**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, 2006o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from _______ to _______**Commission
                File Number: 000-26529








**AUDIBLE,
      INC.**


(Exact
      name of registrant as specified in its charter)





**DELAWARE**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **22-3407945**
              (I.R.S.
                employer
              identification
                number)**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 a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of “accelerated and
      large accelerated filer” in Rule 12b-2 of the Exchange Act.


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





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


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




As
      of
      November 6, 2006, 24,190,598 shares
      of the registrant's common stock were outstanding.










**AUDIBLE, INC.
      AND SUBSIDIARY**


**TABLE
      OF CONTENTS**





**PART
                I**
            **FINANCIAL
                INFORMATION**
            **PAGE**Item
                1.
            Financial
                Statements:Condensed
                Consolidated Balance Sheets as of September
                30, 2006 (unaudited) and December 31, 2005
            3Condensed
                Consolidated Statements of Operations for
                the three and nine month periods ended September 30, 2006 and 2005
                (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for
                the nine month periods ended September 30, 2006 and 2005
                (unaudited)
            5Notes
                to Condensed Consolidated Financial
                Statements (unaudited)
            6Item
                2.
            Management's
                Discussion and Analysis of Financial
                Condition and Results of Operations
            29Item
                3.
            Quantitative
                and Qualitative Disclosures about
                Market Risks
            47Item
                4.
            Controls
                and Procedures
            47**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            49Item
                1A.
            Risk
                Factors
            50Item
                6.
            Exhibits
            51**Signatures**
            
            52











-2-
 Table
          of Contents





**PART I
      - FINANCIAL INFORMATION**




**ITEM
      1.    Financial Statements**




**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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




**September
                30,**
            
            **December
                31,****2006**
            
            **2005****(unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            13,556
            
            $
            11,549Short-term
                investments
            
            
            47,373
            
            
            55,616Interest
                receivable on short-term investments
            
            
            505
            
            
            428Accounts
                receivable, net of provision for refunds and chargebacks of $31 at
                September 30, 2006 and December 31, 2005
            
            
            2,836
            
            
            2,337Accounts
                receivable, related parties
            
            
            527
            
            
            594Royalty
                advances
            
            
            519
            
            
            471Prepaid
                expenses and other current assets
            
            
            1,998
            
            
            899Inventory
            
            
            156
            
            
            498Total
                current assets
            
            
            67,470
            
            
            72,392Property
                and equipment, net
            
            
            8,798
            
            
            8,159Other
                assets
            
            
            804
            
            
            114Total
                assets
            
            $
            77,072
            
            $
            80,665**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,356
            
            $
            4,750Accrued
                expenses
            
            
            4,278
            
            
            4,802Accrued
                royalties
            
            
            5,889
            
            
            5,104Accrued
                compensation
            
            
            1,069
            
            
            868Deferred
                revenue
            
            
            10,957
            
            
            6,459Total
                current liabilities
            
            
            24,549
            
            
            21,983Deferred
                revenue, noncurrent
            
            
            480
            
            
            99Royalty
                obligations, noncurrent
            
            
            124
            
            
            188Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $.01. Authorized 40,000,000 shares at September
                30, 2006
                and December 31, 2005; 24,188,596 and 24,326,503 shares issued and
                outstanding at September 30, 2006 and December 31, 2005,
                respectively
            
            
            242
            
            
            243Additional
                paid-in capital
            
            
            190,161
            
            
            192,547Deferred
                compensation
            
            
            --
            
            
            (3,696
            )Accumulated
                other comprehensive (loss) income
            
            
            (23
            )
            
            15Accumulated
                deficit
            
            
            (138,461
            )
            
            (130,714
            )Total
                stockholders' equity
            
            
            51,919
            
            
            58,395Total
                liabilities and stockholders' equity
            
            $
            77,072
            
            $
            80,665





See
      accompanying notes to condensed consolidated financial statements.







-3-
 Table
          of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(Unaudited)**




**Three
                month periods**
              **ended
                September 30,**
            
            **Nine
                month periods**
              **ended
                September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            $
            19,565
            
            $
            16,472
            
            $
            57,681
            
            $
            44,469Point
                of sale rebates
            
            
            --
            
            
            (208
            )
            
            (293
            )
            
            (795
            )Services
            
            
            26
            
            
            42
            
            
            85
            
            
            82Total
                content and services revenue
            
            
            19,591
            
            
            16,306
            
            
            57,473
            
            
            43,756Hardware
                revenue
            
            
            73
            
            
            142
            
            
            283
            
            
            332Related
                party revenue
            
            
            222
            
            
            263
            
            
            852
            
            
            796Other
                revenue
            
            
            140
            
            
            60
            
            
            274
            
            
            89Total
                revenue, net
            
            
            20,026
            
            
            16,771
            
            
            58,882
            
            
            44,973Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            8,240
            
            
            6,018
            
            
            23,943
            
            
            15,585Discount
                certificate rebates
            
            
            307
            
            
            298
            
            
            910
            
            
            1,262Total
                cost of content and services revenue
            
            
            8,547
            
            
            6,316
            
            
            24,853
            
            
            16,847Cost
                of hardware revenue
            
            
            826
            
            
            846
            
            
            1,707
            
            
            1,442Cost
                of related party revenue
            
            
            27
            
            
            48
            
            
            227
            
            
            121Operations
            
            
            2,996
            
            
            2,461
            
            
            8,959
            
            
            6,584Technology
                and development
            
            
            4,758
            
            
            2,343
            
            
            12,936
            
            
            5,812Marketing
            
            
            3,340
            
            
            3,173
            
            
            11,214
            
            
            8,368General
                and administrative
            
            
            2,743
            
            
            2,376
            
            
            8,607
            
            
            5,601Total
                operating expenses
            
            
            23,237
            
            
            17,563
            
            
            68,503
            
            
            44,775(Loss)
                income from operations
            
            
            (3,211
            )
            
            (792
            )
            
            (9,621
            )
            
            198Loss
                on equity investment
            
            
            (90
            )
            
            --
            
            
            (270
            )
            
            --Other
                income (expense):Interest
                income
            
            
            779
            
            
            554
            
            
            2,153
            
            
            1,424Interest
                expense
            
            
            --
            
            
            --
            
            
            --
            
            
            (1
            )Other
                income, net
            
            
            779
            
            
            554
            
            
            2,153
            
            
            1,423(Loss)
                income before income taxes
            
            
            (2,522
            )
            
            (238
            )
            
            (7,738
            )
            
            1,621Income
                tax (expense) benefit
            
            
            (3
            )
            
            51
            
            
            (9
            )
            
            (97
            )Net
                (loss) income
            
            $
            (2,525
            )
            $
            (187
            )
            $
            (7,747
            )
            $
            1,524Basic
                net (loss) income per common share
            
            $
            (0.10
            )
            $
            (0.01
            )
            $
            (0.32
            )
            $
            0.06Basic
                weighted average common shares outstanding
            
            
            24,348,938
            
            
            24,291,008
            
            
            24,443,620
            
            
            24,157,233Diluted
                net (loss) income per common share
            
            $
            (0.10
            )
            $
            (0.01
            )
            $
            (0.32
            )
            $
            0.06Diluted
                weighted average common shares outstanding
            
            
            24,348,938
            
            
            24,291,008
            
            
            24,443,620
            
            
            25,458,621





See
      accompanying notes to condensed consolidated financial statements.





-4-
 Table
          of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(Unaudited)**




**Nine
                month periods ended****September
                30,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                (loss) income
            
            $
            (7,747
            )
            $
            1,524Adjustments
                to reconcile net (loss) income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            3,710
            
            
            677Impairment
                of long lived asset
            
            
            144
            
            
            --Share-based
                compensation expense
            
            
            4,162
            
            
            535Accretion
                of discounts on short-term investments
            
            
            (724
            )
            
            (932
            )Income
                tax benefit from exercise of stock options
            
            
            --
            
            
            97Changes
                in assets and liabilities:Interest
                receivable on short-term investments
            
            
            (77
            )
            
            (166
            )Accounts
                receivable, net
            
            
            (496
            )
            
            (637
            )Accounts
                receivable, related parties
            
            
            67
            
            
            (89
            )Royalty
                advances
            
            
            (48
            )
            
            (401
            )Prepaid
                expenses and other current assets
            
            
            (1,098
            )
            
            (68
            )Inventory
            
            
            345
            
            
            295Other
                assets
            
            
            (688
            )
            
            (114
            )Accounts
                payable
            
            
            (2,402
            )
            
            886Accrued
                expenses
            
            
            (595
            )
            
            2,815Accrued
                royalties
            
            
            773
            
            
            3,424Accrued
                compensation
            
            
            194
            
            
            513Deferred
                revenue
            
            
            4,872
            
            
            798Net
                cash provided by operating activities
            
            
            392
            
            
            9,157Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (4,049
            )
            
            (2,107
            )Capitalized
                internally developed software costs
            
            
            (445
            )
            
            (768
            )Purchases
                of short-term investments
            
            
            (60,098
            )
            
            (61,718
            )Proceeds
                from maturity of short-term investments
            
            
            69,065
            
            
            54,900Net
                cash provided by (used in) investing activities
            
            
            4,473
            
            
            (9,693
            )Cash
                flows from financing activities:Proceeds
                from exercise of common stock options
            
            
            385
            
            
            623Proceeds
                from exercise of common stock warrants
            
            
            750
            
            
            295Purchase
                of treasury stock at cost
            
            
            (3,988
            )
            
            --Principal
                payments made on obligations under capital leases
            
            
            --
            
            
            (121
            )Net
                cash (used in) provided by financing activities
            
            
            (2,853
            )
            
            797Effect
                of exchange rate changes on cash and cash equivalents
            
            
            (5
            )
            
            14Increase
                in cash and cash equivalents
            
            
            2,007
            
            
            275Cash
                and cash equivalents at beginning of period
            
            
            11,549
            
            
            13,296Cash
                and cash equivalents at end of period
            
            $
            13,556
            
            $
            13,571




See
      Note
      11 for supplemental disclosure of cash flow information.




See
      accompanying notes to condensed consolidated financial statements.





-5-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
            thousands, except share and per share data)**
 **(Unaudited)**
 Table
            of Contents


*The
      Business*





Audible,
      Inc. (together with its 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, 2006, the Company reported
      a
      net loss of $2,525 and $7,747, respectively, and has an accumulated deficit
      of
      $138,461 as of September 30, 2006. The Company's cash and cash equivalents
      balance as of September 30, 2006 is $13,556. In addition, the Company has
      short-term investments of $47,373.





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





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





*Basis
      of Presentation*





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





The
      accompanying condensed consolidated financial statements as of September 30,
      2006 and for the three and nine month periods ended September 30, 2006 and
      2005,
      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 month
      periods ended September 30, 2006 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2006. These condensed
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto for the year ended December
      31, 2005, from the Company's Annual Report on Form 10-K.





*Cash
      and Cash Equivalents*




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





*Restricted
      Cash*





During
      the third quarter of 2005, the Company deposited a $25 retainer in an
      interest-bearing account. In the third quarter of 2006, this deposit was
      refunded to the Company. This deposit is included in Other Assets on the
      accompanying December 31, 2005 condensed consolidated Balance
      Sheet.





-6-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents


*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, 2006 and December 31, 2005, of $47,373 and
      $55,616, 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 a
      held-to-maturity security below the amortized cost basis that is deemed to
      be
      other-than-temporary results in a reduction in carrying amount to fair value.
      The impairment is charged to operations and a new cost basis for the security
      is
      established. To determine whether 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
      period 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, 2006 was $47,373, $37 and
      $47,410, respectively.





All
      of
      the debt securities classified as held-to-maturity
      mature before September 30, 2007.




*Provision
      for Refunds and Chargebacks*





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




The
      amount of the provision that was recorded as a reduction of accounts receivable
      as of September 30, 2006 and December 31, 2005 was $31. The amount of the
      provision reflected in the accrued liability was $59 and $287 at September
      30,
      2006 and December 31, 2005, 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.





*Audio
      Production Costs*





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





-7-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
            thousands, except share and per share data)**
 **(Unaudited)**
 Table
            of Contents


*Property
      and Equipment*




Property
      and equipment, which includes computer server and Web site equipment, office
      furniture and equipment, leasehold improvements, internally developed software,
      studio equipment, and software licenses, are stated at cost. Property and
      equipment under capital leases are stated at the present value of minimum lease
      payments. Depreciation is calculated using the straight-line method over the
      estimated useful lives of the respective assets, which is three years for
      computer server, Web site equipment, and software licenses, and two years for
      internally developed software, and studio equipment. Property and equipment
      held
      under capital leases are amortized on a straight-line basis over the estimated
      useful life of the asset. In June 2006, the Company reassessed the estimated
      useful lives of office furniture and equipment and leasehold improvements.
      Prior
      to June 2006, office furniture and equipment was depreciated using the straight
      line method over a two year period and leasehold improvements were amortized
      on
      a straight-line basis over the lease term or the estimated useful life of the
      asset, whichever was shorter. In June 2006, the Company changed the estimated
      useful life of these assets to seven months. The change in estimate resulted
      in
      a higher depreciation expense of $90 for the nine month period ended September
      30, 2006. The amortization is included within depreciation expense in the
      condensed consolidated Statements of Cash Flows.





Work
      in
      process primarily 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 certain payroll and payroll related expenses
      for employees directly associated with these projects. Amortization for each
      software project begins when the computer software is ready for its intended
      use.




*Impairment
      of Long-Lived Assets*




The
      Company reviews its long-lived assets for impairment when events or
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected cash flows, undiscounted and without
      interest, is less than the carrying amount of the related asset, an impairment
      loss is recognized as the amount by which the carrying amount of the asset
      exceeds its fair value, generally based on discounted cash flow. In the third
      quarter of 2006, the Company recorded a $144 impairment charge, included in
      technology and development on the accompanying condensed consolidated Statement
      of Operations, related to expenditures previously capitalized for the
      development of a computer software project.




*Royalty
      Advances and Royalty Obligations*




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





*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, 2006 and December 31, 2005, the fair
      values of these financial instruments approximated their carrying values due
      to
      the short-term nature of these instruments.





-8-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
            thousands, except share and per share data)**
 **(Unaudited)**
 Table
            of Contents




*Foreign
      Currency Translation*





In
      accordance with the provision of Statement of Financial Accounting Standard
      (“SFAS”) No. 52, *Foreign Currency Translation* , ** Audible
      UK, whose functional currency is the British Pound, translates its balance
      sheet
      into U.S. dollars at the prevailing rate at the balance sheet date and
      translates its revenues, costs and expenses at the average rates prevailing
      during each reporting period. Net gains or losses resulting from the translation
      of Audible UK's financial statements are accumulated and charged directly to
      accumulated other comprehensive (loss) 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 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 a security deposit on office space and payroll of U.S.
      employees working on the UK business. All of these fundings were made with
      the
      intention of treating them as a long-term investment. In accordance with the
      provisions of SFAS No. 52, the foreign currency gain/loss at each reporting
      period resulting from the inter-company account is recorded to accumulated
      other comprehensive (loss) income.





*Reclassifications*





Certain
      prior period amounts have been reclassified to conform to current period
      presentation.




*Revenue
      Recognition*




Content
      and Services





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





In
      July
      2006, the Company entered into a global master agreement with Apple Computer,
      Inc. that replaced the principal agreements the Company entered into with Apple
      during 2002 and 2003. The Company continues to recognize revenue from audio
      book sales made at the Apple iTunes Store in the period when the content is
      purchased and delivered. However, in accordance with the terms of the new
      agreement, the amount of revenue the Company recognizes on each audio
      book sale is now formula-driven, derived from the Apple iTunes selling
      price and the content cost of each audio book. For the last month of the
      quarter ended September 30, 2006, the Company estimated revenue for sales at
      the
      Apple iTunes Store, based on actual number of titles sold, as provided by Apple
      Computer, Inc., and the prior month or current unit sales price at the Apple
      iTunes Store.





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





-9-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




In
      December 2005, the Company introduced new AudibleListener membership plans,
      designed to provide customers more flexibility in using their audio credits.
      Depending upon the AudibleListener membership plan, customers receive and can
      “bank” or delay using a maximum number of audio credits, depending on the
      membership plan. The banking feature results in audio credits being used
      (delivered) over different periods for different customers. This may result
      in
      slower revenue growth or less revenue than the Company experienced in prior
      periods because the customer has a longer period of time to use their audio
      credits. In addition, some of the new AudibleListener plans include new
      membership benefits, ranging from a complimentary daily newspaper to everyday
      discounts of 30% on a la carte purchases. The daily newspaper and 30% discount
      benefits are “serial” elements that are delivered continuously over the
      membership period, whereas the content selections underlying the audio credits
      are discrete elements that are delivered at different times based on individual
      customer behavior. As a result of the characteristics of the new AudibleListener
      memberships, they are considered revenue arrangements with multiple
      deliverables; however under EITF 00-21, *Revenue Arrangements with Multiple Deliverables,* because
      the deliverables are not eligible for separation, they are accounted for as
      a
      single unit of accounting. As a result, revenue is recognized for these new
      AudibleListener membership plans using the lesser of straight-line or
      proportional performance (based on content delivery) over the maximum membership
      period.





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




Point
      of Sale Rebates and Discount Certificate Rebates





Part
      of
      the Company's marketing strategy to obtain new AudibleListeners includes retail
      promotions in which the Company pays retailers to offer discounts to consumers
      on their purchase of AudibleReady devices if they become AudibleListeners for
      twelve months. The Company also has retail promotions in which it purchases
      electronic discount certificates or gift cards from retailers and gives them
      away to the Company's customers when they sign up to be AudibleListeners for
      twelve months. Point of sale rebates, which are discounts given by a third
      party
      retailer to a customer on the purchase of a digital audio player at the point
      of
      sale of the Audible membership, are recorded as a reduction of revenue in the
      period the discount is given in accordance with 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.





Services
      Revenue




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





Hardware
      Revenue





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





-10-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




Related
      Party Revenue





Related
      party revenue consists of revenue earned under agreements with Audible Germany
      (see Note 7) and France Loisirs (see Note 8). Revenue under the Audible Germany
      agreement includes $30 earned per month over the initial 30-month term of the
      agreement, which began on August 30, 2004. The Company recognizes $30 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 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, France Loisirs has paid the full amount as of September 30, 2006.
      Revenue earned under each of these agreements also includes consulting services
      performed by certain of the Company's employees and reimbursement of certain
      incremental costs incurred by the Company that are billed to Audible Germany
      and
      France Loisirs in accordance with EITF Issue 01-14, *Income Statement Characterization of Reimbursement Received for ‘Out-of-Pocket’
Expenses Incurred* .





Other
      Revenue




Other
      revenue for the three and nine month periods ended September 30, 2006 and 2005
      primarily included revenue from fees earned under a product development and
      distribution agreement, which are being amortized into revenue on a
      straight-line basis as the fees are billed over a 58 month period, to coincide
      with the end of the agreement.





Customer
      Concessions





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





*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 $44 and $94, for the three month periods ended
      September 30, 2006 and 2005, respectively, and $163 and $255 for the nine month
      periods ended September 30, 2006 and 2005, respectively.




*Cost
      of Content and Services Revenue*




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





*Advertising
      Expenses*




The
      Company expenses the costs of advertising and promoting its products and
      services as incurred. These costs are included in marketing expense in the
      accompanying condensed consolidated Statements of Operations and totaled $1,201
      and $863 for the three month periods ended September 30, 2006 and 2005,
      respectively, and $4,304 and $2,265 for the nine month periods ended September
      30, 2006 and 2005, respectively.





-11-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




*Legal
      Fees*





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





*Use
      of Estimates*





The
      preparation of financial statements in conformity with U.S. generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the reported amounts of assets and liabilities, disclosure of contingent
      assets and liabilities at the date of the financial statements, and reported
      amounts of revenues and expenses during the period. Significant items subject
      to
      estimates include the recoverability of the carrying amount of property and
      equipment (including internally developed software), the provision for refunds
      and chargebacks, Apple revenue recognition, customer concessions, recoverability
      of royalty advances, valuation of deferred tax assets, certain accruals and
      fair
      value of share-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 basis and operating loss and tax credit
      carryforwards. Deferred tax assets and liabilities are measured using enacted
      tax rates expected to apply to taxable income in the years in which those
      temporary differences are expected to be recovered or settled. The effect on
      deferred tax assets and liabilities of a change in tax rates is recognized
      in
      results of operations in the period in which the tax change occurs. Deferred
      tax
      assets are reduced, if necessary, by a valuation allowance for any tax benefits,
      which are more likely than not, not going to be realized.





*Equity
      Instruments Issued for Goods and Services*




The
      Company 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, expected term of the warrant, dividend
      yield
      and expected volatility. The fair value of the warrant is expensed on a
      straight-line basis over the term of the agreement and is recorded within the
      operating expense line item that best represents the nature of the goods and
      services provided. Depending on the terms of the warrant, the Company applies
      variable plan or fixed plan accounting in accordance with EITF No.
      96-18.




*Basic
      and Diluted Net (Loss) Income Per Share*





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





-12-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




For
      the
      three and nine month periods ended September 30, 2006, and the three month
      period ended September 30, 2006, diluted net loss per share is equal to basic
      net loss per share, since all potential common stock was anti-dilutive. For
      the
      nine month period ended September 30, 2005, diluted net income per share is
      computed by dividing net income by the diluted weighted average common shares
      outstanding.





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,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Basic
                  weighted average common shares outstanding
              
              
              24,348,938
              
              
              24,291,008
              
              
              24,443,620
              
              
              24,157,233Effect
                  of dilutive potential common shares:Stock
                  options
              
              
              --
              
              
              --
              
              
              --
              
              
              1,125,786Warrants
              
              
              --
              
              
              --
              
              
              --
              
              
              173,008Restricted
                  stock
              
              
              --
              
              
              --
              
              
              --
              
              
              2,594Diluted
                  weighted average common shares outstanding
              
              
              24,348,938
              
              
              24,291,008
              
              
              24,443,620
              
              
              25,458,621




For
      the
      three and nine month periods ended September 30, 2006, and the three month
      period ended September 30, 2005, 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. For the nine month period ended
      September 30, 2005, 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.




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




**Three
                  months ended**
                **September
                  30,**
              
              **Nine
                  months ended**
                **September
                  30,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Stock
                  options
              
              
              2,307,598
              
              
              2,667,159
              
              
              2,307,598
              
              
              1,200,813Warrants
              
              
              716,723
              
              
              883,389
              
              
              716,723
              
              
              648,311Restricted
                  Stock
              
              
              869,360
              
              
              240,407
              
              
              869,360
              
              
              --




*Share-Based
      Compensation*




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





The
      number of authorized common shares available for issuance under the Plan is
      5,700,000 shares. As of September 30, 2006 and December 31, 2005, options to
      purchase 2,307,598 and 2,629,809, respectively, shares of common stock were
      outstanding. As of September 30, 2006 and December 31, 2005, 869,360 and
      258,083, respectively, of non-vested restricted share awards had been granted,
      net of forfeitures and net of shares vested.





-13-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




Effective
      January 1, 2006, the Company adopted SFAS No. 123 (revised), *“Share-Based
      Payment* ”
(“SFAS
      123R") utilizing the modified prospective approach. Prior to the adoption of
      SFAS 123R, stock option grants were accounted for in accordance with the
      intrinsic value method prescribed in Accounting Principles Board Opinion No.
      25, *"Accounting
      for Stock Issued to Employees"* ("APB
      25") and accordingly, no compensation expense was recognized for these awards
      except for awards that had intrinsic value on the grant date. Restricted stock
      was also accounted for under APB 25 and compensation expense was recognized
      for
      restricted stock awards based on intrinsic value (which was equal to fair
      value).





Under
      the
      modified prospective approach, SFAS 123R applies to all new awards and to
      previously issued awards that were unvested on January 1, 2006, and awards
      that
      are modified, repurchased or cancelled after January 1, 2006. Compensation
      expense recognized for the first three quarters of 2006 includes compensation
      cost for all share-based payments granted prior to, but not yet vested as of
      January 1, 2006, based on the grant-date fair value estimated in accordance
      with
      the original provisions of SFAS 123, and compensation expense for all
      share-based payments granted subsequent to January 1, 2006, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS 123R.
      Prior periods were not restated to reflect the impact of adopting the new
      standard. Total compensation expense for share-based payment arrangements
      recognized for the three month periods ended September 30, 2006 and 2005 was
      $1,505 and $363, respectively, and $4,162 and $535 for the nine month periods
      ended September 30, 2006 and 2005, respectively. At September 30, 2006, Audible
      had $11,916 of unrecognized compensation expense related to share-based payments
      which is expected to be recognized over a weighted-average period of 2.32 years.
      No compensation cost, as defined under SFAS 123R, was capitalized in any asset
      for the three or nine month periods ended September 30, 2006.





The
      unearned share-based compensation related to stock options and restricted stock
      awards is being amortized to compensation expense over the requisite service
      period. The Plan does not make a separate reference to provisions regarding
      participant retirement and the vesting terms in stock options and restricted
      stock awards relating to participants eligible for retirement; therefore, in
      accordance with the provisions of SFAS 123R, compensation expense, for stock
      options and restricted stock awards to participants that are retirement eligible
      on the grant date, is amortized to compensation expense over the requisite
      service period, rather than immediately at the grant date.





The
      Company receives a tax deduction for certain stock option exercises, generally
      for the intrinsic value of the award on the exercise date and a tax deduction
      for increases in the value of restricted stock upon vesting. Prior to the
      adoption of SFAS 123R, all tax benefits resulting from the exercise of stock
      options and restricted stock were reported as operating cash flows in the
      condensed consolidated Statements of Cash Flows. SFAS 123R requires the cash
      flows resulting from tax benefits in excess of the compensation costs recognized
      for these options (excess tax benefits) to be classified as financing cash
      flows. Further, under SFAS 123R, excess tax benefits are recognized as a credit
      to additional paid-in capital only in the period in which the deduction reduces
      income taxes payable. Since the Company currently has significant net operating
      loss ("NOL") carryforwards that are fully reserved through the valuation
      allowance, any excess tax benefits related to the exercise of stock options
      will
      not be recorded until after the Company utilizes its NOL carryforwards to
      reduce current income taxes payable. For the nine month periods ended
      September 30, 2006 and 2005, there was none and $97, respectively, excess tax
      benefit recognized resulting from share-based compensation. The Company’s net
      cash proceeds from the exercise of stock options was $385 and $623 for the
      nine
      month periods ended September 30, 2006 and 2005, respectively.





All
      stock
      incentives (options and restricted stock) issued to employees and non-employee
      directors are awarded according to the applicable plan terms. The source of
      shares for exercised stock options and delivery of vested restricted stock
      are
      newly issued shares.





As
      a
      result of adopting SFAS 123R on January 1, 2006, the Company’s loss from
      operations, loss before income taxes, and net loss for the three and nine month
      periods ended September 30, 2006 is $687 and $2,010 higher, respectively, than
      if it had continued to account for share-based compensation under APB Opinion
      No. 25. Basic and diluted net loss per common share for the three and nine
      month
      periods ended September 30, 2006 was $0.03 and $0.08 higher, respectively,
      than if the Company had continued to account for share-based compensation
      under APB Opinion No. 25.




-14-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




On
      November 10, 2005, the FASB issued FASB Staff Position 123(R)-3 (“FSP 123R-3”), *“Transition
      Election Related to Accounting For the Tax Effects of Share-Based Payment
      Awards”* ,
      that
      provides an elective alternative transition method of calculating the pool
      of
      excess tax benefits available to absorb tax deficiencies recognized subsequent
      to the adoption of SFAS 123R (the “APIC Pool”) to the method otherwise required
      by paragraph 81 of SFAS 123R. The Company may take up to one year from the
      effective date of this FSP to evaluate its available alternatives and make
      its
      one-time election. The Company is currently evaluating the alternative methods,
      however neither alternative would have an impact on the Company’s results of
      operations or financial condition for the three or nine month periods ended
      September 30, 2006, due to the fact that the Company currently has net operating
      loss carryforwards and has not realized any tax benefits under SFAS 123R. Until
      and unless the Company elects the transition method described in this FSP,
      the
      Company will follow the transition method described in paragraph 81 of SFAS
      123R.





The
      following table illustrates the effect on the Company’s net (loss) income and
      net (loss) income per common share had the Company accounted for share-based
      compensation in accordance with SFAS 123 for the three and nine month periods
      ended September 30, 2005:





**Three
                months ended**
            
            ******Nine
                months ended****September
                30, 2005**
            
            **September
                30, 2005**Net
                (loss) income, as reported
            
            $
            (187
            )
            $
            1,524Add:
                Total share-based employee compensation expense included in reported
                net
                income
            
            
            363
            
            
            535Deduct:
                Total share-based employee compensation expense determined under
                the fair
                value method for all awards
            
            
            (1,090
            )
            
            (2,363
            )Pro
                forma net loss
            
            $
            (914
            )
            $
            (304
            )Basic
                net (loss) income per common share:As
                reported
            
            $
            (0.01
            )
            $
            0.06Pro
                Forma
            
            $
            (0.04
            )
            $
            (0.01
            )Diluted
                net (loss) income per common share:As
                reported
            
            $
            (0.01
            )
            $
            0.06Pro
                forma
            
            $
            (0.04
            )
            $
            (0.01
            )





The
      Company has on occasion issued options to employees to purchase shares of common
      stock at a price less than the fair value of the stock at the time of issuance.
      Prior to the adoption of SFAS 123R, the difference between the fair value on
      grant date and the exercise price of options issued, as well as the value of
      restricted stock on the grant date, was accounted for under APB 25 and was
      recorded as deferred compensation, a component of stockholders' equity, and
      was
      amortized as compensation expense on a straight-line basis over the vesting
      term
      of the option or restricted stock, as applicable. In connection with the
      adoption of SFAS 123R, the unamortized deferred compensation balance of $3,696
      at December 31, 2005 relating to previous grants of options that had intrinsic
      value at the time of issuance and restricted stock was eliminated against
      additional paid-in capital on January 1, 2006.




-15-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents


*Stock
      Options*




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





**Three
                months ended**
            
            **Nine
                months ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Dividend
                yield
            
            
            --
            
            
            --
            
            
            --
            
            
            --Expected
                volatility
            
            
            76.6
            %
            
            111.1
            %
            
            76.6
            %
            
            116.2
            %Risk-free
                interest rate
            
            
            4.50
            %
            
            4.14
            %
            
            4.50
            %
            
            4.14
            %Expected
                life of option (years)
            
            
            4.63
            
            
            5.00
            
            
            4.63
            
            
            5.00





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





The
      following table represents stock option activity for the nine month period
      ended
      September 30, 2006:





**Stock
                Options**
            
            **Number
                of Shares**
            
            **Weighted-Average
                Exercise Price Per Share**
            
            **Aggregate
                Intrinsic Value**
            
            **Weighted-Average
                Remaining Contractual Life**Balance,
                December 31, 2005
            
            
            2,629,809
            
            $
            8.13
            
            
            
            
            
            6.98
                YearsGranted
            
            
            13,100
            
            $
            10.85Exercised
            
            
            (147,530
            )
            $
            2.62Forfeited
            
            
            (140,554
            )
            $
            10.77Expired
            
            
            (47,227
            )
            $
            14.90Balance,
                September 30, 2006
            
            
            2,307,598
            
            $
            8.20
            
            $
            6,805
            
            
            6.09
                YearsOptions
                exercisable at September 30, 2006
            
            
            1,829,294
            
            $
            7.99
            
            $
            5,701
            
            
            5.66
                YearsVested
                and expected to vest at September 30, 2006
            
            
            2,238,507
            
            $
            8.17
            
            $
            6,664
            
            
            6.04
                Years





The
      following table summarizes stock option activity for the nine month periods
      ended September 30:





**Stock
                Options**
            
            **2006**
            
            **2005**Weighted-average
                grant date fair value of options granted
            
            $
            6.86
            
            $
            13.52Total
                fair value of options that vested during the period
            
            $
            1,854
            
            $
            1,275Total
                intrinsic value of options exercised during the period
            
            $
            1,075
            
            $
            3,103




-16-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




*Restricted
      Stock*





During
      the three month periods ended September 30, 2006 and 2005, the Company granted
      awards to receive 71,900 and 112,100 restricted stock units, respectively,
      to
      employees under the Plan. During the nine month periods ended September 30,
      2006
      and 2005, the Company granted awards to receive 733,300 and 258,600 units of
      restricted stock, respectively, to employees under the Plan. The restricted
      shares either cliff-vest or vest periodically between three months and
      forty-eight months after the grant date. During the three month periods ended
      September 30, 2006 and 2005, 74,500 and 18,193 units of restricted stock were
      forfeited due to employee terminations. During the nine month periods ended
      September 30, 2006 and 2005, 115,300 and 18,193 units of restricted stock were
      forfeited due to employee terminations. The fair value of restricted stock
      on
      the grant date is determined by the closing price of Audible's stock on the
      day
      immediately preceding the grant date. Actual shares under these awards are
      not
      issued until vesting is complete. Under the terms of the restricted stock
      awards, unless different provisions are noted on the restricted stock award,
      the
      Company is required to issue to the recipient the number of whole shares of
      common stock that equals the number of vested whole restricted stock shares
      following the date on which the restricted stock share becomes vested.





The
      following table summarizes nonvested restricted stock activity for the nine
      month period ended September 30, 2006:





**Weighted-Average
                Grant-Date****Nonvested
                Restricted Stock**
            
            **Units**
            
            **Fair
                Value**Nonvested
                at December 31, 2005
            
            
            258,083
            
            $
            16.23Granted
            
            
            733,300
            
            $
            10.24Vested
            
            
            (6,723
            )
            $
            13.01Forfeited
            
            
            (115,300
            )
            $
            11.06Nonvested
                at September 30, 2006
            
            
            869,360
            
            $
            11.89





The
      following table summarizes restricted stock activity for the nine month periods
      ended September 30:





**Restricted
                Stock**
            
            **2006**
            
            **2005**Weighted-average
                grant date fair value of shares granted
            
            $
            10.24
            
            $
            16.47Total
                fair value of shares that vested during the period
            
            $
            87
            
            $
            49




Total
      common stock available for future stock option and restricted stock grants
      is
      approximately 1,071,000 shares.





-17-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




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





Property
      and equipment at September 30, 2006 and December 31, 2005 consists of the
      following:





**September
                30,**
              **2006**
            
            **December
                31, 2005**Computer
                server and Web site equipment
            
            $
            8,942
            
            $
            6,599Software
                licenses
            
            
            4,235
            
            
            745Internally
                developed software
            
            
            2,445
            
            
            1,357Office
                furniture and equipment
            
            
            1,652
            
            
            1,558Leasehold
                improvements
            
            
            1,010
            
            
            975Studio
                equipment
            
            
            667
            
            
            652Work
                in process
            
            
            512
            
            
            3,283Total
                property and equipment
            
            
            19,463
            
            
            15,169Less:
                accumulated depreciation and amortization
            
            
            (10,665
            )
            
            (7,010
            )Total
                property and equipment, net
            
            $
            8,798
            
            $
            8,159




Depreciation
      and amortization expense on property and equipment totaled $1,325 and $300
      during the three month periods ended September 30, 2006 and 2005, respectively,
      and $3,710 and $677, during the nine month periods ended September 30, 2006
      and
      2005, respectively.





In
      the
      third quarter of 2006, the Company recognized a $144 impairment charge, included
      in technology and development in the accompanying condensed consolidated
      Statement of Operations, relating to expenditures previously capitalized for
      a
      computer software project. These costs were in included in work in process
      and
      internally developed software. Upon review of the financial forecast for this
      project during the third quarter of 2006, management concluded that an
      impairment charge should be recognized for the full amount of the project costs
      in accordance with the provisions of FASB Statement No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Asset* .





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




**September
                30,**
              **2006**
            
            **December
                31, 2005**Computer
                server and Web site equipment
            
            $
            743
            
            $
            743Less:
                accumulated amortization
            
            
            (623
            )
            
            (437
            )Total
                computer server and Web site equipment, net
            
            $
            120
            
            $
            306





**(4)**  **Accrued
      Expenses**




The
      components of the accrued expenses balance are as follows:





**September
                30,**
              **2006**
            
            **December
                31, 2005**Professional
                fees
            
            $
            1,089
            
            $
            1,084Revenue
                sharing and bounty payments
            
            
            673
            
            
            774Accrued
                expense - related parties
            
            
            475
            
            
            333Retail
                rebates and discounts
            
            
            468
            
            
            578Royalty
                obligations
            
            
            302
            
            
            293Marketing
            
            
            241
            
            
            468Refunds
                and chargebacks
            
            
            59
            
            
            287Other
                accrued expenses
            
            
            971
            
            
            985Total
                accrued expenses
            
            $
            4,278
            
            $
            4,802




-18-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents





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





The
      following is a summary of the consolidated Stockholders' Equity activity for
      the
      nine month period ended September 30, 2006:





**Common
                Stock**
            
            **Treasury
                Stock****Shares**
            
            **Par
                value**
            
            **Shares**
            
            **Cost**
            
            **Additional
                paid-in capital**
            
            **Deferred
                compensation**
            
            **Accumulated
                other comprehensive (loss) income**
            
            **Accumulated
                deficit**
            
            **Total
                stockholders' equity**Balance
                at December 31, 2005
            
            
            24,326,503
            
            $
            243
            
            
            --
            
            
            --
            
            $
            192,547
            
            $
            (3,696
            )
            $
            15
            
            $
            (130,714
            )
            $
            58,395Exercise
                of common stock warrants
            
            
            166,666
            
            
            2
            
            
            
            
            
            
            
            
            748
            
            
            
            
            
            
            
            
            
            
            
            750Exercise
                of common stock options
            
            
            147,530
            
            
            --
            
            
            
            
            
            
            
            
            385
            
            
            
            
            
            
            
            
            
            
            
            385Repurchase
                of treasury stock
            
            
            10,197
            
            
            --
            
            
            (462,300
            )
            
            (3,988
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,988
            )Retirement
                of treasury stock
            
            
            (462,300
            )
            
            (3
            )
            
            462,300
            
            
            3,988
            
            
            (3,985
            )
            
            
            
            
            
            
            
            
            
            
            --Share-based
                compensation expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,162
            
            
            
            
            
            
            
            
            
            
            
            4,162Elimination
                of deferred compensation upon FAS 123R adoption
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,696
            )
            
            3,696
            
            
            
            
            
            
            
            
            --Foreign
                currency translation adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (38
            )
            
            
            
            
            (38
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (7,747
            )
            
            (7,747
            )Balance
                at September 30, 2006
            
            
            24,188,596
            
            $
            242
            
            
            --
            
            
            --
            
            $
            190,161
            
            
            --
            
            $
            (23
            )
            $
            (138,461
            )
            $
            51,919







-19-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




*Common
      Stock*




As
      of
      September 30, 2006 and December 31, 2005, the Company had issued 24,188,596
      and
      24,326,503 respectively, shares of common stock. As of September 30, 2006 and
      December 31, 2005, the Company had 3,893,681 and 3,774,755, respectively, shares
      of common stock reserved for common stock warrants, options and restricted
      stock.




*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
      by
      the Black-Scholes model, in accordance with EITF Issue No. 96-18 and are
      recognized as an expense under fixed plan or variable accounting depending
      on
      the terms of the agreements over the periods in which services are being
      performed. The assumptions used in the Black-Scholes pricing model to calculate
      fair values, including risk-free interest rate and volatility, are determined
      using available information on the measurement date. Expected dividend yield
      of
      zero is used for all calculations. There were no warrants issued in the 2006
      or
      2005 periods. All warrants previously issued were fully vested as of December
      31, 2004. Accordingly, there was no expense related to warrants recognized
      during the three or nine month periods ended September 30, 2006 and
      2005.





*Common
      Stock Repurchase Program and Treasury Stock*





In
      February 2006, the Company's Board of Directors authorized a new common stock
      repurchase program, pursuant to which the Company may from time to time
      repurchase (through open market repurchases at prevailing market prices), up
      to
      an aggregate of $25,000 of the Company's outstanding common stock. During the
      nine month period ended September 30, 2006, 462,300 shares were repurchased
      at
      an average price of $8.63. The Company subsequently legally retired the treasury
      stock. At the February 8, 2005 Board of Directors meeting, the Board voted
      that
      all 229,741 shares of common stock held as treasury shares by the Company at
      that time were to be retired, and the Company subsequently legally retired
      the
      treasury stock. As of September 30, 2006 and December 31, 2005, the Company
      held
      no shares of common stock as treasury stock.





*Comprehensive
      (Loss) Income*





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





**Three
                months ended**
              **September
                30,**
            
            **Nine
                months ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                (loss) income
            
            $
            (2,525
            )
            $
            (187
            )
            $
            (7,747
            )
            $
            1,524Other
                comprehensive (loss) income:Foreign
                currency translation adjustment
            
            
            (7
            )
            
            --
            
            
            (38
            )
            
            18Comprehensive
                (loss) income
            
            $
            (2,532
            )
            $
            (187
            )
            $
            (7,785
            )
            $
            1,542





**(6)
      Audible UK**





In
      February 2005, the Company launched Audible UK, a spoken audio Web site 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 in June 2005.




-20-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents


**(7)
      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 Web site.
      Under the original agreement of the Joint Venture, Random House and Holtzbrinck
      each contributed approximately $17 in exchange for each receiving a 24.5%
      interest in Audible Germany. The Company was required to contribute $34 in
      exchange for a 51% interest in Audible Germany. After the initial formation,
      Random House and Holtzbrinck were to provide additional equity financing of
      approximately $1,490 each in certain installments, subject to Audible Germany
      meeting certain milestones. The full amount has been funded by Random House
      and
      Holtzbrinck. In the event of liquidation of Audible Germany, this additional
      financing by Random House and Holtzbrinck accrues interest at 8% per annum
      and
      is senior to Audible's capital investment. The Company may, but is not obligated
      to, contribute additional capital to the entity. Any profits distributed by
      Audible Germany are to be distributed in accordance with the ownership
      interests. In July 2006, a new investor, Luebbe, contributed €287 for a 5%
      interest in Audible Germany. This contribution reduced the Company’s interest to
      48% and Random House’s and Holzbrinck’s ownership percentage to 23.5% each.





In
      October 2006, an amendment was prepared to the original Joint Venture
      agreement, which stipulates the additional financing commitments of the
      investors. The agreement has not been signed and executed as of the filing
      date
      of this report.  Additional contributions were made by the Company and
      Holtzbrinck in October 2006. The Company contributed €213, or $270, which
      represents the amount that was due to the Company from Audible Germany for
      services performed during the nine month period ended September 30, 2006, and
      Holtzbrinck contributed €312. In addition, the Company contributed €3 and
      Holtzbrinck contributed €3 as statutory capital contributions in October 2006.
      These contributions further changed each investor ownership percentage to 47.8%
      for the Company, 26.3% for Holtzbrinck, 21.3 % for Random House, and 4.6% for
      Luebbe. Subsequent to the additional contributions made in October 2006, Random
      House and Luebbe shall be entitled, but not obligated, to provide additional
      fundings to Audible Germany in the amounts of €312 and €67, respectively. Random
      House and Luebbe have a period of four weeks from the effective date of the
      first amendment to decide if they will make additional contributions. To the
      extent that Random House and Luebbe do not wish to make additional financial
      contributions, Holtzbrinck shall be entitled, but not obligated, to make the
      additional contributions.




At
      the
      time the original Joint Venture agreement was executed, the Company had
      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 had sufficient
      equity to permit it to finance the activities in which it was currently engaged
      in without additional subordinated financial support. In addition, the other
      criteria within FIN 46R that would characterize Audible Germany as a variable
      interest entity were not met. Rather, Audible Germany was considered to be
      a
      voting interest entity. Upon occurrence of the additional financing in July
      2006, the Company performed an analysis to determine whether or not Audible
      Germany is a variable interest entity, as defined in FIN 46R. Audible Germany
      is
      100% equity funded and no debt exists or is planned. Therefore equity is deemed
      to be sufficient under the definition of FIN 46R paragraph 5a. In addition,
      under paragraph 9 of FIN 46R, on a qualitative basis, Audible Germany has
      demonstrated that it can finance its activities without additional subordinated
      financial support, even though the equity may be less than 10% of the entity’s
      total assets. An entity that is able to support its operations with existing
      equity has demonstrated the sufficiency of its equity. Therefore, the Company
      has concluded that Audible Germany is a voting interest entity and the Company’s
      investment will continue to be accounted for under the equity method of
      accounting.




Prior
      to
      the additional contribution made in July 2006, the Company’s ownership
      percentage was greater than 50%. Under EITF 96-16, *Investor's Accounting for an Investee When the Investor has a Majority of the
      Voting Interest but the Minority Shareholder or Shareholders Have Certain
      Approval or Veto Rights* ,
      the
      Company had determined that the minority shareholders, together, have
      significant participatory rights, allowing them to participate in significant
      decisions of Audible Germany and to block significant decisions proposed by
      Audible. As a result of the significant participatory rights held by the
      minority shareholders, the Company did not have unilateral control over Audible
      Germany. Therefore, Audible did not consolidate the results of Audible Germany
      but rather accounted for its investment in Audible Germany under the equity
      method of accounting. Under the equity method of accounting, the Company records
      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. The initial investment was reduced
      to zero during 2004. Subsequent to the additional fundings made in July 2006,
      the Company’s ownership percentage was reduced to 48% and therefore the equity
      method of accounting for the investment in Audible Germany is appropriate
      regardless of the significant participatory rights of the other
      investors.





-21-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




In
      connection with the Joint Venture, on August 30, 2004, the Company entered
      into
      a license and services agreement with Audible Germany (the “License”). Under the
      License, Audible Germany has launched a German language spoken word audio
      service. The terms provide for the Company to provide intellectual property
      and
      substantially all of the technological infrastructure for the operation of
      the
      service. In return, Audible Germany is required to pay Audible $30 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 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 €1,500, subject to Audible Germany achieving certain
      operating margins. No royalties have been received by the Company under the
      License.





During
      the three and nine month periods ended September 30, 2006 the Company recognized
      $90 and $270, respectively, in related party revenue under the license agreement
      as the related services were delivered and accepted on or before September
      30,
      2006. During the three and nine month periods ended September 30, 2005, the
      Company recognized $90 and $300, respectively, under this license agreement.
      As
      of September 30, 2006 the $270 in accounts receivable related to revenues
      recognized for the nine months ended September 30, 2006 were not collected
      in
      cash, but rather were contributed as the Company’s equity investment in Audible
      Germany in October 2006. As of September 30, 2006, the Company recorded its
      share of the equity loss up to the amount of its investment of $270, on the
      accompanying consolidated Statements of Operations.





In
      addition, the Company recognized billings for certain consulting services and
      related incremental reimbursable costs incurred in connection with the License
      in accordance with EITF 01-14. These amounts are included in related party
      revenue on the condensed consolidated Statements of Operations. During the
      three
      and nine month periods ended September 30, 2006, none and $108 was recognized,
      respectively. During the three and nine month periods ended September 30, 2005,
      $18 and $68 was recognized, respectively. The Company accrues for amounts to
      be
      paid to Audible Germany related to net profit earned by Audible, Inc. at the
      Apple Germany iTunes music store. These amounts are included in accrued expenses
      in the condensed consolidated Balance Sheets as of September 30, 2006 and
      December 31, 2005, and marketing expense in the condensed consolidated Statement
      of Operations as of September 30, 2006 and 2005.





**(8)
      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. The Agreement expired in September
      2006. An addendum, effective September 15, 2006, stipulates that the parties
      agree to a first renewal period of the original Agreement from September 15,
      2006 to December 31, 2006. During this time, terms and conditions of the
      original Agreement remain in effect and if the parties do not agree to and
      execute a second renewal of the original Agreement by November 30, 2006, the
      first renewal will expire on December 31, 2006 and no further renewals will
      be
      possible.





-22-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents





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, payable as follows: $250 in September
      2004, $250 in October 2004, $250 in January 2005 and $21 for each of the
      following 12 months. As of September 30, 2006, the Company had received the
      three installments of $250 each and twelve monthly payments of the $21.
      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. Once net
      paid revenue exceeds €20,000, the Company will receive a flat fee of €1,000. If
      net paid revenue exceeds €33,300, the Company will receive a royalty payment of
€1,000, plus 3% of net paid revenue in excess of €33,300. An additional royalty
      is payable equal to one-half of the distributable pre-tax profits of the
      business.




FIN
      46R
      addresses the consolidation by business enterprises of variable interest
      entities (VIEs) and requires that if an enterprise is the primary beneficiary
      of
      a variable interest entity, the assets, liabilities, and results of the
      activities of the variable interest entity should be consolidated in the
      financial statements of the enterprise.




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




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 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 in fees are non-refundable and not subject to any acceptance provisions.
      Since fair values do not exist for the different services (elements) that
      Audible is providing, the services are considered a single unit of accounting
      under EITF 00-21 and accordingly, the $1,000 in fees is recognized as related
      party revenue on a straight-line basis over the 24-month term at the rate of
      $42
      per month, provided collectibility is reasonably assured.





The
      Company recognized $104 and $354, respectively, during the three and nine month
      periods ended September 30, 2006, and $125 and $375, respectively, during the
      three and nine month periods ended September 30, 2005. As of September 30,
      2006
      and December 31, 2005, none and $187, respectively, was recorded as deferred
      revenue related to the Agreement. In addition, the Company recognizes related
      party revenue for billings for certain consulting services and related
      incremental reimbursable costs incurred in connection with the Agreement in
      accordance with EITF 01-14. These amounts are included in related party
      revenue on the condensed consolidated Statements of Operations. For the three
      and nine month periods ended September 30, 2006, the Company recognized $28
      and
      $119, respectively, and for the three and nine month periods ended September
      30,
      2005 the Company recognized $30 and $54, respectively. The Company accrues
      for
      amounts to be paid to France Loisirs related to net profit earned by
      Audible, Inc. at the Apple France iTunes music store. These amounts are included
      in accrued expenses in the condensed consolidated Balance Sheets as of September
      30, 2006 and December 31, 2005, and marketing expense in the condensed
      consolidated Statement of Operations as of September 30, 2006 and
      2005.





-23-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




**(9)
      Product Development, Licensing, Marketing and Distribution
      Agreement**





On
      May
      16, 2005, the Company entered into a five-year agreement with a new
      content provider to develop, license, market and distribute audio
      content. The Company 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, 2006, the Company billed the publisher $1,132, of which
      $825
      has been received as of September 30, 2006, 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 month periods ended
      September 30, 2006 and 2005, $132 and $52, respectively, was recorded as other
      revenue in connection with this agreement. During the nine month periods ended
      September 30, 2006 and 2005, $261 and $52, respectively, was recorded as other
      revenue in connection with this agreement. As of September 30, 2006, the Company
      recorded $312 and $444, as deferred revenue current and non-current,
      respectively, on the accompanying condensed consolidated Balance Sheet, relating
      to this agreement, representing cash received in advance of being recognized
      as
      revenue. As of December 31, 2005, the Company recorded $252 and $99,
      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.





**(10)
      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. During the third quarter of 2006, the Company notified the landlord
      of its intentions to terminate the office lease in Wayne, NJ as of February
      28,
      2007, and has made the $100 cancellation payment as of September 30, 2006,
      which
      is included in general and administrative expenses in the accompanying condensed
      consolidated Statement of Operations. In September 2006, the Company entered
      into a new lease agreement for office space in Newark, NJ. The Company will
      be
      occupying two floors with an approximate space of 49,600 square feet, which
      will
      be used as the Company’s corporate headquarters. The agreement is for a term of
      seven years and there is a one time only option to terminate the lease agreement
      after the 64 th month of
      the lease term upon 12 months prior written notice to the landlord. In February
      2005, Audible UK signed a one year lease for office space, which includes office
      amenities. This lease was subsequently amended in the second quarter of 2005
      for
      additional space and was renewed in May 2006 for an additional two years. Total
      future minimum lease obligations as of September 30, 2006 under these lease
      arrangements are $8,752.




Rent
      expense of $299 and $166 was recorded under operating leases for the three
      month
      periods ended September 30, 2006 and 2005, respectively, and $658 and $414
      for
      the nine month periods ended September 30, 2006 and 2005,
      respectively.





There
      are
      no future minimum lease payments due under capital leases as of September 30,
      2006, 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 paid.
      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, and relate to audio content that has been delivered
      to Audible. Royalty obligations pursuant to minimum guarantees for audio content
      to be delivered in the future are reflected as a commitment in the table
      below.





-24-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




*Service
      Agreements*





The
      Company has entered into operational and marketing agreements and purchase
      orders with various vendors to provide certain contracted services. The majority
      of the amounts committed are for hosting services related to the Company's
      Web site.




*Committed
      Purchases*





Committed
      purchases represent agreements the Company has made for future purchases of
      goods and service. The balance primarily consists of consulting services for
      technology and development projects and marketing services.





**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, 2006:





**Year**
            
            **Operating
                Leases**
              **(1)**
            
            **Royalty
                Obligations**
              **(2)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
            
            **Total**2006
            
            $
            373
            
            $
            428
            
            $
            791
            
            $
            1,349
            
            $
            2.9412007
            
            
            686
            
            
            217
            
            
            1,486
            
            
            --
            
            
            2,3892008
            
            
            1,016
            
            
            2
            
            
            938
            
            
            --
            
            
            1,9562009
            
            
            1,066
            
            
            --
            
            
            45
            
            
            --
            
            
            1,1112010
            
            
            1,141
            
            
            --
            
            
            --
            
            
            --
            
            
            1,1412011
                and thereafter
            
            
            4,470
            
            
            --
            
            
            --
            
            
            --
            
            
            4,470Total
            
            $
            8,752
            
            $
            647
            
            $
            3,260
            
            $
            1,349
            
            $
            14,008





(1)
      Of
      the $8,752 in total operating leases, $8,300 relates to the new office lease
      agreement signed in September 2006.





(2)
      Of
      the $647 in total royalty obligations, $302 is recorded in accrued expenses
      and
      $124 is recorded as royalty obligations, non-current, in the accompanying
      condensed consolidated Balance Sheet as of September 30, 2006. The remaining
      obligation of $221 relates to content that had not yet been delivered as of
      September 30, 2006.





**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, 2006 that may result
      from those matters for which accruals have been recorded may differ, the Company
      believes that any amounts exceeding the recorded accruals would not be material
      to the consolidated financial position or results of operations.





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




-25-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




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.





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 was held on April 24, 2006, and the court reserved decision.
      If
      the court determines that the settlement is fair to the class members, the
      settlement will be approved. There can be no assurance that this proposed
      settlement would be approved and implemented in its current form, or at
      all.




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





Starting
      on or about February 22, 2005, several class actions were filed against 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 December 2005, the United States District
      Court for the District Court of New Jersey consolidated the class action,
      appointed a group of lead plaintiffs and appointed lead plaintiff’s counsel. By
      prior agreement, the plaintiff’s consolidated amended complaint was filed on
      February 14, 2006. The plaintiffs seek unspecified monetary damages and
      their reasonable costs and expenses, including counsel fees and expert fees.
      The
      defendants have moved to dismiss the pleading. The motion has been fully
      briefed, but the Court has not yet ruled.





-26-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents




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




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





The
      Company believes that all of the claims described above are without merit and
      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. In June 2006,
      the Company filed a motion to dismiss, asserting, among other things, that
      Digeo
      does not have standing to sue. On August 24, 2006 the District Court ruled
      that Digeo did not have legal title to the patent at issue, and therefore was
      not entitled to money damages.  The Court ruled that it could not resolve
      the question of equitable title on summary judgment.  If Digeo was the
      owner of all equitable title, it could be entitled to equitable relief. 
However, Digeo recently moved to dismiss the case with prejudice, precluding
      them from any recovery, legal or equitable. The Company believes the case is
      without merit and will not have a material adverse impact on its financial
      position or results of operations.





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




**Cash
      Paid for Interest and Taxes**





The
      Company paid interest of $0 and $1 during the nine month periods ended September
      30, 2006 and 2005, respectively.




No
      income
      taxes were paid in the nine month periods ended September 30, 2006 and
      2005.




-27-
 **AUDIBLE,
              INC. AND SUBSIDIARY**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
              thousands, except share and per share data)**
 **(Unaudited)**
 Table
              of Contents





**(12)   Customer
      Concentration**





For
      the
      three month periods ended September 30, 2006 and 2005, Apple Computer accounted
      for 23.6% and 14.3% of total revenue, respectively.




For
      the
      nine month periods ended September 30, 2006 and 2005, Apple Computer accounted
      for 22.5% and 13.6% of total revenue, respectively.





As
      of
      September 30, 2006 and December 31, 2005, Apple Computer accounted for 66.8%
      and
      62.1%, respectively, of the Company's accounts receivable.




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





Revenues
      and long-lived assets for the Company's United States and United Kingdom
      operations are as follows:




**Revenues**
            
            **United**
              **States**
            
            **United
                Kingdom**
            
            **Consolidated**Three
                months ended September 30, 2006
            
            $
            19,109
            
            $
            917
            
            $
            20,026Three
                months ended September 30, 2005
            
            
            16,618
            
            
            153
            
            
            16,771Nine
                months ended September 30, 2006
            
            $
            56,705
            
            $
            2,177
            
            $
            58,882Nine
                months ended September 30, 2005
            
            
            44,810
            
            
            163
            
            
            44,973**September
                30, 2006**Long-lived
                assets
            
            
            9,556
            
            
            46
            
            
            9,602**September
                30, 2005**Long-lived
                assets
            
            
            3,143
            
            
            105
            
            
            3,248




**(14)
      Apple Agreement**




In
      July
      2006, the Company entered into a global master agreement with Apple Computer,
      Inc. that replaced the principal agreements entered into with Apple during
      2002
      and 2003. Pursuant to the new agreement, the Company will continue to be the
      exclusive source of audiobooks, book-related content, and other spoken-word
      material to Apple’s iTunes music stores worldwide and will continue to provide
      the iTunes music store with comedy, lectures, speeches, periodicals, educational
      programs, Audible originals, spiritual programming, paid podcasts, and other
      spoken-word programs. All Audible content will continue to receive branding
      within the audio stream and visually in the iTunes music store. All Apple iPods
      and iTunes applications will continue to be AudibleReady® and will work with the
      Audible service. Under the new agreement, the Company has agreed to certain
      exclusivity obligations that restrict the Company to varying degrees from
      integrating Audible content into other internet-based services. The new
      agreement also provides that the Company’s revenue is formula-driven, based upon
      the selling price at the iTunes music store and the content cost. Under the
      old
      agreements, the Company’s revenue was a fixed price, based upon a percentage of
      either the manufacturer’s suggested retail price or amount the item was sold for
      on the Audible service. This change in payment structure will result in a change
      in the manner in which revenue is calculated under the new agreement (See Note
      1). The new agreement also changes the terms of the revenue share payments
      due
      to Apple. Under the terms of the previous agreements, the Company paid Apple
      a
      revenue share based on number of customers who used the iTunes software to
      download digital audio from the Company. In the new agreement, the revenue
      share
      paid to Apple is a percentage of revenue from content sales made to new paying
      customers who were referred by Apple to the Company’s Web site. The term of the
      new agreement expires on September 30, 2010.





-28-
 Table
            of Contents


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


(dollars
      in thousands except per share data)





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our audited consolidated financial
      statements and notes thereto appearing in our 2005 Annual Report on Form 10-K.
      This discussion and analysis contains forward-looking statements that involve
      risks and uncertainties. Our actual results may differ materially from those
      anticipated in these forward-looking statements as a result of a number of
      factors.*





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




**Overview**




Our
      Business





Our
      goal
      is to be the preeminent supplier of spoken-word digital audio on the Internet.
      At our Web sites, our customers can select, purchase, and download spoken audio
      of their choice of over 115,000 hours and over 34,000 different programs amongst
      a wide range of categories. Our AudibleListener membership plans provide our
      customers a wide variety of monthly and annual membership options, depending
      upon their listening preferences. Customers can access our content at our Web
      sites, www.audible.com (United States) and www.audible.co.uk (United Kingdom),
      or at our related parties Web sites, www.audible.de (Germany) and www.audible.fr
      (France), or at Amazon.com and at the Apple iTunes Store.





Key
      Business Metrics





For
      the
      nine month period ended September 30, 2006, we generated total revenue of
      $58,882 and incurred a net loss of $7,747. During this period, total number
      of
      new AudibleListener members added was approximately 215,000, compared to
      approximately 166,000 acquired in the first nine months of 2005. This increase
      in new AudibleListeners acquired resulted in total AudibleListeners of
      approximately 345,000 as of September 30, 2006, compared to approximately
      245,000 as of December 31, 2005 and approximately 224,000 at September 30,
      2005.





Churn,
      a
      measure of AudibleListener member cancellation rate, decreased for the first
      three quarters of 2006 over 2005, due primarily to the increase in new
      AudibleListeners that have joined one of our annual membership programs, and
      a
      sharp decline in members acquired through free trial programs. Monthly churn
      is
      defined as member cancellations in the period divided by the sum of members
      at
      the beginning of the period plus gross member adds, divided by three
      months.  Members that are financially delinquent are counted as
      churn.




The
      average monthly churn in AudibleListener Members for the three month period
      ended September 30, 2006 was 3.1% compared to 3.4% and 4.6% in the first and
      second quarters of 2006, respectively, and 5.1% in the third quarter of
      2005.





For
      2006,
      our major goals include increasing the number of new AudibleListeners we
      acquire, continuing to increase the breadth and depth of content that we offer
      to our customers, further reducing our churn rate and increasing customer
      satisfaction.




We
      expect
      that our net revenues during 2006 will grow over 2005 levels, primarily from
      continuing to increase the number of AudibleListeners we acquire, improving
      the
      merchandising of our content to our customers, reducing the monthly churn rate
      and increasing customer satisfaction.





-29-
 Table
            of Contents


Members
      of our senior leadership team regularly review key operating metrics such as
      new
      AudibleListeners acquired, customer purchase patterns, customer satisfaction,
      churn rate, Web site performance and effectiveness of our marketing programs.
      We
      believe that an understanding of these key metrics as well as financial measures
      and how they change over time is important to us as well as to other parties
      analyzing our business results and future market opportunities.





The
      discussion of our condensed consolidated financial results contained herein
      is
      intended to assist investors, analysts and other parties reading this report
      to
      better understand the key operating and financial measures as well as the
      changes in our consolidated results of operations, and the primary factors
      that
      accounted for these changes.





**Recent
      Developments**





Apple
      Agreement





In
      July
      2006, we entered into a global master agreement with Apple Computer, Inc. that
      replaced the principal agreements we entered into with Apple during 2002 and
      2003. Pursuant to the new agreement, we will continue to be the exclusive source
      of audiobooks, book-related content, and other spoken-word material to Apple’s
      iTunes music stores worldwide and will continue to provide the iTunes music
      store with comedy, lectures, speeches, periodicals, educational programs,
      Audible originals, spiritual programming, paid podcasts, and other spoken-word
      programs. All Audible content will continue to receive branding within the
      audio
      stream and visually in the iTunes music store. All Apple iPods and iTunes
      applications will continue to be AudibleReady® and will work with the Audible
      service. Under the new agreement, we have agreed to certain exclusivity
      obligations that restrict us to varying degrees from integrating Audible content
      into other internet-based services. The new agreement also provides that our
      revenue is formula-driven, based upon the selling price on the iTunes music
      store and the content cost. Under the old agreements, our revenue was a fixed
      price, based upon a percentage of either the manufacturer’s suggested retail
      price or amount the item was sold for on the Audible service. This change in
      payment structure will result in a change in the manner in which we calculate
      revenue under the new agreement. The new agreement also changes the terms of
      the
      revenue share payments due to Apple. Under the terms of the previous
      agreements,we paid Apple a revenue share based on number of customers who used
      the iTunes software to download digital audio. In the new agreement, the revenue
      share paid to Apple is a percentage of sales made by customers who are referred
      by Apple to our Web site. The new agreement also changes the terms of the
      revenue share payments due to Apple. Under the terms of the previous agreements,
      we paid Apple a revenue share based on number of customers who used the iTunes
      software to download digital audio from us. In the new agreement, the revenue
      share paid to Apple is a percentage of revenue from content sales made to new
      paying customers who were referred by Apple to the our Web site. The term of
      the
      new agreement expires on September 30, 2010.





Audible
      Germany





In
      July
      2006, a new investor, Luebbe, contributed €287 for a 5% interest in Audible
      Germany. This contribution reduced our interest to 48% and Random House’s and
      Holzbrinck’s ownership percentage to 23.5% each.





In
      October 2006, an amendment was prepared to the original Joint Venture
      agreement, which stipulates the additional financing commitments for us and
      Holtzbrinck. The agreement has not been signed and executed as of the filing
      date of this report.  Additional contributions were made by us and
      Holtzbrinck in October 2006. We contributed €213, or $270, which represents the
      amount that was due to us from Audible Germany for services performed during
      the
      nine month period ended September 30, 2006, and Holtzbrinck contributed €312. In
      addition, we contributed €3 and Holtzbrinck contributed €3 as statutory capital
      contributions in October 2006. These contributions further changed each investor
      ownership percentage to 47.8% for us, 26.3% for Holtzbrinck, 21.3 % for Random
      House, and 4.6% for Luebbe. Subsequent to the additional contributions made
      in
      October 2006, Random House and Luebbe shall be entitled, but not obligated,
      to
      provide additional fundings to Audible Germany in the amounts of €312 and €67,
      respectively, which would further reduce our ownership interest. Random House
      and Luebbe have a period of four weeks from the effective date of the first
      amendment to decide if they will make additional contributions. To the extent
      that Random House and Luebbe do not wish to make additional financial
      contributions, Holtzbrinck shall be entitled, but not obligated, to make the
      additional contributions.




-30-
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            of Contents




France
      Loisirs





The
      France Loisirs agreement expired in September 2006. An addendum, effective
      September 15, 2006, stipulates that the parties agree to a first renewal period
      of the original agreement from September 15, 2006 to December 31, 2006. During
      this time, terms and conditions of the original agreement remain in effect
      and
      if the parties do not agree to and execute a second renewal of the original
      agreement by November 30, 2006, the first renewal will expire on December 31,
      2006 and no further renewals will be possible.





**Critical
      Accounting Policies**





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




Our
      critical accounting policies are as follows:




***Revenue
      Recognition***




We
      derive
      our revenue from four main categories:





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




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





In
      July
      2006, we entered into a global master agreement with Apple Computer, Inc. that
      replaced the principal agreements we entered into with Apple during 2002 and
      2003. We continue to recognize revenue from audio book sales made at the
      Apple iTunes Store in the period when the content is purchased
      and delivered. However, in accordance with the terms of the new agreement,
      the amount of revenue we recognize on each audio book sale is
      now a formula-driven, based upon the Apple iTunes selling price and
      the content cost of each audio book. As a result, Apple revenue for each
      quarterly period will reflect an estimate for the last month of the quarter,
      based on actual number of titles sold and the prior month or current unit sales
      price as applicable, at the Apple iTunes Store.




Our
      “legacy” AudibleListener monthly membership plans generally provide customers
      two audio credits for a fixed monthly fee. Customers may use these audio credits
      to select content of their choice from our Web site. “Legacy” AudibleListener
      audio credits provided under a monthly membership program have a life of 30
      days, after which they expire. We recognize revenue from the sale of legacy
      AudibleListener memberships ratably over the AudibleListener'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.




-31-
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In
      December 2005, we introduced new AudibleListener membership plans, designed
      to
      provide our customers more flexibility in using their audio credits. Depending
      upon the AudibleListener membership plan, customers can receive and “bank” or
      delay using up to a maximum number of audio credits, depending on the membership
      plan. The banking feature results in audio credits being used (delivered) over
      different periods for different customers. In addition, some of the new
      AudibleListener plans include new membership benefits, ranging from a
      complimentary daily newspaper to everyday discounts of 30% on a la carte
      purchases. The daily newspaper and 30% discount benefits are “serial” elements
      that are delivered continuously over the membership period, whereas the content
      selections underlying the audio credits are discrete elements that are delivered
      at different times based on individual customer behavior. As a result of the
      characteristics of the new AudibleListener memberships, they are considered
      revenue arrangements with multiple deliverables, however under Emerging Issues
      Task Force, or EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
      because
      the deliverables are not eligible for separation, they are accounted for as
      a
      single unit of accounting. As a result, we recognize revenue for these new
      AudibleListener plans using the lesser of straight-line or proportional
      performance (based on content delivery) over the maximum membership period.
      This
      may result in a decrease in revenue or slower revenue growth than we experienced
      in prior periods because the customer has a longer period of time to use their
      audio credits. For example, a customer may pre-pay an annual membership for
      twelve audio credits and not use any credits for six months. Due to the revenue
      recognition model described above, this revenue will be deferred until the
      customer uses the audio credits.





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





*Provision
      for Refunds and Chargebacks*





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





*Customer
      Concessions*





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





-32-
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            of Contents




***Royalty
      Expense***




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





***Internal-Use
      Software***





In
      accordance with Statement of Position 98-1, *Accounting for the Costs of Computer Software Developed or Obtained for Internal
      Use* ,
      all
      costs incurred for the development of internal use software that relate to
      the
      planning and post-implementation phases of the development are expensed. Direct
      costs incurred in the development phase are capitalized and recognized over
      the
      software's estimated useful life, generally two years, commencing at the
      time the software is ready for its intended use. Research and development costs
      and other computer software maintenance costs related to software development
      are expensed as incurred. We review the capitalized software costs for
      impairment when events or circumstances indicate that the carrying amount of
      an
      asset may not be recoverable. If the sum of the expected cash flows,
      undiscounted and without interest, is less than the carrying amount of the
      related asset, an impairment loss is recognized as the amount by which the
      carrying amount of the asset exceeds its fair value. Actual cash flows could
      differ from our expectations.





***Warrants
      Issued To Non-Employees In Exchange For Goods and
      Services***




We
      occasionally issue warrants to purchase shares of common stock to non-employees
      as part of their compensation for providing goods and services. We account
      for
      these warrants in accordance with 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* ,
      or EITF
      96-18. The exercise price of the warrants is determined by the closing price
      of
      our common stock on the day of the agreement. The fair value of the warrant
      issued is estimated using the Black-Scholes model. Application of management's
      judgment is required in determining the assumptions concerning risk free
      interest rate, expected term of the warrant, dividend yield and expected
      volatility to be used in the Black-Scholes model. 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,
      we
      apply variable plan or fixed plan accounting in accordance with EITF
      96-18.




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




In
      accordance with SFAS 123(R), we measure compensation cost for stock awards
      at
      fair value and recognize compensation over the requisite service period for
      awards expected to vest. Estimating the portion of stock awards that will
      ultimately vest requires judgment, and to the extent actual results or updated
      estimates differ from our current estimates, such amounts are recorded in the
      period estimates are revised. We consider many factors when estimating expected
      forfeitures, including types of awards, employee class, and historical
      experience. We also consider many factors when estimating expected volatility
      and expected life of the option. Actual results, and future estimates, may
      differ substantially from our current estimates.




-33-
 Table
            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 month periods ended September
      30, 2006 and 2005:





**Three
                months ended**
              **September
                30,**
            
            **Nine
                month periods ended**
              **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            
            97.7
            %
            
            98.2
            %
            
            98.0
            %
            
            98.9
            %Point
                of sale rebates
            
            
            0.0
            
            
            (1.3
            )
            
            (0.5
            )
            
            (1.8
            )Services
            
            
            0.1
            
            
            0.3
            
            
            0.1
            
            
            0.2Total
                content and services revenue
            
            
            97.8
            
            
            97.2
            
            
            97.6
            
            
            97.3Hardware
                revenue
            
            
            0.4
            
            
            0.8
            
            
            0.5
            
            
            0.7Related
                party revenue
            
            
            1.1
            
            
            1.6
            
            
            1.4
            
            
            1.8Other
                revenue
            
            
            0.7
            
            
            0.4
            
            
            0.5
            
            
            0.2Total
                revenue, net
            
            
            100.0
            
            
            100.0
            
            
            100.0
            
            
            100.0Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            41.2
            
            
            35.9
            
            
            40.7
            
            
            34.7Discount
                certificate rebates
            
            
            1.5
            
            
            1.8
            
            
            1.5
            
            
            2.8Total
                cost of content and services revenue
            
            
            42.7
            
            
            37.7
            
            
            42.2
            
            
            37.5Cost
                of hardware revenue
            
            
            4.1
            
            
            5.0
            
            
            2.9
            
            
            3.2Cost
                of related party revenue
            
            
            0.1
            
            
            0.3
            
            
            0.4
            
            
            0.3Operations
            
            
            15.0
            
            
            14.7
            
            
            15.2
            
            
            14.6Technology
                and development
            
            
            23.8
            
            
            14.0
            
            
            22.0
            
            
            12.9Marketing
            
            
            16.6
            
            
            18.9
            
            
            19.0
            
            
            18.6General
                and administrative
            
            
            13.7
            
            
            14.2
            
            
            14.6
            
            
            12.5Total
                operating expenses
            
            
            116.0
            
            
            104.8
            
            
            116.3
            
            
            99.6(Loss)
                income from operations
            
            
            (16.0
            )
            
            (4.8
            )
            
            (16.3
            )
            
            0.4Loss
                on equity investment
            
            
            0.5
            
            
            --
            
            
            0.5
            
            
            --Other
                income, net
            
            
            3.9
            
            
            3.3
            
            
            3.6
            
            
            3.2(Loss)
                income before income taxes
            
            
            (12.6
            )
            
            (1.5
            )
            
            (13.2
            )
            
            3.6Income
                tax (expense) benefit
            
            
            (0.0
            )
            
            0.3
            
            
            (0.0
            )
            
            (0.2
            )Net
                (loss) income
            
            
            (12.6
            )%
            
            (1.2
            )%
            
            (13.2
            )%
            
            3.4
            %





-34-
 Table
            of Contents




***Three
      month period ended September 30, 2006 compared to three month period ended
      September 30, 2005***




**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Content
                and services revenue:**$
            19,591
            
            $
            16,306
            
            $
            3,285
            
            
            20.2
            %




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





Content
      and services revenue grew during the three month period ended September 30,
      2006
      versus the three month period ended September 30, 2005 due primarily to growth
      in sales at the Apple iTunes Store, as well as growth in our AudibleListener
      memberships and a la carte sales. AudibleListener membership growth was driven
      mainly through online marketing channels, specifically promotions of the new
      membership programs introduced in December 2005. Our AudibleListener
      membership count grew from approximately 224,000 at September 30, 2005, to
      approximately 345,000 at September 30, 2006. As we continue to acquire new
      AudibleListener members who may choose to roll over their audio credits, our
      ability to recognize revenue will depend upon audio credit usage patterns of
      individual members. This will result in an increase in deferred revenue and
      may
      result in a decrease or slower growth in our revenue as compared to prior
      periods. We recognized in revenue $4,728 and $2,405 from sales of Audible
      content at the Apple iTunes Store during the three month periods ended September
      30, 2006 and 2005, respectively. Our AudibleListener membership count excludes
      customers that purchase Audible content directly from the Apple iTunes Store.
      We
      believe continuing consumer adoption of digital downloading, increased consumer
      awareness of the Audible service, customer satisfaction and improved marketing
      will continue to drive AudibleListener membership growth and growth in sales
      at
      the Apple iTunes Store.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Hardware
                revenue:**$
            73
            
            $
            142
            
            $
            (69
            )
            
            (48.6
            )%





*Hardware
      revenue* consists
      of revenue derived primarily from the shipping and handling charge to customers
      on devices that Audible provides for free to AudibleListeners who commit to
      a
      twelve month AudibleListener membership. Under EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
      with
      these multiple-element arrangements (membership plus device), we recognize
      only shipping and handling fees as revenue for the delivery of hardware because
      all other consideration paid by the customer is contingent upon delivery of
      the
      content. Revenue is recognized upon shipment, assuming all other criteria are
      met. Also included are separate sales of digital audio devices to consumers
      and
      libraries. The decrease in hardware revenue for the three month period ended
      September 30, 2006 compared to the three month period ended September 30, 2005
      is due to a reduction in devices shipped during the periods.




-35-
 Table
            of Contents






**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Related
                party revenue:**$
            222
            
            $
            263
            
            $
            (41
            )
            
            (15.6
            )%




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




Related
      party revenue during the three months ended September 30, 2006 and 2005,
      included $105 and $125, respectively, in fees earned from our agreement with
      France Loisirs, representing the straight-line recognition of $1,000 in fees
      we
      are entitled to receive pursuant to the arrangement, which was being recognized
      over the initial 24-month term of the original agreement through September
      14,
      2006, as well as $27 and $30, respectively, in billings to France Loisirs for
      certain consulting services and reimbursement of related incremental costs.
      Related party revenue during the three month periods ended September 30, 2006
      and 2005, also included $90 in fees earned under our agreement with Audible
      Germany, as well as none and $18, respectively, in billings to Audible Germany
      for certain consulting services and reimbursement of related incremental costs
      incurred by us in connection with our license and services
      agreement.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Other
                revenue:**$
            140
            
            $
            60
            
            $
            80
            
            
            133.3
            %




*Other
      revenue* for the
      three month period ended September 30, 2006 and 2005 included $132 and $52,
      respectively, of revenue earned under a product development agreement with
      a
      publishing partner, which commenced in May 2005. The fees are being amortized
      on
      a straight line basis as fees are billed over a 58 month period beginning in
      the
      month the Company commenced production of audio (July 2005) through the
      expiration of the agreement. As of September 30, 2006, the Company billed the
      publisher $1,132, of which $825 has been received as of September 30,
      2006, in connection with this agreement. As of September 30, 2005, the
      Company billed the publisher $325, of which the full amount was received, as
      of
      September 30, 2005.





**Three
                moths ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of content and services revenue:**Royalties
                and other content charges
            
            $
            8,240
            
            $
            6,018
            
            $
            2,222
            
            
            36.9
            %Discount
                certificate rebates
            
            $
            307
            
            $
            298
            
            $
            9
            
            
            3.0
            %




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





Royalties
      and other content charges as a percentage of total content and services revenue
      increased from the three month period ended September 30, 2005 to September
      30,
      2006 from 36.9% to 42.1%. This increase was primarily due to the increasing
      percentage of revenue from sales at the Apple iTunes Store, which yields a
      higher royalty cost as a percentage of revenue, as well as the impact of higher
      royalty rates from publishers.




-36-
 Table
            of Contents




**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of hardware revenue:**$
            826
            
            $
            846
            
            $
            (20
            )
            
            (2.4
            )%




*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 2006 period primarily due to a reduction
      in
      the number of digital audio players given away to customers, offset in part
      by a
      higher unit cost of the players given away or sold to customers during the
      2006
      period as compared to the 2005 period.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of related party revenue:**$
            27
            
            $
            48
            
            $
            (21
            )
            
            (43.8
            )%




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





Cost
      of
      related party revenue for the three month periods ended September 30, 2006
      and
      2005, included $27 and $30 respectively, for France Loisirs, and none and $18
      respectively, for Audible Germany. These costs primarily consisted of payroll
      costs related to services performed for France Loisirs and Audible Germany
      by
      certain employees of our technology, development, and audio
      departments.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Operations
                expense:**$
            2,996
            
            $
            2,461
            
            $
            535
            
            
            21.7
            %




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




Operations
      expense increased in the three month period ended September 30, 2006 versus
      the
      three month period ended September 30, 2005 primarily due to $284 in higher
      personnel expenses and $109 in higher outside service expenses. These increases
      were primarily related to the increased scale of our business and improving
      the
      quality of customer service.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Technology
                and development:**$
            4,758
            
            $
            2,343
            
            $
            2,415
            
            
            103.1
            %




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





The
      increase in technology and development expense for the three month period ended
      September 30, 2006 compared to the three month period ended September 30, 2005
      was primarily due to $933 in higher depreciation and amortization expense,
      $887
      in higher outside services expenses, $279 in higher maintenance and repair
      costs, $144 in higher hosting fees and a $144 loss on impairment charge. Many
      of
      these higher costs were related to enhancing the capacity and performance of
      our
      Web site, and upgrades to our internal systems and infrastructure.




-37-
 Table
            of Contents





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Marketing:**$
            3,340
            
            $
            3,173
            
            $
            167
            
            
            5.3
            %




*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 three month period ended September 30, 2006 versus
      the three month period ended September 30, 2005 primarily due to $338 in higher
      advertising and promotional expenses. The higher advertising and promotional
      expenses were directed toward marketing campaigns and new promotions for our
      membership plans. As we continue to build the AudibleListener membership base,
      we expect our marketing expenses to continue to grow. This was offset by a
      decrease of $184 in lower revenue sharing and bounty fees, which was mainly
      due
      to the change in the bounty and revenue sharing terms in the new Apple
      agreement.





**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****General
                and administrative:**$
            2,743
            
            $
            2,376
            
            $
            367
            
            
            15.4
            %




*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 three month period ended
      September 30, 2006 versus the three month period ended September 30, 2005 was
      primarily due to $588 in increased personnel expenses and $90 in higher
      depreciation expense. This was offset by a decrease of $474 in lower legal
      fees,
      primarily due to progress in the Digeo, Inc. litigation during the third quarter
      of 2006.








**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Loss
                on equity investment**$
            90
            
            $
            --
            
            $
            90
            
            
            100.0
            %




*Loss
      on equity investment* consists
      of the equity method losses related to our investment in Audible Germany. The
      $90 loss recorded during the three month period ended September 30, 2006 was
      recorded against the $90 accounts receivable due from Audible Germany for
      services performed during the three month period ended September 30, 2006.
      For
      the three month period ended September 30, 2006, we had recorded our share of
      the equity loss up to the amount of the investment. For the three month period
      ended, September 30, 2005, there were no equity losses to record, as Audible
      had
      not funded any losses and had not made any monetary contributions.




**Three
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Other
                Income:**Other
                income, net
            
            $
            779
            
            $
            554
            
            $
            225
            
            
            40.6
            %




*Other
      Income, net* consists
      of interest income and interest expense. The increase in other income, net
      was
      due to an increase in interest earned on the investment of funds in short-term
      investments, which consisted of governmental agency notes and mortgage-backed
      securities. We began to make these investments in November 2004.





-38-
 Table
            of Contents


***Nine
      month period ended September 30, 2006 compared to nine month period ended
      September 30, 2005***




**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Content
                and services revenue:**$
            57,473
            
            $
            43,756
            
            $
            13,717
            
            
            31.4
            %




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





Content
      and services revenue grew due primarily to growth in sales at the Apple iTunes
      Store, as well as growth in our AudibleListener memberships and a la carte
      sales. AudibleListener membership growth was driven mainly through online
      marketing channels, specifically promotions for the new membership programs
      introduced in December 2005. Our AudibleListener membership count grew from
      approximately 224,000 at September 30, 2005, to approximately 345,000 at
      September 30, 2006. As we continue to acquire new AudibleListener members who
      may choose to roll over their audio credits, our ability to recognize revenue
      will depend upon audio credit usage patterns of individual members. This will
      result in an increase in deferred revenue and may result in a decrease or slower
      growth in our revenue as compared to prior periods.We recognized in revenue
      approximately $13,263 and $6,128 from sales of Audible content at the Apple
      iTunes Store during the nine month periods ended September 30, 2006 and 2005,
      respectively. Our AudibleListener membership count excludes customers that
      purchase Audible content directly from the Apple iTunes Store. We believe
      continuing consumer adoption of digital downloading, increased consumer
      awareness of the Audible service, customer satisfaction and improved marketing
      will continue to drive AudibleListener membership growth and growth in sales
      at
      the Apple iTunes Store.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Hardware
                revenue:**$
            283
            
            $
            332
            
            $
            (49
            )
            
            (14.8
            )%





*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. Under EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* ,
      with
      these multiple-element arrangements (membership plus device), we recognize
      only shipping and handling fees as revenue for the delivery of hardware because
      all other consideration paid by the customer is contingent upon delivery of
      the
      content. Revenue is recognized upon shipment, assuming all other criteria are
      met. Also included are separate sales of digital audio players to consumers
      and
      libraries. The decrease in hardware revenue for the nine month period ended
      September 30, 2006 compared to the nine month period ended September 30, 2005
      is
      due to a reduction in devices shipped during the periods, offset in part by
      a
      higher unit cost of the players given away or sold to customers during the
      2006
      period as compared to the 2005 period.





-39-
 Table
            of Contents




**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Related
                party revenue:**$
            852
            
            $
            796
            
            $
            56
            
            
            7.0
            %




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




Related
      party revenue during the nine month periods ended September 30, 2006 and 2005,
      included $355 and $375, respectively, in fees earned from our agreement with
      France Loisirs, representing the straight-line recognition of $1,000 in fees
      we
      received pursuant to the arrangement, which was being recognized over the
      initial 24-month term of the original agreement through September 14, 2006,
      as
      well as $119 and $54, respectively, in billings to France Loisirs for certain
      consulting services and reimbursement of related incremental costs. Related
      party revenue during the nine month periods ended September 30, 2006 and 2005,
      also included $270 and $300, respectively, in fees earned from our agreement
      with Audible Germany, as well as $108 and $67, respectively, in billings to
      Audible Germany for certain consulting services and reimbursement of related
      incremental costs incurred by us in connection with our license and services
      agreement.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Other
                revenue:**$
            274
            
            $
            89
            
            $
            185
            
            
            207.9
            %




*Other
      revenue* for the
      nine month period ended September 30, 2006 and 2005 primarily included $261 and
      $52, respectively, of revenue earned under a product development agreement
      with
      a publishing partner, which commenced in May 2005. The fees are being amortized
      on a straight line basis as fees are billed over a 58 month period beginning
      in
      the month the Company commenced production of audio (July 2005) through the
      expiration of the agreement. As of September 30, 2006, the Company billed the
      publisher $1,132, of which $825 has been received as of September 30,
      2006, in connection with this agreement. As of September 30, 2005, the
      Company billed the publisher $325, of which the full amount was received, as
      of
      September 30, 2005.








**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of content and services revenue:**Royalties
                and other content charges
            
            $
            23,943
            
            $
            15,585
            
            $
            8,358
            
            
            53.6
            %Discount
                certificate rebates
            
            $
            910
            
            $
            1,262
            
            $
            (352
            )
            
            (27.9
            )%




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





Royalties
      and other content charges as a percentage of total content and services revenue
      increased from the nine month period ended September 30, 2005 to September
      30,
      2006 from 35.6% to 41.7%. This increase was primarily due to the increasing
      percentage of revenue from sales at the Apple iTunes Store, which yields a
      higher royalty cost as a percentage of revenue, as well as the impact of higher
      royalty rates from publishers.




-40-
 Table
            of Contents




**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of hardware revenue:**$
            1,707
            
            $
            1,442
            
            $
            265
            
            
            18.4
            %




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




In
      the
      third quarter of 2005, we changed the model of the digital audio player to
      an
      iPod, which we give away to certain AudibleListener members. The iPod was more
      expensive than the device we previously provided. As a result, although there
      was a reduction in the number of digital audio players given away to customers
      in the nine months ended September 30, 2006 compared to the nine months ended
      September 30, 2005, cost of hardware revenue increased.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Cost
                of related party revenue:**$
            227
            
            $
            121
            
            $
            106
            
            
            87.6
            %




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





Cost
      of
      related party revenue for the nine month periods ended September 30, 2006 and
      2005, included $119 and $54 respectively, for France Loisirs, and $108 and
      $67
      respectively, for Audible Germany. These costs primarily consisted of payroll
      costs related to services for France and Germany operations, performed by
      certain employees of our technology, development, and audio
      departments.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Operations
                expense:**$
            8,959
            
            $
            6,584
            
            $
            2,375
            
            
            36.1
            %




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




Operations
      expense increased in the nine month period ended September 30, 2006 versus
      the
      nine month period ended September 30, 2005 primarily due to $1,500 in higher
      personnel expenses, $239 in higher credit card fees, and $254 in higher outside
      service expenses. These increases were primarily related to the increased scale
      of our business and improving the quality of customer service.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Technology
                and development:**$
            12,936
            
            $
            5,812
            
            $
            7,124
            
            
            122.6
            %




*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 expense from the nine month period ended
      September 30, 2005 to the nine month period ended September 30, 2006 was
      primarily due to $2,761 in higher depreciation and amortization expense, $1,819
      in higher outside services expenses, $945 in higher personnel expenses, $919
      in
      higher maintenance and repair costs, as well as an increase in supplies
      purchased, $419 in higher Web site hosting fees, and $144 loss on impairment
      charge. Many of these higher costs were related to enhancing the capacity and
      performance of our Web site, and upgrades to our internal systems and
      infrastructure.




-41-
 Table
            of Contents





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Marketing:**$
            11,214
            
            $
            8,368
            
            $
            2,846
            
            
            34.0
            %




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





Marketing
      expenses were higher in the nine month period ended September 30, 2006 versus
      the nine month period ended September 30, 2005 primarily due to $2,040 in higher
      advertising and promotional expenses, $1,106 in higher personnel expenses and
      $125 in higher outside service fees. This was partially offset by a decrease
      in
      bounty and revenue sharing fees of $182 (due to the new terms of the new Apple
      agreement) and public relations expense of $103. Most of these higher expenses
      were directed toward strengthening our marketing and business development teams
      and obtaining new AudibleListeners. As we continue to build the AudibleListener
      membership base, we expect our marketing expenses to continue to
      grow.





**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****General
                and administrative:**$
            8,607
            
            $
            5,601
            
            $
            3,006
            
            
            53.7
            %




*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 nine month period ended
      September 30, 2006 versus the nine month period ended September 30, 2005 was
      primarily due to $2,364 in increased personnel expenses, $261 in increased
      depreciation expense, $144 in higher job search and placement fees, $124 in
      increased legal, accounting and other professional fees, and $117 in increased
      insurance fees. The increase in personnel expense is primarily attributable
      to
      the adoption of SFAS No. 123R on January 1, 2006. See Note 2 for further detail
      regarding the adoption of this standard.





-42-
 Table
            of Contents




**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Loss
                on equity investment**$
            270
            
            $
            --
            
            $
            270
            
            
            100.0
            %




*Loss
      on equity investment* consists
      of the equity method losses related to our investment in Audible Germany. The
      $270 loss recorded during the nine month period ended September 30, 2006
      was recorded against the $270 accounts receivable due from Audible Germany
      for
      services performed during the nine month period ended September 30, 2006. For
      the nine month period ended September 30, 2006, we had recorded our share of
      the equity loss up to the amount of the investment. For the nine month period
      ended September 30, 2005, there were no equity losses to record, as Audible
      had
      not funded any losses and had not made any monetary contributions.




**Nine
                months ended**
              **September
                30,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**
            
            **$
                Change**
            
            **%
                Change****Other
                Income:**Other
                income, net
            
            $
            2,153
            
            $
            1,423
            
            $
            730
            
            
            51.3
            %




*Other
      Income, net* consists
      of interest income and interest expense. The increase in other income, net
      was
      due to increased interest earned on the investment of funds in short-term
      investments, which consisted of governmental agency notes and mortgage-backed
      securities. We began to make these investments in November 2004.





-43-
 Table
            of Contents


**Off-Balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements that have a material current effect or that
      are reasonably likely to have a material future effect on our financial position
      or results of operations.





**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 www.audible.com and
      www.audible.co.uk;


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


**·** Control
      customer acquisition costs, cost of content, and other costs;


**·** Minimize
      customer churn rate;


**·** 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, 2006, 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, 2006, we
      had
      an accumulated deficit of $138,461.





Our
      operating results have varied on a quarterly basis during our operating history
      and may fluctuate significantly in the future as a result of a variety of
      factors, many of which are outside of our control. Factors that may affect
      our
      operating results include but are not limited to: (1) the demand for the Audible
      service; (2) sales of Audible content through the Apple iTunes Store; (3) the
      availability of premium audio content; (4) sales and consumer usage of
      AudibleReady devices; (5) our ability to acquire new customers; (6) our ability
      to retain existing customers; (7) the introduction of new products or services
      by a competitor; (8) the cost and availability of acquiring sufficient Web
      site
      capacity to meet our customers' needs; (9) technical difficulties with our
      computer system or the internet or system downtime; (10) the cost of acquiring
      audio content; (11) the amount and timing of capital expenditures and other
      costs relating to the expansion of our international operations; (12) successful
      expansion of the Audible service in the UK; (13) effective management of and
      compliance with Sarbanes-Oxley requirements; and (14) general economic
      conditions and economic conditions specific to electronic commerce and online
      media. In the past, we experienced fluctuations in demand for the Audible
      service based on the level of marketing expenditures, the occurrence of external
      publicity and the quality of our software and Web site. Any one of these factors
      could cause our revenue and operating results to vary significantly in the
      future. In addition, as a strategic response to changes in the competitive
      environment, we may from time to time make pricing, service or marketing
      decisions that could cause significant declines in our quarterly
      revenue.





Because
      we have a number of fixed expenses, we may be unable to adjust our spending
      in a
      timely manner to compensate for unexpected revenue shortfalls. Accordingly,
      any
      significant shortfall in relation to our expectations could cause significant
      declines in our operating results. We believe that our quarterly revenue,
      expenses and operating results could vary significantly in the future, and
      that
      period-to-period comparisons should not be relied upon as indications of future
      performance. Due to the foregoing factors, it is likely that in some future
      quarters our operating results will fall below the expectations of securities
      analysts and investors, which could have a material adverse effect on the
      trading price of our common stock.





-44-
 Table
            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 such preferred stock and warrants
      prior to our initial public offering were $28,719. In July 1999, we completed
      our initial public offering and received net proceeds of $36,856. From the
      time
      of our IPO we have raised $15,860 in net proceeds through the private sale
      of
      shares of our convertible preferred stock (all of which were subsequently
      converted into common stock), $4,186 in net proceeds through the private sales
      of our common stock, $3,415 in net proceeds through the exercise of common
      stock
      options, and $2,338 in net proceeds through the exercise of common stock
      warrants. In November 2004, we completed a secondary public offering of our
      common stock resulting in net proceeds to us of approximately
      $46,457.





As
      of
      September 30, 2006, our cash and cash equivalents balance was $13,556. In
      addition, as of September 30, 2006 we had $47,373 in short-term investments,
      consisting of governmental agency notes and mortgage backed securities, which
      we
      intend to hold until maturity. Based on our currently proposed business plans
      and related assumptions, we believe that our cash and cash equivalents balance
      and short-term investment balance as of September 30, 2006 will enable us to
      meet our anticipated cash requirements for operations and capital expenditures
      for the foreseeable future. Beyond that, we may need additional cash to fund
      our
      business and finance our planned 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, 2006 our principal source of liquidity was $13,556 in cash and
      cash equivalents and $47,373 in short-term investments.




The
      following table shows future cash payments due under our commitments and
      obligations as of September 30, 2006:





**Year**
            
            **Operating
                Leases**
              **(1)**
            
            **Royalty
                Obligations**
              **(2)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
            
            **Total**2006
            
            $
            373
            
            $
            428
            
            $
            791
            
            $
            1,349
            
            $
            2.9412007
            
            
            686
            
            
            217
            
            
            1,486
            
            
            --
            
            
            2,3892008
            
            
            1,016
            
            
            2
            
            
            938
            
            
            --
            
            
            1,9562009
            
            
            1,066
            
            
            --
            
            
            45
            
            
            --
            
            
            1,1112010
            
            
            1,141
            
            
            --
            
            
            --
            
            
            --
            
            
            1,1412011
                and thereafter
            
            
            4,470
            
            
            --
            
            
            --
            
            
            --
            
            
            4,470Total
            
            $
            8,752
            
            $
            647
            
            $
            3,260
            
            $
            1,349
            
            $
            14,008




(1)
      Of
      the $8,752 in total operating leases, $8,300 relates to our new office lease
      agreement signed in September 2006.





(2)
      Of
      the $647 in total royalty obligations, $302 is recorded in accrued expenses
      and
      $124 is recorded as royalty obligations, non-current, in the accompanying
      condensed consolidated Balance Sheet as of September 30, 2006. The remaining
      obligation of $221 relates to content that had not yet been delivered as of
      September 30, 2006.





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***Sources
      and Uses of Cash***





Net
      cash
      provided by operating activities for the nine months ended September 30, 2006
      was $392. This was primarily attributable to an increase in deferred revenue,
      depreciation and amortization and share-based compensation expense, partially
      offset by our net loss, an increase in prepaid expenses and other current
      assets, and a decrease in accounts payable and accrued expenses. The increase
      in
      deferred revenue was due to the increase in the number of memberships in our
      AudibleListener plans, as well as the revenue recognition model, where revenue
      is recognized based on the content delivery using the lesser of straight line
      or
      proportional performance revenues. Net cash provided by operating activities
      for
      the nine months ended September 30, 2005 was $9,157. This was primarily
      attributable to our net income, increases in accrued expenses, accrued
      royalties, accounts payable, accrued compensation, and deferred revenue, offset
      in part by an increase in accounts receivable, royalty advances, and accretion
      of discounts on short-term investments.





Net
      cash
      provided by investing activities for the nine months ended September 30, 2006
      was $4,473, attributable to net proceeds from short-term investing activity
      of
      $8,967, partially offset by purchases of property and equipment of $4,049.
      Net
      cash used in investing activities for the nine months ended September 30, 2005
      was $9,693. This was attributable to net short-term investing activity of $6,818
      and purchases of property and equipment of $2,107.




Net
      cash
      used in financing activities for the nine months ended September 30, 2006,
      was
      $2,853, resulting primarily from purchases of treasury stock, offset by proceeds
      from exercise of common stock options and common stock warrants. Net cash
      provided by financing activities for the nine months ended September 30, 2005
      was $797, resulting primarily from proceeds from the exercise of common stock
      options and common stock warrants, partially offset by principal payments made
      on capital lease obligations.





***New
      Accounting Standards***





*SFAS
      No. 123R*





Effective
      January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
      No. 123R, “Share-Based Payment” using the Modified Prospective Approach. See
      Note 2 for further detail regarding the adoption of this standard.





*SFAS
      No. 155*





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





*SFAS
      No. 156*





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





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*FIN
      No. 48*





In
      June
      2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes”.
      FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
      in accordance with SFAS No. 109, *Accounting
      for Income Taxes* .
      This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This interpretation is effective for
      fiscal years beginning after December 15, 2006. We do not expect that the
      adoption of FIN No. 48 will have a material impact on our consolidated financial
      statements.




*SAB
        No. 108*




In
      September 2006, the Securities and Exchange Commission released Staff Accounting
      Bulletin No. 108, “Quantifying Financial Statement Misstatements”
(“SAB 108”). SAB 108 gives guidance on how errors, built up over time
      in the balance sheet, should be considered from a materiality perspective and
      corrected. SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. SAB 108 is effective for fiscal years
      ending after November 15, 2006. We do not expect the adoption of
      SAB No. 108 to have a material impact on our financial position,
      results of operation, or cash flows.




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




We
      are
      exposed to fluctuations in foreign currency exchange rates as the financial
      results of our foreign subsidiary are translated into U.S. dollars in
      consolidation. We do not use derivative instruments or hedging to manage our
      exposures and do not hold any market risk sensitive instruments for trading
      purposes.





**ITEM
      4****.
      Controls and Procedures**





**Changes
      in Internal Control Over Financial Reporting**





As
      previously disclosed in our annual report on Form 10-K for the fiscal year
      ended
      December 31, 2005, we identified the following material weaknesses in our
      internal control over financial reporting: (i) insufficient accounting
      personnel; (ii) inadequate information and communication; (iii) inadequate
      risk
      assessment; (iv) ineffective contract management; (v) ineffective control and
      retail promotions.





The
      material weaknesses identified by us could result in a material misstatement
      to
      the annual or interim financial statements that would not be prevented or
      detected. As a result, we have determined these control deficiencies each
      constituted a material weakness as of December 31, 2005. Because of the material
      weaknesses noted above, we have concluded that we did not maintain effective
      internal control over financial reporting as of December 31, 2005, based on
      criteria in *Internal
      Control — Integrated Framework* issued
      by
      the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      We
      have communicated these conclusions to the Audit Committee of our Board of
      Directors.





Changes
      in our internal control over financial reporting, as such term is defined in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as of September 30, 2006
      that have materially affected, or are reasonably likely to materially affect,
      our internal control over financial reporting, include the items described
      below. These changes were implemented in the second quarter of
      2006.





We
      have
      taken various corrective actions to remediate the material weaknesses noted
      above. By their nature, such actions require a period of time to become fully
      effective. The remedial actions associated with these material weaknesses
      include the following:




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*Inadequate
      information and communication, specifically as they related to the gift center
      and customer concessions.*


·
            We
                have temporarily discontinued accepting new sales in the gift center
                until
                adequate financial controls for processing new gift transactions
                are
                formally implemented into supporting business processes and information
                systems.


·
            We
                have hired an experienced Director of Customer Care to oversee customer
                service and assume operational accountability for defining and
                implementing financial controls.


·
            New
                policies and procedures were developed, communicated, and implemented
                regarding policies and procedures relative to customer
                concessions.


·
            A
                review and analysis of customer concession activity is being
                performed.


·
            We
                have formalized financial close procedures to include adequate scheduling
                allowing for review of reports, calculations, analysis, and
                reconciliations.





*Ineffective
      contract management*


·
            We
                have been building a database which will maintain and track all contracts,
                with the relative information, including key provisions (operational
                and
                financial) and unusual specifications. Once this database is completed,
                management will ensure that the financial terms and conditions of
                contracts match the business rules in our other financial information
                systems (i.e. royalty system). We expect the database to be
                completed during the fourth quarter of
                2006.





*Ineffective
      control over retail promotions*


·
            A
                new process has been implemented for recording and reporting activity
                related to the retail promotion programs.


·
            We
                now perform timely retail program roll forward procedures including
                requesting third party verifications on period-end
                balances.





We
      have
      made the remediation of the material weaknesses that have been identified a
      significant priority for us and will continue to take steps to address them
      by
      the end of 2006. We believe that the remediation efforts, taken as a whole,
      mitigated the risk of error with respect to our preparation of this quarterly
      report on Form 10-Q for the period ended September 30, 2006. We believe that
      our
      controls and procedures will continue to improve as a result of the further
      implementation of these measures.





**Evaluation
      of Disclosure Controls and Procedures**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports filed or submitted pursuant
      to the Securities Exchange Act of 1934 is recorded, processed, summarized and
      reported within the time periods specified in the Securities and Exchange
      Commission’s rules and forms, and that information required to be disclosed in
      our Exchange Act reports is accumulated and communicated to our management,
      including the our Chief Executive Officer and Chief Financial Officer, to allow
      timely decisions regarding required disclosure.




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we carried out an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of September
      30, 2006.  Based upon that evaluation, our Chief Executive Officer and
      Chief Financial Officer concluded that our disclosure controls and procedures
      were not effective as of such date due to the fact that the material weaknesses
      described in the December 31, 2005 Form 10-K had not been completely remediated
      as of September 30, 2006.





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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, in addition to the matters described below, are pending
      against us. All of these matters are subject to many uncertainties, and it
      is
      possible that some of these matters could be ultimately decided, resolved or
      settled adversely. We have recorded accruals for losses related to those matters
      which we consider to be probable and that can be reasonably estimated. Although
      the ultimate amount of liability at September 30, 2006 that may result from
      those matters for which accruals have been recorded may differ, we believe
      that
      any amounts exceeding the recorded accruals would not be material to the
      consolidated financial position or results of operations.





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





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




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





In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. If the court determines that the settlement is fair to the class
      members, the settlement will be approved. There can be no assurance that this
      proposed settlement would be approved and implemented in its current form,
      or at
      all.




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





Starting
      on or about February 22, 2005, several class actions were filed against us
      and
      two of our executives in the United States District Court for the District
      of
      New Jersey.  The plaintiffs purport to represent a class consisting of all
      persons (other than our officers and directors and their affiliates) who
      purchased our securities between November 2, 2004 and February 15, 2005 (the
      "Class Period").  The plaintiffs allege that the defendants violated
      Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 there under
      by failing to make complete and accurate disclosures concerning our future
      plans
      and prospects.  The individual defendants are also alleged to be liable
      under Section 20(a) of the Exchange Act.  All of the defendants are alleged
      to have sold stock at inflated prices during the Class Period. In December
      2005, the United States District Court for the District of New Jersey
      consolidated the class action, appointed a group of lead plaintiffs and
      appointed lead plaintiff’s counsel. By prior agreement, the plaintiff’s
      consolidated amended complaint was filed on February 14, 2006. The plaintiffs
      seek unspecified monetary damages and their reasonable costs and expenses,
      including counsel fees and expert fees. The defendants have moved to dismiss
      the
      pleading. The motion has been fully briefed, but the Court has not yet ruled.





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





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





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





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





In
      May
      2005, Digeo, Inc. commenced an action against us for patent infringement in
      Federal District Court in the State of Washington. We have 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. In June 2006, we filed
      a motion to dismiss, asserting, among other things, that Digeo does not have
      standing to sue. On August 24, 2006 the District Court ruled that Digeo did
      not have legal title to the patent at issue, and therefore was not entitled
      to
      money damages.  The Court ruled that it could not resolve the question of
      equitable title on summary judgment.  If Digeo was the owner of all
      equitable title, it could be entitled to equitable relief.  However, Digeo
      recently moved to dismiss the case with prejudice, precluding them from any
      recovery, legal or equitable. We believe the case is without merit and will
      not
      have a material adverse impact on our financial position or results of
      operations.





**ITEM
      1A.****Risk
      Factors**





For
      a
      more detailed explanation of the factors affecting our businesses, please refer
      to the Risk Factors section in Item 1A of our 2005 Form 10-K. There
      have been no material changes to our risk factors as of September 30,
      2006.





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





**Exhibit
                Number**
            **Description**10.47*
            Digital
                Download Agreement with Apple Computer, Inc. dated July 27,
                200610.48
            Office
                lease dated September 27, 2006, by and between Audible, Inc., as
                tenant,
                andWashington
                Park Fidelco, LLC, as landlord10.49
            First
                Amendment to the License and Services Agreement by and between Audible
                Inc., and Audible GmbH dated October 5, 200610.50
            First
                Amendment to the Master Alliance Agreement by and between Audible
                Inc.,
                France Loisirs S.A.S. and Audio Direct S.A.S. dated September 15,
                200631.1
            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.





*
      A
      request for confidential treatment was filed for certain portions of the
      indicated document. Confidential portions have been omitted and filed separately
      with the Commission as required by Rule 24b-2 of the Commission.





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Pursuant
      tothe
      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 and Chief Financial Officer
              (Principal Financial and Accounting Officer)Date:
            November
                8, 2006






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