized in revenue related to Audible GmbH incremental costs.  For
        the three months ended September 30, 2007 and 2006, less than $0.1 million
        and
        zero, respectively, was
        recognized in revenue related to France Loisirs incremental costs. The increase
        is primarily due to recognition of prior period billings that were not recorded
        due to collectablity concerns which were alleviated during the three months
        ended September 30, 2007.





Related
      party revenue during the three months ended September 30, 2006 included $0.1
      million in fees earned from our agreement with France Loisirs, representing
      the
      straight-line recognition of $1.0 million in fees we were entitled to receive
      pursuant to the arrangement, which was being recognized over the initial
      24-month term of the original agreement through September 14, 2006, less than
      $0.1 million in billings to France Loisirs for certain consulting services
      and
      reimbursement of related incremental costs, as well as $0.1 million in fees
      earned under our agreement with Audible Germany.  As the fees related
      to the original agreements with both France Loisirs and Audible Germany have
      been fully recognized, we do not expect significant related party revenue in
      the
      future.




**Three
                months ended**
              **September
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Other
                revenue (in thousands):**$
            162
            
            
            $
            140
            
            
            $
            22
            
            
            
            15.7
            %





*Other
      revenue* for the three months ended September 30, 2007 and 2006 was less
      than $0.1 million primarily relating to revenue earned under a product
      development agreement with a content provider, which commenced in May 2005.
      The
      fees are being amortized on a straight line basis as fees are billed over a
      58-month period beginning in the month we commenced production of audio (July
      2005) through the expiration of the agreement. As of September 30, 2007, we
      billed the content provider $1.7 million in connection with this
      agreement.




**Three
                months ended September 30,**
            
            
            **As
                a Percentage of Total Content and Services
                Revenue****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Cost
                of content and services revenue (in thousands):**Royalties
                and other content charges
            
            $
            11,989
            
            
            $
            8,240
            
            
            
            44.4
            %
            
            
            42.1
            %Discount
                certificate rebates
            
            
            74
            
            
            
            307
            
            
            
            0.3
            
            
            
            1.5Total
                cost of content and services revenue
            
            $
            12,063
            
            
            $
            8,547
            
            
            
            44.7
            %
            
            
            43.6
            %





*Cost
      of content and services revenue*consists primarily of royalties incurred,
      discount certificate rebates and the amortization of publisher royalty advances.
      Discount certificate rebates, introduced in 2004, are electronic discount
      certificates or gift cards given to certain AudibleListener members who commit
      to joining an AudibleListener plan for twelve months. AudibleListener customers
      use these when purchasing an AudibleReady digital audio player from a
      third-party retailer.





Royalties
      and other content charges as a percentage of total content and services revenue
      increased from the three months ended September 30, 2006 to September 30, 2007
      from 42.1% to 44.4%. This increase was primarily due to the increasing
      percentage of revenue from sales at the Apple iTunes Store, which yields a
      higher royalty cost as a percentage of revenue, the impact of higher royalty
      rates from certain publishers, the impact of our Gold and Platinum membership
      plans, in which royalties are incurred on revenue that may be deferred if the
      straight-line revenue is less than the proportional performance revenue, the
      effect of the new Gold monthly discounted membership plan offered in the first
      half of 2007, and the impact of the 30% a la carte discount offered under our
      basic membership plan for titles that have a fixed royalty.


-30-
 Table
            of Conents
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Cost
                  of hardware revenue (in thousands):**$
              95
              
              
              $
              826
              
              
              $
              (731
              )
              
              
              (88.5)
              %
 
 *Cost
        of hardware revenue* consists of the cost of digital audio players that are
        given away or sold to customers.
 
 The
        cost
        of hardware revenue decreased in the 2007 period primarily due to a substantial
        reduction in the number of digital audio players given away or sold at a
        discount to customers.
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Cost
                  of related party revenue (in thousands):**$
              133
              
              
              $
              169
              
              
              $
              (36
              )
              
              
              (21.0)
              %
 
 *Cost
        of related party revenue* consists of costs we have incurred in connection
        with our agreements with France Loisirs and Audible Germany.  These
        costs primarily consist of payroll costs related to services performed for
        France Loisirs and Audible Germany by certain employees of our technology,
        development, and audio departments.
 
 Cost
        of
        related party revenue for the three months ended September 30, 2007 compared
        to
        the three months ended September 30, 2006 has decreased primarily due to
        the
        amount of services performed for Audible Germany.
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Operations
                  (in thousands):**$
              3,761
              
              
              $
              2,987
              
              
              $
              774
              
              
              
              13.9
              %
              
              
              15.2
              %
 
 *Operations*
        expense consists of payroll and related expenses for content acquisition,
        education, editorial, audio recording and conversion, programming and customer
        service. Also included are outside consultants, professional fees, credit
        card
        processing fees, and audio recording fees.
 
 Operations
        expense increased in the three months ended September 30, 2007 compared to
        the
        three months ended September 30, 2006 primarily due to $0.7 million in higher
        personnel costs, including incentive compensation, and $0.1 million in higher
        credit card processing fees. This was partially offset by a reduction in
        share-based compensation costs of $0.1 million.
 
 **Three
                  months ended September 30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Technology
                  and development (in thousands):**$
              4,680
              
              
              $
              4,625
              
              
              $
              55
              
              
              
              17.3
              %
              
              
              23.6
              %
 
 *Technology
        and development* expense consists of payroll and related expenses for
        information technology, systems and telecommunications infrastructure, as
        well
        as technology licensing fees.
 
 Technology
        and development expense increased for the three months ended September 30,
        2007
        compared to the three months ended September 30, 2006 was primarily due to
        a
        $0.8 million increase in personnel costs, including incentive compensation,
        partially offset by a reduction in impairment charges of $0.1 million related
        to
        an internally developed software tool that we determined was not going to
        be
        used as originally intended in 2006 and a reduction in consulting expense
        of
        $0.6 million.
  -31-
 Table
            of Conents
 
 **Three
                  months ended September 30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Marketing
                  (in thousands):**$
              4,300
              
              
              $
              3,340
              
              
              $
              960
              
              
              
              15.9
              %
              
              
              17.0
              %
 
 *Marketing*
        expense consists of payroll and related expenses for personnel in marketing
        and
        business development, as well as advertising expenditures and other promotional
        activities. Also included are revenue sharing and bounty payments which we
        make
        to our marketing partners, and shipping and handling costs associated with
        selling digital devices.
 
 Marketing
        expense increased in the three months ended September 30, 2007 compared to
        the
        three months ended September 30, 2006 primarily due to $0.4 million in higher
        personnel costs, including incentive compensation, $0.4 million in higher
        advertising and promotional expenses and $0.2 million in higher outside services
        expense. The higher advertising and .promotional expenses were directed toward
        marketing campaigns and promotions of our membership plans.
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****General
                  and administrative (in thousands):**$
              3,609
              
              
              $
              2,743
              
              
              $
              866
              
              
              
              13.4
              %
              
              
              14.0
              %
 
 *General
        and administrative* expense consists primarily of payroll and related
        expenses for executive, finance and administrative personnel. Also included
        are
        legal fees, audit fees and other professional fees, public company expenses
        and
        other general corporate expenses.
 
 General
        and administrative expense increased in the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006 was primarily
        due to
        $0.7 million in higher personnel expenses, including incentive compensation,
        $0.1 million increase in share-based compensation costs and $0.1 million
        increase in international expenses. These increases were partially offset
        by a
        reduction in legal fees of $0.1 million.
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Loss
                  on equity investment (in thousands):**$
              17
              
              
              $
              90
              
              
              $
              (73
              )
              
              
              (81.1
              )%
 
 *Loss
        on equity investment* during the three months ended September 30, 2006
        consisted of  $0.1 million, respectively which relates to amounts
        recorded when we agreed to an additional investment in Audible Germany in
        consideration for writing off amounts owed to us by Audible
        Germany.
 
 For
        the
        three months ended September 30, 2007, we recorded less than $0.1 million
        as a
        pro-rata equity loss on its investment in Audible Germany.
 
 **Three
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Other
                  income, net (in thousands):**$
              900
              
              
              $
              779
              
              
              $
              121
              
              
              
              15.5
              %
 
 *Other
        income, net* primarily consists of interest income. The increase in other
        income, net was due to an increase in interest earned on our short-term
        investments, associated principally with higher interest rates.
  -32-
 Table
            of Conents
  ***Nine
        months ended September 30, 2007 compared to nine months ended September 30,
        2006
        (unaudited):***
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Content
                  and services revenue (in thousands):**$
              77,736
              
              
              $
              57,473
              
              
              $
              20,263
              
              
              
              35.3
              %
 
 *Content
        and services revenue* grew during the nine months ended September 30, 2007
        compared to the nine months ended September 30, 2006 due primarily to growth
        in
        our AudibleListener memberships, as well as growth in sales at the Apple
        iTunes
        Store, and a la carte sales. AudibleListener membership growth was driven
        mainly
        through online marketing channels, specifically promotions of the new membership
        programs introduced in December 2005. We recognized $23.3 million and $13.3
        million in revenue from sales of Audible content at the Apple iTunes Store
        during the nine months ended September 30, 2007 and 2006, respectively. Revenue
        we receive from Apple is net of Apple’s negotiated share of transaction
        proceeds. Audible is obligated to pay content service fees for Apple
        sales.
 
 Our
        total
        AudibleListener membership count grew 29.7% for the nine months ended September
        30, 2007 to approximately 446,000 from approximately 344,000 for the nine
        months
        ended September 30, 2006. As we continue to acquire new AudibleListener members
        who may choose to roll over their audio credits, our ability to recognize
        revenue will depend upon audio credit usage patterns of individual members.
        This
        will result in an increase in deferred revenue and may result in a decrease
        or
        slower growth in our revenue as compared to prior periods. Our customer count
        and AudibleListener membership excludes customers that purchase Audible content
        directly from the Apple iTunes Store. We believe continuing consumer adoption
        of
        digital downloading, increased consumer awareness of the Audible service,
        customer satisfaction and improved marketing will continue to drive
        AudibleListener membership growth and growth in sales at the Apple iTunes
        Store.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Hardware
                  revenue (in thousands):**$
              192
              
              
              
              283
              
              
              $
              (91
              )
              
              
              (32.2
              )%
 
 *Hardware
        revenue* decreased for the nine months ended September 30, 2007 compared to
        the nine months ended September 30, 2006 due primarily to a de-emphasis of
        hardware as a means of acquiring new members.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Related
                  party revenue (in thousands):**$
              542
              
              
              $
              852
              
              
              $
              (310
              )
              
              
              (36.4
              )%
 
 *Related
        party revenue* during the nine months ended September 30, 2007, primarily
        included $0.1 million in billings to France Loisirs for certain consulting
        services and reimbursement of related incremental costs as well as $0.1 million
        in fees earned under our agreement with Audible Germany and $0.4 for certain
        consulting services and reimbursement of related incremental costs. Related
        party revenue during the nine months ended September 30, 2006 included $0.4
        million in fees earned under our agreement with France Loisirs, representing
        the
        straight-line recognition of $1.0 million in fees we were entitled to receive
        pursuant to the arrangement, which was being recognized over the initial
        24-month term of the original agreement through September 14, 2006, $0.1
        million
        in billings to France Loisirs for certain consulting services and reimbursement
        of related incremental costs, $0.2 million in fees earned from our agreement
        with Audible Germany, and $0.1 million in billings to Audible Germany for
        certain consulting services and reimbursement of related incremental costs
        incurred by us in connection with our license and services
        agreement.
  -33-
 Table
            of Conents
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Other
                  revenue (in thousands):**$
              359
              
              
              $
              274
              
              
              $
              85
              
              
              
              31.0
              %
 
 *Other
        revenue* for the nine months ended September 30, 2007 and 2006 primarily
        included $0.1 million, respectively, of revenue earned under a product
        development agreement with a content provider, which commenced in May 2005.
        The
        fees are being amortized on a straight line basis as fees are billed over
        a
        58-month period beginning in the month we commenced production of audio (July
        2005) through the expiration of the agreement. As of September 30, 2007,
        we
        billed the content provider $1.7 million in connection with this
        agreement.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **As
                  a Percentage of Total Content and Services
                  Revenue****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Cost
                  of content and services revenue (in thousands):**Royalties
                  and other content charges
              
              $
              34,455
              
              
              $
              23,943
              
              
              
              44.3
              %
              
              
              41.7
              %Discount
                  certificate rebates
              
              
              407
              
              
              
              910
              
              
              
              0.5
              %
              
              
              1.5
              %Total
                  cost of content and services revenue
              
              $
              34,862
              
              
              $
              24,853
              
              
              
              44.8
              %
              
              
              43.2
              %
 
 *Cost
        of content and services revenue* consists primarily of royalties which as a
        percentage of total content and services revenue increased from the nine
        months
        ended September 30, 2006 to September 30, 2007 from 44.3% to 41.6%. This
        increase was primarily due to the increasing percentage of revenue from sales
        at
        the Apple iTunes Store, which yields a higher royalty cost as a percentage
        of
        revenue, the impact of higher royalty rates from certain publishers, the
        impact
        of our Gold and Platinum membership plans, in which royalties are incurred
        on
        revenue that may be deferred if the straight-line revenue is less than the
        proportional performance revenue, the effect of the new Gold monthly discounted
        membership plan offered in the first half of 2007, and the impact of the
        30% a
        la carte discount offered under our basic membership plan for titles that
        have a
        fixed royalty.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Cost
                  of hardware revenue (in thousands):**$
              395
              
              
              $
              1,707
              
              
              $
              (1,312
              )
              
              
              (76.9
              )%
 
 *Cost
        of hardware revenue* decreased in the 2007 period primarily due to a
        reduction in the number of digital audio players given away or sold at a
        discount to customers.
  **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Cost
                  of related party revenue (in thousands):**$
              370
              
              
              $
              498
              
              
              $
              (128
              )
              
              
              (25.7)
              %
 
 *Cost
        of related party revenue* decreased for the nine months ended September 30,
        2007 compared to nine months ended September 30, 2006 due to the amount services
        performed for Audible Germany.
  -34-
 Table
            of Conents
  **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Operations
                  (in thousands):**$
              10,993
              
              
              $
              8,943
              
              
              $
              2,050
              
              
              
              14.1
              %
              
              
              15.6
              %
 
 *Operations*
        expense increased in the nine months ended September 30, 2007 compared to
        the
        nine months ended September 30, 2006 primarily due to $1.2 million in higher
        personnel expenses, including incentive compensation, $0.3 million in higher
        outside service expenses, $0.3 million in higher credit card processing fees
        and
        $0.1 million in higher supplies and miscellaneous costs.
 
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Technology
                  and development (in thousands):**$
              13,820
              
              
              $
              12,681
              
              
              $
              1,139
              
              
              
              17.8
              %
              
              
              22.1
              %
 
 *Technology
        and development* expense increased for the nine months ended September 30,
        2007 compared to the nine months ended September 30, 2006 primarily due to
        $0.8
        million in higher outside services expenses, $0.6 in higher personnel costs,
        including incentive compensation, $0.1 million in higher share-based
        compensation costs, and $0.1 million in higher depreciation and amortization.
        This is partially offset by $0.7 million in lower licensing and maintenance
        fees. Many of these higher costs were related to enhancing the capacity and
        performance of our Web site and upgrades to our internal systems and
        infrastructure.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****Marketing
                  (in thousands):**$
              12,253
              
              
              $
              11,214
              
              
              $
              1,039
              
              
              
              15.8
              %
              
              
              19.5
              %
 
 *Marketing*
        expense increased in the nine months ended September 30, 2007 compared to
        the
        nine months ended September 30, 2006 primarily due to a $0.4 million increase
        in
        personnel costs, including incentive compensation, $0.4 million increase
        in
        outside service fees and $0.1 million increase in share-based compensation
        costs.
  **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              
              **As
                  a Percentage of Content and Services Revenue****2007**
              
              
              **2006**
              
              
              **Change**
              
              
              **2007**
              
              
              **2006****General
                  and administrative (in thousands):**$
              10,072
              
              
              $
              8,607
              
              
              $
              1,465
              
              
              
              13.0
              %
              
              
              15.0
              %
 
 *General
        and administrative* expense increased in the nine months ended September 30,
        2007 compared to the nine months ended September 30, 2006 primarily due to
        $1.2
        million in higher personnel cost, including incentive compensation, $0.3
        million
        in higher supplies and administrative expenses, $0.2 million in higher
        international expenses, $0.2 million in higher share-based compensation expense,
        $0.2 million in higher outside consulting services and $0.1 million in higher
        depreciation and amortization expense. This was partially offset by a decrease
        of $0.6 million in legal fees and $0.2 million in job placement
        fees.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Loss
                  on equity investment (in thousands):**$
              77
              
              
              $
              270
              
              
              $
              (193
              )
              
              
              (71.5
              )%
 
 *Loss
        on equity investment* during the nine months ended September 30, 2007 and
        September 30, 2006 consisted of $0.1 million and $0.3 million, respectively
        which relates to amounts recorded when we agreed to an additional investment
        in
        Audible Germany in consideration for writing off amounts owed to us. In addition
        for the nine months ended September 30, 2007 we recorded less than $0.1 million
        as a pro-rata equity loss on its investment in Audible Germany.
 
 **Nine
                  months ended**
                **September
                  30,**
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Other
                  income, net (in thousands):**$
              2,593
              
              
              $
              2,153
              
              
              $
              440
              
              
              
              20.4
              %
 
 *Other
        income, net* increased due to an increase in interest earned on our
        short-term investments, associated principally with higher interest
        rates.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        have
        no off-balance sheet arrangements that have a material current effect or
        that
        are reasonably likely to have a material future effect on our financial position
        or results of operations.
 
 -35-
 Table
            of Conents
  **Factors
        Affecting Operating Results**
 
 We
        have
        only a limited operating history with which to evaluate our business and
        prospects. Our limited operating history and the emerging nature of the market
        for internet-delivered audio content makes predicting our future operating
        results difficult. In addition, while we commenced operations in 1997, our
        prospects nonetheless should be considered in light of the risks and
        uncertainties encountered by companies in the early stages of development
        in new
        and rapidly evolving markets, specifically the rapidly evolving market for
        delivery of audio content over the Internet. These risks include:
 
 ·
              We
                  have limited revenue, we have a history of losses, and we may not
                  be
                  profitable in the future.
 ·
              We
                  have identified material weaknesses in internal control over financial
                  reporting which may adversely affect our
                  operations.
 ·
              If
                  too many AudibleListener members refrain from using their audio
                  credits on a timely basis, there will be a delay in recognizing
                  the
                  revenue until the credits are either used or
                  expire.
 ·
              If
                  our efforts to attract new AudibleListener members are not successful,
                  our
                  revenues will be affected
                  adversely.
 ·
              If
                  we experience excessive rates of churn, our revenues may
                  decline.
 ·
              The
                  market for our service is uncertain and consumers may not be willing
                  to
                  use the Internet to purchase spoken audio content, which could
                  cause our
                  business to grow more slowly.
 ·
              We
                  may not be able to license or produce sufficiently compelling audio
                  content to attract and retain customers and grow our
                  revenue.
 ·
              If
                  manufacturers of electronic devices do not manufacture, make available
                  or
                  sell a sufficient number of products suitable for our service,
                  our revenue
                  may not grow.
 ·
              We
                  must establish, maintain and strengthen our brand names, trademarks
                  and
                  service marks in order to acquire customers and generate
                  revenue.
 ·
              Increasing
                  availability of digital audio technologies may increase competition
                  and
                  reduce our revenue, market share and
                  profitability.
 ·
              Our
                  industry is highly competitive and has recently gotten more competitive
                  and we cannot be assured that we will be able to compete
                  effectively.
 ·
              Content
                  owners may decide to expand distribution of their material on an
                  unencrypted basis, which may increase
                  competition.
 ·
              Capacity
                  constraints and failures, delays, or overloads could interrupt
                  our service
                  and reduce the attractiveness of our service to existing or potential
                  customers.
 ·
              We
                  could be liable for substantial damages if there is unauthorized
                  duplication of the content we sell.
 ·
              We
                  do not have a comprehensive disaster recovery plan and we have
                  limited
                  back-up systems, and a disaster could severely damage our operations
                  and
                  could result in loss of customers.
 ·
              Problems
                  associated with the Internet could discourage use of Internet-based
                  services like ours and adversely affect our
                  business.
 ·
              The
                  loss of key employees could jeopardize our growth
                  prospects.
 ·
              Our
                  inability to hire new employees may hurt our growth
                  prospects.
 ·
              Our
                  new facility in Newark may not lead to an increase in operational
                  efficiencies or employee
                  performance.
 ·
              Our
                  common stock has been relatively thinly traded and we cannot predict
                  the
                  extent to which a trading market will develop, which may adversely
                  affect
                  our share price.
 ·
              We
                  may not be able to protect our intellectual property, which could
                  jeopardize our competitive
                  position.
 ·
              Other
                  companies may claim that we infringe their copyrights or patents,
                  which
                  could subject us to substantial
                  damages.
 ·
              We
                  could be sued for content that we distribute over the Internet,
                  which
                  could subject us to substantial
                  damages.
 ·
              Future
                  government regulations may increase our cost of doing business
                  on the
                  Internet, which could adversely affect our cost
                  structure.
 ·
              We
                  may become subject to sales and other taxes for direct sales over
                  the
                  Internet, which could affect our revenue
                  growth.
 ·
              A
                  variety of risks could adversely affect our international
                  activities.
 ·
              Our
                  charter and bylaws could discourage an acquisition of our company
                  that
                  would benefit our stockholders.
 
 If
        we
        fail to manage these risks successfully, it would materially and adversely
        affect our financial performance.
 
 We
        believe that our success will depend largely on our ability to extend our
        leadership position as a provider of premium digital spoken audio content
        over
        the Internet. Accordingly, we plan to continue to invest in marketing, content
        acquisition and operations.
 
 As
        of
        September 30, 2007, we were not a party to any derivative financial instruments
        or other financial instruments or hedging investments that expose us to material
        market risk. We currently do not plan to enter into any derivative instruments
        or engage in any hedging activities.
 
 We
        have
        incurred significant losses since inception and as of September 30, 2007,
        we had
        an accumulated deficit of $142.1 million.
 
 Our
        operating results have varied on a quarterly basis during our operating history
        and may fluctuate significantly in the future as a result of a variety of
        factors, many of which are outside of our control. Factors that may affect
        our
        operating results include but are not limited to: (1) the demand for the
        Audible
        service; (2) sales of Audible content through the Apple iTunes Store; (3)
        the
        availability of premium audio content; (4) sales and consumer usage of
        AudibleReady devices; (5) our ability to acquire new customers; (6) our ability
        to retain existing customers; (7) the introduction of new products or services
        by a competitor; (8) the cost and availability of acquiring sufficient Web
        site
        capacity to meet our customers' needs; (9) technical difficulties with our
        computer system or the internet or system downtime; (10) the cost of acquiring
        audio content; (11) the amount and timing of capital expenditures and other
        costs relating to the expansion of our international operations; (12) successful
        expansion of the Audible service in the UK; (13) effective management of
        and
        compliance with Sarbanes-Oxley requirements; and (14) general economic
        conditions and economic conditions specific to electronic commerce and online
        media. In the past, we experienced fluctuations in demand for the Audible
        service based on the level of marketing expenditures, the occurrence of external
        publicity and the quality of our software and Web site. Any one of these
        factors
        could cause our revenue and operating results to vary significantly in the
        future. In addition, as a strategic response to changes in the competitive
        environment, we may from time to time make pricing, service or marketing
        decisions that could cause significant declines in our quarterly
        revenue.
 
 Because
        we have a number of fixed expenses, we may be unable to adjust our spending
        in a
        timely manner to compensate for unexpected revenue shortfalls. Accordingly,
        any
        significant shortfall in relation to our expectations could cause significant
        declines in our operating results. We believe that our quarterly revenue,
        expenses and operating results could vary significantly in the future, and
        that
        period-to-period comparisons should not be relied upon as indications of
        future
        performance. Due to the foregoing factors, it is likely that in some future
        quarters our operating results will fall below the expectations of securities
        analysts and investors, which could have a material adverse effect on the
        trading price of our common stock.
  -36-
 Table
            of Conents
  
 **Liquidity
        and Capital Resources**
 
 In
        November 2004, we completed a secondary public offering of our common stock
        resulting in net proceeds to us of approximately $46.5 million.
 
 As
        of
        September 30, 2007, our cash and cash equivalents balance was $42.8 million.
        In
        addition, as of September 30, 2007 we had $28.0 million in short-term
        investments, consisting of governmental agency notes and mortgage backed
        securities, which we intend to hold until maturity. Based on our currently
        proposed business plans and related assumptions, we believe that our cash
        and
        cash equivalents balance and short-term investment balance as of September
        30,
        2007 will enable us to meet our anticipated cash requirements for operations
        and
        capital expenditures for the foreseeable future. Beyond that, we may need
        additional cash to fund our business and finance our planned growth. We cannot
        be assured that such additional financing, if needed, will be available on
        terms
        favorable to us or our stockholders, if at all.
 
 ***Cash
        Requirements***
 
 The
        following table shows future cash payments due under our commitments and
        obligations as of September 30, 2007 (in thousands):
 
 **Year**
              
              **Lease
                  Obligations**
                **(1)**
              
              
              **Royalty
                  Obligations**
                **(2)**
              
              
              **Service
                  Agreements**
              
              
              **Purchase
                  Commitments**
              
              
              **Total**2007
              
              $
              265
              
              
              $
              254
              
              
              $
              658
              
              
              $
              308
              
              
              $
              1,4852008
              
              
              1,046
              
              
              
              77
              
              
              
              1,359
              
              
              
              --
              
              
              
              2,4822009
              
              
              1,066
              
              
              
              --
              
              
              
              31
              
              
              
              --
              
              
              
              1,0972010
              
              
              1,141
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,1412011
              
              
              1,215
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,2152012
                  & Thereafter
              
              
              3,255
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              3,255Total
              
              $
              7,988
              
              
              $
              331
              
              
              $
              2,048
              
              
              $
              308
              
              
              $
              10,675
 
 (1)
        Of the $8.0 million in total operating leases, $7.9 million relates to the
        office lease agreement entered into in September 2006, of which $0.8 million
        is
        recorded as deferred rent, noncurrent in the accompanying condensed consolidated
        Balance Sheet as of September 30, 2007.
 
 (2)
        Of
        the $0.3 million in total royalty obligations, $0.2 million is recorded in
        accrued expenses and $0.1 million is recorded as royalty obligations,
        non-current, in the accompanying condensed consolidated Balance Sheet as
        of
        September 30, 2007. The remaining obligation relates to content that had
        not yet
        been delivered as of September 30, 2007.
 
 ***Sources
        and Uses of Cash***
 
 **Nine
                  Months Ended**
                **September
                  30,****2007**
              
              
              **2006****(in
                  thousands)**Operating
                  Activities
              
              $
              10,855
              
              
              $
              392Investing
                  Activities
              
              
              17,034
              
              
              
              4,473Financing
                  Activities
              
              
              21
              
              
              
              (2,853
              )Exchange
                  Rate
              
              
              11
              
              
              
              (5
              )Increase
                  (decrease) in cash and cash equivalents
              
              $
              27,921
              
              
              $
              2,007
 
 Net
        cash
        provided by operating activities for the nine months ended September 30,
        2007
        was $10.9 million. This was primarily attributable to our net loss of $1.5
        million, significantly offset by two non-cash expenses: share-based compensation
        expense of $4.6 million and depreciation and amortization of property and
        equipment of $4.0 million. Additionally, our combined balance in deferred
        revenue increased $2.8 million due to the payments by customers of fees prior
        to
        the consumption of services. An increase in accrued compensation of $3.2
        million
        was offset by a decrease inaccrued royalties of $1.4 million. Net cash provided
        by operating activities for the nine months ended September 30, 2006 was
        $0.4
        million. This was primarily attributable to our net loss of $7.7 million,
        significantly offset by two non-cash expenses: share-based compensation expense
        of $4.2 million and depreciation and amortization of property and equipment
        of
        $3.7 million. Additionally, our balance in deferred revenue increased $4.9
        million due to the payments by customers of fees prior to the consumption
        of
        services. This was offset by a decrease in accounts payable of $2.4 million
        and
        accrued expenses and other current liabilities of $1.2 million, which
        contributed to the overall decline in operating cash.
 
 Net
        cash
        provided by investing activities for the nine months ended September 30,
        2007
        was $17.0 million, attributable to net proceeds from short-term investing
        activity of $24.1 million, partially offset by purchases of property and
        equipment of $5.4 million. Net cash provided by investing activities for
        the
        nine months ended September 30, 2006 was $4.5 million. This was attributable
        to
        net short-term investing activity of $6.2 million, partially offset by purchases
        of property and equipment of $4.0 million.
 
 Net
        cash
        provided by financing activities for the nine months ended September 30,
        2007
        was less than $0.1 million, resulting from proceeds of $0.5 million from
        exercise of common stock options, offset by $0.4 million for payment of taxes
        due on vested restricted stock. Net cash used in financing activities for
        the
        nine months ended September 30, 2006 was $2.9 million, resulting primarily
        from
        purchases of treasury stock of $2.3 million, offset by $0.8 million in proceeds
        from the exercise of common stock warrants and $0.4 million from the exercise
        of
        common stock options.
  -37-
 Table
            of Conents
 
 ***New
        Accounting Standards***
 
 *SFAS
        No. 157*
 
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
        No. 157, *Fair Value Measurements* (“SFAS No. 157”). SFAS No. 157
        establishes a framework for measuring fair value and requires expanded
        disclosures regarding fair value measurements. SFAS No. 157 does not require
        any
        new fair value measurements. However, it eliminates inconsistencies in the
        guidance provided in previous accounting pronouncements.
 
 SFAS
        No.
        157 is effective for financial statements issued for fiscal years beginning
        after November 15, 2007, and interim periods within those fiscal years. Earlier
        application is encouraged, provided that the reporting entity has not yet
        issued
        financial statements for that fiscal year, including financial statements
        for an
        interim period within that fiscal year. All valuation adjustments will be
        recognized as cumulative-effect adjustments to the opening balance of retained
        earnings for the fiscal year in which SFAS No. 157 is initially applied.
        We do
        not believe the impact that SFAS No. 157 will have a material effect on our
        consolidated financial statements.
 
 *SFAS
        No. 159*
 
 In
        February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
        Financial Assets and Financial Liabilities* (“SFAS No. 159”). SFAS No. 159
        expands opportunities to use fair value measurement in financial reporting
        and
        permits entities to choose to measure many financial instruments and certain
        other items at fair value. SFAS No. 159 is effective for fiscal years beginning
        after November 15, 2007. We do not believe the impact of SFAS No. 159 will
        have
        a material effect on our consolidated financial statements.
 
 *FIN
        No. 48*
 
 In
        July
        2006, the FASB issued SFAS Interpretation No. 48, *Accounting for Uncertainty
        in Income Taxes - an interpretation of SFAS Statement No. 109* (“FIN No.
        48”). FIN No. 48 applies to all “tax positions” accounted for under SFAS 109.
        FIN No. 48 refers to “tax positions” as positions taken in a previously filed
        tax return or positions expected to be taken in a future tax return that
        are
        reflected in measuring current or deferred income tax assets and liabilities
        reported in the financial statements. FIN 48 further clarifies a tax position
        to
        include the following:
 
 ·
              a
                  decision not to file a tax return in a particular jurisdiction
                  for which a
                  return might be required,·
              an
                  allocation or a shift of income between taxing
                  jurisdictions,
 ·
              the
                  characterization of income or a decision to exclude reporting taxable
                  income in a tax return, or·
              a
                  decision to classify a transaction, entity, or other position in
                  a tax
                  return as tax exempt.
  FIN
        No.
        48 clarifies that a tax benefit may be reflected in the financial statements
        only if it is “more likely than not” that a company will be able to sustain the
        tax return position, based on its technical merits. If a tax benefit meets
        this
        criterion, it should be measured and recognized based on the largest amount
        of
        benefit that is cumulatively greater than 50% likely to be realized. This
        is a
        change from current practice, whereby companies may recognize a tax benefit
        only
        if it is probable a tax position will be sustained.
 
 FIN
        No.
        48 also requires that we make qualitative and quantitative disclosures,
        including a discussion of reasonably possible changes that might occur in
        unrecognized tax benefits over the next 12 months; a description of open
        tax
        years by major jurisdictions; and a roll-forward of all unrecognized tax
        benefits, presented as a reconciliation of the beginning and ending balances
        of
        the unrecognized tax benefits on an aggregated basis.
 
 This
        statement became effective for us on January 1, 2007. Based on our analysis
        it
        did not have a material effect on our consolidated financial
        statements.
 
 In
        May
        2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, *Definition of
        Settlement in FASB Interpretation No. 48*, (“FIN 48-1”). This FSP was issued
        to amend FIN No. 48 to clarify that a tax position could be effectively settled
        upon examination by a taxing authority. Assessing whether a tax position
        is
        effectively settled is a matter of judgment because examinations occur in
        a
        variety of ways. In determining whether a tax position is effectively settled,
        an enterprise should make the assessment on a position-by-position basis,
        but an
        enterprise could conclude that all positions in a particular tax year are
        effectively settled. The application of the guidance in this FSP had no impact
        on our consolidated financial statements.
  -38-
 Table
            of Conents
 
 **ITEM
        3. Quantitative and Qualitative Disclosures about Market
        Risk**
 
 We
        are
        exposed to fluctuations in foreign currency exchange rates as the financial
        results of our UK subsidiary are translated into U.S. dollars in consolidation,
        we have a short-term inter-company account with our UK subsidiary, and we
        pay
        certain third party suppliers in foreign currencies. We do not use derivative
        instruments or hedging to manage our exposures and do not hold any market
        risk
        sensitive instruments for trading purposes.
 
 **ITEM
        4. Controls and Procedures**
  **Changes
        in Internal Control Over Financial Reporting**
  As
        previously disclosed in our annual report on Form 10-K for the year ended
        December 31, 2006, we identified the following material weaknesses in our
        internal control over financial reporting: (i) ineffective execution of
        non-routine contracts; (ii) inadequate information and communication; (iii)
        ineffective review of account analyses; and (iv) inadequate identification
        and
        analysis of non-income tax related matters.
  The
        material weaknesses identified by us could result in a material misstatement
        to
        the annual or interim financial statements that would not be preventable
        or
        detectable. As a result, we have determined these control deficiencies each
        constituted a material weakness as of December 31, 2006. Because of the material
        weaknesses noted above, we have concluded that we did not maintain effective
        internal control over financial reporting as of December 31, 2006, based
        on
        criteria in *Internal Control — Integrated Framework*issued by the
        Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        We have
        communicated our conclusions to the Audit Committee of our Board of
        Directors.
  Changes
        in our internal control over financial reporting, as such term is defined
        in
        Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months
        ended September 30, 2007 that have materially affected, or are reasonably
        likely
        to materially affect, our internal control over financial reporting, include
        the
        items described below.
  We
        have
        taken various corrective actions to remediate the material weaknesses noted
        above. By their nature, such actions require a period of time to become fully
        effective. The remedial actions associated with these material weaknesses
        include the following:
 
 *Ineffective
        Execution of Non-Routine Contracts.*
  We
        have
        improved our contract review procedures to provide a more detailed legal
        and
        financial review of new contracts in order to identify potential financial
        reporting risks and implementation issues.
 
 *Inadequate
        Information and Communication*
 
 We
        have
        implemented change control procedures requiring review and signoff on
        modifications to existing system-generated financial reports used in financial
        reporting.
 
 We
        began
        a process of reviewing, classifying and reconciling individual gift transactions
        to properly categorize and support remaining gift deferral
        balances.
 
 *Ineffective
        Review of Account Analyses*
 
 We
        have
        implemented additional reconciliation roll-forwards and review procedures
        to
        provide greater accuracy over account analysis used as a basis to record
        journal
        entries.
 
 We
        have
        engaged more participation in the review of account activities by initiating
        periodic circulation of interim financial information.
 
 *Inadequate
        Identification and Analysis of Non-Income Tax Related Matters*
 
 We
        have
        modified our web site to collect value added tax (“VAT”) from customers in
        foreign jurisdictions.
 
 We
        have
        implemented a periodic formal tax review process intended to identify and
        address potential non-income tax related matters.
 
 We
        have
        made the remediation of the material weaknesses that have been identified
        a
        significant priority for us and will continue to take steps to address them
        by
        the end of 2007. We believe that the remediation efforts, taken as a whole,
        mitigated the risk of error with respect to our preparation of this quarterly
        report on Form 10-Q for the period ended September 30, 2007, and that these
        measures have been effective to ensure that information required to be disclosed
        in this quarterly report has been recorded, processed, summarized and reported
        correctly. We believe that our controls and procedures will continue to improve
        as a result of the further implementation of these measures.
 
 **Evaluation
        of Disclosure Controls and Procedures**
  We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our reports filed or submitted pursuant
        to the Exchange Act is recorded, processed, summarized and reported within
        the
        time periods specified in the Securities and Exchange Commission’s rules and
        forms, and that information required to be disclosed in our Exchange Act
        reports
        is accumulated and communicated to our management, including the our Chief
        Executive Officer and Chief Financial Officer, to allow timely decisions
        regarding required disclosure.
  Under
        the
        supervision and with the participation of our management, including our Chief
        Executive Officer and Chief Financial Officer, we carried out an evaluation
        of
        the effectiveness of the design and operation of our disclosure controls
        and
        procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of September
        30, 2007.  Based upon that evaluation, our Chief Executive Officer and
        Chief Financial Officer concluded that our disclosure controls and procedures
        were not effective as of such date due to the fact that the material weaknesses
        described in our annual report on Form 10-K for the year ended December 31,
        2006, had not been remediated as of September 30, 2007.
 
 -39-
 Table
            of Conents
  **PART
        II--OTHER INFORMATION**
 
 **ITEM
        1. Legal Proceedings**
 
 Various
        legal actions, claims, assessments and other contingencies arising in the
        normal
        course of business, in addition to the matters described below, are pending
        against us. All of these matters are subject to many uncertainties, and it
        is
        possible that some of these matters could be ultimately decided, resolved
        or
        settled adversely. We have recorded accruals for losses related to those
        matters
        which we consider to be probable and that can be reasonably estimated. Although
        the ultimate amount of liability at September 30, 2007 that may result from
        those matters for which accruals have been recorded may differ, we believe
        that
        any amounts exceeding the recorded accruals would not be material to the
        consolidated financial position or results of operations.
 
 In
        June
        2001, we and certain of our officers were named as defendants in a securities
        class action filed in United States District Court for the Southern District
        of
        New York related to our initial public offering in July 1999. The lawsuits
        also
        named certain of the underwriters of the IPO as well as certain of our officers
        and directors and former directors as defendants. Approximately 300 other
        issuers and their underwriters have had similar suits filed against them,
        all of
        which are included in a single coordinated proceeding in the Southern District
        of New York (the “IPO Litigations”). An amended complaint was filed on April 19,
        2002. The complaints allege that the prospectus and the registration statement
        for our IPO failed to disclose that the underwriters allegedly solicited
        and
        received “excessive” commissions from investors and that some investors in our
        IPO allegedly agreed with the underwriters to buy additional shares in the
        aftermarket in order to inflate the price of our stock. We and certain of
        our
        officers, directors, and former directors were named in the suits pursuant
        to
        Section 11 of the Securities Act of 1933, Section 10(b) of the Exchange Act
        of
        1934, and other related provisions. The complaints seek unspecified damages,
        attorneys' and expert fees, and other unspecified litigation costs.
 
 On
        July
        1, 2002, the underwriter defendants in the consolidated actions moved to
        dismiss
        all of the IPO Litigations, including the action involving us. On July 15,
        2002
        we, along with other non-underwriter defendants in the coordinated cases,
        also
        moved to dismiss the IPO Litigations. On February 19, 2003, the court ruled
        on
        the motions. The court granted our motion to dismiss the claims against us
        under
        Rule 10b-5, due to the insufficiency of the allegations against us. The motions
        to dismiss the claims under Section 11 of the Securities Act were denied
        as to
        virtually all of the defendants in the consolidated cases, including ours.
        Our
        individual officers, directors and former director defendants in the IPO
        Litigation signed a tolling agreement and were dismissed from the action
        without
        prejudice on October 9, 2002.
 
 In
        June
        2003, a proposed settlement of this litigation was reached among the plaintiffs,
        the issuer defendants in the consolidated actions, the issuer officers and
        directors named as defendants, and the issuers' insurance companies. The
        settlement would provide, among other things, a release for us and for the
        individual defendants for the conduct alleged to be wrongful in the amended
        complaint. We would agree to undertake other responsibilities under the partial
        settlement, including agreeing to assign away, not assert, or release certain
        potential claims that we may have against the underwriters. Any direct financial
        impact of the proposed settlement is expected to be borne by our insurance
        carriers.
 
 In
        June
        2004, the proposed settlement was submitted to the court for preliminary
        approval. The court requested that any objections to preliminary approval
        of the
        settlement be submitted by July 14, 2004, and the underwriter defendants
        formally objected to the settlement. The plaintiff and issuer defendants
        separately filed replies to the underwriter defendants' objections to the
        settlement on August 4, 2004. The court granted preliminary approval on February
        15, 2005, subject to certain modifications. On August 31, 2005, the court
        issued
        a preliminary order further approving the modifications to the settlement
        and
        certifying the settlement cases. The court also appointed the Notice
        Administrator for the settlement and ordered that notice of the settlement
        be
        distributed to all settlement class members beginning on November 15, 2005.
        The
        settlement fairness hearing was held on April 26, 2006, and the court reserved
        decision. The plaintiffs have continued to litigate against the underwriter
        defendants. The district court directed that the litigation proceed within
        a
        number of “focus cases” rather than in all of the 310 cases that have been
        consolidated. Our case is not one of these focus cases. On October 13, 2004,
        the
        district court certified the focus cases as class actions. The underwriter
        defendants appealed the ruling, and on December 5, 2006, the Court of Appeals
        for the Second Circuit reversed the district court’s class certification
        decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for a
        rehearing. In light of the Second Circuit opinion, the district court has
        been
        informed that the settlement cannot be approved because the defined settlement
        class, like the litigation class, cannot be certified. On June 25, 2007,
        the
        district court entered into an order terminating the settlement agreement.
        There
        can be no assurance that a settlement that complies with the Second Circuit’s
        mandate can be renegotiated.
 
 On
        August
        14, 2007, the plaintiffs filed their second consolidated amended class action
        complaints against the focus cases and on September 27, 2007, filed motions
        for
        class certification again.  The focus case issuer and underwriter
        defendants intend to move for dismissal of these second amended
        complaints.
 
 Due
        to
        the inherent uncertainties of litigation, we cannot accurately predict the
        ultimate outcome of the matter.
  -40-
 Table
            of Conents
 
 Starting
        on or about February 22, 2005, several class actions were filed against us
        and
        two of our executives in the United States District Court for the District
        of
        New Jersey. The plaintiffs purport to represent a class consisting of all
        persons (other than our officers and directors and their affiliates) who
        purchased our securities between November 2, 2004 and February 15, 2005 (the
        "Class Period"). The plaintiffs allege that the defendants violated Section
        10(b) of the Securities Exchange Act of 934
        and
        Rule 10b-5 there under by failing to make complete and accurate disclosures
        concerning our future plans and prospects. The individual defendants are
        also
        alleged to be liable under Section 20(a) of the Exchange Act. All of the
        defendants are alleged to have sold stock at inflated prices during the Class
        Period. In December 2005, the United States District Court for the District
        of New Jersey consolidated the class action, appointed a group of lead
        plaintiffs and appointed lead plaintiff's counsel. By prior agreement, the
        plaintiff's consolidated amended complaint was filed on February 14, 2006.
        The
        plaintiffs seek unspecified monetary damages and their reasonable costs and
        expenses, including counsel fees and expert fees. The defendants moved to
        dismiss the pleading. In March 2007, the Court granted the defendants’ motion to
        dismiss the plaintiffs’ consolidated amended complaint but granted the
        plaintiffs leave to amend. The plaintiffs have filed a motion for
        reconsideration, which the defendants have opposed. The Court has yet to
        rule on
        the motion.
 
 In
        April
        2005, a derivative action was filed in the state court of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, six of our outside directors, and three of our stockholders. The
        derivative action made the same factual allegations as the class actions
        described above and added allegations that the six outside directors named
        as
        defendants and/or the stockholders who nominated them sold stock at inflated
        prices at or about the time of the secondary offering of securities that
        we made
        in November 2004. The plaintiff in this derivative action purported to seek
        a
        recovery of the damages allegedly sustained by us rather than by investors
        who
        allegedly purchased securities at inflated prices.
 
 In
        May
        2005, we learned of a second derivative action which was filed during April
        2005
        in the United States District Court for the District of New Jersey against
        us,
        the two executives named as individual defendants in the class actions described
        above, and all seven of our outside directors. The derivative action makes
        the
        same allegations as the class actions described above and adds allegations
        that
        all of the individual defendants are responsible for an alleged failure of
        internal controls that resulted in the 45-day delay in the filing of our
        Form
        10-K for 2004. The plaintiff in this derivative action purports to seek a
        recovery of the damages allegedly sustained by us rather than by investors
        who
        allegedly purchased securities at inflated prices.
 
 The
        plaintiffs in the derivative actions voluntarily agreed to stay those actions
        pending the outcome of our anticipated motion to dismiss the class actions
        described above. More recently, the state derivative action was dismissed
        without prejudice because the Court preferred that course of action to staying
        the action. The state derivative action could be re-commenced if the securities
        class action survives the defendant's motion to dismiss.
 
 The
        Company believes that all of the claims relating to the 2005 class action
        described above are without merit and intends to defend the actions vigorously.
        Due to the inherent uncertainties of litigation and because these actions
        are at
        a preliminary stage, the Company cannot accurately predict the ultimate outcome
        of these matters.
 
 On
        October 5, 2007, Digital Reg of Texas, LLC, a patent holding company, filed
        a
        complaint in the U.S. District Court for the Eastern District of Texas alleging
        that we, among numerous other defendants, infringes a patent purportedly
        relating to our Digital Rights Management technology. We intend to defend
        against the claim vigorously, but at this time we are  unable to
        predict the outcome of the suit or reasonably estimate any possible
        loss.
 
 On
        October 9, 2007, Vanessa Simmonds, a purported stockholder, filed suit in
        the U.S. District Court for the Western District of Washington against
        Credit Suisse Group and JP Morgan & Co., the lead underwriters of our
        initial public offering in July 1999, alleging violations of
        Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec.
        78p(b).  The complaint seeks to recover from the lead underwriters any
“short-swing profits” obtained by them in violation of Section 16(b). 
We were named as a nominal defendant in the action, but have no liability
        for the asserted claims.   We are considering what, if any,
        action to take in response to this litigation.  We do not anticipate
        that the ultimate outcome of this litigation will have a material adverse
        impact
        on our financial position.
  -41-
 Table
            of Conents
 
 **ITEM
        1A.** **Risk
        Factors**
 
 Our
        business is subject to a number of risks. For a more detailed explanation
        of
        factors affecting our businesses, please refer to the Risk Factors section
        in
        Item 1A of our Annual Report on Form 10-K for the year ended December
        31, 2006. There have been no material changes to our risk factors as of
        September 30, 2007.
  **ITEM
        2.** **Unregistered Sales of Equity
        Securities and Use of Proceeds**
 
 None
 
 **ITEM
        3. Defaults Upon Senior
        Security**
 
 Not
        applicable
 
 **ITEM
        4.Submission of Matters to a Vote of Security
        Holders**
 
 None
 
 **ITEM
        5. Other Information**
 
 None
 
 **ITEM
        6.** **Exhibits**
  **Exhibit
                  Number**
              **Description**31.1
              Certification
                  of the Chief Executive Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              Certification
                  of the Chief Financial Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              Certification
                  of the Chief Executive Officer
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.32.2
              Certification
                  of the Chief Financial Officer
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002.
 
  -42-
 Table
            of Conents
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned, thereunto
        duly authorized.
  
 
 **AUDIBLE,
                  INC.**By:
              /s/
                  William H. MitchellName:
              William
                  H. MitchellTitle:
              Chief
                  Financial Officer
                (Principal
                  Financial and Accounting Officer)Date:
              November
                  9, 2007
 
  -43-