**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 March 31, 2007o
            **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** o





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


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





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


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




As
      of May
      7, 2007, 24,275,258 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 March
                31, 2007 (unaudited) and December 31, 2006
            3Condensed
                Consolidated Statements of Operations for
                the three month periods ended March 31, 2007 and 2006
                (unaudited)
            4Condensed
                Consolidated Statements of Cash Flows for
                the three month periods ended March 31, 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
            25Item
                3.
            Quantitative
                and Qualitative Disclosures about
                Market Risks
            39Item
                4.
            Controls
                and Procedures
            39**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            39Item
                1A.
            Risk
                Factors
            41Item
                2.
            Unregistered
                Sales of Equity Securities and
                Use of Proceeds
            41Item
                3.
            Defaults
                Upon Senior
                Security
            41Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            41Item
                5.
            Other
                Information
            41Item
                6.
            Exhibits
            42**Signatures**
            
            43
















-2-


Table
      of Contents


**PART I
      - FINANCIAL INFORMATION**




**ITEM
      1.    Financial Statements**




**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE
      SHEETS**


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





**March
                31,**
            
            **December
                31,****2007**
            
            **2006****(unaudited)****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            19,086
            
            $
            14,925Short-term
                investments
            
            
            46,415
            
            
            51,295Interest
                receivable on short-term investments
            
            
            379
            
            
            626Accounts
                receivable, net of provision for refunds and chargebacks of $40 at
              March
                31, 2007 and December 31, 2006
            
            
            3,589
            
            
            4,181Accounts
                receivable, related parties
            
            
            169
            
            
            100Royalty
                advances
            
            
            637
            
            
            710Prepaid
                expenses and other current assets
            
            
            1,452
            
            
            1,797Inventory
            
            
            125
            
            
            212Total
                current assets
            
            
            71,852
            
            
            73,846Property
                and equipment, net
            
            
            10,989
            
            
            8,149Other
                assets
            
            
            950
            
            
            781Total
                assets
            
            $
            83,791
            
            $
            82,776**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilities:Accounts
                payable
            
            $
            2,860
            
            $
            3,121Accrued
                expenses
            
            
            5,180
            
            
            4,678Accrued
                royalties
            
            
            7,323
            
            
            9,028Accrued
                compensation
            
            
            844
            
            
            778Deferred
                revenue
            
            
            15,180
            
            
            13,840Total
                current liabilities
            
            
            31,387
            
            
            31,445Deferred
                revenue, noncurrent
            
            
            603
            
            
            513Other
                liabilities, noncurrent
            
            
            525
            
            
            262Royalty
                obligations, noncurrent
            
            
            75
            
            
            90Commitments
                and contingenciesStockholders'
                equity:Common
                stock, par value $.01. Authorized 40,000,000 shares at March 31,
              2007
                and December 31, 2006; 24,243,510 and 24,119,768 shares issued and
              outstanding
                at March 31, 2007 and December 31, 2006, respectively
            
            
            242
            
            
            241Additional
                paid-in capital
            
            
            192,745
            
            
            190,799Accumulated
                other comprehensive loss
            
            
            (38
            )
            
            (36
            )Accumulated
                deficit
            
            
            (141,748
            )
            
            (140,538
            )Total
                stockholders' equity
            
            
            51,201
            
            
            50,466Total
                liabilities and stockholders' equity
            
            $
            83,791
            
            $
            82,776





See
      accompanying notes to condensed consolidated financial statements.







-3-


Table
      of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(Unaudited)**




**Three
                month periods**
              **ended
                March 31,****2007**
            
            **2006**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            $
            24,979
            
            $
            19,281Point
                of sale rebates
            
            
            (19
            )
            
            (167
            )Services
            
            
            24
            
            
            33Total
                content and services revenue
            
            
            24,984
            
            
            19,147Hardware
                revenue
            
            
            77
            
            
            125Related
                party revenue
            
            
            91
            
            
            373Other
                revenue
            
            
            112
            
            
            70Total
                revenue, net
            
            
            25,264
            
            
            19,715Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            11,256
            
            
            7,983Discount
                certificate rebates
            
            
            260
            
            
            298Total
                cost of content and services revenue
            
            
            11,516
            
            
            8,281Cost
                of hardware revenue
            
            
            179
            
            
            675Cost
                of related party revenue
            
            
            129
            
            
            158Operations
            
            
            3,826
            
            
            3,102Technology
                and development
            
            
            4,571
            
            
            3,694Marketing
            
            
            3,904
            
            
            4,301General
                and administrative
            
            
            3,104
            
            
            3,201Total
                operating expenses
            
            
            27,229
            
            
            23,412Loss
                from operations
            
            
            (1,965
            )
            
            (3,697
            )Loss
                on equity investment
            
            
            (60
            )
            
            --Other
                income (expense):Interest
                income
            
            
            845
            
            
            660Other
                expense
            
            
            (6
            )
            
            --Other
                income, net
            
            
            839
            
            
            660Loss
                before income taxes
            
            
            (1,186
            )
            
            (3,037
            )Income
                tax expense
            
            
            (24
            )
            
            (3
            )Net
                loss
            
            $
            (1,210
            )
            $
            (3,040
            )Basic
                and diluted net loss per common share
            
            $
            (0.05
            )
            $
            (0.12
            )Basic
                and diluted weighted average common shares outstanding
            
            
            24,205,043
            
            
            24,481,751





See
      accompanying notes to condensed consolidated financial statements.





-4-


Table
      of Contents


**AUDIBLE,
      INC. AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(in
      thousands)**


**(Unaudited)**




**Three
                month periods ended****March
                31,****2007**
            
            **2006**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,210
            )
            $
            (3,040
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            1,310
            
            
            1,122Non-cash
                share-based compensation charge
            
            
            1,576
            
            
            1,094Amortization
                of discounts on short-term investments
            
            
            (259
            )
            
            (230
            )Changes
                in assets and liabilities:Interest
                receivable on short-term investments
            
            
            247
            
            
            35Accounts
                receivable, net
            
            
            591
            
            
            (582
            )Accounts
                receivable from related parties
            
            
            (68
            )
            
            (3
            )Royalty
                advances
            
            
            73
            
            
            11Prepaid
                expenses and other current assets
            
            
            346
            
            
            (1,083
            )Inventory
            
            
            86
            
            
            223Other
                assets
            
            
            (169
            )
            
            (774
            )Accounts
                payable
            
            
            (261
            )
            
            (2,413
            )Accrued
                expenses
            
            
            (227
            )
            
            482Deferred
                revenue
            
            
            1,430
            
            
            2,076Accrued
                royalties
            
            
            (1,707
            )
            
            7Accrued
                compensation
            
            
            29
            
            
            393Other
                liabilities, noncurrent
            
            
            263
            
            
            --Net
                cash provided by (used in) operating activities
            
            
            2,050
            
            
            (3,646
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (3,284
            )
            
            (3,716
            )Capitalized
                internally developed software costs
            
            
            (115
            )
            
            (198
            )Purchases
                of short-term investments
            
            
            (21,736
            )
            
            (14,964
            )Proceeds
                from maturity of short-term investments
            
            
            26,875
            
            
            24,500Net
                cash provided by investing activities
            
            
            1,740
            
            
            5,622Cash
                flows from financing activities:Proceeds
                from exercise of common stock options
            
            
            371
            
            
            151Proceeds
                from exercise of common stock warrants
            
            
            --
            
            
            750Purchase
                of treasury stock at cost
            
            
            --
            
            
            (360
            )Net
                cash provided by financing activities
            
            
            371
            
            
            541Effect
                of exchange rate changes on cash and cash equivalents
            
            
            --
            
            
            (5
            )Increase
                in cash and cash equivalents
            
            
            4,161
            
            
            2,512Cash
                and cash equivalents at beginning of period
            
            
            14,925
            
            
            11,549Cash
                and cash equivalents at end of period
            
            $
            19,086
            
            $
            14,061




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)**


Table
      of Contents


**(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 month period ended March 31, 2007, the Company reported a net loss of
      $1.2
      million, and has an accumulated deficit of $141.7 million as of March 31, 2007.
      The Company's cash and cash equivalents balance as of March 31, 2007 is $19.1
      million. In addition, the Company has short-term investments of $46.4
      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 March 31, 2007
      and for the three month periods ended March 31, 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 month period ended March 31, 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 March 31, 2007 and December 31, 2006, of $46.4 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.




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


Table
      of Contents




The
      amortized cost, gross unrealized holding losses and the fair value of
      held-to-maturity debt securities at March 31, 2007 was $46.4 million, less
      than
      $0.1 million, and $46.4 million, respectively.





All
      of
      the debt securities classified as held-to-maturity mature before March
      31, 2008.




*Provision
      for Refunds and Chargebacks*





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




The
      amount of the provision that was recorded as a reduction of accounts receivable
      as of March 31, 2007 and December 31, 2006 was less than $0.1 million. Refer
      to
      the table in Note 4 for the amount of the provision reflected in the accrued
      liabilities.





*Inventory*




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





*Audio
      Production Costs*





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





*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. 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 computers, office
      furniture, 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 and office appliances and three years for office computers. 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 three month period ended March 31, 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)**


Table
      of Contents




Work
      in
      process consists of expenditures for the development of various computer
      software projects incurred subsequent to the completion of the preliminary
      project stage. In accordance with SOP 98-1, *Accounting for Costs of Computer Software Developed or Obtained for Internal
      Use* ,
      the
      Company has capitalized external direct costs of material and services developed
      or obtained for these projects and 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 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
      and will be amortized on a straight-line basis over the lease term or the
      estimated useful life of the asset, whichever is shorter.





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. There were
      no
      impairment charges recorded during the three month periods ended March 31,
      2007
      and 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.





*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 March 31, 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)**


Table
      of Contents




*Foreign
      Currency Translation*





In
      accordance with the provision of Statement of Financial Accounting Standard
      (“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. In addition, Audible, Inc.
      has paid certain expenses on behalf of the subsidiary, such as a security
      deposit on office space and payroll of U.S. employees working on the UK
      business. All of these fundings were made with the intention of treating them
      as
      a long-term investment. In accordance with the provisions of SFAS No. 52, the
      foreign currency gain/loss at each reporting period resulting from the 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 give
      rise to foreign exchange gains or losses, reported in other income (expense)
      on
      the condensed consolidated Statement of Operations, in accordance with SFAS
      No.
      52.





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





In
      July
      2006, the Company entered into a global master agreement with Apple Computer,
      Inc. that replaced the principal agreements the Company entered into with Apple
      during 2002 and 2003. The Company continues to recognize revenue from audio
      book sales made at the Apple iTunes Store in the period when the content is
      purchased and delivered. However, in accordance with the terms of the new
      agreement, the amount of revenue the Company recognizes on each audio
      book sale is now formula-driven, derived from the Apple iTunes selling
      price and the content cost of each audio book. Revenue recognized in the
      three month period ended March 31, 2007 includes an estimate based upon the
      new
      revenue formula.





-9-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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





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





Upon
      launch of the new AudibleListener plans in December 2005, the legacy
      AudibleListener plans were no longer available to new customers, 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 01-9, *Accounting for Consideration Given by a Vendor to a Customer (Including a
      Reseller of the Vendor's Products)* ,
      or EITF
      01-9. The cost of discount certificate rebates and gift cards that are given
      to
      a customer by 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 01-9.





-10-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents


Services
      Revenue




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





Hardware
      Revenue





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





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 is 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 is being recognized on
      a
      straight-line basis over the initial 24-month term of the agreement, which
      began
      on September 15, 2004. Of the $1.0 million, France Loisirs has 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* .








Other
      Revenue





Other
      revenue for the three month periods ended March 31, 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.





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


Table
      of Contents




*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 and $0.1 million for
      the
      three month periods ended March 31, 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 $1.8 million for the three month periods ended March 31, 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.





*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,
      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* .
      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 48), an interpretation of FASB Statement No.109,
*Accounting for Income Taxes*. FIN 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 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.


-12-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




The
        Company files Federal and State of New Jersey corporate income tax returns.
        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. The years currently open for federal income
        tax
        assessment includes calendar years 2003 through 2006 and calendar years 2003
        through 2006 for New Jersey income tax assessment purposes.
 
 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 48 has not resulted in any adjustment to the Company’s
        beginning tax position or tax position for the three-month period ended March
        31, 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 month period ended March 31, 2007 and 2006, diluted net loss per share
      is
      equal to basic net loss per share and diluted common shares outstanding is
      equal
      to basic common shares outstanding, since all potential common stock was
      anti-dilutive.





For
      the
      three month periods ended March 31, 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**
              **March
                31,****2007**
            
            **2006**Stock
                options
            
            
            2,040,308
            
            
            2,529,781Warrants
            
            
            713,442
            
            
            716,723Restricted
                Stock
            
            
            1,099,045
            
            
            270,457Total
            
            
            3,852,795
            
            
            3,516,961





*Share-Based
      Compensation*




In
      accordance with SFAS No. 123 (revised), *“Share-Based
      Payment* ”
(“SFAS
      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.





-13-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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





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





**March
                31,**
              **2007**
            
            **December
                31, 2006**Computer
                server and Web site equipment
            
            $
            7,919
            
            $
            7,687Software
                licenses
            
            
            4,235
            
            
            4,235Internally
                developed software
            
            
            2,779
            
            
            2,779Leasehold
                improvements
            
            
            2,452
            
            
            1,011Office
                furniture and equipment
            
            
            1,856
            
            
            1,720Studio
                equipment
            
            
            667
            
            
            667Work
                in process
            
            
            441
            
            
            326Construction
                in progress
            
            
            925
            
            
            443Total
                property and equipment
            
            
            21,274
            
            
            18,868Less:
                accumulated depreciation and amortization
            
            
            (10,285
            )
            
            (10,719
            )Total
                property and equipment, net
            
            $
            10,989
            
            $
            8,149





Depreciation
      and amortization expense on property and equipment totaled $1.3 million and
      $1.1
      million during the three month periods ended March 31, 2007 and 2006
      respectively.





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




**March
                31,**
              **2007**
            
            **December
                31, 2006**Computer
                server and Web site equipment
            
            $
            743
            
            $
            743Less:
                accumulated amortization
            
            
            (735
            )
            
            (685
            )Total
                computer server and Web site equipment, net
            
            $
            8
            
            $
            58





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




The
      components of the accrued expenses balance are as follows (in
      thousands):





**March
                31,**
              **2007**
            
            **December
                31, 2006**Professional
                fees
            
            $
            728
            
            $
            958Value
                added tax
            
            
            862
            
            
            708Construction
                in progress
            
            
            750
            
            
            --Revenue
                sharing and bounty payments
            
            
            704
            
            
            630Royalty
                obligations
            
            
            339
            
            
            242Retail
                rebates and discounts
            
            
            173
            
            
            410Accrued
                expense - related parties
            
            
            537
            
            
            400Marketing
            
            
            147
            
            
            241Refunds
                and chargebacks
            
            
            85
            
            
            89Other
                accrued expenses
            
            
            855
            
            
            1,000Total
                accrued expenses
            
            $
            5,180
            
            $
            4,678






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


Table
      of Contents




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





The
      following is a summary of the consolidated Stockholders' Equity activity for
      the
      three month period ended March 31, 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
            
            
            6,040
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Exercise
                of common stock options
            
            
            117,702
            
            
            1
            
            
            370
            
            
            --
            
            
            --
            
            
            371Share-based
                compensation expense
            
            
            --
            
            
            --
            
            
            1,576
            
            
            --
            
            
            --
            
            
            1,576Foreign
                currency translation adjustment
            
            
            --
            
            
            --
            
            
            --
            
            
            (2
            )
            
            --
            
            
            (2
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (1,210
            )
            
            (1,210
            )Balance
                at March 31, 2007
            
            
            24,243,510
            
            $
            242
            
            $
            192,745
            
            $
            (38
            )
            $
            (141,748
            )
            $
            51,201





*Common
      Stock*




As
      of
      March 31, 2007 and December 31, 2006 the Company had issued 24,243,510 and
      24,119,768 respectively, shares of common stock. As of March 31, 2007 and
      December 31, 2006 the Company had 3,852,795 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. For options
      granted to new Audible employees as part of their compensation package, the
      exercise price is determined by the closing price of Audible's common stock
      on
      the day immediately preceding each employee's start date. For the majority
      of
      additional option grants made to existing employees, the exercise price is
      determined based on the closing price of the day immediately preceding the
      grant
      date. The majority of the options granted vest over a fifty-month period and
      expire ten years from the date of the grant. All share-based compensation is
      granted through share-based employee compensation plans maintained by Audible.





The
      number of authorized common shares available for issuance under the Plan is
      5,700,000 shares. As of March 31, 2007 and December 31, 2006, options to
      purchase 2,040,308 and 2,237,731, respectively, shares of common stock were
      outstanding. As of March 31, 2007 and December 31, 2006, 1,099,045 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 123R utilizing the modified
      prospective approach. Total compensation expense for share-based payment
      arrangements recognized for the three month periods ended March 31, 2007 and
      2006 was $1.6 million and $1.1 million, respectively.





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


Table
      of Contents




*Stock
      Options*




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





**Three
                months ended****March
                31,****2007**
            
            **2006**Dividend
                yield
            
            
            --
            
            
            --Expected
                volatility
            
            
            68.7
            %
            
            76.6
            %Risk-free
                interest rate
            
            
            4.57
            %
            
            4.50
            %Expected
                life of option (years)
            
            
            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 months ended March 31, 2007, 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 month periods ended March 31, 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 month periods ended March 31, 2007 and 2006,
      2,418 and 52,381, respectively, options granted were forfeited due to employee
      terminations.





*Restricted
      Stock*





During
      the three month periods ended March 31, 2007 and 2006, the Company granted
      awards to receive 134,300 and 12,400 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 month periods ended March 31, 2007 and 2006, 7,800 and 3,500
      units of restricted stock, respectively, 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.





Total
      common stock available for future stock option and restricted stock grants
      is
      approximately 881,000 shares.






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


Table
      of Contents




*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 three month periods ended March 31, 2007 and 2006, none and 36,500 shares
      were repurchased, respectively. As of December 31, 2006, 635,700 share were
      repurchased at an average price of $8.42. The Company subsequently legally
      retired the treasury stock. As of March 31, 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 March 31,****2007**
            
            **2006**Net
                loss
            
            $
            (1,210
            )
            $
            (3,040
            )Other
                comprehensive loss:Foreign
                currency translation adjustment
            
            
            (2
            )
            
            (5
            )Comprehensive
                loss
            
            $
            (1,212
            )
            $
            (3,045
            )





**(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 5.6% of Audible's common stock, inclusive of certain common stock
      warrants held by the entities.




Audible
      Germany has the exclusive rights to operate a German language Audible Web site.
      Under the original 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
      approximately $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.




-17-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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
      46R”) because, as a development stage enterprise, Audible Germany had sufficient
      equity to permit it to finance the activities in which it was currently engaged
      in without additional subordinated financial support. In addition, the other
      criteria within FIN 46R that would characterize Audible Germany as a variable
      interest entity were not met. Rather, Audible Germany was considered to be
      a
      voting interest entity. Upon occurrence of the additional financing in July
      2006, the Company performed an analysis to determine whether or not Audible
      Germany is a variable interest entity, as defined in FIN 46R. Audible Germany
      is
      100% equity funded and no debt exists or is planned. Therefore, equity is deemed
      to be sufficient under the definition of FIN 46R paragraph 5a. In addition,
      under paragraph 9 of FIN 46R, on a qualitative basis, Audible Germany has
      demonstrated that it can finance its activities without additional subordinated
      financial support, even though the equity may be less than 10% of the entity’s
      total assets. An entity that is able to support its operations with existing
      equity has demonstrated the sufficiency of its equity. Therefore, the Company
      has concluded that Audible Germany 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 96-16, *Investor's Accounting for an Investee When the Investor has a Majority of the
      Voting Interest but the Minority Shareholder or Shareholders Have Certain
      Approval or Veto Rights* ,
      the
      Company had determined that the minority shareholders, together, have
      significant participatory rights, allowing them to participate in significant
      decisions of Audible Germany and to block significant decisions proposed by
      Audible. As a result of the significant participatory rights held by the
      minority shareholders, the Company did not have unilateral control over Audible
      Germany. Therefore, Audible did not consolidate the results of Audible Germany
      but rather accounted for its investment in Audible Germany under the equity
      method of accounting. Under the equity method of accounting, the Company records
      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.




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 is 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 meet to review and accept the services.
      The
      monthly payments are subject to refund if Audible Germany does not accept the
      services, subject to reasonable cure. Under the License, Audible recognizes
      $0.1
      million of revenue per quarter once Audible Germany has agreed that the services
      delivered were satisfactory and collection of the amount is reasonably assured.
      Also under the License, Audible Germany will pay the Company royalties ranging
      from 0.5% to 3% of revenue up to an annual royalty cap of the U.S. dollar
      equivalent of €1.5 million, subject to Audible Germany achieving certain
      operating margins. No royalties have been received by the Company under the
      License.





During
      each of the three month periods ended March 31, 2007 and 2006 the Company
      recognized approximately $0.1 million in related party revenue under the license
      agreement as the related services were delivered and accepted. The full amount
      of revenues recognized during the three months ended March 31, 2007 were not
      collected in cash, but rather were contributed as the Company’s equity
      investment in Audible Germany. As of March 31, 2007, the Company recorded its
      share of the equity loss up to the amount of its investment of approximately
      $0.1 million, on the accompanying consolidated Statements of Operations.
      Revenues under the License have been fully recognized as of March 31,
      2007.





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




-18-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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




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




Based
      upon analysis, the Company determined that France Loisirs is more closely
      associated with Audio Direct, primarily because France Loisirs is required
      to
      fund the operations of Audio Direct, including the $1.0 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 are non-refundable and not subject to any acceptance provisions.
      Since fair values do not exist for the different services (elements) that
      Audible is providing, the services are considered a single unit of accounting
      under EITF 00-21 and accordingly, the $1.0 million in fees is 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 none and $0.1 million of revenue for the three month period
      ended March 31, 2007 and 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 01-14. These amounts are included in related party
      revenue on the consolidated Statements of Operations. During the three month
      periods ended March 31, 2007 and 2006, the Company recognized less than $0.1
      million for both periods. 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 in the
      consolidated Balance Sheets as of March 31, 2007 and December 31, 2006, and
      marketing expense in the condensed consolidated Statements of Operations. As
      of
      March 31, 2007, the Company had an accounts receivable balance of less than
      $0.1
      million related to France Loisirs.





-19-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




**(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 paid 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. Revenue recognized in the
      three month period ended March 31, 2007 includes an estimate based upon the
      new
      revenue formula.





**(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 March 31, 2007, the Company billed the publisher $1.5 million, of which
      $1.4 million has been received as of March 31, 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 month periods
      ended March 31, 2007 and 2006, $0.1 million was recorded as other revenue in
      connection with this agreement. As of March 31, 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,
      representing cash received in advance of being recognized as
      revenue.






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


Table
      of Contents




**(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. 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 March 31, 2007 under these lease arrangements are $8.0
      million.




Rent
      expense of $0.4 million and $0.1 million was recorded under operating leases
      for
      the three month periods ended March 31, 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 during the quarter ended March
      31,
      2007. Based on the Company’s evaluation, this period was included in calculating
      the straight-line rent expense. Included in rent expense for three month period
      ended March 31, 2007 is $0.3 million for “rent holidays”.





*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
      technology and development services and marketing services.





-21-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




**Summary
      of Cash Commitments and Obligations**




The
      following table shows future cash payments due under the Company's commitments
      and obligations as of March 31, 2007 (in thousands):





**Year**
            
            **Operating
                Leases**
              **(1)**
            
            **Royalty
                Obligations**
              **(2)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
            
            **Total**2007
            
            $
            312
            
            $
            590
            
            $
            1,369
            
            $
            1,382
            
            $
            3,6532008
            
            
            1,008
            
            
            76
            
            
            1,036
            
            
            --
            
            
            2,1202009
            
            
            1,066
            
            
            --
            
            
            51
            
            
            --
            
            
            1,1172010
            
            
            1,141
            
            
            --
            
            
            --
            
            
            --
            
            
            1,1412011
            
            
            1,215
            
            
            --
            
            
            --
            
            
            --
            
            
            1,2152012
                & Thereafter
            
            
            3,255
            
            
            --
            
            
            --
            
            
            --
            
            
            3,255Total
            
            $
            7,997
            
            $
            666
            
            $
            2,456
            
            $
            1,382
            
            $
            12,501





(1)
      Of
      the $8.0 million in total operating leases, $7.9 million relates to the new
      office lease agreement signed in September 2006.





(2)
      Of
      the $0.7 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
      March 31, 2007. The remaining obligation of $0.3 million relates to content
      that
      had not yet been delivered as of March 31, 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 March 31, 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.





-22-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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. 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.





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 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 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’s, the two executives named as individual defendants in the class
      actions described above, six of the Company’s outside directors, and three of
      their 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 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.





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
      they intend 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.





-23-
 **AUDIBLE,
            INC. AND SUBSIDIARY**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**


Table
      of Contents




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




**Cash
      Paid for Interest and Taxes**





No
      interest was paid during the three month periods ended March 31, 2007 and
      2006.




No
      income
      taxes were paid in the three month periods ended March 31, 2007 and
      2006.





The
      Company recorded an accrual for property and equipment (CIP) of $0.8
      million and none as of March 31, 2007 and 2006, respectively.





**(12)   Customer
      Concentration**





For
      the
      three month periods ended March 31, 2007 and 2006, Apple Computer accounted
      for
      31.3% and 22.4% of total revenue, respectively.




As
      of
      March 31, 2007 and December 31, 2006, Apple Computer accounted for 82.9% 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):




**United
                States**
            
            **United
                Kingdom**
            
            **Consolidated****Revenues**Three
                months ended March 31, 2007
            
            $
            23,990
            
            $
            1,274
            
            $
            25,264Three
                months ended March 31, 2006
            
            
            19,149
            
            
            566
            
            
            19,715**Long-lived
                assets**March
                31, 2007
            
            
            11,898
            
            
            41
            
            
            11,939March
                31, 2006
            
            
            11,800
            
            
            39
            
            
            11,839




-24-


Table
      of Contents


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


(dollars
      in thousands except per share data)





*The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our audited consolidated financial
      statements and notes thereto appearing in our 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 130,000 hours from more than 420 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 three month period ended March 31, 2007, we generated total revenue, net
      of
      $25.3 million and incurred a net loss of $1.2 million. During this period,
      we
      acquired approximately 72,000 new AudibleListener members, a decrease of 9%,
      from approximately 79,000 acquired in the same period in 2006. Total
      AudibleListener members are approximately 415,000 as of March 31, 2007, compared
      to approximately 279,000 as of March 31, 2006, an increase of 49%.





Churn,
      a
      measure of AudibleListener member cancellation, increased slightly during the
      three month period ended March 31, 2007. This is due primarily to an increase
      in
      the number of cancellations to the annual basic AudibleListener membership
      plan
      which had been implemented in December 2005. The Company reminds customers
      of
      annual plans on their anniversary date of their pending renewal and a number
      in
      excess of 3% are electing not to renew their membership which caused the
      increase. Excluding the annual plan members churn of customers decreased during
      the quarter. 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 $1.3 million in revenue in the UK during the three month
      period ended March 31, 2007, compared to $0.6 million for the three month period
      ended March 31, 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.





-25-


Table
      of Contents




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
      daily 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 $1.3 million
      in deferred revenue during the first quarter of 2007. Revenues in 2007 are
      expected to increase if we are able to increase the rate of consumption of
      our
      customers and reduce the outstanding balance in deferred revenues.





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.





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**





Effective
      March 31, 2007, we and France Loisirs agreed to extend the Master Alliance
      Agreement until March 31, 2010. 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.





**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.




-26-


Table
      of Contents




Our
      critical accounting policies are as
      follows:




***Revenue
      Recognition***




We
      derive
      our revenue from four main categories:





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




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





In
      July
      2006, we entered into a global master agreement with Apple Computer, Inc. that
      replaced the principal agreements we entered into with Apple during 2002 and
      2003. We continue to recognize revenue from audio book sales made at the
      Apple iTunes Store in the period when the content is purchased
      and delivered. However, in accordance with the terms of the new agreement,
      the amount of revenue we recognize on each audio book sale is
      now a formula-driven, based upon the Apple iTunes selling price and
      the content cost of each audio book. As a result, Apple revenue for each
      quarterly period will reflect an estimate for the last month of the quarter,
      based on actual number of titles sold and the prior month or current unit sales
      price as applicable, at the Apple iTunes Store. Revenue in the three month
      period ended March 31, 2007 includes an estimate based upon the new revenue
      formula.





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





Upon
      launch of the new AudibleListener plans in December 2005, the legacy
      AudibleListener programs were no longer available to new customers 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.





-27-


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      of Contents




*Customer
      Concessions*





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





***Royalty
      Expense***




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





***Internal-Use
      Software***





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





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




In
      accordance with SFAS 123(R), we measure compensation cost for stock awards
      at
      fair value and recognize compensation over the requisite service period for
      awards expected to vest. Estimating the portion of stock awards that will
      ultimately vest requires judgment, and to the extent actual results or updated
      estimates differ from our current estimates, such amounts are recorded in the
      period estimates are revised. We consider 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.





-28-


Table
      of Contents




**Results
      of Operations**





The
      following table sets forth certain financial data for the periods indicated
      as a
      percentage of total revenue for the three month periods ended March 31, 2007
      and
      2006:





**Three
                months ended**
              **March
                31,****2007**
            
            **2006**Revenue,
                net:Content
                and services revenue:Consumer
                content
            
            
            98.9
            %
            
            97.8
            %Point
                of sale rebates
            
            
            (0.1
            )
            
            (0.9
            )Services
            
            
            0.1
            
            
            0.2Total
                content and services revenue
            
            
            98.9
            
            
            97.1Hardware
                revenue
            
            
            0.3
            
            
            0.6Related
                party revenue
            
            
            0.4
            
            
            1.9Other
                revenue
            
            
            0.4
            
            
            0.4Total
                revenue, net
            
            
            100.0
            
            
            100.0Operating
                expenses:Cost
                of content and services revenue:Royalties
                and other content charges
            
            
            44.6
            
            
            40.5Discount
                certificate rebates
            
            
            1.0
            
            
            1.5Total
                cost of content and services revenue
            
            
            45.6
            
            
            42.0Cost
                of hardware revenue
            
            
            0.7
            
            
            3.4Cost
                of related party revenue
            
            
            0.5
            
            
            0.8Operations
            
            
            15.1
            
            
            15.7Technology
                and development
            
            
            18.1
            
            
            18.7Marketing
            
            
            15.5
            
            
            21.8General
                and administrative
            
            
            12.3
            
            
            16.2Total
                operating expenses
            
            
            107.8
            
            
            118.6Loss
                from operations
            
            
            (7.8
            )
            
            (18.6
            )Loss
                on equity investment
            
            
            (0.2
            )
            
            --Other
                income, net
            
            
            3.3
            
            
            3.3Loss
                before income taxes
            
            
            (4.7
            )
            
            (15.3
            )Income
                tax expense
            
            
            (0.1
            )
            
            --Net
                loss
            
            
            (4.8
            )%
            
            (15.3
            )%








-29-


Table
      of Contents


***Three
      month period ended March 31, 2007 compared to three month period ended March
      31,
      2006 (unaudited):***




**Three
                months ended**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Content
                and services revenue **(in
                thousands)**:**$
            24,984
            
            $
            19,147
            
            $
            5,837
            
            
            30.5
            %




*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 month period ended March 31, 2007
      compared to the three month period ended March 31, 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 49% from approximately 279,000 at March 31, 2006, to
      approximately 415,000 at March 31, 2007. We recognized in revenue $7.9 million
      and $4.4 million from sales of Audible content at the Apple iTunes Store during
      the three month periods ended March 31, 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**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Hardware
                revenue **(in
                thousands)**:**$
            77
            
            $
            125
            
            $
            (48)
            
            
            (38.4)
            %





*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, *Revenue Arrangements with Multiple Deliverables* ,
      with
      these multiple-element arrangements (membership plus device), we recognize
      only shipping and handling fees as revenue for the delivery of hardware because
      all other consideration paid by the customer is contingent upon delivery of
      the
      content. 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 three month period ended
      March
      31, 2007 compared to the three month period ended March 31, 2006 is due to
      a
      reduction in devices shipped during the periods and a de-emphasis of hardware
      as
      a means of acquiring new members.





**Three
                months ended**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Related
                party revenue (in thousands):**$
            91
            
            $
            373
            
            $
            (282
            )
            
            (75.6)
            %




*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 March 31, 2007 and 2006, primarily
      included none and $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, as well as less than $0.1 million for both periods, in billings to France
      Loisirs for certain consulting services and reimbursement of related incremental
      costs. Related party revenue during the three month periods ended March 31,
      2007
      and 2006, also included approximately $0.1 million in fees earned under our
      agreement with Audible Germany for both periods, as well as none and $0.1
      million, respectively, in billings to Audible Germany for certain consulting
      services and reimbursement of related incremental costs incurred by us in
      connection with our license and services agreement.




-30-


Table
      of Contents




**Three
                months ended**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Other
                revenue (in thousands):**$
            112
            
            $
            70
            
            $
            42
            
            
            60.0
            %




*Other
      revenue* for the
      three month periods ended March 31, 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 March 31, 2007, we billed the publisher $1.5 million,
      of
      which $1.4 million has been received in connection with this agreement.





**Three
                months ended March 31,**
            
            **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
            
            $
            11,256
            
            $
            7,983
            
            
            45.1
            %
            
            41.7
            %Discount
                certificate rebates
            
            
            260
            
            
            298
            
            
            1.0
            %
            
            1.6
            %Total
                cost of content and services revenue
            
            $
            11,516
            
            $
            8,281
            
            
            46.1
            %
            
            43.3
            %





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 month period ended March 31, 2006 to March 31, 2007
      from 41.7% to 45.1%. This increase was primarily due to the increasing
      percentage of revenue from sales at the Apple iTunes Store, which yields a
      higher royalty cost as a percentage of revenue, 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
      quarter 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.








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The
      following is our cost of hardware:





**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            
            **$**
              **Change**
            
            **%
                Change****Cost
              of Hardware Revenue (in thousands):**$
            179
            
            $
            675
            
            $
            (496)
            
            (73.5)
            %





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




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





The
      following is our cost of related party revenue:




**Three
                Months Ended March 31,****2007**
            
            **2006**
            
            
            **$**
              **Change**
            
            
            **%
                Change****Cost of Related Party Revenue
              (in thousands):**$
            129
            
            $
            158
            
            $
            (29)
            
            
            (18.4)
            %





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





Cost
      of
      related party revenue for the three month periods ended March 31, 2007 compared
      to three month period ended March 31, 2006 has remained consistent. These costs
      primarily consisted of payroll costs related to services performed for France
      Loisirs and Audible Germany by certain employees of our technology, development,
      and audio departments.




The
      following is our operations expense:




**Three
                Months Ended March 31,**
            
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            **2006**
            
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Operations (in
              thousands):**$
            3,826
            
            $
            3,102
            
            
            $
            724
            
            
            15.3
            %
            
            16.2
            %





*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 month period ended March 31, 2007 versus the
      three month period ended March 31, 2006 primarily due to $0.2 million in higher
      share-based compensation costs, which was $0.3 million for the three month
      period ended March 31, 2007 compared to $0.1 million for the three month period
      ended March 31, 2006, and $0.3 million in higher outside service expenses.
      These
      increases were primarily related to the increased scale of our business
      resulting in a greater number of customers and transactions.





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The
      following is our technology and development expense:





**Three
                Months Ended March 31,**
            
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            **2006**
            
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Technology and Development
              (in
              thousands):**$
            4,571
            
            $
            3,694
            
            
            $
            877
            
            
            18.3
            %
            
            19.3
            %





*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 month period ended
      March 31, 2007 compared to the three month period ended March 31, 2006 was
      primarily due to $0.8 million in higher outside services expenses, $0.2 million
      in higher share-based compensation costs, which was $0.3 million for the three
      month period ended March 31, 2007 compared to $0.1 million for the three month
      period ended March 31, 2006, and $0.1 million in 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.





The
      following is our marketing expense:




**Three
                Months Ended March 31,**
            
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            **2006**
            
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****Marketing (in
              thousands):**$
            3,904
            
            $
            4,301
            
            
            $
            (397)
            
            
            15.6
            %
            
            22.5
            %





*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 decreased in the three month period ended March 31, 2007 versus the
      three month period ended March 31, 2006 primarily due to $0.3 million in lower
      advertising and promotional expenses and $0.1 million in lower personnel costs,
      offset partially by an increase of $0.1 million in share-based compensation
      costs, which was $0.3 million for the three month period ended March 31, 2007
      compared to $0.2 million for the three month period ended March 31, 2006. This
      reduction was a result of a lower cost for new subscriber acquisitions which
      was
      due to more effective marketing campaigns.





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The
      following is our general and administrative expense:





**Three
                Months Ended March 31,**
            
            
            
            **$**
            
            
            **As
                a Percentage of Content and Services Revenue****2007**
            
            **2006**
            
            
            
            **Change**
            
            
            **2007**
            
            
            **2006****General and Administrative
              (in
              thousands):**$
            3,104
            
            $
            3,201
            
            
            $
            (97)
            
            
            12.4
            %
            
            16.7
            %




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




The
      decrease in general and administrative expense in the three month period ended
      March 31, 2007 versus the three month period ended March 31, 2006 was primarily
      due to $0.4 million in lower legal and other professional fees and $0.2 million
      in lower job placement fees. This was partially offset by an increase of $0.2
      million in higher supplies and administrative costs and $0.1 million in higher
      personnel costs, including incentive compensation.




The
      following is our loss on equity investment:




**Three
                months ended**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Loss
              on Equity Investment (in thousands):**$
            60
            
            $
            --
            
            $
            60
            
            
            --




*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 March 31, 2007 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 month period ended March 31, 2006, there were no equity losses to record,
      as we had not funded any losses and had not made any monetary
      contributions.




The
      following is our other income, net:




**Three
                months ended**
              **March
                31,****2007**
            
            **2006**
            
            **$
                Change**
            
            **%
                Change****Other Income, net (in
              thousands):**$
            839
            
            $
            660
            
            $
            179
            
            
            27.1
            %




*Other
      Income, net* primarily consists of interest income. The increase in other income, net was
      due
      to an increase in interest earned on the investment of funds in short-term
      investments, associated principally with higher interest rates, which consisted
      of governmental agency notes and mortgage-backed securities.





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**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.




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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
      March 31, 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 March 31, 2007, we had
      an
      accumulated deficit of $141.7 million.





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





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





**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
      March 31, 2007, our cash and cash equivalents balance was $19.1 million. In
      addition, as of March 31, 2007 we had $46.4 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 March 31, 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.




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***Cash
      Requirements***




The
      following table shows future cash payments due under our commitments and
      obligations as of March 31, 2007 (in thousands):





**Year**
            
            **Operating
                Leases**
              **(1)**
            
            **Royalty
                Obligations**
              **(2)**
            
            **Service
                Agreements**
            
            **Committed
                Purchases**
            
            **Total**2007
            
            $
            312
            
            $
            590
            
            $
            1,369
            
            $
            1,382
            
            $
            3,6532008
            
            
            1,008
            
            
            76
            
            
            1,036
            
            
            --
            
            
            2,1202009
            
            
            1,066
            
            
            --
            
            
            51
            
            
            --
            
            
            1,1172010
            
            
            1,141
            
            
            --
            
            
            --
            
            
            --
            
            
            1,1412011
            
            
            1,215
            
            
            --
            
            
            --
            
            
            --
            
            
            1,2152012
                & Thereafter
            
            
            3,255
            
            
            --
            
            
            --
            
            
            --
            
            
            3,255Total
            
            $
            7,997
            
            $
            666
            
            $
            2,456
            
            $
            1,382
            
            $
            12,501





(1)
      Of
      the $8.0 million in total operating leases, $7.9 million relates to our new
      office lease agreement signed in September 2006.





(2)
      Of
      the $0.7 million in total royalty obligations, $0.3 milling 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
      March 31, 2007. The remaining obligation of $0.3 relates to content that had
      not
      yet been delivered as of March 31, 2007.





***Sources
      and Uses of Cash***





**March
                31,****2007**
            
            **2006****(in
                thousands)**
            
            **(in
                thousands)**Operating
                Activities
            
            $
            2,050
            
            $
            (3,646
            )Investing
                Activities
            
            
            1,740
            
            
            5,622Financing
                Activities
            
            
            371
            
            
            541Exchange
                Rate
            
            
            --
            
            
            (5
            )Increase
                in cash and cash equivalents
            
            $
            4,161
            
            $
            2,512





Net
      cash
      provided by operating activities for the three months ended March 31, 2007
      was
      $2.1 million. This was primarily attributable to an increase in deferred
      revenue, depreciation and amortization and share-based compensation expense,
      partially offset by our net loss, and a decrease in accrued royalties. The
      increase in deferred revenue was due to the increase in the number of
      memberships in our AudibleListener plans, as well as the revenue recognition
      model, where revenue is recognized based on the content delivery using the
      lesser of straight line or proportional performance revenues. Net cash used
      in
      operating activities for the three months ended March 31, 2006 was $3.6 million.
      This was primarily attributable to our net loss, an increase in prepaid expenses
      and other current assets, accounts receivable, and a decrease in accounts
      payable, partially offset by an increase in deferred revenue, accrued
      compensation, accrued expenses, depreciation and amortization and share-based
      compensation expense.




Net
      cash
      provided by investing activities for the three month period ended March 31,
      2007
      was $1.7 million, attributable to net proceeds from short-term investing
      activity of $5.1 million, partially offset by purchases of property and
      equipment of $3.3 million. Net cash provided by investing activities for the
      three months ended March 31, 2006 was $5.6 million. This was attributable to
      net
      short-term investing activity of $9.5 million offset by purchases of property
      and equipment of $3.7 million.




Net
      cash
      provided by financing activities for the three months ended March 31, 2007,
      was
      $0.4 million, resulting from proceeds from exercise of common stock options.
      Net
      cash provided by financing activities for the three months ended March 31,
      2006
      was $0.5 million, resulting primarily from proceeds from the exercise of common
      stock options and common stock warrants, partially offset by purchases of
      treasury stock.





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***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.





*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,
      we do not believe FIN 48 has 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 guidance in this FSP
      shall
      be applied upon the initial adoption of FIN 48.




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      of Contents





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




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





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





**Changes
      in Internal Control Over Financial Reporting**





There
      were no changes in our internal controls over financial reporting identified
      in
      connection with the evaluation required by paragraph (d) of Exchange Act Rules
      13a-15 or 15d-15 that occurred during our last fiscal quarter that have
      materially affected, or are reasonable likely to materially affect our internal
      control over financial reporting.





**Evaluation
      of Disclosure Controls and Procedures**




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




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer, we carried out an evaluation
      of
      the effectiveness of the design and operation of our disclosure controls and
      procedures pursuant to Exchange Act Rule 13a-15(e) and 15d-15(e) as of March
      31,
      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 the December 31, 2006 Form 10-K have not been remediated as of March 31,
      2007.





**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.





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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. 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.





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.





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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.





**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 March
      31,
      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**




None





**ITEM
      5. Other Information**




(a)
      None




(b)
      None





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





**Exhibit
                Number**
            **Description**10.55
            Third
                Amendment to the Master Alliance
                Agreement by and between Audible Inc., France Loisirs S.A.S. and
                Audio
                Direct S.A.S. dated March 31, 200731.1
            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.








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


****


****






**AUDIBLE,
                INC.**By:
            /s/
                William H. MitchellName:
            William
                H. MitchellTitle:
            Chief
                Financial Officer
              (Principal
                Financial and Accounting Officer)Date:
            May
                9, 2007





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