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








**AUDIBLE,
      INC.**


(Exact
      name of registrant as specified in its charter)





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








**(973)
      820-0400**


(Registrant's
      telephone number, including area code)





**None**


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





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


**Yes**x                                **No**





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


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





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


**Yes************No**x




As
      of
      August 7, 2007, 24,331,109 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 June 30, 2007
                (unaudited) and December 31, 2006
            3Condensed
                Consolidated Statements of Operations for the
                three and six months ended June 30, 2007 and 2006
                (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for the six
                months ended June 30, 2007 and 2006 (unaudited)
            5Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            6Item
                2.
            Management's
                Discussion and Analysis of Financial
                Condition and Results of Operations
            24Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risks
            40Item
                4.
            Controls
                and Procedures
            41**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            42Item
                1A.
            Risk
                Factors
            44Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            44Item
                3.
            Defaults
                Upon Senior Security
            44Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            44Item
                5.
            Other
                Information
            44Item
                6.
            Exhibits
            44**Signatures**
            
            45





-2-


**PART I
      - FINANCIAL INFORMATION**




**ITEM
      1. Financial Statements**




**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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





**June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****(unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            18,597
            
            
            $
            14,925Short-term
                investments
            
            
            48,720
            
            
            
            51,295Interest
                receivable on short-term investments
            
            
            536
            
            
            
            626Accounts
                receivable, net of provision for refunds and chargebacks of $40 at
                June
                30, 2007 and December 31, 2006
            
            
            3,122
            
            
            
            4,181Accounts
                receivable, related parties
            
            
            232
            
            
            
            100Royalty
                advances
            
            
            504
            
            
            
            710Prepaid
                expenses and other current assets
            
            
            3,106
            
            
            
            1,797Inventory
            
            
            103
            
            
            
            212Total
                current assets
            
            
            74,920
            
            
            
            73,846Property
                and equipment, net
            
            
            10,537
            
            
            
            8,149Other
                assets
            
            
            1,416
            
            
            
            781Total
                assets
            
            $
            86,873
            
            
            $
            82,776**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,385
            
            
            $
            3,121Accrued
                expenses and other current liabilities
            
            
            5,391
            
            
            
            4,678Accrued
                royalties
            
            
            6,543
            
            
            
            9,028Accrued
                compensation
            
            
            2,049
            
            
            
            778Deferred
                revenue
            
            
            15,691
            
            
            
            13,840Total
                current liabilities
            
            
            32,059
            
            
            
            31,445Deferred
                revenue, noncurrent
            
            
            644
            
            
            
            513Other
                liabilities, noncurrent
            
            
            1,703
            
            
            
            262Royalty
                obligations, noncurrent
            
            
            75
            
            
            
            90Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $.01. Authorized 40,000,000 shares at June 30, 2007
                and
                December 31, 2006; 24, 287,147 and 24,119,768 shares issued and
                outstanding at June 30, 2007 and December 31, 2006,
                respectively
            
            
            243
            
            
            
            241Additional
                paid-in capital
            
            
            194,070
            
            
            
            190,799Accumulated
                other comprehensive loss
            
            
            (48
            )
            
            
            (36
            )Accumulated
                deficit
            
            
            (141,873
            )
            
            
            (140,538
            )Total
                stockholders' equity
            
            
            52,392
            
            
            
            50,466Total
                liabilities and stockholders' equity
            
            $
            86,873
            
            
            $
            82,776





See
      accompanying notes to condensed consolidated financial
      statements.


-3-


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF
      OPERATIONS**


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


**(Unaudited)**




**Three
                  months**
                **ended
                  June 30,**
              
              
              **Six
                  months**
                **ended
                  June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenue,
                  net:Content
                  and services revenue:Consumer
                  content
              
              $
              25,727
              
              
              $
              18,835
              
              
              $
              50,706
              
              
              $
              38,116Point
                  of sale rebates
              
              
              (10
              )
              
              
              (126
              )
              
              
              (29
              )
              
              
              (293
              )Services
              
              
              38
              
              
              
              26
              
              
              
              62
              
              
              
              59Total
                  content and services revenue
              
              
              25,755
              
              
              
              18,735
              
              
              
              50,739
              
              
              
              37,882Hardware
                  revenue
              
              
              87
              
              
              
              85
              
              
              
              164
              
              
              
              210Related
                  party revenue
              
              
              20
              
              
              
              257
              
              
              
              111
              
              
              
              630Other
                  revenue
              
              
              85
              
              
              
              64
              
              
              
              197
              
              
              
              134Total
                  revenue, net
              
              
              25,947
              
              
              
              19,141
              
              
              
              51,211
              
              
              
              38,856Operating
                  expenses:Cost
                  of content and services revenue:Royalties
                  and other content charges
              
              
              11,210
              
              
              
              7,720
              
              
              
              22,466
              
              
              
              15,703Discount
                  certificate rebates
              
              
              73
              
              
              
              305
              
              
              
              333
              
              
              
              603Total
                  cost of content and services revenue
              
              
              11,283
              
              
              
              8,025
              
              
              
              22,799
              
              
              
              16,306Cost
                  of hardware revenue
              
              
              121
              
              
              
              206
              
              
              
              300
              
              
              
              881Cost
                  of related party revenue
              
              
              108
              
              
              
              171
              
              
              
              237
              
              
              
              329Operations
              
              
              3,406
              
              
              
              2,854
              
              
              
              7,232
              
              
              
              5,956Technology
                  and development
              
              
              4,569
              
              
              
              4,362
              
              
              
              9,140
              
              
              
              8,056Marketing
              
              
              4,049
              
              
              
              3,573
              
              
              
              7,953
              
              
              
              7,874General
                  and administrative
              
              
              3,359
              
              
              
              2,663
              
              
              
              6,463
              
              
              
              5,864Total
                  operating expenses
              
              
              26,895
              
              
              
              21,854
              
              
              
              54,124
              
              
              
              45,266Loss
                  from operations
              
              
              (948
              )
              
              
              (2,713
              )
              
              
              (2,913
              )
              
              
              (6,410
              )Loss
                  on equity investment
              
              
              --
              
              
              
              (180
              )
              
              
              (60
              )
              
              
              (180
              )Other
                  income (expense):Interest
                  income
              
              
              857
              
              
              
              714
              
              
              
              1,702
              
              
              
              1,374Other
                  expense
              
              
              (3
              )
              
              
              --
              
              
              
              (9
              )
              
              
              --Other
                  income, net
              
              
              854
              
              
              
              714
              
              
              
              1,693
              
              
              
              1,374Loss
                  before income taxes
              
              
              (94
              )
              
              
              (2,179
              )
              
              
              (1,280
              )
              
              
              (5,216
              )Income
                  tax expense
              
              
              (31
              )
              
              
              (3
              )
              
              
              (55
              )
              
              
              (6
              )Net
                  loss
              
              $
              (125
              )
              
              $
              (2,182
              )
              
              $
              (1,335
              )
              
              $
              (5,222
              )Basic
                  and diluted net loss per common share
              
              $
              (0.01
              )
              
              $
              (0.09
              )
              
              $
              (0.06
              )
              
              $
              (0.21
              )Basic
                  and diluted weighted average common shares outstanding
              
              
              24,279,102
              
              
              
              24,501,629
              
              
              
              24,242,277
              
              
              
              24,491,745





See
      accompanying notes to condensed consolidated financial
      statements.


-4-


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS**


**(in
      thousands)**


**(Unaudited)**





**Six
                months ended****June
                30,****2007**
            
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,335
            )
            
            $
            (5,222
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            2,630
            
            
            
            2,385Amortization
                of audio production costs
            
            
            206
            
            
            
            22Non-cash
                share-based compensation charge
            
            
            3,108
            
            
            
            2,657Amortization
                of discounts on short-term investments
            
            
            (492
            )
            
            
            (449
            )Impairment
                of long lived asset
            
            
            160
            
            
            
            --Changes
                in assets and liabilities:Interest
                receivable on short-term investments
            
            
            90
            
            
            
            (67
            )Accounts
                receivable, net
            
            
            1,061
            
            
            
            409Accounts
                receivable, related parties
            
            
            (132
            )
            
            
            (13
            )Royalty
                advances
            
            
            208
            
            
            
            40Prepaid
                expenses and other current assets
            
            
            (58
            )
            
            
            (797
            )Inventory
            
            
            109
            
            
            
            (301
            )Other
                assets
            
            
            (840
            )
            
            
            (843
            )Accounts
                payable
            
            
            (737
            )
            
            
            (2,057
            )Accrued
                expenses and other current liabilities
            
            
            (195
            )
            
            
            (1,189
            )Accrued
                royalties
            
            
            (2,492
            )
            
            
            --Accrued
                compensation
            
            
            1,269
            
            
            
            425Deferred
                revenue
            
            
            1,978
            
            
            
            3,349Other
                liabilities, noncurrent
            
            
            369
            
            
            
            --Net
                cash provided by (used in) operating activities
            
            
            4,907
            
            
            
            (1,651
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (4,142
            )
            
            
            (3,973
            )Capitalized
                internally developed software costs
            
            
            (327
            )
            
            
            (254
            )Purchases
                of short-term investments
            
            
            (39,356
            )
            
            
            (35,569
            )Proceeds
                from maturity of short-term investments
            
            
            42,423
            
            
            
            41,800Net
                cash (used in) provided by investing activities
            
            
            (1,402
            )
            
            
            2,004Cash
                flows from financing activities:Proceeds
                from exercise of common stock options
            
            
            371
            
            
            
            354Proceeds
                from exercise of common stock warrants
            
            
            --
            
            
            
            750Purchase
                of treasury stock at cost
            
            
            --
            
            
            
            (2,287
            )Payment
                of taxes due on vested restricted stock
            
            
            (206
            )
            
            
            --Net
                cash provided by (used in) financing activities
            
            
            165
            
            
            
            (1,183
            )Effect
                of exchange rate changes on cash and cash equivalents
            
            
            2
            
            
            
            (12
            )Increase
                (decrease) in cash and cash equivalents
            
            
            3,672
            
            
            
            (842
            )Cash
                and cash equivalents at beginning of period
            
            
            14,925
            
            
            
            11,549Cash
                and cash equivalents at end of period
            
            $
            18,597
            
            
            $
            10,707




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**
 **(Unaudited)**


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





*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 six month periods ended June 30, 2007, the Company reported a net
      loss
      of $0.1 million and $1.3 million, respectively, and has an accumulated deficit
      of $141.9 million as of June 30, 2007. The Company's cash and cash equivalents
      balance as of June 30, 2007 is $18.6 million. In addition, the Company has
      short-term investments of $48.7 million.





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





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





*Basis
      of Presentation*





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





The
      accompanying condensed consolidated financial statements as of June 30, 2007
      and
      for the three and six month periods ended June 30, 2007 and 2006, 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 six month periods ended June
      30,
      2007 are not necessarily indicative of the results that may be expected for
      the
      year ending December 31, 2007. These condensed consolidated financial statements
      should be read in conjunction with the audited consolidated financial statements
      and notes thereto for the year ended December 31, 2006, from the Company's
      Annual Report on Form 10-K.





*Cash
      and Cash Equivalents*





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





*Short-Term
      Investments*





Investments
      purchased with a maturity of more than three months, and less than twelve
      months, are classified as short-term investments. The Company's short-term
      investments, as of June 30, 2007 and December 31, 2006, of $48.7 million and
      $51.3 million, respectively, consisted of governmental agency notes and
      mortgage-backed securities that are to be held to maturity because the Company
      has the positive intent and ability to hold these securities to maturity. Held
      to maturity securities are stated at amortized cost, adjusted for amortization
      of premiums and accretion of discounts to maturity. Dividend and interest income
      are recognized when earned. Premiums and discounts are amortized or accreted
      over the life of the related held-to-maturity security as an adjustment to
      yield
      using the effective interest method. A decline in the market value of 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 June 30, 2007 was $48.7 million, less than
      $0.1 million, and $48.7 million, respectively.





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


-6-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  *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 June 30, 2007 and December 31, 2006 was less than $0.1 million. The amount
      of the provision reflected in the accrued liabilities as of June 30, 2007 and
      December 31, 2006 was $0.1 million.





*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 substantial economic life of
      the
      title, and are recognized as cost of content revenue in the condensed
      consolidated Statement of Operations. The remaining unamortized balance is
      periodically reviewed, and adjusted if necessary, to reflect the fair
      value.





*Property
      and Equipment*




Property
      and equipment, which includes computer server and Web site equipment, office
      furniture and equipment, leasehold improvements, internally developed software,
      studio equipment, software licenses, work in progress and construction in
      progress, are stated at cost. Property and equipment under capital leases are
      stated at the present value of minimum lease payments. Depreciation is
      calculated using the straight-line method over the estimated useful lives of
      the
      respective assets and for leasehold improvements, over the shorter of the
      estimated useful life of the asset or the lease term.  For assets
      placed in service prior to January 1, 2007, the Company estimated the useful
      lives to be three years for computer server and Web site equipment, and software
      licenses, and two years for office furniture and equipment, internally developed
      software, and studio equipment. As of January 1, 2007 the Company reassessed
      the
      useful lives of its new asset purchases. For assets placed in service after
      January 1, 2007 the Company estimates the useful lives to be five years for
      computer server and Web site equipment, studio equipment, office appliances
      (included in office furniture and equipment in Note 3), and telephone equipment
      (included in office furniture and equipment in Note 3), seven years for office
      furniture (included in office furniture and equipment in Note 3), and three
      years for office computers (included in office furniture and equipment in Note
      3). There has been no change to the estimated useful lives for software licenses
      and internally developed software. Property and equipment held under capital
      leases are amortized on a straight-line basis over the estimated useful life
      of
      the asset. In June 2006, in anticipation of the Company’s move to its new
      facility, the Company reassessed the estimated useful lives of its existing
      office furniture and equipment and leasehold improvements located at the old
      corporate office. The existing office furniture and equipment was depreciated
      using the straight line method over a two year period and leasehold improvements
      were amortized on a straight-line basis over the lease term or the estimated
      useful lives of the asset, whichever was shorter. In June 2006, the Company
      changed the remaining estimated useful life of these assets to seven months
      and
      in December 2006, extended the previous estimate by an additional two months
      to
      coincide with the termination of the Company’s office lease. This change in
      estimate related to the move from the Company’s old corporate office resulted in
      higher depreciation expense of $0.1 million for the six month period ended
      June
      30, 2007. The amortization is included within depreciation expense in the
      condensed consolidated Statements of Cash Flows.


-7-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  Work
      in
      process consists of expenditures for the development of various computer
      software projects incurred subsequent to the completion of the preliminary
      project stage. In accordance with Statement of Position, or SOP, No. 98-1,*Accounting for Costs of Computer Software Developed or Obtained for Internal
      Use*(“SOP No. 98-1”), the Company has capitalized external direct costs of
      material and services developed or obtained for these projects and certain
      payroll and payroll related expenses for employees directly associated with
      these projects. Amortization for each software project begins when the computer
      software is ready for its intended use. Construction in progress primarily
      represents leasehold improvement costs related to the development and
      construction of the new corporate office space. Amortization for the office
      space leasehold improvements begins when the project is complete.





Maintenance
      and repairs are expensed as incurred.





*Impairment
      of Long-Lived Assets*





The
      Company reviews its long-lived assets for impairment when events or
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. If the sum of the expected cash flows, undiscounted and without
      interest, is less than the carrying amount of the related asset, an impairment
      loss is recognized as the amount by which the carrying amount of the asset
      exceeds its fair value, generally based on discounted cash flow. In the three
      month period ended June 30, 2007, the Company recorded a $0.2 million impairment
      charge, included in technology and development, on the accompanying condensed
      consolidated Statement of Operations, related to a previously purchased software
      license, which the Company determined would not be used. There were no
      impairment charges recorded during the three and six month periods ended June
      30, 2006.





*Royalty
      Advances and Royalty Obligations*





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





*Tenant
      Leasehold Improvement Allowance*





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





*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 June 30, 2007 and December 31, 2006, the fair values
      of
      these financial instruments approximated their carrying values due to the
      short-term nature of these instruments.


-8-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  *Foreign
      Currency Translation*





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





During
      2005 and periodically in 2006, Audible Inc. made cash fundings to Audible UK
      to
      assist with the cash flow needs of the subsidiary. All of these fundings were
      made with the intention of treating them as a long-term investment. In
      accordance with the provisions of SFAS No. 52, the foreign currency gain/loss
      at
      each reporting period resulting from the long-term inter-company account is
      recorded to accumulated other comprehensive loss, a component of stockholders’
equity. Other inter-company transactions between Audible, Inc. and Audible
      UK
      that are not considered long-term in nature, and other transactions denominated
      in a foreign currency, give rise to foreign exchange gains or losses, which
      are
      reported in other income (expense) on the condensed consolidated Statement
      of
      Operations, in accordance with SFAS No. 52.





*Reclassifications*





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





*Investments
      Accounted For Under the Equity Method of Accounting*





Prior
      to
      the additional contribution made to Audible Germany (see Note 6) by a new
      investor in July 2006, the Company’s ownership percentage of Audible Germany was
      greater than 50%. Under Emerging Issues Task Force, or EITF, Issue No. 96-16,
      *Investor’s Accounting for an Investee when the Investor has a Majority of
      the Voting Interest but the Minority Shareholder of Shareholders Have Certain
      Approval or Veto Rights* (“EITF No. 96-16”), the Company had determined that
      the minority shareholders, together have significant participatory rights,
      allowing them to participate in significant decisions of Audible Germany and
      to
      block significant decisions proposed by Audible. As a result of the significant
      participatory rights held by the minority shareholders, the Company did not
      have
      unilateral control over Audible Germany. Therefore, the Company did not
      consolidate the results of Audible Germany but rather accounted for its
      investment in Audible Germany under the equity method of accounting. Under
      the
      equity method of accounting, the Company records its pro-rata share of the
      profits, if any, and its pro-rata of the equity losses but only until such
      time
      that the Company records losses equal to the initial investment of the Company
      plus any profits previously recorded. The initial investment was reduced to
      zero
      during 2004. Subsequent to the additional fundings made during 2006, the
      Company’s ownership percentage was reduced to 44.9% and therefore the equity
      method of accounting for the investment in Audible Germany is appropriate
      regardless of the significant participatory rights of the other
      shareholders.





*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 sites, customers purchase content either through an
      AudibleListener membership plan or on an a la carte basis. When purchased on
      an
      a la carte basis, the Company recognizes revenue from the sale of individual
      content titles in the period when the content is purchased and delivered. The
      Company generally recognizes revenue from the sale of a la carte content
      subscriptions pro rata over the term of the subscription period.





In
      July
      2006, the Company entered into a global master agreement with Apple Computer,
      Inc. that replaced the principal agreements the Company entered into with Apple
      Computer, Inc. during 2002 and 2003. The Company continues to recognize
      revenue from sales made at the Apple iTunes Store in the period when the
      content is purchased and delivered. However, in accordance with the terms
      of the new agreement, the amount of revenue the Company recognizes on
      each sale is now formula-driven, derived from the Apple iTunes
      selling price and the content cost of each audio book.





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


-9-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  In
      December 2005, the Company introduced new AudibleListener monthly and annual
      membership plans, designed to provide customers more flexibility in using their
      audio credits. Depending upon the AudibleListener membership plan, customers
      receive and can “bank” or delay using a maximum number of audio credits,
      depending on the membership plan. The banking feature results in audio credits
      being used (delivered) over different periods for different customers. This
      may
      result in slower revenue growth or less revenue than the Company experienced
      in
      prior periods because the customer has a longer period of time to use his/her
      audio credits. In addition, some of the new AudibleListener plans include new
      membership benefits, ranging from a complimentary audio newspaper delivered
      each
      weekday to everyday discounts of 30% on a la carte purchases. The audio
      newspaper and 30% discount benefits are “serial” elements that are delivered
      continuously over the membership period, whereas the content selections
      underlying the audio credits are discrete elements that are delivered at
      different times based on individual customer behavior. As a result of the
      characteristics of the new AudibleListener memberships, they are considered
      revenue arrangements with multiple deliverables; however under EITF No.
      00-21,*Revenue Arrangements with Multiple Deliverables* (“EITF No.
      00-21”)*,* because the deliverables are not eligible for separation, they
      are accounted for as a single unit of accounting. As a result, revenue is
      recognized for these new AudibleListener membership plans using the lesser
      of
      straight-line or proportional performance (based on content delivery) over
      the
      maximum membership period.





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





Point
      of Sale Rebates and Discount Certificate Rebates





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





Services
      Revenue





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 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**
 **(Unaudited)**
  Related
      Party Revenue





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





Other
      Revenue





Other
      revenue for the three and six month periods ended June 30, 2007 and 2006
      primarily included revenue for fees earned under a product development and
      distribution agreement, which is being recognized on a straight-line basis
      over
      a 58 month period, to coincide with the end of the agreement.





Customer
      Concessions





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





*Cost
      of Content and Services Revenue*





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





*Shipping
      and Handling Costs*





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





*Advertising
      Expenses*





The
      Company expenses the costs of advertising and promoting its products and
      services as incurred. These costs are included in marketing expense in the
      accompanying condensed consolidated Statements of Operations and totaled $1.5
      million and $1.3 million for the three months ended June 30, 2007 and 2006,
      respectively, and $3.0 million and $3.1 million for the six months ended June
      30, 2007 and 2006, respectively.





*Legal
      Fees*





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


-11-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  *Use
      of Estimates*





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





*Income
      Taxes*





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





*Accounting
      for Uncertainty in Income Taxes*





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





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





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





*Basic
      and Diluted Net Loss Per Share*





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





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


-12-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  For
      the
      three and six month periods ended June 30, 2007 and 2006, all potential common
      shares have been excluded from the diluted calculation because the Company
      was
      in a net loss position, and their inclusion would have been
      anti-dilutive.




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





**Three
                months ended June 30,**
            
            
            **Six
                months ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Stock
                options
            
            
            2,036,724
            
            
            
            2,412,730
            
            
            
            2,036,724
            
            
            
            2,412,730Warrants
            
            
            417,332
            
            
            
            716,723
            
            
            
            417,332
            
            
            
            716,723Restricted
                Stock
            
            
            1,026,540
            
            
            
            882,157
            
            
            
            1,026,540
            
            
            
            882,157Total
            
            
            3,480,596
            
            
            
            4,011,610
            
            
            
            3,480,596
            
            
            
            4,011,610





*Share-Based
      Compensation*





In
      accordance with SFAS No. 123 (revised), *Share-Based Paymen*t (“SFAS No.
      123R”), the Company measures compensation cost for stock awards at fair value
      and recognizes compensation over the requisite service period for awards
      expected to vest. Estimating the portion of stock awards that will ultimately
      vest requires judgment, and to the extent actual results or updated estimates
      differ from the Company’s current estimates, such amounts are recorded in the
      period estimates are revised. The Company considers several factors when
      estimating expected forfeitures, including types of awards, employee class,
      and
      historical experience. The Company also considers several factors when
      estimating expected volatility and expected life of the option.





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





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





**June
                30,**
              **2007**
            
            
            **December
                31, 2006**Computer
                server and Web site equipment
            
            $
            7,960
            
            
            $
            7,687Software
                licenses
            
            
            3,915
            
            
            
            4,235Internally
                developed software
            
            
            3,031
            
            
            
            2,779Leasehold
                improvements
            
            
            2,728
            
            
            
            1,011Office
                furniture and equipment
            
            
            2,333
            
            
            
            1,720Studio
                equipment
            
            
            671
            
            
            
            667Work
                in process
            
            
            401
            
            
            
            326Construction
                in progress
            
            
            944
            
            
            
            443Total
                property and equipment
            
            
            21,983
            
            
            
            18,868Less:
                accumulated depreciation and amortization
            
            
            (11,446
            )
            
            
            (10,719
            )Total
                property and equipment, net
            
            $
            10,537
            
            
            $
            8,149





Depreciation
      and amortization expense on property and equipment totaled $1.3 million during
      the three months ended June 30, 2007 and 2006. Depreciation and amortization
      expense on property and equipment totaled $2.6 million and $2.4 million during
      the six months ended June 30, 2007 and 2006, respectively.





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





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




-13-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **(4)** **Accrued
      Expenses and Other Current Liabilities**





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





**June
                30,**
              **2007**
            
            
            **December
                31, 2006**Value
                added tax
            
            $
            1,041
            
            
            $
            708Liabilities
                - related parties
            
            
            808
            
            
            
            400Construction
                in progress
            
            
            713
            
            
            
            --Professional
                fees
            
            
            637
            
            
            
            958Revenue
                sharing and bounty payments
            
            
            494
            
            
            
            630Consulting
            
            
            492
            
            
            
            232Royalty
                obligations
            
            
            272
            
            
            
            242Software
                license fees
            
            
            227
            
            
            
            215Retail
                rebates and discounts
            
            
            144
            
            
            
            410Marketing
            
            
            130
            
            
            
            241Other
                accrued expenses and other current liabilities
            
            
            433
            
            
            
            642Total
                accrued expenses
            
            $
            5,391
            
            
            $
            4,678





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





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




**Common
                Stock****Shares**
            
            
            **Par
                value**
            
            
            **Additional
                paid-in capital**
            
            
            **Accumulated
                other comprehensive loss**
            
            
            **Accumulated
                deficit**
            
            
            **Total
                stockholders' equity**Balance
                at December 31, 2006
            
            
            24,119,768
            
            
            $
            241
            
            
            $
            190,799
            
            
            $
            (36
            )
            
            $
            (140,538
            )
            
            $
            50,466Issuance
                of restricted stock
            
            
            49,677
            
            
            
            1
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            --Exercise
                of common stock options
            
            
            117,702
            
            
            
            1
            
            
            
            370
            
            
            
            --
            
            
            
            --
            
            
            
            371Share-based
                compensation expense
            
            
            --
            
            
            
            --
            
            
            
            3,108
            
            
            
            --
            
            
            
            --
            
            
            
            3,108Payment
                of taxes due on vested restricted stock
            
            
            --
            
            
            
            --
            
            
            
            (206
            )
            
            
            --
            
            
            
            --
            
            
            
            (206
            )Foreign
                currency translation adjustment
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (12
            )
            
            
            --
            
            
            
            (12
            )Net
                loss
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            (1,335
            )
            
            
            (1,335
            )Balance
                at June 30, 2007
            
            
            24,287,147
            
            
            $
            243
            
            
            $
            194,070
            
            
            $
            (48
            )
            
            $
            (141,873
            )
            
            $
            52,392





-14-
 **AUDIBLE,
          INC. AND SUBSIDIARY** **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**





As
      of
      June 30, 2007 and December 31, 2006 the Company had issued 24,287,147 and
      24,119,768 respectively, shares of common stock. As of June 30, 2007 and
      December 31, 2006 the Company had 3,480,596 and 3,942,674, respectively, shares
      of common stock reserved for common stock warrants, options and restricted
      stock.





*Share-Based
      Compensation*





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





The
      number of authorized common shares available for issuance under the Plan is
      5,700,000 shares. As of June 30, 2007 and December 31, 2006, options to purchase
      2,036,724 and 2,237,731, respectively, shares of common stock were outstanding.
      As of June 30, 2007 and December 31, 2006, 1,026,540 and 979,985, respectively,
      of non-vested restricted share awards had been granted, net of forfeitures
      and
      net of shares vested.





Effective
      January 1, 2006, the Company adopted SFAS No. 123R utilizing the modified
      prospective approach. Total compensation expense for share-based payment
      arrangements recognized for the three months ended June 30, 2007 and 2006 was
      $1.5 million and $1.6 million, respectively, and $3.1 million and $2.7 million
      for the six months ended June 30, 2007 and 2006, respectively.





*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**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Dividend
                yield
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --Expected
                volatility
            
            
            68.74
            %
            
            
            76.56
            %
            
            
            68.74
            %
            
            
            76.56
            %Risk-free
                interest rate
            
            
            4.57
            %
            
            
            4.50
            %
            
            
            4.57
            %
            
            
            4.50
            %Expected
                life of option (years)
            
            
            4.58
            
            
            
            4.63
            
            
            
            4.58
            
            
            
            4.63





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





During
      the three months ended June 30, 2007 and 2006, the Company did not grant any
      awards to receive stock options to employees under the Plan. During the six
      months ended June 30, 2007 and 2006, the Company granted awards to receive
      70,000 and 13,100 stock options, respectively, to employees under the Plan.
      During the three months ended June 30, 2007 and 2006, 2,302 and 27,986,
      respectively, options granted were forfeited due to employee
      terminations.  During the six months ended June 30, 2007 and 2006,
      4,720 and 80,367, respectively, options granted were forfeited due to employee
      terminations.


-15-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  *Restricted
      Stock*





During
      the three months ended June 30, 2007 and 2006, the Company granted awards to
      receive 20,400 and 649,000 restricted stock units, respectively, to employees
      under the Plan. During the six months ended June 30, 2007 and 2006, the Company
      granted awards to receive 142,200 and 661,400 restricted stock units,
      respectively, to employees under the Plan. The restricted shares either
      cliff-vest or vest periodically between three months and forty-eight months
      after the grant date. During the three months ended June 30, 2007 and 2006,
      29,555 and 37,300, respectively, units of restricted stock were forfeited due
      to
      employee terminations. During the six months ended June 30, 2007 and 2006,
      37,355 and 40,800, respectively, units of restricted stock were forfeited due
      to
      employee terminations. Actual shares under these awards are not issued until
      vesting is complete. Under the terms of the restricted stock awards, unless
      different provisions are noted on the restricted stock award, the Company is
      required to issue to the recipient the number of whole shares of common stock
      that equals the number of vested whole restricted stock shares following the
      date on which the restricted stock share becomes vested.





In
      accordance with the terms of the restricted stock unit award agreement, the
      Company has the right to deduct from any compensation due the employee, the
      amount of any federal, state or local taxes required by law to be withheld
      as a
      result of vesting of the restricted stock units; provided, however, that the
      value of the shares of common stock withheld may not exceed the statutory
      minimum withholding amount required by law.  In lieu of such deduction, the
      Company may require the employee to make a cash payment to the Company equal
      to
      the amount required to be withheld.  During the three months ended June 30,
      2007, 19,713 shares were withheld from employees for the payment for taxes
      due,
      at the employee’s election.





Total
      common stock available for future stock option and restricted stock grants
      is
      approximately 893,000 shares.





*Common
      Stock Repurchase Program and Treasury Stock*





In
      February 2006, the Company's Board of Directors authorized a new common stock
      repurchase program, pursuant to which the Company may from time to time
      repurchase (through open market repurchases at prevailing market prices), up
      to
      an aggregate of $25.0 million of the Company's outstanding common stock. During
      the six months ended June 30, 2007 no shares were repurchased. During the six
      months ended June 30, 2006, 236,500 shares were repurchased, at an average
      price
      of $9.67. The Company subsequently legally retired the treasury stock. As of
      June 30, 2007 and December 31, 2006, the Company held no shares of common stock
      as treasury stock.





*Comprehensive
      Loss*





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





**Three
                months ended June 30,**
            
            
            **Six
                months ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                loss
            
            $
            (125
            )
            
            $
            (2,182
            )
            
            $
            (1,335
            )
            
            $
            (5,222
            )Other
                comprehensive loss:Foreign
                currency translation adjustment
            
            
            (10
            )
            
            
            (26
            )
            
            
            (12
            )
            
            
            (31
            )Comprehensive
                loss
            
            $
            (135
            )
            
            $
            (2,208
            )
            
            $
            (1,347
            )
            
            $
            (5,253
            )


-16-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **(6)
      Audible Germany Agreement**





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




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





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





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





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





Prior
      to
      the additional contribution made in July 2006, the Company’s ownership
      percentage was greater than 50%. Under EITF No. 96-16,**the Company
      had determined that the minority shareholders, together, have significant
      participatory rights, allowing them to participate in significant decisions
      of
      Audible Germany and to block significant decisions proposed by Audible. As
      a
      result of the significant participatory rights held by the minority
      shareholders, the Company did not have unilateral control over Audible Germany.
      Therefore, Audible did not consolidate the results of Audible Germany but rather
      accounted for its investment in Audible Germany under the equity method of
      accounting. Under the equity method of accounting, the Company records its
      shares of the profits, if any, and its share of the equity losses but only
      until
      such time that the Company records losses equal to the initial investment of
      the
      Company plus any profits previously recorded. The initial investment was reduced
      to zero during 2004. Subsequent to the additional fundings made in July 2006,
      October 2006, December 2006, and March 2007 the Company’s ownership percentage
      was reduced to 45.3% and therefore the equity method of accounting for the
      investment in Audible Germany continues to apply regardless of the significant
      participatory rights of the other investors.


-17-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  In
      connection with the Joint Venture, on August 30, 2004, the Company entered
      into
      a license and services agreement with Audible Germany (the “License”). Under the
      License, Audible Germany launched a German language spoken word audio service.
      The terms provide for the Company to provide intellectual property and
      substantially all of the technological infrastructure for the operation of
      the
      service. In return, Audible Germany was required to pay Audible $0.9 million
      evenly over a period of 30 months, beginning in September 2004. Every 60 days
      during this agreement, the parties met to review and accept the services. The
      monthly payments were subject to refund if Audible Germany did not accept the
      services, subject to reasonable cure. Under the License, Audible recognized
      $0.1
      million of revenue per quarter once Audible Germany agreed that the services
      delivered were satisfactory and collection of the amount was reasonably assured.
      Also under the License, Audible Germany will pay the Company royalties ranging
      from 0.5% to 3% of revenue up to an annual royalty cap of the U.S. dollar
      equivalent of €1.5 million, subject to Audible Germany achieving certain
      operating margins. No royalties have been received by the Company under the
      License.





During
      the three and six month periods ended June 30, 2007 the Company recognized
      none
      and $0.1 million, respectively, in related party revenue under the license
      agreement as the related services were delivered and accepted. During the three
      and six month periods ended June 30, 2006 the Company recognized $0.1 million
      and $0.2 million, respectively, in related party revenue. The full amount of
      revenues recognized during the six months ended June 30, 2007 were not collected
      in cash, but rather were contributed as the Company’s equity investment in
      Audible Germany. As of June 30, 2007, the Company recorded its share of the
      equity loss up to the amount of its investment of $0.1 million, on the
      accompanying consolidated Statements of Operations. Revenues under the License
      have been fully recognized as of June 30, 2007.





In
      addition, the Company recognizes billings for certain consulting services and
      related incremental reimbursable costs incurred in connection with the License
      in accordance with EITF 01-14. These amounts are included in related party
      revenue on the condensed consolidated Statements of Operations. During the
      three
      and six month periods ended June 30, 2007 there were no amounts recognized
      for
      these costs, because this revenue is being recognized on the cash basis due
      to
      uncertainty of collection, and no cash was received. During the three and six
      month periods ended June 30, 2006, none and $0.1 million, respectively, was
      recognized for these costs. The Company accrues for amounts to be paid to
      Audible Germany related to net profit earned by Audible, Inc. at the Apple
      Germany iTunes music store. These amounts are included in accrued expenses
      and
      other current liabilities in the condensed consolidated Balance Sheets as of
      June 30, 2007 and December 31, 2006, and marketing expense in the condensed
      consolidated Statement of Operations. As of June 30, 2007, the Company had
      an
      accounts receivable balance of $0.1 million related to Audible Germany,
      primarily related to accrued royalties and accrued revenue share expenses the
      Company pays on Audible Germany’s behalf.





**(7)
      France Loisirs Agreement**





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





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





FIN
      No.
      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 No. 46R, as a result of the Bertelsmann affiliation and the number of seats
      that Bertelsmann holds on the Audible Board of Directors. Under FIN No. 46R,
      the
      entity within the related party group that is most closely associated with
      the
      variable interest entity is the primary beneficiary.


-18-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  Based
      upon analysis, the Company determined that France Loisirs is more closely
      associated with Audio Direct, primarily because France Loisirs is required
      to
      fund the operations of Audio Direct, including the $1.0 million payment made
      to
      Audible. France Loisirs is therefore considered to be the primary beneficiary
      of
      Audio Direct. As a result, the Company does not consolidate the results of
      Audio
      Direct but rather accounts for its variable interest in Audio Direct under
      the
      cost method of accounting.





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





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





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





**(8)
      Apple Agreement**





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


-19-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **(9)
      Product Development, Licensing, Marketing and Distribution
      Agreement**





On
      May
      16, 2005, the Company entered into a five-year agreement with a new
      content provider to develop, license, market and distribute audio
      content. The Company is paid an exclusivity fee, a product development fee
      and production fees for audio content produced under the
      agreement. In addition, the Company will make royalty and revenue
      sharing payments to the publisher based on sales of the products produced.
      As of June 30, 2007, the Company billed the publisher $1.6 million, of which
      $1.6 million has been received as of June 30, 2007, in connection with this
      agreement. The fees associated with this agreement are being amortized over
      a 58
      month period beginning in the month the Company commenced production of audio
      through the expiration of the agreement. During the three and six month periods
      ended June 30, 2007, $0.1 million and $0.2 million was recorded as other revenue
      in connection with this agreement. During the three and six month periods ended
      June 30, 2006 $0.1 million was recorded as other revenue for both periods in
      connection with this agreement. As of June 30, 2007, the Company recorded $0.3
      million and $0.6 million, as deferred revenue current and non-current,
      respectively, on the accompanying condensed consolidated Balance Sheet, relating
      to this agreement, representing cash received in advance of being recognized
      as
      revenue. As of December 31, 2006, the Company recorded $0.3 million and $0.5
      million, as deferred revenue current and non-current, respectively, on
      the accompanying consolidated Balance Sheet, relating to this
      agreement.





**(10)
      Commitments and Contingencies**





*Lease
      Obligations*





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





Rent
      expense of $0.3 million and $0.2 million was recorded under operating leases
      for
      the three months ended June 30, 2007 and 2006, respectively, and $0.7 million
      and $0.4 million for the six months ended June 30, 2007 and 2006, respectively.
      Access to the space for the new corporate office was provided to the Company
      at
      the time the lease was executed in September 2006, so it could design and
      develop the office as needed in order to move in timely. Based on the Company’s
      evaluation, this period was included in calculating the straight-line rent
      expense.





*Service
      Agreements*





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





*Royalty
      Obligations*





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





*Purchase
      Commitments*





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





-20-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


**Summary
      of Cash Commitments and Obligations**





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





**Year**
            
            **Lease
                Obligations**
              **(1)**
            
            
            **Royalty
                Obligations**
              **(2)**
            
            
            **Service
                Agreements**
            
            
            **Purchase
                Commitments**
            
            
            **Total**2007
            
            $
            392
            
            
            $
            438
            
            
            $
            1,040
            
            
            $
            260
            
            
            $
            2,1302008
            
            
            1,008
            
            
            
            76
            
            
            
            1,216
            
            
            
            --
            
            
            
            2,3002009
            
            
            1,066
            
            
            
            --
            
            
            
            51
            
            
            
            --
            
            
            
            1,1172010
            
            
            1,141
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,1412011
            
            
            1,215
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,2152012
                & Thereafter
            
            
            3,255
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3,255Total
            
            $
            8,077
            
            
            $
            514
            
            
            $
            2,307
            
            
            $
            260
            
            
            $
            11,158





(1)
      Of
      the $8.1 million in total operating leases, $8.0 million relates to the new
      office lease agreement signed in September 2006, of which $0.6 million is
      recorded as deferred rent in other liabilities, noncurrent in the accompanying
      condensed consolidated Balance Sheet as of June 30, 2007.





(2)
      Of
      the $0.5 million in total royalty obligations, $0.3 million is recorded in
      accrued expenses and $0.1 million is recorded as royalty obligations,
      non-current, in the accompanying condensed consolidated Balance Sheet as of
      June
      30, 2007. The remaining obligation of $0.1 million relates to content that
      had
      not yet been delivered as of June 30, 2007.





**Contingencies**





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





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





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





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


-21-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. The plaintiffs have continued to litigate against the underwriter
      defendants. The district court directed that the litigation proceed within
      a
      number of “focus cases” rather than in all of the 310 cases that have been
      consolidated. The Company’s case is not one of these focus cases. On October 13,
      2004, the district court certified the focus cases as class actions. The
      underwriter defendants appealed the ruling, and on December 5, 2006, the Court
      of Appeals for the Second Circuit reversed the district court’s class
      certification decision. On April 6, 2007, the Second Circuit denied plaintiffs’
petition for a rehearing. In light of the Second Circuit opinion, the district
      court has been informed that the settlement cannot be approved because the
      defined settlement class, like the litigation class, cannot be certified. On
      June 25, 2007, the district court entered into an order terminating the
      settlement agreement.





There
      can
      be no assurance that a settlement that complies with the Second Circuit’s
      mandate can be renegotiated.





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





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





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





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





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


-22-
 **AUDIBLE,
            INC. AND SUBSIDIARY** **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  In
      March
      2007, the Court granted the defendants’ motion to dismiss the plaintiffs’
consolidated amended complaint but granted the plaintiffs leave to amend. The
      plaintiffs have filed a motion for reconsideration, which the defendants have
      opposed. The Court has yet to rule on the motion.





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.





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





**Cash
      Paid for Interest and Taxes**





No
      interest was paid during the six months ended June 30, 2007 and
      2006.





No
      income
      taxes were paid in the six months ended June 30, 2007 and 2006.





The
      Company recorded an accrual for property and equipment (CIP) of $0.7 million
      and
      none during the six months ended June 30, 2007 and 2006,
      respectively.





**(12)
      Customer Concentration**





For
      the
      three months ended June 30, 2007 and 2006, Apple Computer accounted for 28.7%
      and 21.5% of total revenue, respectively.





For
      the
      six months ended June 30, 2007 and 2006, Apple Computer accounted for 30.0%
      and
      22.0% of total revenue, respectively.





As
      of
      June 30, 2007 and December 31, 2006, Apple Computer accounted for 73.8% and
      64.1%, 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 (in thousands):





**Revenues**
            
            **United
                States**
            
            
            **United
                Kingdom**
            
            
            **Consolidated**Three
                months ended June 30, 2007
            
            $
            24,563
            
            
            $
            1,384
            
            
            $
            25,947Three
                months ended June 30, 2006
            
            $
            18,447
            
            
            $
            694
            
            
            $
            19,141Six
                months ended June 30, 2007
            
            $
            48,553
            
            
            $
            2,658
            
            
            $
            51,211Six
                months ended June 30, 2006
            
            $
            37,596
            
            
            $
            1,260
            
            
            $
            38,856**June
                30, 2007**Long-lived
                assets
            
            $
            11,913
            
            
            $
            40
            
            
            $
            11,953**June
                30, 2006**Long-lived
                assets
            
            $
            10,887
            
            
            $
            49
            
            
            $
            10,936





**(14)
      Subsequent Events**





Audible
      Germany





In
      July
      2007, a second amendment was signed and executed to the original Joint
      Venture agreement, which stipulates the additional financing commitments for
      the
      Company, Holtzbrinck, Random House, and a new investor, CSW. CSW, incorporated
      in Germany, is an entity owned 100% by the managing director of Audible Germany.
      Additional contributions are to be made by these investors as
      follows:  Audible, Inc., €0.7 million, Holtzbrinck, €0.5 million,
      Random House, €0.3 million, and CSW, €0.2 million. In addition, each investor is
      to contribute statutory capital contributions of less than €0.1 million each. As
      of the filing date of this report, the Company had not made any additional
      contributions. Once all these contributions are made, the investor’s ownership
      percentage will further change to 45.4% for the Company, 29.7% for Holtzbrinck,
      19.5% for Random House, 3.4% for Luebbe, and 2.0% for CSW.


-23-


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


(dollars
      in thousands except per share data)





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





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




**Overview**




**Our
      Business**





Our
      goal
      is to be the preeminent supplier of spoken-word digital audio on the Internet.
      At our Web sites, our customers can select, purchase and download spoken audio
      of their choice from more than 138,000 hours from more than 470 content partners
      that include leading audiobook publishers, broadcasters, entertainers, magazine
      and newspaper publishers, and business information providers. Our
      AudibleListener membership plans provide our customers a wide variety of monthly
      and annual membership options, depending upon their listening preferences.
      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**





During
      the six months ended June 30, 2007, we generated net revenue of $51.2 million
      and incurred a net loss of $1.3 million. During this period, we acquired
      approximately 128,000 new AudibleListener members, a decrease of 11.1%, from
      approximately 144,000 acquired in the same period in 2006. Total AudibleListener
      members are approximately 431,000 as of June 30, 2007, compared to approximately
      309,000 as of June 30, 2006, an increase of 39.5%, and 415,000 at March 31,
      2007, an increase of 3.9%.





Churn,
      a
      measure of AudibleListener member cancellation, decreased slightly during the
      three month period ended June 30, 2007 from the three months ended March 31,
      2007. This is due primarily to an increase in the number of members we had
      relative to cancellations as gross cancellations were relatively flat during
      the
      quarter due to improved customer retention efforts. On a quarterly basis, we
      calculate monthly churn as the number of member cancellations in the period
      divided by the sum of AudibleListener members at the beginning of the period
      plus gross member additions, divided by three months.





During
      2006 and continuing in 2007, our operations in Audible UK significantly
      accelerated due to our increased marketing initiatives and customer acquisition
      programs. We generated $2.7 million in revenue in the UK during the six months
      ended June 30, 2007, compared to $1.3 million for the six months ended June
      30,
      2006. We believe that revenue from Audible UK will continue to grow provided
      we
      are able to obtain additional content that is appealing to more
      customers.





Our
      new
      AudibleListener membership plans, launched in December 2005, provide an array
      of
      new member benefits, ranging from greater flexibility in using AudibleListener
      membership credits, to everyday 30% discounts on a la carte purchases, and
      a
      weekday audio edition of *The New York Times* or *The Wall Street
      Journal* subscription. The increase in the number of AudibleListener members
      and the flexibility in the requirement to use credits led to an increase of
      $1.9
      million in deferred revenue from December 31, 2006. Revenues in 2007 are
      expected to increase if we are able to increase the rate of consumption of
      our
      customers.





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





-24-




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





**Recent
      Developments**





Audible
      Germany





In
      July
      2007, a second amendment was signed and executed to the original Joint
      Venture agreement, which stipulates the additional financing commitments for
      us,
      Holtzbrinck, Random House, and a new investor, CSW. CSW, incorporated in
      Germany, is an entity owned 100% by the managing director of Audible Germany.
      Additional contributions are to be made by these investors as follows: Audible,
      Inc, €0.7 million, Holtzbrinck, €0.5 million, Random House, €0.3 million, and
      CSW, €0.2 million. In addition, each investor is to contribute statutory capital
      contributions of less than €0.1 million each. As of the filing date of this
      report, we have not made any additional contributions. Once all of these
      contributions are made, each investor’s ownership percentage will further change
      to 45.4% for us, 29.7% for Holtzbrinck, 19.5% for Random House, 3.4% for Luebbe,
      and 2.0% for CSW.





**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 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 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.





-25-




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





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





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





*Provision
      for Refunds and Chargebacks*





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





*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.





-26-




***Royalty
      Expense***





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





***Internal-Use
      Software***





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





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





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





-27-


**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 six month periods ended June
      30,
      2007 and 2006:





**Three
                months ended June 30,**
            
            
            **Six
                months ended**
              **June
                30,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            
            99.1
            %
            
            
            98.5
            %
            
            
            99.0
            %
            
            
            98.1
            %Point
                of sale rebates
            
            
            --
            
            
            
            (0.7
            )
            
            
            0.0
            
            
            
            (0.8
            )Services
            
            
            0.2
            
            
            
            0.1
            
            
            
            0.1
            
            
            
            0.2Total
                content and services revenue
            
            
            99.3
            
            
            
            97.9
            
            
            
            99.1
            
            
            
            97.5Hardware
                revenue
            
            
            0.3
            
            
            
            0.4
            
            
            
            0.3
            
            
            
            0.6Related
                party revenue
            
            
            0.1
            
            
            
            1.4
            
            
            
            0.2
            
            
            
            1.6Other
                revenue
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.4
            
            
            
            0.3Total
                revenue, net
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            43.2
            
            
            
            40.3
            
            
            
            43.9
            
            
            
            40.4Discount
                certificate rebates
            
            
            0.3
            
            
            
            1.6
            
            
            
            0.6
            
            
            
            1.6Total
                cost of content and services revenue
            
            
            43.5
            
            
            
            41.9
            
            
            
            44.5
            
            
            
            42.0Cost
                of hardware revenue
            
            
            0.5
            
            
            
            1.1
            
            
            
            0.6
            
            
            
            2.3Cost
                of related party revenue
            
            
            0.4
            
            
            
            0.9
            
            
            
            0.5
            
            
            
            0.8Operations
            
            
            13.1
            
            
            
            14.9
            
            
            
            14.1
            
            
            
            15.3Technology
                and development
            
            
            17.6
            
            
            
            22.8
            
            
            
            17.9
            
            
            
            20.7Marketing
            
            
            15.6
            
            
            
            18.7
            
            
            
            15.5
            
            
            
            20.3General
                and administrative
            
            
            12.9
            
            
            
            13.9
            
            
            
            12.6
            
            
            
            15.1Total
                operating expenses
            
            
            103.6
            
            
            
            114.2
            
            
            
            105.7
            
            
            
            116.5Loss
                from operations
            
            
            (3.6
            )
            
            
            (14.2
            )
            
            
            (5.7
            )
            
            
            (16.5
            )Loss
                on equity investment
            
            
            --
            
            
            
            (0.9
            )
            
            
            (0.1
            )
            
            
            (0.5
            )Other
                income, net
            
            
            3.3
            
            
            
            3.7
            
            
            
            3.3
            
            
            
            3.6Loss
                before income taxes
            
            
            (0.3
            )
            
            
            (11.4
            )
            
            
            (2.5
            )
            
            
            (13.4
            )Income
                tax expense
            
            
            (0.1
            )
            
            
            (0.0
            )
            
            
            (0.1
            )
            
            
            (0.0
            )Net
                loss
            
            
            (0.4
            )%
            
            
            (11.4
            )%
            
            
            (2.6
            )
            
            
            (13.4
            )%





-28-


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




**Three
                months ended**
              **June
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Content
                and services revenue (in thousands):**$
            25,755
            
            
            $
            18,735
            
            
            $
            7,020
            
            
            
            37.5
            %





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





Content
      and services revenue grew during the three months ended June 30, 2007 compared
      to the three month period ended June 30, 2006 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 total AudibleListener membership
      count
      grew 39.5% from approximately 309,000 at June 30, 2006, to approximately 431,000
      at June 30, 2007. We recognized in revenue $7.5 million and $4.1 million from
      sales of Audible content at the Apple iTunes Store during the three months
      ended
      June 30, 2007 and 2006, respectively. As we continue to acquire new
      AudibleListener members who may choose to roll over their audio credits, our
      ability to recognize revenue will depend upon audio credit usage patterns of
      individual members. This will result in an increase in deferred revenue and
      may
      result in a decrease or slower growth in our revenue as compared to prior
      periods. Our customer count and AudibleListener membership count excludes
      customers that purchase Audible content directly from the Apple iTunes Store.
      We
      believe continuing consumer adoption of digital downloading, increased consumer
      awareness of the Audible service, customer satisfaction and improved marketing
      will continue to drive AudibleListener membership growth and growth in sales
      at
      the Apple iTunes Store.





**Three
                months ended**
              **June
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Hardware
                revenue (in thousands):**$
            87
            
            
            $
            85
            
            
            $
            2
            
            
            
            2.4
            %





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





**Three
                months ended**
              **June
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Related
                party revenue (in thousands):**$
            20
            
            
            $
            257
            
            
            $
            (237
            )
            
            
            (92.2
            )%





*Related
      party revenue* consists of revenue recognized in connection with our
      agreements with France Loisirs and Audible Germany.





Related
      party revenue during the three months ended June 30, 2007 consisted of billings
      to France Loisirs for certain consulting services and reimbursement of related
      incremental costs.  Related party revenue during the three months
      ended June 30, 2006 included $0.1 million in fees earned from our agreement
      with
      France Loisirs, representing the straight-line recognition of $1.0 million
      in
      fees we were entitled to receive pursuant to the arrangement, which was being
      recognized over the initial 24-month term of the original agreement through
      September 14, 2006, less than $0.1 million in billings to France Loisirs for
      certain consulting services and reimbursement of related incremental costs,
      as
      well as $0.1 million in fees earned under our agreement with Audible
      Germany.  As the fees related to the original agreements with both
      France Loisirs and Audible Germany have been fully recognized, we do not expect
      significant related party revenue in the future.




-29-




**Three
                  months ended**
                **June
                  30,**
              
              
              
              **$**
              
              **%****2007**
              
              
              **2006**
              
              
              **Change**
              
              **Change****Other
                    revenue (in thousands):**$
              85
              
              
              $
              64
              
              
              $
              21
              
              
              
              32.8
              %
 *Other
        revenue* for the three months ended June 30, 2007 and 2006 primarily
        included for each period $0.1 million of revenue earned under a product
        development agreement with a publishing partner, which commenced in May 2005.
        The fees are being amortized on a straight line basis as fees are billed
        over a
        58-month period beginning in the month we commenced production of audio (July
        2005) through the expiration of the agreement. As of June 30, 2007, we billed
        the publisher $1.6 million, of which $1.6 million has been received in
        connection with this agreement.





**Three
                months ended June 30,**
            
            
            **As
                a Percentage of Total Content and Services
                Revenue****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Cost
                of Content and Services (in thousands):**Royalties
                and other content charges
            
            $
            11,210
            
            
            $
            7,720
            
            
            
            43.5
            %
            
            
            41.2
            %Discount
                certificate rebates
            
            
            73
            
            
            
            305
            
            
            
            0.3
            %
            
            
            1.6
            %Total
                cost of content and services revenue
            
            $
            11,283
            
            
            $
            8,025
            
            
            
            43.8
            %
            
            
            42.8
            %





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





Royalties
      and other content charges as a percentage of total content and services revenue
      increased from the three months ended June 30, 2006 to June 30, 2007 from 41.2%
      to 43.5%. This increase was primarily due to the increasing percentage of
      revenue from sales at the Apple iTunes Store, which yields a higher royalty
      cost
      as a percentage of revenue, the impact of higher royalty rates from certain
      publishers, the impact of our Gold and Platinum membership plans, in which
      royalties are incurred on revenue that may be deferred if the straight-line
      revenue is less than the proportional performance revenue, the effect of the
      new
      Gold monthly discounted membership plan offered in the first half of 2007,
      and
      the impact of the 30% a la carte discount offered under our basic membership
      plan for titles that have a fixed royalty.





**Three
                months ended**
              **June
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Cost
                of Hardware Revenue (in thousands):**$
            121
            
            
            $
            206
            
            
            $
            (85
            )
            
            
            (41.3
            )%





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





The
      cost
      of hardware revenue decreased in the 2007 period primarily due to a reduction
      in
      the unit cost of digital audio players given away or sold at a discount to
      customers.





**Three
                months ended**
              **June
                30,**
            
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Cost
                of Related Party Revenue (in thousands):**$
            108
            
            
            $
            171
            
            
            $
            (63
            )
            
            
            (36.8
            )%





*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.  These costs primarily consist of payroll
      costs related to services performed for France Loisirs and Audible Germany
      by
      certain employees of our technology, development, and audio
      departments.





Cost
      of
      related party revenue for the three months ended June 30, 2007 compared to
      the
      three months ended June 30, 2006 has decreased primarily due to a decrease
      in
      services performed for Audible Germany.





-30-





**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Operations
                (in thousands):**$
            3,406
            
            
            $
            2,854
            
            
            $
            552
            
            
            
            13.2
            %
            
            
            15.2
            %





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





Operations
      expense increased in the three months ended June 30, 2007 compared to the three
      months ended June 30, 2006 primarily due to $0.5 million in higher personnel
      costs and $0.1 million in higher credit card processing fees. This was partially
      offset by a reduction in share-based compensation costs of $0.1 million. These
      increases were primarily related to the increased scale of our business
      resulting in a greater number of customers and transactions.




**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Technology
                and Development (in thousands):**$
            4,569
            
            
            $
            4,362
            
            
            $
            207
            
            
            
            17.7
            %
            
            
            23.3
            %





*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 months ended June
      30, 2007 compared to the three months ended June 30, 2006 was primarily due
      to a
      $0.2 million impairment charge related to a third-party software tool that
      we
      determined was not going to be used as originally intended.





**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Marketing
                (in thousands):**$
            4,049
            
            
            $
            3,573
            
            
            $
            476
            
            
            
            15.7
            %
            
            
            19.1
            %





*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 increased in the three months ended June 30, 2007 compared to the
      three
      months ended June 30, 2006 primarily due to $0.2 million in higher outside
      services expense and $0.2 million in higher advertising and promotional
      expenses. The higher advertising and promotional expenses were directed toward
      marketing campaigns and promotions of our membership plans.





-31-





**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****General
                and Administrative (in thousands):**$
            3,359
            
            
            $
            2,663
            
            
            $
            696
            
            
            
            13.0
            %
            
            
            14.2
            %





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





The
      increase in general and administrative expense in the three months ended June
      30, 2007 compared to the three months ended June 30, 2006 was primarily due
      to
      $0.4 million in higher personnel expenses, including incentive compensation,
      $0.1 million increase in share-based compensation costs, $0.1 million increase
      in accounting and other professional fees, $0.1 million increase in
      international expenses, and $0.1 million increase in supplies and administrative
      costs. These increases were partially offset by a reduction in legal fees of
      $0.2 million.





**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Loss
                on Equity Investment (in thousands):**$
            --
            
            
            $
            180
            
            
            $
            (180
            )
            
            
            (100.0
            )%





*Loss
      on equity investment* consists of the equity method losses related to our
      investment in Audible Germany. The loss recorded during the three month period
      ended June 30, 2006 was recorded when we agreed to contribute an additional
      equity investment in Audible Germany for amounts owed to us by Audible Germany.
      The investment was written down to zero as we recorded our share of current
      losses up to the amount of our investment. For the three months ended June
      30,
      2007, there were no equity losses to record, as we had not funded any losses
      and
      had not made any monetary investments.





**Three
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Other
                Income, net (in thousands):**$
            854
            
            
            $
            714
            
            
            $
            140
            
            
            
            19.6
            %





*Other
      Income, net* primarily consists of interest income. The increase in other
      income, net was due to an increase in interest earned on our short-term
      investments, associated principally with higher interest rates.


-32-


***Six
      months ended June 30, 2007 compared to six months ended June 30, 2006
      (unaudited):***





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Content
                and services revenue (in thousands):**$
            50,739
            
            
            $
            37,882
            
            
            $
            12,857
            
            
            
            33.9
            %





*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 six months ended June 30, 2007 compared
      to
      the six months ended June 30, 2006 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 total AudibleListener membership count grew
      39.5% from approximately 309,000 at June 30, 2006, to approximately 431,000
      at
      June 30, 2007. We recognized in revenue $15.4 million and $8.5 million from
      sales of Audible content at the Apple iTunes Store during the six months ended
      June 30, 2007 and 2006, respectively. As we continue to acquire new
      AudibleListener members who may choose to roll over their audio credits, our
      ability to recognize revenue will depend upon audio credit usage patterns of
      individual members. This will result in an increase in deferred revenue and
      may
      result in a decrease or slower growth in our revenue as compared to prior
      periods. Our customer count and AudibleListener membership count excludes
      customers that purchase Audible content directly from the Apple iTunes Store.
      We
      believe continuing consumer adoption of digital downloading, increased consumer
      awareness of the Audible service, customer satisfaction and improved marketing
      will continue to drive AudibleListener membership growth and growth in sales
      at
      the Apple iTunes Store.





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Hardware
                revenue (in thousands):**$
            164
            
            
            $
            210
            
            
            $
            (46
            )
            
            
            (21.9
            )%





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





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Related
                party revenue (in thousands):**$
            111
            
            
            $
            630
            
            
            $
            (519
            )
            
            
            (82.4
            )%





*Related
      party revenue* consists of revenue recognized in connection with our
      agreements with France Loisirs and Audible Germany.





Related
      party revenue during the six months ended June 30, 2007, primarily included
      less
      than $0.1 million in billings to France Loisirs for certain consulting services
      and reimbursement of related incremental costs as well as $0.1 million in fees
      earned under our agreement with Audible Germany. Related party revenue during
      the six months ended June 30, 2006 included $0.3 million in fees earned under
      our agreement with France Loisirs, representing the straight-line recognition
      of
      $1.0 million in fees we were entitled to receive pursuant to the arrangement,
      which was being recognized over the initial 24-month term of the original
      agreement through September 14, 2006, $0.1 million in billings to France Loisirs
      for certain consulting services and reimbursement of related incremental costs,
      $0.2 million in fees earned from our agreement with Audible Germany, and $0.1
      million in billings to Audible Germany for certain consulting services and
      reimbursement of related incremental costs incurred by us in connection with
      our
      license and services agreement. As the fees related to the original agreements
      with both France Loisirs and Audible Germany have been fully recognized, we
      do
      not expect significant related party revenue in the future.





-33-





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Other
                revenue (in thousands):**$
            197
            
            
            $
            134
            
            
            $
            63
            
            
            
            47.0
            %





*Other
      revenue* for the six months ended June 30, 2007 and 2006 primarily included
      $0.2 million and $0.1 million, respectively, of revenue earned under a product
      development agreement with a publishing partner, which commenced in May 2005.
      The fees are being amortized on a straight line basis as fees are billed over
      a
      58-month period beginning in the month we commenced production of audio (July
      2005) through the expiration of the agreement. As of June 30, 2007, we billed
      the publisher $1.6 million, of which $1.6 million has been received in
      connection with this agreement.





**Six
                months ended**
              **June
                30,**
            
            
            **As
                a Percentage of Total Content and Services
                Revenue****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006****Cost
                of Content and Services (in thousands):**Royalties
                and other content charges
            
            $
            22,466
            
            
            $
            15,703
            
            
            
            44.3
            %
            
            
            41.5
            %Discount
                certificate rebates
            
            
            333
            
            
            
            603
            
            
            
            0.7
            %
            
            
            1.6
            %Total
                cost of content and services revenue
            
            $
            22,799
            
            
            $
            16,306
            
            
            
            45.0
            %
            
            
            43.1
            %





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





Royalties
      and other content charges as a percentage of total content and services revenue
      increased from the six months ended June 30, 2006 to June 30, 2007 from 41.5%
      to
      44.3%. This increase was primarily due to the increasing percentage of revenue
      from sales at the Apple iTunes Store, which yields a higher royalty cost as
      a
      percentage of revenue, the impact of higher royalty rates from certain
      publishers, the impact of our Gold and Platinum membership plans, in which
      royalties are incurred on revenue that may be deferred if the straight-line
      revenue is less than the proportional performance revenue, the effect of the
      new
      Gold monthly discounted membership plan offered in the first half of 2007,
      and
      the impact of the 30% a la carte discount offered under our basic membership
      plan for titles that have a fixed royalty.





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Cost
                of Hardware Revenue (in thousands):**$
            300
            
            
            $
            881
            
            
            $
            (581
            )
            
            
            (65.9
            )%





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





The
      cost
      of hardware revenue decreased in the 2007 period primarily due to a reduction
      in
      the number of digital audio players given away or sold at a discount to
      customers.




-34-




**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Cost
                of Related Party Revenue (in thousands):**$
            237
            
            
            $
            329
            
            
            $
            (92
            )
            
            
            (28.0
            )%




*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. These costs primarily consist of payroll costs related
      to services performed for France Loisirs and Audible Germany by certain
      employees of our technology, development, and audio departments.





Cost
      of
      related party revenue for the six months ended June 30, 2007 compared to six
      months ended June 30, 2006 has decreased primarily due to a reduction services
      performed for Audible Germany.




**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Operations
                (in thousands):**$
            7,232
            
            
            $
            5,956
            
            
            $
            1,276
            
            
            
            14.3
            %
            
            
            15.7
            %





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





Operations
      expense increased in the six months ended June 30, 2007 compared to the six
      months ended June 30, 2006 primarily due to $0.5 million in higher personnel
      expenses, $0.3 million in higher outside service expenses, $0.1 million in
      higher share-based compensation costs, and $0.1 million in higher credit card
      processing fees. These increases were primarily related to the increased scale
      of our business resulting in a greater number of customers and
      transactions.





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Technology
                and Development (in thousands):**$
            9,140
            
            
            $
            8,056
            
            
            $
            1,084
            
            
            
            18.0
            %
            
            
            21.3
            %





*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 six months ended June
      30,
      2007 compared to the six months ended June 30, 2006 was primarily due to $0.6
      million in higher outside services expenses, $0.2 million in higher licensing
      and maintenance fees, $0.2 million impairment charge, $0.1 million in higher
      share-based compensation costs, and $0.1 million in higher depreciation and
      amortization. This was partially offset by a reduction in personnel costs of
      $0.3 million. 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.





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Marketing
                (in thousands):**$
            7,953
            
            
            $
            7,874
            
            
            $
            79
            
            
            
            15.7
            %
            
            
            20.8
            %





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





Marketing
      expense has increased for the six months ended June 30, 2007 compared to the
      six
      months ended June 30, 2006 primarily due to a $0.2 million increase in outside
      service fees and $0.1 million increase in share-based compensation
      costs.  These increases were partially offset by a $0.1 million
      reduction in advertising and promotional expenses and $0.1 million reduction
      in
      shipping and handling fees.




-35-




**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            
            **2006**
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****General
                and Administrative (in thousands):**$
            6,463
            
            
            $
            5,864
            
            
            $
            599
            
            
            
            12.7
            %
            
            
            15.5
            %





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





The
      increase in general and administrative expense in the six months ended June
      30,
      2007 compared to the six months ended June 30, 2006 was primarily due to $0.5
      million in higher personnel cost, including incentive compensation, $0.3 million
      in higher supplies and administrative expenses, $0.1 million in higher
      share-based compensation expense, $0.1 million in higher depreciation and
      amortization expense, and $0.1 million in higher international expenses. This
      was partially offset by a decrease of $0.5 million in legal fees and $0.2
      million in job placement fees.





**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Loss
                on Equity Investment (in thousands):**$
            60
            
            
            $
            180
            
            
            $
            (120
            )
            
            
            (66.7
            )%





*Loss
      on equity investment* consists of the equity method losses related to our
      investment in Audible Germany. The loss recorded during the six months ended
      June 30, 2007 and 2006 was recorded when we agreed to contribute an additional
      equity investment in Audible Germany for amounts owed to us by Audible Germany.
      The investment was written down to zero as we recorded our share of current
      losses up to the amount of our investment.




**Six
                months ended**
              **June
                30,**
            
            
            **$**
            
            **%****2007**
            
            
            **2006**
            
            
            **Change**
            
            **Change****Other
                Income, net (in thousands):**$
            1,693
            
            
            $
            1,374
            
            
            $
            319
            
            
            
            23.2
            %





*Other
      Income, net* primarily consists of interest income. The increase in other
      income, net was due to an increase in interest earned on our short-term
      investments, associated principally with higher interest rates.





-36-




**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:





·
            We
                have limited revenue, we have a history of losses, and we may not
                be
                profitable in the future.


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


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


·
            If
                our efforts to attract new AudibleListener members are not successful,
                our
                revenues will be affected
                adversely.


·
            If
                we experience excessive rates of churn, our revenues may
                decline.


·
            The
                market for our service is uncertain and consumers may not be willing
                to
                use the Internet to purchase spoken audio content, which could cause
                our
                business to grow more slowly.


·
            We
                may not be able to license or produce sufficiently compelling audio
                content to attract and retain customers and grow our
                revenue.


·
            If
                manufacturers of electronic devices do not manufacture, make available
                or
                sell a sufficient number of products suitable for our service, our
                revenue
                may not grow.


·
            We
                must establish, maintain and strengthen our brand names, trademarks
                and
                service marks in order to acquire customers and generate
                revenue.


·
            Increasing
                availability of digital audio technologies may increase competition
                and
                reduce our revenue, market share and
                profitability.


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


·
            Capacity
                constraints and failures, delays, or overloads could interrupt our
                service
                and reduce the attractiveness of our service to existing or potential
                customers.


·
            We
                could be liable for substantial damages if there is unauthorized
                duplication of the content we sell.


·
            We
                do not have a comprehensive disaster recovery plan and we have limited
                back-up systems, and a disaster could severely damage our operations
                and
                could result in loss of customers.


·
            Problems
                associated with the Internet could discourage use of Internet-based
                services like ours and adversely affect our
                business.


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


·
            Our
                inability to hire new employees may hurt our growth
                prospects.


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


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


·
            We
                may not be able to protect our intellectual property, which could
                jeopardize our competitive
                position.


·
            Other
                companies may claim that we infringe their copyrights or patents,
                which
                could subject us to substantial
                damages.


·
            We
                could be sued for content that we distribute over the Internet, which
                could subject us to substantial
                damages.


·
            Future
                government regulations may increase our cost of doing business on
                the
                Internet, which could adversely affect our cost
                structure.


·
            We
                may become subject to sales and other taxes for direct sales over
                the
                Internet, which could affect our revenue
                growth.


·
            A
                variety of risks could adversely affect our international
                activities.


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





If
      we
      fail to manage these risks successfully, it would materially and adversely
      affect our financial performance.





We
      believe that our success will depend largely on our ability to extend our
      leadership position as a provider of premium digital spoken audio content over
      the Internet. Accordingly, we plan to continue to invest in marketing, content
      acquisition and operations.





As
      of
      June 30, 2007, we were not a party to any derivative financial instruments
      or
      other financial instruments or hedging investments that expose us to material
      market risk. We currently do not plan to enter into any derivative instruments
      or engage in any hedging activities.





We
      have
      incurred significant losses since inception and as of June 30, 2007, we had
      an
      accumulated deficit of $141.9 million.





-37-




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.





**Liquidity
      and Capital Resources**





In
      November 2004, we completed a secondary public offering of our common stock
      resulting in net proceeds to us of approximately $46.5 million.





As
      of
      June 30, 2007, our cash and cash equivalents balance was $18.6 million. In
      addition, as of June 30, 2007 we had $48.7 million in short-term investments,
      consisting of governmental agency notes and mortgage backed securities, which
      we
      intend to hold until maturity. Based on our currently proposed business plans
      and related assumptions, we believe that our cash and cash equivalents balance
      and short-term investment balance as of June 30, 2007 will enable us to meet
      our
      anticipated cash requirements for operations and capital expenditures for the
      foreseeable future. Beyond that, we may need additional cash to fund our
      business and finance our planned growth. We cannot assure you that such
      additional financing, if needed, will be available on terms favorable to us
      or
      our stockholders, if at all.





***Cash
      Requirements***





The
      following table shows future cash payments due under our commitments and
      obligations as of June 30, 2007 (in thousands):





**Year**
            
            **Lease**
              **Obligations**
              **(1)**
            
            
            **Royalty
                Obligations**
              **(2)**
            
            
            **Service
                Agreements**
            
            
            **Purchase
                Commitments**
            
            
            **Total**2007
            
            $
            392
            
            
            $
            438
            
            
            $
            1,040
            
            
            $
            260
            
            
            $
            2,1302008
            
            
            1,008
            
            
            
            76
            
            
            
            1,216
            
            
            
            --
            
            
            
            2,3002009
            
            
            1,066
            
            
            
            --
            
            
            
            51
            
            
            
            --
            
            
            
            1,1172010
            
            
            1,141
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,1412011
            
            
            1,215
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            1,2152012
                & Thereafter
            
            
            3,255
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            3,255Total
            
            $
            8,077
            
            
            $
            514
            
            
            $
            2,307
            
            
            $
            260
            
            
            $
            11,158





(1)
      Of
      the $8.1 million in total operating leases, $8.0 million relates to the new
      office lease agreement signed in September 2006, of which $0.6 million is
      recorded as deferred rent in other liabilities, noncurrent in the accompanying
      condensed consolidated Balance Sheet as of June 30, 2007.





(2)
      Of
      the $0.5 million in total royalty obligations, $0.3 million is recorded in
      accrued expenses and $0.1 million is recorded as royalty obligations,
      non-current, in the accompanying condensed consolidated Balance Sheet as of
      June
      30, 2007. The remaining obligation of $0.1 million relates to content that
      had
      not yet been delivered as of June 30, 2007.





-38-





***Sources
      and Uses of Cash***





**Six
                Months Ended**
              **June
                30,****2007**
            
            
            **2006****(in
                thousands)**
            
            
            **(in
                thousands)**Operating
                Activities
            
            $
            4,907
            
            
            $
            (1,651
            )Investing
                Activities
            
            
            (1,402
            )
            
            
            2,004Financing
                Activities
            
            
            165
            
            
            
            (1,183
            )Exchange
                Rate
            
            
            2
            
            
            
            (12
            )Increase
                (decrease) in cash and cash equivalents
            
            $
            3,672
            
            
            $
            (842
            )





Net
      cash
      provided by operating activities for the six months ended June 30, 2007 was
      $4.9
      million. This was primarily attributable to our net loss of $1.3 million,
      significantly offset by two non-cash expenses: share-based compensation expense
      of $3.1 million and depreciation and amortization of property and equipment
      of
      $2.6 million. Additionally, our balance in deferred revenue increased $2.0
      million due to the payments by customers of fees prior to the consumption of
      services. Decreases in accounts receivable of $1.1 million and an increase
      in
      accrued compensation of $1.3 million were offset by a decrease in accrued
      royalties of $2.5 million. Net cash used in operating activities for the six
      months ended June 30, 2006 was $1.7 million. This was primarily attributable
      to
      our net loss of $5.2 million, significantly offset by two non-cash expenses:
      share-based compensation expense of $2.7 million and depreciation and
      amortization of property and equipment of $2.4 million. Additionally, our
      balance in deferred revenue increased $3.3 million due to the payments by
      customers of fees prior to the consumption of services. This was offset by
      a
      decrease in accounts payable of $2.1 million and accrued expenses and other
      current liabilities of $1.2 million.





Net
      cash
      used in investing activities for the six months ended June 30, 2007 was $1.4
      million, attributable to purchases of property and equipment of $4.1 million,
      partially offset by net proceeds from short-term investing activity of $3.0
      million. Net cash provided by investing activities for the six months ended
      June
      30, 2006 was $2.0 million. This was attributable to net short-term investing
      activity of $6.2 million, partially offset by purchases of property and
      equipment of $4.0 million.





Net
      cash
      provided by financing activities for the six months ended June 30, 2007 was
      $0.2
      million, resulting from proceeds of $0.4 million from exercise of common stock
      options, offset by $0.2 million for payment of taxes due on vested restricted
      stock. Net cash used in financing activities for the six months ended June
      30,
      2006 was $1.2 million, resulting primarily from purchases of treasury stock
      of
      $2.3 million, offset by $0.8 million from exercise of common stock warrants
      and
      $0.4 million from exercise of common stock options.





***New
      Accounting Standards***





*SFAS
      No. 157*





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





SFAS
      157
      is effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. Earlier
      application is encouraged, provided that the reporting entity has not yet issued
      financial statements for that fiscal year, including financial statements for
      an
      interim period within that fiscal year. All valuation adjustments will be
      recognized as cumulative-effect adjustments to the opening balance of retained
      earnings for the fiscal year in which SFAS 157 is initially applied. We do
      not
      believe the impact that SFAS 157 will have a material effect on our consolidated
      financial statements.




-39-


*SFAS
      No. 159*





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities* (SFAS 159). SFAS 159 expands
      opportunities to use fair value measurement in financial reporting and permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value. SFAS 159 is effective for fiscal years beginning after November
      15, 2007. We do not believe the impact of SFAS 159 will have a material effect
      on our consolidated financial statements.





*FIN
      No. 48*





In
      July
      2006, the FASB issued SFAS Interpretation No. 48, *Accounting for Uncertainty
      in Income Taxes - an interpretation of SFAS Statement No. 109* (FIN 48). FIN
      48 applies to all “tax positions” accounted for under SFAS 109. FIN 48 refers to
“tax positions” as positions taken in a previously filed tax return or positions
      expected to be taken in a future tax return that are reflected in measuring
      current or deferred income tax assets and liabilities reported in the financial
      statements. FIN 48 further clarifies a tax position to include the
      following:





·
            a
                decision not to file a tax return in a particular jurisdiction for
                which a
                return might be required,·
            an
                allocation or a shift of income between taxing
                jurisdictions,





·
            the
                characterization of income or a decision to exclude reporting taxable
                income in a tax return, or·
            a
                decision to classify a transaction, entity, or other position in
                a tax
                return as tax exempt.





FIN
      48
      clarifies that a tax benefit may be reflected in the financial statements only
      if it is “more likely than not” that a company will be able to sustain the tax
      return position, based on its technical merits. If a tax benefit meets this
      criterion, it should be measured and recognized based on the largest amount
      of
      benefit that is cumulatively greater than 50% likely to be realized. This is
      a
      change from current practice, whereby companies may recognize a tax benefit
      only
      if it is probable a tax position will be sustained.





FIN
      No.
      48 also requires that we make qualitative and quantitative disclosures,
      including a discussion of reasonably possible changes that might occur in
      unrecognized tax benefits over the next 12 months; a description of open tax
      years by major jurisdictions; and a roll-forward of all unrecognized tax
      benefits, presented as a reconciliation of the beginning and ending balances
      of
      the unrecognized tax benefits on an aggregated basis.





This
      statement became effective for us on January 1, 2007 and, based on our analysis,
      it did not have a material effect on our consolidated financial
      statements.





In
      May
      2007, the FASB issued FASB Staff Position No. FIN 48-1, *Definition of
      Settlement in FASB Interpretation No. 48*,(FSP FIN 48-1). This FSP
      was issued to amend FIN 48 to clarify that a tax position could be effectively
      settled upon examination by a taxing authority. Assessing whether a tax position
      is effectively settled is a matter of judgment because examinations occur in
      a
      variety of ways. In determining whether a tax position is effectively settled,
      an enterprise should make the assessment on a position-by-position basis, but
      an
      enterprise could conclude that all positions in a particular tax year are
      effectively settled. The application of the guidance in this FSP had no impact
      on our consolidated financial statements.




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





We
      are
      exposed to fluctuations in foreign currency exchange rates as the financial
      results of our UK subsidiary are translated into U.S. dollars in consolidation,
      we have a short-term inter-company account with our UK subsidiary, and we pay
      certain third party suppliers in foreign currencies. We do not use derivative
      instruments or hedging to manage our exposures and do not hold any market risk
      sensitive instruments for trading purposes.




-40-




**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, 2006, we identified the following material weaknesses in our
      internal control over financial reporting: (i) ineffective execution of
      non-routine contracts; (ii) inadequate information and communication; (iii)
      ineffective review of account analyses; and (iv) inadequate identification
      and
      analysis of non-income tax related matters.




The
      material weaknesses identified by us could result in a material misstatement
      to
      the annual or interim financial statements that would not be preventable or
      detectable. As a result, we have determined these control deficiencies each
      constituted a material weakness as of December 31, 2006. Because of the material
      weaknesses noted above, we have concluded that we did not maintain effective
      internal control over financial reporting as of December 31, 2006, based on
      criteria in *Internal Control — Integrated Framework*issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO). We
      have
      communicated our conclusions to the Audit Committee of our Board of
      Directors.




Changes
      in our internal control over financial reporting, as such term is defined in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the three months
      ended June 30, 2007 that have materially affected, or are reasonably likely
      to
      materially affect, our internal control over financial reporting, include the
      items described below.




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





*Ineffective
      Execution of Non-Routine Contracts.*





We
      have
      improved our contract review procedures to provide a more detailed legal and
      financial review of new contracts in order to identify potential financial
      reporting risks and implementation issues.








*Inadequate
      Information and Communication*





We
      have
      implemented change control procedures requiring review and signoff on
      modifications to existing system-generated financial reports used in financial
      reporting.





We
      began
      a process of reviewing, classifying and reconciling individual gift transactions
      to properly categorize and support remaining gift deferral
      balances.








*Ineffective
      Review of Account Analyses*





We
      have
      implemented additional reconciliation roll-forwards and review procedures to
      provide greater accuracy over account analysis used as a basis to record journal
      entries.





We
      have
      engaged more participation in the review of account activities by initiating
      periodic circulation of interim financial information.





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





We
      have
      modified our web site to collect value added tax (“VAT”) from customers in
      foreign jurisdictions.





We
      have
      implemented a periodic formal tax review process intended to identify and
      address potential non-income tax related matters.








We
      have
      made the remediation of the material weaknesses that have been identified a
      significant priority for us and will continue to take steps to address them
      by
      the end of 2007. We believe that the remediation efforts, taken as a whole,
      mitigated the risk of error with respect to our preparation of this quarterly
      report on Form 10-Q for the period ended June 30, 2007, and that these measures
      have been effective to ensure that information required to be disclosed in
      this
      quarterly report has been recorded, processed, summarized and reported
      correctly. We believe that our controls and procedures will continue to improve
      as a result of the further implementation of these measures.





**Evaluation
      of Disclosure Controls and Procedures**




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




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we carried out an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of June
      30,
      2007.  Based upon that evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      not
      effective as of such date due to the fact that the material weaknesses described
      in our annual report on Form 10-K for the year ended December 31, 2006, had
      not
      been remediated as of June 30, 2007.




-41-




**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 December 31, 2006 that may result from those matters for which accruals
      have
      been recorded may differ, we believe that any amounts exceeding the recorded
      accruals would not be material to the consolidated financial position or results
      of operations.





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





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





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





In
      June
      2004, the proposed settlement was submitted to the court for preliminary
      approval. The court requested that any objections to preliminary approval of
      the
      settlement be submitted by July 14, 2004, and the underwriter defendants
      formally objected to the settlement. The plaintiff and issuer defendants
      separately filed replies to the underwriter defendants' objections to the
      settlement on August 4, 2004. The court granted preliminary approval on February
      15, 2005, subject to certain modifications. On August 31, 2005, the court issued
      a preliminary order further approving the modifications to the settlement and
      certifying the settlement cases. The court also appointed the Notice
      Administrator for the settlement and ordered that notice of the settlement
      be
      distributed to all settlement class members beginning on November 15, 2005.
      The
      settlement fairness hearing was held on April 26, 2006, and the court reserved
      decision. The plaintiffs have continued to litigate against the underwriter
      defendants. The district court directed that the litigation proceed within
      a
      number of “focus cases” rather than in all of the 310 cases that have been
      consolidated. Our case is not one of these focus cases. On October 13, 2004,
      the
      district court certified the focus cases as class actions. The underwriter
      defendants appealed the ruling, and on December 5, 2006, the Court of Appeals
      for the Second Circuit reversed the district court’s class certification
      decision. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for a
      rehearing. In light of the Second Circuit opinion, the district court has been
      informed that the settlement cannot be approved because the defined settlement
      class, like the litigation class, cannot be certified. On June 25, 2007, the
      district court entered into an order terminating the settlement
      agreement.





-42-




There
      can
      be no assurance that a settlement that complies with the Second Circuit’s
      mandate can be renegotiated.





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





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





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





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





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





In
      March
      2007, the Court granted the defendants’ motion to dismiss the plaintiffs’
consolidated amended complaint but granted the plaintiffs leave to amend. The
      plaintiffs have filed a motion for reconsideration, which the defendants have
      opposed. The Court has yet to rule on the motion.





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.







-43-





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





Our
      business is subject to a number of risks. For a more detailed explanation of
      factors affecting our businesses, please refer to the Risk Factors section
      in
      Item 1A of our Annual Report on Form 10-K for the year ended December
      31, 2006. There have been no material changes to our risk factors as of June
      30,
      2007.





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





None





**ITEM
      3.Defaults Upon Senior Security**





None





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





We
      held
      our Annual Meeting of Stockholders on June 20, 2007 (the “Annual Meeting”). The
      following matter was voted upon at the Annual Meeting:





(i)
            The
                election of one director to serve until the 2010 annual meeting of
                stockholders and until his successor is elected and duly qualified,
                by
                97.3% of the common stock present and voting at the meeting for Mr.
                Zeev
                as follows:




**Nominee**
              **For**
              **Against
                  or Withheld**
              **Serve
                  Until**Oren
                  Zeev
              14,777,731
              417,433
              2010
 **ITEM
        5. Other Information**





(a)
      None


(b)
      None





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





**Exhibit
                Number**
            **Description**31.1
            Certification
                of the Chief Executive Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.31.2
            Certification
                of the Chief Financial Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002.32.1
            Certification
                of the Chief Executive Officer
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2
            Certification
                of the Chief Financial Officer
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.





-44-





Pursuant
      to the requirements of the Securities Exchange Act of 1934,
      the registrant has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.

















**AUDIBLE,
                INC.**By:
            /s/
                William H. MitchellName:
            William
                H. MitchellTitle:
            Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)Date:
            August
                8, 2007








-45-