##### 



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

|                 |                                                                                          |  |                                                                     
|---------------- | ---------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------
|(Mark One)
[ x ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 
|                 |                                                                                          |  |                                                                     
|                 |                                                                                          |  | For the quarterly period ended September 30, 2002                   
|                 |                                                                                          |  |                                                                     
|                 |                                                                                          |  | OR                                                                  
|                 |                                                                                          |  |                                                                     
|[  ]             | 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                                 |  | 22-3407945            
|(State or other jurisdiction of          |  | (I.R.S. employer      
|incorporation or organization)           |  | identification number)
|                                         |  |                       
|65 WILLOWBROOK BLVD.                     |  |                       
|WAYNE, NEW JERSEY                        |  | 07470                 
|(Address of principal executive offices) |  | (Zip Code)            

(973) 837-2700
(Registrants telephone number, including area code)

None
(Former name, former address and former
fiscal year  if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

As of November 13, 2002, 31,627,869 shares of common stock (Common
Stock) of the Registrant were outstanding.

1



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##### 



AUDIBLE, INC.
INDEX
FORM 10-Q

|           |  |                                                                                                                |  |     
|---------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|PART I    |  | FINANCIAL INFORMATION                                                                                          |  | Page
|           |  |                                                                                                                |  |     
|Item 1.    |  | Financial Statements:                                                                                          |  |     
|           |  |                                                                                                                |  |     
|           |  | Condensed Balance Sheets as of September 30, 2002 (unaudited)
and December 31, 2001                            |  | 3   
|           |  |                                                                                                                |  |     
|           |  | Condensed Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 (unaudited) |  | 4   
|           |  |                                                                                                                |  |     
|           |  | Condensed Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (unaudited)           |  | 5   
|           |  |                                                                                                                |  |     
|           |  | Notes to Condensed Financial Statements                                                                        |  | 6   
|           |  |                                                                                                                |  |     
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations                          |  | 17  
|           |  |                                                                                                                |  |     
|Item 3.    |  | Qualitative and Quantitative Disclosure about Market Risk                                                      |  | 27  
|           |  |                                                                                                                |  |     
|Item 4.    |  | Controls and Procedures                                                                                        |  | 27  
|           |  |                                                                                                                |  |     
|PART II   |  | OTHER INFORMATION                                                                                              |  |     
|           |  |                                                                                                                |  |     
|Item 1.    |  | Legal Proceedings                                                                                              |  | 28  
|           |  |                                                                                                                |  |     
|Item 2.    |  | Changes in Securities                                                                                          |  | 28  
|           |  |                                                                                                                |  |     
|Item 3.    |  | Defaults Upon Senior Securities                                                                                |  | 29  
|           |  |                                                                                                                |  |     
|Item 4.    |  | Submission of Matters to a Vote of Securities Holders                                                          |  | 29  
|           |  |                                                                                                                |  |     
|Item 5.    |  | Other Information                                                                                              |  | 29  
|           |  |                                                                                                                |  |     
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                               |  | 30  
|           |  |                                                                                                                |  |     
|Signatures |  |                                                                                                                |  | 32  

2



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##### 



PART I  FINANCIAL INFORMATION

ITEM 1. Financial Statements

AUDIBLE, INC.
CONDENSED BALANCE SHEETS

|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                   |            |         |            | 
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | --------------------------------------------- | ---------- | ------------------ | --------- | ----------------- | ---------- | ------- | ---------- | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            | September 30, 2002 |           | December 31, 2001
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|Assets                                            |                                                                                                                                                                                        | (unaudited)                                                                                                                                                            |                                                             |                                               |            |                   
|Current assets:                                   |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Cash and cash equivalents                     |            | $                  | 3,670,017 |                   |            | $       | 7,627,802  | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Accounts receivable, net                      |            |                    | 227,710   |                   |            |         | 153,122    | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Royalty advances                              |            |                    | 93,000    |                   |            |         | 56,682     | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Prepaid expenses and other current assets     |            |                    | 519,359   |                   |            |         | 661,192    | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Inventory                                     |            |                    | 398,719   |                   |            |         | 449,220    | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Note receivable due from stockholder, current |            |                    |          |                   |            |         | 10,000     | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Total current assets                          |            |                    | 4,908,805 |                   |            |         | 8,958,018  | 
|Property and equipment, net                       |                                                                                                                                                                                        |                                                                                                                                                                        | 923,059                                                     |                                               |            |                    | 1,990,670 |                  
|Note receivable due from stockholder, non current |                                                                                                                                                                                        |                                                                                                                                                                        |                                                            |                                               |            |                    | 35,000    |                  
|Other assets                                      |                                                                                                                                                                                        |                                                                                                                                                                        | 90,805                                                      |                                               |            |                    | 15,805    |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Total assets                                  |            | $                  | 5,922,669 |                   |            | $       | 10,999,493 | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Liabilities and Stockholders Deficit         |            |                    |           |                   |            |         |            | 
|Current liabilities:                              |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Accounts payable                              |            | $                  | 1,215,191 |                   |            | $       | 1,519,586  | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Accrued expenses and compensation             |            |                    | 2,812,890 |                   |            |         | 2,345,288  | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Royalty obligations, current                  |            |                    | 645,500   |                   |            |         | 896,950    | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Advances, current                             |            |                    | 390,571   |                   |            |         | 517,813    | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        | Accrued dividends on redeemable convertible preferred stock |                                               |            | 470,138            |           |                   |            | 730,612 |           
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Total current liabilities                     |            |                    | 5,534,290 |                   |            |         | 6,010,249  | 
|Deferred cash compensation                        |                                                                                                                                                                                        |                                                                                                                                                                        | 90,550                                                      |                                               |            |                    | 93,550    |                  
|Royalty obligations, non current                  |                                                                                                                                                                                        |                                                                                                                                                                        | 45,000                                                      |                                               |            |                    | 48,500    |                  
|Advances, non current                             |                                                                                                                                                                                        |                                                                                                                                                                        | 34,031                                                      |                                               |            |                    | 77,780    |                  
|Redeemable convertible preferred stock;           |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        | Series A, par value $.01, 4,500,000 shares authorized,
3,091,818 and 2,751,707 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively |                                                             |                                               | 11,594,318 |                    |           |                   | 10,318,902 |        
|Commitments and contingencies (see note 9)        |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|Stockholders deficit:                            |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  | Common stock, par value $.01. 75,000,000 shares authorized
and 31,627,869 shares issued at September 30, 2002;
50,000,000 shares authorized and 27,546,989 issued at December
31, 2001 |                                                                                                                                                                        |                                                             | 316,279                                       |            |                    |           | 275,470           |           
|                                                  | Additional paid-in capital                                                                                                                                                             |                                                                                                                                                                        |                                                             | 97,696,784                                    |            |                    |           | 93,728,564        |           
|                                                  | Deferred compensation and services                                                                                                                                                     |                                                                                                                                                                        |                                                             | (2,006,935                                    | )          |                    |           | (5,884,267        | )         
|                                                  | Notes due from stockholders for common stock                                                                                                                                           |                                                                                                                                                                        |                                                             | (289,545                                      | )          |                    |           | (294,456          | )         
|                                                  | Convertible preferred stock;                                                                                                                                                           |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                   |           
|                                                  |                                                                                                                                                                                        | Series B, par value $.01, 1,250,000 shares authorized,
1,250,000 and no shares issued and outstanding at September
30, 2002 and December 31, 2001, respectively        |                                                             |                                               | 1,137,500  |                    |           |                   |           |        
|                                                  | Treasury stock at cost: 689,225 and 676,725 shares of common
stock at September 30, 2002 and December 31, 2001,
respectively                                                           |                                                                                                                                                                        |                                                             | (184,740                                      | )          |                    |           | (179,990          | )         
|                                                  | Accumulated deficit                                                                                                                                                                    |                                                                                                                                                                        |                                                             | (108,044,863                                  | )          |                    |           | (93,194,809       | )         
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  | Total stockholders deficit                                                                                                                                                            |                                                                                                                                                                        |                                                             | (11,375,520                                   | )          |                    |           | (5,549,488        | )         
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             | Total liabilities and stockholders deficit   |            | $                  | 5,922,669 |                   |            | $       | 10,999,493 | 
|                                                  |                                                                                                                                                                                        |                                                                                                                                                                        |                                                             |                                               |            |                    |           |                  

See accompanying notes to condensed financial statements.

3



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##### 



AUDIBLE, INC.
CONDENSED STATEMENTS OF OPERATIONS



---



|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |             |             |            | 
|------------------------------------------- | ------------------------------------------ | ----------------------------------------------- | ------------------------ | ---------- | ------------------ | --------- | ----------------- | ---------- | ----------- | --------- | ----------- | ----------- | ----------- | ---------- | ---------- | ----------- | ----------- | ---------- | 
|                                            |                                            |                                                 |                          |            | Three Months Ended |           | Nine Months Ended
|                                            |                                            |                                                 |                          |            | September 30,      |           | September 30,    
|                                            |                                            |                                                 |                          |            |                    |           |                  
|                                            |                                            |                                                 |                          |            | 2002               |           | 2001              |            | 2002        |           | 2001       
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |            
|                                            |                                            |                                                 |                          |            | (unaudited)        |           | (unaudited)       |            | (unaudited) |           | (unaudited)
|Revenue, net:                               |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            | Content and services                       |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |             |            
|                                            |                                            |                                                 | Consumer content         |            | $                  | 3,002,039 |                   |            | $           | 1,398,379 |             |             | $           | 7,442,070  |            |             | $           | 3,423,775  | 
|                                            |                                            |                                                 | Services                 |            |                    | 64,316    |                   |            |             | 120,566   |             |             |             | 299,942    |            |             |             | 635,375    | 
|                                            |                                            |                                                 | Bulk content             |            |                    |          |                   |            |             | 485,048   |             |             |             |           |            |             |             | 935,048    | 
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            | Total content and services                 |                                                 |                          | 3,066,355  |                    |           |                   | 2,003,993  |             |           |             | 7,742,012   |             |            |            | 4,994,198   |            
|                                            | Hardware                                   |                                                 |                          | 152,243    |                    |           |                   | 140,044    |             |           |             | 734,877     |             |            |            | 1,093,387   |            
|                                            | Other                                      |                                                 |                          | 68,709     |                    |           |                   | 16,895     |             |           |             | 100,961     |             |            |            | 298,715     |            
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            |                                            |                                                 | Total revenue, net       |            |                    | 3,287,307 |                   |            |             | 2,160,932 |             |             |             | 8,577,850  |            |             |             | 6,386,300  | 
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|Operating expenses:                         |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            | Cost of content and services revenue       |                                                 |                          | 1,475,558  |                    |           |                   | 1,162,221  |             |           |             | 3,596,012   |             |            |            | 3,759,330   |            
|                                            | Cost of hardware revenue                   |                                                 |                          | 604,644    |                    |           |                   | 451,958    |             |           |             | 2,053,196   |             |            |            | 2,193,462   |            
|                                            | Production expenses                        |                                                 |                          | 1,029,185  |                    |           |                   | 1,235,676  |             |           |             | 2,946,614   |             |            |            | 4,577,708   |            
|                                            | Development                                |                                                 |                          | 702,463    |                    |           |                   | 736,251    |             |           |             | 1,778,349   |             |            |            | 2,851,772   |            
|                                            | Sales and marketing                        |                                                 |                          | 3,016,255  |                    |           |                   | 3,436,519  |             |           |             | 9,264,769   |             |            |            | 11,151,068  |            
|                                            | General and administrative                 |                                                 |                          | 1,005,892  |                    |           |                   | 1,179,426  |             |           |             | 2,850,421   |             |            |            | 3,885,741   |            
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            |                                            |                                                 | Total operating expenses |            |                    | 7,833,997 |                   |            |             | 8,202,051 |             |             |             | 22,489,361 |            |             |             | 28,419,081 | 
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            | Loss from operations                       |                                                 |                          | (4,546,690 | )                  |           |                   | (6,041,119 | )           |           |             | (13,911,511 | )           |            |            | (22,032,781 | )          
|                                            | Other income, net                          |                                                 |                          | 17,134     |                    |           |                   | 100,525    |             |           |             | 76,399      |             |            |            | 519,266     |            
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            |                                            | Net loss                                        |                          |            | (4,529,556         | )         |                   |            | (5,940,594  | )         |             |             | (13,835,112 | )          |            |             | (21,513,515 | )         
|                                            |                                            | Accrued dividends on redeemable
preferred stock |                          |            | (354,195           | )         |                   |            | (302,496    | )         |             |             | (1,014,942  | )          |            |             | (772,662    | )         
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            | Net loss applicable to common
stockholders |                                                 | $                        | (4,883,751 | )                  |           | $                 | (6,243,090 | )           |           | $           | (14,850,054 | )           |            | $          | (22,286,177 | )          
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|Basic and diluted net loss per common share |                                            | $                                               | (0.16                    | )          |                    | $         | (0.23             | )          |             | $         | (0.49       | )           |             | $          | (0.83      | )          
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            
|Weighted average shares outstanding         |                                            |                                                 | 30,947,340               |            |                    |           | 26,885,820        |            |             |           | 30,352,908  |             |             |            | 26,933,436 |            
|                                            |                                            |                                                 |                          |            |                    |           |                   |            |             |           |             |             |             |            |            |            

See accompanying notes to condensed financial statements.

4



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##### 



AUDIBLE, INC.
CONDENSED STATEMENTS OF CASH FLOWS



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|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |             |           |          |             |  
|------------------------------------------------ | --------------------------------------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------- | --------------------------------------------------- | --------- | ----------------- | ---------- | ----------- | --------- | -------- | ----------- | -
|                                                 |                                                                             |                                                                        |                                               |                                                     |           | Nine months Ended
|                                                 |                                                                             |                                                                        |                                               |                                                     |           | September 30,    
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                  
|                                                 |                                                                             |                                                                        |                                               |                                                     |           | 2002              |            | 2001       
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 |                                                                             |                                                                        |                                               |                                                     |           | (unaudited)       |            | (unaudited)
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|Cash flows from operating activities:            |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 | Net loss                                                                    |                                                                        | $                                             | (13,835,112                                         | )         |                   | $          | (21,513,515 | )        
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                        |                                               |                                                     |           |                   |            |             |          
|                                                 |                                                                             | Depreciation and amortization                                          |                                               |                                                     | 1,212,744 |                   |            |             | 1,360,813 |         
|                                                 |                                                                             | Services rendered for common stock and warrants                        |                                               |                                                     | 4,594,223 |                   |            |             | 5,530,944 |         
|                                                 |                                                                             | Services rendered for preferred stock                                  |                                               |                                                     | 454,998   |                   |            |             |          |         
|                                                 |                                                                             | Non-cash compensation charge                                           |                                               |                                                     | 219,834   |                   |            |             | 260,097   |         
|                                                 |                                                                             | Non-cash bonus in satisfaction of note receivable due from stockholder |                                               |                                                     | 40,250    |                   |            |             |          |         
|                                                 |                                                                             | Deferred cash compensation                                             |                                               |                                                     | (3,000    | )                 |            |             | (113,540  | )       
|                                                 |                                                                             | Non-cash barter revenue                                                |                                               |                                                     |          |                   |            |             | (285,048  | )       
|                                                 |                                                                             | Changes in assets and liabilities:                                     |                                               |                                                     |           |                   |            |             |           |         
|                                                 |                                                                             |                                                                        | Interest receivable on short-term investments |                                                     |           | 1,260             |            |             |           | 98,078   |            
|                                                 |                                                                             |                                                                        | Accounts receivable, net                      |                                                     |           | (74,588           | )          |             |           | (170,293 | )          
|                                                 |                                                                             |                                                                        | Royalty advances                              |                                                     |           | (36,318           | )          |             |           | 661,755  |            
|                                                 |                                                                             |                                                                        | Prepaid expenses and other current assets     |                                                     |           | 140,573           |            |             |           | 97,496   |            
|                                                 |                                                                             |                                                                        | Inventory                                     |                                                     |           | 50,501            |            |             |           | (220,117 | )          
|                                                 |                                                                             |                                                                        | Other assets                                  |                                                     |           | (75,000           | )          |             |           | 21,705   |            
|                                                 |                                                                             |                                                                        | Accounts payable                              |                                                     |           | (304,395          | )          |             |           | (436,664 | )          
|                                                 |                                                                             |                                                                        | Accrued expenses and compensation             |                                                     |           | 1,057,602         |            |             |           | (381,750 | )          
|                                                 |                                                                             |                                                                        | Royalty obligations                           |                                                     |           | (254,950          | )          |             |           | (320,250 | )          
|                                                 |                                                                             |                                                                        | Advances                                      |                                                     |           | (170,991          | )          |             |           | (78,826  | )          
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 |                                                                             |                                                                        |                                               | Net cash used in operating activities               |           |                   | (6,982,369 | )           |           |          | (15,489,115 | )
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|Cash flows from investing activities:            |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 | Purchases of property and equipment                                         |                                                                        |                                               | (145,133                                            | )         |                   |            | (983,419    | )        
|                                                 | Redemptions of short-term investments, net                                  |                                                                        |                                               |                                                    |           |                   |            | 1,957,734   |          
|                                                 | Payments received on note receivable due from stockholder                   |                                                                        |                                               |                                                    |           |                   |            | 5,000       |          
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 |                                                                             |                                                                        |                                               | Net cash (used in) provided by investing activities |           |                   | (145,133   | )           |           |          | 979,315     |  
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|Cash flows from financing activities:            |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 | Proceeds from issuance of Series A redeemable convertible preferred stock   |                                                                        |                                               |                                                    |           |                   |            | 10,000,000  |          
|                                                 | Proceeds from sale of common stock, net                                     |                                                                        |                                               | 3,159,250                                           |           |                   |            |            |          
|                                                 | Proceeds from exercise of common stock options                              |                                                                        |                                               | 5,556                                               |           |                   |            |            |          
|                                                 | Payments received on notes due from stockholders for common stock           |                                                                        |                                               | 4,911                                               |           |                   |            | 63,082      |          
|                                                 | Payment of principal on obligations under capital leases                    |                                                                        |                                               |                                                    |           |                   |            | (47,187     | )        
|                                                 | Cash paid for purchase of treasury stock                                    |                                                                        |                                               |                                                    |           |                   |            | (5,767      | )        
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 |                                                                             |                                                                        |                                               | Net cash provided by financing activities           |           |                   | 3,169,717  |             |           |          | 10,010,128  |  
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 |                                                                             |                                                                        |                                               | Decrease in cash and cash equivalents               |           |                   | (3,957,785 | )           |           |          | (4,499,672  | )
|Cash and cash equivalents at beginning of period |                                                                             |                                                                        | 7,627,802                                     |                                                     |           |                   | 14,149,027 |            
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|Cash and cash equivalents at end of period       |                                                                             | $                                                                      | 3,670,017                                     |                                                     |           | $                 | 9,649,355  |            
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|Non cash investing and financing activities:     |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            
|                                                 | Common stock received as payment on note receivable                         |                                                                        | $                                             | 4,750                                               |           |                   |            |            |          
|                                                 |                                                                             |                                                                        |                                               |                                                     |           |                   |            |            

See accompanying notes to condensed financial statements.

5



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying condensed financial statements as of September 30,
2002, and for the three and nine months ended September 30, 2002 and 2001,
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
accounting principles generally accepted in the United States of America.
Operating results for the three and nine months ended September 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended December 31, 2001, from the Companys Annual Report on Form 10-K.

Barter Arrangements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the three and nine months ended September 30, 2001, $485,048 and
$785,048, respectively, of our bulk content revenue was the result of barter
transactions in which we exchanged bulk content for advertising or prepaid
advertising. Revenue from barter transactions is recognized based on the
fair value of the consideration surrendered or received, whichever is more
readily determinable in accordance with Accounting Principles Board (APB)
No. 29, Accounting for Nonmonetary Transactions. Advertising received
under barter arrangements is recognized in the period the advertising is
broadcasted. As of September 30, 2002, all of the acquired advertising
related to these barter agreements had been expensed. There were no bulk
content barter transactions in the three and nine months ended September 30,
2002.

Basic and Diluted Net Loss Per Common Share



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic and diluted net loss per common share is presented in accordance
with the provisions of SFAS No. 128, ''Earnings Per Share. Basic net loss
per common share is computed by dividing net loss applicable to common
stockholders by the weighted average number of common shares outstanding for
the period. Diluted net loss per common share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock and resulted in the
issuance of common stock. Diluted net loss per common share is equal to
basic net loss per common share, since all common stock equivalents are
antidilutive for each of the periods presented.

6



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Diluted net loss per common share for the three and nine months ended
September 30, 2002 does not include the effects of outstanding options to
purchase 7,372,150 shares of common stock; warrants outstanding to purchase
3,505,271 shares of common stock; 12,467,138 shares of common stock on
conversion of outstanding Series A Redeemable Convertible Preferred Stock
(Series A); and 1,250,000 shares of common stock on conversion of
outstanding Series B Convertible Preferred Stock (Series B), as the effect
of their inclusion is antidilutive during the periods. Diluted net loss per
common share for the three and nine months ended September 30, 2001 does not
include the effects of outstanding options to purchase 6,084,400 shares of
common stock, outstanding warrants to purchase 2,390,654 shares of common
stock, and 10,666,664 shares of common stock on conversion of outstanding
Series A as the effect of their inclusion is antidilutive during the
periods.

(2) Stockholders Equity

Common Stock



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 1999, the Company issued 229,500 shares of common stock to
employees at a price less than the fair value of the stock at the time of
issuance. These shares, which are subject to vesting over four years, were
paid for by full recourse promissory notes executed by the employees. The
difference between the fair value and the issue price of these common shares
of $907,214 was recorded as deferred compensation, a component of
stockholders equity, and is being amortized as an expense straight-line
over the vesting term. When employees have left the Company, the remaining
unexpensed deferred compensation has been reversed against additional
paid-in-capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | In February 2000, the Company offered 100,000 common shares to its new
Chief Executive Officer in connection with his offer of employment at five
dollars per share less than the fair value of the stock. The Company
recorded $500,000 as deferred compensation in February 2000 and was
recording the compensation expense straight-line over the vesting term. The
offer to purchase these shares was rescinded in August 2000, and the CEO did
not purchase any of the offered shares. In August 2000, the Company issued
to its CEO 500,000 stock options at an exercise price equal to the fair
value of the common stock at the time of issuance. The Company was
recording the original compensation expense over the vesting term of the new
option grant, and was accounting for 100,000 of the 500,000 newly issued
options as replacement options using variable
accounting by adjusting the compensation expense associated with these
100,000 options based on the closing price of the Companys common stock in
accordance with FASB Interpretation No. 44 (FIN 44) Accounting for Certain
Transactions involving Stock Compensation  an Interpretation of APB Opinion
No. 25. In July 2001, as a result of the CEO no longer being employed by
the Company, the Company stopped recording any further expense related to
these options and reversed the remaining unexpensed deferred compensation
against additional paid-in-capital.

7



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2000, the Company issued 370,000 options to purchase shares of
common stock to employees at $1.00 less than the fair value of the common
stock at the time of issuance. These options are subject to vesting over
four years. The difference between the fair value and the issue price of
these options of $370,000 was recorded as deferred compensation, and is
being amortized as an expense straight-line over the vesting term. When
employees have left the Company, the remaining unexpensed deferred
compensation has been reversed against additional paid-in-capital.                                                                                                              
|
| | In May 2001, the Company issued 50,000 options to purchase shares of
common stock to an employee at $0.50 less than the fair value of the common
stock at the time of issuance. These options are subject to vesting over
four years. The difference between the fair value and the issue price of
these options of $25,000 was recorded as deferred compensation, and was
being amortized as an expense straight-line over the vesting term. In July
2001, as a result of the employee no longer being employed by the Company,
the Company stopped recording any further expense related to these 50,000
options and reversed the remaining unexpensed deferred compensation against
paid-in-capital.
|
| | During the three months ended September 30, 2002 and 2001, $73,278 and
$74,278, respectively, of compensation expense was recognized related to
these transactions. During the nine months ended September 30, 2002 and
2001, $219,834 and $260,097, respectively, of compensation expense was
recognized related to these transactions. During the three and nine months
ended September 30, 2001, none and $23,431, respectively, of deferred
compensation was reversed against paid-in capital related to unvested
options forfeited due to employees leaving the Company. No such forfeitures
occurred during the three or nine months ended September 30, 2002.                                   
|
| | The Company has a Stock Incentive Plan (the ''Plan), which permits up
to 9,000,000 common stock shares to be issued under the Plan. The Plan
permits the granting of stock options, stock appreciation rights, restricted
or unrestricted stock awards, phantom stock, performance awards and other
stock-based awards. As of September 30, 2002, options to purchase 7,372,150
common stock shares were outstanding.                                                                                                                                                                                                                                                                                
|
| | In February 2002, the Company issued 4,069,768 shares of common stock
in connection with an investment in the Company made by Special Situations
Funds (see note 10).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | During the three and nine months ended September 30, 2002, the Company
issued none and 11,112, respectively, shares of common stock in connection
with the exercise of employee stock options. During the three and nine
months ended September 30, 2001, no shares of common stock were issued.                                                                                                                                                                                                                                                                                                                                                                                                       

8



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In March 2002, at a special meeting of stockholders of Audible Inc.,
the Company increased the number of shares of common stock authorized from
50,000,000 to 75,000,000. As of September 30, 2002 and December 31, 2001,
the Company had issued 31,627,869 and 27,546,989 shares of common stock,
respectively. As of September 30, 2002 and December 31, 2001, the Company
had 3,505,271 and 2,455,654 shares of common stock, respectively, reserved
for issuance upon exercise of outstanding common stock warrants, and
7,372,150 and 6,010,150 shares of common stock, respectively, reserved for
issuance upon exercise of outstanding options. As of September 30, 2002 and
December 31, 2001, the Company had 12,467,138 and 11,006,828 shares of
common stock, respectively, reserved for issuance upon conversion of
outstanding Series A redeemable convertible preferred stock, and 1,250,000
and none shares of common stock, respectively, reserved for issuance upon
conversion of outstanding Series B convertible preferred stock

(3) Redeemable Convertible Preferred Stock

Microsoft Investment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In February, 2001, Microsoft purchased 2,666,666 shares of Series A
stock for $10,000,000 at a per share price of $3.75. Each share of Series A
was originally convertible into four shares of Common Stock, (equivalent to
a price of $.9375 per share), subject to adjustment under certain
conditions. As a result of the investment in the Company made by Special
Situations Funds in the first quarter of 2002, the conversion rate has been
adjusted as per the Stock Purchase Agreement to 4.0323 shares of Common
Stock. The stock is convertible at the option of the holder at any time
prior to the fifth anniversary of the original issue date. Dividends are
payable semi-annually at an annual rate of 12% in either additional
preferred shares or in cash at the option of the Company. As of September
30, 2002, the Company had issued 425,152 additional shares of Series A
covering the dividends payable through June 1, 2002. On the fifth
anniversary of the original issue date, the Company is required to redeem
all remaining outstanding shares at a per share price of $3.75 plus all
accrued and unpaid dividends. During the three months ended September 30,
2002 and 2001, $354,195 and $302,496, respectively, had been recognized as
accrued dividends. During the nine months ended September 30, 2002 and
2001, $1,014,942 and $772,662, respectively, had been recognized as accrued
dividends. As of September 30, 2002, and December 31, 2001, approximately
$470,138 and $730,612, respectively, in accrued dividends are included in
the accompanying Balance Sheet.

9



---



##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(4) Microsoft Agreement



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 1998, the Company entered into a five-year agreement with
Microsoft. The agreement provides for services related to integration of
products, the granting of various rights and licenses, and a provision for
Microsoft to be paid future royalties for content distributed as a result of
the software developed in the agreement. Under the terms of the agreement,
Microsoft committed a minimum of $2,000,000 in payments to the Company to
integrate certain products and acquire various rights and licenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Microsoft advanced Audible $1,500,000 in November 1998 in consideration
of Audible granting Microsoft the right to distribute software enabling
users of Microsoft platforms to access and use Audible content. The
Company allocated $50,000 of this advance to certain business development
work that was recognized as a reduction of general and administrative
expense in the nine month period ended September 30, 2001. The
remaining $1,450,000 of this advance has been recognized as revenue on a
straight-line basis beginning in the quarter ended September 30, 1999
through the initial term of the agreement, which ended in the second
quarter of 2001. During the three months and nine months ended
September 30, 2001, none and $252,174, respectively, of this advance was
recognized as other revenue. No revenue related to this transaction was
recognized during the three and nine months ended September 30, 2002.                                                               
|
| | Audible will pay Microsoft a royalty on content licensed and
distributed by Audible to each end user that accesses its content using the
developed software. Royalties will be recognized during the period that the
related content revenue is earned. Through September 30, 2002, Audible had
not recognized any royalties under this agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | In April 1999, in connection with an amendment to the agreement with
Microsoft, the Company issued to Microsoft a warrant which expires November
18, 2003 to purchase 100,000 shares of common stock at the IPO price of
$9.00 per share. The fair value of this warrant was determined in
accordance with EITF Issue No. 96-18, Accounting for Equity Instruments
that are Issued to Other than Employees for Acquiring or in Conjunction with
Selling, Goods or Services and was being amortized as an expense on a
straight-line basis over the same period as the $1,450,000 advance described
above. During the three and nine months ended September 30, 2001, none and
$89,611, respectively, was recorded as a production expense related to this
warrant with the non-cash credit for services to additional paid-in capital.
No expense related to this transaction was recognized during the three and
nine months ended September 30, 2002 as the fair value was fully amortized
during 2001.

10



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(5) Services Agreement



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September 1999, in connection with a services agreement, the Company
issued a warrant to purchase 150,000 shares of common stock at $0.01 per
share, which is fully vested, and a warrant to purchase 500,000 shares of
common stock at $8.00 per share, which is subject to vesting over a
three-year period. The agreement allows for an additional warrant to
purchase 250,000 shares of common stock at $8.00 per share upon extension of
the agreement for an additional year, also subject to vesting. In May 2001,
this services agreement was amended. Under the terms of the amended
agreement, the previously issued warrant to purchase 500,000 shares at $8.00
was replaced with two new warrants. The first new warrant issued, which is
fully vested, is for the purchase of 200,000 shares of common stock at $0.91
per share. The second warrant for the purchase of 200,000 shares of common
stock at $0.91 per share, is subject to vesting over a 20 month period
ending December 31, 2002.
|
| | The fair value of these warrants was determined in accordance with EITF
Issue No. 96-18 and is being amortized as an expense on a straight-line
basis over the amended term of the service agreement using variable plan
accounting for any unvested portion of shares. Under variable plan
accounting, the compensation costs will vary each accounting period until
the final measurement date. During the three months ended September 30,
2002 and 2001, $116,928 and $123,813, respectively, of expense was recorded,
primarily as a marketing expense, related to this agreement with the
non-cash credit for services to additional paid-in capital. During the nine
months ended September 30, 2002 and 2001, $354,564 and $688,412,
respectively, of expense was recorded, primarily as a marketing expense,
related to this agreement with the non-cash credit for services to
additional paid-in capital.                                                                                             

(6) Amazon Agreements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2000, the Company entered into two agreements with
Amazon.com. Under the Co-Branding, Marketing and Distribution Agreement the
Company is the exclusive provider of digital spoken audio
(as defined) to Amazon.com. On January 24, 2001, the Company signed
Amendment No.1 to its Co-Branding, Marketing, and Distribution Agreement
with Amazon.com. Under the amendment, the annual fee for Year 3 of the
agreement is reduced from $10,000,000 to $1,500,000 and an additional fee of
$1,000,000 is payable in Year 2 of the agreement. Also in connection with
Amendment No.1, the Company issued 500,000 fully vested common stock
warrants to Amazon.com at an exercise price of $1.50 per share, which are
exercisable after
January 31, 2002. The fair value of these warrants was determined in
accordance with EITF Issue No. 96-18 and is being amortized as an expense on
a straight-line basis over the remaining term of the agreement. During each
of the three month periods ended September 30, 2002 and 2001, $43,200 was
recorded as a marketing expense related to these warrants with the non-cash
credit for services to additional paid-in capital. During each of the nine
month periods ended September 30, 2002 and 2001, $129,600 was recorded as a
marketing expense related to these warrants with the non-cash credit for
services to additional paid-in capital.

11



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##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the three-year term of this agreement, in consideration for
certain services, Amazon will receive $22,500,000 (as amended) plus a
specified percentage of revenue earned over a specified amount. Under the
Securities Purchase Agreement, Amazon.com purchased 1,340,033 shares of
common stock from the Company for $20,000,000. Under the agreements, the
consideration paid by Amazon for the purchase of the
common stock, and the Companys obligation for the annual fee for the
first two years per the original
Co-Branding, Marketing, and Distribution Agreement, which are identical
amounts, were offset and no cash was exchanged. Accordingly, $20,000,000
was recorded as deferred services, a component of stockholders equity, and
was being amortized over the first two years of the agreement on a
straight-line basis. Prior to Amendment No. 1, through January 2001,
$10,000,000 had been amortized as a marketing expense related to the initial
$20,000,000 of deferred services. Subsequent to Amendment No. 1, the
unamortized payment for year 2 of $10,000,000 plus the additional $2,500,000
payment required under the amendment, or $12,500,000, is being
amortized on a straight-line basis over the remaining term of the
agreement of 24 months. During each of the three months ended September 30,
2002 and 2001, $1,250,000 was recorded as a marketing expense, with the
non-cash credit to deferred services. During the nine months ended September
30, 2002 and 2001, $3,750,000 and $4,166,667, respectively, was recorded as
a marketing expense, with the non-cash credit to deferred services.
|
| | During each of the three months ended September 30, 2002 and 2001,
$312,500 was recorded as a marketing expense representing the straight-line
amortization of the cash portion of payments due under this agreement.
During the nine months ended September 30, 2002 and 2001, $937,500 and
$833,333, respectively, was recorded as a marketing expense representing the
straight-line amortization of the cash portion of payments due under this
agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | As of September 30, 2002, a total of $1,125,000 in cash payments, which
was payable in three installments of $375,000 each due on January 30,
April 30, and July 31, 2002, respectively, under this agreement remains
unpaid. Of this amount, $1,083,000 has been accrued based on the
straight-line amortization and is included in Accrued Expenses and
Compensation in the accompanying September 30, 2002 Balance Sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

(7) Random House Agreement



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On May 5, 2000 Audible and Random House entered into a 50-month
Co-Publishing, Marketing, and Distribution Agreement to form a strategic
alliance to establish Random House Audible, a publishing imprint, as defined
in the agreement, to produce spoken word content specifically suited for
digital distribution. All titles published by the imprint are being
distributed exclusively on the Internet by Audible. As part of this
alliance, Random House, through its Random House Ventures, LLC subsidiary,
purchased

12



---



##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 169,780 shares of Audible common stock from the Company for $1,000,000. Audible is required to
contribute $1,000,000 annually, or
$4,000,000 in total, towards funding the acquisition and creation of digital
audio titles through Random House Audible. This total contribution was
being amortized over the 50-month term as a cost of content and services
revenue. On March 26, 2002 the agreement was amended to waive the cash
payment due to Random House in 2002 of $1,250,000, thereby reducing the
total cash payments due under the agreement from $4,000,000 to $2,750,000.
Through September 30, 2002, $1,250,000 of the revised $2,750,000 obligation
had been paid, with the remaining amount of $1,500,000 due in 2003 and 2004.
On April 1, 2002, the Companys Board of Directors authorized the
amendment and the issuance of 1,250,000 shares of Series B Convertible
Preferred Stock. At any time on or after March 26, 2004, subject to certain
conditions, all outstanding shares of Series B Convertible Preferred Stock
shall automatically convert to shares of common stock at the then effective
conversion price.                                                                                                                                                                                                                                                                              
|
| | The fair value of the Series B Convertible Preferred Stock issued was
determined in accordance with EITF Issue No. 01-1, Accounting for a
Convertible Instrument Granted or Issued to a Nonemployee for Goods or
Services or a Combination of Goods or Services and Cash. Accordingly, using
the measurement date of March 26, 2002, the fair value of the Series B stock
issued was determined to be $1,137,500. On April 1, 2002 when the
Series B was issued, the Company recorded $547,500 (the difference between
the fair value of the shares and the previously recognized accrued liability
of $590,000) as deferred services, a component of stockholders deficit.
During the three months ended September 30, 2002 and 2001, $ 227,499 and
$240,000, respectively, was recorded as a cost of content and services
revenue related to this agreement. During the nine months ended September
30, 2002 and 2001, $694,998 and $720,000, respectively, was recorded as a
cost of content and services revenue related to this agreement.                                                                                                                                                                                                                                                                                                                                                                           
|
| | The original agreement further provides for Random House to be granted
a warrant to purchase 878,333 shares of Audible common stock at various
exercise prices that vest over the term of the agreement as well as the
granting of additional warrants to Random House to purchase Audible common
shares based on future performance. The fair value of these warrants was
determined in accordance with EITF Issue No. 96-18 and is being amortized as
an expense on a straight-line basis over the 50-month term of the agreement.
The warrants are accounted for using variable plan accounting whereby
compensation costs will vary each accounting period until the final
measurement date. During the three months ended September 30, 2002 and
2001, $124,079 and $90,581, respectively, was recorded as a cost of content
and services revenue related to these warrants with the non-cash credit for
services to additional paid-in capital. During the nine months ended
September 30, 2002 and 2001, $313,381 and $402,597, respectively, was
recorded as a cost of content and services revenue related to these warrants
with the non-cash credit for services to additional paid-in capital.
Additionally, the agreement contains provisions for profit participation and
bounties, among other items. Random House Audible is an imprint of Random
House, Inc.s Random House Audio Publishing Group division.

13



---



##### 



AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(8) Related Party Transactions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 11, 2001, the Company amended the payment terms of the $50,000
note receivable due from a stockholder-employee due on March 27, 2001. The
amendment required semi-annual principal payments of at least $5,000
beginning July 15, 2001 until the note and all accrued interest is repaid.
The interest rate on the note was 5.42% annually. On September 3, 2002, the
remaining outstanding principal balance of $45,000 and all accrued interest
was paid to the Company by the stockholder-employee giving the Company 12,500
shares of Audible common stock with the fair value at the date of the
transaction of $4,750, and with the proceeds of a salary bonus paid to the
stockholder-employee on the same date.

(9) Contingencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2001, the Company was named as a defendant in a securities
class action filed in United States District court for the Southern District
of New York related to its initial public offering (IPO) in July 1999. The
lawsuits also named certain of the underwriters of the IPO, including Credit
Suisse First Boston Corporation, J.P. Morgan Chase & Co., Volpe Brown Whelan
& Co., LLC, and Wit Capital Corporation, as well as certain Officers and
Directors and former Directors of the Company 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 Litigation). The complaints
allege that the prospectus and the registration statement for the IPO failed
to disclose that the underwriters allegedly solicited and received
excessive commissions from investors and that some investors in the IPO
allegedly agreed with the underwriters to buy additional shares in the
aftermarket in order to inflate the price of the Companys stock. A
consolidated amended complaint was filed April 19, 2002. The Company and
certain officers, directors and former directors are named in the suits
pursuant to Section 11 of the Securities Act of 1933. The complaints seek
unspecified damages, attorney and expert fees, and other unspecified
litigation costs.
|
| | On July 1, 2002, the underwriter defendants in the consolidated actions
moved to dismiss all of the IPO Litigations, including the action involving
the Company. On July 15, 2002, the Company, along with other non-underwriter
defendants in the coordinated cases, also moved to dismiss the litigation.
Those motions were fully briefed on September 13 and September 27, 2002,
respectively. Those motions have not yet been decided. Due to the inherent
uncertainties of litigation and because the litigation is at a preliminary
stage, we cannot accurately predict the ultimate outcome of the motions. In
addition, the individual defendants in the IPO Litigation signed a tolling
agreement and were dismissed from the action without prejudice on October 9,
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Other than what is disclosed above, we are not a party to any lawsuit
or proceeding, which we believe is likely to have a material effect on us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(10) Special Situation Funds Investment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 15, 2002, Special Situations Funds purchased 4,069,768
shares of common stock for $3,500,000 at a per share price of $0.86. Net
proceeds received by the Company was $3,159,000 after deducting direct costs
of $331,000 in finders fees and $10,000 in legal fees. In connection with
this transaction, the Company
issued warrants to purchase an additional 1,220,930 shares of common stock.
The warrants are exercisable at a price of $1.15 per share anytime prior to
the fifth anniversary of the issue date. The Company may demand the
warrantholder exercise its rights in the event that closing bid price of a
share of the Companys common
stock exceeds $2.30 for twenty consecutive trading sessions.

(11) Nasdaq Listing Qualifications



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 29, 2002, the Company received a Nasdaq Listing
Qualifications letter advising the Company that its stock had closed below
the $1.00 per share requirement for the last 180 consecutive trading days.
Accordingly, the Company was notified that, unless appealed, its securities
would be subject to delisting. The Company has filed a request to appeal the
delisting with the Nasdaq Listing Qualifications Panel. The Company expects
that its appeal request will be granted and that the appeal will be heard
sometime in December 2002. The results of the appeal are expected in the
second half of December 2002 or early January 2003.
|
| | If the Companys common stock is de-listed from the Nasdaq Small Cap
Market, the Company expects that its common stock would trade on The
National Association of Securities Dealers, Inc. (NASDs) OTC Bulletin
Board. Such alternative trading markets are generally considered less
efficient than the Nasdaq National Market.                                                                                                                                                                                                                                                                                                                           
|
| | Consequently, selling our common stock would be more difficult because
smaller quantities of shares would likely be bought and sold, transactions
could be delayed, and securities analysts and news media coverage of us may
be reduced. These factors could result in lower prices and larger spreads
in the bid and ask prices for shares of common stock.                                                                                                                                                                                                                                                                                              
|
| | Such delisting from the Nasdaq Small Cap Market or further declines in
our stock price could also greatly impair our ability to raise additional
necessary capital through equity or debt financing, and significantly
increase the ownership dilution to stockholders caused by our issuing
equity. The price at which we issue shares in such transactions is
generally based on the market price of our common stock and a decline in our
stock price could result in the need for us to issue a greater number of
shares to raise a given amount of funding.                                                                                            

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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, if our common stock is not listed on the Nasdaq Market, we
may become subject to Rule 15g-9 under the Securities and Exchange Act of
1934, as amended. That rule imposes additional sales practice requirements
on broker-dealers that sell low-priced securities to persons other than
established customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the
purchasers written consent to the transaction prior to sale.
Consequently, the rule may affect the ability of broker-dealers to sell the
common stock and affect the ability of holders to sell their shares of our
common stock in the secondary market. Moreover, investors may be less
interested in purchasing low-priced securities because the brokerage
commissions, as a percentage of the total transaction value, tend to be
higher for such securities, and some investment funds will not invest in
low-priced securities (other than those which focus on small-capitalization
companies or low-priced securities).

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

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our audited financial
statements and notes thereto appearing in our 2001 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.

Overview

We are the leading provider of premium spoken audio content, such as audio
versions of books and newspapers and radio programs, that is delivered over the
Internet and can be streamed, burned to CD or played back on personal computers
and hand-held electronic devices that have digital audio capabilities. The
Audible service allows consumers to purchase and download our content from our
Web site at www.audible.com. We offer customers the opportunity to
subscribe to AudibleListener, a monthly audio service. For a fixed monthly
fee, AudibleListener customers may download their choice of programs from our
Web site. More than 34,000 hours of audio content, much of which is only
available in digital audio format at www.audible.com, is currently available on
our Web site. We also sell at our web site our own digital audio player under
the brand name of Otis, which is manufactured to our specifications in Korea.
Customers can also access content products sold by Audible through
www.amazon.com. Several manufacturers, including Apple, Hewlett-Packard, Compaq
Computer Corporation, Sony Electronics, Handspring, Casio Inc., Franklin
Electronic Publishers, Digisette, LLC., and SONICblue Incorporateds Rio Audio
Group, have agreed to support and promote the playback of our content on their
hand-held electronic devices by including our Audible software on their
devices.

The market for the Audible service results from the increasing usage of
the Internet and the introduction of hand-held electronic devices that have
digital audio capabilities. In contrast to traditional radio broadcasts, the
Audible service offers customers access to content of their choice and the
ability to listen to what they want, when and where they wantwhether
commuting, exercising, relaxing or sitting at their personal computers. Unlike
traditional and online bookstores, which are subject to physical inventory
constraints and shipping delays, we provide a selection that is readily
available in digital format that can be quickly delivered over the Internet
directly to our customers.

Revenue from the sale of consumer content has increased in each of the
last four quarters. We expect this trend to continue as we expand our customer
base. As of September 30, 2002, more than 182,000 customers in over 100
countries had purchased content from our Web site.

Although we have experienced revenue growth in our content sales in recent
periods, there can be no assurance that such growth rates are sustainable, and
therefore such growth rates should not be considered indicative of future
operating results. There can also be no assurance that we will be able to
continue to increase our revenue or attain profitability or, if increases in
revenue and profitability are achieved, that they can be sustained. We believe
that period-to-period comparisons of our historical operating results are not
meaningful and should not be relied upon as an indication of future
performance.

Our revenue is derived from three main categories: (1) content and
services revenue, which includes consumer content, corporate services, and bulk
content sales; (2) hardware revenue; and (3) other revenue.

17



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Consumer content revenue consists of content sales made from our website.
Revenue from the sale of individual content titles is recognized in the period
when the content is downloaded and the customers credit card is processed.
Revenue from the sale of content subscriptions is recognized pro rata over the
term of the subscription period. Revenue from the sale of AudibleListener
memberships is recognized straight-line each month the customer participates in
the program. Revenue from the sale of prepaid discounted content packages and
gift programs are recognized the earlier of when the content is downloaded or
expiration. Rebates are recorded as a reduction of revenue over the period in
which the related revenue is recognized.

Corporate service revenue consists of library sales and audio production
services. Where applicable, corporate service revenue is recognized as services
are performed after the agreement has been finalized, the price is fixed, and
collectibility is assured. Collectibility is based on past transaction history
and credit worthiness of the customer. Under multiple element arrangements, the
fair value of different elements cannot usually be determined since we do not
sell the items separately, therefore revenue is recognized on a straight-line
basis over the term of the agreement.

Bulk content revenue consists of sales of negotiated numbers of
downloadable rights of selected content material to entities for their
distribution. Bulk content sales potentially allow for additional exposure of
our products through distribution channels not normally available to us. Bulk
content revenue is recognized after the agreement has been finalized, the price
is fixed, collectibility is assured and the content is delivered via either
CD-ROM or electronic transfer and accepted without further obligation on our
part. Collectibility is based on past transaction history and credit worthiness
of the customer.

The majority of our bulk content revenue was a result of barter
transactions in which we exchanged bulk content for advertising. Revenue from
barter transactions is recognized based on the fair value of consideration
surrendered or received, whichever is more readily determinable. Advertising
received under barter arrangements is recognized in the period the advertising
is broadcasted.

Hardware revenue consists of sales of AudibleReady digital audio players
sold primarily at a discount when a customer signs up for a one year commitment
to our AudibleListener Membership. The discounted selling price of the hardware
device reflects the subsidy that we incur to acquire a customer with a one year
commitment to AudibleListener. 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.

Other revenue consists of our profit participation from hard copy sales of
products in connection with our agreement with Random House and revenue from a
license granted for certain technology rights to a device manufacturer which is
being recognized on a straight-line basis over the term of the agreement. Other
revenue also consisted of revenue recognized in connection with our agreement
with Microsoft, granting Microsoft the right to distribute software platforms
enabling users to access and use Audible content, which ended in April 2001. We
recognized this revenue on a straight-line basis beginning in the quarter ended
September 30, 1999 through the term of the agreement which ended in April 2001.

We are party to several joint marketing agreements with device and media
storage manufacturers such as Apple, Casio, Compaq, SONICblue Incorporateds
Rio Audio Group, Fuji Film and Hewlett-Packard. Under these agreements, device
manufacturers may receive a portion of the content revenue generated over a
specified period of time from each new Audible customer referred by them
through the purchase of a hand-held electronic device. For
example, a purchaser of Compaqs hand-held electronic device will be able to
use the device and our AudibleManager software to access audible.com and
download content. Compaq will receive a percentage of the revenue related to
content downloaded by this purchaser. These revenue sharing arrangements
typically last one or two years from the date the device user becomes an
Audible customer.

In January 2000, the Company entered into two agreements with Amazon.com.
The Company is the exclusive provider of digital spoken audio to Amazon.com, as
defined in the Co-Branding, Marketing and Distribution Agreement, as amended.
During the three-year term of this agreement, in consideration for certain
services, Amazon

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is entitled to $22,500,000 plus a specified percentage of revenue earned
over a threshold amount in addition to common stock warrants. Under the
Securities Purchase Agreement dated January 30, 2000, Amazon.com purchased
1,340,033 shares of common stock from the Company for $20,000,000. The first
$20,000,000 in payments due to Amazon.com under the amended Co-Branding,
Marketing and Distribution Agreement, were offset against the $20,000,000 in
consideration due to Audible for the purchase of common stock and no cash was
exchanged. Of the remaining $2,500,000 due in cash to Amazon.com under the
agreement, $1,000,000 has been paid through September 30, 2002 with the
remaining $1,500,000 due in 2002. As of September 30, 2002, a total of
$1,125,000, which was payable in three installments of $375,000 each due on
January 30, April 30, and July 31, 2002, respectively, under this agreement
remains unpaid.

In May 2000, the Company entered into a 50-month Co-Publishing, Marketing,
and Distribution Agreement with Random House to form a strategic alliance to
establish Random House Audible, a publishing imprint, as defined in the
agreement, to produce spoken word content specifically suited for digital
distribution. All titles published by the imprint will be distributed
exclusively on the Internet by Audible. As part of this alliance, Random
House, through its Random House Ventures, LLC subsidiary, purchased 169,780
shares of Audible common stock from the Company for $1,000,000. Over the term
of the agreement Audible will be contributing towards funding the acquisition
and creation of digital audio titles through Random House Audible. On March 26,
2002, the agreement was amended to waive the cash payment due to Random House
in 2002 of $1,250,000, thereby reducing the total payments due under the
agreement from $4,000,000 to $2,750,000. In exchange for this waiver, under the
amendment the Company on April 1, 2002, issued 1,250,000 shares of Series B
Convertible Preferred Stock to Random House. Through September 30, 2002,
$1,250,000 of the $2,750,000 obligation had been paid, with the remaining
amount of $1,500,000 due in 2003 and 2004.

In February 2001, Microsoft purchased 2,666,666 shares of Audible Series A
Redeemable Convertible Preferred stock for $10,000,000 at a per share price of
$3.75. Each share of preferred stock was originally convertible into four
shares of Common Stock (equivalent to a price of $.9375 per share, which was
greater than the common stock price at the date of grant, therefore, there is
no beneficial conversion feature associated with these preferred shares),
subject to adjustment under certain conditions. As a result of the investment
in the Company made by Special Situations in February 2002, the conversion rate
has been adjusted as per the Stock Purchase Agreement to 4.0323 shares of
Common Stock. The Series A Redeemable Convertible Preferred stock is
convertible at the option of the holder at any time prior to the fifth
anniversary of the original issue date. Dividends are payable semi-annually at
a annual rate of 12% in either additional preferred shares or in cash at the
option of the Company. On the fifth anniversary of the original issue date,
Audible is required to redeem all remaining outstanding shares at a per share
price of $3.75 plus all accrued and unpaid dividends.

In February 2002, Special Situations Funds purchased 4,069,768 shares of
common stock for $3,500,000 at a per share price of $0.86. Net proceeds
received by the Company net of direct costs was $3,159,000. In connection with
this transaction, the Company issued warrants to purchase an additional
1,220,930 shares of common stock. The warrants are exercisable at a price of
$1.15 anytime prior to the fifth anniversary of the issue date. The Company may
demand the warrantholder exercise its rights in the event that closing bid
price of a share of the Companys common stock exceeds $2.30 for twenty
consecutive trading sessions.

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Results of Operations

The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue for the three and nine months ended
September 30, 2002 and 2001.

|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |     |    |     |  
|----------------------------------------------- | ------------------------------------ | ---------------- | ------------------------ | -- | ------------------- | --- | ------------------- | --- | ---- | --- | ---- | --- | -- | --- | ---- | --- | -- | --- | -
|                                               
|                                                |                                      |                  |                          |    | Three Months        |     | Nine months        
|                                                |                                      |                  |                          |    | Ended September 30, |     | Ended September 30,
|                                                |                                      |                  |                          |    |                     |     |                    
|                                                |                                      |                  |                          |    | 2002                |     | 2001                |     | 2002 |     | 2001
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |     
|                                                |                                      |                  |                          |    | (unaudited)         |     | (unaudited)        
|Revenue:                                        |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                                | Content and services                 |                 
|                                                |                                      | Consumer content |                          |    | 91                  | %   |                     |     | 65   | %   |      |     | 87 | %   |      |     | 54 | %  
|                                                |                                      | Services         |                          |    | 2                   |     |                     |     | 6    |     |      |     | 3  |     |      |     | 10 |    
|                                                |                                      | Bulk content     |                          |    |                    |     |                     |     | 22   |     |      |     |   |     |      |     | 15 |    
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                                | Total content and services           |                  |                          | 93 |                     |     |                     | 93  |      |     |      | 90  |    |     |      | 79  |   
|                                                | Hardware                             |                  |                          | 5  |                     |     |                     | 6   |      |     |      | 9   |    |     |      | 17  |   
|                                                | Other                                |                  |                          | 2  |                     |     |                     | 1   |      |     |      | 1   |    |     |      | 4   |   
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                                |                                      |                  | Total revenue            |    |                     | 100 | %                   |     |      | 100 | %    |     |    | 100 | %    |     |    | 100 | %
|Operating expenses:                             |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                                | Cost of content and services revenue |                  |                          | 45 |                     |     |                     | 54  |      |     |      | 42  |    |     |      | 59  |   
|                                                | Cost of hardware revenue             |                  |                          | 18 |                     |     |                     | 21  |      |     |      | 24  |    |     |      | 34  |   
|                                                | Production expenses                  |                  |                          | 31 |                     |     |                     | 57  |      |     |      | 34  |    |     |      | 72  |   
|                                                | Development                          |                  |                          | 22 |                     |     |                     | 34  |      |     |      | 21  |    |     |      | 45  |   
|                                                | Sales and marketing                  |                  |                          | 92 |                     |     |                     | 159 |      |     |      | 108 |    |     |      | 174 |   
|                                                | General and administrative           |                  |                          | 31 |                     |     |                     | 55  |      |     |      | 33  |    |     |      | 61  |   
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                                |                                      |                  | Total operating expenses |    |                     | 239 |                     |     |      | 380 |      |     |    | 262 |      |     |    | 445 |  
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|Loss from operations                            |                                      |                  | (139                     | )  |                     |     | (280                | )   |      |     | (162 | )   |    |     | (345 | )  
|                                                |                                      |                  | Other income, net        |    |                     | (1  | )                   |     |      | (5  | )    |     |    | (1  | )    |     |    | (8  | )
|Net loss                                        |                                      |                  | (138                     | )  |                     |     | (275                | )   |      |     | (161 | )   |    |     | (337 | )  
|Accrued dividends on redeemable preferred stock |                                      |                  | 11                       |    |                     |     | 14                  |     |      |     | 12   |     |    |     | 12   |    
|Net loss applicable to common stockholders      |                                      |                  | (149                     | )% |                     |     | (289                | )%  |      |     | (173 | )%  |    |     | (349 | )% 
|                                                |                                      |                  |                          |    |                     |     |                     |     |      |     |      |     |    |     |      |    
|                                               

Three months ended September 30, 2002 compared to three months ended September
30, 2001.

Total revenue, net. Total revenue, net for the three months ended
September 30, 2002 was $3,287,000, as compared to $2,161,000 for the three
months ended September 30, 2001, an increase of $1,126,000, or 52%.

Total content and services revenue. Total content and services revenue
for the three months ended September 30, 2002 was $3,066,000, as compared to
$2,004,000 for the three months ended September 30, 2001, an increase of
$1,062,000, or 53%.

Consumer content. Consumer content revenue for the three months ended
September 30, 2002 was $3,002,000, as compared to $1,398,000 for the three
months ended September 30, 2001, an increase of $1,604,000, or 115%. This
increase was primarily the result of our customer base growing from 102,000 to
over 182,000 customers as well as the effect of an increase in the prices of
our AudibleListener Memberships.

Services. Services revenue for the three months ended September 30,
2002 was $64,000, as compared to $121,000 for the three months ended September
30, 2001, a decrease of $57,000, or 47%. This decrease was primarily the
result of fewer corporate projects.

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Bulk content. Bulk content revenue for the three months ended
September 30, 2001 consisted of two barter bulk content sales totaling
$485,000. There were no bulk content sales during the three months ended
September 30, 2002.

Hardware. Hardware revenue for the three months ended September 30,
2002 was $152,000, as compared to $140,000 for the three months ended September
30, 2001, an increase of $12,000, or 9%. Hardware revenue increased slightly
as the result of selling more AudibleReady hand-held electronic devices in the
period, primarily the Audible Otis, offset by these additional devices being
sold at a deeper discount when the customer signed up for a one year commitment
to AudibleListener membership.

Other. Other revenue for the three months ended September 30, 2002, was
$69,000, as compared to $17,000 for the three months September 30, 2001. Other
revenue increased as a result of revenue earned from our profit participation
from hard copy sales of products in connection with our agreement with Random
House. Other revenue in both three month periods also consisted of royalties
earned from a license granted for certain technology rights to a device
manufacturer.

Operating expenses.

Cost of content and services revenue. Cost of content and services
revenue was $1,476,000, or 48% of content and services revenue, for the three
months ended September 30, 2002, as compared to $1,162,000, or 58% of content
and services revenue, for the three months ended September 30, 2001. Included
in cost of content and services revenue for the three-month period ended
September 30, 2001, was a charge of $199,000 to reflect the net realizable
value of royalty advances, as compared to a charge of $122,000 in the three
month period ended September 30, 2002. Cost of content and services revenue as
a percentage of content and services revenue decreased in the 2002 period due
to the reduction in unrecoupable fixed content and services revenue costs which
resulted in charges necessary to reflect the net realizable value of royalty
advances.

Cost of hardware revenue. Cost of hardware revenue was $605,000, or
397% of hardware revenue, for the three months ended September 30, 2002, as
compared to $452,000, or 323% of hardware revenue, for the three months ended
September 30, 2001. This cost increase was primarily due to the fact that we
sold more hand-held electronic devices in the 2002 period versus the 2001
period, offset in part by a decease in unit cost from the vendor. The increase
in cost of hardware revenue as a percentage of hardware sales was primarily due
to these additional devices being sold at a deeper discount when the customer
signs up for a one year commitment to AudibleListener membership.

Production expenses. Production expenses were $1,029,000 for the three
months ended September 30, 2002, as compared to $1,236,000 for the three months
ended September 30, 2001, a decrease of $207,000, or 17%. This decrease was
primarily due to a reduction in personnel costs and reduced depreciation
expense during the 2002 period.

Development. Development costs were $702,000 for the three months ended
September 30, 2002, as compared to $736,000 for the three months ended
September 30, 2001, a decrease of $34,000, or 5%. This decrease was primarily
due to a reduction in outside consultants offset in part by expenses associated
with a technology license.

Sales and marketing. Sales and marketing expenses were $3,016,000 for
the three months ended September 30, 2002, as compared to $3,437,000 for the
three months ended September 30, 2001, a decrease of $421,000, or 12%. This
decrease was primarily due to a reduction in certain marketing expenses such as
web related advertising offset in part by increased expenses related to
customer service.

General and administrative. General and administrative expense was
$1,006,000 for the three months ended September 30, 2002, as compared to
$1,179,000 for the three months ended September 30, 2001, a decrease of

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$173,000, or 15%. The difference between the periods was primarily the
result of severance cost incurred during the 2001 period as a result of our
streamlining initiative of July 23, 2001.

Other income, net. Other income, net in both periods consisted of
interest income. Interest income was $17,000 for the three months ended
September 30, 2002, as compared to $101,000 for the three months ended
September 30, 2001, a decrease of $83,000. This decrease was due to less
interest income being earned from lower cash and cash equivalent balances
available.

Accrued dividends on redeemable preferred stock.Accrued dividends on
redeemable preferred stock was $354,000 for the three months ended September
30, 2002 as compared to $302,000 for the three months ended September 30, 2001.
This increase was due to the additional shares of Audible Series A Redeemable
Convertible Preferred Stock outstanding during the 2002 period.

Nine months ended September 30, 2002 compared to nine months ended September 30, 2001.

Total revenue, net. Total revenue, net for the nine months ended
September 30, 2002 was $8,578,000, as compared to $6,386,000 for the nine
months ended September 30, 2001, an increase of $2,192,000, or 34%.

Total content and services revenue. Total content and services revenue
for the nine months ended September 30, 2002 was $7,742,000, as compared to
$4,994,000 for the nine months ended September 30, 2001, an increase of
$2,748,000, or 55%.

Consumer content. Consumer content revenue for the nine months ended
September 30, 2002 was $7,442,000, as compared to $3,424,000 for the nine
months ended September 30, 2001, an increase of $4,018,000, or 117%. This
increase was primarily the result of our increased customer base as well as the
effect of an increase in the prices of our AudibleListener Memberships.

Services. Services revenue for the nine months ended September 30, 2002
was $299,000, as compared to $635,000 for the nine months ended September 30,
2001, a decrease of $336,000, or 53%. This decrease was primarily the result
of fewer corporate projects.

Bulk content. Bulk content revenue for the nine months ended September
30, 2001 consisted of one cash bulk content sale of $150,000 and three barter
bulk content sales totaling $785,000. There were no bulk content sales during
the nine months ended September 30, 2002.

Hardware. Hardware revenue for the nine months ended September 30, 2002
was $735,000, as compared to $1,093,000 for the nine months ended September 30,
2001, a decrease of $358,000, or 33%. Hardware revenue decreased as a result
of selling more AudibleReady hand-held electronic devices in the period,
primarily the Audible Otis, at a deeper discount when the customer signed up
for at least a one year commitment to AudibleListener membership.

Other. Other revenue for the nine months ended September 30, 2002, was
$101,000, as compared to $299,000 for the nine months ended September 30, 2001.
Other revenue decreased as a result of the end of the amortization in April
2001 of the advance from Microsoft relating to granting Microsoft the right to
distribute software platforms to enable users to access and use Audible
content. Other revenue in the 2002 period included revenue earned from our
profit participation from hard copy sales of products in connection with our
agreement with Random House. Other revenue in both nine month periods also
consisted of royalties earned from a license granted for certain technology
rights to a device manufacturer.

22



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Operating expenses.

Cost of content and services revenue. Cost of content and services
revenue was $3,596,000, or 47% of content and services revenue, for the nine
months ended September 30, 2002, as compared to $3,759,000, or 75% of content
and services revenue, for the nine months ended September 30, 2001. Included
in cost of content and services revenue for the nine month period ended
September 30, 2001, was a charge of $604,000 to reflect the net realizable
value of royalty advances, as compared to a charge of $122,000 in the nine
month period ended September 30, 2002. Cost of content and services revenue as
a percentage of content and services revenue decreased in the 2002 period due
to the reduction in unrecoupable fixed content and services revenue costs which
resulted in charges necessary to reflect the net realizable value of royalty
advances.

Cost of hardware revenue. Cost of hardware revenue was $2,053,000, or
279% of hardware revenue, for the nine months ended September 30, 2002, as
compared to $2,193,000, or 201% of hardware revenue, for the nine months ended
September 30, 2001. This decrease was primarily due to reduced costs in
acquiring hand-held electronic devices in the 2002 versus the 2001 period.
Cost of hardware revenue as a percentage of hardware revenue increased as we
sold these hand-held electronic devices at a deeper discount from normal retail
price in the 2002 period than in the 2001 period, when a customer enrolled in
AudibleListener for a 12-month period.

Production expenses. Production expenses were $2,947,000 for the nine
months ended September 30, 2002, as compared to $4,578,000 for the nine months
ended September 30, 2001, a decrease of $1,631,000, or 36%. This decrease was
primarily due to a reduction in personnel costs and reduced outside services as
a result of our streamlining initiative of July 23, 2001.

Development. Development costs were $1,778,000 for the nine months ended
September 30, 2002, as compared to $2,852,000 for the nine months ended
September 30, 2001, a decrease of $1,074,000, or 38%. This decrease was
primarily due to a reduction in outside consultants as well as reduced
personnel cost as a result of our streamlining initiative of July 23, 2001
offset in part by expenses associated with a technology license.

Sales and marketing. Sales and marketing expenses were $9,265,000 for
the nine months ended September 30, 2002, as compared to $11,151,000 for the
nine months ended September 30, 2001, a decrease of $1,886,000, or 17%. This
decrease was due to a reduction in certain advertising costs such as
advertising received in connection in bartered transactions, tradeshow
expenses, warrant charges in connection with a services agreement, reduced
personnel costs as well as expenses recognized in connection with our
Co-Branding, Marketing and Distribution Agreement with Amazon.com.

General and administrative. General and administrative expense was
$2,850,000 for the nine months ended September 30, 2002, as compared to
$3,886,000 for the nine months ended September 30, 2001, a decrease of
$1,036,000, or 27%.This decrease was primarily due to a reduction in personnel
costs as a result of our streamlining initiative of July 23, 2001 and reduced
professional fees.

Other income, net. Other income, net in both periods consisted of
interest income offset by interest expense. Interest income was $76,000 for
the nine months ended September 30, 2002, as compared to $529,000 for the nine
months ended September 30, 2001, a decrease of $453,000. This decrease was due
to less interest income being earned from lower cash and cash equivalent
balances available. No interest expense was recognized for the nine months
ended September 30, 2002, as compared to $10,000 for the nine months ended
September 30, 2001. This decrease was the result of the expiration of the
capital leases entered into for capital equipment.

Accrued dividends on redeemable preferred stock.Accrued dividends on
redeemable preferred stock was $1,015,000 for the nine months ended September
30, 2002 as compared to $773,000 for the nine months ended September 30, 2001.
This increase was due to the 12% dividends payable to Microsoft as a result of
Microsofts purchase of 2,666,666 shares of Audible Series A Redeemable
Convertible Preferred Stock in February 2001 as well as additional shares being
outstanding in the 2002 period as the Company had elected to pay dividends due
by issuing additional stock rather than by cash.

23



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Factors Affecting Operating Results

We have only a limited operating history with which to evaluate our
business and prospects. Our limited operating history and emerging nature of
the market for Internet-delivered audio content makes predicting our future
operating results difficult. In addition, our prospects must be considered in
light of the risks and uncertainties
encountered by companies in the early stages of development in new and rapidly
evolving markets, specifically the
rapidly evolving market for delivery of audio content over the Internet. These
risks include our ability to:



| |  |  | acquire and retain customers;                                                                   
| | - |  | ------------------------------------------------------------------------------------------------
|
| |  |  | build awareness and acceptance of audible.com, the AudibleReady format and AudibleReady devices;
|
| |  |  | extend existing and acquire new content provider relationships;                                 
|
| |  |  | manage growth to stay competitive and fulfill customer demand; and                              
|
| |  |  | generate cash from operations and/or raise capital.                                             

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

We have incurred significant losses since inception, and as of September
30, 2002, we had an accumulated deficit of approximately $108,045,000. 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 sales and
marketing, content acquisition and production over the next several quarters to
the extent available cash allows.

Our operating results have varied on a quarterly basis during our short
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) the
availability of premium audio content; (3) sales and consumer usage of
AudibleReady devices; (4) our ability to acquire new customers; (5) our ability
to retain existing customers; (6) the introduction of new products or services
by a competitor; (7) the cost and availability of acquiring sufficient Web site
capacity to meet our customers needs; (8) technical difficulties with our
computer system or the Internet or system downtime; (9) the cost of acquiring
audio content; (10) the amount and timing of capital expenditures and other
costs relating to the expansion of our operations; and (11) 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
operating revenue.

Our limited operating history and the emerging nature of our market make
prediction of future revenue difficult. We have no assurance that we will be
able to predict our future revenue accurately. 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.

24



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Liquidity and Capital Resources

From inception through the date prior to our initial public offering, we
financed our operations through private sales of our redeemable convertible
preferred stock and warrants. Net proceeds from the sales of redeemable
convertible stock and warrants prior to our initial public offering were
$28,719,000.

On July 15, 1999, we completed an initial public offering of 4,600,000
shares of common stock at $9.00 per share. Total proceeds were $36,856,000,
net of underwriting discounts and commissions of $2,898,000 and offering costs
of $1,641,000. Concurrent with the offering, all outstanding shares of our
redeemable convertible preferred stock were converted into 13,400,985 shares of
common stock.

On February 8, 2001 Microsoft purchased 2,666,666 shares of Audible Series
A Redeemable Convertible Preferred stock for $10,000,000 at a per share price
of $3.75.

On February 15, 2002 Special Situations fund purchased 4,069,768 shares of
Common stock for $3,500,000 at a per share price of $0.86. Proceeds received by
the Company net of direct costs were approximately $3,159,000.

At September 30, 2002, our principal source of liquidity was approximately
$3,670,000 in cash and cash equivalents.

At September 30, 2002, our principal commitments consisted of obligations
for operating lease commitments, dividends payable to Microsoft in connection
with the sale of Series A Redeemable Convertible Preferred Stock, contractual
commitments with content providers, revenue sharing commitments pursuant to
agreements with device manufacturers, and commitments under our agreements with
Amazon.com and Random House.

Net cash used in operating activities for the nine months ended September
30, 2002 was $6,982,000. Net cash used during the period was primarily
attributable to our net loss and a decrease in accounts payable, royalty
obligations, and advances, offset in part by services rendered for common stock
and warrants, services rendered for preferred stock, depreciation and
amortization and an increase in accrued expenses and compensation. Net cash
used in operating activities for the nine months ended September 30, 2001 was
$15,489,000. Net cash used during the period was primarily attributable to our
net loss, increase in inventory, and a decrease in royalty obligations,
accounts payable, and accrued expenses and compensation, offset in part by
services rendered for common stock and warrants, and depreciation and
amortization.

Net cash used in investing activities for the nine months ended September
30, 2002 was $145,000. Net cash used during the period was related to
purchases of property and equipment. Net cash provided by investing activities
for the nine months ended September 30, 2001 was $979,000. Net cash provided
during the period was primarily related to redemptions of short-term
investments offset in part by cash used to purchase property and equipment.

Net cash provided by financing activities for the nine months ended
September 30, 2002 was $3,170,000 resulting primarily from the investment in
the Company by Special Situations Funds of $3,159,000, net of direct costs, and
the exercise of common stock options by an employee. Net cash provided by
financing activities for the nine months ended September 30, 2001 was
$10,010,000 resulting primarily from the sale of Series A Redeemable
Convertible Preferred Stock to Microsoft and payments received on notes due
from shareholders for common stock, offset in part by capital lease payments.

Based on our currently proposed business plans and related assumptions, we
believe that our cash and cash equivalents balance will enable us to meet our
anticipated cash requirements for operations and capital expenditures through
2002. In the first quarter of 2003, we expect that additional cash will be
required to fund the business and
finance our continued growth. However, any projection of future revenues is
subject to a level of uncertainty. If planned revenues are insufficient to
satisfy our liquidity requirements in 2002, we will need to raise additional
funds through public or private financing or other arrangements earlier than
expected. No assurance can be given that such

25



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additional financing, when needed, will be available on terms favorable to us
or to our stockholders, if at all, and that such financing would not be
antidilutive to our stockholders.

New Accounting Standards

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS
141), and Statement No. 142, Goodwill and Other Intangible Assets (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business
combinations. SFAS 141 also specifies criteria that intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported separately from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS 142. SFAS 142 also requires that intangible assets with
definite useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in accordance
with SFAS 144 Accounting for the Impairment or Disposal of Long-Lived Assets.

The Company adopted the provisions of SFAS 141 effective July 1, 2001. The
adoption of SFAS 141 had no effect on the Companys financial position or
results of operations. SFAS 142 was effective for the Company beginning January
1, 2002, and had no impact on the Companys financial position or results of
operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which supercedes both SFAS No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and reporting
provisions of APB Opinion No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(Opinion 30), for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also resolving
significant implementation issues associated with SFAS 121. SFAS 144 retains
the basic provisions of Opinion 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a component of
entity (rather than a segment of a business). Unlike SFAS 121, an impairment
assessment under SFAS 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS 142.

The Company adopted SFAS 144 on January 1, 2002 which had no impact on the
financial statements or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) (EITF 94-3) and
requires that a liability for costs associated with an exit or disposal
activity be recognized and measured initially at fair value in the period in
which the liability is incurred. Under EITF 94-3, a liability for an exit cost
was recognized at the date of an entitys commitment to an exit plan. The
adoption of SFAS 146 is expected to result in delayed recognition for certain
types of costs as compared to the provisions of EITF 94-3. SFAS 146 is
effective for new exit or disposal activities that are initiated after December
31, 2002, and does not affect amounts currently reported in the Companys
financial statements. SFAS 146 will affect the types and timing of costs
included in future restructuring programs, if any, but is not expected to have
a material impact on the Companys financial position or results of operations.

26



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ITEM 3. Qualitative and Quantitative Disclosure about Market Risk

We do not have operations subject to risk of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio.

ITEM 4. Controls and Procedures

Our management, under the supervision and with the participation of Donald
Katz, our Chief Executive Officer, and Andrew Kaplan, our Chief Financial
Officer, performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures within 90 days before the
filing date of this quarterly report. Based on that evaluation, Messrs. Katz
and Kaplan concluded that our disclosure controls and procedures were
effective. There have been no significant changes in our internal controls or
in other factors that could significantly affect internal controls subsequent
to their evaluation.

27



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PART II  OTHER INFORMATION

ITEM 1. Legal Proceedings.

In June 2001, the Company was named as a defendant in a securities class
action filed in United States District court for the Southern District of New
York related to its initial public offering (IPO) in July 1999. The lawsuits
also named certain of the underwriters of the IPO, including Credit Suisse
First Boston Corporation, J.P. Morgan Chase & Co., Volpe Brown Whelan & Co.,
LLC, and Wit Capital Corporation, as well as certain Officers and Directors and
former Directors of the Company 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 Litigation). The complaints allege that the prospectus and the
registration statement for the IPO failed to disclose that the underwriters
allegedly solicited and received excessive commissions from investors and
that some investors in the IPO allegedly agreed with the underwriters to buy
additional shares in the aftermarket in order to inflate the price of the
Companys stock. A consolidated amended complaint was filed April 19, 2002. The
Company and certain officers, directors and former directors are named in the
suits pursuant to Section 11 of the Securities Act of 1933. The complaints seek
unspecified damages, attorney and expert fees, and other unspecified litigation
costs.

On July 1, 2002, the underwriter defendants in the consolidated actions
moved to dismiss all of the IPO Litigations, including the action involving
the Company. On July 15, 2002, the Company, along with other non-underwriter
defendants in the coordinated cases, also moved to dismiss the litigation.
Those motions were fully briefed on September 13 and September 27, 2002,
respectively. Those motions have not yet been decided. Due to the inherent
uncertainties of litigation and because the litigation is at a preliminary
stage, we cannot accurately predict the ultimate outcome of the motions. In
addition, the individual defendants in the IPO Litigation signed a tolling
agreement and were dismissed from the action without prejudice on October 9,
2002.

Other than what is disclosed above, we are not a party to any lawsuit or
proceeding, which we believe is likely to have a material effect on us.

ITEM 2. Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

Report of Offering of Securities and Use of Proceeds Therefrom

In July 1999, we commenced and completed a firm commitment underwritten
initial public offering of 4,600,000 shares of our common stock at a price of
$9.00 per share. The shares were registered with the Securities and Exchange
Commission pursuant to a registration statement on Form S-1 (No. 333-76985),
which was declared effective on July 15, 1999. The public offering was
underwritten by a syndicate of underwriters led by Credit Suisse First Boston
Corporation, J. P. Morgan Securities Inc., Volpe Brown Whelan & Company, LLC
and Wit Capital Corporation as their representatives. After deducting
underwriting discounts and commissions of $2,898,000 and expenses of
$1,641,000, we received net proceeds of $36,856,000.

28



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During the three months ended September 30, 2002, we invested $3,118,000
of our funds in accordance with the use of proceeds in our Registration
Statement Form S-1. As of September 30, 2002, we have
$3,670,000 in remaining funds, which includes in part the $10,000,000 received from
Microsoft in February 2001 related to the sale of Series A Redeemable
Convertible Preferred Stock, and the $3,159,000, net of direct costs received
from the Special Situations Fund investment in our Company. These remaining
funds are currently in cash or cash equivalents. None of the net proceeds of
the offering were paid directly or indirectly to any of our directors or
officers, or their associates, or persons owning 10 percent or more of any
class of our equity securities.

ITEM 3. Defaults Upon Senior Securities

Inapplicable

ITEM 4. Submission of Matters to Vote of Security Holders

None

ITEM 5. Other Information

On October 29, 2002, the Company received a Nasdaq Listing Qualifications
letter advising the Company that its stock had closed below the $1.00 per share
requirement for the last 180 consecutive trading days. Accordingly, the Company
was notified that, unless appealed, its securities would be subject to
delisting. The Company has filed a request to appeal the delisting with the
Nasdaq Listing Qualifications Panel. The Company expects that its appeal
request will be granted and that the appeal will be heard sometime in December
2002. The results of the appeal are expected in the second half of December
2002 or early January 2003.

If the Companys common stock is de-listed from the Nasdaq Small Cap
Market, the Company expects that its common stock would trade on The National
Association of Securities Dealers, Inc. (NASDs) OTC Bulletin Board. Such
alternative trading markets are generally considered less efficient than the
Nasdaq National Market.

Consequently, selling our common stock would be more difficult because
smaller quantities of shares would likely be bought and sold, transactions
could be delayed, and securities analysts and news media coverage of us may be
reduced. These factors could result in lower prices and larger spreads in the
bid and ask prices for shares of common stock.

Such delisting from the Nasdaq Small Cap Market or further declines in our
stock price could also greatly impair our ability to raise additional necessary
capital through equity or debt financing, and significantly increase the
ownership dilution to stockholders caused by our issuing equity. The price at
which we issue shares in such transactions is generally based on the market
price of our common stock and a decline in our stock price could result in the
need for us to issue a greater number of shares to raise a given amount of
funding.

In addition, if our common stock is not listed on the Nasdaq Market, we
may become subject to Rule 15g-9 under the Securities and Exchange Act of 1934,
as amended. That rule imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons other than
established customers and institutional accredited investors. For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. Consequently, the rule may
affect the ability of broker-dealers to sell the common stock and affect the
ability of holders to sell their shares of our common stock in the secondary
market. Moreover, investors may be less interested in purchasing low-priced
securities because the brokerage commissions, as a percentage of the total
transaction value, tend to be higher for such securities, and some investment
funds will not invest in low-priced securities (other than those which focus on
small-capitalization companies or low-priced securities).

29



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ITEM 6. Exhibits and Reports on Form 8-K

(a)     Exhibits

|         |  |                                                                                                                                                                                                        
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1*     |  | Amended and Restated Certificate of Incorporation of Audible                                                                                                                                           
|         |  |                                                                                                                                                                                                        
|3.1.1*** |  | Certificate of Designation of Designations, Limitations,
Restrictions And Relative Rights of the Series A Convertible
Preferred Stock of Audible, Inc.                                                 
|         |  |                                                                                                                                                                                                        
|3.1.2 !  |  | Certificate of Amendment to the Amended and Restated
Certificate of Incorporation.                                                                                                                     
|         |  |                                                                                                                                                                                                        
|3.1.3 !! |  | Certificate of Designation of Designations, Limitations,
Restrictions and Relative Rights of the Series B Convertible
Preferred Stock of Audible, Inc.                                                 
|         |  |                                                                                                                                                                                                        
|3.2*     |  | Amended and Restated Bylaws of Audible                                                                                                                                                                 
|         |  |                                                                                                                                                                                                        
|10.1+*   |  | License Agreement dated November 4, 1998, by and between Microsoft
Corporation and Audible                                                                                                             
|         |  |                                                                                                                                                                                                        
|10.2+*   |  | Digital Rights Management Agreement dated November 4, 1998, between
Microsoft Corporation and Audible                                                                                                  
|         |  |                                                                                                                                                                                                        
|10.3+*   |  | Development Agreement dated November 12, 1998, by and between RealNetworks, Inc. and
Audible                                                                                                           
|         |  |                                                                                                                                                                                                        
|10.4*    |  | RealMedia Architecture Partner Program Internet Agreement
dated November 12, 1998, between RealNetworks, Inc. and Audible                                                                              
|         |  |                                                                                                                                                                                                        
|10.5*    |  | Master Lease Agreement dated November 19, 1996, by and between
Comdisco, Inc. as lessor, and Audible as lessee                                                                                         
|         |  |                                                                                                                                                                                                        
|10.5.1*  |  | Addendum to Master Lease Agreement dated November 20, 1996, by and
between Comdisco, Inc., as lessor, and Audible, as lessee (relating
to Exhibit 10.5)                                                
|         |  |                                                                                                                                                                                                        
|10.8*    |  | Loan and Security Agreement dated April 6, 1998, by and
between Silicon Valley Bank, as lender,
and Audible, as borrower, for a revolving line of credit of up to $1,000,000                           
|         |  |                                                                                                                                                                                                        
|10.10*   |  | Security and Loan Agreement dated November 20, 1996, between Audible, as borrower, and
Imperial Bank, as lender, for up to $500,000                                                                    
|         |  |                                                                                                                                                                                                        
|10.14*   |  | Amended and Restated Registration Rights Agreement dated February 26, 1998, by and among
Audible and certain stockholders named therein                                                                
|         |  |                                                                                                                                                                                                        
|10.14.1* |  | Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)                                                                              
|         |  |                                                                                                                                                                                                        
|10.14.2* |  | Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)                                                                                  
|         |  |                                                                                                                                                                                                        
|10.15*   |  | 1999 Stock Incentive Plan                                                                                                                                                                              
|         |  |                                                                                                                                                                                                        
|10.16*   |  | Form of Common Stock Warrants issued September 30, 1997 by Audible to various investors in
connection with the Series C preferred stock financing                                                      
|         |  |                                                                                                                                                                                                        
|10.17*   |  | Form of Stock Restriction Agreement by and between Audible and the
Named Executive Officers made in connection with various purchases and sales of shares
of restricted common stock                   
|         |  |                                                                                                                                                                                                        
|10.18*   |  | Form of Promissory Note made by the Named Executive Officers in
favor of Audible in connection with various purchases and sales of
shares of restricted common stock                                   
|         |  |                                                                                                                                                                                                        
|10.19*   |  | Office Lease dated September 20, 1997, by and between Audible, as
tenant, and Passaic Investment LLC, Sixty-Five Willowbrook
Investment LLC and Wayne Investment LLC, as tenants-in-common, as
landlord
|         |  |                                                                                                                                                                                                        
|10.20*   |  | Sublease Agreement dated July 19, 1996, by and between Audible, as sublessee, and Painewebber
Incorporated, as sublessor                                                                               
|         |  |                                                                                                                                                                                                        
|10.21+*  |  | Agreement dated April 3, 1999 by and between Audible and Diamond Multimedia Systems, Inc.                                                                                                              
|         |  |                                                                                                                                                                                                        
|10.22*   |  | Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft Corporation                                                                                                                         
|         |  |                                                                                                                                                                                                        
|10.23*   |  | Employment Offer Letter from Audible to Guy Story dated September 10, 1996                                                                                                                             
|         |  |                                                                                                                                                                                                        
|10.24*   |  | Employment Offer Letter from Audible to Brian Fielding dated April 25, 1997                                                                                                                            
|         |  |                                                                                                                                                                                                        
|10.25    |  | Omitted.                                                                                                                                                                                               

30



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|          |  |                                                                                                                                                                                                                                                         
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.26*    |  | Employment Offer Letter from Audible to Andrew Kaplan dated May 25, 1999                                                                                                                                                                                
|          |  |                                                                                                                                                                                                                                                         
|10.27     |  | Omitted.                                                                                                                                                                                                                                                
|          |  |                                                                                                                                                                                                                                                         
|10.28**   |  | Warrant Agreement to purchase 10,000 shares of Common Stock at a
price of $7.65 per share, dated October 8, 1999, issued by Audible to
National Public Radio, Inc.                                                                                      
|          |  |                                                                                                                                                                                                                                                         
|10.29*    |  | Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin Williams                                                                                                                                                                             
|          |  |                                                                                                                                                                                                                                                         
|10.30*    |  | Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin Williams                                                                                                                                                                             
|          |  |                                                                                                                                                                                                                                                         
|10.30.1## |  | Amendment No. 1 to Common Stock Purchase Warrant, W-2, issued
January 25, 2001, to Robin Williams (relating to Exhibit 10.30)                                                                                                                           
|          |  |                                                                                                                                                                                                                                                         
|10.31++#  |  | Securities Purchase Agreement dated January 30, 2001, by and
between Audible and Amazon.com Commerce Services, Inc.                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                         
|10.32++#  |  | Co-Branding, Marketing and Distribution Agreement dated January
30, 2001, by and between Audible and Amazon.com Commerce Services, Inc.                                                                                                                 
|          |  |                                                                                                                                                                                                                                                         
|10.33***  |  | Series A Convertible Preferred Stock Purchase Agreement by and
between Audible Inc. and Microsoft Corporation dated as of February 8, 2001.                                                                                                             
|          |  |                                                                                                                                                                                                                                                         
|10.34++!  |  | Amendment No. 1 to Co-Branding, Marketing and Distribution
Agreement dated as of January 24, 2001 by and between Amazon.com
Commerce Services, Inc. and Audible (relating to Exhibit 10.32)                                                             
|          |  |                                                                                                                                                                                                                                                         
|10.35!    |  | Securities Purchase Agreement dated January 25, 2002 by and
between Audible Inc., and Special Situations Fund III, L.P., Special
Situations Cayman Fund, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
|          |  |                                                                                                                                                                                                                                                         
|10.36!    |  | Registration Rights Agreement dated January 25, 2002 by and
between Audible Inc., and Special Situations Fund III, L.P., Special
Situations Cayman Fund, L.P., Special Situations Private Equity Fund,
L.P. and Special Situations Technology Fund, L.P.
|          |  |                                                                                                                                                                                                                                                         
|10.37!    |  | Form of Common Stock Warrant issued in connection with the
sale of common stock to Special Situation Funds.                                                                                                                                             
|          |  |                                                                                                                                                                                                                                                         
|99.1      |  | Quarterly Certifications of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      
|          |  |                                                                                                                                                                                                                                                         
|99.2      |  | Quarterly Certifications of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                      
|          |  |                                                                                                                                                                                                                                                         
|*         |  | Incorporated by reference from the Companys Registration Statement on
Form S-1 (No. 333-76985)                                                                                                                                                         
|          |  |                                                                                                                                                                                                                                                         
|**        |  | Incorporated by reference from the Companys Form 10K/A for the
fiscal year ended December 31, 1999                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                         
|***       |  | Incorporated by reference from the Companys Form 10-K for the
fiscal year ended December 31, 2000.                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                         
|#         |  | Incorporated by reference from the Companys Form 10-Q for the
quarterly period ended September 30, 2000                                                                                                                                                
|          |  |                                                                                                                                                                                                                                                         
|##        |  | Incorporated by reference from the Companys Form 10-Q for the
quarterly period ended September 30, 2001                                                                                                                                                
|          |  |                                                                                                                                                                                                                                                         
|###       |  | Incorporated by reference from the Companys Form 10-Q for the
quarterly period ended September 30, 2001                                                                                                                                                
|          |  |                                                                                                                                                                                                                                                         
|!         |  | Incorporated by reference from the Companys Form 10-K for the
fiscal year ended December 31, 2001.                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                         
|!!        |  | Incorporated by reference from the Companys Form 10-Q for the
quarterly period ended June 30, 2002.                                                                                                                                                    
|          |  |                                                                                                                                                                                                                                                         
|!!!       |  | Incorporated by reference from the Companys Form 10-Q for the
quarterly period ended September 30, 2002.                                                                                                                                               
|          |  |                                                                                                                                                                                                                                                         
|+         |  | Portions of these Exhibits were omitted and have been filed
separately with the Secretary of the Commission pursuant to the
Companys Application requesting Confidential Treatment under Rule
406 of the Securities Act of 1933.                       
|          |  |                                                                                                                                                                                                                                                         
|++        |  | Portions of these Exhibits were omitted and have been filed
separately with the Secretary of the Commission pursuant to the
Companys Application requesting Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934.            



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------
|
| |     |  | None.              

31



---



##### 



SIGNATURES

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

| |  |                  |  |                                                                                                                       
| |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------
| |  | AUDIBLE, INC.   
|
| |  | By:
Name:
Title: |  | /s/ Andrew P. KaplanAndrew P.  Kaplan
Chief Financial Officer and
Executive Vice President,
Finance and Administration

Dated: November 13, 2002

32



---



##### 



CERTIFICATIONS

I, Donald R. Katz, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Audible, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

|                  |  |                                                                                                                         
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------
|November 13, 2002 |  | By: /s/ Donald R. Katz
Name:   Donald R. Katz
Title:  Chief Executive Officer and
Chairman (Principal Executive Officer)

33



---



##### 



I, Andrew P. Kaplan, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Audible, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of the registrants board of directors:

a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

|                  |  |                                                                                                                                          
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|November 13, 2002 |  | By: /s/ Andrew P. Kaplan                                                                                                                 
|                  |  | Name: Andrew P. Kaplan
Title: Chief Financial Officer,
Executive Vice President,
Finance and Administration
(Principal Financial Officer)

34