**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, 2005o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**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)**65
                WILLOWBROOK BLVD. WAYNE, NEW JERSEY**
              (Address
                of principal executive offices)
            
            **07470**
              (Zip
                Code)








**(973)
      837-2700**


(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** o





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


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





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


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





As
      of
      November 7, 2005, 24,302,385 shares
      of the registrant's common stock were outstanding.


1














**AUDIBLE, INC.
      AND SUBSIDIARY**


**TABLE
      OF CONTENTS**


**PART
                  I**
              **FINANCIAL
                  INFORMATION**
              **PAGE**Item
                  1.
              Financial
                  Statements:Condensed
                  Consolidated Balance Sheets as of
                  September 30, 2005 (unaudited) and December 31, 2004
              3Condensed
                  Consolidated Statements of Operations for the
                  three and nine months ended September 30, 2005 and 2004
                  (unaudited)
              4Condensed
                  Consolidated Statements of Cash Flows for the
                  nine months ended September 30, 2005 and 2004
                  (unaudited)
              5Notes
                  to Condensed Consolidated Financial
                  Statements (unaudited)
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              26Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risks
              41Item
                  4.
              Controls
                  and Procedures
              41**PART
                  II**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              42Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              43Item
                  3.
              Defaults
                  Upon Senior Securities
              43Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              43Item
                  5.
              Other
                  Information
              43Item
                  6.
              Exhibits
              44**Signatures**
              
              45


2
 *Table
        of Contents*
  **PART
        I - FINANCIAL INFORMATION**


**ITEM
        1.    Financial Statements**
 **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 **September
                    30,**
                  **2005**
                
                **December
                    31,**
                  **2004****Assets**
                
                **(unaudited)**Current
                    assets:Cash
                    and cash equivalents
                
                $
                13,570,880
                
                $
                13,296,006Short-term
                    investments
                
                
                56,136,629
                
                
                48,386,399Interest
                    receivable on short-term investments
                
                
                242,335
                
                
                76,151Accounts
                    receivable, net of allowance for refunds and chargebacks of $22,500
                    and
                    $14,600 at September 30, 2005 and December 31, 2004,
                    respectively
                
                
                1,424,408
                
                
                786,987Accounts
                    receivable - related parties
                
                
                176,334
                
                
                87,625Royalty
                    advances
                
                
                541,421
                
                
                140,634Prepaid
                    expenses and other current assets
                
                
                733,507
                
                
                665,984Inventory
                
                
                98,705
                
                
                394,109Total
                    current assets
                
                
                72,924,219
                
                
                63,833,895Property
                    and equipment, net
                
                
                3,116,455
                
                
                919,090Other
                    assets
                
                
                131,803
                
                
                20,805Total
                    assets
                
                $
                76,172,477
                
                $
                64,773,790**Liabilities
                    and Stockholders' Equity**Current
                    liabilities:Accounts
                    payable
                
                $
                1,734,116
                
                $
                850,906Accrued
                    expenses
                
                
                9,470,509
                
                
                3,628,556Royalty
                    obligations
                
                
                331,652
                
                
                150,800Accrued
                    compensation
                
                
                958,977
                
                
                448,156Capital
                    lease obligations
                
                
                --
                
                
                120,795Deferred
                    revenue
                
                
                3,218,599
                
                
                2,445,868Total
                    current liabilities
                
                
                15,713,853
                
                
                7,645,081Royalty
                    obligations - non-current
                
                
                250,578
                
                
                38,000Deferred
                    revenue - non-current
                
                
                24,995
                
                
                --Commitments
                    and contingenciesStockholders'
                    equity:Common
                    stock, par value $.01, 40,000,000 shares authorized, 24,302,285
                    and
                    24,169,775 shares issued at September 30, 2005 and December 31,
                    2004,
                    respectively
                
                
                243,023
                
                
                241,697Additional
                    paid-in capital
                
                
                192,317,579
                
                
                187,248,675Deferred
                    compensation
                
                
                (3,858,677
                )
                
                (154,173
                )Accumulated
                    other comprehensive income
                
                
                17,649
                
                
                --Treasury
                    stock at cost, none and 229,741 shares of common stock at September
                    30,
                    2005 and December 31, 2004, respectively
                
                
                --
                
                
                (184,740
                )Accumulated
                    deficit
                
                
                (128,536,520
                )
                
                (130,060,750
                )Total
                    stockholders' equity
                
                
                60,183,051
                
                
                57,090,709Total
                    liabilities and stockholders' equity
                
                $
                76,172,477
                
                $
                64,773,790
  
 See
        accompanying notes to condensed consolidated financial statements.
 
 
  
 
 
  3
 *Table
            of Contents*
  
 **AUDIBLE,
        INC. AND SUBSIDIARY**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**


**Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Revenue,
                  net:Content
                  and services:Consumer
                  content
              
              $
              16,471,719
              
              $
              9,110,575
              
              $
              44,468,360
              
              $
              23,724,075Point
                  of sale rebates
              
              
              (208,320
              )
              
              (101,640
              )
              
              (795,130
              )
              
              (285,645
              )Services
              
              
              41,472
              
              
              17,791
              
              
              81,806
              
              
              47,794Total
                  content and services
              
              
              16,304,871
              
              
              9,026,726
              
              
              43,755,036
              
              
              23,486,224Hardware
              
              
              141,790
              
              
              186,408
              
              
              331,686
              
              
              530,874Related
                  party revenue
              
              
              263,358
              
              
              65,762
              
              
              796,889
              
              
              65,762Other
              
              
              60,275
              
              
              --
              
              
              89,009
              
              
              32,257Total
                  revenue, net
              
              
              16,770,294
              
              
              9,278,896
              
              
              44,972,620
              
              
              24,115,117Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              5,919,011
              
              
              2,838,098
              
              
              15,553,805
              
              
              7,492,866Discount
                  certificate rebates
              
              
              297,860
              
              
              434,170
              
              
              1,261,591
              
              
              778,505Total
                  cost of content and services revenue
              
              
              6,216,871
              
              
              3,272,268
              
              
              16,815,396
              
              
              8,271,371Cost
                  of hardware revenue
              
              
              840,463
              
              
              747,734
              
              
              1,460,169
              
              
              1,879,337Operations
              
              
              2,461,166
              
              
              1,318,442
              
              
              6,587,547
              
              
              3,658,374Technology
                  and development
              
              
              2,324,678
              
              
              1,271,737
              
              
              5,771,436
              
              
              3,807,839Marketing
              
              
              3,344,560
              
              
              1,180,929
              
              
              8,539,016
              
              
              3,332,926General
                  and administrative
              
              
              2,375,895
              
              
              959,518
              
              
              5,600,114
              
              
              2,367,233Total
                  operating expenses
              
              
              17,563,633
              
              
              8,750,628
              
              
              44,773,678
              
              
              23,317,080(Loss)
                  income from operations
              
              
              (793,339
              )
              
              528,268
              
              
              198,942
              
              
              798,037Other
                  income (expense):Interest
                  income
              
              
              553,994
              
              
              23,467
              
              
              1,424,318
              
              
              83,122Interest
                  expense
              
              
              --
              
              
              (10,069
              )
              
              (1,495
              )
              
              (26,347
              )Other
                  income, net
              
              
              553,994
              
              
              13,398
              
              
              1,422,823
              
              
              56,775(Loss)
                  income before income taxes
              
              
              (239,345
              )
              
              541,666
              
              
              1,621,765
              
              
              854,812Income
                  tax benefit (expense)
              
              
              50,315
              
              
              (57,782
              )
              
              (97,535
              )
              
              (76,571
              )Net
                  (loss) income
              
              
              (189,030
              )
              
              483,884
              
              
              1,524,230
              
              
              778,241Dividends
                  on preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              (614,116
              )Charges
                  related to conversion of convertible preferred stock
              
              
              --
              
              
              --
              
              
              --
              
              
              (9,873,394
              )Total
                  preferred stock expense
              
              
              --
              
              
              --
              
              
              --
              
              
              (10,487,510
              )Net
                  (loss) income applicable to common shareholders
              
              $
              (189,030
              )
              $
              483,884
              
              $
              1,524,230
              
              $
              (9,709,269
              )Basic
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              (0.01
              )
              $
              0.02
              
              $
              0.06
              
              $
              (0.48
              )Diluted
                  net (loss) income applicable to common shareholders per common
                  share
              
              $
              (0.01
              )
              $
              0.02
              
              $
              0.06
              
              $
              (0.48
              )Basic
                  weighted average common shares outstanding
              
              
              24,291,008
              
              
              21,270,416
              
              
              24,157,233
              
              
              20,394,380Diluted
                  weighted average common shares outstanding
              
              
              24,291,008
              
              
              23,678,669
              
              
              25,458,621
              
              
              20,394,380





4
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**





**Nine
                  months ended****September
                  30,****2005**
              
              **2004**Cash
                  flows from operating activities:Net
                  income
              
              $
              1,524,230
              
              $
              778,241Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              676,755
              
              
              377,284Services
                  rendered for common stock and warrants
              
              
              --
              
              
              432,327Non-cash
                  compensation charge
              
              
              535,459
              
              
              70,339Deferred
                  cash compensation
              
              
              --
              
              
              (58,750
              )Accretion
                  of discounts on short-term investments
              
              
              (932,053
              )
              
              --Income
                  tax benefit from exercise of stock options
              
              
              96,985
              
              
              --Changes
                  in assets and liabilities:Interest
                  receivable on short-term investments
              
              
              (166,184
              )
              
              --Accounts
                  receivable, net
              
              
              (637,690
              )
              
              (284,589
              )Accounts
                  receivable, related parties
              
              
              (88,709
              )
              
              (65,762
              )Royalty
                  advances
              
              
              (400,787
              )
              
              43,838Prepaid
                  expenses and other current assets
              
              
              (67,739
              )
              
              (41,704
              )Inventory
              
              
              294,303
              
              
              (50,902
              )Other
                  assets
              
              
              (113,846
              )
              
              397,719Accounts
                  payable
              
              
              885,706
              
              
              187,630Accrued
                  expenses
              
              
              5,845,733
              
              
              704,429Royalty
                  obligations
              
              
              393,430
              
              
              (146,500
              )Accrued
                  compensation
              
              
              513,334
              
              
              60,674Deferred
                  revenue
              
              
              798,351
              
              
              312,729Net
                  cash provided by operating activities
              
              
              9,157,278
              
              
              2,717,003Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (2,106,440
              )
              
              (325,080
              )Capitalized
                  software development costs
              
              
              (768,352
              )
              
              --Purchases
                  of short-term investments
              
              
              (61,718,177
              )
              
              --Proceeds
                  from maturity of short-term investments
              
              
              54,900,000
              
              
              --Net
                  cash used in investing activities
              
              
              (9,692,969
              )
              
              (325,080
              )Cash
                  flows from financing activities:Proceeds
                  from exercise of common stock warrants
              
              
              294,500
              
              
              27,500Proceeds
                  from exercise of common stock options
              
              
              623,518
              
              
              362,962Principal
                  payments made on obligations under capital leases
              
              
              (120,795
              )
              
              (468,439
              )Payments
                  received on notes due from stockholders for common stock
              
              
              --
              
              
              58,750Net
                  cash provided by (used in) financing activities
              
              
              797,223
              
              
              (19,227
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              13,342
              
              
              --Increase
                  in cash and cash equivalents
              
              
              274,874
              
              
              2,372,696Cash
                  and cash equivalents at beginning of period
              
              
              13,296,006
              
              
              9,074,987Cash
                  and cash equivalents at end of period
              
              $
              13,570,880
              
              $
              11,447,683




See
      Note
      13 for supplemental disclosure of cash flow information.





See
      accompanying notes to condensed consolidated financial statements.













5
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








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





*The
      Business*





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





For
      the
      three and nine month periods ended September 30, 2005, the Company reported
      net
      (loss) income of ($189,030) and $1,524,230, respectively. However due to prior
      losses since its inception, the Company has an accumulated deficit of
      $128,536,520 as of September 30, 2005. The Company's cash and cash equivalent
      balance as of September 30, 2005 is $13,570,880. In addition, the Company has
      short-term investments of $56,136,629. The Company believes that its cash and
      cash equivalents and short-term investments will enable it to meet its
      anticipated future cash requirements for operations and capital expenditures
      for
      the foreseeable future.





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. The accompanying
      unaudited condensed consolidated financial statements as of and for the three
      and nine month periods ended September 30, 2005 include the accounts of Audible,
      Inc. and Audible UK. All inter-company transactions and balances have been
      eliminated.





The
      accompanying condensed consolidated financial statements as of September 30,
      2005 and for the three and nine months ended September 30, 2005 and 2004, are
      unaudited and, in the opinion of management, include all adjustments (consisting
      of normal recurring adjustments and accruals) 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 months ended
      September 30, 2005 are not necessarily indicative of the results that may be
      expected for the year ending December 31, 2005. These condensed consolidated
      financial statements should be read in conjunction with the audited financial
      statements and notes thereto for the year ended December 31, 2004, from the
      Company's Annual Report on Form 10-K, as amended.





*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 consisted primarily of money market funds and notes due from
      governmental agencies. Cash consists of funds held in the Company's checking
      account.






















6
 *Table
          of Contents*





**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**







*Restricted
      Cash*





During
      the third quarter of 2005, the Company has deposited a $25,000 retainer in
      an
      interest-bearing account, which is included in Other Assets on the accompanying
      condensed consolidated Balance Sheet.





*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, 2005 and December 31, 2004, of $56,136,629
      and
      $48,386,399, respectively, consisted of governmental agency notes and
      mortgage-backed securities that are to be held to maturity because the Company
      has the positive intent and ability to hold these securities to maturity. Held
      to maturity securities are stated at amortized cost, adjusted for amortization
      of premiums and accretion of discounts to maturity. Dividend and interest income
      are recognized when earned. Premiums and discounts are amortized or accreted
      over the life of the related held-to-maturity security as an adjustment to
      yield
      using the effective interest method. A decline in the market value of
      held-to-maturity security below that is deemed to be other-than-temporary
      results in a reduction in carrying amount to fair value. The impairment is
      charged to operations and a new cost basis for the security is established.
      To
      determine whether an impairment is other-than-temporary, the Company considers
      whether it has the ability and intends to hold the investment until a market
      price recovery and considers whether evidence indicating the cost of the
      investment is recoverable outweighs evidence to the contrary. Evidence
      considered in this assessment includes the reasons for the impairment, the
      severity and duration of the impairment, changes in the value subsequent to
      year
      end, and forecasted performance of the investee.





The
      amortized cost, gross unrealized holding losses and the fair value of
      held-to-maturity debt securities at September 30, 2005 was $56,136,629, $54,298
      and $56,082,331, respectively.





All
      of
      the debt securities classified as held-to-maturity
      mature before September 30, 2006.





*Allowance
      for Refunds and Chargebacks*





The
      allowance 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 allowance 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 allowance is
      reflected as an accrued liability at period-end.




The
      amount of the allowance that was recorded as a reduction of accounts receivable
      as of September 30, 2005 and December 31, 2004 was $22,500 and $14,600,
      respectively. The amount of the allowance reflected in the accrued liability
      was
      $310,991 and $168,584 at September 30, 2005 and December 31, 2004,
      respectively.





*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.






















7
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








*Property
      and Equipment*




Property
      and equipment are stated at cost. Property and equipment under capital leases
      are stated at the present value of minimum lease payments. Depreciation is
      calculated using the straight-line method over the estimated useful lives of
      the
      respective assets, which are three years for computer server, website equipment,
      and software license, and two years for office furniture and equipment, and
      studio equipment.




Property
      and equipment held under capital leases are amortized on a straight-line basis
      over the estimated useful life of the asset. Leasehold improvements are
      amortized on a straight-line basis over the lease term or the estimated useful
      life of the asset, whichever is shorter. The amortization is included within
      depreciation expense.





Work
      in
      process consists of expenditures for the development of various computer
      software projects incurred subsequent to the completion of the preliminary
      project stage. In accordance with SOP 98-1, *Accounting
      for Costs of Computer Software Developed or Obtained for Internal
      Use* ,
      the
      Company has capitalized external direct costs of material and services developed
      or obtained for these projects and payroll and payroll related expenses for
      employees directly associated with these projects. Amortization for each
      software project will begin when the computer software is ready for its intended
      use.




Maintenance
      and repairs are expensed as incurred.




*Impairment
      of Long-Lived Assets*




The
      Company reviews its long-lived assets (property and equipment) 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.




*Royalty
      Advances and Royalty Obligations*




Royalty
      advances and the corresponding royalty obligations represent payments made
      and
      payments to be made to various content providers pursuant to minimum guarantees
      under their royalty agreements, net of royalties expensed. These agreements
      give
      the Company the right to sell digital audio content over the internet. The
      royalty obligations recorded in the accompanying balance sheets are classified
      between current and 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. Royalty expense is included in
      cost of content and services revenue in the accompanying condensed consolidated
      Statements of Operations.





*Fair
        Value of Financial Instruments*
  Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist of cash and cash equivalents, short-term investments,
        accounts receivable, accounts receivable from related parties, accounts payable
        and accrued expenses. At September 30, 2005 and December 31, 2004,
        the fair
        values of these financial instruments approximated their carrying values
        due to
        the short-term nature of these instruments.


*Foreign
      Currency Translation*





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




Since
        the
        inception of Audible UK operations, Audible Inc. has made periodic cash fundings
        to Audible UK to assist with the cash flow needs of the start up subsidiary.
        Audible Inc. expects these periodic fundings to continue into the foreseeable
        future. In addition to cash fundings, Audible Inc has paid certain expenses
        on
        behalf of the subsidiary, such as security deposit on office space and payroll
        of US employees working on the UK business. All of these fundings were made
        with
        the intentions of having a long-term investment nature. In accordance with
        the
        provisions of SFAS 52, the
        foreign currency gain/loss at each reporting period resulting from the
        inter-company account is recorded to Accumulated Other Comprehensive
        Income.






















8
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**







*Revenue
      Recognition*




*Consumer
      Content Revenue*




Consumer
          content revenue consists of content sales made from the Company's website
          and
          content sold through the Company's agreement with the Apple iTunes Music
          Store.
          The Company uses real-time credit card authorization for sales transactions
          made
          through the Company’s website. Revenue from the sale of individual content
          titles from both the Company's website and the Apple iTunes Music Store
          is
          recognized in the period when the content is purchased. Revenue from the
          sale of
          content subscriptions is recognized pro rata over the term of the subscription
          period. Revenue from the sale of monthly AudibleListener memberships is
          recognized ratably over the AudibleListener's monthly membership
          period.


This
      results in approximately 50% of the AudibleListener membership fees received
      during each calendar month being deferred at month-end and recognized as content
      revenue in the following month. Revenue from the sale of UltimateListener,
      a
      prepaid discounted content package, and gift programs are recognized when the
      content is downloaded.




*Point
      of Sale Rebates and Discount Certificate Rebates*




Part
          of
          the Company's marketing strategy to acquire new AudibleListeners includes
          retail
          promotions. These retail promotions consist of offering rebates to consumers
          on
          their purchase of digital audio players from certain retailers if the customer
          commits to a twelve month AudibleListener membership. These rebates take
          one of
          two forms. The first type, reflected as point of sale rebates on the condensed
          consolidated Statements of Operations, relates to a discount 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. The cost of these rebates is accounted
          for as a reduction in content revenue in the period the discount is given.
          The
          second type, reflected as discount certificate rebates on the condensed
          consolidated Statements of Operations, relates to retailer promotional
          codes or
          retailer gift cards that are given to a customer by Audible at the time
          the
          customer purchases the Audible membership. These promotional codes are
          honored
          by third party retailers and allow the customer to purchase a digital audio
          player at a discounted price from the third party retailer. The gift cards
          are
          honored by third party retailers on a future purchase. The cost of these
          promotional codes and gift cards is accounted for as a cost of content
          revenue
          when the customer commits to a twelve-month AudibleListener membership
          under one
          of the retailer promotion programs. The accounting for both types of customer
          rebates as described above is pursuant to Emerging Issues Task Force (“EITF”)
          Issue No. 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including
          a
          Reseller of the Vendor's Products)* .


*Services
      Revenue*





Services
      revenue consists of library sales and audio production services. Service revenue
      is recognized as services are performed after the agreement has been finalized,
      the price is fixed and collectibility is reasonably assured. Collectibility
      is
      based on past transaction history and credit-worthiness of the
      customer.






















9
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








*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 commits to an AudibleListener membership. For
      multiple-element arrangements in which a customer signs up for a one year
      membership and receives an audio player for free, revenue is recognized using
      the relative fair value method under EITF Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables* .
      Each
      separate unit of accounting is recognized as revenue at its relative fair value,
      where the delivered item (hardware) is limited to the non-contingent
      consideration, which consists of shipping and handling. The free hardware device
      reflects the subsidy incurred to acquire an AudibleListener member. For players
      sold separately, hardware revenue is recognized upon shipment of the device,
      pursuant to a customer order and credit card authorization and includes amounts
      received for shipping and handling.




*Related
      Party Revenue*




Related
        party revenue consists of revenue earned under agreements with Audible Germany
        (see Note 8) and France Loisirs (see Note 9). Revenue under the Audible Germany
        agreement includes $30,000 earned per month over the initial 30-month term
        of
        the agreement, which began on August 30, 2004. The Company recognizes $30,000
        per month only after Audible Germany has agreed that the services delivered
        for
        the prior 60-day period were satisfactory and collection of the amount is
        reasonably assured. Revenue under the France Loisirs agreement includes a
        $1,000,000 technology licensing fee that is being recognized on a straight-line
        basis over the initial 24-month term of the agreement, which began on September
        15, 2004. Of the $1,000,000, France Loisirs has paid approximately $812,000
        as
        of September 30, 2005, resulting in a deferred revenue of approximately $291,000
        as of September 30, 2005. Revenue earned under each of these agreements also
        includes reimbursement of certain incremental costs incurred by the Company
        that
        are billed to France Loisirs and Audible Germany in accordance with EITF
        Issue
        01-14, *Income Statement Characterization of Reimbursement Received for `Out-of-Pocket'
        Expenses Incurred* .




*Other
      Revenue*


Other
          revenue for the nine months ended September 30, 2004, included revenue
          from a
          license granted for certain technology rights to a device manufacturer
          which was
          recognized on a straight-line basis over the term of the agreement which
          expired
          in June 2004. There was no other revenue for the three months ended September
          30, 2004. Other revenue for the three and nine months ended September 30,
          2005
          included revenue from commissions earned by the Company for referring customers
          to a retail partner to purchase a digital audio device, which is recognized
          in
          the period when the purchase is completed and revenue from fees earned
          under a
          new product development, licensing, marketing, and distribution agreement.
          Revenues under this agreement include a $1.2 million fee, which is being
          amortized on a straight-line basis over a 58 month period, beginning in
          July
          2005.




*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 $93,672 and $144,439, for the three months
      ended
      September 30, 2005 and 2004, respectively, and $255,322 and $354,236 for the
      nine months ended September 30, 2005 and 2004, respectively.




*Cost
      of Content and Services Revenue*


Cost
        of
        content and services revenue includes earned royalties on sales of content
        as
        specified by the terms of the content agreements, periodic net realizable
        value
        adjustments to royalty advances, amortization of warrants issued to content
        providers in connection with content agreements, production costs incurred
        in
        connection with creation of audio products, other non-recoupable content
        costs,
        and discount certificate rebates. Royalty expense for sales of content is
        either
        paid based upon a percentage of revenue or as a fixed price per title as
        per the
        royalty agreement. In certain cases, 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.



















10
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








*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
      $863,209 and $458,059 for the three months ended September 30, 2005 and 2004,
      respectively, and $2,264,605 and $1,003,626 for the nine months ended September
      30, 2005 and 2004, respectively.





*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, the allowance for returns and chargebacks, recoverability of royalty
        advances, valuation of deferred tax assets, certain accruals and fair value
        of
        equity based compensation. Actual results could differ from those
        estimates.





*Income
      Taxes*





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




*Basic
      and Diluted Net Income (Loss) Applicable to Common Shareholders Per Common
      Share*





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





For
      the
      nine month period ended September 30, 2005 and three month period ended
      September 30, 2004, diluted net income applicable to common shareholders per
      common share is computed by dividing net income applicable to common
      shareholders by the diluted weighted average common shares outstanding. For
      the
      three month period ended September 30, 2005 and for the nine month period ended
      September 30, 2004, diluted net loss applicable to common shareholders per
      common share is equal to basic net loss applicable to common shareholders per
      common share, since all potential common stock was anti-dilutive.






















11
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








The
      reconciliation of weighted average basic common shares outstanding to weighted
      average diluted common shares outstanding is as follows:


Three
                  Months ended
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Basic
                  weighted average common shares outstanding
              
              
              24,291,008
              
              
              21,270,416
              
              
              24,157,233
              
              
              20,394,380Effect
                  of dilutive potential common shares:Stock
                  options
              
              
              --
              
              
              2,089,718
              
              
              1,125,786
              
              
              --Warrants
              
              
              --
              
              
              318,535
              
              
              173,008
              
              
              --Restricted
                  stock
              
              
              --
              
              
              --
              
              
              2,594
              
              
              --Diluted
                  weighted average common shares outstanding
              
              
              24,291,008
              
              
              23,678,669
              
              
              25,458,621
              
              
              20,394,380





For
        the
        nine month period ended September 30, 2005 and for the three month period
        ended
        September 30, 2004, warrants and stock options with exercise prices greater
        than
        the average market price of the common stock in the period were excluded
        from
        the diluted calculation as their inclusion would have been anti-dilutive.
        For
        the three month period ended September 30, 2005 and the nine month period
        ended
        September 30, 2004, all potential common shares have been excluded from the
        diluted calculation because 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:


Three
                  Months ended
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Stock
                  options
              
              
              2,667,159
              
              
              1,075,993
              
              
              1,200,813
              
              
              3,165,711Warrants
              
              
              883,389
              
              
              736,904
              
              
              648,311
              
              
              1,055,439Restricted
                  Stock
              
              
              240,407
              
              
              --
              
              
              --
              
              
              --





*Stock-Based
      Compensation*


SFAS
        No.
        148, *Accounting for Stock Based Compensation-Transition and Disclosure, an Amendment
        of FASB Statement No. 123* ,
        (“SFAS
        No. 148”), amended FASB Statement No. 123, *Accounting for Stock-based Compensation* ,
        (“SFAS
        No. 123”), to provide alternative methods of transition for a voluntary change
        to the fair value method of accounting for stock-based compensation. However,
        it
        allows an entity to continue to measure compensation cost for those instruments
        using the intrinsic value method of accounting prescribed by Accounting
        Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* ,
        (“APB
        No. 25”), provided it discloses the effect of SFAS No. 123, as amended by SFAS
        No. 148, in the footnotes to the financial statements. Until the adoption
        of
        SFAS No. 123(R), Share-Based Payment, which becomes effective for the Company
        on
        January 1, 2006, the Company has chosen to continue to account for stock-based
        compensation using the intrinsic value method.





















12
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








The
      Company's 1999 Stock Incentive Plan (the “Plan”) permits the granting of stock
      options, stock appreciation rights, restricted or unrestricted stock awards,
      performance rights and other stock-based awards to employees. For options
      granted to new Audible employees as part of their compensation package, the
      exercise price is determined by the closing price of Audible's common stock
      on
      the day immediately preceding each employee's start date. For the majority
      of
      additional option grants made to existing employees, the exercise price is
      determined based on the closing price of the day immediately preceding the
      grant
      date. The majority of the options granted vest over a fifty-month period and
      expire ten years from the date of the grant.




The
      Plan
      originally permitted up to 3,000,000 common stock shares to be issued under
      the
      plan. In September 2003, at the annual meeting of stockholders, the stockholders
      approved an amendment to the plan increasing the number of authorized common
      shares available for issuance under the plan to 4,200,000 shares. In June 2005,
      at the annual stockholders meeting, the stockholders approved an amendment
      to
      the plan increasing the number of authorized common shares available for
      issuance under the plan to 5,700,000 shares. As of September 30, 2005 and 2004,
      options to purchase 2,667,159 and 3,165,711, respectively, shares of common
      stock were outstanding. As of September 30, 2005 and 2004, 240,407 and zero,
      respectively, of restricted share awards had been granted.





Compensation
      expense, if any, based on the intrinsic value method is recognized on a
      straight-line basis over the vesting term. Had the Company elected to recognize
      compensation cost based on fair value of the stock options at the date of grant
      under SFAS No. 148, such costs would have been recognized ratably over the
      vesting period of the underlying instruments and the Company's net income (loss)
      applicable to common shareholders and net income (loss) applicable to common
      shareholders per common share would have changed to the pro forma amounts
      indicated in the table below.


Three
                  Months Ended
                September
                  30,
              
              Nine
                  months ended
                September
                  30,2005
              
              2004
              
              2005
              
              2004Net
                  (loss) income applicable to common shareholders as
                  reported
              
              $
              (189,030
              )
              $
              483,884
              
              $
              1,524,230
              
              $
              (9,709,269
              )Add:
                  Total stock-based employee compensation cost included in reported
                  net
                  (loss) income applicable to common shareholders (based on intrinsic
                  value
                  method)
              
              
              363,027
              
              
              14,913
              
              
              535,460
              
              
              70,339Deduct:
                  Total stock-based employee compensation expense determined under
                  the fair
                  value method for all awards
              
              
              (1,089,790
              )
              
              (432,845
              )
              
              (2,363,067
              )
              
              (2,163,451
              )Pro-forma
                  net (loss) income applicable to common shareholders
              
              $
              (915,793
              )
              $
              (65,952
              )
              $
              (303,377
              )
              $
              (11,802,381
              )Basic
                  net (loss) income applicable to common shareholders per common
                  share:As
                  reported
              
              $
              (0.01
              )
              $
              0.02
              
              $
              0.06
              
              $
              (0.48
              )Pro
                  forma
              
              $
              (0.04
              )
              $
              0.00
              
              $
              (0.01
              )
              $
              (0.58
              )Diluted
                  net (loss) income applicable to common shareholders per common
                  share:As
                  reported
              
              $
              (0.01
              )
              $
              0.02
              
              $
              0.06
              
              $
              (0.48
              )Pro
                  forma
              
              $
              (0.04
              )
              $
              0.00
              
              $
              (0.01
              )
              $
              (0.58
              )


















13
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








The
      Company has used the Black-Scholes option pricing model in calculating the
      fair
      value of options. The assumptions used and the weighted-average information
      for
      the three and nine months ended September 30, 2005 and 2004, are as
      follows:






Three
                Months Ended
              September
                30,
            
            Nine
                months ended
              September
                30,2005
            
            2004
            
            2005
            
            2004Risk-free
                interest rate
            
            
            4.14
            %
            
            3.66
            %
            
            4.14
            %
            
            3.66
            %Expected
                dividend yield
            
            
            --
            
            
            --
            
            
            --
            
            
            --Expected
                lives
            
            
            5
                years
            
            
            5
                years
            
            
            5
                years
            
            
            5
                yearsExpected
                volatility
            
            
            111.1
            %
            
            86
            %
            
            116.2
            %
            
            85
            %







*Stock
      and Equity Instruments Issued for Goods and Services*




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





( **2)
      Reverse Stock Split**




At
      the
      annual meeting of stockholders held on June 3, 2004, the stockholders approved
      a
      proposal to amend and restate the Company's certificate of incorporation to
      effect a reverse stock split and to decrease the authorized number of shares
      of
      common stock on a proportional basis. The proposal granted the Company's Board
      of Directors (“Board”) authority to effect a reverse stock split of the
      Company's common stock of between and including two and four shares to be
      combined into one share of common stock. No fractional shares were to be
      converted.






















14


*Table
          of Contents*





**AUDIBLE,
        INC. AND SUBSIDIARY**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 On
        June
        3, 2004, the Board approved a reverse stock split at a ratio of one for three
        shares effective June 17, 2004. On the effective date, each holder of record
        was
        deemed to hold one share of common stock for every three shares of common
        stock
        held immediately prior to the effective date. The 64,480,245 common shares
        then
        issued and outstanding were converted into 21,493,415 shares of common stock.
        Following the effective date of the reverse stock split, the par value of
        the
        common stock remained at $.01 per share.
 
 All
        share
        numbers and amounts have been retroactively restated for all periods presented
        to reflect the one for three reverse stock split.
 
 **(3)**  **Property
        and Equipment**
 
 Property
        and equipment consists of the following:
  **September
                  30, 2005**
              
              **December
                  31, 2004**Studio
                  equipment
              
              $
              641,029
              
              $
              549,359Computer
                  server and website equipment
              
              
              5,443,377
              
              
              4,567,189Third
                  party software
              
              
              439,942
              
              
              --Office
                  furniture and equipment
              
              
              1,458,970
              
              
              850,750Leasehold
                  improvements
              
              
              945,273
              
              
              827,317Work
                  in process - capitalized software development costs
              
              
              768,352
              
              
              28,384Total
                  property and equipment
              
              
              9,696,943
              
              
              6,822,999Less:
                  accumulated depreciation and amortization
              
              
              (6,580,488
              )
              
              (5,903,909
              )Total
                  property and equipment, net
              
              $
              3,116,455
              
              $
              919,090
 
 Depreciation
        and amortization expense on property and equipment totaled $299,549 and
        $121,857, during the three month periods ended September 30, 2005 and 2004,
        respectively and $676,755 and $377,284 during the nine month periods ended
        September 30, 2005 and 2004, respectively.
 
 At
        September 30, 2005 and December 31, 2004, respectively, the gross amount
        of
        property and equipment and related accumulated amortization recorded under
        capital leases were as follows:
  **September
                  30, 2005**
              
              **December
                  31, 2004**Computer
                  server and website equipment
              
              $
              743,302
              
              $
              743,302Less:
                  accumulated amortization
              
              
              (375,309
              )
              
              (189,483
              )Total
                  computer server and website equipment, net
              
              $
              367,993
              
              $
              553,819
 
 Work
        in
        process consists of expenditures made by the Company in the third
        quarter
        of 2005 for the development of various computer software projects incurred
        subsequent to the completion of the preliminary project stage. In accordance
        with SOP 98-1, *Accounting
        for Costs of Computer Software Developed or Obtained for Internal
        Use* ,
        the
        Company has capitalized external direct costs of material and services developed
        or obtained for these projects and payroll and payroll related expenses for
        employees directly associated with these projects.
 
 **(4)**  **Accrued
        Expenses**
  The
        components of the accrued expenses balance are as follows:
 
 **September
                  30, 2005**
              
              **December
                  31, 2004**Royalties
              
              $
              5,306,316
              
              $
              1,882,039Professional
                  fees
              
              
              844,009
              
              
              346,000Revenue
                  sharing and bounty payments
              
              
              609,561
              
              
              304,718Retail
                  rebates and discounts
              
              
              464,940
              
              
              461,182Accrued
                  inventory costs
              
              
              410,908
              
              
              --Refunds
                  and chargebacks
              
              
              310,991
              
              
              168,584Marketing
              
              
              377,332
              
              
              274,631Consulting
                  fees
              
              
              237,862
              
              
              --Other
                  accrued expenses
              
              
              908,590
              
              
              191,402Total
                  accrued expenses
              
              $
              9,470,509
              
              $
              3,628,556
 
 15
 *Table
        of Contents*


**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








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





The
      following is a summary of the consolidated Stockholders' Equity activity for
      the
      nine months ended September 30, 2005:


**Common
                  Stock**
              
              **Treasury
                  Stock****Shares**
              
              **Par
                  value**
              
              **Shares**
              
              **Cost**
              
              **Additional
                  paid-in capital**
              
              **Deferred
                  compensation**
              
              **Accumulated
                  other comprehensive income**
              
              **Accumulated
                  deficit**
              
              **Total
                  stockholders' equity**Balance
                  at December 31, 2004
              
              
              24,169,775
              
              $
              241,697
              
              
              (229,741
              )
              $
              (184,740
              )
              $
              187,248,675
              
              $
              (154,173
              )
              
              --
              
              $
              (130,060,750
              )
              $
              57,090,709Cashless
                  exercise of common stock warrants
              
              
              23,733
              
              
              237
              
              
              
              
              
              
              
              
              (237
              )
              
              
              
              
              
              
              
              
              
              
              --Exercise
                  of warrants
              
              
              116,666
              
              
              1,167
              
              
              
              
              
              
              
              
              293,333
              
              
              
              
              
              
              
              
              
              
              
              294,500Exercise
                  of options
              
              
              221,852
              
              
              2,219
              
              
              
              
              
              
              
              
              621,300
              
              
              
              
              
              
              
              
              
              
              
              623,519Reversal
                  of deferred compensation
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (8,492
              )
              
              8,492
              
              
              
              
              
              
              
              
              --Issuance
                  of restricted stock awards
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              4,257,854
              
              
              (4,257,854
              )
              
              
              
              
              
              
              
              --Cancellation
                  of restricted stock awards
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (278,899
              )
              
              278,899
              
              
              
              
              
              
              
              
              --Issuance
                  of options below fair value
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              269,500
              
              
              (269,500
              )
              
              
              
              
              
              
              
              --Non-cash
                  compensation charge - restricted stock, net
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              469,692
              
              
              
              
              
              
              
              
              469,692Non-cash
                  compensation charge - options
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65,767
              
              
              
              
              
              
              
              
              65,767Retirement
                  of treasury stock
              
              
              (229,741
              )
              
              (2,297
              )
              
              229,741
              
              
              184,740
              
              
              (182,443
              )
              
              
              
              
              
              
              
              
              
              
              --Income
                  tax benefit from stock options exercised
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              96,985
              
              
              
              
              
              
              
              
              
              
              
              96,985Foreign
                  currency translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17,649
              
              
              
              
              
              17,649Net
                Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,524,230
              
              
              1,524,230Balance
                  at September 30, 2005
              
              
              24,302,285
              
              $
              243,023
              
              
              --
              
              
              --
              
              $
              192,317,576
              
              $
              (3,858,677
              )
              $
              17,649
              
              $
              (128,536,520
              )
              $
              60,183,051


16
 *Table
          of Contents*





**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








*Common
      Stock*


On
        February 6, 2004, in connection with the conversion of the outstanding Series
        A
        Preferred Stock (“Series A”), the Company issued 5,836,013 shares of common
        stock to Apax Partners (“Apax”). The Series A conversion was the result of a
        negotiated agreement under which, in addition to the 4,669,347 shares of
        common
        stock issuable upon conversion of the outstanding Series A shares in accordance
        with the terms of conversion, the Company issued to Apax 1,166,666 shares
        of
        common stock and warrants to purchase 333,333 shares of common stock. Of
        the
        additional 1,166,666 shares issued, 389,863 shares were issued in payment
        of
        cumulative accrued dividends at the date of conversion, and 776,803 shares
        together with the warrants to purchase 333,333 shares were issued as an
        inducement to Apax to convert its Series A shares. The warrants are exercisable
        at $21.00 per share and expire on February 5, 2011. The fair value of the
        776,803 shares of common stock and the warrants to purchase 333,333 shares
        of
        $9,873,394 was recorded as a charge to arrive at a net loss applicable to
        common
        shareholders in the condensed consolidated Statement of Operations for the
        nine
        months ended September 30, 2004.


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





On
      November 17, 2004 the Company issued 2,022,500 shares of common stock in
      connection with a secondary public offering at a price of $24.50 per share.
      Net
      proceeds received by the Company were $46,456,593, net of direct
      costs.





As
      of
      September 30, 2005 and December 31, 2004, the Company had issued 24,302,285
      and
      24,169,775 respectively, shares of common stock. As of September 30, 2005 and
      December 31, 2004, the Company had 3,790,955 and 3,635,660, respectively, shares
      of common stock reserved for common stock warrants, options and restricted
      stock.





*Stock
      Options*


The
        Company has on occasion issued options to purchase shares of common stock
        to
        employees at a price less than the fair value of the stock at the time of
        issuance. The difference between the fair value on grant date and the exercise
        price of options issued is recorded as deferred compensation, a component
        of
        stockholders' equity, and is amortized as compensation expense on a
        straight-line basis over the vesting term of the option. When employees who
        have
        these options leave the Company, the remaining un-expensed deferred compensation
        is reversed against additional paid-in-capital. During the three month periods
        ended September 30, 2005 and 2004, $31,533 and $14,913, respectively, and
        $65,767 and $70,339 during the nine month periods ended September 30, 2005
        and
        2004, respectively, of compensation expense was recognized, related to these
        transactions.
  *Restricted
          Stock*
 
 During
          the three and nine months ended September 30, 2005, the Company granted
          awards
          to receive 112,100 and 258,600 restricted shares, respectively, to employees
          under the Plan. The restricted shares either cliff-vest or vest periodically
          between three months to forty-eight months after the grant date. During
          the
          three months ended September 30, 2005, 18,193 units of restricted stock
          were
          cancelled due to an employee termination. The fair value of the restricted
          stock
          units on the grant date, as determined by the closing price of Audible's
          stock
          on the day immediately preceding the grant date, is recorded as deferred
          compensation, a component of stockholders' equity, and is amortized as
          compensation expense on a straight-line basis over the vesting term of
          the
          restricted stock award. When employees who have these restricted stock
          awards
          leave the Company prior to the final vesting date, the remaining un-expensed
          deferred compensation is reversed against additional paid-in-capital, and
          any
          previously recognized compensation expense related to awards that did not
          vest
          is reversed against additional paid-in-capital. Total non-cash compensation
          expense relating to the amortization of restricted stock units was $331,494
          and
          $0 during the three month periods ended September 30, 2005 and 2004,
          respectively, and $469,693 and $0 during the nine month periods ended September
          30, 2005 and 2004, respectively. 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 units following
          the date
          on which the restricted stock unit becomes vested.






















17
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**







*Warrants*


The
        Company issues common stock warrants to third parties in exchange for services.
        The fair values of warrants issued in exchange for services are determined
        in
        accordance with EITF Issue No. 96-18 and are recognized as an expense under
        fixed plan or variable accounting using the Black-Scholes pricing model
        depending on the terms of the agreements over the periods in which services
        are
        being performed. The assumptions used in the Black-Scholes pricing model
        to
        calculate fair values, including risk-free interest rate and volatility,
        were
        determined using available information on the measurement date. Expected
        dividend yield of zero was used for all calculations. For the three and nine
        month periods ended September 30, 2004, $0 and $267,171 was recognized as
        expense related to warrants. No expense related to warrants was recognized
        during the three and nine months ended September 30, 2005. There were no
        warrants issued in the 2005 periods. For the three and nine months ended
        September 30, 2004, none and 1,100,000 warrants were issued, respectively.


*Treasury
      Stock*





During
      the February 8, 2005 Board of Directors meeting, the Board voted that all
      229,741shares of common stock held as treasury shares by the Company were to
      be
      retired, and the Company subsequently legally retired the treasury stock.
      Consequently, as of September 30, 2005 and December 31, 2004 the Company held
      zero and 229,741, respectively, shares of common stock as treasury
      stock.





*Comprehensive
      Income*





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





Three
                Months Ended
              September
                30,
            
            Nine
                months ended
              September
                30,2005
            
            2004
            
            2005
            
            2004Net
                (loss) income
            
            $
            (189,030
            )
            $
            483,884
            
            $
            1,524,230
            
            $
            778,241Other
                comprehensive income:Foreign
                currency translation adjustment
            
            
            90
            
            
            --
            
            
            17,649
            
            
            --Comprehensive
                (loss) income
            
            $
            (188,940
            )
            $
            483,884
            
            $
            1,541,879
            
            $
            778,241








**(6)**  **Random
      House Agreement**


On
        May 5,
        2000, Audible and Random House entered into a 50-month Co-Publishing, Marketing,
        and Distribution Agreement to form a strategic alliance to establish Random
        House Audible, a publishing imprint, to produce spoken word content specifically
        suited for digital distribution. All titles published by the imprint are
        distributed exclusively over the internet by Audible. As part of this alliance,
        Random House, through its subsidiary Random House Ventures, LLC, purchased
        56,593 shares of Audible common stock from the Company for $1,000,000. Over
        the
        term of the agreement Audible was to contribute toward funding the acquisition
        and creation of digital audio titles through Random House Audible. On March
        26,
        2002, the agreement was amended to waive the cash payment due to Random House
        in
        2002 of $1,250,000, thereby reducing the total payments due from the Company
        under the agreement from $4,000,000 to $2,750,000. In exchange for this waiver,
        under the amendment the Company issued 1,250,000 shares of Series B stock
        to
        Random House Ventures. If they had not been converted, then on March 26,
        2004
        all outstanding shares of Series B stock would have automatically converted
        to
        shares of common stock at the then effective conversion price. These shares
        were
        converted on February 6, 2004 (see Note 5). Through December 31, 2002,
        $1,250,000 of the $2,750,000 obligation had been paid, with the remaining
        amount
        of $1,500,000 due in 2003 and 2004. On February 10, 2003, the agreement was
        further amended so that Audible was no longer required to pay the $1,500,000
        in
        imprint fees that were due in 2003 and 2004.



















18
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








The
        fair
        value of the Series B stock issued was determined in accordance with EITF
        Issue
        No. 01-1, *Accounting for a Convertible Instrument Granted or Issued to a Nonemployee
        for
        Goods or Services or a Combination of Goods or Services and
        Cash* .
        Accordingly, using the measurement date of March 26, 2002, the fair value
        of the
        Series B stock issued was determined to be $1,137,500. On April 1, 2002 when
        the
        Series B was issued, the Company recorded $547,500 (the difference between
        the
        fair value of the shares and the previously recognized accrued liability
        of
        $590,000) as deferred services, a component of stockholders' equity, which
        was
        amortized as Cost of Content and Services Revenue on a straight-line basis
        through November 2002. There was no expense related to this agreement during
        the
        three and nine month periods ended September 30, 2005 and 2004.
  The
        original agreement further provided for Random House to be granted a warrant
        to
        purchase 292,777 shares of Audible common stock at various exercise prices
        that
        vest over the term of the agreement as well as the granting of additional
        warrants to Random House to purchase Audible common shares based on future
        performance. The fair value of these warrants was determined in accordance
        with
        EITF Issue No. 96-18 and was being amortized as an expense on a straight-line
        basis over the 50-month term of the agreement. During the three and nine
        months
        ended September 30, 2004, $0 and $165,156, respectively, was recorded as
        a cost
        of content and services revenue related to these warrants with the non-cash
        credit for services to additional paid-in capital. No expense related to
        these
        warrants was recorded during the three and nine months ended September 30,
        2005.
 
 The
        warrants were accounted for using variable plan accounting whereby compensation
        costs varied each accounting period until the final measurement
        date.


The
      Company continued to operate under the general terms of the agreement, which
      expired on June 30, 2004. The Company and Random House are currently in
      discussion over the post-contract operating terms.





**(7)
      Audible UK**





In
      February 2005, the Company launched Audible UK, a spoken audio website service
      mirroring the audible.com service, but focused on the UK marketplace. Audible,
      Inc. purchased one share of Audible UK stock on February 7, 2005, which at
      that
      date became a wholly-owned subsidiary of Audible Inc. Audible UK began
      commercial operations on June 15, 2005.




**(8)
      Audible Germany Agreement**





On
      August
      30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
      Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
      (the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
      an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
      approximately 5.6% of Audible's common stock, inclusive of certain common stock
      warrants held by the entities.




Audible
      Germany has the exclusive rights to operate a German language Audible website.
      Under the Joint Venture, Random House and Holtzbrinck each contributed
      approximately $16,542 in exchange for each receiving a 24.5% interest in Audible
      Germany. The Company was required to contribute $34,384 in exchange for a 51%
      interest in Audible Germany. After the initial formation, Random House and
      Holtzbrinck will provide additional financing of approximately $1,490,000 each
      in certain installments, subject to Audible Germany meeting certain milestones.
      As of September 30, 2005, the full amount has been funded by Random House and
      Holtzbrinck. In the event of liquidation of Audible Germany, this additional
      financing by Random House and Holtzbrinck accrues interest at 8% per annum
      and
      is senior to Audible's capital investment. The Company may, but is not obligated
      to, contribute additional capital to the entity. Any profits distributed by
      Audible Germany are to be distributed in accordance with the ownership
      interests.





















19
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








The
        Company has determined that Audible Germany is not a variable interest entity
        as
        defined in FASB Interpretation No. 46R, *Consolidation of Variable Interest Entities, an interpretation of ARB No.
        51* (“FIN
        46R”) because, as a development stage enterprise, Audible Germany has sufficient
        equity to permit it to finance the activities in which it is currently engaged
        in without additional subordinated financial support. In addition, the other
        criteria within FIN 46R that would characterize Audible Germany as a variable
        interest entity have not been met. Rather, Audible Germany is a voting interest
        entity.


Under
      EITF 96-16, *Investor's Accounting for an Investee When the Investor has a Majority of the
      Voting Interest but the Minority Shareholder or Shareholders Have Certain
      Approval or Veto Rights* ,
      the
      Company has 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 does not have unilateral control over Audible
      Germany. Therefore, Audible does not consolidate the results of Audible Germany
      but rather accounts for its investment in Audible Germany under the equity
      method of accounting. Under the equity method of accounting, the Company records
      51% of the profits, if any, and 51% of the equity losses but only until such
      time that the Company records losses equal to the initial investment of the
      Company plus any profits previously recorded. Audible has no further obligation
      to fund the operations of Audible Germany. The Company will continue to monitor
      its portion of unreported equity losses in the event that Audible Germany
      subsequently generates income. The Company would resume applying the equity
      method after its share of profits equals the unreported equity method
      losses.


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 intends to launch a German language spoken word
        audio
        service. The terms provide for the Company to provide intellectual property
        and
        substantially all of the technological infrastructure for the operation of
        the
        service. In return, Audible Germany is required to pay Audible $30,000 each
        month for a period of 30 months, beginning in September 2004. Every 60 days
        during this agreement, the parties meet to review and accept the services.
        The
        monthly payments are subject to refund if Audible Germany does not accept
        the
        services, subject to reasonable cure. Under the License, Audible recognizes
        $30,000 of revenue per month once Audible Germany has agreed that the services
        delivered for the prior 60-day period were satisfactory and collection of
        the
        amount is reasonably assured. Also under the License, Audible Germany will
        pay
        the Company royalties ranging from 0.5% to 3% of revenue up to an annual
        royalty
        cap of the U.S. dollar equivalent of €1.5 million, subject to Audible Germany
        achieving certain operating margins.


During
        the three and nine month periods ended September 30, 2005 the Company recognized
        $90,000 and $300,000 respectively, in related party revenue under the license
        agreement as the related services were delivered and accepted on or before
        September 30, 2005. In addition, the Company also recognized $17,863 and
        $68,049, in billings for certain incremental reimbursable costs incurred
        in
        connection with the License in accordance with EITF 01-14 during the three
        and
        nine months ended September 30, 2005, respectively. During the three and
        nine
        month periods ended September 30, 2004, the Company recognized $44,929 in
        related party revenue under this license agreement. There were no billings
        for
        incremental reimbursable costs during the three and nine months ended September
        30, 2004. These amounts are included in related party revenue on the condensed
        consolidated Statements of Operations. No royalties have been received by
        the
        Company under the license.


**(9)
      France Loisirs Agreement**





On
      September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
      Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
      Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
      France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann
      AG
      and its affiliates own 5.6% of Audible's common stock, inclusive of certain
      common stock warrants held by the entities.





















20
 *Table
          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








Under
        the
        Agreement, in the first quarter of 2005, France Loisirs launched a French
        language spoken word audio service through Audio Direct. The terms provide
        for
        Audible to provide intellectual property and substantially all of the
        technological infrastructure for the operation of the service. In return,
        France
        Loisirs is required to pay Audible $1,000,000, payable as follows: $250,000
        in
        September 2004, $250,000 in October 2004, $250,000 in January 2005 and $20,833
        for each of the following 12 months. As of September 30, 2005, the Company
        had
        received the three installments of $250,000 each and three monthly payments
        of
        the $20,833. Commencing the first fiscal year after the business achieves
        positive net income, the Company will receive a royalty of 5% of the business's
        net paid revenue. Net paid revenue refers to net revenues for digital spoken
        word content after the deduction of taxes but excluding certain hardware
        revenue. The 5% royalty will apply until the business net paid revenue exceeds
        €20,000,000. Once net paid revenue exceeds €20,000,000, the Company will receive
        a flat fee of €1,000,000. If net paid revenue exceeds €33,300,000, the Company
        will receive a royalty payment of €1,000,000, plus 3% of net paid revenue in
        excess of €33,300,000. An additional royalty is payable equal to one-half of the
        distributable pre-tax profits of the business.


FIN46R
      addresses the consolidation by business enterprises of variable interest
      entities (VIEs) and requires that if an enterprise is the primary beneficiary
      of
      a variable interest entity, the assets, liabilities, and results of the
      activities of the variable interest entity should be consolidated in the
      financial statements of the enterprise.




Audio
      Direct is considered a VIE because its equity is not sufficient to permit the
      entity to finance its activities without additional subordinated financial
      support. Audible and France Loisirs form a related party group, as defined
      in
      FIN 46R, as a result of the Bertelsmann affiliation and the number of seats
      that
      Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the entity
      within the related party group that is most closely associated with the variable
      interest entity is the primary beneficiary.




Based
      upon analysis, the Company determined that France Loisirs is more closely
      associated with Audio Direct, primarily because France Loisirs is required
      to
      fund the operations of Audio Direct, including the $1,000,000 payment due 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
      $1,000,000 in fees are non-refundable and not subject to any acceptance
      provisions. Since fair values do not exist for the different services (elements)
      that Audible is providing, the services are considered one unit of accounting
      under EITF 00-21 and accordingly, the $1,000,000 in fees is recognized as
      related party revenue on a straight-line basis over the 24-month term at the
      rate of $41,667 per month, provided collectibility is reasonably
      assured.


During
        the three and nine month periods ended September 30, 2005, the Company
        recognized $125,000 and $375,000, respectively, in related party revenue
        in
        connection with this agreement, representing the straight-line recognition
        of
        $1,000,000 in revenue being recognized over the 24-month term of the agreement.
        During the three and nine month periods ended September 30, 2004 the company
        recognized $20,833 in related party revenue in connection with this agreement.
        In addition, for the three and nine month periods ended September 30, 2005
        the
        Company recognized $30,494 and $53,839, respectively, in billings for certain
        incremental reimbursable costs incurred in connection with the License in
        accordance with EITF 01-14. There were no billings for incremental reimbursable
        costs during the three and nine months ended September 30, 2004. These amounts
        are included in related party revenue on the condensed consolidated
        Statements of Operations.






















21
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








**(10)
      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 will be 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 publisher based on sales of the products produced.
        As of September 30, 2005, the Company received $325,000 from the publisher
         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, 2005 the Company recorded
        $51,725 as other revenue in connection with this agreement. As of September
        30,
        2005, the Company recorded $248,280 and $24,995 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.


**(11)
        Employee Benefit Plan**




The
      Company has a 401(k) plan based on contributions from employees and
      discretionary Company contributions. As of December 31, 2004, the Company had
      never contributed to the 401(k) plan. Beginning January 1, 2005, the Company
      has
      adopted a policy to match up to the first two percent of salary contributions
      made from employees into the 401(k) plan. During the three and nine month
      periods ended September 30, 2005 the Company made contributions of $34,654
      and
      $85,241, respectively.





**(12)
      Commitments and Contingencies**





*Lease
      Obligations*




The
      Company has an operating lease on its office space in Wayne, New Jersey that
      expires in December 2008. The lease contains a renewal option for a period
      of
      three years. The Company signed a lease for additional space in the Wayne
      office, which also expires December 2008. In February 2005, Audible UK signed
      a
      one year lease for office space, which includes office amenities. This lease
      was
      subsequently amended in the second quarter of 2005 for additional space and
      will
      expire in May 2006. Total future minimum lease obligations as of September
      30,
      2005 under these lease arrangements are $1,717,742.




Rent
      expense of $139,705 and $92,776 was recorded under operating leases for the
      three months ended September 30, 2005 and 2004, respectively, and $378,791
      and
      $278,327 for the nine months ended September 30, 2005 and 2004,
      respectively.





There
      are
      no future minimum lease payments due under capital leases as of September 30,
      2005, which were paid in full during the first quarter of 2005.





*Royalty
      Obligations*





Royalty
      obligations represent payments to be made to various content providers pursuant
      to minimum guarantees under their royalty agreements, net of royalties expensed.
      The royalty obligations recorded in the accompanying condensed consolidated
      Balance Sheets are classified between current and non-current based on the
      payment terms specified in the agreements.





*Service
      Agreements*


The
        Company has entered into operational and marketing agreements with various
        vendors to provide certain services. The majority of the amounts committed
        are
        for hosting services related to the Company's website.
  *Committed
        Purchases*
 
 Committed
        purchases represent agreements the Company has made for future purchases
        of
        goods and service. The balance primarily consists of purchases for digital
        audio
        players and network and operating systems equipment.



















22
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








**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, 2005, except as noted in footnote (2)
      below:





**Year**
            
            **Operating
                Leases**
            
            **Royalty
                Obligations**
              **(1)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
              **(2)**
            
            **Total**2005
            
            $
            84,329
            
            $
            224,650
            
            $
            1,300,317
            
            $
            4,407,030
            
            $
            6,016,3262006
            
            
            527,943
            
            
            357,580
            
            
            2,168,567
            
            
            --
            
            
            3,054,0902007
            
            
            558,335
            
            
            --
            
            
            1,748,496
            
            
            --
            
            
            2,306,8312008
            
            
            547,135
            
            
            --
            
            
            1,260,629
            
            
            --
            
            
            1,807,7642009
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --2010
                and thereafter
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Total
            
            $
            1,717,742
            
            $
            582,230
            
            $
            6,478,009
            
            $
            4,407,030
            
            $
            13,185,011








(1)
      Reflected in the current and non-current liabilities respectively, on the
      accompanying September 30, 2005 condensed consolidated Balance
      Sheet.




(2)
      Includes $2,968,311 committed in October
      2005.








**Contingencies**





Various
      legal actions, claims, assessments and other contingencies arising in the normal
      course of business, including certain matters described below, are pending
      against the Company. 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, 2005 that may result
      from those matters for which accruals have been recorded is not ascertainable,
      the Company believes that any amounts exceeding the recorded accruals would
      not
      materially affect its financial condition.





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 (“IPO”) in
      July 1999. The lawsuits also named certain of the underwriters of the IPO as
      well as certain of the Company's 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 amendment 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 the
      Company's IPO allegedly agreed with the underwriters to buy additional shares
      in
      the aftermarket in order to inflate the price of the Company's stock. The
      Company and certain of its 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 the Company. 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 the Company's motion
      to
      dismiss the claims against the Company under Rule 10b-5, due to the
      insufficiency of the allegations against the Company. The motions to dismiss
      the
      claims under Section 11 of the Securities Act were denied as to virtually all
      of
      the defendants in the consolidated cases, including the Company. The Company's
      individual officers, directors and former director defendants in the IPO
      Litigation signed a tolling agreement and were dismissed from the action without
      prejudice on October 9, 2002.




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

























23
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**








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
      and
      completed by January 15, 2006. The settlement fairness hearing has been set
      for
      April 26, 2006. Following the hearing, if the court determines that the
      settlement is fair to the class members, the settlement will be approved. There
      can be no assurance that this proposed settlement would be approved and
      implemented in its current form, or at all.




Due
      to
      the inherent uncertainties of litigation and because the settlement approval
      process is at a preliminary stage, the Company cannot accurately predict the
      ultimate outcome of the matter.





Starting
      on or about February 22, 2005, several class actions were filed against Audible
      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 Audible'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
        April
        2005, a derivative action was filed in the state court of New Jersey against
        Audible, the two executives named as individual defendants in the class actions
        described above, six of the Company's outside directors, and three of the
        Company's stockholders.  The derivative action makes the same factual
        allegations as the class actions described above and adds 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 purports to seek a recovery of the damages allegedly
        sustained by Audible rather than by investors who allegedly purchased securities
        at inflated prices.
 
 In
        May
        2005, the Company learned of a second derivative action which was filed during
        April 2005 in the United States District Court for the District of New Jersey
        against Audible, 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
        Audible
        rather than by investors who allegedly purchased securities at inflated
        prices.


The
      Company believes that all of the claims 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.





In
      May
      2005, Digeo, Inc. commenced an action against Audible for patent infringement
      in
      Federal District Court in the State of Washington. The Company has filed an
      answer asserting the patent is invalid and unenforceable and that its services
      do not fall within the scope of the claims of the Digeo patent. The parties
      are
      in the midst of discovery. The Company believes the claims made in the complaint
      are without merit and will not have a material adverse impact on its financial
      position or results of operations.






















24
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          of Contents*








**AUDIBLE,
      INC. AND SUBSIDIARY**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**







**(13)
      Supplemental Disclosure of Cash Flow Information**




**Cash
      Paid for Interest and Taxes**





The
      Company paid interest of $1,495 and $26,347 during the nine month periods ended
      September 30, 2005 and 2004, respectively.




No
      income
      taxes were paid in the nine month periods ended September 30, 2005 and
      2004 .




**(14)   Customer
      Concentration**


For
        the
        three month periods ended September 30, 2005 and 2004, Apple Computer accounted
        for 14.3% and 11.1% of total revenue, respectively, and for the nine month
        periods ended September 30, 2005 and 2004, Apple Computer accounted for 13.6%
        and 10.0% of total revenue, respectively.
 
 As
        of
        September 30, 2005 and December 31, 2004, Apple Computer accounted for 61.3%
        and
        66.7%, respectively, of the Company's accounts receivable.
















25
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          of Contents*











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





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our audited financial statements
      and notes thereto appearing in our 2004 Annual Report on Form 10-K, as amended.
      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**




Audible,
      Inc. is the Internet's leading provider of digital spoken entertainment,
      information and educational programming for playback on personal computers,
      CDs
      or AudibleReady mobile listening devices. Our customers purchase and download
      their choice of thousands of audiobooks, audio editions of leading newspapers
      or
      magazines or other exclusive and original programming. The Audible service
      allows consumers to download content for enjoyment where and when they prefer.
      In addition to enabling our customers to enjoy their choice of thousands of
      hours of entertainment, we also help them make better use of their time by
      allowing them to listen to books, newspapers, magazines or time-shifted radio
      programming that, due to their busy lives, they would otherwise not have the
      time to read. Audible has a direct online presence in four markets: the US,
      the
      UK, Germany and France. Our main location of operations is in Wayne, New Jersey.
      Under the September 2003 agreement, Audible.com is also the Apple iTunes Music
      Store's exclusive provider of paid spoken content for digital distribution,
      subject to certain, limited exceptions.




Audible
      has nearly 80,000 hours of audio programs and over 270 content providers that
      include leading audio book publishers, broadcasters, entertainers, magazine
      and
      newspaper publishers and business information providers, 62% of which are
      exclusive relationships. Most of our customers join the AudibleListener program,
      where for a monthly fee, they may download and listen to a prescribed number
      of
      digital audio programs of their choice. AudibleListeners provide us with their
      credit card information and are billed monthly in advance for the
      AudibleListener service. Customers may also purchase individual audio titles
      from us on an á la carte basis.




Since
      launching the service in 1997, more than 721,000 customers in 120 countries
      have
      purchased content at audible.com. We believe our growth has been driven
      primarily by our strong collection of content, value to our customers by the
      growing trends of downloading and listening to audio on-the-go, and by the
      growing market for digital audio devices that securely play content from
      audible.com. We promote the Audible service through advertising and promotion
      programs, co-marketing partnerships with device manufacturers, online
      promotions, promotions with retailers and our customer-get-customer referral
      program. In addition, customers at the Apple iTunes Music Store can purchase
      and
      download Audible content of their choice.


The
        key
        drivers of our business include new customer growth, the cost of acquiring
        a
        customer, our customer cancellation rate, controlling our costs and sales
        of
        Audible content through the Apple iTunes Music Store. Our new customer growth
        is
        a function of developing compelling advertising and promotional programs
        to
        encourage people to try the Audible service for the first time, as well as
        the
        creation of marketing partnerships that similarly encourage consumers to
        try our
        service. A key source of new AudibleListeners is our device rebate program.
        Under this program, AudibleListeners that commit to our AudibleListener service
        for a period of time qualify for a $100 rebate or discount on the purchase
        of
        certain AudibleReady devices, such as an Apple iPod, PocketPC or smartphone.
        Other sources of new AudibleListeners include free trial programs, our “tell a
        friend” customer-get-customer program and our marketing efforts directed at
        converting á la carte purchasers to AudibleListener members. We manage customer
        acquisition costs by entering primarily into co-marketing deals where we
        pay for
        results, rather than advertising impressions. We believe that by targeting
        qualified customers and providing them with a wide range of high value content,
        a compelling value proposition and solid customer service minimizes our customer
        cancellation rate.



















26
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          of Contents*














We
      plan
      to continue to focus on new customer growth, expanding our content selection,
      improving the Audible service, broadening the range of AudibleReady listening
      devices, broadening our range of marketing and sales partnerships, providing
      solid customer service, controlling our costs, pursuing our strategic
      initiatives of international expansion, entering the consumer and institutional
      learning markets, as well as facilitating wireless delivery and the podcasting
      of premium content to our customers.




Although
      we have experienced revenue growth in our content sales in recent periods,
      we
      cannot assure you that such growth rates are sustainable, and therefore such
      growth rates should not be considered indicative of future operating results.
      We
      cannot assure you that we will be able to continue to increase our revenue,
      or
      that increases in revenue and profitability can be sustained. We believe that
      period-to-period comparisons of our historical operating results are not
      meaningful and should not be relied upon as an indication of future
      performance.




Our
      revenue is derived from four main categories: (1) content and services revenue,
      which includes consumer and educational content and corporate services, (2)
      hardware revenue, (3) related party revenue, and (4) other revenue.


Consumer
        content revenue consists of content sales made from our website and content
        sold
        through our agreement with the Apple iTunes Music Store. We use real-time
        credit
        card authorization for sales transactions which are made through our website.
        We
        recognize revenue from the sale of individual content titles in the period
        when
        the content is purchased. We recognize revenue from the sale of content
        subscriptions pro rata over the term of the subscription period. We recognize
        revenue from the sale of monthly AudibleListener memberships ratably over
        the
        AudibleListener's monthly membership period. This results in approximately
        50%
        of the AudibleListener membership fees received during each calendar month
        being
        deferred at month end and recognized as content revenue in the following
        month.
        We recognize revenue from the sale of UltimateListener, our prepaid discounted
        content package, and gift programs when the content is downloaded.
  Part
        of
        our marketing strategy to acquire new AudibleListeners includes retail
        promotions in which we pay retailers to offer discounts to consumers on their
        purchase of AudibleReady devices if they become AudibleListeners for twelve
        months. We also have retail promotions in which we purchase electronic discount
        certificates or gift cards from retailers and give them away to our customers
        when they sign up to be AudibleListeners for twelve months. Point of sale
        rebates, which are discounts given by a third party retailer to a customer
        on
        the purchase of a digital audio player at the point of sale of the Audible
        membership, are recorded as a reduction of revenue in the period the discount
        is
        given in accordance with Emerging Issues Task Force, or EITF, Issue No.
        01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including a
        Reseller of the Vendor's Products)* ,
        or EITF
        01-9. The cost of discount certificate rebates and gift cards that are given
        to
        a customer by Audible at the time the customer purchases the Audible membership
        are recorded as a cost of content and services revenue in accordance with
        EITF
        01-9. As a result, these costs, which we consider marketing, are not included
        in
        marketing expense but instead are recorded either as a reduction of revenue
        or
        as part of cost of content and services revenue as described above. Customer
        returns and chargebacks are also recorded as a reduction in revenue. Estimates
        for future refunds and chargebacks are made and recorded as an allowance
        for
        refunds and chargebacks at each period end.




Corporate
      service revenue consists of library sales and audio production services. Where
      applicable, we recognize corporate service revenue as services are performed
      after the agreement has been finalized, the price is fixed, and collectibility
      is reasonably assured. Collectibility is based on past transaction history
      and
      credit-worthiness of the customer.




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 one-year commitment to an AudibleListener
      membership. For multiple-element arrangements in which a customer signs up
      for a
      one year membership and receives an audio player for free, revenue is recognized
      using the relative fair value method under EITF Issue No. 00-21, *Revenue Arrangements with Multiple Deliverables* .
      Each
      separate unit of accounting is recognized as revenue at its relative fair value,
      where the delivered item (hardware) is limited to the non-contingent
      consideration, which consists of shipping and handling. The free hardware device
      reflects the subsidy incurred to acquire a customer with a one-year commitment
      to AudibleListener. For players sold separately, hardware revenue is recognized
      upon shipment of the device, pursuant to a customer order and credit card
      authorization and includes amounts received for shipping and
      handling.




Related
      party revenue consists of revenue recognized in connection with our agreements
      with Audible Germany, France Loisirs S.A.S. and Audio Direct S.A.S., which
      we
      entered into during 2004.





Other
      revenue consists of revenue from a license for certain technology rights granted
      to a device manufacturer recognized on a straight-line basis over the term
      of
      the agreement, commissions earned from a retail partner related to our referral
      of customers to purchase their digital mobile players and revenues earned under
      a new product development, licensing, marketing, and distribution agreement.
      Retail partner commissions are based on a percentage of the purchase price
      of
      the players and are recognized when customer purchases are made.






















27
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          of Contents*










We
        have
        marketing agreements with device manufacturers such as Apple Corp., Palm,
        Inc.,
        Hewlett-Packard, Motorola, Kenwood, Creative Labs and Rio Audio. Under these
        agreements, the device manufacturer will receive a portion of the content
        revenue generated over a specified period of time from each new Audible customer
        referred by them or using their hand-held electronic device. For example,
        when a
        purchaser of an Apple iPod accesses audible.com to download content, Apple
        Corp.
        receives a percentage of the revenue related to content downloaded by this
        purchaser. These revenue sharing arrangements typically last one or more
        years
        from the date the device user becomes an Audible customer. We have also entered
        into marketing agreements with Amazon.com, Microsoft, The New York Times
        Company, Dow Jones ( *The
        Wall Street Journal* ),
        XM
        Satellite Radio, Harlequin Enterprises, Bookspan and others to promote our
        content to their customers, either directly or indirectly under which these
        marketing partners will receive payments from us. The payments to these
        marketing partners are generally based upon driving potential customers to
        the
        Audible website who then become customers.
 
 We
        have
        also established relationships with electronics vendors such as Crutchfield,
        Micro Center, and MobilePlanet.com, to promote our AudibleListener membership
        plan at the point of purchase, offering consumers a discount against the
        cost of
        an AudibleReady device. Retailers such as Target, Best Buy and Wal Mart sell
        Audible book gift cards entitling the purchaser to download an audio book
        from
        Audible.com.




In
      February 2005, we launched Audible UK, a spoken audio website service mirroring
      our existing audible.com service, but focused on the UK marketplace. Audible
      UK
      was formed on February 7, 2005, and is a wholly owned subsidiary of Audible
      Inc.
      Audible UK began commercial operations on June 15, 2005.




On
      August
      30, 2004, Audible Inc., Verlagsgruppe Random House GmbH, and Holtzbrinck
      networXs AG entered into a joint venture agreement to form Audible GmbH, or
      Audible Germany. Audible Germany has the exclusive rights to operate a German
      language Audible website. Under the joint venture, Random House and Holtzbrinck
      each contributed approximately $16,000 in exchange for each receiving a 24.5%
      interest in Audible Germany. We contributed approximately $34,000 in exchange
      for a 51% interest in Audible Germany. Following initial formation, Random
      House
      and Holtzbrinck are obligated to provide additional financing of approximately
      $1,490,000 each in certain installments subject to Audible Germany meeting
      certain milestones. As of September 30, 2005, 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, which accrues
      interest at 8% per annum, is senior in right of payment to our investment.
      We
      may, but we are not obligated to, contribute additional capital to the entity.
      Pursuant to a license agreement, beginning in September 2004, Audible Germany
      is
      required to pay us $30,000 per month for thirty months subject to certain
      conditions. The agreement also requires Audible Germany to pay us a royalty
      ranging from 0.5% to 3% of Audible Germany's 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. Audible Germany is a related party to
      Audible.




On
      September 15, 2004, Audible Inc., France Loisirs S.A.S. and Audio Direct S.A.S.,
      a wholly-owned subsidiary of France Loisirs entered into a 24-month service
      and
      license agreement, under which France Loisirs launched in the first quarter
      of
      2005 a French language spoken word audio service through Audio Direct. Under
      the
      agreement, we provide intellectual property and substantially all of the
      technological infrastructure for the operation of the service. In return, France
      Loisirs is required to pay us a total of $1,000,000 over the term of the
      agreement. Commencing the first fiscal year after the business achieves positive
      net income, we will receive a royalty of 5% of the business's net paid revenue.
      Net paid revenue means 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's net paid revenue exceeds €20 million. Once net paid
      revenue exceeds €20 million, we will receive a flat fee of €1 million. If net
      paid revenue exceeds €33.3 million, we will receive a royalty payment of €1
      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. Audio Direct S.A.S. is a related party to Audible Inc.




In
      September 2003, we entered into a four year agreement with Apple Computer,
      Inc.
      under which Audible is the Apple iTunes Music Store's exclusive provider of
      spoken word content for digital distribution, subject to certain, limited
      exceptions. Under the agreement, Apple is required to incorporate into the
      Apple
      iTunes jukebox software AudibleReady features to enable owners of personal
      computers and the Apple iPod to download and listen to spoken audio from
      audible.com. The iTunes Music Store is the only digital download music service
      through which we are permitted to distribute our content. We began selling
      content at the Apple iTunes Music Store in October 2003. Apple may convert
      the
      agreement to a non-exclusive arrangement for both us and Apple upon 120 days
      prior written notice, although Apple will have a continuing obligation to
      incorporate AudibleReady features into the Apple iPod and Apple iTunes jukebox
      software. Under the agreement, when the Apple iTunes Music Store sells Audible
      content, we receive from Apple a fixed price per content title.





As
      of
      February 6, 2004, following the conversion of all of our preferred stock, we
      no
      longer have any capital stock outstanding having special preferences or
      privileges.
























28
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          of Contents*








**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 months ended September 30,
      2005 and 2004.


**Three
                  Months Ended**
              
              **Nine
                  months ended****September
                  30,**
              
              **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004****(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**Revenue,
                  net:Content
                  and services:Consumer
                  content
              
              
              98.2
              %
              
              98.2
              %
              
              98.9
              %
              
              98.4
              %Point
                  of sale rebates
              
              
              (1.2
              )
              
              (1.1
              )
              
              (1.8
              )
              
              (1.2
              )Services
              
              
              0.2
              
              
              0.2
              
              
              0.2
              
              
              0.2Total
                  content and services
              
              
              97.2
              
              
              97.3
              
              
              97.3
              
              
              97.4Hardware
              
              
              0.8
              
              
              2.0
              
              
              0.7
              
              
              2.2Related
                  party revenue
              
              
              1.6
              
              
              0.7
              
              
              1.8
              
              
              0.3Other
              
              
              0.4
              
              
              0.0
              
              
              0.2
              
              
              0.1Total
                  revenue, net
              
              
              100.0
              
              
              100.0
              
              
              100.0
              
              
              100.0Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              35.3
              
              
              30.6
              
              
              34.6
              
              
              31.1Discount
                  certificate rebates
              
              
              1.8
              
              
              4.7
              
              
              2.8
              
              
              3.2Total
                  cost of content and services revenue
              
              
              37.1
              
              
              35.3
              
              
              37.4
              
              
              34.3Cost
                  of hardware revenue
              
              
              5.0
              
              
              8.1
              
              
              3.2
              
              
              7.8Operations
              
              
              14.7
              
              
              14.2
              
              
              14.7
              
              
              15.2Technology
                  and development
              
              
              13.8
              
              
              13.7
              
              
              12.8
              
              
              15.8Marketing
              
              
              19.9
              
              
              12.7
              
              
              19.0
              
              
              13.8General
                  and administrative
              
              
              14.2
              
              
              10.3
              
              
              12.5
              
              
              9.8Total
                  operating expenses
              
              
              104.7
              
              
              94.3
              
              
              99.6
              
              
              96.7(Loss)
                  income from operations
              
              
              (4.7
              )
              
              5.7
              
              
              0.4
              
              
              3.3Other
                  income (expense):Interest
                  income
              
              
              3.3
              
              
              0.2
              
              
              3.2
              
              
              0.3Interest
                  expense
              
              
              0.0
              
              
              (0.1
              )
              
              0.0
              
              
              (0.1
              )Other
                  income, net
              
              
              3.3
              
              
              0.1
              
              
              3.2
              
              
              0.2(Loss)
                  income before income taxes
              
              
              (1.4
              )
              
              5.8
              
              
              3.6
              
              
              3.5Income
                  tax benefit (expense)
              
              
              0.3
              
              
              -0.6
              
              
              -0.2
              
              
              (0.3
              )Net
                  (loss) income
              
              
              (1.1
              )
              
              5.2
              
              
              3.4
              
              
              3.2Total
                  preferred stock expense
              
              
              0.0
              
              
              0.0
              
              
              0.0
              
              
              (43.5
              )Net
                  (loss) income applicable to common shareholders
              
              
              (1.1
              )%
              
              5.2
              %
              
              3.4
              %
              
              (40.3
              )%


29
 *Table
          of Contents*














**Three
      months ended September 30, 2005 compared to three months ended September 30,
      2004.**




**Content
                and service revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            16,304,871
            
            $
            9,026,726
            
            $
            7,278,145
            
            
            80.6
            %










*Content
      and services revenue* consists
      of AudibleListener membership revenue, revenue from single title sales, revenue
      from subscriptions, revenue from sales at the Apple iTunes Music Store and
      library 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, 2005
      compared to the three months ended September 30, 2004 due primarily to the
      growth in our customer count as well as sales at the Apple iTunes Music Store.
      Our customer count grew from approximately 430,000 as of September 30, 2004
      to
      more than 721,000 as of September 30, 2005. Included in these numbers are new
      AudibleListener memberships added during the period, which increased to
      approximately 62,000 new members in the 2005 period from approximately 31,000
      new members in the 2004 period. The revenue growth was mainly due to new
      AudibleListener members, which was due to increases in marketing spending and
      our continued development of the various channels we use to recruit new
      customers. We recognized approximately $2,405,000 in revenue during the three
      months ended September 30, 2005 from sales of Audible content at the Apple
      iTunes Music Store, compared to approximately $1,026,000 in the same period
      in
      2004. Our customer count includes all customers who have purchased Audible
      content at www.audible.com. Our customer count does not include customers who
      purchased our content at the Apple iTunes Music Store. We believe continuing
      consumer adoption of digital downloading, increased consumer awareness of the
      Audible service, customer satisfaction and improved marketing drove the increase
      in our customer count.




**Hardware
                revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            141,790
            
            $
            186,408
            
            $
            (44,618
            )
            
            (23.9
            )%











*Hardware
      revenue* consists
      of revenue derived primarily from the shipping and handling charge to customers
      on devices that Audible provides for free to AudibleListeners who commit to
      a
      twelve month AudibleListener membership. Also included are separate sales of
      digital audio players to consumers and libraries.




Hardware
      revenue decreased during the 2005 period primarily as a result of a reduction
      in
      shipments of digital audio devices we give away, which resulted in lower
      shipping and handling revenues. Under EITF No. 00-21, with these
      multiple-element arrangements, 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.





















30
 *Table
          of Contents*













**Related
                party revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            263,358
            
            $
            65,762
            
            $
            197,596
            
            
            300.5
            %








*Related
      Party revenue* consists
      of revenue recognized in connection with our agreements with France Loisirs
      and
      Audible Germany which were entered into during the third quarter of
      2004.


Related
        party revenue for the three months ended September 30, 2005 and 2004 included
        $125,000 and $20,833, respectively, in fees earned from our agreement with
        France Loisirs representing the prorated amount of the straight-line recognition
        of $1,000,000 in fees being recognized over the 24-month term of the agreement
        and $30,494 and $0, respectively, in billings to France Loisirs for
        reimbursement of certain incremental costs incurred by us in connection with
        the
        joint venture in accordance with EITF 01-14. Also included in related party
        revenues during the three months ended September 30, 2005 and 2004 were $90,000
        and $44,929, respectively, in fees earned from our agreement with Audible
        Germany and $17,864 and $0, respectively, in billings to Audible Germany
        for
        reimbursement of certain incremental costs incurred by us in connection with
        the
        joint venture in accordance with EITF 01-14.





**Other
                revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            60,275
            
            $
            --
            
            $
            60,275
            
            
            --








*Other
      revenue* for the
      three month period ended September 30, 2005 primarily included $57,125 of
      revenue earned from a new product development, licensing, marketing, and
      distribution agreement, representing the recognized amount of the total fees
      being amortized over a 58 month period. There was no Other Revenue for the
      2004
      period.








**Cost
                of content and service revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**Royalties
                and other content charges
            
            $
            5,919,011
            
            $
            2,838,098
            
            $
            3,080,913
            
            
            108.6
            %Discount
                certificate rebates
            
            $
            297,860
            
            $
            434,170
            
            $
            (136,310
            )
            
            (31.4
            )%








*Cost
      of content and services revenue* consists
      primarily of royalties incurred, discount certificate rebates, and the
      amortization of publisher royalty advances.


Royalties
        and other content charges as a percentage of total revenues increased from
        30.6%
        for the three months ended September 30, 2004 to 35.3% for the three months
        ended September 30, 2005. This increase was primarily due to the product
        mix and
        quantity of titles sold, including sales at the Apple iTunes Music Store,
        and an
        increase in royalties incurred for select titles. Discount
        certificate
        rebates, introduced in 2004, are electronic discount certificates or gift
        cards
        given to certain AudibleListeners who commit to joining the AudibleListener
        program for twelve months. AudibleListener customers use these when purchasing
        an AudibleReady digital audio player.



















31
 *Table
          of Contents*













**Cost
                of hardware revenue:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            840,463
            
            $
            747,734
            
            $
            92,729
            
            
            12.4
            %








*Cost
      of hardware revenue* consists
      of the cost of digital audio players that are given away or sold to
      customers.


During
        the third quarter of 2005, we changed the digital audio player given away
        to
        customers when they become AudibleListener members. The new audio player
        has a
        higher unit cost than the one previously offered and therefore resulted in
        a
        higher cost of hardware revenue in the 2005 period, despite a reduction in
        the
        number of units shipped.





**Operations
                expense:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            2,461,166
            
            $
            1,318,442
            
            $
            1,142,724
            
            
            86.7
            %








*Operations* expense
      consists of payroll and related expenses for content acquisition, education,
      editorial, audio conversion, programming and customer service and credit card
      fees.




Operations
      expenses increased in the 2005 period primarily due to approximately $582,000
      in
      higher personnel expenses, approximately $283,000 in higher outside services
      expenses and approximately $232,000 in higher credit card fees. These increases
      were primarily related to customer and revenue growth.








**Technology
                and development:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            2,324,678
            
            $
            1,271,737
            
            $
            1,052,941
            
            
            82.8
            %








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





The
      increase in technology and development expenses in the 2005 period was primarily
      due to approximately $406,000 in higher personnel costs, approximately $363,000
      in higher outside service expenses, and approximately $272,000 in higher
      maintenance and repair costs, and supplies purchased.






















32
 *Table
          of Contents*














**Marketing:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            3,344,560
            
            $
            1,180,929
            
            $
            2,163,631
            
            
            183.2
            %











*Marketing* expense
      consists of payroll and related expenses for personnel in marketing and business
      development, as well as advertising expenditures and other promotional
      activities. 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
        expenses were higher in the 2005 period primarily due to approximately
        $1,165,000 in higher co-marketing and bounty fees, approximately $605,000
        in
        higher advertising and promotional expenses and approximately $435,000 in
        higher
        personnel expenses. This was offset by a decrease of approximately $52,000
        in
        public relations fees and approximately $51,000 in shipping and handling
        fees.
        As we continue to obtain new customers through our marketing partners, these
        expenses will continue to grow.








**General
                and administrative:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            2,375,895
            
            $
            959,518
            
            $
            1,416,377
            
            
            147.6
            %








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


The
        increase in general and administrative expense in the 2005 period was primarily
        due to approximately $599,000 in increased legal and other professional fees,
        approximately $418,000 in increased personnel expenses, $116,000 in increased
        audit and related fees, which included fees related to Sarbanes-Oxley compliance
        activities, and approximately $103,000 in increases related to expenses in
        international operations.





**Other
                Income and Income Taxes:**
            
            **Three
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**Other
                income, net
            
            $
            553,994
            
            $
            13,398
            
            $
            540,596
            
            
            4,034.9
            %Income
                tax benefit (expense)
            
            $
            50,315
            
            $
            (57,782
            )
            $
            108,097
            
            
            187.1
            %








*Other
      Income, net* consists
      of interest income and interest expense. The increase in other income, net
      was
      mainly due to interest earned on the investment of funds in short-term
      investments, which consisted of governmental agency notes and mortgage-backed
      securities. We had no such investments as of September 30, 2004 *.*




We
        have
        recorded an income tax benefit of $50,315 for the three month period ended
        September 30, 2005. This benefit was recorded to arrive at the year to date
        tax
        expense of $97,535, which was based upon our estimated 2005 domestic effective
        tax rate of approximately 3.6%. This
        income tax expense consists of U.S. alternative minimum tax and New
        Jersey
        corporate business tax, and is based upon our estimates for the 2005 tax
        year.
        The income tax expense is driven by statutory limitations on the
        utilization of net operating loss carryforwards for U.S. alternative minimum
        tax
        and New Jersey purposes, however it is assumed that the net operating loss
        carryforward will not be limited for U.S. regular income tax purposes. Future
        utilization of our net operating loss carryforwards for U.S. regular income
        tax
        purposes, may
        be
        affected by the Tax Reform Act of 1986, which imposes limitations on our
        use of
        net operating loss carryforwards because certain changes have occurred in
        the
        ownership of our common stock over the years.



















33
 *Table
          of Contents*














**Nine
      months ended September 30, 2005 compared to nine months ended September 30,
      2004.**







**Content
                and service revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            43,755,036
            
            $
            23,486,224
            
            $
            20,268,812
            
            
            86.3
            %










*Content
      and services revenue* consists
      of AudibleListener membership revenue, revenue from single title sales, revenue
      from subscriptions, revenue from sales at the Apple iTunes Music Store and
      library revenue. We deduct the cost of point of sale rebates from content
      and services revenue.





Content
      and services revenue grew during the nine months ended September 30, 2005
      compared to the nine months ended September 30, 2004 due primarily to the growth
      in our customer count as well as sales at the Apple iTunes Music Store. Our
      customer count grew from approximately 430,000 as of September 30, 2004 to
      more
      than 721,000 as of September 30, 2005. Included in these numbers are new
      AudibleListener memberships added during the period, which increased to
      approximately 172,000 new members in the 2005 period from approximately 76,000
      new members in the 2004 period. The revenue growth was mainly due to new
      AudibleListener members, which was due to increases in marketing spending and
      our continued development of the various channels we use to recruit new
      customers. We recognized approximately $6,128,000 in revenue during the nine
      months ended September 30, 2005 from sales of Audible content at the Apple
      iTunes Music Store, compared to approximately $2,411,000 in the same period
      in
      2004. Our customer count includes all customers who have purchased Audible
      content at www.audible.com. Our customer count does not include customers who
      purchased our content at the Apple iTunes Music Store. We believe continuing
      consumer adoption of digital downloading, increased consumer awareness of the
      Audible service, customer satisfaction and improved marketing drove the increase
      in our customer count.




**Hardware
                revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            331,686
            
            $
            530,874
            
            $
            (198,188
            )
            
            (37.5
            )%











*Hardware
      revenue* consists
      of revenue derived primarily from the shipping and handling charge to customers
      on devices that Audible provides for free to AudibleListeners who commit to
      a
      twelve month AudibleListener membership. Also included are separate sales of
      digital audio players to consumers and libraries.




Hardware
      revenue decreased during the 2005 period primarily as a result of a reduction
      in
      the shipments of digital audio devices we give away, which resulted in lower
      shipping and handling revenues. Under EITF No. 00-21, with these
      multiple-element arrangements, 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.
























34
 *Table
          of Contents*














**Related
                party revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            796,889
            
            
            65,762
            
            $
            731,127
            
            
            1,111.8
            %








*Related
      Party revenue* consists
      of revenue recognized in connection with our agreements with France Loisirs
      and
      Audible Germany which were entered into during the third quarter of
      2004.


Related
        party revenue for the nine months ended September 30, 2005 and 2004 included
        approximately $375,000 and $20,833, respectively, in fees earned from our
        agreement with France Loisirs representing the prorated amount of the
        straight-line recognition of $1,000,000 in fees being recognized over the
        24-month term of the agreement and $53,840 and $0, respectively, in billings
        to
        Audible France Loisirs for reimbursement of certain incremental costs incurred
        by us in connection with the joint venture in accordance with EITF 01-14.
        Also
        during the nine months ended September 30, 2005 and 2004 included in related
        party revenues were $300,000 and $44,929, respectively, in fees earned from
        our
        agreement with Audible Germany and $68,049 and $0, respectively, in billings
        to
        Audible Germany for reimbursement of certain incremental costs incurred by
        us in
        connection with the joint venture in accordance with EITF
        01-14.





**Other
                revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            89,009
            
            $
            32,257
            
            $
            56,752
            
            
            175.9
            %








*Other
      revenue* for the
      nine month period ended September 30, 2005 primarily consisted of commissions
      earned by us for referring customers to a retail partner to purchase a digital
      audio device, which is recognized in the period when the purchase is completed,
      and revenue earned from a new product development, licensing, marketing, and
      distribution agreement, representing the recognzied amount of the total fees
      being amortized over a 58 month period. For the nine month period ended
      September 30, 2004, other revenue consisted of the straight-line amortization
      of
      revenue derived from technology licensing fees.








**Cost
                of content and service revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**Royalties
                and other content charges
            
            $
            15,553,805
            
            $
            7,492,866
            
            $
            8,060,939
            
            
            107.6
            %Discount
                certificate rebates
            
            $
            1,261,591
            
            $
            778,505
            
            $
            483,086
            
            
            62.1
            %











*Cost
      of content and services revenue* consists
      primarily of royalties incurred, discount certificate rebates, and the
      amortization of publisher royalty advances.


Royalties
        and other content charges as a percentage of total revenues increased from
        31.1%
        for the nine months ended September 30, 2004 to 34.6% for the nine months
        ended
        September 30, 2005. This increase was primarily due to the product mix and
        quantity of titles sold, including sales at the Apple iTunes Music Store,
        and
        an increase in royalties incurred for select titles. Discount
        certificate rebates, introduced in 2004, are electronic discount certificates
        or
        gift cards given to certain AudibleListeners who commit to joining the
        AudibleListener program for twelve months. AudibleListener customers use
        these
        when purchasing an AudibleReady digital audio player.



















35
 *Table
          of Contents*













**Cost
                of hardware revenue:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            1,460,169
            
            $
            1,879,337
            
            $
            (419,168
            )
            
            (22.3
            )%








*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 2005 period primarily due to the decrease
        in the number of digital audio players given away to customers. During August
        2005, we changed the digital audio player given away to customers when they
        become AudibleListener members. The new audio player has a higher unit cost
        than
        the one previously offered, however the decrease in costs related to the
        reduction in units shipped was larger than the increase due to the increase
        in
        unit cost for the nine month period.








**Operations
                expense:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            6,587,547
            
            $
            3,658,374
            
            $
            2,929,173
            
            
            80.1
            %








*Operations* expense
      consists of payroll and related expenses for education, content acquisition,
      editorial, audio conversion, programming and customer service and credit card
      fees.




Operations
      expense increased in the 2005 period primarily due to approximately $1,304,000
      in higher personnel expenses, approximately $747,000 in higher outside services
      expenses and approximately $592,000 in higher credit card fees. These increases
      were primarily related to customer and revenue growth.








**Technology
                and development:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            5,771,436
            
            $
            3,807,839
            
            $
            1,963,597
            
            
            51.6
            %








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





The
      increase in technology and development expenses in the 2005 period was primarily
      due to approximately $799,000 in higher personnel costs, approximately $717,000
      in higher consultant expenses and approximately $583,000 in higher maintenance
      and repair costs, and supplies purchased, offset in part by a decline of
      approximately $353,000 in web-hosting fees.






















36
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          of Contents*













**Marketing:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            8,539,016
            
            $
            3,332,926
            
            $
            5,206,090
            
            
            156.2
            %








*Marketing* expense
      consists of payroll and related expenses for personnel in marketing and business
      development, as well as advertising expenditures and other promotional
      activities. Also included are revenue sharing and bounty payments which we
      make
      to marketing partners, and shipping and handling costs associated with selling
      digital devices.





Marketing
      expenses were higher in the 2005 period primarily due to approximately
      $2,727,000 in higher co-marketing and bounty payments, approximately $1,690,000
      in higher advertising and promotional expenses, approximately $830,000 in higher
      personnel expenses and approximately $137,000 in higher public relations and
      other promotional costs. This increase was offset in part by the absence during
      the 2005 period of approximately $267,000 in warrant charges incurred during
      the
      2004 period. As we continue to obtain new customers through our marketing
      partners, these expenses will continue to grow.







**General
                and administrative:**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**$
            5,600,114
            
            $
            2,367,233
            
            $
            3,232,881
            
            
            136.6
            %








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




The
      increase in general and administrative expense in the 2005 period was primarily
      due to approximately $938,000 in increased audit and related fees, which
      included fees related to Sarbanes-Oxley compliance activities, approximately
      $792,000 in increased personnel expenses, approximately $692,000 in increased
      legal fees and other professional fees, approximately $230,000 in international
      operating expansion, which began in the first quarter of 2005, approximately
      $132,000 in increased depreciation and amortization expenses, approximately
      $106,000 in higher supplies and administrative costs and approximately $85,000
      in 401(k) matching contribution expense.







**Other
                Income and Income Taxes**
            
            **Nine
                months ended**
              **September
                30,****2005**
            
            **2004****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change**Other
                income, net
            
            $
            1,422,823
            
            $
            56,775
            
            $
            1,366,048
            
            
            2,406.1
            %Income
                tax expense
            
            $
            (97,535
            )
            $
            (76,571
            )
            $
            20,964
            
            
            27.4
            %






*Other
      Income, net*consists of interest income and interest expense. The increase
      in other income, net was mainly due to interest earned on the investment of
      funds in short-term investments, which consisted of governmental agency notes
      and mortgage-backed securities. We had no such investments as of September
      30,
      2004*.*


We
        have
        recorded a income tax expense of $97,535 for the nine month period ended
        September 30, 2005. This income tax expense consists of U.S. alternative
        minimum
        tax and New Jersey corporate business tax, and is based upon our estimates
        for
        the 2005 tax year. The income tax expense is driven by statutory limitations
        on
        the utilization of net operating loss carryforwards for U.S. alternative
        minimum
        tax and New Jersey purposes, however it is assumed that the net operating
        loss
        carryforward will not be limited for U.S. regular income tax purposes. Future
        utilization of our net operating loss carryforwards for U.S. regular income
        tax
        purposes, may
        be
        affected by the Tax Reform Act of 1986, which imposes limitations on our
        use of
        net operating loss carryforwards because certain changes have occurred in
        the
        ownership of our common stock over the years.






















37
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          of Contents*














**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 our ability
      to:





**·** Acquire
      and retain customers;


**·** Sell
      Audible content through the Apple iTunes Music Store;


**·** Control
      customer acquisition and other costs;


**·** Minimize
      customer cancellation rates;


**·** Build
      awareness and acceptance of audible.com, the AudibleReady format and
      AudibleReady devices;


**·** Extend
      existing and acquire new content provider relationships;


**·** Compete
      against other companies that provide services similar to ours; and


**·** Generate
      cash from operations and/or raise additional capital.




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, 2005, 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, 2005, we
      had
      an accumulated deficit of $128,536,520.





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 Music 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 website
      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
      introduction of the Audible service in the UK; (13) continuous management 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 website. 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.






















38
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          of Contents*










**Liquidity
      and Capital Resources**





From
      inception through the date prior to our initial public offering, we financed
      our
      operations through private sales of our redeemable convertible preferred stock
      and warrants. Net proceeds from the sales of redeemable convertible stock and
      warrants prior to our initial public offering were approximately $28,719,000.
      In
      July 1999, we completed our initial public offering and received net proceeds
      of
      approximately $36,856,000. From the time of our IPO we have raised approximately
      $15,860,000 in net proceeds through the private sale of shares of our
      convertible preferred stock (all of which were subsequently converted into
      common stock), approximately $4,186,000 in net proceeds through the private
      sales of our common stock, approximately $2,961,000 in net proceeds through
      the
      exercise of common stock options and approximately $1,589,000 in net proceeds
      through the exercise of common stock warrants. In November 2004, we completed
      a
      public offering of our common stock resulting in net proceeds to us of
      approximately $46,457,000.




As
      of
      September 30, 2005, our cash and cash equivalents balance was approximately
      $13,571,000. In addition, as of September 30, 2005 we had approximately
      $56,137,000 in short-term investments which we intend to hold until maturity.
      Based on our currently proposed business plans and related assumptions, we
      believe that our cash and cash equivalents balance and short-term investment
      balance as of September 30, 2005 will enable us to meet our anticipated cash
      requirements for operations and capital expenditures for the foreseeable future.
      Beyond that, we may need additional cash to fund our business and finance our
      continued growth. We cannot assure you that such additional financing, if
      needed, will be available on terms favorable to us or our stockholders, if
      at
      all.




***Cash
      Requirements***




At
      September 30, 2005 our principal source of liquidity was approximately
      $13,571,000 in cash and cash equivalents and $56,137,000 in short-term
      investments.




The
      following table shows future cash payments due under our commitments and
      obligations as of September 30, 2005, except as noted in footnote (2)
      below:








**Year**
            
            **Operating
                Leases**
            
            **Royalty
                Obligations**
              **(1)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
              **(2)**
            
            **Total**2005
            
            $
            84,329
            
            $
            224,650
            
            $
            1,300,317
            
            $
            4,407,030
            
            $
            6,016,3262006
            
            
            527,943
            
            
            357,580
            
            
            2,168,567
            
            
            --
            
            
            3,054,0902007
            
            
            558,335
            
            
            --
            
            
            1,748,496
            
            
            --
            
            
            2,306,8312008
            
            
            547,135
            
            
            --
            
            
            1,260,629
            
            
            --
            
            
            1,807,7642009
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --2010
                and thereafter
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Total
            
            $
            1,717,742
            
            $
            582,230
            
            $
            6,478,009
            
            $
            4,407,030
            
            $
            13,185,011








(1)
      Reflected in the current and non-current liabilities respectively, on the
      accompanying September 30, 2005 condensed consolidated Balance
      Sheet.




(2)
      Includes $2,968,311 committed in October 2005.
















39
 *Table
          of Contents*














***Sources
      and Uses of Cash***





Net
        cash
        provided by operating activities for the nine months ended September 30,
        2005
        was approximately $9,157,000. This was primarily attributable to our net
        income,
        and increases in accrued expenses, accounts payable, deferred revenue, accrued
        compensation, royalty obligations, depreciation and amortization expenses
        and
        non-cash compensation charge, offset in part by an increase in accounts
        receivable, royalty advances, and accretion of discounts on short-term
        investments. Net cash provided by operating activities for the nine months
        ended
        September 30, 2004 was approximately $2,717,000. This was primarily attributable
        to our net income, increase in accrued expenses, services rendered for common
        stock and warrants, depreciation and amortization, and deferred revenue,
        offset
        in part by an increase in accounts receivable and a decrease in royalty
        obligations.


Net
      cash
      used in investing activities for the nine months ended September 30, 2005 was
      approximately $9,693,000. This was attributable to additional purchases of
      property and equipment of approximately $2,106,000, expenditures on software
      development costs of approximately $768,000, and net purchases of short-term
      investments of approximately $6,800,000. Net cash used in investing
      activities for the nine months ended September 30, 2004 was approximately
      $325,000, attributable to purchases of property and equipment.





Net
      cash
      provided by (used in) financing activities for the nine months ended September
      30, 2005 and 2004 was approximately $797,000 and $(19,000), respectively,
      resulting primarily from proceeds from the exercise of common stock options
      and
      common stock warrants offset by principal payments made on capital lease
      obligations.





***New
      Accounting Standards***





In
      November 2004, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards No. 151, Inventory Costs, an
      amendment of ARB No. 43, Chapter 4. SFAS No. 151, amends ARB No. 43, Chapter
      4,
      to clarify that abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage) should be recognized as current period
      charges. In addition, SFAS No. 151 requires that allocation of fixed production
      overhead to the cost of conversion be based on the normal capacity of the
      production facilities. The provision of SFAS No. 151 is effective for us
      beginning on January 1, 2006 and is not expected to have a significant
      impact on our consolidated financial statements.


In
        December 2004, the FASB issued Statement of Financial Accounting Standards
        No.
        153, Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29,
        which
        addresses the measurement of exchanges of nonmonetary assets. It eliminates
        the
        exception from fair value accounting for nonmonetary exchanges of similar
        productive assets and replaces it with an exception for exchanges that do
        not
        have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
        has commercial substance if the future cash flows of an entity are expected
        to
        change significantly as a result of the exchange. This statement is effective
        for us beginning January 1, 2006 and is not expected to have a significant
        impact on our consolidated financial statements.


In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123(R), Share-Based Payment, which is a revision of SFAS No. 123, Accounting
      for
      Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
      Accounting For Stock Issued To Employees, and amends SFAS No. 95, Statements
      Of
      Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the
      approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the condensed consolidated Statement of operations based
      on
      their fair values. Pro forma disclosure is no longer an alternative. The new
      standard will be effective, for us, beginning January 1, 2006. We have not
      yet
      completed our evaluation but we expect the adoption to have a material effect
      on
      our consolidated financial statements.






















40
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**ITEM
      3. Qualitative and Quantitative Disclosures about Market
      Risk**




None




**ITEM
      4. Controls and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





The
      Company's management, including its Chief Executive Officer and Chief Financial
      Officer, has conducted an evaluation of the effectiveness of the Company's
      disclosure controls and procedures pursuant to Securities Exchange Act
      Rule 13a-15 and 15d-15 as of the end of the period covered by this
      quarterly report. Based on that evaluation, the Chief Executive Officer and
      Chief Financial Officer concluded that the Company has in place effective
      controls and procedures designed to ensure that information required to be
      disclosed by the Company in the report it files or submits under the Securities
      Exchange Act and the rules there under, is recorded, processed, summarized
      and
      reported within the time periods specified in the Commission's rules and
      forms.





**Changes
      in Internal Control Over Financial Reporting**





Internal
      Audit Manager




In
      July
      2005, we hired an internal auditor, to supervise our Sarbanes-Oxley
      404
      compliance. His main responsibilities are to plan and execute the 2005
      Sarbanes-Oxley 404 compliance work and continue to improve the control
      environment of our growing organization.






















41
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**PART
      II--OTHER INFORMATION**


**ITEM
      1. Legal Proceedings**





Various
      legal actions, claims, assessments and other contingencies arising in the normal
      course of business, including certain matters described below, are pending
      against us. 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, 2005 that may result from those
      matters for which accruals have been recorded is not ascertainable, we believe
      that any amounts exceeding the recorded accruals would not materially affect
      our
      financial condition.





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 (“IPO”) in July 1999. The
      lawsuits also named certain of the underwriters of the IPO as well as certain
      of
      our 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,
      attorney and expert fees, and other unspecified litigation costs.




On
      July
      1, 2002, the underwriter defendants in the consolidated actions moved to dismiss
      all of the IPO Litigations, including the action involving 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 us. 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 us that may have against our underwriters. Any direct financial
      impact of the proposed settlement is expected to be borne by our insurance
      carriers.




In
      June
      2004, a 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 plaintiffs and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval motion
      on
      February 15, 2005, subject to certain modifications. The parties are directed
      to
      report back to the court regarding the modifications. If the parties are able
      to
      agree upon the required modifications, and such modifications are acceptable
      to
      the court, notice will be given to all class members of settlement, a “fairness”
      hearing will be held and if the court determines that the settlement is fair
      to
      the class members, the settlement will be approved. There can be no assurance
      that this proposed settlement would be approved and implemented in its current
      form, or at all.




Due
      to
      the inherent uncertainties of litigation and because the settlement approval
      process is at a preliminary stage, we cannot accurately predict the ultimate
      outcome of the matter.





Starting
      on or about February 22, 2005, several class actions were filed against Audible
      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 Audible's officers and directors and their affiliates)
      who purchased our securities between November 2, 2004 and February 15, 2005
      (the
      "Class Period").  The plaintiffs allege that the defendants violated
      Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
      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.






















42
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In
      April
      2005, a derivative action was filed in the state court of New Jersey against
      Audible, 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 makes the same factual allegations
      as
      the class actions described above and adds allegations that the six outside
      directors named as defendants and/or the stockholders who nominated them sold
      stock at inflated prices during at or about the time of the secondary offering
      of securities that the Company made in November 2004. The plaintiff in this
      derivative action purports to seek a recovery of the damages allegedly sustained
      by Audible 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
        Audible, 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 Audible rather than by
        investors who allegedly purchased securities at inflated
        prices.


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





In
      May
      2005, Digeo, Inc. commenced an action against Audible for patent infringement
      in
      Federal District Court in the State of Washington. Audible has filed an Answer
      asserting the patent invoiced is invalid and unenforceable and that our services
      do not fall within the scope of the claims of the Digeo patent. The parties
      are
      in the midst of discovery. We believe the claims made in the complaint are
      without merit and will not have a material adverse impact on our financial
      position or results of operations.




**ITEM
      2.**  **Unregistered
      Sales of Equity Securities and Use of Proceeds**




None




**ITEM
      3.**  **Defaults
      Upon Senior Securities**




None





**ITEM
      4.**  **Submission
      of Matters to a Vote of Security Holders**




None




**ITEM
      5.****Other
      Information**




None














43
 *Table
          of Contents*








**ITEM
      6.**  **Exhibits**







Exhibit
                Number
            Description31.1
            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.

























44
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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/
                Andrew P. KaplanName:
            Andrew P. KaplanTitle:
            Executive Vice president, Chief Financial Officer and
                Director
              (Principal Financial and Accounting Officer)Date:
            November 7, 2005






















45